Document of The World Bank FOR OFFICIAL USE ONLY FILE CP Report No. 2183b-BR BRAZIL STAFF APPRAISAL REPORT NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT January 17, 1979 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their officia2L duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency unit = Cruzeiro US$1.00 = Cr$16.25 (January 1978) UPC1.00 = Cr$227.15 (January 1978) UPC1.00 = US$14.68 (January 1978) MEASURES 1 mm = millimeter = 0.04 inches l,cm = centimeter = 0.39 inches 1 m = meter = 3.28 feet 1 km = kilometer = 0.62 miles 1 13 = liter = 0.26 US gallons 1 m3 = cubic meter = 264 US gallons 1 m /sec cubic meter per second = 22.82 MGD = million US gallons per day ABBREVIATIONS AND ACRONYMS ABES = National Association of Sanitary Engineers BNH = National Housing Bank CAGECE = Water Supply and Sewerage Company of Ceara COMPESA = Sanitation Company for Pernambuco EMBASA = Water and Sanitation Company of Bahia FAE = Water and Sewerage Funds FGTS = Employee Indemnity Fund FSESP = Special Public Health Service Foundation FINEST = Credit Lines for Sanitation Sector IDB = Interamerican Development Bank OT = Technical Supervision Agency (BNH) PAHO = Pan-American Health Organization PLANASA = National Sanitation Plan ORTN National Treasury Securities SATECIA = Technical Assistance Program for Institutional Development of the State Water Companies S/SFS = Superintendency of Sanitation Financing System SUDENE = Superintendency for Development of the Northeast SWC = State Water Company UPC = Standard Capital Unit (BNH) USAID = United States Agency for International Development FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY BRAZIL STAFF APPRAISAL REPORT NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT TABLE OF CONTENTS Page No. I. GENERAL ............... ............................ 1 II. THE SECTOR ......................................... 1 Country Background ............. ... . . . 1I Service Levels ...... ......................... . I Sector Development ..... ....................... 2 Institutional Developments ................. ... 4 Financial Viability ..... ...................... 4 Tariffs ....... .............................. . 5 Environmental Legislation ................. .... 6 Bank Participation ..... ....................... 6 Experience Under Previous Loans ............ ... 7 III. THE BORROWER ... 8 Organization . . ........................ . 8 Loan Approvals Procedures ..................... 10 Evaluation ....... ............. ................ 10 IV. THE, BENEFICIARIES ...... ............. ............... 11 Background .................................... 11 Organization and Management ................. .. 11 Metering, Billings and Collections ............ 12 Accounting Organizations ........... .. ......... 12 Accounting Systems ............................ 13 Finance ....................................... 14 Audit ......................................... 14 V. PROJECT AREA, DEMAND AND MARKET ASPECTS ...... ...... 15 Location and Development Prospects ........... . 15 Water Resources ...... ......................... 15 Population ....... ............. ................ 16 Present Water Supply and Sewerage Service Levels 17 Demand Projections ................. 19 This report was prepared by Messrs. A. Sanchez, Engineer; A. Heron, Financial Analyst; J. Culagovski, Economist; A. Guzman, Financial Analyst; P. Larroque, Financial Analyst; and R. Westin, Consultant. The appraisal took place in April 1978. IThis document has a restricted distribution and may be used by recipients only in the performancel of theif offcisi duties. Its contents may not otherwise be disclosed without Wotld Bank authorization. TABLE OF CONTENTS (Continued) Page No. VI. THE PROJECT ............................. 21 Project Origin .......... . ... 21 Project Objectives ..21 Project Description . .22 Engineering . .23 Project Costs ..24 Financing. 26 Implementation. 27 Subproject Selection . .28 Procurement . .29 Disbursements . .30 VII. FINANCIAL ANALYSIS ..32 The Borrower . .32 Past and Present Finances . .32 Financial Projections . . .34 The Beneficiaries. . 35 Financial Status and Projections of the Beneficiaries ...38 EMBASA ...38 COIPESA ...39 CAGECE ...40 Evaluation ... 42 monitoring Indicators/Reporting Requirements .. 42 VIII. ECONOMIC AND SOCIAL ANALYSIS . ....... 43 Introduction . .43 Internal Rate of Return and Long Run Marginal Cost 43 Design and Selection Criteria . .45 Population Served . .45 Impact on Poverty Groups. 45 Project Services Affordability . .47 IX. AGREEMENTS REACHED AND RECOMMENDATIONS . .47 TABLE OF CONTENTS (Continued) List of Tables Page No. 5.1 Population Data in the Project States and Brazil (1977) ....... 16 5.2 brban Population in the Project States (1977) .... ............. 17 5.3 Water Supply Service Levels for 1977 (%) ...................... 17 5.4 Water Production and Sales for 1977 ..... ...................... 18 5.5 Present and Projected Water Production and Sales, 1978-1982 ... 20 6.1 Projected Annual Investments for EMBASA, COMPESA, and GAGECE - 1979-1982 .......................................... 25 6.2 Summary of Project Costs .26 6.3 Estimated Schedule of Disbursement .31 7.1 BNI Summary Funds Flow Statement . .32 7.2 BNM Summary Balance Sheets .33 7.3 B1i Projected Sources and Application of Funds, 1978-1980 34 7.4 Project SWCs' Tariff Structures - 1977 .36 7.5 Selected Financial Data - EMBASA .39 7.6 Selected Financial Data - COMPESA .40 7.7 Selected Financial Data - CAGECE .41 8.1 Average Incremental Cost and Tariffs (January 1978) .44 8.2 Water Supply: Incremental Change in Population Served in the Capital Cities, 1977-1985 .46 8.3 Sewerage: Incremental Change in Population Served in the Capital Cities, 1977-1985 .46 List of Annexes 1. Graphical Representation of BNH's Supervision Arrangements 2. Organization Charts for State Water Companies 3. Description of Subprojects for Capital Cities and List of Communities to be Served in the States of Bahia, Ceara and Pernambuco 4. Schedule of Execution for Water and Sewerage Subprojects 5. Summary of Project Costs 6. BNH Financial Statements 7. State Water Companies' Financial Statements 8. Outline of Terms of Reference for Metering and Tariff Studies 9. lnternal Financial Rates of Return and Average Incremental Costs 10. I)ocuments Available in Project File TABLE OF CONTENTS (Continued) List of Maps 13716 - The Northeast Region 13717 - Rainfall and Probability of Drought 13718 - City of Salvador - Major Works 13719 - City of Recife - Major Works 13720 - City of Fortaleza - Major Works BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT STAFF APPRAISAL REPORT I. GENERAL 1.01 The Government of Brazil has requested Bank financing for the expansion and improvement of water supply and sewerage systems in the three northeast States of Bahia, Ceara and Pernambuco. The Bank has been assisting the water supply and sewerage sector in Brazil since 1971 through the financing of five projects. The water supply and sewerage systems for which Bank financing would be provided under the proposed loan have a total cost of US$303 million, of which the proposed Bank loan of US$100 million would cover the foreign excharge cost. The loan would be made to the National Housing Bank (BNH). The executing entities would be the State Water Companies (SWCs) of Bahia, Ceara and Pernambuco (EMBASA, CAGECE and COMPESA, respectively), which are public agencies owned by their respective state governments, and responsible for the implementation of the National Sanitation Plan (PLANASA) in their respective states. The works to be financed are scheduled for construction and completion in the four-year period 1979-1982 inclusive. II. THE SECCOR Country Backpround 2 2.01 Brazil has an area of 8.5 million km and is divided into 23 states, four territories and one federal district. The population of Brazil at the end of 1977 was estimated to be 113.2 million and growing at 2.8% per annum. 1/ Of this total, 69.5 million, or 61.4%, is classified as urban population, 2/ which is growing at an estimated rate of 4.1% per annum. By 1984, two-thirds of Brazil's population is expected to be living in urban ienters. While the overall population density is only 13 inhabitants per km , the distribution of population throughout the country is uneven with a high proportion concen- trated along the East Coast, in particular the four southeastern states which include the large urban centers of Rio de Janeiro and Sao Paulo and account for 42.1% of Brazil's population. This concentration has been partially due to migration from the north and northeast regions. Service Levebls 2.02 At: present about three-fourths of the urban population has access to public water supply and about 35% is served by public sewerage. I/ Source of Population Statistics: Anuario Estatistico do Brasil. 2/ Brazil:Lan official definition of "urban population" is based on adminis- trative status (a county seat, "sede do municipio," is an urban place) rather than minimum population size. - 2 - There are however, regional imbalances'. water supply service levels in the lesser developed states in the interior and northeast are below 50% with many communities not supplied at all. In rural areas, there are only limited sanitation facilities, with less than 5% of the households having water connections. Only 2% of the rural households have septic tanks, 23% latrines and three-fourths have no satisfactory excreta disposal facilities. The urban poor group (para 8.09) is the most severely affected by the lack of services. Many of the urban poor are recent migrants who squat on the periphery of metropolitan areas where the land is still to be serviced, or in centrally located but often precarious old squatter settlements. Statistics on mortality and morbidity rates from waterborne diseases are not complete, but the figures available indicate one of the highest infant mortality rates in Latin America and a high incidence of deaths due to waterborne diseases. Infant mortality in the country reaches 70 per 1,000 live births and life expectancy is 61 years 1/. These indices are, respectively, well above and below the ones for countries with similar income levels, and compare with about 60 per 1,000 live births for infant mortality and 60.5 years of life expectancy for Latin America. Sector Development 2.03 Prior to 1971 expansion of urban infrastructure, particularly water supply and sewerage facilities, had not kept pace with Brazil's overall devel- opment. The resulting inadequacy of services had been due primarily to institutional problems and the method of financing water and sewerage systems. Responsibility for these services had been vested in the municipalities, which was the level of government which was weakest in organizational, technical and financial capacity. Thus, in 1970, less than 60% of the urban population had access to public water supply and less than 30% were connected to sewerage systems. Furthermore, in the majority of Brazil's cities, the capacity of the water supply systems was insufficient to meet demand requirements. 2.04 Initial measures to improve sector development were undertaken in 1967 when the Federal Government created the Sistema Financeiro de Saneamento (SFS) and assigned to it the responsibility for the financing of the sanita- tion sector in the country. At the same time the Banco Nacional da Habitacao (BNH), was designated as the agency to operate SFS. A concerted effort began in 1971 when BNH launched PLANASA, the National Sanitation Plan for Brazil, which encompassed the financing, design, and construction of water and sewerage services and the training of personnel for their management and operation. The PLANASA objectives for 1980, as revised in 1975, are to provide water services to 80% of the urban population in 80% of the communities and sewerage services to all main urban centers (over 50,000 inhabitants). The program is expected to cost around US$6.6 billion in 1977 prices, 2.6 times the original estimate as a result of enlarged programs, underestimation of project costs, and inflation, which has particularly affected the construction industry. 2.05 The PLANASA program is implemented through SWCs formed in each state through consolidation of existing regional or local water companies. Each SWC is responsible for construction and operation of the water supply and 1/ Source: World Development Report, August 1978 - World Bank. sewerage systems throughout the state. Initially each SWC prepared a global feasibility study for the state which set forth the sector service level objectives, priorities, and financing program. On the basis of this study and a comLitment by the state to provide one-half of the financing for the sector investment program from a Sanitation Revolving Fund (Fundo de Aguas y Esgoto - FAE), BNH has entered into "PLANASA Agreements" with all the states, which incorporate the service level objectives of the global feasibility studies and commit BNH to providing the other half of the financing for the investment program. The PLANASA program has been conceived to alleviate regional imbalances in services through cross subsidization and to remedy, through the creation of SWCs, municipal deficiencies in qualified manpower, capacity of expansion, and maintenance and administration of systems, espe- cially outside of the capital cities. It replaces a large number of municipal companies in each state with one organization enabling economies of scale, central review of all system designs and proper operation and maintenance of municipal systems. 2.06 Implementation of the PLANASA program has been slower than expected due to time taken to organize SWCs and consolidate operations, and to the capacity of some SWCs in preparing and implementing water supply and sewerage projects. In retrospect, the PLANASA objectives were too ambitious consider- ing the fragmented state of the sector in 1971. Actual performance, however, has been satisfactory in water supply. By the end of 1977, 75% of the urban population was receiving water supply services and 35% was served with sewerage. In terms of number of urban centers (total 3,164) to be served with water systems, some 1,511 (47%) remained to be supplied, and these are almost all small communities. Out of the 160 cities and towns to be provided with sewerage services, 93 were partially served in 1977 and 67 remained unattended. Meeting sewerage service level objectives will be a major problem in the next decade, especially because of the amounts of capital required and the technical problems involved. 2.07 It appears that by 1980 the original water supply service level objec- tive of 80% of the urban population could be met, although the target to reach 80% of the communities will not be attained. The sewerage service level objec- tive will not be met in 1980. It is estimated that 3 to 4 additional years, after 1980, are required to meet the proposed objectives for water supply and more than that to reach sewerage targets. 2.08 The PLANASA program has established service level targets for the urban subsector but there are no explicit objectives for the rural areas and knowledge of this subsector is still very incomplete. There is no organized plan of action on a countrywide basis, although specific programs to assist the rural subsector have been established at federal, state and municipal levels. The Ministry of Health has a "Special Public Health Service Founda- tion" (FSESP), which provides subsidies to the poorest municipalities for implementation of water supply and waste disposal projects. Recently, BNH entered into the rural sector (para. 3.05), offering funds to the state government (2% below the interest rate charged for urban projects). Regional development agencies have also been including assistance to the rural popula- tion through their integrated rural development programs. Actions are clearly required to coordinate and organize these efforts to make them more efficient. The Bank is planning to include in the sector review to be carried out in cooperation with the Pan-American Health Organization (PAHO) 1/, a preliminary assessment of the rural subsector. This sector review has been tentatively planned for 1979. Institutional Developments 2.09 In order to strengthen the execution capabilities and administrative efficiency of the SWCs, BNH in 1974 entered into an agreement with PAHO to carry out a technical assistance program, SATECIA 2/. The program is being developed by 36 specialists, including 12 foreign experts, and has improved organization and financial reporting in the SWCs. The first three-year program, which included a diagnosis and formulation of recommendations of each of the SWCs and produced standardized information systems, has been completed, and a new program (1978/79) is now underway which will assist the SWCs in implementing the recommendations. 2.10 As a complement to the technical assistance program, BNH established a National Sanitation Training Program through the National Association of Sanitary Engineers (ABES). The initial objective of the program was to train 60,000 employees from the SWCs by the end of 1980. This objective was revised in January 1977, and a new target was set at 84,000 employees. Through 1976, some 37,000 participants, 44X of the new target, were trained. ABES and the SWCs are periodically analyzing the results of the program and introducing adjustments to make the training meet the actual needs of the sector. 2.11 For the sector overall, design and construction capabilities, and availability of finance from BNH/FAE appear to be in balance. There are, however, unclear financial and economic criteria applied in evaluation and selection of BNH-financed projects, and specific criteria should be agreed to in negotiations for the proposed loan (para 6.18). BNH's loan super- vision through its regional offices and Technical Supervisory Agency (OTs) (para. 3.03), which covers technical, administrative and financial aspects of the projects and the SWCs, is working satisfactorily. Project execution is monitored through periodic visits to each project site by representatives of BNH and its OTs. Disbursements are controlled by BNH on a quarterly basis. Financial Viability 2.12 One of the basic principles of the PLANASA program was that the SWCs should be financially viable, with revenues sufficient to cover cash operating and maintenance costs and debt service payments. For the sector generally and most SWCs individually, this requirement has not been met. The principal reason for this is the failure of tariffs, which are regulated by both the Federal and state governments, to keep pace with the increases in operating costs and debt service requirements. As a result, some SWCs are meeting debt service payments, and even operating expenses, through loans from BNH/FAE and state government equity contributions. 1/ IBRD/WHO - Cooperative Program - Latin America Region. 2/ SATECIA: Programa de Assistencia Technica para o Desenvolvimento Institucional das Empresas Estaduais de Saneamento. -5- Tariffs 2.13 One major problem of the SWCs has been the mechanism for revising tariffs which has resulted in delays in rate increases, and increases granted often being, of insufficient magnitude to improve an SWC's financial viability. In the pasit an SWC presented a request for tariff increase, along with proper justification to the state government, which had the power to approve a level lower than requested. Approval must then be obtained from the Interministerial Price Committee which in 1977 established annual ceilings on increases of 25% in current terms as a normal case. Since operating costs and debt service are indexed in line with the UPC, which in 1976 and 1977 increased 34% p.a. in relation to the Brazilian Cruzeiro, tariff increases have often not maintained revenues of the SWCs at existing levels in real terms. 2.14 On May 12, 1978 a National Tariff Law for the Water Supply and Sewerage Sector was approved by the Brazilian Congress. The objectives of the Law are: (a) to relate tariffs to service costs; (b) to ensure the financial viability of the SWCs; (c) to put a ceiling on the cost of obtaining water supply and sewerage services for the low-income population by estab- lishing a minimum consumption tariff related to income level; and (d) to set tariff levels which would produce the necessary revenue to pay for all costs and allow a rate of return of up to 12% on capital investments. In addition, the Law establishes that tariff studies should be undertaken in accordance with guidelines to be set by the Ministry of the Interior. 2.15 Implementing regulations of the Tariff Law are contained in Decree No. 82586 of November 6, 1978. The regulations set forth the procedure for, and frequency of, tariff adjustments and spell out the criteria to be used in the design of tariff structures. The regulations establish 1983 as the year for SWCs to attain the position where revenues cover operating and maintenance costs and depreciation and provide a rate of return on operating assets, after covering these expenses, which will produce sufficient cash flow to cover debt service. Gradual and continuous financial programs are provided for SWCs to reach this objective, although interim targets are not specified. The main features of the Decree are the following: (a) SWCs must submit to BNH by March 1979 financial plans for the 1979-1983 period, including tariff proposals to attain in 1983 the financial objectives of the Law and Decree. (b) Tariffs are to be revised each year. SWCs will prepare and submit to BNH annual tariff recommendations which will enable them to comply with the Law and Decree. No approval of the tariff recommendations is required now by the state governments. (c) BNH is responsible for reviewing the tariff proposals prepared by the SWCs and, if in agreement with a proposal, to forward it to the Interministerial Price Committee (IPC) with a recommendation for approval, otherwise the proposal will be returned to the SWCs for review. BNH is also responsible for supervising the financial performance of the SWC's. - 6 - (d) Responsibility for final tariff approval is with the IPC, and authorization of effectiveness of tariff adjustments is done by the Ministry of the Interior. (e) SWCs revenues must cover operation and maintenance costs and depreciation and, after covering these expenses, provide a rate of return on fixed assets in operation which in 1983 and subsequent years will produce sufficient cash flow to cover debt service. (f) Tariffs should be progressive according to volumes consumed, and users should be classified as residential, industrial, commercial and public. It is expected that under the Decree the process of tariff adjustment will be more systematic and timely. In addition, water and sewerage rates will be related to costs and cross-subsidization to the poor will be possible through improved tariff structures. Progressiveness of tariffs would also permit pricing practices to control waste. Environmental Legislation 2.16 The federal and state authorities in charge of environmental pollu- tion controls regulate the permissible pollution loads to be discharged into the water courses. In October 1973, the Federal Government created the Secretaria Especial do Meio Ambiente in the Ministry of Interior to monitor changes in the environment, establish air and water quality standards, enforce pollution control legislation, and coordinate all federal pollution control programs. Several laws and decrees were issued thereafter providing regula- tions for the enforcement of pollution control. In January 1976, the Government issued a regulation to classify inland water resources according to their uses, and limit their contamination by setting up maximum permissible physical, chemical and biological concentration. 