Document of

The World Bank F Q ZOPY

Report No. P-2447-BR

REPORT AND RECOMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

BANCO NACIONAL DA HABITACAO

WITH THE GUARANTEE OF

THE FEDERATIVE REPUBLIC OF BRAZIL

FOR A

WATER SUPPLY AND SEWERAGE PROJECT

January 17, 1979

This report may not be published nor may it be quoted as representing the views of the World Bank.The World Bank does not accept responsibility for the accuracy or completeness of the report.

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CURRENCY EQUIVALENTS

Calendar 1977 November 20, 1978

Currency Unit - Cruzeiro (Cr$) Cr$US$1 - Cr$14.1 20.05Cr$1 - US$0.07 0.05

ABBREVIATIONS AND ACRONYMS

3NH - Banco Nacional da HabitacaoCAGECE - Companhia de Agua e Esgoto do CearaCOMPESA - Companhia Pernambucana de SaneamentoEMBASA - Empresa Bahiana de Aguas e Saneamento S.A.PAHO - Pan-American Health OrganizationPLAN4SA - Plano Nacional de SaneamentoORTN - Obligacoes Reajustaveis do Tesoro NacionalSABESP - Companhia de Saneamento Basico do Estado de Sao Paulo$ATECIA Programa de Asistencia Tecnica para o Desenvolvimento

Institucional das Empresas Estaduais de SaneamentoS/SFS Superintendencia do Sistema Financeiro do SaneamentoSUDENE - Superintencia de Desenvolvimento do Nordeste

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

BRAZIL

NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Banco Nacional da Habitacao

Guarantor: Federative Republic of Brazil

Beneficiaries: Empresa Bahiana de Aguas e Saneamento S.A. - EMBASA;Companhia de Agua e Esgoto do Ceara - CAGECE; andCompanhia Pernambucana de Saneamento - COMPESA.

Amount: US$100 million equivalent

Terms: Repayment in 15 years, including three years of grace,at 7 % per annum

Relending Termsto FinalBeneficiaries: Repayment in 20 to 24 years, including 1 to 3 years of

grace at 4.0% to 5.0% p.a. on the indexed principal, plus

various one-time fees amounting to about 2% of loan amount.

ProjectDescription: The project would extend water supply services to 2.3

million people and sewerage services to 1.2 million peoplein the northeastern states of Bahia, Ceara and Pernambuco.It would also improve the provision of water supply to 5.3million people who now receive a deficient service in thesame states. The project would include construction ofwater production, treatment, storage and distribution

- facilities and about 125,000 house connections in thecapital cities of the three states; execution of metering,leak detection and control programs in capital citiesand major towns; construction of sewage collection anddisposal facilities in capital cities and major urbancenters; and expansion and improvement of water supplysystems in about 35 medium-sized cities and 285 smallvillages, most of them in rural areas. The project wouldalso include tariff studies and consultancy services forthe three state water companies which would be theexecuting agencies. It is estimated that 61% of the finalbeneficiaries of water supply investments in the capitalcities would belong to families having incomes below therelative poverty level. In rural areas this proportionwould be higher. In the case of sewerage investments,about 37% of the direct final beneficiaries would haveincomes below the relative poverty level. Indirectbenefits in terms of water pollution control would sub-stantially accrue to the urban poor. The project

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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involves the administrative risks associated with carryingout complex and large investment programs by state watercompanies. However, the experience already gained by thecompanies under previous expansions and the subprojectpreparation and eligibility criteria developed shouldensure the successful execution of the project.

Estimated Cost: --------US$ Million----Local Foreign Total

Civil Works and EquipmentWater Supply 85.9 64.6 150.5Sewerage 59.5 14.2 73.7

Engineering andTechnical Assistance 17.1 0.6 17.7

162.6 79.3 241.9

Physical Contingencies 18.0 8.6 26.6Price Contingencies 22.5 12.0 34.5

40.5 20.6 61.1

Total 203.0 100.0 303.0

Financial Plan: Proposed IBRD Loan 100.0States Water Supply andSewerage Revolving Funds 151.5

