Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-3003-BR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO NACIONAL DE HABITACAO WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR A MULTI-STATE WATER SUPPLY AND SEWERAGE PROJECT April 1, 1981 | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its eentents may not otherwise be disclosed without World Bank authorizfaon.| CURRENCY EQUIVALENTS Calendar 1980 March 18, 1981 Currency Unit = Cruzeiro (Cr$) Cr$ US$1 = Cr$53.25 Cr$73.4 Cr$1 = US$O.019 US$0.014 ACRONYMS BNH - Banco Nacional de Habitacao CAESB - Companhia de Aguas e Esgotos de Brasilia CAGEPA - Companhia de Aguas e Esgotos da Paraiba COPASA - Companhia do Saneamento de Minas Gerais, S.A. COSAMA - Companhia de Saneamento do Amazonas COSAN - Operations Division of the BNH for the Sanitation Finance System COSANPA - Companhia de Saneamento do Para FAE - Fundo de Agua e Esgotos FGTS - Fundo de Garantia do Tempo de Servico FINEST - BNH's Credit Program for States and Small Communities ORTN - Readjustable National Treasury Bond PARO - Pan-American Health Organization PLANASA - National Sanitation Plan REFINAG - BNH's Line of Credit for Water Supply Projects REFINESG - BNH's Line of Credit for Sewerage Projects SABESP - Companhia de Saneamento Basico do Estado de Sao Paulo SANEAGO - Companhia de Saneamento de Goias, S.A. SANESUL - Empresa de Saneamento de Mato Grosso do Sul SWCs - State Water Companies UPC - Standard Capital Units FISCAL YEAR January 1 - December 31 The exchange rate used in the Staff Appraisal Report (US$1 = ORTN 1/ 0.086) corresponds to the cruzeiro selling rate as of February 1981. 1/ Readjustable National Treasury Bonds. The index used to adjust the principal of these bonds monthly is widely used in Brazil to adjust other values. FOR OFFICIAL USE ONLY BRAZIL MULTI-STATE WATER SUPPLY AND SEWERAGE PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional da Habitacao (BNH) Guarantor: Federative Republic of Brazil Beneficiaries: Companhia de Saneamento do Amazonas (COSAMA) Companhia de Saneamento de Goias (SANEAGO) Empresa de Saneamento de Mato Grosso do Sul (SANESUL) Companhia de Saneamento do Para (COSANPA) Companhia de Agua e Esgotos da Paraiba (CAGEPA) Companhia de Aguas e Esgotos de Brasilia (CAESB) Amount: US$180 million equivalent Terms: Repayment in 15 years, including three years of grace at 9.6% interest per annum. Relending Terms to Final Beneficiaries: Repayment in 18 to 30 years, not including one to four and one-half years of grace, at 2.0% to 5.0% (2-3% under subprograms in support of small communi- ties) per annum on the outstanding principal, adjusted in accordance with the ORTN index, plus various one-time fees amounting to about 3% of the amount of subloans. BNH would bear the foreign exchange risk of the loan. Project Description: The proposed project would provide piped water to some 2.5 million people and sewerage services to 0.6 million people in the states of Amazonas, Goias, Mato Grosso do Sul, Para, Paraiba and the Federal District. To achieve these targets, the project would include (i) the improvement and extension of water supply systems in the five capital cities and the Federal District, consisting of the construction of water production and treatment systems and transmission lines, the extension of distribution systems, including the installation of 200,000 new house connections for water, 286,000 water meters and the implementation of leak detection programs; (ii) the construction of some 630 km of new sewers with 45,000 connections in three capital cities and in Campina Grande, and the expansion This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - iL - of sewerage treatment plants in the Federal District; (iii) the construction or expansion of water supply systems in 80 medium-sized cities and 65 small communities; (iv) equipment for the operation and maintenance of water supply and sewerage systems; and (v) consulting services for design and supervision, and technical assistance to BNH and the state water companies (SWCs). It is estimated that 63% of the final benefi- ciaries of the water supply improvements and about 10% of the beneficiaries of the project's sewerage component would be urban poor whose income is less than one third the national average income. The project does not present any special risks. Estimated Costs: --US$ Million Equivalent-- Local Foreign Total % Civil Works and Equipment Water Supply 210.6 107.6 318.2 70.7 Sewerage 52.5 25.5 78.0 17.3 Engineering 47.3 5.5 52.8 11.7 Technical Assistance O.4 0.7 1.1 0.3 Base Cost 310.8 139.3 450.1 100.0 Physical Contingency 31.1 13.9 45.0 10.0 Price Contingency 67.1 26.8 93.9 20.9 Total Contingencies 98.2 40.7 138.9 30.9 Total Project Cost 409.0 180.0 589.0 130.9 Financing Plan: Bank Loan - 180.0 180.0 30.6 State Water Supply and Sewerage Revolving Funds 294.5 50.0 BNH 114.5 19.4 Total 409.0 180.0 589.0 100.0 Estimated Disbursements: ----US$ Million Equivalent---- Bank FY82 1983 1984 1985 Annual 48.2 70.3 44.1 17.4 Cumulative 48.2 118.5 162.6 180.0 Rate of Return: Important benefits stemming from improved health, in particular lower infant mortality, increased labor productivity and improved environmental conditions, are not meaningfully quantifiable. The return on investment based on incremental costs and revenues -- which may be presumed to lie below the minimum economic rate of return -- is estimated at 10% for the project as a whole. Appraisal RepQrt: Report No. 3243c-BR, dated April 2, 1981 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO NACIONAL DE HABITACAO WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR A MULTI-STATE WATER SUPPLY AND SEWERAGE PLOJECT 1. I submit the following report and recommendation on a proposed loan to Banco Nacional de Habitacao (BNH) with the guarantee of the Federative Republic of Brazil for the equivalent of US$180 million to help finance a Multi-State Water Supply and Sewerage Project. The loan would have a term of 15 years, including 3 years of grace with interest at 9.6% per annum. PART I - THE ECONOMY 1/ 2. A report, entitled "Economic Memorandum on Brazil" (No. 2283a-BR), dated March 19, 1979, was distributed to the Executive Directors on March 30, 1979. The following discussion and related annex tables are based on the work of an economic mission that visited Brazil in March 1980 and was updated in August 1980. The mission's report will be distributed shortly. 3. The present Government, headed by President Joao Baptista de Oliveira Figueiredo, took office on March 15, 1979, for a six-year term. Much of its attention has had to be devoted to grappling with accelerating inflation and a deteriorating balance-of-payments situation. Major economic priorities of the Government include the accelerated growth of agriculture, reduced dependence on imported petroleum, and continued expansion of manufactured exports. Success on these fronts is crucial to the solution of the inflation and balance-of- payments problems, as well as to the sustained improvement of living standards and a better income distribution. Economic Performance 4. Over the past 13 years Brazil has enjoyed remarkable economic growth. with GDP and income per capita rising at average real rates of about 9% and 6% per year, respectively. During the 1967-1973 period, growth was achieved with no significant deterioration of the external resource balance, despite considerable trade liberalization, and there also occurred a gradual decline in the rate of domestic inflation. Given the heavy dependence of Brazil's industry and transport system on petroleum, however, over 80% of which was imported, the quadrupling of oil prices at the end of 1973 resulted in a sharp deterioration in the nation's terms of trade. Excess aggregate demand and a succession of bad harvests have, along with increased energy costs, resulted in increasing balance-of-payments difficulties and the reacceleration of domestic inflation. 1/ This part is reprinted substantially from the corresponding part of the President's Report for the Third Urban Transport Project (No. P2989-BR), dated March 11, 1981. -2- 5. Coping with these short-term constraints while responding to continuing pressures to maintain high growth rates of output and employment and simultaneously establishing the basis for long-term structural adjustment has been the central problem of Brazilian economic management during the past seven years. Considerable success has been achieved in maintaining rapid growth, and an aggressive and innovative effort has been launched to reduce energy consumption and substitute domestic energy resources for imported petroleum. Through 1978, the balance-of-payments pressures were successfully contained through the continued rapid expansion of exports, particularly of manufactures, increased import barriers, accelerated import substitution, and heavy external borrowing, including large additions to international reserves. 6. Any significant reduction in Brazil's dependence on imported petro- leum, however, necessarily involves a long gestation period. Meanwhile, the rapid accumulation of external debt, compression of imports and intensification of domestic inflationary pressures have been increasing the economy's vulner- ability to further external shock. That vulnerability is being severely tested by the additional sharp increases in petroleum prices and international interest rates that occurred in 1979 and 1980. 7. Aggregate demand continued to grow in 1979, fueled by rapid monetary expansion, a large public sector deficit, large wage settlements in the unionized sectors, and the continued expansion of manufactured exports. Indus- trial production was up about 7% over the previous year. Agricultural output suffered a second consecutive year of droughts, floods, and frost but showed some recovery from the depressed levels of 1978. Overall, GDP growth was 6.4%. High demand, the poor harvest, and increased fuel costs resulted in a rapid acceleration of inflation which reached 78% by the end of year, the highest rate since 1964. 8. Increased petroleum prices, consecutive bad harvests, and a sharp rise in external borrowing costs also contributed to a progressive deteriora- tion of Brazil's balance of payments. Despite the continued rapid growth of manufactured exports, the merchandise trade balance fell from a small surplus in 1977 to a US$1.0 billion deficit in 1978 and a US$2.7 billion deficit in 1979. The cost of fuel imports alone increased from 1978 to 1979 by 53%, or US$2.2 billion. Increases in the London interbank offered rate (LIBOR), to which more than 65% of Brazil's external debt is tied, contributed to raising gross interest payments abroad from US$3.3 billion in 1978 to US$5.3 billion in 1979. Consequently, the deficit on current account grew from US$5.9 billion to US$9.7 billion, or from 3.1% to 4.7% of GDP. 9. With amortization payments totaling US$6.6 billion, gross external capital requirements in 1979 amounted to US$16.3 billion. Of this amount, US$3.2 billion was covered by reserve drawdowns, and another US$1.5 billion was provided by net direct foreign investment. Gross and net foreign borrow- ings in 1979, including bond issues totaled US$11.6 billion and US$5.0 billion, respectively. Few difficulties were encountered in attracting the necessary credits, and an improvement noted in 1978 in spreads and maturities available to Brazil was sustained in 1979. The drawdown brought international reserves to US$9.7 billion at the end of 1979, or equivalent to about 6 months of goods and nonfactor service imports. Gross medium- and long-term debt had risen to US$49.9 billion, or 24% of GDP. 10. Measures introduced in April 1979 to slow the inflation and reduce balance-of-payments pressures met with only temporary success and were followed by new packages of measures in December 1979 and in January and April 1980. The most important of the December measures were a 30% devaluation of the cruzeiro, accompanied by the elimination of some export subsidies and the prior deposit requirement on imports; increased restrictions on public enterprise investments, imports and borrowing; selected tax increases; the introduction of a programmed phase-out of most tax earmarking; a modification of administered credit programs intended to reduce subsidies; the imposition of direct controls on credit expansion by the private banking system; and the establishment of ceilings on monetary correction and exchange rate adjustment during 1980 and the first half of 1981 in an effort to dampen inflationary expectations. 