2.17 The enforcement of the pollution control laws will demand large investments, as well as substantial operational and maintenance expenditures for sewage disposal. For those cities needing sewage treatment, the total costs of the services, including water supply, could be so high that tariff increases will not be sufficient to recover these costs, and capital contri- butions from the state and/or the Federal Government might be required in addition to BNH and FAE debt financing. Sewage tariffs will have to be structured so as to achieve, where appropriate, a cross-subsidization among the consumers, in particular the industrial ones, to make systems financially viable. Studies to establish appropriate tariff structures and levels for sewage collections and treatment are now underway by BNH under a covenant in the Greater Sao Paulo Sewage Collection and Treatment Project (Ln. 1525-BR). Bank Participation 2.18 The Bank has been assisting Brazil since 1971 in the implementation of PLANASA through the financing of five projects. Five loans totalling US$220 million have been extended for water supply and sewerage. In 1971, two - 7 - loans were approved for the City of Sao Paulo (Lns. 757 and 758-BR), one for water distribution and storage (US$22.0 million), and one for sewage collection and disposal (US$15.0 million subsequently reduced to US$12.0 million). In 1974, a loan was extended to BNH (US$36.0 million, Ln. 1009-BR) for relending to the SWC in Minas Gerais for municipal water supply and sewerage projects, and a second loan for the same purpose followed in 1976 (US$40.0 million, Ln. 1309-BR). The last loan, approved in February 1978 (US$110.0 million), is for the first phase of a large sewage collection and treatment project in Sao Paulo which forms part of a high priority program of water pollution control. 2.19 Total actual and planned Bank assistance to the water supply and sewerage sector is estimated to account for about 10% of sector investment in the period 1971 through 1981. The only other external lenders to the sector since 1970 have been USAID, which in 1971 extended a loan to BNH (US$25.0 million) for urban sanitation, and IDB which in 1971 provided a loan to BNH (US$30.0 million) for water and sewerage projects throughout Brazil. Experience Under Previous Loans 2.20 Projects financed under Loans 757-BR and 758-BR were completed with a three-year delay. Initial failure of the State of Sao Paulo to supply the necessary funds to complete financing, substantial technical revision of the project, and reorganization of the executing agencies resulted in the above- mentioned slippage. However, population served with water as a result of the project reached 3.3 million (against 2.4 million initially targeted). At the same time 1.3 million persons were served with sewers, the water pollution control ccomponent kept pace with population growth, and the Borrower improved substantiaL1ly its overall operations. As a result, service levels rose from 58.9% to E88.7% of population served with water and from 35.8% to 44.6% served with sewerage during 1971-1977. 2.21 The first Minas Gerais Loan (US$36.0 million) became effective in Januaryr 1975 and is now fully committed. The second Minas Gerais Loan (US$40.0 million) became effective in January 1977 and is also fully committed. The Sao Paulo Loan 1525-BR (US$110.0 million) became effective in August 1978. Initially,, there were problems related to efficiency of internal operations of the executing agencies, especially in regard to commercial and financial areas as well as to technical quality of the projects. These problems have been substantially overcome and projects are progressing satisfactorily. There are still financial problems in Sao Paulo and Minas Gerais as a result of inade- quate tarLff increases, which have resulted in non compliance with the revenue covenant for 1978. Recently the Government has approved a 36% increase in their tariffs effective January 1, 1979, which will allow both companies to achieve a satisfactory financial condition. However, the water company of Minas Gerais may require a further tariff increase in mid-1979. For the future it is exp,ected that the application of the new tariff legislation (paras. 2.14 and 2.15) will allow them to operate within a framework of financial discipline. 2.22 The Bank has been holding regular discussions with BNH regarding improvements in its operations in the sanitation sector. The major improve- ments have been: (i) the decentralization of project approval and loan supervision to BNH's regional offices which has resulted in faster project execution; and (ii) the establishment of a uniform accounting system for the SWCs, which, with some revisions, will enable BNH and the SWCs to have uniform - 8 - and reliable financial information. Much has still to be done in other areas such as coordination with the SWCs, general information systems for BNH in regard to SWCs' operational and technical data, project appraisal, and loan administration by BNH. These objectives will be pursued in the proposed project. III. THE BORROWER Organization 3.01 The Borrower for the proposed loan will be the Banco Nacional da Habitacao which has also been the Borrower for Loans 1009-BR and 1309-BR for the First and Second Water Supply and Sewerage Projects for Minas Gerais, and Loan 1525-BR for the Greater Sao Paulo Sewage Collection and Treatment Project. BNH was established by Federal Law in August 1964, and since 1967 has been under the Ministry of the Interior. It has legal personality, is tax exempt and is administratively and financially independent of the Ministry. Its major activities have been to finance low-cost housing programs, urban development and sanitation. BNH does not operate as a commercial or savings bank. 3.02 BNH is administered by a Board of Directors (Conselho de Adminis- tracao) and an Executive Committee (Diretoria). The Board consists of the seven Directors of the Executive Committee and nine counselors. The Executive Committee is composed of the President of the Board and six Directors, all appointed by the President of the Country with the approval of the Federal Senate. Daily operations are the direct responsibility of the President and Department Heads, but decisions concerning routine operations have been delegated to Regional Credit Committees. 3.03 Since September 1967, BNH has had a Department (Superintendencia), called the "Superintendencia do Sistema Financeiro do Saneamento" (S/SFS), which is responsible for water and sewerage activities. The S/SFS consists of three divisions as indicated on the organization chart (3.1). The Analysis and Planning Division is responsible for the review and approval of each water supply and sewerage investment programs and supervises projects proposed by the SWCs for BNH financing. The Technical Control Division supervises the Technical Supervisory Agency (OT) which has been retained by BNH to review project design and assist in supervision of construction, and in addition, provides S/SFS with technical consulting services when needed. The Finance Division authorizes disbursements from BNH and FAE and monitors the financial performance of the SWCs. 3.04 Project technical review and project supervision are done by 11 BNH regional offices established in December 1976. These offices are a microcosm of the S/SFS Department in BNH Headquarters and operate under well-defined guidelines. The functions of the offices include the control of loan agree- ments between BNH and the SWCs, the control of disbursements, the updating of the physical and financial project schedules, the monitoring of the FAE's and OT's performance, and the supervision of the SWCs' operations, technical assistance, and training programs. This decentralization is necessary and is working effectively. A graphical representation of the supervision system is shown in Annex 1. CHART 3.1 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT National Housing Bank (BNH) Superintendency of the Sanitation Finance System (SFS) Organization Chart SUPERINTENDENT ASSISTANT SUPERINTENDENT | ANALYSI AND TECHNICAL FINANCES L PLANw4ING | C N RCL IANESLCONTROL PLANNING AND I CONSTRUCTION [ P|RAIOAN PROGRAMMING CONTROL P .OGRAMMIN TECHNICAL TECHNICAL 1 OFNANCIAL ANALYSIS ASSISTANCE J CONTROL TECUNICAL CONTROL OF- SIATE | COST ANALYSIS AUDITING SANITATION FUNDS - 10 - Loan Approvals Procedure 3.05 BNH analyzes water supply and sewerage projects proposed for finan- cing by the SWCs, extends loans, and provides technical assistance to SWf s through S/SFS. Projects are normally prepared by local consultants retained by the SWCs or sometimes by SWCs' staff. The technical aspects and costs of the projects are then reviewed by the OTs, which are specialized agencies (or consultants) retained by BNH, and are then either returned to the SWCs for revision or accepted and forwarded to BNH headquarters by the regional office for final evaluation and approval. BNH has established a basic line of credit for the water supply and sewerage sector. Through this line BNH lends to the SWCs (through the state banks, called the financial agents) 50% of project costs for medium and large-size cities 1/. A second line of credit, known as FINEST I 2/, has been created to assist the states to meet their obligations to finance 50% of the project costs. Under this line, loans are made to the states (through financial agents) upon request and channeled to SWCs through FAEs. Two additional credit lines with the objective of promoting investments in small communities, FINEST II and FINEST III, are available for direct lending to state governments (through the financial agents) which are used to assist the states in the financing of projects for small communities. To be eligible for these loans, at least 40% of the state contributions to FAEs must be allocated to small communities. The SWCs receive 70% of these funds as equity and 30% as an FAE loan. Loans granted to the states under FINEST II and III are repaid to BNH out of the proceeds of general tax revenues. Principal and interest payments on all BNH loans are guaranteed by the state government. 3.06 State government funds for financing 50% of subproject costs are deposited in the FAEs for lending to the SWCs. The FAE is a revolving fund continually replenished by appropriations from the state government, normally equivalent up to 5% of the state tax revenues, and by the debt service pay- ments of the SWCs. 3.07 Interest rates on BNH/FAE loans vary from 2% to 8% p.a. depending upon the per capita tax revenue levels in the state. Maturities are normally 18 years, after a one to three-year grace period on principal repayment. Interest and principal on loans are denominated in indexed standard capital units (UPCs) 3/. Evaluation 3.08 Up to 1975, the PLANASA program did not develop as expected, due to poor organization and management in the SWCs resulting in underestimated 1/ Medium-size arid large cities are those over 5,000 people. Small size villages are those with less than 5,000 inhabitants, according to 1970 census figures. 2/ Subprograma de Emprestimo Suplementar. 3/ An accounting unit which is revalued quarterly using the Ministry of Finance monetary correction index (ORTN). - 11 - project costs, overoptimistic scheduling, constraints of interrelated activ- ities, such as poor engineering studies and cost estimates, and a shortage of materials and equipment. In addition, S/SFS activities were centralized at BNH Headquarters in Rio de Janeiro, where inaccurate information was received from t'e SWCs, further delaying projects' review and approval by overloaded staff. During implementation of the three Bank-financed projects with BNH and during project appraisal, many discussions were held with S/SFS staff in order to solve the above-mentioned problems. In early 1976, BNH issued new regulations decentralizing PLANASA and delegating more responsibility and authority to the regional offices in order to speed up implementation. It is now considered that BNH's project selection, approval and disbursement pro- cedures, and loan supervision procedures are improving, but further efforts by BNH are necessary to adapt these procedures to the requirements of expanded operations. Assurances were obtained that the Bank will be given the oppor- tunity to exchange views on any proposed modifications to SISFS organization and guidelines. IV. THE BENEFICIARIES Background 4.01 The three beneficiaries and executing agencies for the project will be Empresa Bahiana de Aguas e Saneamento S.A. (EMBASA), Companhia Pernambucana de Saneamento (COMPESA), and Companhia de Agua e Esgoto do Ceara (CAGECE). The three SWCs were formed in 1974 through mergers of the water authorities in the state capital cities and a large number of municipalities. All states have complied with S/SFS requirements and have signed PLANASA agreements setting forth service level objectives, state financial participation and empowering BNH to control all SWCs' programs financed by BNH. All states have committed 5% of state tax revenues to FAEs and are eligible for maximum BNH loans. The three SWCs have completed global feasibility studies and have ongoing construc- tion programs financed by BNH, FAEs, and the states. Organization and Management 4.02 All SWCs are owned by their respective state governments. Each has a six-member Board of Directors appointed by the state governor for a period of four years. Apart from the President, who is the Chief Executive Officer, each director is the working head of one of the functional departments. 4.03 Organizational structures have evolved with the assistance of SATECIA and are straightforward with departments for planning, construction, operations, administration, and finance and accounting (see Organization Charts, Annex 2). These organizational structures are considered appro- priate for the activities undertaken. In all of the SWCs, investment planning has been over-ambitious, and the expansion programs, such as they appear in the global feasibility studies presented to the Bank during project preparation, were unrealistically high with respect to executing capabilities and funding limitations. The state government plays an active role in the selection of projects. Construction activities are carried out by local contractors. - 12 - Engineering studies and design as well as supervision of works are executed mainly through local consultants and coordinated by SWCs engineering units (para. 6.17). Projects are generally implemented on schedule. Project programming and control procedures are now being improved to handle the increased volume of construction. System operations and maintenance require improvements, especially in EMBASA and CAGECE, and programs have been developed with the assistance of SATECIA which are now being implemented. In addition, the three SWCs annually prepare two-year training programs to be executed under ABES (para. 2.10). These programs were reviewed and found acceptable vis-a-vis the forecasted staffing needs of the SWCs. Administration and finance and accounting are the weakest areas in the SWCs and special assistance is being provided through SATECIA for this purpose (para. 6.06). 4.04 All three SWCs have suffered from the common problems of new organi- zations and the need to consolidate the large number of previously separate operations into a unified operation. The difficulties of consolidation have been compounded by the large geographic areas covered by these SWCs, their inability to attract and retain qualified technical and managerial staff and by too frequent changes in directors who are working department heads. In the environment in which they are operating, the present managements of the SWCs may be considered satisfactory. Metering, Billings and Collections 4.05 Metering levels for consumption are very low in the three SWCs (Table 5.4). On the average 69% of the connections are unmetered and produc- tion metering is nonexistent. Meter maintenance is poor. Only COMPESA and EMBASA have completed partial studies in this regard. Meter reading, billing and collection procedures are satisfactory in all three SWCs. Meters are read monthly on a continuous basis by zones, and consumers are billed within 20 to 30 days of the reading. Inspectors are used to verify accuracy of the readings. Billing is centralized in the SWCs' headquarters, and all bills are prepared on the state government computers, although keypunching is performed by SWCs' staff. Bills are delivered by messenger (EMBASA) and by mail (COMPESA, CAGECE); payments may be made at the SWCs' offices or in state banks throughout the states. Recent programs to improve collections, including the cut-off of service after two months of nonpayment of bills, have resulted in monthly receipts exceeding new billings, and outstanding accounts receivable now represent slightly less than three months of billing, which is satisfactory. Accounting Organizations 4.06 All SWCs have similar organizational structures for the accounting and finance functions. The department is headed by a director of the SWC and is divided into two functional divisions, one for accounting and one for finance. The Accounting Division is responsible for general accounting, cost accounting, and budget and expense control and the Finance Division for financial planning, treasury, and control of borrowings. These organization structures are considered appropriate, and accounting staff are considered capable of satisfactorily implementing the routine accounting functions in the SWCs. - 13 - 4.07 EMBASA's Accounting and Finance Department is in the process of reorganization under a Finance Director appointed in May 1977. COMPESA's and CAGECE's Accounting Departments are satisfactorily organized. While CAGECE's Accounting Department is almost fully computerized, both EMBASA and COMPESA have been slow in having their accounting systems placed on the computer, and require additional assistance from SATECIA. Accounting Systems 4.08 Accounting functions are centralized in the three SWCs headquarters located in the capital cities. All SWCs are utilizing the uniform system of accounts prepared in January 1976 by S/SFS with the assistance of SATECIA. The SWCs' new accounting systems are expected to be fully computerized in 1979. The introduction of the uniform system of accounts and the use of the computer will provide timely financial reports for management review and for the first time will permit BNH to consolidate SWCs' financial statistics and to evaluate and compare SWCs' financial performance on a consistent basis. It does not, however, provide for an appropriate statement of sources and applications of cash, and it is difficult to derive this data from the existing income state- ments and balance sheets. Since cash management is critical for all SWCs, it is essential that the uniform system of accounts include a statement of sources and applications of cash. BNH has agreed to revise the uniform accounting manuals to include cash flow statements before December 31, 1979. 4.09 The individual SWCs are to some extent having difficulties in producing meaningful financial statements under the new accounting system. First, all SWCs have been formed by mergers of the capital city water authori- ties and a large number of interior municipal water authorities. Because of incomplete inventories and cost data, it has been difficult for them to determine a proper valuation of fixed assets, and( efforts are being made to accomplish this. Also, there are delays in transferring assets of completed projects from construction in process to fixed assets in operation, which understates the value of the latter. Finally, none of the three SWCs has its own in-house computer specialists or a computer, and have to rely on outside services which has made the shift to the uniform accounting system more diffi- cult. These areas will all be included in the technical assistance program to be provided under the proposed project (para. 6.06). Assurances have been obtained from the SWCs that not later than December 31, 1980: (a) they will take the necessary steps satisfactory to the Bank to update fixed asset inventories and to have them properly recorded in the books of account; and (b) that uniform accounting systems, including a statement of sources and applications of cash, will be fully implemented. 