Banco Nacional da Habitacao 51.5

303.0

EstimatedDisbursements: --------… US$ Million--------------

Bank FY79 1980 1981 1982 1983

Annual 0.5 22.2 34.8 21.4 11.1Cumulative 0.5 22.7 57.5 88.9 100.0

Rate of Return: The most important project benefits are not meaningfullyquantifiable since they relate to improvements in thehealth and living conditions of the population. Theinternal financial rate of return (conservatively used asa proxy for the minimum economic rate of return) forsubprojects in capital cities is estimated at 10%. Theinternal financial rate of return for subprojects inmedium-sized cities and small villages is expected to besomewhat lower.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE IBRD TO THE EXECUTIVE DIRECTORS

ON A PROPOSED LOAN TO BANCO NACIONAL DA HABITACAO (BNH)FOR A WATER SUPPLY AND SEWERAGE PROJECT IN THE NORTHEAST OF BRAZIL

1. I ubmit the following report and recommendation on a proposedloan to Banco Nacional da Habitacao (BNH) with the guarantee of the FederativeRepublic of Brazil for the equivalent of US$100 million to help finance awater supply and sewerage project in the northeastern states of Bahia, Cearaand Pernambuco. The loan would have a term of 15 years, including 3 years ofgrace, with interest at 7% p.a.. Proceeds of the loan would be relentto the state water companies of Bahia, Ceara and Pernambuco at 4% to 5% perannum (plus various one-time fees amounting to about 2% of the loan amount)with principal subject to monetary correction in accordance with changes inthe national treasury bond index. Relending would be for 19 to 21 yearsincluding grace periods of 1 to 3 years. Payments due to the Bank but not yetcollected from the companies would be met from the general resources of BNH.

PART I - THE ECONOMY *

2. A report, entitled "Economic Memorandum on Brazil" (1665a-BR),dated October 13, 1977, was distributed to the Executive Directors onOctober 21, 1977. An economic mission visited Brazil in April 1978. A neweconomic report to be issued shortly is being prepared. The following para-graphs as well as the country data sheets attached as Annex I to this reportreflect the findings and projections of that mission.

Recent Economic Performance

3. During the late 1960s and early 1970s, Brazil achieved very rapideconomic growth together with much reduced inflation rates and a good balance-of-payments performance. Net capital inflows fluctuated between I and 2.5% ofGDP. The petroleum crisis of late 1973 and the ensuing world recession cuminflation produced a sharp deterioration in the balance of payments and infla-tion accelerated. Brazil's response was more successful than that of mostLDCs, even though, with 80% of its petroleum imported, it was particularlyhard hit. The growth rates of the economy and of prices were:

GeneralGDP Price Index

1973 14.0 15.11974 9.8 28.71975 5.6 27.71976 9.2 41.31977 4.7 42.7

* This section has been reprinted from the President's Report on theSites and Services and Low-Cost Housing Project (Report No.P-2442-BR of January 4, 1979).

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The maintenance of high rates of growth after 1973 required large amounts ofexternal financing. Gross capital inflows averaged $9 billion in 1974-77,compared to $6 billion in 1973. Government policies were to keep importsapproximately constant through a combination of import restrictions and importsubstitution; to maintain investment levels; and to continue to stimulatenon-traditional exports.

4. The major problem facing Brazil after the onset of the petroleumcrisis was the merchandise trade balance, which turned into a large deficit in1974, as a result of a doubling in the value of imports. Since then, underthe influence of the policies described below, the trade balance graduallyimproved, and turned again into a small surplus in 1977, helped in part by thefavorable trend of coffee and soy export prices in 1976 and in the first halfof 1977. In 1978, on the other hand, agricultural exports have been adverselyaffected by falling commodity prices and have suffered the impact of a severedrought in Brazil's most important agricultural states. As a result, primaryproduct exports are estimated to have fallen by more than $1 billion. Thisshortfall has been largely offset by increased manufactured exports which arerising very rapidly. Total exports, thus, are estimated to have remained atabout the same level as in 1977. The merchandise trade account has shown adeficit of about US$1 billion because of increasing imports. Borrowing require-ments will continue to be high because of rising debt service payments.

5. During 1977, at the same time as the balance of payments was improv-ing, the Government began to make some headway in the fight against inflation,by placing more rigid limitations on credit expansion and more effectiverestraints on public sector investment. By May 1978, the annual rate ofinflation, which had accelerated sharply in 1976, was reduced to 35%, ascompared to 47% a year earlier. The restrictions on public investment playeda major role in the program to control aggregate demand. The overall size ofthe public investment program leveled off in real terms in 1977, after adecade of strong growth which had, in recent years, come to place a signifi-cant amount of strain on available resources. In 1977, in addition, ceilingswere placed on the lending programs of the National Economic Development Bank,the National. Housing Bank, and other official credit agencies. These measuresreinforced the impact of increasingly stringent policies in other areas,including increases in bank reserve requirements and continued curbs on con-sumer and real estate credit designed to dampen speculative demand and reverseinflationary expectations. The anti-inflationary program induced a slowdownin the rate of growth of GDP, from 9.2% in 1976 to 4.7% in 1977. The growthof manufacturing industry dropped to 2.3%, reflecting a slackening of bothconsumer demand and gross fixed investment.