11. Nevertheless, the economic momentum continued in 1980, with overall economic growth exceeding 8%, including an excellent agricultural harvest and continued rapid industrial expansion. Aggregate demand remained strong, despite improved fiscal and monetary restraint, and inflation rose to over 110%, as measured by the General Price Index. 12. On the external side, preliminary estimates are that exports grew by 32% in 1980 as a consequence of the excellent harvest and continued expansion of manufactured exports despite the slow growth of the world economy. Imports expanded almost as fast, however, in response to the continued strong growth of the economy, higher petroleum prices, and some private sector inventory accumulation early in the year in anticipation of possible tighter import controls. Despite the rapid growth of industrial output and GDP, the volume of petroleum imports fell from 1,003 thousand b/d in 1979 to 929 thousand b/d in 1980 as a result of conservation efforts and domestic energy substitution. Nevertheless, the trade deficit for the year totaled an estimated US$2.8 billion. External borrowing totaled about US$15 billion (including an estimated US$3 billion of short-term borrowing), and reserves were drawn down by an additional US$3.0 billion. Although Brazil was able to obtain the required US$5-6 billion net external financing, loan terms were tighter. Total medium- and long-term external debt outstanding at the end of 1980 was about US$56 billion. 13. A number of important policy measures have been announced for 1981. Controls on public expenditures have been further tightened, and monetary expansion is targeted at 50-60%. In an effort to encourage private savings and maintain adequate export incentives, monetary correction will be brought into line with actual inflation, and the exchange rate will again be fully adjusted for the differential between domestic and international inflation. Commercial banks have been freed from interest rate controls, interest rates on official credits have been raised, and price controls are being progressively relaxed. An increase in the foreign exchange transactions tax on imports from 15 to 25% will further discourage imports. Although the net impact of these measures may be some short-term increase in inflation, the overall result should be greater restraint of aggregate demand, a slowdown of economic activity and reduced pressure on the balance of payments. -4- Poverty Programs 14. Although Brazil continues to be characterized by severe income inequality, the Government has in recent years made serious efforts to relieve poverty. In addition to general efforts to maintain the growth of employment and prevent the erosion of real wages, special programs for the Northeast region have been protected from the present tight fiscal and monetary restraints. Coverage of the social security program has been expanded and extended to the rural population. More than 70% of the urban population is now covered by the social security health care system, and a cash transfer program has been established for the rural elderly poor. Under this latter system, rural households headed by persons over 65 years of age are eligible to receive a monthly income supplement equivalent to US$30, an amount which is almost twice the average per capita expenditure in the rural Northeast. The urban popula- tion over age 70 is covered by a similar program. Almost 2 million loans have been made for housing by the National Housing Bank since 1964. A sites and services program was established in 1975 to benefit the urban poor more directly, and this was complemented in 1977 by a program to finance home improvement and building materials. High priority has also been given to the extension and improvement of urban water supply. Consequently, some 6 million households comprising about 30 million people have been connected to public water supply systems since 1971, increasing the proportion of urban dwellers who receive such services to 75%. Efforts have also been made to attack the poverty-related problems of adult illiteracy and malnutrition. 1/ Future Prospects 15. Since 1973, Brazil has made major efforts to reduce the drain on the economy of petroleum imports. Investments in exploration have been accelerated, and foreign oil companies have been invited to drill under risk contracts with PETROBRAS, the state oil company. Investments have also been undertaken to develop the nation's extensive hydroelectric potential, to initiate nuclear power production, to substitute alcohol for gasoline, and to expand domestic coal production. Efforts are also being made to induce energy conservation. While results thus far are encouraging, dependence on imported energy remains a formidable problem. With oil imports constituting an estimated US$10.2 billion (nearly 45% of Brazil's merchandise imports) in 1980, as compared to US$700 million (11% of imports) in 1973, the trade-off between growth and balance-of-payments viability will continue to be a principal preoccupation of economic decision makers. 16. In view of the balance-of-payments constraint, Brazil must undergo a period of careful demand management. In addition to the measures already noted, a number of important institutional reforms are being carried out to improve fiscal and monetary policy design and implementation. Among these are the marked improvement of information flows and budgetary control in the public sector, including the expenditures of the many semi-autonomous agencies and public enterprises; incorporation into the fiscal budget of several of the 1/ For a more detailed account of these efforts see "The Distribution of Income in Brazil" (Staff Working Paper No. 356, dated September 1979) and "Brazil - Human Resources Special Report" (Report No. 2604-BR, dated July 13, 1979). subsidy programs formerly handled outside the budget through the Central Bank; and reduced earmarking of public revenues. The December 1979 devaluation of the cruzeiro, the removal of import deposit requirements, and the gradual freeing of prices and interest rates should help to promote more efficient resource allocation favorable to both export growth and efficient import substitution. Although public investments may be constrained by reduced resource availabilities over the next several years, priority attention will continue to be given to the development of domestic energy sources, agriculture and major import-substitution projects. 17. Growth is expected to average about 5-5.5% per year in 1981-85 as compared to 11% in 1967-73 and 7.2% in 1973-80. Such a growth rate should be compatible with a stable current account deficit after 1980 and high, but declining, debt service ratios. These projections are highly sensitive, how- ever, to petroleum prices, international interest rates, and the rate of growth of manufactured exports. The combination of high debt service and a high share of petroleum in total imports leaves the economy more vulnerable to external events than it has been for many years, and this situation may be expected to persist for the next several years. External Assistance and Creditworthiness 18. With the forecast upward trend of real petroleum prices, Brazil's resource balance is expected to remain negative until 1984. Interest payments on the growing external debt will increase throughout the 1981-85 period despite an expected decline in international interest rates. Thus large service account deficits will contribute to continuing current account deficits on the order of US$10-12 billion through 1985. As a proportion of GDP, the current account deficit is projected to fall steadily from its peak of 5.6% in 1980. This projection assumes that imports grow at a moderate pace through 1985, reflecting continued import substitution, as well as a strengthening of the overall domestic savings effort. A trade surplus would then appear beginning in 1983. 19. Net medium- and long-term borrowing requirements are expected to be around US$11-12 billion in 1981, and remain in the same range from 1982 to 1985. Annual gross borrowing would be about $19 billion this year and rise to about $21 billion over the five-year period, with 75-85% obtained as financial credits from private lenders. Consequently the gross debt service ratio 1/ would decline from about 65% in 1980 to about 47% in 1985 (corresponding net figures are 62% and 45% respectively). 20. In summary, after a period of very rapid growth in the late 1960s and early 1970s, the sharply increased cost of petroleum imports has forced the nation to moderate its growth expectations and to adapt its economic structure to the changed terms of trade. This adjustment process was initially eased by a strong reserve position, a solid image of national creditworthiness, the aggressive expansion of manufactured exports, and the ample opportunities for efficient import substitution offered by the large domestic market. 1/ Including both public and private debt. The figure for public debt service alone would be substantially lower. For example, in 1979 the public sector accounted for only 53% of total debt service payments. - 6 - Nevertheless, continued heavy dependence on petroleum imports, the resurgence of domestic inflation, and the rapid accumulation of external debt have left the economy increasingly vulnerable to further external shocks. The Govern- ment recognizes the need for careful demand management and for selectivity in its investment policies emphasizing efficiency in export expansion, import substitution, employment creation, and poverty alleviation. 21. The great sensitivity of Brazil's balance of payments to petroleum prices and international interest rates will continue to make projections subject to a wide margin of error. The present scenario also depends heavily on Brazil's ability to curtail inflation, expand manufactured exports, despite the slower anticipated growth of the world economy, and on its continued access to international capital. A major effort is underway to reduce depen- dence on foreign petroleum, but significant results will not be apparent for several years. On the other hand, the Brazilian economy remains dynamic, highly diversified, and resilient. The task of economic management will not be easy, but policy makers have demonstrated their ability to adjust to changing circumstances, and recent policy measures should greatly strengthen their management capacity. Thus, despite the deterioration noted in 1979 and 1980, Brazil remains creditworthy for new borrowing on conventional terms. PART II - BANK OPERATIONS IN BRAZIL 22. By January 31, 1981 the Bank had approved 101 loans to Brazil, amounting to US$5,393 million (net of cancellations), of which 55 were not yet fully disbursed. During FY70-75, disbursements averaged US$150 million per year, reaching US$202 million in FY76, US$267 million in FY77, US$252 million in FY78, US$295 million in FY79, and US$318 million in FY80. Disbursements amounted to US$184 million in the first half of FY81. They are expected to increase further during the next few years. The total undisbursed amount as of January 31, 1981 was US$2,682 million. Annex II contains a summary statement of Bank loans as of December 31, 1980 and notes on the execution of ongoing projects. 23. Over the FY76-80 period, Bank lending to Brazil ranged from US$425 to over US$700 million per year. In FY76, ten loans were made totalling US$498 million; in FY77, seven loans totalling US$425 million; in FY78, nine loans totalling US$705 million; in FY79, nine loans totalling US$674 million; and in FY80, seven loans totalling US$695 million were made. So far in FY81, four loans totalling US$325 million have been approved, US$125 million for a second power transmission project of ELETROSUL, US$56 million for a second Ceara rural development project, US$54 million for an electric power system coordination project, and US$90 million for a third urban transport project. Work is relatively advanced on loans for the fuel alcohol program, a rural development project in Piaui, a second agricultural research project, an integrated regional development program in the northwest, and a multi-state power distribution project. -7- 24. Of Brazil's external public and private debt outstanding and dis- bursed at the end of 1979, amounting to US$49.9 billion, the Bank held 3.6%. The Bank's share of the service on this debt in 1979 was 2.0%. In 1980, the Bank's share in total outstanding debt is expected to fall very slightly, while its share in total debt service should fall to about 1.8%. 