4.10 Accounting for long-term debt obligations and for project disburse- ment is relatively complicated. Since all borrowings are specifically related to individual SWC projects, separate bank accounts and loan accounts are maintained for each project (one BNH and one FAE account for each project). All loan advances and interest and principal repayments are effected by BNH/FAE, and the SWCs do not now maintain proper separate accounting records for these transactions, but simply record the transactions from statements provided by BNH/FAE. Thus, at this time there is no independent verification of SWCs' transactions with BNH/FAE. This situation will be remedied when the accounting system is computerized. - 14 - Finance 4.11 Financial planning in the SWCs has been poor. While all SWCs have long-range capital budgets, these have been unrealistically high in relation to demonstrated capabilities of preparing and executing projects and the availability of funds from FAE and BNH. Because the SWCs have operated with the knowledge that a project's costs will be wholly-financed by BNH/FAE, they have not been particularly concerned with either long-range or short-range cash management. The SWCs have now introduced financial projections which are expected to become increasingly useful as accounting statements improve. Assurances have been obtained from the SWCs that these financial projections will be submitted annually to the Bank and BNH not later than March 31 (para. 7.24). Technical assistance for financial planning will be implemented under SATECIA's supervision (para. 6.06). Audit 4.12 CAGECE and EMBASA have internal auditors, but COMPESA does not. The internal audits now made are of limited utility under existing authorities and staffing, and assurances have been given by the SWCs that they will maintain adequately staffed and properly functioning internal audit offices beginning no later than December 31, 1980. 4.13 All SWCs retain external independent private auditors 1/. These audits are generally superficial and are concerned primarily with the presen- tational aspects of the financial statements. The audits by SWCs' lenders, BNH and the FAEs, and the Federal and state governments are more comprehensive, but are designed primarily to ensure that federal and state loans to the SWCs are properly disbursed and accounted for. None of the audits may be considered satisfactory in the commercial sense, as no independent verification is made of fixed assets, inventories, and accounts receivable and payable. Assurances were obtained from the SWCs that their accounts and financial statements for each fiscal year will be audited by independent auditors satisfactory to the Bank and in accordance with generally accepted accounting principles, and that by April 30 of each subsequent year certified copies of the audited financial statements will be submitted to the Bank. 4.14 In addition to its audit, BNH provides a continuing control over disbursements on projects. At the time a loan contract is signed with BNH/FAE, the SWC presents a monthly disbursement schedule against which actual disbursements are compared by the BNH regional office. When actual disbursements are 20% below projections, disbursements are suspended until the SWC provides a satisfactory explanation. BNH technical staff, together with its OT staff, visit project sites quarterly to verify the extent to which construction is completed. The BNH regional offices supervising the three project SWCs are functioning satisfactorily. 1/ CAGECE and COMPESA, Boucinhas, Campos and Claro S/C Ltda., EMBASA, Loudon Blomquist Auditores Associados Ltda. - 15 - V. PROJECT AREA, DEMAND AND MARKET ASPECTS Location and Development Prospects 5.01 With an estimated 33.6 million inhabitants and a per capita product estimated at 38% of the country's average (US$1,140 in 1976), the Northeast Region of Brazil 1/ is one of the largest concentrations of poverty in Latin America. Total population of the Region is growing at an average annual rate of 2.5% and urban population is growing at 3.2% to 4.6% per annum. Life expectancy at birth is only 49 years compared to 61 years for Brazil and infant mortality rate reaches 137 per 1,000 live births in the Northeast, against 70 for the country. These high indices are partly due to poor sanitation conditions. 5.02 The project area consists of three states in the Northeast of Brazil (Bahia, Pernambuco and Ceara; see Map 13716) which accounts for 9.5% of the land area and 18% of the population of Brazil. These three states were selected by BNH and the Bank as the ones having the strongest executing capacity as well as the largest investment requirements for 1979-82. Economic and health conditions for these states are similar to those prevailing through- out the Region. 5.03 Aware of the serious income disparities and economic and social development differences between the Northeast and other more developed regions in the country, the Government has launched a series of programs aimed at promoting employment, industrializing the area and diversifying production. The Government's actions have been mainly devoted to heavy investments in transport, power, rural development, and stimulus to industrialization which have contributed to regional growth. These investments together with the population increase have built up pressure on the already precarious public services, especially urban water supply and sewerage. The Bank has supported this regional development policy through several recent loans to develop different sectors in the Northeast. According to the Superintendency for Development of the Northeast (SUDENE) the regional GDP grew during 1977 at 8% as a result of the above-mentioned programs, compared with 4.7% for the country. This growth is closely related to agriculture and in minor scale to industrial activities. If this growth is to be maintained, adequate infrastructure has to be provided in the immediate future. Water Resources 5.04 The Northeast can be classified in general as a semi-arid region. Rainfall is scarce (200 to 1,000 mm per year) and unevenly distributed. Average annual rainfall is higher along the coast (around 1,000 mm) and less towards the interior (as low as 200 mm). Severe droughts are frequent in the State of Ceara, the interior of Pernambuco and the northern part of Bahia (see Map 13717). Surface water is available only on a seasonal basis in most 1/ Northeast Region comprises the States of Maranhao, Piaui, Ceara, Rio Grande do Norte, Paraiba, Pernambuco, Alagoas, Sergipe and Bahia. - 16 - of the project area. Groundwater, especially in the State of Ceara and in the interior of Pernambuco (with the exception of narrow river valleys), is scarce and of poor quality (high salinity). This is basically due to pre- dominance of geologic crystalline formations of low permeability. These characteristics are reflected quite often in high water supply project costs in comparison to those in the rest of the country. Population 5.05 The combined population of the three project area states is 20.4 mil- lion, equivalent to 61% of the total population of the Northeast Region. The population and density of the individual states are given in the following table: Table 5.1: Population Data in the Project States and Brazil (1977) Bahia Ceara Pernambuco Brazil Estimate5 Population 8,850,000 5,409,000 6,141,000 113,209,000 Area (km ) 2 559,951 146,817 98,281 8,512,000 Density (persons/km ) 16 37 62 13 Source: Anuario Estatistico do Brasil. 5.06 Of note is the fact that while Bahia has a large population, its population density is low because of its large area. Conversely, both Ceara and Pernambuco have population densities that are well above the average for Brazil. The latter is in fact one of the most densely populated states, on par with those in the southeast of Brazil. 5.07 Population growth in the project states overall is below the 2.8% p.a. growth rate for Brazil. In Ceara the growth rate is 2.9% p.a., and in Pernambuco and Bahia 2.5% and 2.4% p.a., respectively. The lower population growth rates have been primarily a result of outward immigration, and it is expected that this will continue to be the situation in the near future. 5.08 The ratio of urban to total population of the project area is below the national average of 61.4% as indicated in Table 5.2. Of the three states, only Pernambuco in the future can be expected to approximate the national degree of urbanization, as the economic activity in Bahia and Ceara is more centered in the rural areas. Population annual growth rates in the capital cities are estimated at 4.9% for Salvador (Bahia), 4.4% for Recife (Pernambuco) and 5.8% for Fortaleza (Ceara), which are in excess of the overall urban growth rates for each state. - 17 - Table 5.2: Urban Population in the Project States (1977) Bahia Ceara Pernambuco Urban Population 4,044,000 2,439,000 3,741,000 % of Total 45.7 45.1 60.9 Growth Rates (%) 3.6 4.0 3.7 Source: SUDENE. Present Water Supply and Sewerage Service Levels 5.09 Service levels for urban water supply are below the national average of 75% of the urban population as indicated in the following table: Table 5.3: Water Supply Service Levels for 1977 (%) Bahia Ceara Pernambuco Capital City a/ 73 34 71 Total Urban b/ 63 30 56 Total State (urban and rural) b/ 28 14 32 a/ Source: State Water Companies. b/ Source: SUDENE. 5.10 The service levels appear relatively good for the capital cities in Bahia and Pernambuco but poor in Ceara. The situation is less satisfactory than is statistically indicated because of the deficient water supply condi- tions (para. 5.11). Also, in these states with relatively large rural populations, the overall state service levels are very low compared to the estimated national average of 46% of the population served. In Ceara the situation is the most serious with only 14% of total population served and less than one-third of the urban sector being attended. 5.11 The inadequacy of service is very serious in the capital cities where vast portions of population, mostly poor, remain unserved or served on a very restricted basis. In Salvador (capital of Bahia), present production capacity iLs only one-half of that required to serve the population connected to the system. Consequently, service is provided intermittently and is - 18 - suspended 40% of the time on a rotational basis. The city has a hilly topo- graphy and consumers located in the higher areas are deprived of service for one to three continuous days of the week. In Recife (capital of Pernambuco), idle production capacity coexists with unsatisfied demand due to inadequacy of the storage and distribution system. The system is subject to low pressures in some city districts combined with frequent pipe bursts in others. In Fortaleza (capital of Ceara) the situation is even more serious due to low percentage of the population served through networks. The unconnected population relies basically on individual dug wells. However, due to the extensive use of latrines and septic tanks, resulting from low coverage of sewerage networks, groundwater is heavily contaminated. 5.12 Although inadequate records, and limited metering of production and consumption do not allow precise computations of water production, sales, and unaccounted-for water, the mission prepared rough estimates, shown in Table 5.4, based upon water production capacity and other operational data. Table 5.4: Water Production and Sales for 1977 Bahia Ceara Pernambuco Water Productisn (m /sec) 4.4 2.0 5.9 Water Sales( m /sec) 2.4 1.0 3.0 Unaccounted-for Water (%) 46 50 49 Number of Connections 340,000 93,000 271,000 Percentage Metered 26 10 44 From these estimates it appears that a substantial amount of water produced is unaccounted for as a result of the lack of metering, illegal connections and water leakages in older or poorly maintained systems. 5.13 Sewerage service levels in urban areas were estimated to be, at the end of 1977, 8% for Pernambuco, 5% for Ceara and 6% for Bahia in comparison with the national average of 35%. Since most of the sewerage systems are in the capital cities, the situation in the other urban centers is even more serious, with Bahia and Ceara not having any sewerage systems outside the capital cities. As a result of the unequal expansion in water supply and sewerage, there has been increased water use without improving disposal systems, and the population basically relies on septic tanks and latrines, or discharges wastes in the storm drain system. In very poor areas where people cannot afford these facilities, sewage is dumped on the streets or in sidewalk drainage ditches with great danger of epidemic diseases. This situation, if not solved, will be aggravated by the increased consumption of water. - 19 - 5.14 The situation of sewerage services in the capital cities varies among them. In Salvador, EMBASA recently completed the first stage of a collection and disposal system (about 150 km of collectors and interceptors, pumping stations and sea outfall) to serve the most densely populated areas. However, for technical and financial reasons, connection rates have been very low, and in four years only 5,300 connections have been made. The portion served with networks corresponds only to about 10% of the city area although the disposal facilities (pumping and sea outfall) were designed and constructed to handle 100% of the sewage in 1990. 5.15 In Recife only 20% of the urban area is served with sewerage networks due to high construction costs. High water table levels and expansive soils make it difEicult and costly to install interceptors and collectors. For this reason, programs for Recife are more modest in terms of increased coverage. 5.16 In Fortaleza there are some 200 km of sewerage networks of which 100 km are operative and the rest require complementary investments to be committed. Only less than 5% of the city is now served with networks. Fortaleza has primarily single dwellings and low-rise buildings and, therefore, extension of required networks is considerable. Demand Projections 5.17 Expected water production and sales through 1982 are indicated for each state in Table 5.5. The estimates were based on: (i) the future avail- ability of supply coupled with distribution facilities resulting from the investments programs; and (ii) per capita consumption was considered constant after supply constraints are removed. This assumption is justified because the increased industrial demands and the elimination of rationing should offset the lower per capita consumption in the poor areas to be incorporated in the systems. For this estimate present per capita consumptions for metered and permanently supplied sectors in the cities or figures provided for in the consultants' studies were used. Because of the inability to measure unaccounted-for water (para. 5.12), these projections are considered only indicative of the expected results. - 20 - 5.18 Forecasted sewerage connections over the next four years are a result of the planned works. Levels of service are still far behind the requirements for collective waste disposal systems, but it is expected that only after 1982 will it be possible to improve the situation substantially, given the limited investment capacity of the SWCs. Table 5.5: Present and Projected Water Production and Sales,1977-1982 1977 1978 1979 1980 1981 1982 EMBASA Water Water Production (million m3) 157 173 188 200 207 215 Water Sales (million m ) 85 99 107 116 124 133 Unaccounted-for Water (%) 46 43 43 42 40 38 Number of Connections ('000) 340 345 368 396 424 452 Urban Population Served ('000) 2110 2261 2429 2617 2798 2890 Percent of Urban Population Served 63 64 66 68 72 74 Sewerage Population served ('000) 210 252 288 507 570 660 Percent of Urban Population Served 6 7 8 13 15 17 COMPESA Water Water Production (million m3) 186 196 229 248 267 285 Water Sales (million m3) 94 106 128 143 160 176 Unaccounted-for Water (x) 49 46 44 42 40 38 Number of Connections ('000) 271 304 356 386 415 444 Urban Population Served ('000) 2020 2190 2572 2802 3209 3260 Percent of Urban Population Served 56 59 66 69 72 74 Sewerage Population Served ('000) 280 285 371 463 639 810 Percent of Urban Population Served 8 8 10 11 14 18 CAGECE Water Water Production (million m3) 64 67 69 69 98 103 Water Sales (million m3) 32 34 36 38 59 67 Unaccounted-for Water (%) 50 49 48 45 40 35 Number of Connections ('000) 93 106 126 151 181 211 Urban Population Served ('000) 670 756 881 1052 1207 1400 Percent of Urban Population Served 30 31 34 39 43 47 Sewerage Population Served ('000) 115 128 191 252 313 375 Percent of Urban Population Served 5 5 7 9 11 12 - 21 - VI. THE PROJECT Project Origin 6.01 Since October 1975 the Brazilian Government has ,een considering the possibility of Bank participation in the implementation of PLANASA in the Northeast Region. During that year the Bank held discussions with the Government and BNH on the nature and scope of a potential Bank-financed project for the Northeast. Since then, three Bank missions have visited Brazil to assist BNH in the identification and subsequent preparation of the project. The investment programs initially presented by the SWCs to the Bank were too ambitious and reduced substantially during preparation to keep them in line with the executing capacity of the companies, the availability of funds and the possibility of timely and adequate supply of materials and equipment for the works. Project Objectives 6.02 The objectives of the proposed project are: (a) to support through the provision of water and sewerage services the Government actions aiming to promote economic growth and social development in the Northeast Region; (b) to improve the environment and health conditions of the population in the project area by assisting the SWCs in achieving PLANASA's water supply and sewerage objectives. It is estimated that the project will provide safe water to an additional 2.3 million people and sewerage to an additional 1.2 million by the end of 1982; (c) to assist the SWCs in making institutional improvements iLn the areas of planning, operations, finance and accounting, through technical assistance under the coordination of SATECIA program; (d) to ensure the continuation of the training program under the coordination of ABES; (e) to improve the financial position of the SWCs through the establishment of adequate tariff levels and structures and rationalization of operating costs; (f) to contribute to the strengthening of BNH's capability for project appraisal and supervision; and (g) to gain experience in administration of loans for this sector covering several SWCs that can be replicated in future operations in Brazil. - 22 - Project Description 6.03 The project consists of all major subprojects (representing 68% of the total investment program) to be commenced and completed in the States of Bahia, Ceara and Pernambuco in the period 1979-1982. The proposed Bank financing would cover the foreign exchange component of procurement contracts awarded by the SWCs for eligible subprojects between loan signature date (expected to be February 1979) and June 30, 1981. The project includes the following: (a) the increase of water production, treatment, storage, and distribution facilities for the capital cities of Salvador (Bahia) and Fortaleza (Ceara); (b) the extension of water distribution networks in Recife (Pernambuco); (c) the provision of about 125,000 new house connections in the three capital cities; (d) the execution of metering and leak detection and control programs in the capital cities and major towns; (e) the extension of sewerage networks, sewage treatment and disposal facilities, and house connections in the capital cities and in about 20 of the major urban centers of the interior of the states; (f) the expansion and improvement of water supply systems in approximately 35 medium-sized cities; (g) the construction or expansion of water systems in small villages as follows: Bahia - approximately 140 villages Ceara - approximately 60 villages Pernambuco - approximately 85 villages (h) tariff and metering studies for the three SWCs; (i) specific consulting services provided under the coordination of SATECIA to the SWCs in the areas of project management, finance and accounting, systems operations and inventory control; and (j) engineering services for detailed design and construction supervision. 6.04 A listing of communities to be served through Bank-financed subproj- ects during 1979-1982 in the interior of the states is presented in Annex 3. A description of the subprojects for the capital cities, and their execution - 23 - schedules are included in Annexes 3 and 4, respectively. Major works for the capital cities are indicated on Maps 13718, 13719, and 13720. Cost estimates are shown in Annex 5. 6.05 The tariff and metering studies included in the project are geared to: (a) rationalizing consumption; (b) improving the financial position of the SWCs; (c) removing subsidies to commercial and industrial consumers; (d) estab- lishing a more progressive tariff structure; and (e) implementing adequate metering levels and meter maintenance practices (paras. 4.05 and 7.14). 6.06 Although SATECIA is carrying out a nationwide technical assistance program for all SWCs in Brazil (para. 2.09), additional and specifically tailored support in certain areas in the three SWCs was found necessary as summarized below: SWC Areas for Technical Assistance EMBASA (Bahia) Financial Management, Accounting, Systems Operation, Information Systems CAGECE (Ceara) Financial Management, Project Management, Systems Operation, Commercial Area COMPESA (Pernambuco) Financial Management, Supplies and Materials Control It is estimated that a total of 100 man-months of specialized consulting services, in addition to the regular SATECIA program, are required. The assistance would be coordinated by SATECIA. BNH submitted during negotiations a detailed program, prepared with the assistance of SATECIA, to carry out these activities, which is considered satisfactory. Assurances were obtained that the programs will be implemented by BNH in accordance with the proposed plan and that the SWCs will take all required steps to enable BNH to implement the program. EngineerirLg 6.07 Final engineering design is completed or well advanced for all major works in the capital cities and for some 50% of the subprojects to be executed in the interior. It is estimated that an equivalent of 70% of the total program is already designed and that bids for about 30% of the total project components will be called during the first year of project execution. Additiona:L engineering consultant services, about 2,850 man-months, are required to complete designs and for construction supervision during 1979-1982. 6.08 Water works proposed for Salvador are part of the Master Plan for water supily and pollution control prepared in 1974 by consulting engineers, Hidroservice and Coplasa from Sao Paulo. The study is a comprehensive analysis of demands, sources and alternatives of supply to meet demands up to the year 2000. The plan analyzed five technically feasible alternatives of sequential - 24 - works (four using Joanes Basin waters and a fifth using Paraguacu River waters) and selected the least-cost solution. Part of the works recommended by the consultants are under construction (interconnections of storage tanks and Santa Elena Reservoir). Sewerage works are also part of a master plan prepared by Walter Sanchez y Associados from Rio de Janeiro. The feasibility report, concluded in 1968, reviewed the different alternatives for sewage collection and disposal in the natural basins of Salvador City and recommended the least-cost plan. Later, in 1969, the same consultants prepared a basic project for the recommended alternative which has been followed by EMBASA. These studies were reviewed by the Bank during the appraisal and the conclu- sions and recommendations found acceptable. 