6. While information on economic trends during 1978 is still fragmentary,

it appears that a recovery of industrial activity has taken place in 1978.Agricultural output, on the other hand, grew very little because of widespreadcrop failures caused by the drought, and the overall rate of growth of theeconomy is not believed to have exceeded 5%. The Government has maintainedits anti-inflationary monetary and fiscal policies. Credit policy remainedtight and current public sector investment plans did not call for a significantincrease in investment in real terms, except in the priority sectors ofpetroleum, electric power and steel. The overall increase in public investment

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has probably not exceeded 5%. However, a number of factors have led to someintensification of inflationary pressures in 1978. In the first place,inflation was affected by the drought, as the decline in food production putpressure on the cost of living. Moreover, on the wage front some industrialworkers in the state of Sao Paulo were able in May-June 1978 to negotiateincreases significantly above the annual inflation adjustment and the slightreal increase authorized by the official guidelines. Finally, as the Govern-ment has continued to take advantage of favorable conditions in the inter-national financial markets to borrow in excess of requirements and build upexchange reserves, there has been a large inflow of external capital into theeconomy. Although steps were taken to minimize the domestic impact of thisinflow by sterilizing the funds temporarily at the Central Bank, the pace ofinflation has accelerated to approximately 42% a year.

Poverty Programs

7. Brazil is a country with great income inequalities and extensivepoverty. While the debate on income distribution goes on, and the statisticalevidence remains inconclusive, in recent years the Brazilian Government hasmade serious efforts towards the relief of poverty. During the Administrationof President Geisel social programs have increasingly been designed to meetthe needs of the lower income groups. Although the provision of basic socialservices such as health, education and housing is still very inadequate, therehas been significant progress in many areas. The coverage of the socialsecurity program has been expanded in the urban areas and extended to ruralpopulations in the early 1970s. The urban public health care system nowcovers more than 70% of the urban population. In the rural sector, a systemof cash transfer to poorer old persons has been established. By 1978 virtuallyall rural persons over 65 years of age received the equivalent of US$30 permonth per household--a very substantial income supplement equal to almosttwice the average per capita expenditure in the rural Northeast and a muchhigher proportion for the poorer rural recipients. A similar program coversthe urban population over 70. Literacy of the population aged 10 and over hasincreased from 48% in 1950 to 67% in 1970, and between 1970 and 1974 the adultliteracy program (MOBRAL) enrolled some 7 million persons. In the area ofurban housing, the National Housing Bank (BNH) has made over 1.7 million loansover the period 1964-77. Beginning in 1975, a new sites and services program(PROFILURB) was established to serve the urban poor and in 1977 this wascomplemented by a program to finance the purchase of construction materials.Increased priority has also been placed on improving urban water supply. Thepercentage of urban dwellings connected to general water supply networks rosefrom 54% in 1970 to 61% in 1973, and it appears likely to reach at least 70%by 1980. Available evidence suggests that malnutrition remains one of themost serious social problems in Brazil. Beginning in 1973, the Governmentestablished a National Nutrition Program (PRONAN) to attack the problem.

Long-Term Prospects

8. During the past decade, the Brazilian economy grew at an averagerate of 10% a year. The Government has now recognized the need for moderatinggrowth because of the balance-of-payments constraint and to contain inflation.