25. As of December 31, 1980 IFC commitments to Brazil totalled US$544.5 million, of which US$343.9 million had been sold, repaid or cancelled. Of the balance of US$200.6 million, US$149.9 million represent loans and US$50.7 million equity. A summary of IFC's investments as of December 31, 1980 is given in Annex II. Lending Strategy 26. In its lending to Brazil, the Bank has sought to help the Govern- ment achieve a number of important development objectives which are inter- dependent and complementary. One important lending objective in Brazil is to help to intensify the efforts of the Government to identify and develop projects that will increase the productivity and incomes of the lowest income segments of the population, to broaden the economic opportunities open to those groups, and to improve their living conditions. It is to these ends that the proposed Multi-State Water Supply and Sewerage Project is mainly directed. Loans for water supply and sewerage projects in the State of Minas Gerais, in Greater Sao Paulo, in the northeast and in the south, loans for urban transport in several major cities, a loan for sites and services and low-cost housing, and a loan for urban development in medium sized cities are assisting to improve the living conditions of the urban population, particu- larly of the urban poor. Additional urban development projects are in prepara- tion including an integrated urban development project for Recife. Previous loans for nutrition research and development, vocational training, agricultural research, agricultural extension and polder construction in the lower Sao Francisco river basin and for integrated rural development in the States of Rio Grande do Norte, Minas Gerais, Ceara, Paraiba, Bahia, Sergipe and Pernambuco were designed to assist low-income groups in rural areas. Additional projects to assist the rural poor are in preparation including several more integrated rural development projects in the northeast and northwest. 27. Another of the Bank's lending objectives in Brazil is to support institutional development and policy reform designed to develop rational policies and procedures, establish adequate coordination and control within the public sector and help maximize public savings and ensure that they are used economically through rational selection of investment projects. This institution-building objective is particularly important in the proposed project which seeks to improve the operations of BNH, especially its selection, appraisal and supervision of projects. The proposed operation would also provide for institution building in the state water companies. Loans for urban development, electric power, railways, industrial finance, highways, agricultural research and extension, water supply and sewerage, and rural development also have important institution-building objectives. -8- 28. Another lending objective is to ease the foreign exchange constraint on development, a constraint that has become more critical since the increase in petroleum prices in 1974, by supporting projects designed to increase Brazil's export capacity and, where economical, to substitute domestic production for imports. As a result of the deterioration in Brazil's terms of trade and balance of payments which took place at the time of the 1974 energy crisis, this objective was placed in the forefront of the Government's economic policy. Lending for the electric power sector supports this objective, since it is based primarily on hydroelectric energy, and its development lessens the need for petroleum imports. Bank support of fertilizer and petrochemical projects is assisting Brazil to substitute imports with large-scale efficient domestic production and aid its balance-of-payments position. Much of the Bank-assisted investment in the transport sector -- railways, ports and highways -- is designed to facilitate the smooth and economical flow of exports. Support of the steel expansion program is helping Brazil to expand domestic output of a traditional import commodity which can be produced efficiently in Brazil due to the country's ample supply of high-grade iron ore and the scale of its internal markets. A similar objective is being achieved through the VALESUL aluminum project which will use Brazil's abundant hydro- electric resources and ample bauxite reserves. 29. A final objective which applies to all Bank lending to Brazil is to provide part of the large volume of medium- and long-term capital inflows that Brazil has needed and will continue for some years to need in order to sustain satisfactory growth and achieve its employment creation and regional development objectives. Continued active lending by the Bank in Brazil is regarded by the international financial community as an important sign of confidence in Brazil and encourages others to continue contributing to the country's development. In some sectors, especially in electric power and industry, Bank participation is helping Brazil obtain additional resources in greater amounts and on more favorable terms from bilateral credit agencies and private financial institutions than may otherwise have been provided. Eleven co-financing operations, for more than US$425 million, have been concluded since 1976 with private financial institutions and several others are in preparation, including about US$110 million in private co-financing for the CEEE power distribution project (Loan No. 1824-BR, approved in March 1980), US$50 million in private co-financing for the Second Minas Gerais Rural Development Project (Loan No. 1877-BR, approved in June 1980), and about US$65 million in private co-financing for the ELETROSUL Second Power Transmission Project (Loan No. 1895-BR, approved in July 1980). -9- PART III - THE WATER SUPPLY AND SEWERAGE SECTOR Sector Organization 30. Municipalities traditionally had responsibility for the provision of water supply and sewerage services in Brazil. During the sixties, Brazil's accelerating urbanization. and the poor performance of the municipalities in providing even minimum services, prompted the federal and state governments to finance new water and sewerage systems with budget grants to satisfy the most urgent needs. In addition, BNH was created in 1964 (para. 51) and assigned nationwide responsibility for the sector in 1967 (para. 52). Even though some US$700 million were invested between 1960 and 1970, the situation was far from satisfactory and deteriorating in 1970. Less than 60% of the urban population had piped water connections, and less than 30% sewerage services. 31. In response to the above situation, in 1971, the Government launched PLANASA -- a nationwide program to finance, promote and coordinate the sector -- under the aegis of BNH. The initial goals of the program were to provide water by 1980 to 80% and sewerage services to 50% of the urban population. These goals were revised in 1980 to establish more realistic targets, and the present targets call for the provision of water to some 5,700 urban communities -- representing 72% of Brazil's total -- and sewerage services to all urban centers with populations in excess of 100,000 inhabitants. Further, as part of the revised plan, the pollution level in selected watersheds would be reduced to acceptable levels. 32. The main focus of the PLANASA program has been to provide a stable source of financing, and to help the states develop their own organization in the water supply and sewerage sector. To enter the program, a state must sign an agreement with BNH establishing a statewide water and sewerage company, draw up a statewide sector investment plan and guarantee BNH loans. The statewide organization of the program has two major advantages. First, it makes possible the establishment of statewide tariff structures which permit a cross-subsidy mechanism within the state. Second, the statewide activities of the companies allow for significant economies of scale, and financial flexibility. 33. Roughly one half of the PLANASA program is financed by BNH, and the other half by the states through revolving water and sewerage funds (Fundos de Agua e Esgotos -- FAEs). BNH has set up several credit lines to finance water supply and sewerage projects, some of which would be used under the project (paras. 61 and 62). Implementation of PLANASA 34. The PLANASA program is progressing well, although at a slower pace than expected. All of Brazil's 22 states have signed agreements under the program and more than 2,100 municipalities over the entire country have already benefited from it. BNH has renewed the PLANASA agreements with the five states, the Federal District and the respective water companies that would participate in the proposed project. Large efforts have been made under the program over the past decade. After investing some US$5 billion in - 10 - 1971-1980, about 74% 1/ of the urban population is now receiving piped water as compared with less than 60% -- of a smaller urban population -- when the Government started the program in 1971. It is estimated that PLANASA's water supply objectives (para. 31) will be met by 1985. Because of the relatively high costs and more complex building and operating requirements, however, sewerage service levels have increased only from 30% of the urban population in 1971 to 34% 1/. It is unlikely that the major cities of Brazil will receive sewerage services at the levels envisaged by PLANASA before 1990. 35. In 1980, increased Government restrictions on public enterprise investments (para. 10) to curtail inflation have also begun to affect BNH. The Government is expected to authorize increased PLANASA investment levels in the years to come. BNH and the Government would, in November of each year until the project's completion, review with the Bank the amount of contribu- tions it would make in the following year for Bank financed subprojects (Section 3.03(b) of the draft Loan Agreement and Section 2.01(c) of the draft Guarantee Agreement). 36. In 1975, BNH hired consultants to study the various aspects of water supply and sewerage tariffs and the administrative responsibilities for the provision of water supply and sewerage services. As a result of this initia- tive, the Brazilian Congress approved a tariff law for the sector on May 11, 1978. This legislation allows the SWCs to charge tariffs based on the cost of service, and earn a rate of return of up to 12% on operational investments. The legislation provides further that by 1983, the SWCs must generate suffi- cient revenues to cover operating expenses, depreciation, and debt service. These objectives would be reached by gradual tariff adjustments over the 1980-82 period, and the SWCs are expected to comply with the requirements of the legislation by 1983. Average tariffs for 1980 were 100% higher than in 1979 in the eight states benefiting from Bank financing, complying with the financial covenants of Bank loans. Tariff increases proposed for 1981 in the states receiving Bank finance, including those six that would benefit under the proposed project, have been discussed with BNH and the Government, and approved last December. The agreed tariff increases became effective January 1, 1981 and would help all SWCs financed or proposed to be financed under Bank loans -- if complemented by additional tariff measures in 1981-83 (para. 58) -- to achieve the 1983 targets of the new tariff law. 37. The new legislation also deals with the country's tariff structures. It establishes four categories of consumers: residential, commercial, indus- trial, and official, and stipulates a progressive tariff system that allows for cross-subsidies between lower- and higher-income consumers. Further, it establishes that tariffs for minimum consumption by low-income consumers should not exceed 35% of one ORTN for water, and 50% for water and sewerage. 