6.09 Water distribution and sewerage networks for Recife are now under final design by private consultants retained by COMPESA. The alternative for final disposal of sewage, which was found acceptable, is under design by the consultants as well as the updating of the Sewerage Master Plan for Metro- politan Recife. The results of this updating would be reviewed by the Bank during project execution. Detailed designs for Fortaleza, with the exception of water distribution networks, that are being designed by CAGECE's own engineers, were executed by local consulting firms on the basis of previous preliminary studies to select the least-cost approach, and were found satis- factory during appraisal. Project Costs 6.10 Table 6.1 shows a summary of investment costs for the three SWCs from 1979-1982. The program amounts to US$460 million. Out of this total program, about US$148 million corresponds to ongoing works or works which would be committed before expected loan signature (February 1979) or after July 1981, and would not be eligible for Bank financing. In addition, according to previous experience in other similar Bank-financed operations, it is estimated that some 3% (or US$10 million) of the proposed investments will not meet subproject selection criteria (para. 6.18). Total project cost for which Bank financing would be available is about US$303 million and the resulting proposed loan amount is US$100 million, representing the estimated foreign exchange cost of the project. Table 6.2 shows a summary of project costs. Subprojects for capital cities represent about 61% of the total project cost. Table 6.1 PROJECTED ANNUAL INVESTMENTS FOR EMBASA, COMPESA, AND CAGECE - 1979-1982 (thousand of UPCs) (million of US$) DESCRIPTION 1979 1980 1981 1982 TOTAL 1979 1980 1981 1982 TOTAL EMBASA Water Supply 2942.4 2311.4 2469.1 1172.8 8895.7 42.9 33.7 36.0 17-1 129.7 Sewerage 1076.8 1035.7 864.2 109.7 3086.4 15.7 15.1 12.6 1.6 45.0 Subtotal 4019.2 3347.1 3333.3 1282.5 11982.1 58.6 48.8 48.6 18.7 174.7 Price Contingencies 219.5 404.7 692.7 377.2 1694.1 3.2 5.9 10.1 5.5 24.7 TOTAL (EMBASA) 4328.7 3751.8 4026.0 1659.7 13676.2 61.8 54.7 58.7 24.2 199.4 COMPESA Water Supply 2174.2 1076.8 1618.6 473.2 5342.8 31.7 15.7 23.6 6.9 77.9 Sewerage 1035.7 1001.4 1625.5 939.6 4602.2 15.1 14.6 23.7 13.7 67.1 Subtotal 3209.9 2078.2 3244.2 1412.9 9945.2 46.8 30.3 47.3 20.6 145.0 Price Contingencies 178.3 253.8 665.3 342.9 1440.3 2.6 3.7 9.7 5.0 21.0 ,TOTAL (COMPESA) 3388.2 2332.0 3909.5 1755.8 11385.5 49.4 34.0 57.0 25.6 166.0 CAGECE Water Supply 2366.2 1111.1 816.2 397.8 4691.3 34.5 16.2 11.9 5.8 68.4 Sewerage 445.8 68.6 473.2 68.6 1056.2 6.5 1.0 6.9 1.0 15.4 Subtotal 2812.0 1179.7 1289.4 466.4 5747.5 41.0 17.2 18.8 6.8 83.8 Price Contingencies 157.8 144.0 267-.5 137.2 706.5 2.3 2.1 3.9 2.0 10.3 TOTAL (CAGECE) 2969.8 1323.7 1556.9 603.6 6454.0 43.3 19.3 22.7 8.8 94.1 TOTAL (GENERAL) 10596.7 7407.5 9492.4 4019.1 31515.7 154.5 108.0 138.4 58.6 459.5 1. Investment costs include provisions for physical contingencies (between 10% and 20% depending upon the nature of the works and status of engineering) and for engineering and administration (8%). 2. 1 UPC = US$14.68. 3. Base costs at September 1978. - 26 - Table 6.2: Summary of Project Costs a/ (In US$ million) - SWCs … Item EMBASA COMPESA CAGECE Local Foreign Totals Construction Costs: Water Supply 72.1 45.6 32.8 85.9 64.6 150.5 Sewerage 27.5 35.9 10.3 59.5 14.2 73.7 Engineering and Technical Assistance 7.9 6.4 3.4 17.1 0.6 17.7 Base Cost 107.5 87.9 46.5 162.6 79.3 241.9 Physical Contingencies 11.3 10.5 4.8 18.0 8.6 26,6 Price Contingencies 14.2 13.5 6.8 22.5 12.0 34.5 Total 133.0 111.9 58.1 203.0 100.0 303.0 a/ See Annex 3 for details. 6.11 Cost estimates have been based on bills of quantities prepared by the consultants for those projects with final engineering designs. Estimates for the rest were obtained on the basis of average unit per capita costs using samples of similar projects previously financed by the Bank in Brazil or executed by SWCs. Basic costs were estimated at December 1977 price levels and updated to September 1978 and include physical contingencies allowance which vary between 10% and 20% according to the type and location of works and to the status of engineering. Engineering and technical assistance consulting services have been calculated on the basis of US$6,000 per man-month, with an estimated cost of US$17.7 million! Costs exclude administrative expenses incurred by the SWCs that may be capitalized and interest during construction. Estimates were prepared in UPCs (para 3.07). Over the years the relative value of UPC with respect to the US dollar has been approximately constant. Thus an annual price escalation of 7% in US dollar terms was used for the period covered by the program. Financing 6.12 The SWCs expansion programs are to be financed by loans from BNH and state revolving funds (FAEs). The Bank loan of US$100 million would finance the estimated foreign exchange cost of the project estimated at 33% of project costs. The balance of project costs will be financed by BNH funds (17%) and loans from the state FAEs (50%). Due to the possible shortages of FAE funds, assurances were obtained from BNH and the state governments for the timely provision of necessary local currency funds to carry out the Bank-financed program on schedule. - 27 - 6.13 BNH would relend the Bank funds to the SWCs at interest rates of 3% to 4% per annum, a one- to three-year grace period on principal repayments and 19 to 21 years' final maturity and principal and interest subject to monetary correction (denominated in UPCs, para. 7.09). The loan would be allocated among the three SWCs as follows: US$60 million distributed according to project costs for the three capital cities; US$20 million in proportion to the investments in the interior of the three states; US$0.6 million for technical assistance to be provided under SATECIA and US$19.4 million unallocated, to be assigned on a first-come first-served basis. According to these criteria, distribution of loan funds would be as follows: US$ million EMBASA (Bahia) 38.0 COMPESA (Pernambuco) 26.0 CAGECE (Ceara) 16.0 Technical Assistance 0.6 Unallocated 19.4 Total 100.0 Implementation 6.14 The project will be executed by EMBASA, COMPESA and CAGECE during the period 1979-1982 in accordance with the investment program shown in Table 6.1. The construction schedule for the capital cities is given in Annex 4. Annual construction schedules for the interior would be prepared during project execution, with the schedule for 1979 to be agreed upon in January 1979. The individual subprojects to be financed by the Bank have been prepared, or will be prepared, by competent consultants retained by the SWCs. Subproject design will be subsequently reviewed by BNH's OT for the Northeast Region, SUDENE. SUDENE has a well-qualified team which reviews first the basic project and then the final designs and also assists BNH's central and regional offices in the supervision and control of project execu- tion. Financial and economic evaluation will be carried out by BNH headquarters. BNH will have the responsibility for coordination of the entire project. 6.15 The Bank will review all subprojects with an estimated investment cost of US$2.0 million or more. It is estimated that some 35 subprojects will require review. These 35 subprojects, together with the ones for the capital cities, represent around 80% of the programmed investments. Subprojects where the estimated investment cost is less than US$2.0 million may be approved by BNH subject to ex post review by the Bank on a selective basis. At the time Bank financing is approved, funds sufficient to cover the Bank's share of subproject costs will be committed to the subproject to ensure Bank participa- tion in the subproject up to the time of its completion. BNH has prepared technical guidelines, and on this basis the SWCs have adopted standard technical designs for communities with fewer than 5,000 inhabitants. These design standards aim at: (a) reducing the design costs and the construction period for subprojects; (b) ensuring that construction costs are kept to the - 28 - minimum level; and (c) reducing, through standardization, the operating and maintenance costs of small communities. These design standards were reviewed during the appraisal and found in conformity with the current design practices followed for similar Bank-financed small community systems and with sound engineering principles. The delegation of approval authorIty to BNH for sub- projects under US$2.0 million is consistent with the institutional capabilities of BNH in subproject analysis and approval. 6.16 Low connection rates to existing sewerage networks in Salvador have been a problem for EMBASA. There are several areas, especially in the older parts of the city, where connections to the network are difficult due to topographic and other reasons. However, the variety of individual situations is not very large and typical technical solutions can be devised for similar connection conditions. In addition, there are some low-income areas with very narrow, steep and zigzagging streets where conventional network designs could be very costly and alternative technological solutions should be analyzed. Finally, EMBASA has not officially approved technical norms for sewerage of new construction sites. Assurances were obtained that: (a) as a condition for disbursements for sewerage in Salvador, EMBASA will prepare a plan satis- factory to BNH and the Bank including technical and financial solutions to the existing problem of difficult sewer house connections in Salvador; (b) not later than December 31, 1979 EMBASA will prepare alternative solutions and implementation schedules satisfactory to the Bank to collect and dispose of sewage in those areas where current sewerage practices are very expensive or inappropriate; (c) EMBASA will prepare sewer house connection standards satisfactory to BNH and the Bank, not later than December 31, 1979. 6.17 The proposed investment program and construction schedules have been discussed with the SWCs and are compatible with their execution capabilities. SWCs are staffed with qualified personnel and have experienced engineering units, which with appropriate consultants' assistance as provided for in the project, can execute the proposed works (para. 6.07). Subproject Selection 6.18 Assurances were obtained that the following basic criteria for subproject acceptability for Bank financing will be used (para. 8.07): (a) All subprojects should comply with the following two conditions: (i) design must be in conformity with sound engineering practices; and (ii) subprojects must be the least-cost solution. (b) Subprojects for communities with fewer than 5,000 inhabitants must be in accordance with the standards for small communities (para. 6.15) and must: (i) generate revenues to cover at least operating and maintenance costs; and - 29 - (ii) have a per capita construction cost of less than 10 UPCs (or approximately US$150). (c) Subprojects for municipalities between 5,000 and 50,000 inhabitants must have a positive internal financial rate of return; (d) Subprojects for municipalities with 50,000 or more inhabitants must have an internal financial rate of return of not less than 5%; and (e) If a project for a municipality between 5,000 and 50,000 inhabitants does not meet the criteria under (c) above, it would be redesigned in accordance with lower acceptable standards to fulfill the criteria. If, even after redesign, the project does not meet the criteria on (c) above, it would be eligible for Bank financing only if its revenues cover at least operation and maintenance costs and if economic and social justifications are presented to the Bank and found acceptable. BNH would furnish subprojects for approval (para 6.15) together with an appraisal of the subprojects including economic and financial analysis. BNH would also provide information on financial terms to be applied to the subproject. Procurement 6.19 Project goods and civil works will be purchased and carried out respectively under contracts awarded in accordance with Bank guidelines, on the basis of international competitive bidding. However, civil work contracts under US$1,200,000 and equipment or materials supply contracts under US$400,000 can be awarded on the basis of local competitive bidding according to procedures satisfactory to the Bank. Foreign bidders will not be precluded from partici- pating in local bidding. Assurances were obtained that: (a) SWCs will prepare and make available to the Bank not later than sixty days prior to the issue of first tender or prequalification documents a general procurement notice satisfactory to the Bank; and (b) SWCs will update such a notice annually as long as any goods or works remain to be procured. The Bank will request prior review and concurrence of invitations to bid and of proposed awards for all contracts estimated to cost US$2.0 million or more. For all other contracts the SWCs will make available to the Bank for review copies of each contract together with the respective bidding documents, bid analysis report and recommendations for award. In the evaluation of bids, the local manufacturers will be allowed a margin of preference of either 15% of the c.i.f. price or the applicable import duty, whichever is lower. Consulting services will be awarded on terms and conditions acceptable to the Bank. It is expected that all contracts for engineering design and supervision be awarded to local firms. Given the advanced development of the civil works construction industry in Brazil, all civil works contracts are expected to be won by local contractors. Also, the bulk of the equipment and materials are likely to be won by Brazilian firms or Brazilian subsidiaries of foreign suppliers. - 30 - Disbursements 6.20 Disbursements for the proposed loan are scheduled to be completed before December 31, 1982. The closing date for the loan would be June 30, 1983. Table 6.3 shows the estimated schedule of disbursements. The proceeds of the loan would be made available to BNH in an amount equivalent to: (a) 58% of BNH's disbursements to SWCs on eligible subprojects 1/; (b) 29% of BNH's disbursements to the states under FINEST II line of credit for small communities approved subprojects; 2/ (c) 58% of BNH's disbursements to the states under FINEST III line of credit for small communities program 1/; and (d) 100% of foreign costs for consulting services for the technical assistance program referred to in para. 6.06. In case the amounts disbursed by BNH qualify for withdrawals from the Loan Account under (b) and (c) above, withdrawals shall be made, at BNH's choice, under either subparagraphs but not both. Bank disbursements would be made against a certificate of expenditure made by the Borrower for each subproject, the detailed documentation of which would not be submitted for Bank review, but would be retained by the beneficiary and made available for inspection during the course of supervision missions. Disbursements against consulting services for technical assistance program ((d) above) would be made against standard documentation. No works by force account are envisaged. Similar procedures have been used in previous loans for the sector in Brazil. 1/ BNH and FAE each lend to SWCs 50% of the direct project cost, plus an amount equivalent to 6.5% of the direct project cost to cover project related expenses of the SWCs which are capitalized (Annex 7, para. 1.04). 2/ BNH loans under FINEST II finance 100% of the direct project cost plus an amount equivalent to 6.5% of the direct project costs to cover project related expenses of the SWCs which are capitalized. - 31 - Table 6.3: Estimated Schedule of Disbursements (US $ '000) Fiscal Year Disbursement Cumulative at and Quarter in the Quarter end of Quarter 1978/79 March 31, 1979 June 30, 1979 0.5 0.5 1979/80 September 30, 1979 3.5 4.0 December 31, 1979 5.0 9.0 March 31, 1980 6.5 15.5 June 30, 1980 7.2 22.7 1980/81 September 30, 1980 8.0 30.7 December 31, 1980 9.2 39.9 March 31, 1981 8.2 48.1 June 30, 1981 9.4 57.5 1981/82 September 30, 1981 9.0 66.5 December 31, 1981 8.6 75.1 March 31, 1982 7.0 82.1 June 30, 1982 6.8 88.9 1982/83 Sepitember 30, 1982 6.4 95.3 December 31, 1982 4.7 100.0 - 32 - VII. FINANCIAL ANALYSIS The Borrower 7.01 BNH is the largest government-owned banking institution in Brazil dedicated to social development, with total assets at the end of 1977 of US$11.6 billion. BNH's main activities, which are nationwide, are concerned with the financing of low-cost housing, urban development and the sanitation sectors. Over the period 1971-1980, BNH expects to invest about 54% of its resources in low-cost housing programs, 17% in urban development for infra- structure and mass transportation systems, 17% in sanitation projects, and the remaining 12% in studies, training, technical assistance, and miscellaneous activities. BNH's primary source of funds is an 8% employer's payroll contri- bution (Employee Indemnity Fund-FGTS) for all nongovernment employees covered by labor legislation. Individual FGTS accounts are maintained for the parti- cipants and withdrawals of the deposits can be made when a worker is unemployed or retired. All deposits made after 1974 earn interest at the rate of 3% p.a. Other fund sources for BNH include interest and principal repayments from its existing loans and investments. Past and Present Finances 7.02 The following summary financial statements indicate the development of BNH's financial activities since 1971. Full details are given in Annex 6. Table 7.1 BNH Summary Funds Flow Statement (US$ millions) 1971 1973 1975 1976 1977 Loan and Service Income 163.0 341.1 559.6 667.2 801.3 Operating Expense 102.0 196.5 339.0 411.2 592.6 Operating Income 61.0 144.6 220.6 256.0 208.7 Indemnity Deposits (net) 424.4 727.1 1,135.1 1,199.6 1,458.0 All Other Sources 249.0 361.8 904.7 1,132.5 912.2 Total Sources 734.4 1,233.5 2,260.4 2,588.1 2,578.8 New Loans Granted 618.4 1,021.9 1,939.4 2,569.7 2,483.2 All Other Applications 116.0 211.6 321.0 18.4 95.6 Total Applications 734.4 1,233.5 2,260.4 2,588.1 2,578.8 - 33 - Table 7.2 BNH Summary Balance Sheets (US$ Millions) December 31 1971 1973 1975 1976 1977 Loan Receivables 1,545.3 3,131.7 5,461.4 7,246.1 9,284.9 Negotiable Bonds 203.8 761.1 1,120.0 1,048.8 1,001.3 All Other Assets 378.1 345.4 893.2 995.8 1,279.7 Total Assets 2,127.2 4,238.2 7,474.6 9,290.7 11,565.8 Indemnity Fund Deposits 1,741.5 3,373.3 5,337.7 6,400.3 8,021.7 Capital and Reserves 283.8 696.4 1,349.8 1,495.2 1,644.5 Other Liabilities 101.9 168.5 787.1 1,395.2 1,899.6 Total Liabilities 2,127.2 4,238.2 7.474.6 9,290.7 11,565.8 7.03 BNH's gross loan and service income has shown steady and rapid growth (30% p.a.) since 1971, and until 1976 operating income increased at the same rate and averaged about 40% of revenues during the period. The Govern- ment has directed BNH, as an institution promoting social welfare, to minimize its operating income. While loan and service income continued to grow in 1977, operating income declined from US$256.0 million in 1976 to US$208.7 million in 1977, a figure which represented only 26% of loan and service income. This reduced margin reflected primarily the fact that operating expenses increased at more than twice the rate of revenue growth, 44% and 20%, respectively. 7.04 Since 1971 net receipts of the Employee Indemnity Fund have grown at a rate of 23% p.a. In 1977 they increased at almost the same rate (22%) and represented about 57% of total BNH fund sources, about the same level which prevailed in 1971. Amortization of loan principal, which has increased only slightly since 1974, was about the same level as the previous year. As a result of this, the reduction in internal cash generation, and lesser funds being provided by working capital reductions, total funds available for investment were almost the same in 1977 as in the previous year. They were, however, sufficient to meet requirements for new loans, which were below the 1976 level reflecting the Government's desire to restrain investment for the purpose of reducing inflation. 7.05 In 1974, BNH established a liquidity fund (Fundo de Assistencia de Liquideza-FAL) financed by contributions from savings and loan institutions to provide short-term assistance to financial institutions in the housing sector in financial difficulty. In spite of the assistance, BNH had to take judicial action to force the liquidation of six institutions. Debts of these Borrowers amounted to US$636.8 million, or about 6% of BNH's total assets at - 34 - the end of 1977. BNH has established a reserve of US$255.0 million to cover any loss from these liquidations although none are expected. 7.06 Since 1971, BNH's loan portfolio has expanded five-fold and its total ass-ts have grown by 440%. To protect the Employee Indemnity Funds from losses due to inflation, BNH denominates all financial transactions in a constant monetary equivalent, the Unidade Padrao de Capital (UPC). Addition- ally, BNH requires that all its loans be guaranteed by state or municipal governments, financial institutions, or by mortgages where appropriate. At the end of 1977 BNH's capital and reserves were equal to 16% of liabilities, which is satisfactory. Financial Projections 7.07 Each year BNH prepares a three-year investment program (expressed in UPCs) which is approved by the Minister of Interior. For the period 1978- 1980 BNH's investment budget totals US$11.4 billion with projected fund sources and applications as indicated in the following Table: Table 7.3: BNH Projected Sources and Application of Funds, 1978-1980 Amount % (In US$ Millions) Sources FGTS (Net) 5,559 49 Net Receipts on Lending Operations 3,571 31 Operating Income 808 7 Sale of Securities/Other (Net) 1,201 11 Foreign Loans (including Bank Loan) 220 2 Total Sources 11,359 100 Applications Housing 7,169 63 Sanitation 1,872 17 Urban Development 1,176 10 Technical Assistance 747 7 Other 395 3 Total Applications 11,359 100 7.08 During the three-year program period, BNH's growth has been projected at 14% p.a. The sectoral distribution of investments, in general, follows the same proportions as in previous periods. BNH's administrative costs are projected to rise from their historic 40% of service income level to - 35 - 67%. This increase is attributed to the need to establish a new reserve for contingencies, additional technical assistance, and additional personnel for the decentralization of BNH's activities. BNH's management is aware of its rapidly increasing administrative costs, and has recently initiated programs to promote better utilization of its personnel. 