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In broad terms, a growth rate of 6 to 7% a year is probably needed to absorbnew entrants into the labor force and permit the continued transfer of man-power from low to high productivity areas and sectors. GDP growth rates inthat range seem feasible through 1980, and growth might accelerate to 8 to 9%a year in the 1980s. The assumptions underlying this projection include asignificant growth of export volume (at a rate of about 10% a year in 1980-85).The terms of trade are expected to turn against Brazil sharply in 1978-80, butshould improve again slowly after 1982. Coffee prices are expected to leveloff in the early 1980s, but to resume their rise subsequently. Soybean pricesshould improve earlier. The growth of manufactured exports volume is projectedto range between 15 and 18% a year until 1983, and taper off gradually there-after, to 10% in the late 1980s. Assuming a continuation of present importsubstitution policies, a sizeable trade surplus would begin to emerge by 1980and the current account deficit would narrow in the early 1980s to about $3billion or 1% of GDP as compared to 4-5% in 1974-76. The rate of growth ofthe external debt would slow down considerably in the 1980s. In the late1980s, the growth of imports is expected to accelerate as import-substitutionprojects are completed and the import ratio to GDP can be expected to increaseas a result. At the same time the exceptional momentum of export growth canbe expected to slow down as the absolute magnitude of Brazil's non-traditionalexports becomes large by world standards. As a result, the current accountdeficit of the balance of payments is projected to increase somewhat innominal terms, although it would still remain below 1% of GDP.

9. This outlook rests on a number of basic assumptions, including, inparticular, the expectation of a relatively favorable world economic situationand the continued expansion of market opportunities for manufactured exports.Although there are indications of increasing protectionism in industrialcountries, Brazilian commercial policy has so far proven extremely flexible.Brazil can be expected to diversify its export products and markets and reviseits commercial strategy within a wide range of options to overcome emergingobstacles in international trade. Even under a less favorable set of assump-tions, however, Brazil can still be expected to sustain a long-term growthrate of about 6.5% a year, a growth rate which would constitute a reasonablygood performance, and would in all likelihood be adequate to satisfy theexpected demand for employment opportunities.

10. Brazil's current development strategy was defined in the secondNational Development Plan (1975-79). It relies on rapid expansion of bothagriculture and industry. Agriculture grew by an impressive 5% per year overthe past decade, largely by expansion of land under cultivation. The culti-vated area makes up less than 5% of Brazil's surface, and there is everyindication that rapid agricultural growth will continue to meet both exportand domestic demands, though the development of frontier lands will becomeprogressively more expensive. In the industrial sector, manufacturing hasbeen expanding at the average rate of 11% over the past 10 years. In the late1960s and early 1970s the leading sectors were automobiles, consumer durablesand light equipment, with basic industry lagging behind. Since 1975, however,Brazil's strategy has been to promote a more balanced pattern of industrialgrowth and reduce dependence on imports by emphasizing heavy industry. One

element of this policy involves stepping up the development of Brazil's rawmaterial resources to supply industrial input needs. Large investment programsare now being carried out, often with substantial public sector involvement,in steel, petrochemicals, fertilizers, pulp and paper, non-ferrous metals andcement. At the same time, Brazil is building up its capability in themachinery and equipment sectors, moving into the production of heavy andmore sophisticated equipment, and equipment made to order. The recent decisionto build the turbines for the Itaipu dam (one of the largest in the world) inBrazil reflects the growing capability of the sector. The National EconomicDevelopment Bank (BNDE) is supporting these efforts through its large credit

program.

11. Public sector investment plays a key role in Brazilian nationaldevelopment plans. Defined broadly, public sector investment accounts formore than half of total fixed investment in the Brazilian economy. Federalinvestment has been heavily concentrated in infrastructure and basic industry.These two areas together account for about 70% of total investment by federalGovernment agencies and enterprises. Regional development and social programsabsorb most of the remaining 30%. Until 1975, the rapid expansion of publicinvestment reflected a heavy emphasis on road construction and regional devel-opment. The Second National Development Plan added the massive programof import substitution in basic industrial inputs, and an acceleration inthe pace of social programs. Since 1977, with the restraints placed onpublic investment, road and rail transport expansion plans have been cut backsharply. Investments in electric power, on the other hand, are maintained ata high level. In basic industries such as steel, non-ferrous metals andpetroleum, investments are being stepped up considerably. The share ofregional development programs in total federal investment has now stabilizedat about 7%. The percentage allocated to social investment is increasinggradually, reflecting continued expansion of federal investment in housing,water supply and sewerage, and other urban development programs. State andmunicipal governments also devote a substantial proportion of their resources

to health, education, welfare and other public services.