1/ These figures represent, respectively, water service level through house connections only, and sewerage service level through connections to central sewerage systems only and, therefore, they are lower than the corresponding service levels shown for the urban population in the Social Indicators Data Sheet in Annex I. - 11 - These threshold values amount, respectively, to about US$4 and US$6 equivalent in 1981 dollars. Monthly charges for minimum consumption in the six states that would participate in the proposed project are well within these limits, thus assuring that water and sewerage services would be affordable to the urban poor. Finally, the new legislation assigns to BNH the responsibility for overseeing the financial performance of the companies operating in the sector, and recommending tariff adjustments to the Government. Bank Assistance 38. The proposed loan to BNH would be the Bank's ninth loan for Brazil's water supply and sewerage sector, bringing total lending to date for the sector to US$769 million. In 1971, a loan for water distribution and storage (757-BR) and another for sewage collection and disposal (758-BR) were made for Greater Sao Paulo. The original objective of Loan 757-BR to extend water supply services to 2.4 million people in the municipality of Sao Paulo has been exceeded. By 1977, water services had been extended to 3.3 million people. Both projects were completed with a three-year delay and at a cost of about 30% over the appraisal estimate. Managerial and institutional problems in the borrowing agencies, as well as delays in contributions of counterpart funds from the state of Sao Paulo were responsible for this. Project imple- mentation improved after the three sector agencies were merged into a single agency -- SABESP -- in 1974, and state contributions were made promptly after SABESP had signed a PLANASA agreement with BNH and the state government. The borrower's financial performance was also unsatisfactory, and no significant change was observed in this respect even after SABESP's creation. However, Sao Paulo's tariff structure was revised in 1977 and a new tariff law was adopted in 1978 (para. 36), both of which substantially improved the agency's finances. A combined Project Performance Audit Report for the two projects issued in April 1980 states that SABESP brought works under the project to a successful completion and that after the resolution of initial difficulties both projects achieved their main objectives. 39. In 1974, a US$36 million loan was made to BNH (Loan 1009-BR) for water supply and sewerage subprojects in the state of Minas Gerais. The project under this loan -- which was fully disbursed recently -- was the Bank's first experience with a statewide program including many cities some of which, however, were appraised only during project implementation. Inadequate feasibility studies and poor subproject appraisals delayed project completion by almost three years. Financial performance was also short of original expectations, mainly because several financially viable municipal water supply companies did not join the state company, COPASA, as originally expected. Under this project, the Bank's participation significantly contrib- uted to sector institution building and strengthening BNH. A second loan for US$40.0 million for Minas Gerais followed in 1976 (Loan 1309-BR). Funds under this loan are fully committed, and all subprojects are underway. About 40 systems in small communities have been completed to date. - 12 - 40. A third Sao Paulo loan (Loan 1525-BR) for US$110 million was made to BNH in early 1978 to assist in the financing of a large sewage collection and treatment project for Greater Sao Paulo, which forms part of a high priority program for water pollution control. Execution of this - project is proceeding satisfactorily. A US$100 million water supply and sewerage loan (Loan 1656-BR) was made in February 1979 for the northeast states of Bahia, Pernambuco and Ceara. Subprojects for the capital cities have already been approved, and construction is underway, but the project may be completed with a one-year delay. A loan for US$130 million (Loan 1823-BR) for the southern states of Parana, Santa Catarina and Rio Grande do Sul was approved in March 1980. The Bank's most recent loan (Loan 1850-BR) for US$139 million in April 1980 was its eighth for the sector and third for the State of Minas Gerais. During the past decade the Bank has played a growing role in Brazil's water supply and sewerage sector, contributing to institution building, strengthening BNH's regional offices, and helping adopt rational financial policies, uniform accounting systems and a new tariff law (para. 36). The timing of the proposed project is critical to continued institution building within BNH and the participating states, and the provision of safe water to some 1.2 million urban poor. PART IV - THE PROJECT Project Origin 41. The project was identified in October 1979, and prepared by BNH and its consultants. A Bank mission, with BNH's participation, appraised the project between August 17 and September 18, 1980. A post-appraisal mission followed in November 1980. The mission's report entitled "Staff Appraisal Report - Multistate Water Supply and Sewerage Project" dated , 1981, is being circulated separately. Negotiations with the Borrower and Guarantor were held in Washington from February 23 to 27, 1981. The Brazilian delegation was led by Mr. Isaac Lima Azevedo, Director of Planning and Research of BNH. A supplemental project data sheet, including a timetable of key events and a summary of special conditions, is attached as Annex III. The Project Area 42. General. The project area consists of the Federal District of Brasilia and five states in the center-west, north and northeast regions, namely, Mato Grosso do Sul, Goias, Amazonas, Para and Paraiba. The area in 1980 was home to over 15 million people, or 12.6% of the country's population. Urban population in the five states varies between 31% and 59% of the total, reaching virtually 100% in the Federal District. Except for the states of Para and Paraiba, the urban population has grown faster than the national average of 3.9% per annum, and this trend is expected to continue in the 1980's. The project states are low-income areas in Brazil, some only with limited potential for growth. The vast project area's share of the nation's income was only 8% in 1979. - 13 - 43. Health conditions, particularly for the poor, are inferior to those prevailing in more developed states in the southeast and south. For instance, enteritis and diarrheal diseases -- commonly associated with deficient water supply and sewerage and a major cause of infant mortality -- are frequent occurrences in the project area. 44. Service Levels. In Amazonas, Para and the Federal District all of the municipalities have piped water systems, but not in Paraiba, Goias and Mato Grosso do Sul. In the project area only 60% of the population is served with water, and some 15% with sewerage, and the PLANASA targets have not been met. Water service coverages of the SWCs among the urban population vary between 42% in Mato Grosso do Sul and 80% in the Federal District, and sewerage connections are either non-existent (Amazonas) or vary up to 16% (Paraiba), except for the relatively high coverage of 44% in the more modern Federal District. To speed up the provision of adequate sewerage systems in the cities of Manaus, Belem, Goiania and Campo Grande, where the lack of adequate sewerage is most critical, the companies responsible for those cities would employ consultants with qualifications and on terms and conditions of employ- ment satisfactory to the Bank to assist in carrying out master waste disposal studies. Furthermore, the companies would provide to the Bank, not later than December 31, 1983, the studies and their findings for review and comment (Section 4.08 and Schedule 5, Section B(9) of the draft Loan Agreement). 45. The level of metered house connections is generally low in the project areas, varying between 36% in Goiania and 74% in Campo Grande. As production metering is also deficient or non-existent in the regions involved, the unaccounted-for water levels are high, with COSAMA in the state of Amazonas reporting it as high as 59%. To help the SWCs to deal with these problems and increase their efficiency, the proposed loan would finance leak detection and extensive metering programs. In addition, the SWCs would, in each city with a population of 100,000 or more, expand water metering to cover not less than 70% of house connections by December 31, 1982, and 80% by December 31, 1983, and maintain such level thereafter (Schedule 5, Section B(18) of the draft Loan Agreement). Project Objectives and Description 46. The proposed project would, through the provision of piped water to some 2.5 million people, and sewerage services to a population of 0.6 million, improve the environment and health conditions in five states and the Federal District. In addition, the project would provide institutional improvement in the SWCs, strengthen BNH's appraisal and supervision capabilities and -- by delegating to BNH part of the responsibility for selection of subprojects -- prepare the way for future sector lending. 47. The project consists of a group of water supply and sewerage subprojects to be carried out in the states of Amazonas, Goias, Mato Grosso do Sul, Para and Paraiba and the Federal District over the four-year period 1981-84. More specifically, it would include the following components: (a) in the five capital cities and the Federal District, the construction of water production and treatment systems, and - 14 - transmission pipelines, the extension of water distri ution systems, including the installation of some 170,000 m of new storage capacity, 2,000 km of pipes, 200,000 new house con- nections for water, and 286,000 water meters, and the purchase and installation of production meters, as well as the implementa- tion of leak detection and repair programs; (b) the construction of about 630 km of sewers and the installation of 45,000 sewerage connections in Manaus, Campo Grande, Joao Pessoa, Campina Grande and the Federal District; (c) the upgrading of existing and the construction of new sewage treatment plants as well as the provision of final disposal facilities in the Federal District; (d) the construction or expansion of water supply systems in approximately 80 medium-sized cities; 1/ (e) the construction or expansion of water supply systems in approximately 65 small communities; 1/ (f) provision of equipment for the operation and maintenance of water supply and sewerage systems; (g) consulting services for design and construction supervision; and (h) technical assistance to improve COSAN's information system and project appraisal and supervision capability, and to assist the SWCs in strengthening personnel management and administration. In the project area, the proposed improvements would increase water service coverage, from 60% in 1980 to 73% in 1984, and sewerage service levels from 15% in 1980 to about 21% in 1984. Investments made under the proposed loan, however, would help expand water and sewerage services beyond 1984. With relatively modest additional investments -- which are expected to be partly financed by developers and consumers -- water could be piped through house connections to about 4.6 million people, and sewerage services provided to some 1 million people during the project's useful life. 1/ Cities with more than 5,000 people -- excluding state capitals -- are considered medium-sized; those with less than 5,000 inhabitants are considered small communities. - 15 - Subproject Selection 48. Subproject components have already been selected in the five capital cities and Brasilia, but not for the medium-sized cities and small communities. To be eligible for financing from the proposed loan subprojects must (a) be approved by BNH; (b) have cost estimates not substantially different from those shown in the global feasibility studies; and (c) represent the least-cost solution. In addition, water supply subprojects in cities with populations greater than 50,000 inhabitants should have average tariffs not lower than 75% of the subproject's average incremental cost (equivalent to an internal rate of return of 5% or higher). Sewerage subprojects and water supply subprojects in small- and medium-size cities with populations between 5,000 and 50,000 inhabitants -- not benefiting from economies of scale as do the larger urban centers -- should have average tariffs not lower than 60% of the subproject's average incremental cost (equivalent to a positive rate of return). The use of average incremental cost as a criterion is simple and provides an insight into the cost structure of proposed water and sewerage improvements. In communities with less than 5,000 people, the eligibility test would,be that subprojects cost less than US$180 equivalent per beneficiary in 1980 prices. Subprojects not meeting the above criteria would qualify for Bank financing only if strong social and economic justification were provided (Section 3.08 and Schedule 4 of the draft Loan Agreement). 