7.09 As the interest rate on the Bank loan will be higher than the relending rate and the maturity of BNH's loans to the SWCs exceeds the maturity of the Bank loan, BNH's debt service payments to the Bank will exceed payments to BNH by the SWCs. BNH's financial position is expected to be strong enough to absorb this shortfall without difficulty. A comparison of Bank terms and BNH onlending terms to the SWCs follows: Lending in the Normal Northeast PLANASA Terms Terms Bank Terms BNH FAE BNH FAE Annual Interest (%) 2-8 5.5/a 3.0-4,0 3.5-4.0 - Grace Period (years) 1-3 1-3 1-3 1-3 3 Final Maturity (years) 19-21 19-21 19-21 19-21 12 /a Average. In addition to the interest rates, BNH may charge up to 2% of the total loan as a one time fee for administration and technical services. Also a commitment fee of 12; is charged by BNH on the undisbursed portion of the loan. The financial agent also charges 1% per year for administrative expenses and is entitled to receive 0.1% of each periodic payment made by the SWCs to amortize the loan. The resulting interest cost on BNH loans to the SWCs thus ranges between 4.0 and 5.0% p.a. The low interest rates and extended maturity periods for the Northeast SWCs are justified for the following reasons: (a) the urgency to provide safe water and sewerage services to satisfy at least basic minimum needs, at the lowest possible cost to a large segment of the poor population; (b) the magnitude of tariff increases required to meet the debt service; (c) higher tariffs could jeopardize consumers' affordability of these services; and (d) the maturity period is in line with the economic life of the project. The Beneficiaries 7.10 All three SWCs share the common problem of inadequate rates of return on assets and low internal cash generation. This situation exists primarily because of high cost structures and inadequate tariff levels. This section will cover tariff matters common to all SWCs and then review the past, current and projected financial position of each SWC. 7.11 Tariff structures for the SWCs are basically similar, with three consumer categories including residential, commercial and industrial as indicated on Table 7.4. The bulk of residential customers are not metered (para. 5.12 and Table 5.4) and most are billed at a flat rate of about US$1.75 per monYh. Metered residential customers pay minimum charges for the first 12 to 15 m which is roughly equivalent to the nonmetered customers' total Table 7.4 BRAZIL - NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT PROJECT SWCs TARIFF STRUCTURES - 1977 (current Cr$) CONSUMER CLASSIFICATION EMBASA CAGECE COMPESA Minimum Excess Minimum Excess m3 Minimum Excess m' l2m3 mJ 20m3 21-50m- 51-lO0m3 over lOOmJ 15mJ 16-55m: 56-75m3 over 75m3 RESIDENTIAL/PUBLIC Not metered (small)25.00 33.00 30.00 - 121.00 based on floor Area (large)56.00 Metered (small)25.00 3.75 33.00 1.72 1.80 1.87 30.00 2.00 2.20 2.50 (large)40.00 3.75 COMMERCIAL/PUBLIC Not metered 56.00 33.00 30.00 - 121.00 based on flobr area Metered 56.00 3.75 33.00 1.72 1.80 1.87 60.00 2.20 2.60 INDUSTRIAL Not metered 190.00 66.00 60.00 - 256.00 based on floor area Metered (30m3)190.00 1.75 66.00 1.57 1.50 1.35 60.00 2.20 2.60 Raw water 1.50/m3 - 37 - billing, and then pay UJ$0.11 to US$0.22 per m for excess consumption. EMBASA has a flat charge per m for excess consumption, while COMPESA and CAGECE have slightly increased charges in three successive consumption blocks. Commercial and industrial rates are about the same as the residential rate, with the exception oE higher initial minimums. Sewerage tariffs are generally a percentage of water tariffs, with the percentage ranging from 30% to 110%. 7.12 Tlhe tariff structures are applicable to both the capital city and interior municipalities and no attempt is made to relate charges to capital investments and operating cost conditions in the various municipalities. The tariff structures are only mildly prog5essive, except for EMBASA which bills any consumption above the minimum 12 m block at almost twice the base rate per cubic meter for small consumers, and the structures, therefore, provide only limited incentive for metered large customers to conserve water. 7.13 All SWCs and their respective state governments have recognized the need to improve their financial position and have agreed to revenue covenants which will provide for sufficient revenues to cover the sum of operating and maintenance expenses and depreciation, and provide the following rates of return on revalued net fixed assets in operation: 1983/ 1979/1980 1981 1982 Subsequent Years EMBASA 6% 6% 6% 7% COMPESA 5% 5% 5% 7% CAGECE 1% 3% 5% 6% The specified rates of return are consistent with each SWC's present financial position and future cash requirements. In the case of CAGECE, the magnitude of real tariff adjustments required to achieve the long-run objective return is large, aLnd accordingly lower rates of return have been established for the early years; to allow for more gradual tariff increases. 7.14 In-the past, tariff increases have generally been affected by adding a fixed percent to the water charge for each category. Because of the low per capita income in the project states, this procedure could result in unmetered residential consumers paying for water an amount in excess of the government guidelines of 5.0% of the minimum wage. Accordingly, future tariff increases will have to be accompanied by tariff restructuring and metering policies to take into account aspects of income distribution, resource allocation, and water conservation. Under the project, by October 31, 1979, the SWCs will carry out studies in the fields of metering policies and water supply and sewerage tariffs, in accordance with terms of reference and with the assistance of consultants satisfactory to the Bank. These studies are expected to make recommendations on the improvement of tariff structures and metering policies. The summary terms of reference for the studies are in- cluded in Annex 8. The individual SWCs will put into effect the findings and conclusions of the studies as shall be agreed upon between the Bank, BNH and each SWC. - 38 - Financial Status and Projections of the Beneficiaries 7.15 Past and projected income, cash flow statements and balance sheets for EMBASA, COMPESA and CAGECE are presented in Annex 7. Because of the high rates of inflation, which distort year to year comparisons, the historical income statements and balance sheets and the projected financial statements have been stated in UPCs. The 1976 and 1977 results are at best indicative, since SWCs income statements include monetary adjustments, and asset and liability accounts are maintained by the SWCs in current Cruzeiros, both of which make it difficult to present financial statements on the basis of a constant monetary unit. I/ The UPCs used in the financial projections have been escalated at 7% p.a. during the period 1979-1982, to reflect the recent differential growth rates in the ORTN (on which the UPC/Cruzeiro parity is based) and the general price index in Brazil. EMBASA 7.16 In 1977 EMBASA had an operating ratio of .77, but interest expense exceeded operating income resulting in a net loss equal to 11% of revenues. The rate of return on net revalued fixed assets in operation was 2.9%. EMBASA had not generated enough cash internally to meet its debt service requirements in 1977 (debt service ratio 0.8), and required equity contribu- tions from the state for these purposes. EMBASA's current financial position is tight in spite of a satisfactory current ratio of 2.8. This is because some cash balances represent advance loan drawdowns from BNH/FAE and are reserved for subsequent disbursements to contractors on specific projects. The capital structure of EMBASA is overburdened with debt, which accounts for 86% of total capitalization. The following table summarizes financial results for 1977 and projections through 1983: 1/ Decree Law 1598 of December 26, 1977 requires firms to set up a special ledger as of January 1, 1978 in ORTN in which all items subject to monetary correction are to be entered. - 39 - Table 7.5: Selected Financial Data - EMBASA (UPC millions) 1977 1978 1979 1980 1981 1982 1983 Water Sold (Million m3) 85 99 107 116 124 133 141 Revenue/rI (water) (UPCs) .015 .017 .019 .021 .023 .027 .029 Revenues 1.51 1.98 2.44 3.03 3.60 4.41 4.95 Operating Costs a/ 1.17 1.43 1.52 1.92 1.28 2.91 3.06 Operating Income .34 .55 .92 1.11 1.32 1.50 1.89 Interest .50 .54 .63 .69 .78 .98 1.15 Net Income (Loss) (.16) .01 .29 .42 .54 .52 .74 Operating Ratio .77 .72 .62 .63 .63 .66 .62 Debt Service Ratio 0.8 1.2 1.6 1.7 1.8 1.7 1.6 Rate of Return (%) 2.9 4.3 6.0 6.0 6.0 6.0 7.0 Debt/Total Capital (%) 86 88 89 89 89 87 86 a/ IncLudes depreciation. 7.17 Income projections based on tariffs designed to meet the Bank's revenue covenant (para. 7.13) indicate that through 1983 operating ratios will be in the range of 62% to 66% and that EMBASA will have a satisfactory net income position. To achieve this performance EMBASA will have to increase tariffs in real terms by about 21% during the 1979-1983 period. 1/ Internal cash generation will be adequate to cover working capital and debt service requirements during the forecasted period. All capital expenditures not covered by internal cash generation are assumed to be financed by BNH/FAE loans. 'With regard to the balance sheet, liquidity will be satisfactory and the ratio of debt to total capital is expected to remain close to its present level of about 88% as a result of the fact that the bulk of capital expenditures will be debt-financed. COMPESA 7.18 In 1977 COMPESA had an operating ratio of .75 and reported a net income equivalent to 9% of revenues. However, construction in progress in- cluded a large amount of completed work, and had this work been transferred to 1/ In current Cruzeiros the tariff increase needed to keep pace with price escalation is estimated to be equivalent to the annual devaluation of the Cruzeiro vis-a-vis the UPC plus 7% (para. 7.15), currently equivalent to between 35% and 40% p.a. - 40 - fixed assets, the larger amount of depreciation would have placed COMPESA in a loss position. The rate of return on net fixed assets in operation was 11.1%, the high figure resulting from the understatement of fixed assets (para 4.09). Internal cash generation was sufficient to provide a debt service ratio of 1.5. COMPESA's current financial position is tight (current ratio 1.6), and most of the cash balance is committed to specific work in progress payments. COMPESA's capital structure is largely debt, which constitutes 77% of the total. The following table gives the highlights of COMPESA's financial performance for 1977 and the projected performance through 1983: Table 7.6: Selected Financial Data - COMPESA (UPC millions) 1977 1978 1979 1980 1981 1982 1983 Water Soll (Million m ) 94 106 128 143 160 176 196 Revenue/m (water) (UPCs) .011 .012 .013 .014 .014 .015 .017 Revenues 1.32 1.57 2.07 2.66 3.07 3.88 4.71 Operating Costs /a .99 1.32 1.64 2.11 2.38 3.04 3.34 Operating Income .33 .25 .43 .55 .69 .84 1.37 Interest .22 .19 .30 .49 .60 .77 .89 Net Income/(Loss) .12 .06 .13 .06 .09 .07 .48 Operating Ratio .75 .84 .79 .79 .77 .78 .71 Debt Service Ratio 1.5 1.5 1.2 1.3 1.2 1.5 1.4 Rate of Return (%) 11.1 4.5 5.0 5.0 5.0 5.0 7.0 Debt/Total Capital (%) 77 78 80 81 83 84 83 /a Includes depreciation. 7.19 Income projections based on maintaining tariffs in real terms through 1983, which will allow COMPESA to meet the Bank's revenue covenant in 1979 and subsequent years (para. 7.13), indicate an operating ratio averaging about 78%, and a net income position in all forecast years. COMPESA's internal cash generation will be adequate to meet debt service, with the debt service ratio averaging 1.3 during the forecast period. The debt to total capital ratio is projected to increase slightly to .83 by 1982. CAGECE 7.20 In 1977 CAGECE had an operating ratio of .79 and reported a modest net income, although both depreciation and interest expense have been under- stated. More importantly, CAGECE capitalized an estimated 73% of its operating - 41 - and administrative costs (Annex 7, para. 1.04) without which a 100% increase in tariffs would have been required to break even. The rate of return on net fixed assets in operation was 3.2%, also overstated because of the above items and because of excessive construction in progress which did not enter the rate base. The debt service ratio-was 1.5. CAGECE's current position is poor, with a current ratio of .9, but CAGECE's capitalization is satisfactory, with debt equivalient to 56% of total capital. CAGECE's financial position is worse than the othier two SWCs because revenues are extremely low in relation to assets and debt and are also lower on a unit basis. The table below indicates CAGECE's financial results for 1977 and projected financial performance through 1983: Table 7.7: Selected Financial Data - CAGECE (UPC millions) 1977 1978 1979 1980 1981 1982 1983 Water Sold (Million m3) 32 34 36 38 59 67 75 Revenue/m3 (water) (.01 UPC) .008 .010 .014 .017 .017 .023 .024 Revenues .31 .40 .61 .83 1.23 1.83 2.17 Operating Costs /a .25 .37 .54 .75 .99 1.30 1.42 Operating Income (Loss) .06 .03 .07 (.08) .24 .53 .75 Interest .05 .14 .14 .15 .27 .45 .52 Net Income (Loss) .01 (.11) (.07) (.07) (.03) .08 .23 Operating Ratio .79 .92 .89 .91 .80 .71 .65 Debt Service Ratio 1.5 1.1 1.7 1.6 1.4 1.4 1.5 Rate of Return (%) 3.2 0.9 1.2 1.1 3.0 5.0 6.0 Debt/Total Capital (%) 56 70 80 82 84 84 83 /a Includes depreciation. 7.21 For CAGECE's projections, tariffs have been increased gradually as the real increase in tariffs required to meet the Bank's financial viability in 1979 and 1980 (para. 7.13) would be too large in terms of consumer afford- ability. Through 1981 CAGECE is projected to be in a loss position, but will be able to meet its debt service. By 1983 CAGECE will have to raise its tariffs by 71% in real terms to meet the rate of return requirement of 6%. CAGECE's financial position is worse than the other two SWCs because revenues are extremely low in relation to assets and debt and are also lower on a unit basis. In that year the operating ratio will be .65, the debt service ratio 1.5, and debt will account for 84% of total capital. - 42 - Evaluation 7.22 The financial performance of the SWCs will have to be closely monitored during supervision and the financial projections revised at least annually. In this regard it must be noted that the risks of the three SWCs not attaining or maintaining financial viability during the forecasted period are high for a number of reasons, the most important of which is the require- ment for a 35-40% annual tariff increase needed just to keep pace with inflation. Also the required tariffs have been based on aggregate statewide projections of water produced, unaccounted for and sold, and if water sales fail to materialize, actual tariffs in real terms will have to be higher than indicated in the financial projections. Another major problem is that all three SWCs have embarked on large sewerage programs in the capital cities which are not likely to be financially viable during the forecast period. The sewerage investments, coupled with high cost per capita water supply systems and correspondingly high debt service requirements, will make it difficult to maintain tariffs at levels which will keep the SWCs financially viable. Assurances have been obtained from the Federal and state governments and BNH that they will support and assist the SWCs in meeting the Bank's revenue covenant (para. 7.13). 7.23 The SWCs' managements are aware of the magnitude of their problems and have developed financial recovery programs encompassing the following actions: (a) increased metering of existing connections, particularly in high income and high consumption areas; (b) increased water supply through upgrading the capacity of existing treatment plants; (c) increased consumer connections in existing water distribution systems and sewerage networks; (d) close control of operating expenses; and (e) reduction of unaccounted-for water. Assurances were obtained that the SWCs will propose for Bank consideration specific programs, implementation schedules, and objectives not later than October 31, 1979, and these programs will be carried out in accordance with agreed-upon schedules. Monitoring Indicators/Reporting Requirements 7.24 In order to permit the satisfactory monitoring of its investment program and financing plans, EMBASA, COMPESA and CAGECE have agreed: (a) to prepare three-year financial projections before March 31 of each year expressed in local currency and UPCs, which would include an income statement, statement of cash flow, balance sheet, and calculation of fixed assets in operation; (b) to establish, not later than October 31, 1979 a system of monitoring indicators satisfactory to the Bank. Under this system, each SWC would provide a quarterly progress report which would include: (i) progress on the project implementation, giving details about design completion, physical execution of the works and disbursements; - 43 - (ii) progress in meeting the objectives of the financial recovery programs (para 7.23); (iii) statistical data for the number of water and sewer connec- tions, volume of water produced, volume of water and sewerage billed, and average tariffs; and (iv) preliminary financial statements indicating key operating and financial ratios for water supply and sewerage; and (c) to prepare a report satisfactory to BNH and to the Bank on the execution and initial operation of the project, not later than six months after project completion. BNH will be responsible for the timely preparation and submission of these project completion reports. VIII. ECONOMIC AND SOCIAL ANALYSIS IntroductLon 8.01 The project aims to achieve two major objectives: (a) to enhance the living and health conditions of the people in the three project states, especially for the low-income population, by improving and extending water supply and sewerage systems; and (b) to improve the planning and execution capabilities of the three project SWCs by additional consulting services and Bank supervision. These objectives are particularly important in the Northeast Region where health conditions are worse than in the rest of the country and water supply and sewerage coverage is behind the PLANASA targets set for 1980. Internal Rate of Return and Long Run Marginal Cost 8.02 The combined internal financial rate of return (IFRR) for the sub- projects and their complementary works in the three capital cities is estimated to be 10%. These subprojects, the cost of which is US$250.1 million at December 1977 prices 1/, account for 61% of the total project cost. Of these subprojects, the IFRRs for Recife, Fortaleza, and metropolitan Salvador are estimated to be 13%, 12%, and 7% and account for 17%, 15%, and 29% of the total project cost, respectively. Since the subprojects outside the capital cities are numerous and are at various stages of preparation, their internal rate of return has not been calculated. Their cost is estimated to US$152.9 million which represents 39% of the total project cost. 8.03 The IFRRs can be used as a proxy for the minimum internal economic rates of return (IERR) by using existing tariff levels to represent benefits based on demonstrated willingness to pay. All taxes and subsidies are excluded and the Eoreign exchange costs are shadow priced at 1.30 times the official exchange rate, to represent its opportunity cost. On this basis the minimal economic rates of return are 11.2% for Recife, 1.2% for Fortaleza, and 3.4% for metropolitan Salvador. These IERRs understate the real economic return since 1/ Including complementary investments. - 44 - they do not include those important benefits that are not meaningfully quanti- fiable. Water sales to the urban poor 1/ (about 28% of total incremental volume sold), while priced at a low tariff, represent in fact much higher benefits since they are the first increment in safe water consumption and will ensure most of the health benefits from an improved supply. Improvements in public health, labor productivity, infrastructure for economic development and institutional capabilities, are not reflected in most cases in revenues from tariffs, and provide evidence that economic and social benefits of the proposed project exceed its financial benefits. These considerations lead to the conclusion that the above IFRRs are acceptable. 8.04 The estimated IFRRs are highly sensitive to tariffs or demand changes since estimated benefits include only revenues from consumption charges. The existence of water rationing and the extremely low level of sewerage coverage suggest that services to be provided by the project are not likely to be restricted by a limited demand despite the increase in tariffs in real terms. Annex 9 includes the calculation of the IFRRs for the three capital cities. 8.05 The long-term marginal cost of water supply and sewerage has been estimated for the three capital cities by calculating the average incremental cost of each subproject and complementary works. Details of the calculations are also given in Annex 9. A comparison between average incremental cost and the average tariff at December 1977 price level is also shown in Table 8.1. Table 8.1: Average Incremental Cost and Tariffs a/ (December 1977 prices) Average Incremental Cost City (at 11% Discount Rate) Average Tariff Salvador Water Supply (C$/m ) 5.3 3.7 Sewerage (Cr$/m equivalent) 8.8 3.8 Recife Water Supply (C$/m 3) 3.2 2.6 Sewerage (Cr$/m equivalent) 2.3 2.7 Fortaleza Water Supply (CS$/m ) 3.5 2.2 Sewerage (Cr$/m equivalent) 3.9 2.2 a/ A shadow exchange rate factor of 1.3 was used to reflect the opportunity cost of the foreign exchange. 1/ See para. 8.01 for definition. - 45 - 8.06 From the preceding table, it can be concluded that, except for sewerage charges in Recife, average tariffs for water supply and sewerage are significantly lower in all three capital cities than the corresponding average incremental costs. Since tariffs in most cases are not progressive with respect to volume, tariffs for marginal consumption are also lower than average incremental costs and are likely to have a detrimental impact on resource allocation. Specific tariff studies are included in this project to correct the present situation (para. 7.14). Design and Selection Criteria 8.07 Project design and selection (para. 6.18) are in accordance with the objectives of the Brazilian sector authorities (to serve 80% of urban popula- tion) to ensure that a significant proportion of low-income population will have access to safe water and basic sanitation at an affordable tariff, while still ensuring, through cross-subsidization, the basis for the financial viability of the SWCs. Population Served 8.08 On an overall basis (para 6.02, Table 5.5) it is estimated that by 1982, an additional 2.3 million persons will benefit from the water supply extension and 5.3 million existing consumers from improved service. The project will increase the overall urban water supply service levels in the three project states from 52% in 1977 to about 67% of the urban population by 1982. Sewerage service will be extended to about 1.2 million individuals, increasing service levels from 6.5% to 16% of the urban population. The impact of the project will continue increasing as complementary works are completed. Impact on Poverty Groups 8.09 The direct impact of the project on the poverty group, defined as families earning a monetary income of three regional minimum salaries or less 1/, in the three capital cities was estimated by calculating the proportion of urban poor in the total incremental population served. In water supply this rate is 61%, increasing the amount of urban poor served from 53% (1,300,000) in 1977 to 73% (2,500,000) by 1985. The SWCs will undertake studies with the Bank's assistance to prepare low-cost solutions to service the remaining poor areas. 1/ According to the 1970 census, close to 1.6 million families or 8.1 million persons living in the metropolitan areas of Brazil were in the poverty group that year. The percentage of families living in poverty ranged from 41% in Sao Paulo to 76% in Fortaleza. Variations in thre minimum salary among regions were assumed to reflect variations in tfle cost of living. On an annual basis the three minimum salary threshold corresponds approximately to one-third of the national per capita income. Minimum monthly salaries on April 28, 1978 were (for the capital cities): Fortaleza Cr$ 1,111.20 (US$68) Recife Cr$ 1,226.40 (US$69) Salvador Cr$ 1,226.40 (US$69) - 46 - Table 8.2: Water Supply: Incremental Change in Population Served in the Capital Cities, 1977-1985 ('000 inhabitants and percentages) Urban Poor Others Total Salvador 452 (62%) 282 (38%) 734 (100%) Recife 283 (64%) 160 (36%) 443 (100%) Fortaleza 469 (60%) 317 (40%) 786 (100%) Total 1,204 (61%) 759 (39%) 1,963 (100%) 8.10 Since the limited information available suggests that the proportion of low-income population is higher in the interior than in the capital cities, the impact of investments on poverty outside the capitals (about 40% of total project cost) is likely to be more significant. 8.11 Due to present low coverage of sewer service, the investments programmed under this project will cover initially commercial and high-rise, high-density residential areas. The proportion of urban poor in these areas is lower than in the areas to be served with water. The distribution of house connections among the different income groups was not available at the time of appraisal and consequently, only rough estimates of the incremental poor to be served are possible. The situation would be as follows: Table 8.3: Sewerage: Incremental Change in Population Served in the Capital Cities 1977-85 Percent of incremental population served by the project which are classified as urban poor City (1977-1985) Salvador 35 Recife 37 Fortaleza 39 - 47 - Project Services Affordability 8.12 Brazilian Government guidelines indicate that the minimum charges for water and sewerage should not exceed 5% of one minimum monthly salary (equivalent to Cr$56 to Cr$61) and the combined charge for water and sewerage should not exceed 7% of one minimum monthly salary. The existing monthly charges for minimum consumption range from Cr$34 to Cr$51, and are therefore within Government guidelines. However, since between 1978 and 1982 the three SWCs will be maintaining or increasing tariffs in real terms, the SWCs tariff structures may have to be made more progressive if revenue objectives are to be met without exceeding Government guidelines for the low, income population. Since approximately 70% of the poor earn more than one minimum wage per family, it may be concluded that water will be provided to most families at affordable prices. It must be recognized, however, that even 5% of one minimum salary may represent an unaffordable amount to the 30% of the poor classified as extremely deprived and greater cross-subsidization than now exists has to be incorporated into the tariff structure to serve these persons. It is estimated that although 61% of the incremental population served with water belongs to the poverty group, only 28% of the incremental water produced will be consumed by these groups. Therefore, the possibilities of cross- subsidization between low-income and high-income groups are feasible with an appropriately designed tariff structure. A tariff study to be undertaken by the three SWCs will include these considerations (para. 7.14 and Annex 8). IX. AGREEMENTS REACHED AND RECOMMENDATIONS 9.01 During loan negotiations, agreements were obtained: (a) from the Banco Nacional da Habitacao (BNH) that it will: (i) implement a technical assistance program to the three SWCs (para. 6.06); (ii) ensure that sufficient local currency funds are made available to the SWCs for completion of the project on schedule (para. 6.12); (iii) ensure that subprojects will be selected in accordance with agreed upon criteria (para. 6.18); (iv) give the Bank a reasonable opportunity to exchange views on future modifications to BNH/SFS organi- zation and guidelines and rules to be used for PLANASA (para. 3.08); (v) revise the uniform accounting manuals to include cash flow statements before December 31, 1979 (para. 4.08); and - 48 - (vi) cause SWCs to prepare and submit not later than six months after project completion individual reports, satisfactory to the Bank, on the execution and initial operation of the project (para. 7.24). (b) from the State Governments of Bahia, Pernambuco and Ceara that they will: (i) ensure that sufficient local currency funds for the project will be made available to the SWCs for completion of the project on schedule (para. 6.12); and (ii) take whatever steps are required to ensure that the respec- tive SWCs maintain revenues at levels sufficient to cover all cash operating and maintenance expenses and depreciation and provide the rates of return on revalued net fixed assets in operation established in para. 7.13; (c) From State Water Companies: (i) The SWCs will take all required steps to enable BNH to implement a technical assistance program, according to the plans agreed upon during negotiations (para. 6.06); (ii) EMBASA will propose with respect to the city of Salvador, a plan satisfactory to the Bank on: a) solution of the technical difficulties for sewer house connections. The sub- mission and Bank concurrence on this plan will be a condition for disbursements for sewerage in Salvador; b) not later than December 31, 1979 alternative technical solutions and an im- plementation schedule satisfactory to the Bank for sewage disposal where conventional sewerage is not feasible; and c) sewer house connection standards not later than December 31, 1979 (para. 6.16); (iii) ensure that subprojects will be selected in accordance with agreed-upon criteria (para. 6.18); (iv) SWCs will prepare and make available to the Bank not later than 60 days prior to the issue of first tender or prequalification documents a general procurement notice satisfactory to the Bank. Such a notice will be annually updated as long as any goods or works remain to be procured (para. 6.19); (v) SWCs will take the necessary steps satisfactory to the Bank to update fixed asset inventories and to have them properly recorded in the books of account, and will fully implement uniform accounting systems not later than December 31, 1980 (para. 4.09); - 49 - (vi) SWCs will submit annually, not later than March 31, updated three-year financial projections satisfactory to the Bank (para. 4.11); (vii) SWCs will establish internal audit offices adequately staffed and properly functioning no later than December 31, 1980 (para. 4.12); (viii) SWCs will have their accounts and financial statements for each fiscal year audited by independent auditors acceptable to the Bank, and will submit to the Bank no later than April 30 of each year, starting calendar year 1979, certified copies of the audited financial statements (para. 4.13); (ix) SWCs will undertake whatever steps required to ensure that revenues will be maintained at levels sufficient to cover cash operating and maintenance expenses, and depreciation and to provide the rates of return on revalued fixed assets in operation established in para. 7.13 (para. 7.13); (x) SWCs will prepare not later than October 31, 1979 tariff and metering studies satisfactory to the Bank to be implemented not later than December 31, 1979 (para. 7.14); (xi) SWCs will submit for Bank consideration specific programs and objectives for financial recovery, including a water loss reduction program, not later than October 31, 1979. These programs will be carried out in accordance with agreed-upon schedules (para. 7.23); (xii) SWCs will establish and implement, not later than October 31, 1979, a system of monitoring indicators and quarterly progress reports covering project implementation, operations, and financial performance (para. 7.24); and (xiii) SWCs will submit to BNH not later than six months after project completion a report satisfactory to the Bank on the execution and initial operation of the project (para. 7.24). 9.02 Provided the above conditions are met, the project would be suitable for a Bank loan of US$100.0 million. The loan would be for a period of 15 years, including a grace period of three years. ANNEX 1 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT Graphical Representation of BNH's Supervision Arrangements r -lBNH SFS-RIO 9 Technical Supervision Agency I 'i ------------------------->|Seii rjcs1-------------------- 0~~~~~~~ I 0-4 State-WtrC.4 1 .; 0 1aer 0.1 --------> Specific Projects] *----------4 BRAZIL - NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT EMBASA ORGANIZATION CHART JUNE 1978 GENERAL ASSEMBLY FISCAL EXCTV COUUNC;IL COUCI BOARD OF DIRECTORS PRESIDENT'S BOARD LEGAL PFtESD ADVISORH ADVIOR NG& ~ ~ ~ ~~~~~POUCINADMINISTRATION FINANCIAL-COMMERC)AL | PLANNIN& r I PRODUCTION - DIRECTOR DIRECTOR l DIRECTOR DIRECTOR CONRO ADIISR FINACIA | ADVISOR ~~~~~~~ADVISOR _ADIO _ ADVISOR _ INSTITTIONAL EVAUTIONS TANG OPRINS OPERATION EXPANTION DEPARTMENT ASSISTANCE OQ World Bank -19081 0) ANNEX 2 Page 2 of 3 BRAZIL - NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT COMPESA ORGANIZATION CHART | GENERAL ASSEMBPLY BOARD LTONSTI OF DIRECTORA PRESIDN DIRECTORS CABINET PLANNING GNRLLEGAL PULC l COMMECA PRTOL INJ ADVISOR~~~~~~~DVSO AVSRADTNAADVISOR DVSRl COORDIAON CRDATN SUPERINTENDENT SUPERINTENDENT SUPER OPERATIONS RATINS | ADMINISTRATION | [ FINANCES lMETREOPOLITAN INTERIOR CONSTRUCTION ( 3 *| OPERATIONS MA E CARPINAL METROECOFLETAN RESOURCES ACCOUNTINGCIF j MATERIALS | I FINANCE l |COMMERCiAL | REGIONAL | j ITRO LAND PROPERTY | 1 l 1 ~RECIFE CARUARU GENERAL REGIONAL TECREIONLNICAUPOR SERVICES OLINDA S ARNUS| 1 PROJECT JABOATAODl 1 ARCOVERDE | REGIONAL PERTROLINA VVorld B-nk 19079 ANNEX 2 Page 3 of 3 BRAZIL - NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT CAGECE ORGANIZATION CHART [ GENERAL ASSEMBLY ADmZISTRATIVE FSA COUNCIL UNCIL DIRECTOR PRESIDENT CAB INET PLANNING ADVISOR SECRETARY PUBLIC REL. ACCOUNTING ] OPERATRNALMAUNTENR .~ ~ ~ ~~~~~~~~~~~~~~~PRT &MNTN ADMINIETRATION FINANCE SERVICE EXPANTION OPERATIONS DIREC'TOR DIRE CTOR 'DIRECTOR DIRECTOR BIDDINGS |CONSTRUCTION | EO COMMITTEE _ _ PROGRAMS I , _ _ | ~~~~~~~~~~COORDINATrOR |HUMAN RESOURCES | ACCOUNTING PROJECTS OPERAT. & MAINTEN.| MANAGMA NAGER MANAGER CAPITAL MANAGER GENERAL SERVICES | FINANCES CONSTRUCTION OPERAT. & MAINTEN.| MANAGER MANAGER MANAGER INTERIOR MATERI[AL FOR TECHNICAL SUPPORT CONSTR. & OPERATS. | MANAGER MANAGER Bank-19080 World Bank - 19080 ANNEX 3 Page 1 of 12 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT Description of Subprojects for the Capital Cities and a List of Communities to be Served in the States of Bahia, Ceara, and Pernambuco 1. Water Supply and Sewerage Subproject for Salvador-Bahia This subproject comprises: (a) Water Supply (i) Construction of intake works and raw water transmission main (4 km in length and 1,500 mm in diameter) and p mping stations (5 x 2,000 hp) with a capacity to divert up to 4.5 m /sec, to interconnect Joanes I and Ipitanga II Reservoirs. (ii) Construction of intake works, pumping stations (4 x 1,240 hp) and raw water transmission main (2 km in length, 1,800 mm in diameter) with a capacity for 4.5 m /sec to connect Ipitanga Reservoir to the new treatment plant. (iii) Construction of the first3stage of the new treatment plant with an initial capacity of 4.5 m /sec. Upgrading of Boulerdera treatment plant and related works. (iv) Pumping stations (5 x 1,100 hp) and treated water transmission mains from new treatment plant to R-7 storage tank with a total length of 13 km and diameters varying from 1,100 to 1,400 mm. (v) Construction of approximately 350 km of primary and secondary distribution networks with diameters varying from 32 to 600 mm, for reinforcement of existing networks and extensions of services to new areas. (vi) Construction of approximately 45,000 new house connections. (vii) Metering and leak detection and repairs programs, the scope of which will be agreed upon on the basis of the studies provided for in the project (para 4.04, d). (b) Sewerage (i) Construction of approximately 22 km of interceptors and collectors in diameters varying from 400 to 1,750 mm. (ii) Construction of approximately 237 km of sewerage networks in diameters varying from 100 to 300 mm. ANNEX 3 Page 2 of 12 (iii) Construction of two sewerage pumping stations (4 x 29 hp and 8 x 160 hp). (iv) Construction of approximately 18,000 new house connections. 2. Water Supply and Sewerage Subproject for Recife - Pernambuco This subproject comprises: (a) Water Supply (i) Construction of approximately 207 km of primary distribution networks in diameters varying from 150 to 1,500 mm for reinforce- ment of existing networks and extensions to new areas. (ii) Construction of approximately 740 km of secondary distribution networks in diameters varying from 60 to 300 mm for reinforcement and extensions. (iii) Construction of approximately 40,000 new house connections. (iv) Installation of about 50,000 water meters for house connections and meters for production and for storage tanks outlets. (v) Execution of leak detection and repair program. 3. Sewerage (i) Construction of 27 km of collectors and interceptors varying from 400 to 900 mm in diameter. (ii) Construction of 21 sewerage pumping stations totalling 1,700 hp and ranging from 5 to 300 hp in capacity. (iii) Construction of approximately 260 km of sewerage networks with diameters ranging from 150 to 350 mm. (iv) Construction of approximately 25,000 new house connections. (v) Expansion of sewage treatment capacity in 2.4 m /sec. Definition of the location of this expansion (Cabanga or Peixinhos) is under study. 3. Water Supply and Sewerage Subproject for the City of Fortaleza - Ceara This subproject comprises: (a) Water Supply (i) Improvements and reinforce Ient of Gaviao Dam to increase the firm capacity from 0.3 to 0.4 m /sec. (ii) Raw water intake with a final capacity of 9 m 3/sec. ANNEX 3 Page 3 of 12 3 (iii) First stage of a new treatment plant for 3 m /sec initial capacity. (iv) Construction of first stage of treated water pumping station with 3 m3/sec initial capacity (2 x 260 hp). (v) Construction of force main from pumping station to Ancuri storage tank 1,400 mm in diameter and 4.7 km in length. (vi) Construction of Ancuri storage tank 70,000 m in capacity. (vii) Interconnections from Ancuri storage tank and other existing storage tanks with a total length of 38 km and diameters ranging from 400 to 1,600 mm. (viii) Construction of three new storage tanks (Messejana, Coco and Mucuripe) with capacities of 10,000 m3, 2,000 m3 and 2,000 m3, respectively. (ix) Construction of approximately 195 km of water distribution networks. (x) Construction of approximately 40 000 house connections. (xi) Metering and leak detection and repair programs. (b) SeweraRe (i) Construction of approximately 175 km of sewerage networks in diameter varying from 150 to 1,200 mm. (ii) Construction of approximately 12,000 new house connections. ANNEX 3 Page 4 of 12 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT List of Medium-Size Towns to be Served by the Project STATE OF BAHIA Name of Town Population 1977 Water Supply 1. San Francisco do Conde 7,000 2. Caetite 8,150 3. Jeique 80,500 4. Jacobina 24,300 5. Itabina 120.500 6. Tucano du Sul 6,800 7. Paulo Alfonso 57,200 8. Entre Rios 7,000 9. San Antonio de Jesus 26.000 10. Cachoeira 11.800 Sewerage 1. Feira de Santa Ana 197.000 2. Ilheus 68.000 3. Itabuna 120.500 4. Vitoria da Conquista 115.000 5. Jeique 80.500 STATE OF PERNAMBUCO Water Supply 1. Afogados Ingazuna 10,900 2. Aguas Belas 10,378 3. Altinho-Cruzes-'Ibirajuba 6,500 ANNEX 3 Page 5 of 12 Name of Town Population 1977 4. Amaratji 5,422 5. Arcoverde 47,800 6. Cabo 47,300 7. Caruaru-Granhuns-Vitoria/outros 140,000 8. Catende 13,400 9. Cupira 6,100 10. Cust6dia 5,200 11. Floresta 8,300 12. GameLeira 6,600 13. Goiana 28,500 14. Gravats 26,000 15. Joboatao 68,000 16. Moreno 20,000 17. Nazare da Mata 15,000 18. Palmares 44,300 19. Pedra 6,200 20. Ribeirao 17,000 21. S. Lourenco-Camaragibe 63,000 22. Tambe 7,000 23. Toritama 5,600 24. Vit. Sto. Antao 52,200 Sewerage 1. Paulista/Apreu e Lima/Praias da zona Norte 23,000 2. Cabo 47,300 3. Jaboatao/Cavaleiro 6,800 4. Sao Lourenco da Mata/Camaragibe 63,000 5. Petrolina 67,000 6. Cararnhuns 61,000 7. Limoeiro 38,300 8. Pesqueira 27,900 9. IgaraLssu 30,100 10. Morerno 20,000 11. Itamaraca 6,300 12. Gravata 2,600 13. CarpiLna 33,400 14. Timjbaiuba 33,300 ANNEX 3 Page 6 of 12 STATE OF CEARA Name of Town Population 1977 Water Supply 1. Bela Cruz 7,800 List of Small-Sized Communities to be served by the Project STATE OF BAHIA 1. Acupe (Sta. Amaro) NA 1/ 2. Agua Fria 1,213 3. Amelia Rodrigues 5,703 4. Andarai 2,243 5. Argolo (N. Vicosa) NA 6. Agua Quente 1,205 7. Baixa Grande (Inhambupe) 2,655 8. Banes do Pedro (Ilehus) NA 9. Faitanga NA 10. Belo Campo 3,068 11. Brotoas -Macaubas NA 12. Boninal 819 13. Baixos (Esplanada) NA 14. Bom Jesus dos Pobres NA 15. Cabucu NA 16. Cardeal da Silva 685 17. Condeuba 1,607 18. Cacule 5,818 19. Campo Alegre de Lourdes 1,943 20. Cabeceiras do Paraguacu (Mluritiba) NA. 21. Cansancao 2,986 22. Campin Grosso (Jacobina) NA 23. Cassilandia (Itambe) NA 24. Cordeiros 1,036 25. Cotegipe 1,343 26. Cruzeiro do Sul (Prado) NA 27. Caldeirao Grande 2,172 28. Carrapichel (S. Bonfim) NA 29. Coqueiros (Maragogipe) NA 30. Carnaibas (C. Formoso) NA 31. Campo Formoso (P. Dutra) 5,972 32. Cinco Rios NA 33. Coquinhos (F. Azul) NA 1/ Not available. Mostly communities subsidiaries of municipalities. ANNEX 3 Page 7 of 12 Name of Town Population 1977 34. Cachoeira do Mato (Alcobaca) 1L,727 35. Catulezinho (Itambe) NA 36. Dario Meira 2,517 37. Duas Serras (Antas) NA 38. Duque de Caxias (Caravelas) NA 39. Dom Basilio 585 40. Entre Rios. 7,758 41. Entrocamento (Jaguaquara) NA 42. Elisio Med rado 941 43. Fatima (C. Dautas) NA 44. Ferradas (Itabuna) NA 45. Gentio do Ouro 920 46. Goes Calmcin (Simoes Filho) NA 47. Ipupiara 2,020 48. Ibipetum (Ipupiara) NA 49. Itabatam (Mfucuri) NA 50. Ibitiara 533 51. Ituacu 1,667 52. Iraporanga (Iraquara) NA 53. Iraji (Itamaraju) NA 54. Itiuba NA 55. Itamari 1,643 56. Ibiraja' (Itanhem) NA 57. Itubera 5,469 58. luiu (Malhada) NA 59. Ibicoara 313 60. Itupeva (M. Neto) NA 61. Inhata (A. Rodrigues) NA 62. Ibipitanga 1,074 63. Tbiassuce 1,219 64. Itaia (F. Alves) NA 65. Iraquara 1,266 66. Itanagra 761 67. Jussiape NA 68. Jacaraci 615 69. Joao Amaro NA 70. Junco (Jacobina) NA 71. Jacuipe (S. S. Passe) NA 72. Jacurucu (Itamarju) NA 73. Juacema (Jaguarari) NA 74. Lucinio de Almeida 3,494 75. Livramento do Brumado 6,321 76. Laje 1,811 77. Malhada 1,703 78. Mfacarani 5,385 79. Mortugaba 2,036 80. Malhada de Pedras 1,016 81. Vairi 3,942 82. Plarau 1,561 ANNEX 3 Page 8 of 12 Name of Town Population 1977 83. Mirangaba 1,163 84. Mulurgu do Morro (Caparnaum) NA 85. Mata da Alianca (A. Rodrigues) NA 86. Manoel Victormo 2,140 87. Nilo Pechara 1,550 88. Nage (Maragogipe) NA 89. Nova Lidice NA 90. Nova Alegria (Itamaraju) NA 91. Oliveira dos Brejinhos 1,081 92. Paramirim 3,686 93. Palmeiras 2,442 94. Porto Nova NA 95. Pedrao 834 96. Piritiba 3,719 97. Presidente Dutra 4,346 98. Pecho Alexandre NA 99. Paripiranga 3,837 100. Palmira (I do Colonia) NA 101. Posto da Mata (N. Lidice) NA 102. Planalto 4,752 103. Piripa 899 104. Pindobacu 2,011 105. Paraiso (Jacobina) NA 106. Pirai do Norte (Itubera) NA 107. Piraja (Itamaraju) NA 108. Pocos (Campo Formoso) NA 109. Quice (S. do Bonfim) NA 110. Ribeira do Amparo 448 111. Rio do Pires 1,217 112. Sitio do Meio (E. Rios) NA 113. Santo Antonio Barcelona NA 114. Saubara NA 115. S. Jose do Colonia (Itambe) NA 116. Santiago do Iguape NA 117. Santa Cruz da Vitoria NA 118. S. Miguel das Matas NA 119. Salobro (Canarana) NA 120. Sao Jose (Buerarema) NA 121. Santa Luzia (Canavieiras) NA 122. Sao Paulinho (Itamaraju) NA 123. Tremedal 1,096 124. Triunfo (Antas) NA 125. Taquarinha (Mucuri) NA 126. Tanhacu 2,063 127. Teolandia NA 128. Ubiraita (Andarai) NA 129. Utinga 2,165 130. Varzea do Poco 3,131 131. Varzea NA ANNEX 3 Page 9 of 12 STATE OF CEARA Name of Community Population 1977 1. Alcantaras NA 2. Antonina do Norte 3,788 3. Aratuba NA 4. Arneiroz 1,314 5. Aurora 6,111 6. Caridade 1,068 7. Coreau 2,830 8. Itatira 563 '9. Meruoca 1,145 10. Moraujo 1,346 11i Penaforte 794 12. Piquet Carneiro 1,947 13. Abaiara 607 14. Alto Santo 1,698 15. Apuiares 2,063 16. Aquiraz 1,976 17. Aracoiaba 2,910 18. Araripe 1,529 19. Assare 3,327 20. Barro 2,830 21. Beberibe 1,837 22. Capistrano 1,776 23. Carire 1,702 24. Carius 1,590 