49. Prior Bank approval would be required for all subprojects estimated to cost over US$8 million equivalent. It is expected that such approval would be needed for components accounting for about 70% of the project's cost. Sub- projects costing less than US$8 million equivalent would be reviewed by BNH and the review made available for ex post review by Bank supervision missions. This delegation of authority would be a prelude to possible water supply and sewerage sector lending in the future. By the end of 1981, BNH would apply the selection criteria agreed for this proposed project to all water supply and sewerage, projects the agency is financing throughout Brazil (Section 4.07 of the draft Loan Agreement). The Borrower 50. The Borrower (BNH) was established in 1964 as a financially and administratively autonomous institution. Since 1967, it has been under the overall responsibility of the Ministry of the Interior. BNH's main activities are to finance, through intermediary institutions, low- and medium-income housing, urban development and sanitation programs. A Board of Directors and Executive Committee oversee its functions. BNH has eleven regional agencies to coordinate its activities at the state level. BNH's principal source of funds is the Fundo de Garantia do Tempo de Servico (FGTS), a national employee security fund financed by a payroll tax. Other sources include interest and principal repayments on outstanding loans and interest on national treasury bonds. Net receipts of the FGTS increased from US$424.4 million equivalent in 1971 to US$1.8 billion equivalent in 1979 and total funds available for investment increased from US$0.7 billion equivalent to US$3.5 billion equivalent over the same period. BNH's financial position is sound and its resources are expected to be sufficient to carry out its planned investment program. - 16 - 51. In September 1967, BNH established what is now called the Operations Division for the Sanitation Finance System (COSAN), which is responsible for water and sewerage activities. COSAN consists of three subdivisions responsible respectively for (i) the review and approval of the SWCs' water supply and sewerage investment program, (ii) the supervision of the Technical Supervisory Agencies (OTs) which are retained for each state by BNH to review designs and assist in supervision, and (iii) the authorization of disbursements and monitoring of the SWCs' financial performance. BNH's regional offices, which are responsible for sector investments in one or more states, also review and supervise projects at the local level. These offices -- strengthened since the agency's decentralization in 1976 -- operate under guidelines set by COSAN. 52. Prior to 1976, the PLANASA program did not develop as expected, owing to weak organization and management in many of the SWCs, poor engineer- ing studies, cost overruns, over-optimistic scheduling, and a shortage of materials and equipment. Excessive centralization of COSAN's activities in Rio de Janeiro, and the receipt of inadequate information from the SWCs further delayed project review and approval. To remedy the situation, in 1974, BNH entered into an agreement with the Pan American Health Organization (PAHO) to provide technical assistance to the SWCs, and in 1976, it issued new regulations for PLANASA delegating more responsibility and authority for project implementation to the regional BNH offices. The Southern States Water Supply and Sewerage Project (Loan 1823-BR) includes technical assistance to COSAN, for which a satisfactory implementation schedule has already been prepared. BNH staff was responsible for the appraisal of three of the six SWCs that would benefit from the proposed new project (para. 66). Bank staff's evaluation of the strengths and weaknesses of the BNH appraisals and the required revisions to bring them up to Bank standards identified the need for additional strengthening within COSAN. Therefore, an additional 200 man-months of consultant services have been included for technical assistance under the proposed operation at an average man-month cost of US$6,500 equiva- lent. In addition, BNH has approved seven new staff positions to strengthen COSAN. As conditions of the proposed loan's effectiveness, COSAN would (a) appoint three of the seven additional staff members, satisfactory to the Bank; and (b) in order to assist in carrying out the above technical assistance program, employ consultants whose qualifications and terms of conditions of employment would be satisfactory to the Bank (Section 6.01(c) and (d) of the draft Loan Agreement). The remaining four additional staff members would be appointed by December 31, 1981 (Section 4.10 of the draft Loan Agreement). Future sector lending for water and sewerage through BNH would depend on how quickly BNH can carry out and absorb the above institutional measures and assistance, and strengthen its appraisal and supervision capability. 53. Federal grants to SWCs for water supply and sewerage investments are allocated through BNH. Although declining, grants are still expected to account for some 5% of sector investments in 1983. Subprojects financed all or in part with grants have not hitherto been eligible for financing under Bank loans in the water supply and sewerage sector. In fact, many of the subprojects supported by grants are to supply water and sanitation services to some of the poorest urban areas, and are made by the federal - 17 - or state governments in order to induce the companies to provide services in those areas even though their financial returns might be greater from investments in higher income areas. Under the proposed loan, projects assisted by grants would be eligible for financing provided at least 70% of the beneficiaries had an average per capita income of less han three times the minimum wage in the respective state (equivalent to the lowest third of the income scale, i.e., persons in a state of relative poverty) (Section 2.02(a) of the draft Loan Agreement). The Beneficiaries 54. Organization. The six beneficiaries and executing agencies for the project would be the Companhia de Saneamento do Amazonas (COSAMA), Companhia de Saneamento de Goias (SANEAGO), Empresa de Saneamento do Mato Grosso do Sul (SANESUL), Companhia de Saneamento do Para (COSANPA), the Companhia de Agua e Esgotos da Paraiba (CAGEPA), and Companhia de Aguas e Esgotos de Brasilia (CAESB). Each company is owned by the relevant state and operates under a Board of Directors appointed by the state's governor. They all have departments for technical operations, administration and finance. 55. Technical Operations. SWCs, under guidance from the state govern- ments, establish the priorities in the water supply and sewerage sector based on the assessed needs of the various communities. They prepare five-year global feasibility studies, including financial projections and budgetary requirements. Planning is done by the companies' own staff with some assistance from COSAN. Engineering studies and design, as well as supervision of works, are done through local consultants, whose qualifications and performance are satisfactory. To afford the Bank an opportunity to monitor the SWCs' invest- ment and financing plans, each company would, not later than April 30 of each year until the loan's closing date, provide through BNH to the Bank a copy of its most recent global feasibility study, including income statements, cash flow projections, balance sheets and demand projections and investments by city (Schedule 5, Section B(14)(b) of the draft Loan Agreement). 56. The SWCs' administration, including programming and control proce- dures, would be further strengthened under the project through the provision of technical assistance. This would help the SWCs to face the challenge of handling an increased volume of work in the early 1980s. Technical operations of existing water and sewerage systems are generally satisfactory. Operating efficiency, as measured by the companies' ratio of employees to house connec- tions, has been improving, and this coefficient is expected to vary between 5 and 11 employees per thousand connections in 1981. To help increase their efficiency, the companies are working on a new personnel management system, which would define functions, responsibilities and salaries of management and technical staff, thus providing incentives, enhancing stability and reducing the high turnover of personnel. Each SWC would adopt, by December 31, 1982, a new personnel management system which would be satisfactory to BNH (Schedule 5, Section B(16) of the draft Loan Agreement). - 18 - 57. Financial Operations and Performance. The companies' commercial operation -- mainly billing and collecting -- is generally satisfactory, although the accounts receivables in Goias and the Federal District are excessive, and are expected to be reduced during project implementation to about two months' billings. The six beneficiary companies use computerized accounting systems. Their accounting is generally satisfactory and the results are available promptly, but the computer reports' format is cumbersome and not well suited for managerial purposes. To improve the quality and usefulness of the SWCs' financial reporting, each SWC would, not later than December 31, 1982, establish a system analysis unit which would be responsible for the company's computer software (Schedule 5, Section B(17) of the draft Loan Agreement). Each SWC would retain independent auditors to audit their financial statements for each fiscal year beginning in 1981, and submit by May 31 of the following year through BNH to the Bank the audited statements and the auditors' report, including a statement of compliance by each company with its financial obligations under the proposed loan (Schedule 5, Section B(14) of the draft Loan Agreement). To strengthen and oversee the SWCs' operations, each company would also, not later than December 31, 1982, establish, ade- quately staff and maintain an internal auditing office satisfactory to the Bank (Schedule 5, Section B(19) of the draft Loan Agreement). 58. With efficient management, prompt billing for services and collec- ting of outstanding bills, the tariff law (para. 36) assures sound financial performance for the companies. To meet the objectives of the tariff law by 1983 -- as the legislation now requires -- the SWCs will have to implement gradual tariff increases over 1981-83 in addition to the tariff adjustments that went into effect on January 1, 1981 (para. 36). The financial projections prepared for the beneficiary companies during the project's appraisal are based on adequate tariff adjustments each year during the project's implemen- tation allowing the SWCs to achieve the law's targets by 1983. To ensure compliance with the tariff law, each company would take all action necessary to generate sufficient revenues to cover its operating costs, depreciation charges and debt service payments by 1983; those SWCs not meeting the require- ments of the tariff law in 1981 and 1982 would raise tariffs by at least one third of the gap required to comply with the law in 1981, and by at least two-thirds in 1982 (Section 4.09 and Schedule 5, Section B(15) of the draft Loan Agreement). BNH and the Government would take, or authorize, all action necessary to enable SWCs to comply with the above revenue covenant (Section 4.06 of the draft Loan Agreement and Section 3.02(b) of the draft Guarantee Agreement). 59. Because inventories of fixed assets were often incomplete and their valuation inadequate at the time the SWCs were created, the companies' financial returns -- although calculated as specified by the law -- are inaccurate. To correct this, each SWC would reassess the inventory and value of its fixed assets, and include, not later than December 31, 1982, a revised valuation of its fixed assets in its financial statements (Schedule 5, Section B(14)(c) of the draft Loan Agreement). - 19 - Costs and Financing 60. The project's cost is expected to come to US$589 million equivalent including US$180 million, or 30.6% of the total, in foreign exchange, which the proposed loan would cover. The local component includes 3.4% in taxes. Costs of the major subprojects were estimated on the basis of unit prices provided by consultants, and of the remaining subprojects based on unit prices for similar works. In addition to the proposed loan of US$180 million, BNH would finance US$114.5 million, or 19.4% of the project's total cost, and the state revolving funds would provide US$294.5 million representing the remaining 50%. The SWCs and BNH would share the proceeds of the Bank loan as follows: US$19.3 million for Amazonas, US$31.5 million for Goias, US$31.8 million for Mato Grosso do Sul, US$34.7 million for Para, US$22.8 million for Paraiba, US$39.1 million for the Federal District, and US$0.8 million for technical assistance to COSAN. The Federal and State Governments and BNH would, as necessary, provide the counterpart funds for carrying out the project (Section 2.01(b) of the draft Guarantee Agreement, and Schedule 5, Section A(1) and Section 3.03(a) of the draft Loan Agreement). Re-lending Terms 61. Under the project, BNH would make subloans equivalent to US$294.5 million for approved subprojects in the five project states and the Federal District using its basic lines of credit (REFINAG for water supply, and REFINESG for sewerage subprojects), as well as its FINEST II and III programs (Section 3.03(c) of the draft Loan Agreement). REFINAG and REFINESG provide subloans to the SWCs to cover one-half the cost of subprojects in medium-size or capital cities, with the other half of the cost being financed from FAE sub- loans. These subloans are made at interest rates of two to five percent per annum on the outstanding balance which is readjusted for inflation, for terms ranging from 18 years (water supply) to 30 years (sewerage) not including grace periods of one to four and one-half years. BNH's FINEST II credit line provides funds to a state in the same amount that the state has already passed on as contributions to the SWCs' water and sewerage subprojects in small communities. Its FINEST III program matches funds provided by the states to finance specific water or sewerage subprojects in small communities. The states -- under both FINEST II and III -- transfer BNH's loan contribution through the relevant FAE to the beneficiary SWC to finance the approved subprojects. For small communities the SWCs receive 702 of any subprojects' costs as grants, and the remaining 30% as loans. The terms and conditions, including grace periods, of the FINEST II and III credits are essentially the same as those under BNH's basic credit line, but interest rates are typically one percentage point lower. - 20 - 62. BNH's FINEST credit lines were set up to provide supplemental finance for urban water and sewerage projects, thus encouraging the mobiliza- tion of resources at the state level for investments in the sector. The FINEST I credit -- designed to complement contributions to any water and sewerage investment by the state in excess of five percent of its revenues -- is financed by BNH alone. FINEST II and III -- as explained above (para. 53) -- are designed to induce the states and the SWCs to step up their investments in small communities without cutting back on other investments, and both would be eligible for Bank financing. BNH's amortization periods, reflecting the useful lives of the subprojects, are considerably longer than the terms of Bank loans. This, and the factors affecting effective interest rates will cause the debt service on the Bank loan to exceed the annual service charges received by BNH. The resulting burden, as well as the exchange rate risk, would be assumed by BNH, whose financial position is strong enough to absorb both. Procurement 63. Goods and services would be procured under international competitive bidding in accordance with Bank guidelines, except that civil works contracts up to US$3 million equivalent, and equipment purchases up to US$500,000 equivalent may be awarded in accordance with locally advertised competitive bidding following procedures which have been reviewed by the Bank and are acceptable. Foreign contractors and suppliers would also be eligible to bid under local procurement procedures. The Bank would review and give prior approval of invitations to bid, evaluation of bids, recommendations for award of contracts and proposed contracts for civil works estimated to cost US$3 million or more, and for equipment contracts costing in excess of US$500,000. Local bidders under international competitive bidding would be allowed a margin of preference of 15% of the CIF price or the applicable import duty, whichever is lower (Section 2.05 and Schedule 3 to the draft Loan Agreement). It is expected that all civil works would be awarded to local contractors, who are experienced and qualified, and that the bulk of equipment and materials purchases would be from local firms or Brazilian subsidiaries of foreign suppliers. Disbursements 64. The loan would be disbursed against the project's actual or estimated foreign exchange component, except for subproject components financed through state or federal grants, as follows: (a) 59% of BNH's disbursements under subloans to SWCs for subprojects in medium-size and capital cities and consul- tant services; (b) 29.5% of BNH's disbursements under FINEST II subloans to the states for subprojects in small communities; (c) 59% of BNH's disbursements under FINEST III subloans to the states in small communities; and (d) 100% of foreign expenditures and 50% of local expenditures for consultant services to COSAN; and (e) 29.5% of disbursements by BNH or the project states from grants. In recognition of the Government's vigorous efforts to contain public investment expenditures, the percentages disbursed on items (a), (b), (c), and (e) would be increased from 59% to 72% and from 29.5% to 36% up to December 31, 1982 (or until US$80 million had been disbursed, whichever came first) with correspond- ing reductions in the percentages thereafter. In order to reduce the interval - 21 - during which BNH would finance the Bank's share of project costs with its own resources, BNH may request the Bank to make advance payments in dollars from the loan account into a Special Account to be opened in the Banco Central do Brasil. BNH would be entitled to make withdrawals in cruzeiros from the Special Account upon preparation to the Banco Central of statements of expendi- tures on the project. Conversion from dollars into cruzeiros would be made at the exchange rate that prevailed on the date the expenditures on the project were made. Banco Central would forward those statements to the Bank, which would then replenish the Special Account. Detailed documentation would be retained by BNH and made available for review by Bank supervision missions. The loan is expected to be disbursed between mid-1981 and mid-1985 (Sections 2.02 and 4.04(b) of the draft Loan Agreement). Advance Contracting and Retroactive Financing 65. If some of the high priority subprojects to be financed from the proposed loan would not be contracted until the loan is signed, some 770,000 urban poor would have access to critically needed piped water and sewerage services with a delay of six months. Given Brazil's stringent foreign exchange policy at present, it is unlikely that these urgent works would be advanced unless loan funds were available retroactively. Therefore, advance contracting up to an amount of US$90 million, equivalent to 15% of the project's cost, would be allowed for works which would be contracted after January 1, 1981. Retroactive financing would be allowed for expenditures of up to US$7 million equivalent for civil works, equipment and materials, incurred after February 1, 1981 (3.9% of the proposed loan) (Section 2.02(c)(i) of the draft Loan Agreement). Project Implementation 66. The SWCs prepared feasibility studies for major subprojects in the cities of Manaus, Belem, Joao Pessoa and Campina Grande, which were reviewed by Bank staff during appraisal. Feasibility studies for the main components in the remaining three large cities were reviewed by BNH and found satisfactory. Together, these studies represent components whose cost accounts for 78% of the project's total cost. Final designs for the large cities are being prepared by consultants commissioned by the SWCs, and it is estimated that about half of the project's components have already been engineered. Feasibility and final design studies are also well advanced for the medium-size cities and small communities. Some 6,000 man-months of consultant services would be provided under the project to the SWCs at an average man-month cost of US$6,200 for the completion of detailed engineering and also for construction supervision (para. 52) and technical assistance (para. 56). The bulk of design work is expected to be completed by the end of 1981. Except for technical assistance to COSAN (para. 52), foreign consultants are not expected to participate directly. 67. As pointed out already in paras. 49 and 52, BNH's commitment to take an increased role in the proposed project's implementation, particularly the selection, appraisal and supervision of subprojects, would be a key to the agency's preparation for future Bank sector lending. BNH's success hinges on how well it will oversee and control the SWCs' activities. Therefore, Bank supervision missions would focus on COSAN's relationship with the SWCs, including measures taken to improve their administration and to implement the - 22 - technical assistance provided under the project. COSAN would use agreed monitoring indicators during the project's implementation and supervise each SWC twice a year, and BNH would submit to the Bank twice a year a report of the findings, including comments on compliance with Bank covenants and measures to improve the efficiency of each company (Section 3.07(c) and (d) of the draft Loan Agreement). Project Justification 68. The economic benefits of water supply and sewerage projects are difficult to quantify meaningfully in monetary terms. Therefore, rates of return on investment have been calculated using revenues as a proxy for minimum economic benefits. However, since revenues derive from admin- istered tariffs which do not fully reflect the consumers' willingness to pay -- i.e., exclude consumer surplus -- actual economic benefits are likely to be higher. For the investments proposed for the capital cities, which account for 59% of the project's total cost, the rate of return is 13% for the water supply component, and 10% for water and sewerage. The rate of return for the project as a whole -- including the medium-size cities and small communities -- is estimated at about 10% for the combined water and sewerage investments, which may be presumed to lie below the minimum economic rate of return. 69. Estimated returns are considered adequate, as all the major project components so far evaluated represent the least cost solution for each city. Investments per person served average US$100 per capita, existing average water tariffs are close (92%) to the average incremental cost of water, and compliance with the 1978 tariff law -- as agreed with the beneficiary SWCs (para. 58) -- would yield average tariffs at about the marginal cost. These parameters are satisfactory. In Campo Grande, the investment per capita in the least cost solution in US$179, because of expensive water sources, but the rate of return is satisfactory. 