25. Carnaubal 4,087 26. Catarina 1,229 27. Chaval 5,198 28. Frecheirinha 2,218 :29. General Sampaio 2,696 30. Granjeiro 849 31. Groairas 2,278 32. Cuaramiranga 607 33. Ipueiras 4,389 34. Iracema 3,144 35. Itapiuna 1,628 36. Jaguaruana 6,838 37. Jati 1,782 ANNEX 3 Page 10 of 12 STATE OF CEARA (Continued) Name of Community Population 1977 38. Lavras da Mangabeira 5,301 39. Mauriti 5,207 40. Milagres 6,379 41. Mucambo 2,376 42. Novo Oriente 2,640 43. Pacoti 1,445 44. Pacuja 1,104 45. Palhano 1,473 46. Poranga 2,547 47. Porteiras 1,903 48. Potengi 2,793 49. Quixere' 1,622 50. Redencao 3,776 51. Reriutaba 4,395 52. S. Goncalo do Amarante 2,081 53. S. Luiz do Curu 4,494 54. Senador Sa 1,000 55. Tamboril 1,218 56. Trairi 919 57. Ubajara 2,747 58. Uruburetama 5,335 59. Uruoca 2,784 60. Vicosa do Ceara 3,451 61. Taperuaba NA 62. Varjota NA STATE OF PERNAMBUCO 1. Afranio 2,100 2. Agrestina 3,778 3. Agua Fria NA 4. Agua Preta 4,903 5. Alagoinha 3,288 6. Altinho 4,870 7. Barra da Gaubiraba 3,296 8. Belem de Maria 3,678 9. Betania 877 10. Bodoc6 3,148 11. Brejao 1,455 12. Brejinho 1,611 13. Buenos Aires 1,667 14. Caetes 1,742 ANNEX 3 Page 11 of 12 STATE OF PERNAMBUCO (Continued) Name of Community PopL-ation 1977 15. Calcado 1,534 16. Calurabi 935 17. Camutanga 3,660 18. Capoeiras 2,237 19. Carnaiba 3,623 20. Cedro 1,057 21. Cha de Alegria 3,714 22. Cha Grande 2,981 23. Cortez 4,152 24. Cumaru 1,648 25. Exu 4,563 26. Ferreiros 4,200 27. Flores 2,689 28. Frei Miguelinho 952 29. Gloria de Goita 3,108 30. Granito 730 31. lati 1,484 32. Ibimirim 4,622 33. Ibirajuba 1,090 34. Iguaraci 1,091 35. Inaja 2,252 36. Ingazeiya 1,912 37. Ipoj,uca 3,982 38. Ipubi 3,269 39. Itacuruba 2,008 40. Itaiba 2,591 41. Itapetim 5,052 42. Jatauba 2,505 43. Joao Alfredo 3,705 44. Lagoa do Itaenga 4,936 45. Lagoa do Ouro 1,667 46. Lagoa dos Gatos 2,481 47. Macaparana 5,299 48. MacIhados 1,619 49. Maraial 3,810 50. Mirandiba 2,699 51. Orobo 1,817 52. Oroco 2,182 53. Palmeirina 2,115 54. Panelas 2,236 55. Paranatama 945 56. Paranamirim 4,071 57. Passira 2,962 58. Pocao 1,810 59. Poinbos 2,957 ANNEX 3 Page 12 of 12 STATE OF PERNAYBUCO (Continued) Name of Community Population 1977 60. Primavera 4,187 61. Quipapa 4,702 62. Riacho das Almas 1,266 63. Rio Formoso 4,463 64. Saire 1,235 65. Salgadinho 929 66. Saloa 2,157 67. Sanharo 4,021 68. Sta. Maria da Boa Vista 2,671 69. Sta. MIaria do Cambuca 1,232 70. Sao Benedito do Sul 2,458 71. Sao Joao 2,680 72. Sao Joaquim do Monte 3,839 73. Sao Vicente Ferrer 2,203 74. Serrita 1,684 75. Sitio dos Moreiras 1,634 76. Solidao 913 77. Tacaratu 3,655 78. Taquaritinga do Norte 2,747 79. Teresinha 1,092 80. Terra Nova 1,950 81. Tracunhame 2,575 82. Tupanatinga 4,307 83. Tuparetama 2,293 84. Venturosa 3,839 85. Vertentes 3,697 BRAZIL NORTHEAST WATER AND SEWERAGE PROJECT BAHIA - EMBASA Schedule of Execution for Water and Sewerage Works in Salvador Period 1978 - 1982 1978 1979 1980 1981 1982 . J- F M F s|| JASON| I I, 41;MIA I JI A ST. N[ J u_M N D J N||| D|||||| ||||||||||| VVATER SUPPLY - SALVADORM Upgrading of Boulandera Treatment Plant ---------- TII New Transmission Mains - Joanes - M Boulandera - Storage R-7 c Transmission System Joanes I - Ipitanga III - M New Treatment Plant - Storage R-7 c Housraronnectlons- -~~---------- M4) iil_Ei Ea ;*n t;ITI s ,X New Treatment Plant list Stage) ---- vmlI Connections to Exsti tit Storage Tanks 1- a---- New Storage Tank- -- - Ew Water Distribation Network … ----------P1 House C~orn,atnions --------------------------g- Metering - - - - - - - - - - - - -- - - - - - Leak Defection and Repadr SEWVERAGE - SALVADOR Sewerage Networks Extensio - ----------- Elim I le,n.r.. otors and Track Li.en----------- Pumping Statios- --------------- i114III CCW is Hoase Corinection- -Installatio W III CW Legend *M l Desigjn 1111Bidding PFNA Deliwery - ConstructionMl M Materials or Equipment CW Cwii Werks 0 I Installation World Bank -19082 BRAZIL NORTHEAST WATER AND SEWERAGE PROJECT PERNAMBUCO - COMPESA Schedule of Execution for Water and Sewerage Works in Recife Period 1978 - 1982 _ ~~~~1978 1979 -1980 1981 1982 _ _ J~~ F M _A M J J AS 0 N D i V F~ JA J A S 0 N D 1 4J FMATJT|A|STO|ND J|F MA M|J J|A|S4t; J|||AMJ|||S. VYATER SUPPLY RECIFE | Mi . E3 ; WVater Distribution Networks ----c House Conniections -------- Metering - - - - - - - - - - -- Ieak Defection and Repair SEWERAGE RECIFE - Ist STAGE Sewerage Networks Extension ---- V interceptors and Force Mains -----c AII Pumping Stations ---;;;;;--- - Exten,sion of Treatment facilities --- House Connections --------------- l l Legend a * Design Iloilo Bidding WAWA Delivery Construction M Materials or Equipment CW Civil Works I Installation World Bank - 19083 0.10 t ll 0 BRAZIL NORTHEAST WATER AND SEWERAGE PROJECT CEARA -CAGECE Schedule of Execution for Water and Sewerage Works in Fortaleza Period 1978 - 1982 _ t~~~~978 .1979 1980 1981 1982 J F I MA J JA_SONDJFMAM J_JA_SONDJFM_AMJJASONDJ JFM|A|M|J|J|A|S|O|N|DJ|F|M|A|M|J|J|A|S|OINI|C WATER SUPPLY - FORTALEZA New Treatment Plant (lst Stage) Includring m (Treated Water Reservoir, Pumping Stationan. Intake Works and Reinforcement of Gaviao Dam) JIW Transmission Main to Anari Tank --------------- - _ New Storage TanksE-CW-------------------- CW Connections to New Storage Tanks ----------w Distribution Networks c House Connections ------------------------------ Leak Defection and Repair SEWERAGE - FORTALEZA maIIFW Sewerage Networks Extension ------------c House Connections--------------- Legend 8 _ * Design 919999 Bidding P'"- Delivery Construction M Materials or Equipmsrnt CW Civil Works I Installation World Bank - 19084 '0 La.9 ANNEX 5 Page 1 of 3 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT Summary of Project Costs - EMBASA DESCRIPTION Local Foreign Total Local Foreign Total (thousands of UPC) (million of US$) Water Supply - Salvador Transmission System Joanes I- Ipitanga III - New Treatment Plant - Storage R-7 514 494 1008 7.54 7.25 14.79 Intakes & pumping stations 189 242 431 2.77 3.55 6.32 New treatment plant - 1st stage 426 526 952 6.25 7.72 13.97 Water distribution networks 510 342 852 7.49 5.02 12.51 House connections 38 21 59 0.56 0.31 0.87 Metering 21 21 42 0.31 0.31 0.62 Leak detection & repairs 17 4 21 0.25 0.06 0.31 Sewerage - Salvador Sewerage network extension 552 63 615 8.10 0.92 9.02 Interceptors and trunk lines 350 33 383 5.14 0.48 5.62 Pumping stations 43 53 96 0.63 0.78 1.41 House connections 147 26 173 2.16 0.38 2.54 Water Supply Medium-Size Cities 547 263 810 8.03 3.86 11.89 Sewerage Medium-Size Cities 522 58 610 8.10 0.85 8.95 Water Supply Small Communities 473 263 736 6.94 3.86 10.80 Engineering & Administration 526 10 536 7.72 0.15 7.87 Total Basic Cost 4905 2419 7324 72.00 35.51 107.51 Physical Contingencies (10.5%) 517 254 771 7.59 3.72 11.31 Price Contingencies (12%) 629 338 967 9.23 4.97 14.20 Total cost of EMBASA 6051 3011 9062 88.82 44.20 133.02 ANNEX 5 Page 2 of 3 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT Summary of Project Costs - COMPESA DESCRIPTION Local Foreign Total Local Foreign Total (thousands of UPC) (million of US$) Water Supply - Recife Water distribution networks 910 610 1520 13.36 8.95 22.31 House connections 34 19 53 0.50 0.28 0.78 Metering 53 53 106 0.78 0.78 1.56 Leak & detection repair 17 4 21 0.25 0.06 0.31 Sewerage - Recife Networks extension 558 95 653 8.19 1.39 9.58 Interceptors & force mains 172 258 430 2.52 3.79 6.31 Pumping stations 81 99 180 1.19 1.45 2.64 Extension of treatment facilities 126 126 252 1.85 1.85 3.70 House connections 76 14 90 1.11 0.20 1.31 Water Supply Medium-Size Cities 568 379 947 8.34 5.56 13.90 Sewerage Mediun-Size Cities 762 80 842 11.19 1.17 12.36 Water Supply Siall Communities 279 184 463 4.09 2.70 6.79 Engineering & ALdministration 425 8 433 6.24 0.12 6.36 Total Basic Cost 4061 1929 5990 59.61 28.30 87.91 Physical Contingencies (12%) 489 232 721 7.13 3.39 10.52 Price Contingencies (14%) 589 329 918 8.63 4.84 13.47 Total Cost of COMPESA 5139 2490 7629 75.37 36.53 111.90 ANNEX S Page 3 of 3 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT Summary of Project Costs - CAGECE DESCRIPTION Local Foreign Total Local Foreign Total (thousands of UPC) (million of US$) Water Supply - Fortaleza New treatment plan (civil works) 189 95 284 2.77 1.39 4.16 Pumping station 46 59 105 0.67 0.87 1.54 Transmission main to Ancurl 123 101 224 1.80 1.48 3.28 Storage tanks 106 36 142 1.56 0.53 2.09 Connections to storage tanks 306 293 599 4.49 4.30 8.79 Distribution networks 246 164 410 3.61 2.41 6.02 House connections 27 15 42 0.40 0.22 0.62 Metering 21 21 42 0.31 0.31 0.62 Leak detection & repair 17 4 21 0.25 0.06 0.31 Sewerage - Fortaleza Interceptor & collector 290 25 315 4.26 0.37 4.63 Sewerage networks 307 35 342 4.51 0.51 5.02 House connections 36 6 42 0.52 0.09 0.61 Water Supply Medium-Siee Cities 71 34 105 1.04 0.50 1.54 Water Supply Small Communities 105 158 263 1.54 2.32 3.86 Engineering & Administration 222 8 230 3.26 0.12 3.38 Total Basic Cost 2112 1054 3166 30.99 15.48 46.47 Physical Contingencies (10.5%) 222 109 331 3.24 1.60 44.84 Price Contingencies (13.2%) 312 150 462 4.58 2.21 6.78 Total Cost CAGECE 2646 1313 3959 38.81 19.29 58.10 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT BANCO NACIONAL DA HABITAGAO INCOME AND CASH FLOW STATEMENTS (us$ million) Year Ending December 31 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 ------------------------------ Audited -----------------…--------------- ---------- Estimated 1/ ------- REVENUES FROM OPERATIONS Loan income 120.3 120.4 173.8 245.8 362.7 437.4 529.8 693.7 830.0 963.3 Service income 36.8 47.5 65.2 83.0 111.1 140.3 167.2 168.8 202.6 237.8 Other income 5.9 60.3 102.1 105.1 85.8 89.5 104.3 108.6 120.4 129.2 Total 163.0 228.2 433.9 559.6 667.2 801.3 801.3 971.1 1,153.0 1,330.3 OPERATING EXPENSES Administrative expenses t4.5 17.6 24.5 36.2 43.9 55.7 76.7 130.6 152.7 177.6 Financial expenses 83.5 115.3 159.9 196.7 273.4 336.5 494.1 567.1 673.4 786.8 Other expenses 4.0 10.6 13.0 15.1 21.7 19.0 21.8 55.8 52.8 49.9 Total 102.0 143.5 196.5 248.0 339.0 411.2 592.6 753.5 878.9 1,014.3 Internal Cash Generation 61.0 84.7 144.6 185.9 220.6 256.0 208.7 217.6 274.1 316.0 CAPITAL RESOURCES Employees/Indemnity Fund (FGTS) net of withdrawals 424.4 523.7 727.1 912.4 1,135.1 1,199.6 1,458.0 1,688.9 1,862.9 2,007.6 Amortization of loan principal 242.5 551.1 325.2 618.7 570.2 664.1 661.7 1,012.2 1,193.5 1,365.7 Foreign loans 4.1 8.7 8.6 16.5 19.9 13.6 22.8 58.7 73.4 88.1 Short-term deposits - net 49.7 301.0 20.4 198.2 168.8 161.5 Short-term investments - net (Bonds) 0.7 163.1 33.9 231.9 205.5 233.4 All other 2/ 1.7 27.3 28.0 97.7 13.6 271.3 193.7 _ FUNDS AVAILABLE FOR INVESTMENT 734.4 1,245.2 1,234.5 1,831.2 2,260.4 2,588.1 2,578.8 3,407.5 3,778.2 4,172.3 FUNDS APPLIED New loans granted 618.4 961.1 1,021.9 1,535.4 1,939.4 2,569.7 2,483.2 339.7 3,766.4 4,159.2 Foreign loan 0.8 0.8 0.8 0.8 0.8 1.7 2.7 10.5 11.F 13.1 Short-term deposits - net 19.2 1.1 Short-term investments - net (Bonds) 255.6 197.7 254.0 50.1 95.6 All other 2/ 115.2 27.7 11.9 39.9 270.1 16.7 Total Applications 734.4 1,245.2 1,233.5 1,831.2 2260.4 2 5 407 4,172.3 FGTS - Withdrawals 291.8 378.1 482.6 618.3 860.2 1,061.2 1,278.5 1,466.4 1,666.3 1,886.1 | 0 1/ Data extracted from 1978-80 budget-forecast of BNH. 2/ Includes net increase or decrease in working capital. ANNEX 6 Page 2 of 2 BRAZIL NORTHEAST WATER SUPPLY AND SEWEAGE PROJECT BANCO NACIONAL DA HABITACAO BALANCE SHEETS (US$ million) AUDITED year Ending December 31 1971 1972 1973 1974 1975 1976 1977 ASSETS Current Assets Cash and Banks 4.4 9.6 6.6 8.2 9.6 6.4 23.2 Treasury bonds 73.3 56.7 56.3 92.6 121.9 36.3 1.9 Receivable from loans 1/ -- 160.0 195.0 418.0 420.8 284.4 348.1 other accounts 5.7 1.1 0.9 0.9 1.2 2.1 36.5 Sub-total 83.4 227.4 258.8 5197 553.5 3292 407.7 Long-tem Receivables Housing loans 1,545.3 2,144.2 3,131.7 4,176.5 5,461.4 7,246.1 9,284.9 Treasury bands 203.8 528.1 761.1 1,062.3 1,120.0 1,048.8 1,001.3 Mortgages 249.8 7.3 0.8 0.4 -- -- -_ other investments 15.2 18.8 40.3 113.1 49.4 40.4 156.3 Collecting agents - INPS 7.7 2.8 2.3 0.9 -- -- -_ Property for resale 5.0 10.3 12.9 16.8 20.5 15.1 8.3 Housing loans in liquidation -- -- -- -- 287.9 365.4 286.7 Other accounts 1.6 3.9 6.1 8.3 8.4 9.0 7.5 Sub-total 2,028.4 27 3,955.2 5,378.3 8,724.9 10,745.0 Fixed Assets Land and buildings 14.0 19.0 22.9 25.3 39.1 40.5 43.2 Equipment and installations 1.8 2.1 2.8 3.2 3.5 4.0 4.6 Other fixed assets 0.8 1.2 1.6 1.9 2.2 2.7 3.2 Sub-total 16.6 22.3 27.3 30.4 44.8 47.2 51.0 Accumulated depreciation (1.4) (2.2) (3.4) (4.4) (5,9) _8.1) (10.5) Sub-total 15.2 20.1 23.9 26.0 38.9 39.1 40.5 Other Assets Interest & i4onetary dorrection on loans to tentities in liquidation -- -- -- -- 34.8 197.0 370.9 Prepaid insurance 0.1 0.6 0.1 -- -- -- -- Material in transit 0.1 0.8 0.2 0.1 -- -- -- Interest Rec. on Treasury bonds -- -- -- 0.5 0.4 0.5 1.7 sub-total 0.2 1.4 0.3 0.6 35.2 197.5 372.6 TOTAL ASSETS 2,127.2 2,964.3 4,238.2 5,924.6 7, .6 9,290.7 11,565.8 LIABILITIES Current Liabilities Entities of the National Housing System (deposits) 26.1 64.5 45.0 111.7 324.7 634.4 823.1 Sundry creditors 3.3 9.2 16.2 19.2 29.5 41.9 162.5 Sub-total 29.4 73.7 61.2 130.9 3.2 2 676.3 985.6 Long-term Debt Employees' Indemnity Fund 1,741.5 2,379.5 3,373.3 4,424.7 5,337.7 6,400.3 8,021.7 BNHl housing bonds 31.2 35.4 36.3 37.8 36.2 34.2 34.2 Foreign Loans: IDB (IDB/BNH 104/SF-BR) 18.9 21.0 25.4 30.7 37,9 48.4 52.1 AID 10.2 15.8 19.4 29.8 40.6 40.6 40.5 IBRD -- -- -- -- 0.9 12.5 27.8 Miscellaneous 0.2 0.3 _ -- 148.8 166.9 180.9 Sub-total 1 3,454.4 4523.0 5,602.1 8,375.2 Other Liabilities Unallocated collections and repayments 12.0 16.0 14.3 4.7 8.8 30.8 26.8 Deferred income -- 13.3 11.9 8.9 9.3 10.6 7.9 Emp. Ind. Fund - to confirm -- -- -- -- 215.6 189.7 196.9 Other unidentified receipts -- _ -- -- 34.8 185.2 346.9 Sub-total 12.0 29.3 26.2 13.6 268.5 416.3 578.5 Capital and Reserves Capital 177.5 160.9 321.5 442.1 1,068.1 1,392.1 1,641.4 Reserves 106.3 248.4 374.9 815.0 281.7 103.1 3.1 Sub-total 283.8 409.3 696.4 1,257.1 1,349.9 1,495.2 1,644.5 TOTAL LIABILITIES 2,127.2 2,964.3 4,238.2 5,924.6 7.574.6 9,290.7 11,568.8 1/ During 1971 through 1974, BNH considered all items over 180 days as long-term.,- In 1975, BNH changed to 365 days or more as the long-term criterion. Data shown for 1972 through 1974 Was estimated by BNH auditors. ANNEX 7 Page 1 of 7 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT State Water Companies Financial Statements Assumptions Underlying Financial Projections 1. Notes on Existing Financial Statements 1.01 The financial projections are based on the historical financial statements of the SWCs, which are prepared in current Cruzeiros. Because of rapid inflation and incomplete records, it has been difficult to convert these Cruzeiros statements into UPCs in which the finarcial projections have been made by Bank staff. There are also deficiencies in the uniform accounting system presently in use by the SWCs, as noted below, and as a result of these factors, the historical financial statements do not provide a reliable base for the financial projections. 1.02 The first deficiency in the accounting system is in the treatment of monetary corrections on fixed assets and long-term debt, which are revalued quarterly in conformity with an index provided by the Ministry of Finance for adjustment of Obrigacoes Readjustaveis do Tesouro Nacional (ORTN). Under the corporate law, for income tax determination 1/, these monetary adjustments must be reflected respectively as income and expense in an SWC's income statement, and this has been provided for in the uniform system of accounts. Since the monetary adjustments to assets and debt have not usually been equivalent, due either to differing indexing and/or to differing ratios of assets to debt, the net income shown for an SWC has often been distorted. A commercial accounting system would exclude these monetary adjustments from the income statement and only adjust asset, liability and revaluation surplus accounts. While from an economic and investor standpoint these adjustments have merit, they must be excluded if income and cash statements meaningful for purposes of cost control, rate making and comparisons of financial performance among SWCs are to be produced. Monetary corrections have been excluded from the SWCs' historical income statements and financial projections have been prepared in UPCs which obviates the need to adjust for monetary correction. 2/ 1.03 The second deficiency in the uniform system of accounts is the fact that it does not provide for an appropriate statement of sources and applica- tions of cash. It is difficult to derive this data from the existing income statements and balance sheets, and the historical statements presented here are subject to a margin of error. 1/ The SWCs must follow the accounting requirements of the corporate law, although they are specifically exempted from income taxes. Z/ The new corporate law effective January 1, 1978, requires corporations to keep accounts in ORTN for all items subject to monetary correction. ANNEX 7 Page 2 of 7 1.04 Finally, the uniform accounting system provides for one other adjust- ment which distorts reported net income. To cover operating and adminis- trative costs of SWCs which are considered directly related to project design and construction, BNH and FAE lend an amount equivalent to 10% of total direct project cost. The SWCs in turn may capitalize an equivalent amount of operating expense which will likely be in excess of actual project-related internal costs and will result in an understatement of operating expenses and an overstatement of net income. For the three SWCs combined in 1978, it is estimated that about 30% of operating expenses exclusive of depreciation will be capitalized, and for CAGECE about 49% of operating expenses will be capitalized. Proper cost accounting, which is not now undertaken in the SWCs, would allow capitalization of only project-related costs and provide a more realistic income statement. The present practice will be reviewed by consul- tants to be recruited to assist the SWCs in the areas of Finance and Accounting. However, it is not expected that this practice will change in the near future and the income statement projections reflect the capitalization of operating expenses equivalent to 10% of direct project costs. 1.05 Finally, in addition to these conceptual deficiencies, the indi- vidual SWCs are having difficulties in producing meaningful financial state- ments. First, all SWCs have been recently formed by mergers of the capital city water authorities and a large number of interior municipal water autho- rities. Because of incomplete asset inventories and cost data, it has been difficult for them to determine a proper valuation of fixed assets, and efforts are being made to accomplish this. Also, there have been delays in transferring assets of completed projects from construction in process to fixed assets in operation, which understates the value of the latter as well as the charge for depreciation. Finally, none of the SWCs has its own in-house computer specialists or a computer, and they have to rely on outside services which has made the shift to the uniform accounting system more difficult. 1.06 Financial planning in the SWCs is virtually non-existent. None of the SWCs has made any attempt to project operating financial results beyond one year. All SWCs do have long-range capital budgets, but these have been unrealistically high in relation to demonstrated capabilities of preparing and executing projects and the availability of funds from FAE and BNH. One year's capital expenditure disbursement projections on a monthly basis are maintained for those projects for which loan contracts have been signed with BNH/FAE. Basically, the SWCs operate with the knowledge that a subproject's costs will be wholly financed by BNH/FAE and have not been concerned with either short- range or long-range cash management. 2. Financial Projections General 2.01 The financial projections are presented in UPCs. The implied assumption is that tariffs will be regularly adjusted upward to compensate for Cruzeiro depreciation against the UPC, (which was 33.9% in 1976 and 30.1% in ANNEX 7 Page 3 of 7 1977), apart from real increases needed to achieve or maintain financial viability. If revenues are not in fact maintained in real terms, and the tariff increases assumed are not implemented, the future financial performance will be less satisfactory than is indicated in the projections. Income Statement 2.02 Water produced has been based on the expected availability of water from on-going source and treatment plant projects and planned projects. Water sold has been determined in relation to supply availability, gradual reductions in unaccounted-for water and on expected consumption per connection under normal conditions of supply. Tariffs have been assumed at levels sufficient to comply with the Bank's revenue covenant. 2.03 Operation and maintenance expense has been assumed to increase in time with water connections plus 7% during the 1978-82 period to reflect inflation. In the 1983-85 period these expenses have been increased in line with water connections only on the assumption that the UPC will no longer have to be adjusted for inflation. 1/ As is the practice of the SWCs (see para. 1.04), an amount equivalent to 10% of the current year's capital expenditures has been capitalized and treated as an offset to operating and maintenance expenses on the income statement. 2.04 Administrative expenses have been increased under the same assumption indicated in para 2.03. 2.05 Interest expense has been based on an average interest rate of 5.0% p.a. and normal average BNH/FAE terms of a three-year grace period on principal repayments followed by an 18-year repayment period. Interest on loan require- ments to construction in progress has been capitalized. 3. Cash Requirements and Sources 3.01 Capital expenditures are based on the expansion programs of the SWCs (Table 6.1). Long-term debt incurred is assumed to be equivalent to capital expenditures, which include capitalized administrative expenses and interest during construction, less availa'ble internal cash generation. To the extent any projects may actually be financed by equity, the amount of such contributions would be subtracted from the new long-term debt and reflected in new equity. 3.02 Debt service has been based on assumptions given in paragraph 2.05. 