70. The project would also have an important social impact in the five state capitals and the Federal District by providing safe water to about 785,000 urban poor whose annual income is less than three times the regional minimum wage. In mid-1980, this threshold was equivalent to an annual income of US$550 per head, which is close to one-third of Brazil's current per capita income, the Bank's definition of the relative poverty line. Some 48,000 urban poor among the project's beneficiaries would receive sewerage services for the first time under the proposed project. In general, health conditions and productivity would improve as a result of these improvements, and the inci- dence of enteritis and other diarrheal diseases commonly associated with deficient water supply would diminish. Risks 71. Given the simple nature of the works proposed, the experience of the local construction industry and the consultants currently engaged in detailed engineering studies, this project does not face any special risk. The Government's tariff law, together with the recently adopted tariff measures, demonstrate Brazil's commitment to assure the financial viability of the SWCs, and adherence to the proposed loan's financial and management covenants (paras. 52, 56-59) would ensure that each SWC would realize that target. Intensive Bank supervision efforts would be required to keep to a minimum the risk that institutional improvements would not be enhanced or that implementa- tion of works would be delayed. - 23 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Bank and Banco Nacional de Habitacao (BNH), the draft Guarantee Agreement between the Federative Republic of Brazil and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 73. The main features of the draft Loan and Guarantee Agreements are referred to in the text and listed in Section III of Annex III. The execution and delivery of an agreement between BNH and one of the project states and companies incorporating the obligations of the state and the company set forth in Schedule 5 of the draft Loan Agreement, the appointment by COSAN of additional staff, satisfactory to the Bank, and the employment by COSAN of consultants to assist in carrying out its technical assistance program, would be conditions of the proposed loan's effectiveness. Execution and delivery of similar agreements would be a condition of disbursement for the projects in each of the other states. PART VI - RECOMMENDATION 74. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. 75. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments by Ernest Stern April 1, 1981 Washington, D.C. ANNX I - 24 -p SRAZIL - SOCIAL INDICATORS DATA SNgrT RAZIL RWEENCt GROUPS (tUIaOTED AVEPrS LAND AREA (T"OUAND SO. EN) -? *DST RLCENT tStIMAT TOTAL 8512.0 AGRICULTURAL 2067.2 HOST RCENT MIDDLE INCOME MIDDLE INCONE 1960 lb 1970 A ISSTmATE 1b LATIN AllUCA & CAtS14NKW EJpoPE GNP PrR CAPITA (USSI 320.0 570.0 1690.0 1562.9 2749.5 ENERGY CONSUMI1O0 Pr CAJPITA (xIwORAMS Of COAL EQUIVALENT) 332.0 474.0 794.0 1055.9 1641.4 POPULATtON AND VITAL STATISTICS POPULATION, ID-YEAR (MILLIONS) 71.5 95.2 119.5 L14 POPULATION (PERCrNT Or TOTAL) 46.1 55.9 63.3 63.4 53.9 POPULATION PRDJECTIONS POPULATION IN YEAR ZOO (MILLIONS) 201.0 STATIONARY POPULATION (MILLIONS) 345.0 YEAR STATIONARY POPULATION IS RI&ACNZ 2075 POPULATION DENSITY PnR SC. Kt. S.0 11.0 14.0 28.1 77.2 PZR SQ. IH. AGRICULTURAL tAND 44.0 49.0 56.0 81.7 129.5 POPULATION AGE STRUCTURE (PERCDNT) 0-14 YES. 63.6 42.6 41.7 41.4 30.6 15-44 YRS. 53.8 54.3 54.9 54.7 61.1 65 YRS. AND ABOVE 2.6 3. 1 3. 4 3.9 8.2 POPULATION GROWTH RATE (PERCENT) TOTAL 3.0 2.9 2.a 2. 7 1. S URBAN 5. 4.8 4.3 4. 1 3. 3 CRUDE BIRTH RATE (PER THOUSAND) 40.0 38.0 36.0 34.8 22.6 CRUDE DEATH LATE (PER TNOUSAND) 11.0 9.0 9.0 8.9 6.9 GROSS REPRODUCTION RATE 2. 6 2.6 2.4 2. 5 1. 5 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 111.0 203.6 USERS (PERCENT OF HARRIED WOMEN) .. 1.6 8OOD AND NUTRITION INDE OF OOS PRODUCTION PER CAPITA (1969-71-100) 89.0 102.0 112.0 106.9 113.1 PER CAPITA SUPPLY OF CALORIES (PERCENtr OF REQUIRENTS) 101.0 104.0 107.2 107.4 125.3 PROTEINS (CRAMS PER DAT) 61.0 62.0 42.7 63.6 91.0 OF WHICH ANIMAL AND PULSE 34.0 34.0 35.1 33.7 59.6 cHILD (ACES 1-4) MORTALITY RATE 13.0 10.0 9.0 8.4 4.3 HEALTH LIFE EIPECTANCY AT BIRTH (YEARS) 57.0 61.0 62.0 63.1 $7.8 INFANT MORTALITY RATE (PER THOUSAND) .. .. * 66.5 55.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 56.3 77.1 65.9 URBAN .. 77.7 88.8 80.4 RURAL * 29.0 56.6 44. 0 ACCESS TO EXCRETA DISPOSAL (PERCENT oF POPULATION) TOTAL *- 59.9 64.8 62.3 URSAN 8 86. 1 63.7 79. 4 RURAL *- 26.5 31.7 29.6 POPULATION PER PFTSICLIN 3600.0 1910.0 1700.0 1849.2 1030.1 POPULATION PER NUBSING PERSON .. 3220.0 *- 1227.5 929.4 POPULATION PER HOSPITAL aED TOTAL 309.0 262.0 253.0 480. 3 299. 7 URBAN *- *- RURAL .. .. ADMISSIONS PEE HOSPITAL BED .. 18.0 .. .. 17.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5. 1 4.8 4.9 URBAN .. 4.6 4.7 RURAL *- 5.2 5.3 AVERAGE NSLSBER OF PERSONS PER ROat TOTAL * 1. I URSAN * 1.0 RURAL *- 1.2 ACCESS TO ELECTRICITY (PERCENT oF DWELLINGS) TOTAL 38.7 47.6 43.0 URBAN .. 75.6 84.9 RURAL .. 8.4 19.2 - 25 - ANNB I page 2 1Am - SOCUAL UDICAS0 DATA Z= SZIL RWU 0 CUM (2D AY S - MMS? ucA ScT - M?ST mwr sIDOu DCan Noi rC= 190~ 1970 a~ ISTUU!Z t ATN AMUZCA 06111216 PUO ADM= m0U1(WI ATIOS RmaD?; TOTL 93.0 125.0 0 Oj 99.7 105.9 Kw 97.0 L23.0 09.e 101.0 107. 2 FUWALI 93.0 125.0 90.0L ".4 103.0 sucomITs TOTAL 11.0 26.0 24. Oil 3s. 64.0 MALI: 11.0 26.0 22.01 33.5 71. 1 TX"" 10.0 26.0 26.0 34.7 94 WOCATIOL u1L. (Z 0f SRcOI ) 19. 17.0. *7. ¢ 38.2 2IL !urrl-TzAC 12o 2sMmT 33.0 28.0 22.0 30.5 29.4 s1co061 13.0 13.0 11.0 16.5 26.1 AULT LIIUC? DATZ (1rr2) 61.0 66.2 75.7 76.3 IPASUESM CAm PU TeOSAID POPULTM0S 7.0 23.0 32.4 41.0 64.6 1.6t1 9.EZZWU M TleOSAI IOIUIION 64.0 124.0 135.0 245.3 19.Z TV KICTIUM PU TB308A1 10or1U06 17.0 6.0 93.0 6.2 113 MSPAI C'DA1L! G901AL *Mzsr) C?C.AOS YU ToomD vo,ur&nat 34.0. 37.0 39.0 63.3 93.0 CIWIA AIUL ATUSDAu PU CAPM 5.0 1.9 2.6 .. 5.7 TOUL. LU01t 10aCZ (TUOUAM0) 22672.9 30057.3 37704.7 trAlg (12CmT) 17.5 20.4 22.0 22.2 30.4 AMcLIURZ (P1RCOT) 51.9 45. 6 41.0 37.1 37.0 130621? (r1CU?) 14.6 16.3 22.0 23.3 29.3 PARTICIlrMO 3AT1 (MUZI) TOrAL 32.0 31.6 31.5 31.3 40.9 MALI 32 7 30.3 49.3 4L.9 53.9 ,iau 11.2 12.8 13.6 14.0 26.2 tC lle 16333f UTIO 1.4 1.4 1.4 1.4 1.0 mcms DISIZDTOUl 13351 or 2r1v1n rmoa cr3sr 3 r3 9 oTrO F ...-IP. .. .. 316T15 20 FMNT0 NoMr Us 60.0 63.3 62.0 .. LstU 20 1265T o0 IIWSOL 3.5 3.2 us. uI3T 40 r1c0 or 0 uswmu io. a 9.0 9.4 fDISTDIT ASOLUTZ 102T? Ionl LmL (US$ PU CAITA) 0315 .. .. . .. LA .. .. 150.0 190.6 n rTrATU IATIWVi 10 r x 1.1932 (MS$ PUL CAPITA) W3261 .. .. 465.0 474.0 .. .. 332.0 332.3 305.8 ESTIMATD PopMATU BU AuoSmn P1e01n 103 LUlL (1s4wr) I. AL . Not crall*ab , The go av-erfs tfr each ludleStmr are pop le _1iou."slht arieheaec __ i . C o're of emtri.. me the §Icators 4_ce oa _e .bstLIty of data a is use *°C ora. vale" otebrwie noted, data for MO0 rer tany yeor betowe 1939 _ 1961; tor 1970. beeme" 1969 m 1971; and for tMoC teset laciett. betwe 1974 and 197L /agcag 1973 primary atd secondary edetism cower ae group" 7-L4 mA 15-17 Insead of 7-10 and 11-17 ia earlier years; therfore moC react *etaest are see coarla '.th earlier dacta Mbae rcear att of C31 per caita ts for 1979. all other data are as of Aprl. 190. October. 1960 - 26 - ANNEX I Na.C.- Altho-gh th. date a, draw tram --a *aa- l judged the -et authoricotiv ad rliable. it should also ba ot.d that th.y may at be late- na~ti-nllyco..p-rahi battig of ch. lack at stand rI:1d deinitions 0.4 co...ePt. need b ifro otra 0cletn h aa b a.ea e. thela... .. usful to de...Cribe o-dere of nsagotude. Inloeted. n hroein eti ao dbffaricfw enva coun.triges. .T.dt Tb. ratfr.-. 'trooPs -r (1) the ea cce gop of the aubject coutry and (0) ... coutr tropbwith .o-lh.t high., ..ru. 1 acoma than the -outry group atth ebj:o coutry ( ....pt for 'Capial S.rplus Oil prrg" .roup ehor "Piddl .. moo . oth A,frica Od Kiddl. tEat" h' ch -e becasa at atongr ealaC ftro ftiahitl>. On tho roornc gou date the . oplaio wighted a1rithetc lean. for ...h indicator- sho- ony - ent I ee.t half of the on. 0ago h.. data. forth.t Indctr ic h oeeoo acre aaone th, .ic adped Io h. .evallbili'ty of deco an Ia tat uniform, cation mus ha ooeord I0 relstit.n veoge of unindicat-r to aothn.c Toev.w acoly ...efni Le a iring the alIo of _n indiat-r at . tin. aaon th, country an rfro -gopo.. LAND0 cOLA (thouead *q.*) rcuaio 0 hreo"o- Yopultion atriad by ouee 00 oc....iciag p67 Total - Total surf.a.s :r" comp.Ieiean asonn and inland meter. aIcoe qulte ft. a eica school at unitveity leve. Asrcnlura - egiaisof grinltrolore usd nporril orperanatl Pooloionn Fr .-rin -Pe Pae Poulaiondivdedbydd mhoboyprctlta for cupo., poat-ro, akat an kitohem grdane o to lie fallen) 1977 data. male and femal graduat not..., pa.cticol -urasa nd aaiteat -rena PomlatontetSonitlRod - total c -n and MIts - I-.I.L"ta (MataL. GtNP Pt CILPITA (USO) - GNP per capita -antmato an cret earht price.. C.al- ubnadrol)ild by har epeati of beepig&L bae" Cuotd by em bovrlothnbd -a Wrld tank Atloa (1977-79 baais); 1960, availabl. In Public an Prirot. gn l n pocialised toepitaL ad n 1970. ad 19yg9data. hbilitatinncnas fopial or et.bli.h-mt. peomananotly stffed by st lean on pybyici-n Ft.blioheot. p-LmIdn prt.eips.llroagda OI00RY COOSUI)OTIOtt PtR CAPITA - A--I.0 -ocptioo of ecoogaroia n...gY (ca coeaentmle.Srlhsioa.hwvr nld alha eia and lignte,ptrlu, ntlgS- 0d hydr-, nucloea and gaathe.al .10- ceter nt, poaanty oaf fed by a physLicia (but by a medital anisitat. iricicy) in ILLorm ofca aqiaetpaw topina; 1960. 1970. and 1978 moran. eddolfa. ac. wichotri-aitucoatna rr dots. un~~~~~~~~~~~lIted r..ng ofadin -foeiliti.e. Po tuinba patpoaa urban hpi ATj TICS 1'~~~~~~~~~~ul lrid 'I0 prncpa gano ad eail .1 d hoepialC.sd ua POPVO.ATI00 ANDO VITAL STAISpC Total Poocl.tio.. Pd-Y-ar (illio .. A. of July 1; 1960, 1970, so 1979 ..i.i..or ooio Ited - Tutsl nIanbe of T dei.an to or diaoh-rge data. 1! 1 f..L11 I... b .IClp lt- fra. hospitals dioidad hy the o.-b. of bed.. difwe dfinitinna o -o ra ear affect cepur-bility of data HUSN sn cooie;1960, 19)0, and 1978 data. 7;ras. Siiae f Hou..ehol.c" on a onoo total uran -ad feMI- 4o7....Prletin A ho...ohold coit ofagruof idvd. roaaelivio uate.s IPooletion in1 year b009 - Currat pop Clio oro)oction Cr band en 1960 sOd their mit male. A boaodao or lodgor nay or y ant ha i2aldod L. ctotlpouatinb aasd se andthir martality and fortiity C0t55* the hbou. hld for staleti alti rpc.1 Projctio parmete. f r srtliny rotwi tomprlo of tbha la-al Oe5tJ- Avese uahr faesu oa om c . chob. an --Io - Ava..g ma. tog lit. anpocency birth lraen Ith coutry'. per cupit. incme he o,!f.pro. prre,I I ra adrrloopidcmotea level an ffnl. Llit opninr tbiltetog at 77.5 rare.. The psr- d-oslicge. n-p-oi-ely. Deellitg. aoolda n-peomaat at-ut-r n _tea arfertiIIty rowe .1.0 have tbra. lav-l .a.....I dnin iuncpied p,rte. fetiit stoding toicae- level and peat famIly plauning par..m....hoes 'o tlectnCiy la-cat of d-.lluno I totl. ura -Ad rual-1 fahcutyi ha sindo f hn ieoeinnnao raity Coarsoion1 d..llins. oith icray inliin qar .w a paona-ae and fattility t oodeo for priwott- p .. pof,a total. urhn. and -ur1 donllingsrpcioy Stitionr onwltiwn -I I. a wtatiory population thor. Is no growh sinn the birth rune! 10 qual to the dath rate. and ale the age etr,ut- oa- EDCTO ooiew oo_tit. Thi. Ie oohi-v. only oftea ftIruity rt.C dacl:tne to dicesd Et-o1-an tMeI the replacmn eo fci n wprdnotien rote, when mobgearaton rawroho oa.nl 0 ma=le . .los tta.....ad l ofevs rplce fel -iatly -t to tetiunory `erln iso.eroyllmet'of algaat tho prt.ar lov - pornateas of 'om"aweoi eatmatod on the boals of the prolsoted cbarag.ronict. of tba PoPilotlon prinary chool-.go population.; nrormlly Linld- children agd 6-11 I. the year 2000. an~d the rtof dauline at f-rility ran. to replac- yasre hot .djuatd too diff.run 1aethe ft prtnar eduutiam; for an Ct lvl.r P1C-L o"-T.yI-- m -y: cuiric with avro edu...niu anrollm t ear enoe 100 perwamt aiza has baa reached. heocodue, sohool- tta. eale ard fanot - CoM.utd -a abo; -Wneory Popul!otion O.e.m euainrureat I.a- fou year of apponvo pronaty Smta Per so. k.. - td-year Vpop tion pot oq-.0 hilvet.a (100 he..taras) of pro-idan goSr-L-oa Ionl rtah r trining imetttaion for VWpi tota uream. cud-Condf. ,.I . IIW_lly of 12 to 17 year. o g;cranodn noa ow *--erlTr coly. Vocatiol onolst(ncand eodry oainl ennaim Poonton bnSrCtur (trp n Childoa (0-1A Yseoe). , ngae(10- include -hchica1, indutrial, or cth.r progra .60g o-torsim 04pa lto;16,1970, end 197 data. Puu-ote ai rnr.ad soo= ry - Total atudat enolld ta PeoleiwnIret tote (P.rrat) - .tota - Asal gootb retm of nataL id- prmr n codr ensdvddby o.-bmt ef taawher in U.a y 9a50puan 60 t, 196070-h 19070 n 190-9 coroouie eol. t looms ar 195-60. 160-70.and 170-9 oapretg.ofttalc. adult population agd 10 year. ad ooe.. Cods girth, tot (orl oou=d 9- Anual lIon bitcho par th .ousn ofadra Pprplot int; 1960. 1970 nd1 'wdta. CONSUKP9TION Crude Death haR. otiouad A- -Ioa do,otha per tbhusad of ad-ot P-.-..u Ce(r thousad towuloci..)- Pse eor.cr caopr. anta paa.t H;i60. 1970. n, 96dn.cr Iatin lss tha ioht oaron; aaldss sebulanoa. heaan and loose Onoroaction Oat A- Arrag w.abf daoght.crs o oanml hn i itn, -ehicina. ta ooalosPOutiop.iod it oh. apsi-ne prLsat as-svncoitic fr- hadin cRce.. r (r- o thousandc ltir- Allypestof rne.i-er too -ed tiiyrcacaal fioyr vrg. .ndint in 1960. 190 nd17. oucavrgoaa pbi prcooedo pouaiu; emn"dm cmli- Femr PaaOun Acsotre. An. (thaa fde -t _In uvbratacPCor caod rctorei conrisad in ear when riectraia ef -adi. - 'alb,'C=nin - l..r. loaruwon of marriedZ _vns _ otte.t.. otg mar.ried co i.1aoished 1ic....iot. wo.ochild-b..rIn&g as (15-Ac roc)ohus bIrth-cotrol dovi... tO TV R,,osi,;,e (pror~ thousand colta - TV rec..iver. for b ...dtat to al nried on in sane _ggou. o-ool pbli a hugdpplto;woue niaadT asos Inda fPn- rdcinrtCot I 96-7i OO-- -daofpot capita a--lI tweae Circulotion (ror, thousad cpulon:i..of) Shee h oveag cira]-l prdcio fal food coseditlan Prduto anlao se ad od n l tirn do..otod pti- rly to r .c.rdioo9- gaolnm.tft is c-madaed ia on colnder rat, buai C..ditios cove primar toda (ag&. ougaoan ta ho "daily' i it !aposr on b-t fou tines a meg.k Iostea= fsgr whc ra edbl and contain nutrients (e.g. cottfn od Cinem An-uI Actf-dicaoa Yctaca TC - bend on the 0,.be of iaur nludad). dflr.ata productIon of -oh coutry Is band onticksts e.Id dueirho b yw.Icld dmsin to doia-in tonam nationo -vrose produce price uih,e; 1961-. 1970,. sd 1970 dat.C.d bl-t. Per osoica enooly ofouris(osrat of -a.our-ca.s - Computed fromadmbiecis a-agy,qlv n ooafoduplias avilabl. 16 country pr caPita inoct FRoCt per day. vobllshlaep'plisoampr-W'i.. deetti production im -orts les Tota-.l-tboo rare (thouands) - E ooecalyative P..-o. intludiag euports. andchngs. In stuk. Oa.upieanld ilfnd o4, a-d foroe. 0,4 cuplynd hut gocludict hooeioco.1.wtudas..ea quatItiesue . in fond- pre onuine an Iean In distribution 5Ut nlniaoi oin.Rcoutiir-o..rt compara.ble;160. 1970 ad on. oas bltdby PAO'haed enphsiloicl ad. for norma a-ti- 1978 d.to. city andheath considering evroa talnPoratu. body v hs. .~ oaarst al ao oc actg f twoal inr force. housatald level; 1961-65. 1970, and 1977 data..0Ibn sOrtg fttllbrfre 1960 .. 19,70 an,d 19716 da.ta. Prco Teawl of or.ctni, (scan. orday' - Potaio .conetot fPo, capita 1.nd... - (P.r ...tI - Labor fcr0. In n.ici. co-trntin., enfnrn oa epply of tend por day. Nat supY of food 10 d.fiosd an_br.. o- and eetict,rter nud o.. .. yarcataog of total labor fort..; 1960. quiromano for oIl coutries osahli.hsd by USDA provida for ni.0 1707 ad 1979 doto.C al faner 60 gosa f totn pootoin p. day ad 20 gram of oanIma .-c Forciiainht rrat oa.nl.adfsas-P iiaieo ,ul.. Pr:ntlo. ofohioh 10 gro should be animl prni.Th..* .t0 c vt rneaecmutda ca.moeWdtml lbrfrsa ards . oe than th.sa of 75 gram of tonal. protin 0d 23 gram of psrecwogee of tonl, aolo n al popolatio otal onropmnivaly; a-Ima pCoo o a fveae -o the world, propose hy PFAO in the ThIrd 16. 90 d C17 dt.Thear 11' Partiipation rota redletint corld ro oy 1941-6.197 ad 1977 dat. an-a tutr ttepopulaibon .an lone nine Crd. A f-n anti- Par cato ortoin unolytram aimal od suan - rotei e1pp0 of tOe d- Eatesarefrom1atuanlsoute ri-ed from uinolo ad Puo...i gr.:dpardy 1961-45. 1970l and f7197 aa aenolonac ol oi fpplto ne 5a 0ad0 Child (s.1-A ool os(Voa Sth-uAe) - Annua daths par tho-asdi to thie ntllbrfre a 4 ru - yanre. to childra in thl ao rop; f- or oe davlopio cou- tries dates derived from life tables; 1960. 1970 ne 1977 data..ncrroSno,c HEALTh Peroanease of Poivoto~~~~~C Ono- (both 1rah and ked) - ge-aivd by rinhmet lit. fanttacv at00mb rare) - ..erg ovebt or yw.nre.of life oaanug ..rt.nC.r~ichoat 2 pacn.oo t 'Oprot ad P-.ea 60 P..oroac at htu; 190 17 ond 1;)6 data... .1 tatmuSoneit hto(ear theno.An - Atnsal dantha ot infnt bodat- en. 7O .r r Ttt S AossCo Sofa Water Cpoocanor oeit)-tnl urban. and rurl - N,. aslte -ovrny lo-a lav1 is thoo Incm lee"I ewis iia ft.or of' pal ttl1ra. n=ua)wt anoai cest sf urtoal adaquat dist Pi . .....tiol OOnf-td qtio-t. L. not waereu 1l (nncd treatd srfac entesor. untreatd but anotias ffordable. c.n.idn...d a boint wthin ranea-obla aton of that h-s. Inrra rse laa -..ajet t f or higher ca flvn in urban re ::.ob. -1t o 000 h.. ~ nsr t ht ao= f.o -. to :.furbf and tua . 6mo of pap di. (total, urban and ural sevd.7 tht by adncost f-b . disposal an p-ooatags at their roela o.algoa-a tenrot die- tEoomi and noia.1 hate Divione Posa my toL-d. the ocaio n dispo-I. wiCh or ithaun ntan-ntono Analysis ad Proloatina Oeperma ofthuma -noet and beewoe y ons Ibrs ysa or the.n f Ottbe_180 pIt privies and etmlar ta llatiboa. -27- ECONOMIC INDICATORS ANNEX I Page 4 Population: 122.9 (mid-1979) GNP Per Capita: US$1,687 (1979) Anouot Average Annual Increase (Sh) Sare of GDP at Market Prices (X) Indicator (million US$ current) (Lt cons.ast 1970 prices) tut prices) 1979 1965-70 1970-75 1975-80 1980-85 1970 1975 1979 1980b/ 19B5 National Account Gro s domertic producta! 206,043 7.7 10.6 6.5 5.4 100.0 100.0 100.0 100.0 100.0 Agricultur 19,462 1.9 5.7 5.3 4.2 8.2 8.7 9.', 9.9 9.4 Industry 65.583 9.2 11.6 7.1 5.6 29.1 32.6 31.8 31.6 31.8 Services 87,636 8.0 10.7 6.4 5.5 43.0 41.3 42. 5 42.6 42.5 Cossumption 163,739 7.7 9.8 5.7 4.8 76.9 78.6 79.5 79.0 76.3 Croa. inve-tm- nt 46,530 9.4 14.6 5.2 5.4 23.5 25.4 22.6 22.6 22.9 Enperts of goods and SFS 15,245 8.2 11.2 7.3 9.9 6.6 7.4 7.41 7.8 9.7 Imports of goods and NFS 19,471 14.5 17.2 2.8 3.3 7.0 11.4 9.5 9.4 8.9 Gr.es domestic savings 42,304 7.9 12.9 6.1 6.2 23.1 21.4 20.5 21.0 23.7 A-ount Average Annual Increase (. ) Cunpositios of Merchandise Trade (.5 (million US$ Current) (at constant 1970 prices) (at current prices) 1979 1965-70 1970-75 1975-80 1966 1970 1975 1980b/ Merchandise Trade Merchandise enperts 15,244 7.8 11.5 6.5 100.0 100.0 908.0 100.0 Primary 6,631 7.3 8.5 -6.8 82.9 75.1 61.8 57.9 Ma..fatort- 8,613 7.9 12.2 8.3 17.1 24.9 38.2 42.1 Merchandise imports 17,961 10.0 13.6 8.3 100.0 100.0 100.0 100.0 Fcod 985 -3.8 5.3 24.9 11.5 4.5 3.0 6.5 Petroleum 6,698 9.3 14.1 8.3 14.7 11.2 24.5 52.1 Machinery and eqnipssent 2,242 22.1 16.8 -15.9 15.2 21.2 14.0 16.6 Other 8,036 8.3 12.6 13.5 58.6 63.1 58.5 24.8 1975 1976 1977 1978 1979 Prices and Teens of Trade GDP deflator (1970-100) 289.6 410.9 584.2 809.2 1,229.6 Emehang. rate (Cr$/005) 8.1 10.6 14.1 18.0 26.8 Export price index (1970-100) 189.0 218.0 266.0 238.5 262.3 Import price iedea (1970-100) 221.0 227.0 236.0 241.9 295.0 Te.rm of trade ilden (1970-100) 85.5 96.0 112.7 98.6 88.6 As 7. of GDP (at current prtce.) 1970 1975 1979_ Public Finance (Cantral Governnt) rurrat revesse 16.6 19.8 20.8 Garremt e*xpenditar. 14.4 15.8 17.6 Sssrpl.. (+5 -r deftict ()2.2 4.0 3.2 Capital bxpenditure 2.6 3.8 3.7 Financing (net) -0.4 +0.2 -0.5 1965-70 1970-75 1975-79 Other Indicators GNP granth rate (7.5 7.7 10.7 5.8 GNP per capita gro-th rats (.) 4.6 7.7 3.0 Energy coMss_ptiop grasth rate (7.5 7.2 7.3 6.5 ICOR 2.9 3.0 3.9 Marginal savings rate 20.5 25.7 22.7 Imprt elasti.ity 2.2 1.6 0.3 a At m-rket prices; components sre net damestic peaducts expressed at factor cost and sill met add due to exelasien of depreciation and indirect tames less subsidies. b/ Estimte J.anuary 22, 1981 rER BAlANCE of P4M971.S 10008061. CAPITAL AND0 0887 34111189 08J .1 oorrert prIce.) Popoletlon 122.9 illIon (mid-1979) 09p P.r CaPita USJ1,687 (1979) 1970 1975 1976 2977 1978 1979 1980i/ 1981 1982 g793 194 Ieleo,o of P*omaot. 9.0 export. of Aood. cod -ro - -l.5a3 .6,702 .6,018 -4,037 -5,99 -9,774 -12,3239 ,550 -11,539 -11,454 -1,530 Export. of good. (2,739) (8,600) (10,128) (12,659) (12,639) 115,246) 128,128) (35,076) (29,641) (35,491) (42,343) IPor. of god. (2,507) (12,20) (12,393) (12,023) (13,683) 17, 951) f20.t1) (264253) (30,030) (34,277) (39,33) K4t feoter 18gm -330 -1,733 -2,189 -0,538 -3,257 -4,740 -7 -7,893 -9,022 10,207 -11,381 (of .6ih itc..r.. ps.auta) (-284) (-1,863) (-2.091) (-2,462) (-3 342) (-5,261) (-7,0203 (-6 384) (-74 90) (-8694) (-9,920) 41h ueso-Ocetor arnloem -485 -1,429 -1.574 -1,576 .1.718 -2,327 -2,200 -2,338 -2,331 2,46 -2,538 NMa Iopn. fre 21 2 1 - 72 17 134 40 5 50 50 C-rrmot aoootkc (atom -562 -6,700 -6,017 -4, 037 -5,927 9,757 -72.179 -11,510 -11,489 -11,404 -10,480 oi0.t prlie-t i- t.ettnr7i/ 92 992 959 810 906 2,200 1.202 1.747 1,996 2 .259 2,550 .6LT loan2 - t 767 3,760 5,023 4,631 8,819 4,995 5,A41 12,212 11,910 122233 11,706 Trditlo.1 co.roc (833) (1.438) (2.052) (2,648) (2,793) (2,738) (2,881) (3.5351 (4,148) (4.620) (5, 64) Pi. nsoal cdltc (434) (4,524) 1.,90) (6,1210 (11,312) (8,808) (9,370) (16,23 (16 162) (16 839) (18,08I) o.orttccttoo (-632) (.2,172) (.3,D09) 1-4,035) (-5 286) (46,551) (-7,800) (7 4449) (8,400) (-9,236) (.11,545) ffiraco(Ic lost. sbhood (ret) _ -197 248 -267 358 -599 4 -1,096 -1,434 -1,890 -2,477 006r -crpIal tel. 248 1.295 2.627 507 440 .61 1,459 ChatSc i re_eroc . .-I .ce )3Ž I545 950 -2,344 -630 -3,980 3,219 3.4 -1,753 -983 -1,128 -1,299 Ooteroetloo^] R .1.......... . ,c.e!I_/ I 1,142 6,036 6.544 7,256 11,826 9,688 6,911 8,264 9,247 10,435 11,734 Ecromec t,oothc of teporte2! 5.5 3.9 6.3 7,2 10. 6.3 3.6 3.8 3. 7 3. 7 3.6 1974 1975 1976 1977 1978 1i79 Et.-ro l Dmbt Tot.1 dckt -uc.-ditg cod dlckorcd 17.5796 1.2 28,984 32,224 43,174 49,9041'/ ProkIlo snd pollioly goeoeommmd '97 3974 722.328 15,852 19,218 27,223 OfFiolcI ooro. 3,276 0,854 4,320 4,612 5,229 0080 (8~~~~~~~~~~~~~~~~~~~~~171) , 03 (1,287) (1,413) (1.615) Otco r (2,405) (2.78) (3 .13) (3,199) (3,614) Prtvemmmoorrm 6.118 8~~~~ ~ ~~~~~~~ ~ ~~~~~~~~~~,47 11,3 14,686 21,9914 Priocto .o.-.ocrc.tced 8,182 9,592 11,133 13,006 15.953 Urdib.rmed debt (poblo oolp) 2,524 2,380 3.66 4,004 4,535 Crocs DOsbursa.ient Tote ..o. 2,dlcboommo If 6...oc. 7,254 592 9032 8,766 14,105 11,54641' Fob)oo8° endd ob)ol ly gerertced 2.937 3,731 4 624 4,620 10,356 OfOlci,) -op docr20. 408 396 368 167 413 (tOT 247 250 173 299 275 Othoc ru)tore 1 1339 1(9 111 92 136 Private urce ~2,140 2,966 3,972 4,062 9,532 PcioateOnco-,,,onteo Od 4,317 2,201 3,408 4,146 3,749 TAo)A dobt ,oTox o poyrmoto 3,290 4,035 5,120 6,597 8,628 11,812 (cer0000 (groot) (1,370) (1 863) (2,091) (2,452) (3,342) (5.261) Rootooror o ' cF Eoporto.. N50 3.8 43. 0 67.4 51.4 64.1 72.6 Porroo- - ot CNP 3.1 3.3 3.8 4.1 4.7 5.9 O.ooao interest rot r 00 .00 lo..e (0 10.6 9.0 8.0 8.3 9,8 7.0 7.8 7.9 8.0 7.7 A oroodo r,o,.,rioy 0) too ne oot 10.9 8,7 (0.2 10.1 10 1 O))coo)l ooouro 14.6 18.4 16.3 (6.6 14.1 PF- sorc .7 5.8 7.0 9.0 9.6 08rD 0T)tor-l nDOT 7 5.0 5.0 4.5 4.4 3,7 3.6 150Dro,oro!oe t dd).trt,mo ,t% 3.4 3.6 2.2l 3.5 1.7 2. 13FD deb itT To)o/totel dobt omoojor (0) 2.4 2.5 3.3 4.0 79 2 0. 9ebt ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~A 0.r oftoc eb ootodt batoooonoo doc oiot)o 5 yooo. 90.6 bRt lrl t ler d e withir SO vears ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~.d 97 dOI Ooo00-02 protio- In''S'l' l 40' B R A Z I L Boovi! ~~~~~MULTISTATE WATER SUPPLY R;G MAPA9- \AND SEWERAGE PROJECT 3 X $~~~~~~~~~~~~~E \I gTORY I <> RT O Manaus NAE ZONA D~~~~~~~~~~~~~p~~~~~,h~~~~~~d Fo~~~~~~rtaleza co p~~~~~~~~~~~~~~~~~~~~~~~~~ P A R AARANIHAO , PPtIIARANHAO reresin l RCEARA /R I oGRA E NORTE f j t f i |m {S S X ? / l -a . soo k itJ NA ti z1 AL i ; S iRANDE 0 ~~~~~~~ B~~~~~~CA P6rto t 2 ,7~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ec~~~ife RiBriooo ROND NIA j TERRITOT A ERGiPE S g Z u a _ W +, M l G R V 0 S/ O f G 9 A S 2 f /XMalv odor \ * t A S S A S ,, Cuiab6 - S - 0 ' RASILLA4V > JATAt' il r p MACTO/ IP Ut l O R U GRO OMIN A GERA I S( 5 F A I F/C, ~ C- ~po ae/ o Belo /"ESP,JRTO SANTO 0 SUl. RES LASOAS ~~~~~~~Horizonte./ , QCEAN 0 qr -::(AOD S PSLA ULGO ict6ria A tL A NF/C 4ffl o O-A f ' 4 _ = ( Sao Paolo O ~~~~ ~~~~~ ~ ~ ~ ~ ~ 'o ~~~~~~RiodeJaneiro i5: =E D; '' ) i otw;:w>^5~>i stiit) NP A R A NA -~~~~~~~~ ~~~~~~~~ANTA CATARI A BRAZI L ~~~~~~~~~~uJSt,~~~~~~~~~' 'I Oin6 s ROJECT AREAS R A Z I L ~I ~RIVERS PGRoAN Er D O SU INTERNATIONAL BOUNDARIES AMWR1C .:STATE _OUNSARIES P ~~~~~~~~~~~~~~~"q~~~~~~~~~~~~~~ 0~~~~~~~ES 200 400 600