1/ In the period 1975-1977 the general price index was up by 37% as opposed to devaluation of the Cruzeiro vis-a-vis the UPC of about 30.3%. To reflect the likelihood of this disparity, continuing in the 1979-82 period, the UPCs in the forecast have been escalated at 7%. ANNEX 7 Page 4 of 7 3.03 Net working capital requirements have been based on the assumption that inventories would be three months' stock, accounts receivable would amount to three months' sales, and current liabilities would be equivalent to inven- tories plus an amount equivalent to 5% of annual investments to allow for contractor's guarantee retentions. 4. Balance Sheets 4.01 Current assets and liabilities have been derived from the assumptions given in paragraph 3.03. 4.02 The long-term debt has been derived from the assumptions given in paragraphs 2.05 and 3.01. Equity has been increased (decreased) annually by the amount of net income (loss) for that year and by new equity contributions. 11*11. ANNEX 7 Page 5 of7 NOREnMAST WATER SUIPIY 4LY SAUM Z E PCT - 3416 F'LNANCtAL 1RSULTS WE8SD IN TH8MSADS o0 uPc3 1976 1977 1970 1979 1980 1981 1982 1983 1984 1985 OPES 'ING DATA i,ter produced (.illison =3) 133 157 173 l88 200 207 215 224 239 24P Ilater sold (=illion = ) 69 85 99 107 116 124 133 141 153 161 al.coo..ted-for (%) 52 46 ' 43 43 42 40 38 37 36 35 I,. of connections (000)-water 300 340 345 368 396 424 452 476 498 522 It, of connections (O05)--eseeraSgo - 19.9 24.3 28.4 42.1 48.4 51.8 56.1 60.4 *4r ,venue/tho.n...d s3-.ater (trPCs 12.38 15.09 16.90 19.10 21.09 23.35 27.11 28970 27.49 ztoe---/..mtectio-s-ewerage --7.04 7.90 9.12 9.96 10.53 11.27 11.92 11.92 ii STAT. :.l'hT OF INCGIE AND EXPENSE RE. huMES E ,ter 854 1,283 1,673 2,044 2,446 2,896 3,606 4,047 4,206 4,3t. - e-e-sge 10 140 192 259 419 511 584 669 720 771 thor 20 90 119 139 165 193 224 238 258 272 Total 884 1.513 1,984 2,442' 3030 '37W_ 4.4 4,954 5,184 25,4 t'peratioss and naintenance 462 449 586 678 786 899 1,032 1,094 1,187 1,299 .,dministration 405 408 437 500 572 655 750 803 859 919 ' pit.li.ed (215) (135) (201) (433) (375) (400) (166) (238) (240) (241) Subtotal 652 722 822 745 983 1,154 1,616 1,659 1,806 1,977 epreciation 287 450 612 776 935 1,130 1,289 1,396 1.442 1_466 Total 939 1,172 1,434. 1,521 1,918 2,284 2,905 3,055 3,228 3,443 !3pcrating incone (55) 341 550 921 1,112 1,316 1,509 1,899 1,936 1it7 ,,tereSt 216 523 541 625 690 779 978 1,147 1.333 1_346 :03t intome (loss) gzn, )(2715 9 2i6 422 537 531 752 603 621 Opersting ratio 1.06 .77 .62 .63 .63 .66 .62 .62 lote base 9,871 11,690 12,794 15,356 18,541 21,928 25,144 27,133 27,655 28,102 tate of return (7.) (0.6) 2.9 4.3 6.0 6.0 6.0 6.0 7.0 7.0 7.' STA >:5t0 OF CASH LOW S. R9ES [sternal cash generation 232 791 1,162 1,697 2,047 2,446 2,798 3,295 3,378 3,433 Long-tern debt 2,365 1,701 2,222 4,406 3,588 3,661 988 1,404 1,687 1,692 Eq-i~~~~~~y--79 --.- --.7 --- - - - - Equity -_ 2.7 -sg 5.- - - 8 -, 9 5,065 Total ,,.2!,97 2,571 384 .03 5.635 6.107 3.786 4.699 ,,5065,,, _______ P FLICATTONS Capital ..pesditur.s 2,037 1,349 2,010 4,329 3,752 4,026 1,660 2,375 2,400 2,410 Capitalized adtnistrative espesditures 215 150 201 433 375 400' 166 138 140 141 Qapitali-d interest 113 151 145 184 213 220 144 101 118 159 Total 2,365 1,650 2,358 946 4,340 4,646 1,970 2,614 656 2,710 Debt service 460 934 978 1i078 1,190 1,344 1,686 1,997 2,298 2,321 Working capital (218) 26 35 55 75 81 86 39 57 40 Total 2,607 3.369 6.079 5.605 6.071 3742 4650 013 5071 Iscresse (D..resse) in sash (10) (39) 15 24 30 36 44 49 52 54 Debt service ratio 0,5 0.8 1.2 1.6 1.7 1.8 1.7 1.6 1.5 1.' MA.L !CE SHEET i3ETS Fixed As.ets Fixed assets is operation 10,962 12,841 15,295 19,404 23,374 28,244 32,225 34,907 36,107 38,709 Reserve for depreciation 519 993 1,605 2.381 3,316 4.446 5,735 7 131 8.573 IOL339 Net fixed assets in operation (NFA) 11,481 11,898 13,690 17,023 20,058 23,798 26,490 27776 27,534 28,670 Construnctio in progress 2,500 3.360 3,313 4,360 5,141 5,542 4,015 4.Z56 5,827 5_986 Total 13,981 15,208 17,003 21,383 25,199 29.340 30,505 32.032 33,361 34,656 Current Assets Cash 600 645 586 678 786 899 1,032 1,094 1,187 1,249 Inventories 170 189 248 295 375 463 544 579 627 665 Accounts Receivllble 580 541 556 580 610 646 690 739 791 845 Other 25 18 *19 19 19 19 19 19 19 19 Total 1,375 1,393 1,409 1,572 1,790 2,027 2,285 2,431 2,624 2,778 TOTAL ASSETS 15,356 1 18,412 22.955 26,989 31.367 32,790 34,463 3.985 7,434 L. 3IILITIES AND CAPITAL Long tern debt 12,611 13,901 15.694 19,857 23.356 27,077 27,840 28,703 29,538 30,306 Equity 2,292 2 209 2.218 2.514 2.936 3.473 4,004 4.756 5,359 53980) Total C.plt.l 14,903 16,110 17,912 22,371 26,292 30,550 31,844 33,459 34,897 36,216 Current Liabilities 453 491 500 584 697 817 946 1.004 1,088 1 14E TOTAL LIABILITIES & CAPITAL 15.356 16 18412 22.955 26.989 31,367 32790 34.465 37 ,4J4 Debt/Total Capital (1 ) 85 86 88 89 89 89 87 86 85 84 ANNEX 7 Page 6 of 7 BRAZIL N0R1TAST WATER SUPPLY AND SEWERAGE PROJECT - CAGECE ACTUAL AND PROJECTED FINAICIAL STATIES (UPCs '000) Actual Projected OPERATING DATA 1977 1978 1979 1980 1981 1982 1983 1984 1985 Water produced (million m3) 64 67 69 69 98 103 107 118 130 Water sold (million a3) 32 34 38 38 59 67 75 83 91 Unaccounted-for (%) 50 49 48 45 40 35 30 30 30 No. of connections ('000) - water 93 106 126 151 181 211 236 261 286 No. of connections ('000) - sewerage 8.7 9.7 14.7 19.7 24.7 29.7 34.7 39.7 44.7 Revenue/thousand m3 - water (UPC) 8.31 10.06 14.00 17.47 17.47 23.03 23.78 23.99 24.07 Revenue/connection - sewerage 3.91 4.32 5.58 6.42 6.42 7.25 8.00 8.00 8.00 STATEfENT OF INCOME AND EXPENSE REVENUES Water 266 342 504 664 1,031 1.543 1,784 1,991 2,190 Sewerage 34 42 82 126 159 215 278 318 358 Other 13 17 25 35 40 68 90 100 103 Total 313 401 611 825 1.230 1.826 2.172 2.409 2.651 EXPENSES Operations and maintenance 230 257 272 305 384 430 451 475 546 Administration 186 208 233 261 343 375 441 485 560 Capitalized (304) (230) (297) (132) (156) (60) (94) (94) (94) Subtotal 112 235 208 434 571 745 798 866 1,012 Depreciation 134 134 336 317 418 555 624 703 720 Total 246 369 544 751 989 1.300 1.422 1.569 1,732 Operating income 67 32 67 74 241 526 750 840 919 Interest 50 141 135 145 273 446 520 601 611 Net income (loss) 17 (109) (68) (71) (32) 80 230 239 308 Operating ratio .79 .92 .89 .91 .80 .71 .65 .65 .65 Rate base 2,100 3,755 5,648 6,859 8,02(0 10,511 12,501 13,429 13,914 Rate of return (%) 3.2 0.9 1.2 1.1 3.0 5.0 6.0 6.3 6.6 STATEMENT OF CASH FLOW SOURCES Internal cash generation 201 228 403 391 659 1,081 1,374 1,543 1,639 Long-term debt 2,661 2,526 3,394 1,609 1,811 689 801 767 731 Equity -- 69 -- 118 -- -- -- Total 2.682 2.823 3,797 2.118 2.470 1.770 2,175 2,310 2.370 APPLICATIONS Capital expenditures 2,250 2,101 2,970 1,324 1,557 604 940 940 940 Capitalized administrative expenditures 304 230 297 132 156 60 94 94 94 Capitalized interest 85 195 161 275 239 178 86 68 57 Total 2.639 2.526 3.428 1.731 1.952 842 1,120 1.102 1.091 Debt service 132 211 232 250 472 769 898 1,036 1,053 Working capital 144 86 134 133 35 151 143 155 205 Total 2.915 2.823 3.794 2.114 2.459 1.762 2.161 2.293 2,349 Increase (Decrease) in cash (53) -0- 3 4 11 8 14 17 21 Debt service ratio 1.5 1.1 1.7 1.6 1.4 1.4 1.5 1.5 1.6 BALANCE SHEET ASSETS Fixed Assets Fixed assets in operation 2,603 4,911 7,398 7,929 10,455 13,883 15,614 17,166 18,008 Reserve for depreciation 176 310 646 963 1,381 1.936 2,560 3.263 3.983 Net fixed assets in operation (NFA) 2,427 4,543 6,752 6,966 9,074 11,947 13,054 13,803 14,025 Construction in progress 2.984 3.177 4.308 5.508 4.934 2.348 1.737 1.387 1,636 Total 5.321 7,720 11,060 12.474 14,008 14,295 14,791 . Ik 15,661 C: rrent Assets Cash 144 144 147 171 162 170 184 201 222 Inventories 218 248 291 320 398 465 512 666 719 Accounts Receivable 73 100 146 206 295 410 550 615 680 Other 176 176 176 176 176 176 176 176 176 Total 611 668 760 853 1,031 1.221 1.422 1,658 1.797 TOTAL ASSETS 5,932 8,388 11,820 13,327 15 039 15,516 16,213 16,848 17,458 LONS-TERM LIABILITIES Long-tens debt 2,930 5,455 9,000 10,504 12,116 12,321 12,631 12,891 13,212 Equity 2.323 2,283 2,215 2.262 2,230 2.310 2.540 2.779 3,087 Total 5,253 7.738 11,215 12,766 14,346 14.631 15,171 15,670 16299 Current Liabilities 679 650 605 561 693 885 1,042 1,178 1.159 TOTAL LIABILITIES AND CAPITAL 5,932 8,388 11.820 13.327 15.039 15,516 16,213 i6 848 17.458 Debt/Total Capital (%! 56 70 80 82 84 84 83 82 81 ANNEX 7 Page 7 of 7 BRAZIL NORTPEAET WATER SUPPLY AND SEWERAGE PROJECT - COMPESA ACrUAL ASD PROJECTED FINaNCIAL STAT4EHBNS (UFPCs '000) Actual Protected O1 HATING DATA 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 later produced (million u3) 186 196 229 248 267 285 301 321 338 1.stor sold (million a3) 94 106 128 143 160 176 196 208 220 3accounted-for (2) 49 46 44 42 40 38 S5 35 35 3. of connections ('000) - water 271 304 356 386 415 444 473 504 533 -a. of connections ('000) - seerage 38 39 51 63 89 111 135 159 182 ovonue/thousand uS - water (UPC) 10.89 11.65 12.56 14.24 13.94 15.15 16.59 16.83 17.00 *evenue/connection - sewerage 6.71 7.18 7.69 8.75 8.60 10.12 10.13 10.20 10.20 _ TEKENT OF INCCME AND EXFENE lEVENUES Water 571 1,024 1,235 1,608 2,037 2,230 2,667 3,251 3,501 3,740 oewerage 149 255 280 392 551 765 1,123 1,367 1,622 1,856 other 73 43 50 68 74 80 86 92 96 104 Total 793 1.322 1.565 2,868 2,662 3.075 3.876 4,710 5.21 570 E;XPENSES Operations and msintennce 295 420 503 629 727 840 962 1,029 1,101 1,167 Adninistration 455 652 781 978 1,130 1.306 1,495 1,600 1,712 1,814 Japitalioed (90) (171) (201) (338) (233) (391) (176) (207) (326) (232) Subt,tal 660 901 1,083 1,269 1,624 1,755 2,281 2,422 2,587 2,749 Depreciation 50 84 238 373 488 627 767 917 1.068 1.189 Total 610 985 1.321 1.642 2.112 2.382 3.042 3,339 3.655 3.938 Operating income 83 337 244 426 550 693 834 1,371 1,566 1,762 Interest 248 222 189 299 487 601 767 885 1,095 1,183 Net income (toes) (165) 115 55 127 63 92 67 486 471 579 Operating ratio .77 .75 .84 .79 .79 .77 .78 .71 .70 .69 Rote base 3,037 5,443 8,486 10,944 13,863 16,671 19,591 22,366 25,171 Rate of return (%) 11.1 4.5 5.0 5.0 5.0 5.0 7.0 7.0 7.0 .CATEMESNT OF CASE PLOW SOURCES Internal cash generation 421 482 799 1,038 1,320 1,601 2,288 2,634 2,951 Long-tern debt 4,103 2,428 3,554 2,720 4,342 2,338 2,072 2,193 2,304 Equity 829 463 418 253 254 -- -- -- -- Total 5.353 3.373 4,771 4.011 5.916 3.939 4,360 4,827 5,255 APPLICATIONS Capitalined expenditures 4,481 2,075 3,388 2,332 3,910 1,756 2,091 2,264 2,324 Capitalized administrative expenditures 171 202 339 233 391 176 209 226 232 Capitali-ed interest -- 353 355 387 406 413 350 288 258 Toital 4,652 2,630 4,082 2,952 4,707 2,345 2,650 2,778 2,814 Debt service 389 311 517 840 1,037 1,322 1,525 1,888 2,040 Working capital 31 530 55 192 141 233 138 109 106 Total 5.072 3.471 4.654 3,984 5.885 3.900 4.313 4,775 4,960 Increase (Decrease) in cash 281 (98) 117 27 31 39 47 52 56 Debt service ratio 1.2 1.5 1.5 1.2 1.3 1.2 1.5 1.4 1.4 3ALASCE SHEET ASSETS Fixed Assets Fined asset in operation 2,984 3,736 8,200 10,432 13,978 17,385 20,987 24,910 28,521 32,778 Reserve for depreciation 240 406 644 1 017 1 505 2 132 2.899 3,816 4884 6,073 Net fixed assets in operation (NFA) 2,744 3,330 7,556 9,415 12.473 15,253 18,088 21,094 23,637 26,705 Construction in progress 4.197 8.927 7,093 8.943 8.349 9,991 8,734 7,461 6.628 5,185 Total 7.661 12.257 14.649 18,358 20_822 25.244 26,822 28,555 30,265 31,890 Current Assets Cash 148 429 331 448 475 506 545 592 644 700 Inventories 75 205 246 308 355 411 470 503 538 571 Accounts ReceivabLe 198 303 391 514 653 823 999 1,139 1,248 1,354 Other 264 281 281 281 281 281 281 281 281 281 Total 685 1218 1.249 1L551 1,764 2,021 2,295 2.515 2.711 2.906 TOTAL ASSETS 8,346 13,475 15,898 19,909 22,586 27,265 29,117 31,070 32,976 34,796 LIABILITIES AND CAPITAL Long-tens debt . 5,931 9,825 12,131 15,467 17,834 22,082 23,865 23,297 26,697 27,905 Equity 2,152 2.902 3,420 3,965 4,281 4,627 4,694 5,180 5.651 6.230 Total Capital 8,083 12,727 15,551 19 432 22,115 26,709 28,559 30,477 32,348 34,135 Current Liabiliti.s 263 748 347 477 471 556 558 593 628 661 TOTAL LIABILITIES AND CAPITAL 8.346 13.475 15,898 19,909 22_586 27.265 2._117 31_070 32.976 3t,796 Debt/Total Capital (7.) 73 77 78 80 81 83 84 83 83 82 ANNEX 8 Page 1 of 2 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT Outline of Terms of Reference for Metering and Tariff Studies Introduction 1.01 Each State Water Company in the States of Salvador, Pernambuco and Ceara will undertake water supply and sewerage metering and tariff studies in order to revise their tariff structures to achieve its resource allocation objectives and to provide sound basis for the expansion of water supply and sewerage services. Each tariff study will be presented for BNH approval and submitted for Bank's comments not later than June 30, 1979. Objectives 1.02 The purpose of the studies is to devise a tariff structure which reflects as closely as possible the costs to the economy of meeting the increasing demand for water and sewerage subject to the constraints imposed by the revenue requirements of the State Water Companies in connection with their financial objectives and by distributional objectives (e.g., subsidizing minimal services for poorer consumers). The study will recommend a timetable for the implementation of the proposed metering programs and the tariff structures. 1.03 The tariff studies should follow these basic principles: (a) the removal of subsidies to commercial and industrial customers for water supply and sewerage services; (b) the establishment of tariff structures progressive with respect to volume; and (c) the fulfillment of the financial covenants established in the Loan Agreement for the SWCs. Summary of Activities 1.04 To carry out the studies, the following main activities should be undertaken: (a) gathering of information on: (i) existing tariffs, (ii) demand levels, (iii) income distribution, ANNEX 8 Page 2 of 2 (iv) operating and capital costs, and (v) other relevant data; (b) identifying the incremental cost of services; (c) identifying and quantifying economic, financial and social objectives to be served through the tariff design; (d) comparing existing tariffs with incremental costs and the tariff implications of financial and social objectives; (e) making a cost-benefit analysis of consumption metering for different consumer groups; (f) analyzing the need for lower standards of service in low- income areas; (g) formulating programs for meter installation and maintenance and tariff proposals, integrating economic, financial and social factors (assessing the affordability of low-income groups); and (h) proposing implementation schedules and procedures for the recommended metering programs and tariff structures. BRAZIL (A) Metropolitan Salvador NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT INTERNAL FINANCIAL RATES OF RETURN AND AVERAGE INCREMENTAL COSTS INTERNAL FINANCIAL RATE OF RETURN (IFRR) (thousand UPCs of Dec. 1977) C 0 S T S R t V E N U E S N E T R E V E,N-ULE S Year Construction Operating & Total 1 2 1 2 As S U M P T I O N S Costs Mainterance 1978 1067 101 1168 167 167 (1001) (1001) Revenue 1: Based on average tariff 1979 2811 207 3018 347 367 (2671) (2651) levels as of 1978 and assumed 1980 2484 261 2745 484 1089 (2261) (1656) constant in real terms thereafter. 1981 2312 315 2627 674 755 (1953) (1872) 3 1982 495 371 886 753 902 (113) 36 Water Supply: UPCs 16.3/000 m 1983 153 579 732 852 1011 120 279 Sewerage: UPC 7.6/connection year 1984 154 650 804 943 1081 139 277 1985 164 736 900 1044 1183 143 283 Revenue 2: Based on expected tariff 1986 199 785 984 1141 1295 157 311 levelresultingefron finacial 1987 214 836 1050 1239 1407 189 357 levels resulting from financial 1988 214 886 1100 1336 1517 236 417 covenant. 1989 214 937 1151 1434 1629 283 478 1990 231 990 1221 1535 1745 314 524 1991 231 1046 1277 1641 1866 364 589 1992 247 1107 1354 1757 1999 403 645 1993 264 1168 1432 1873 2132 441 700 1994 280 1233 1513 1997 2274 484 761 1995 231 1297 1528 2114 2408 586 880 1996- 2012 - 1337 1337 2167 2468 830 1131 IFRR 1: 4.1% IFRR 2: 7.0% IFRR 3: 3.4% 1/ 01 1/ Using a shadow exchange rate factor of 1.3 and present tariff levels in real terms. LONG RUN AV-h-RGE IN1t . NiL A W A T E R S U P P L Y S E W E R A G E A S S U M P T I O N S Volume Cost Volume 3 Cost Year 3 (thousand UPC (million m (thousand UPC (million m ) of Jan. 1978) equivalent) of Jan. 1978) 3, 1978 10.2 1,168 _ _ 0.46 million m3/ 1979 20.7 2,469 0.6 549 connection year 1980 26.2 2,133 3.4 612 1981 32.0 2,094 6.9 533 1982 37.5 656 8.5 210 1983 43.0 342 9.0 150 1984 48.6 614 9.0 150 1985 54.7 711 9.0 150 1986 60.7 782 9.0 150 1987 66.7 844 9.0 150 1988 72.6 894 9.0 150 1989 78.6 945 9.0 150 1990 84.8 1,010 9.0 150 1991 91.3 1,066 9.0 150 1992 98.4 1,139 9.0 150 1993 105.5 1,213 9.0 150 1994 113.1 1,289 9.0 150 1995 120.3 1,317 9.0 150 1996- 2007 123.5 1,187 9.0 150 AICW: 22.24 UPC/000 m AICS! 36.82/000 3 = 5.1 Cr$/m3 = 8.4 Cr$/m xI AICW: 23.50 UPC/OOOm3 1/ AICS: 38.93/OOOm3 , x - 5.3 Cr$/m3 = 8.8 Cr$/m3 ° 1/ Using a shadow exchange rate factor of 1.3. (B) Recife INTERNAL FINANCIAL RATE OF RETURN (IFRR) (thousand UPCs of Dec. 1977) Year Donstruction operating & Total 1 2 1 2 A S S U M P T I E N S Costs Maintenance 1978 - - - Revenues 1: Based on average tariff 1979 1,628 28 1,656 75 75 (1581) (1581) levels as of 1978 and assumed 1980 1,162 51 1,213 149 159 (1064) (1054) constant in real terms thereafter. 1981 1,762 75 1,837 348 340 (1489) (1497) 1982 223 97 320 520 537 ( 200 217 Water Supply: UPC 11.3/000 m3 1983 13 117 130 611 618 481 488 Sewerage: UPC 6.9/economic year 1984 17 126 143 701 716 558 573 Revenues 2: Based on expected 1985 21 133 154 805 825 651 671 average tariff levels resulting from 1986- financial covenant. 2012 - 133 133 805 825 672 692 IFRR 1: 12.3% IFRR 2: 12.6% IFRR 3: 11.2% fD p 0 ?lfi 1/ Using a shadow exchange rate factor of 1.3 and present tariff levels in real terms. 7 LONG RUN AVERAGE INCREMENTAL COST (AIC) W A T E R S U P P L Y S E W E R A G E A S S U M P T I O N S Volume Cost Volume Cost Year (m.il 3i (thousand UPCs (million m3 (thousand UPCs MilllOIon IU of Jan. 1978) equivalent) of Jan. 1978) 1978 0.56 million m / 1979 6.0 1,074 0.6 582 ,, 1980 12.0 446 1.1 767 economia-year 1981 18.0 1,094 11.8 743 1982 24.0 255 20.2 65 1983 29.0 64 23.0 66 1984 29.0 64 30.2 79 1985 29.0 64 38.6 90 1986- 2007 29.0 64 38.6 69 AICW: 12.94 UPC/ooo m3 AICS: 9.52 UPC/ooo m 3 = 2.9 Cr$/m3 = 2.2 Cr$/m 3 AICW: 13.99 UPC/OOOm3 1/ AICS: 10.27 UPC/OOOm3 1/ = 3.2 Cr$/m3 = 2.3 Cr$/m3 VD 0 UefO 1/ Using a shadow exchange rate factor of 1.3. (C) Fortaleza INTERNAL FINANCIAL RATE OF RETURN (IFRR) (thousand UPCs of Dec. 1977) COSTS REVENUES NET REVENUES ASSUMPTIONS Year Construction Maint.& Oper. Total 1 2 1 2 1978 73 - 73 - - ( 73) ( 73) Revenues: Based on average tariff 1979 1930 38 1968 21 25 (1947) (1943) levels as of 1978 and assumed constant 1980 645 42 687 42 54 ( 645) ( 633) in real terms thereafter 1981 680 235 915 248 338 ( 667) ( 577) 1982 905 261 1166 326 532 ( 840) ( 634) Water Supply: UPC 9.7/000 m3 1983 100 326 426 415 662 ( 11) 236 Sewerage: UPC 4.2/connection year 1984 110 392 502 504 810 2 308 1985 121 460 581 593 956 12 375 Revenues 2: Based on expected tariff 1986 132 541 673 692 1116 19 443 levels resulting fron financial 1987 145 670 815 839 1356 24 541 covenant. 1988 158 690 848 880 1420 32 572 1989 170 750 920 958 1547 38 627 1990 2012 - 750 750 1000 1613 250 863 IFRR 1: 1.8% IFRR 2: 12.0% IFRR 3: 1.2% a/ Using a shadow exchange rate factor of 1.3, and present tariff levels in real terms. X X '0 0ll LONG RUN AVERAGE INCREMENTAL COST (AIC) W A T E R S U P P L Y S E W E R A G E A S S U M P T I O N S Volume ~~~~~Volume Cost Year Volume Cost (million m3 (thousand UPC (million m3) (thousand UPC equivalent) of Jan. 1978) of Jan. 1978) 1978 - - - 0.42 million m3/ 1979 - 1578 2.1 390 connection year 1980 - 588 4.2 99 1981 19.0 484 6.3 431 1982 25.0 707 8.4 459 1983 32.0 292 10.5 134 1984 39.0 347 12.6 155 1985 46.0 404 14.7 177 1986 54.0 471 16.8 202 1987 67.0 588 18.9 227 1988 69.0 600 21.0 248 1989 75.0 648 23.1 272 1990- 2007 78.0 587 24.4 163 AICW: 14.60 UPC/OO0 m 3 AICS: 16.42 UPC/O00 m 5 3.3 Cr$/m3 = 3.7 Cr$/m3 AICW: 15.24UPC/OOOm 1/ AICS: 17.16 UPC/00Om3 1/ = 3.5 CrO/W3 = 3,9 Cr$/m3 0% 0' 1/ Using a shadow exchange rate factor of 1.3. ANNEX 10 BRAZIL NORTHEAST WATER SUPPLY AND SEWERAGE PROJECTS Documents Available in Project File 1. BNH Basic Legislation. 2. BNH Audited Financial Statements, 1976 and 1977. 3. BNH Annual Budgets, 1976-1980. 4. BNH Annual Reports, 1976 and 1977. 5. BNH Credit Lines. 6. Accounting Manual for SWCs. 7. Audited Financial Statements for the SWCs, 1976 and 1977. 8. Training Program for Brazil SWCs, January 1977 - ABES. Two volumes. 9. Status of Water Supply and Sewerage Service Levels in the urban areas under SUDENE - June 1977. 10. Investment programs, cost estimates and project maps for the SWCs. 11. Justificative analysis for water treatment works in Salvador. 12. Poverty impact analysis - June 1978. I B R D 13716 AUGUST 1A78 WATER SUPPLY AND SEWERAGE PROJECT THE NORTHEAST REGION _MAlN RAODS: P AVED UNPAVED N - vTATA- AtE ROINDAR SES \ ; tv , ;>,~~~~~~~~~~~~~~~~~~~~~~ s 7 ATES NCILUNDEi THE PROJEtT Hi,<~~~~~~~~~~~~~~~~~~d i'{~~~~~~ (L 20N NT) CL I~~~~ ME[r ,- > .0wrz= w 4- f4W' 44 42 i-l B R A Z IL9OT1990 WATER SUPPLY AND SEWERAGE PROJECT . - -/ .* I~ THE NORTHEAST REGION I' -. , - RAINFALL AND PROBABILITY OF DROUGHT *2' d. P-' D A D A .* - - ' . . r - .P IA U -. bo G O I A S PARA1 ; 8 \ \ *~- ': LAINFALL /~~~~~~~~~~~~~~~~~~~~~~~~~ (~~~~ ... >S~_. .. ... Rt 1REoding si.-ąt g .; W.:> :> ;- . i, , i -~~~~~~~~~~~~"L PRO8ABI.ITY OF DROUGHT ITTEDERAL -$ , 61 - 8ClN |DISTRIC I %r 41 - 60% s r32 R AsI L | t , - .t . : 0 . . . ~~~~~~~~~~~~~~~~~2 1 - 40 .% _16° 0 : ~~~~~~~M I N A S G E R A I S 0.4' - 20% le \ :j ! --- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Srors, B-ud- r-e / '-DYprdBon r Be-wenCer & P-1, ,-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- --v -EPI RI TO.~ t I6+ 4E - G r l .4U 4,D ( S A~-_jL__2 N T 9 0 , _______________! ___________________ IBRD 13718 r - S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~EPTEMBER 1975 [ ~~~~~~~~~~~CANDEIAS B R A Z I L RC C)U T H ,.,, g F_ ,, / h ~~~O~~~UTH~ BRASILIA ,_~~~~~ ~ I Ql ;re- 1SJ f _55.w/ 1. im& /1 , Soo \, - . u , \ \ 0 / SlklCES FILHO.ARi ___50__p'__________________,,I DO JOAA.1S KwLOMETERS LJR DE- ~~~~~~~~ ; I [5 d.',, - / a1 WAJZEIA R S A G PrOJEC KILOMETERS 1 \ :::5.m /Xt tf LAU~~~~~~~ ~ ~~~~~~~~~~ROEamn Wi; er 4~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~ae Mom Plant S,rg .Tanks-.t,s /le_restrlenlD<-~~~~~~~~~~~ 1 XS= -dT'-!'F, o ! o 3 4 5 e~~~~~~-fi~ t e L ! ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Pot.ls t-eDm ,Ml- 3 l