External Assistance and Creditworthiness

12. Although Brazil's resource gap may be expected to turn into asurplus in the early 1980s - barring major unforeseen developments in theworld economy - and its balance-of-payments current account deficit isexpected to be reduced by half in 1980 as compared to the levels reachedin 1974-1976, external capital requirements will remain high in 1979-84because of heavy debt service payments. The gross capital inflow neededduring 1979-84 is projected at US$10.7 billion annually, compared with aUS$8.3 billion average medium- and long-term capital inflow (including netdirect foreign investment) in 1974-77. Of this, gross disbursements ofsuppliers' credits are expected to average US$1.6 billion a year, bond issuesare projected to continue at she current annual rate of US$1 billion andthe gross inflow of financial credits needed should average US$5.2 billion ayear over the 1979-84 period, or about the same as in 1974-77. This level ofborrowing would represent mostly the roll-over of existing credits. Incontrast to the period 1974-77, when financial credits supplied a net inflowof US$3.8 billion a year, the net contribution from this source is expected to

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drop to less than US$1 billion a year, on average, in 1979-84. The remainderwould be made up of direct private investments and bilateral and multilateralcredits.

13. On December 31, 1977, Brazil's public and publicly guaranteedmedium- and long-term external debt amounted to $19.3 billion. Financialcredits make up a little more than half of this amount. Total external debt(both public and private) registered by the Central Bank at the end of 1977was $32.0 billion. Of this total, $21.5 billion, or about two-thirds, was inthe form of financial credits. During 1977, the share of financial credits intotal debt outstanding declined slightly, as a result of an increase in netdisbursements by multilateral agencies and bilateral lenders, and a significantrise in bond issues. The share of public and publicly guaranteed debt intotal external debt has continued to increase, largely reflecting the growingneeds of public sector entities for investment capital. Reflecting thischange in the composition of the total debt, the public debt service ratio isexpected to rise from about 20% in 1977 to 31% in 1978. The net debt serviceratio (debt service less interest earned on reserves) on the total externaldebt, which reached 49% of exports of goods and non-factor services in 1977,is also expected to increase to about 55% in 1978. This ratio will be high in1978, because of the exceptional factors depressing Brazilian exports in thatyear, but can be expected to improve steadily beginning in 1979 and fallgradually to about 28% in 1985. The public debt service ratio can also beexpected to decline from its 1978 peak, as a result of the growth of exportsand the improvement of the debt profile.

14. During 1974-77 Brazil has been able to finance a cumulativecurrent account deficit of nearly $25 billion, while increasing reserves bymore than $1 billion and improving the terms on which it obtains credit in theworld financial markets. With the balance-of-payments deficit on currentaccount expected to continue to improve in the early eighties, and withfurther improvement in the terms of new borrowing, the rate of growth of debtservice payments should slow to an average of about 5% a year in 1980-85, ascompared to more than 25% a year during the period 1974-77. In sum, Brazilmay be expected to remain fully creditworthy for Bank lending.

PART II - BANK OPERATIONS IN BRAZIL

15. By October 31, 1978 the Bank had made 82 loans to Brazil, amountingto US$3,887.4 million, of which 42 were not yet fully disbursed. DuringFY70-75, disbursements averaged US$150 million per year, reaching US$248million in FY75, US$202 million in FY76, US$267 million in FY77 and US$252million in FY78. The decline in disbursements in FY76 was due primarily tothe reduced level of lending in FY73-74. Disbursements are expected toincrease during the next few years. Annex II contains a summary statement ofBank loans as of October 31, 1978 and notes on the execution of ongoingprojects.

16. Over the FY75-FY77 period, Bank lending to Brazil amounted tobetween US$400 and US$500 million per year. In FY75, five loans were madetotalling US$426.5 million; in FY76, ten loans totalling US$498 million; andin FY77 seven loans totalling US$425 million. In FY78, nine loans totallingUS$705 million were made. Work is advanced on the preparation of an indus-trial pollution control project in Sao Paulo; an aluminum project; a secondirrigation project in the lower Sao Francisco river valley; a power distri-bution project in southern Brazil; a medium-sized cities development projectand two rural development projects in the northeast. We expect to proposeloans for these projects in the near future.

17. Of Brazil's external public debt outstanding and disbursed at theend of 1977, amounting to nearly US$19.3 billion, the Bank held about 8.0%.The Bank's share of the service on this debt was about 7.0%. When Brazil'stotal (public and private) external debt is considered, the Bank's share inthe total outstanding at the end of 1977 was 4.8%, and its share in Brazil'sexternal debt service was about 2.9%. By 1980, the ratios of the Bank's sharein total outstanding debt and in total debt service are expected to rise to6.2% and 3.3%, respectively.

18. As of Ocober 31, 1978, IFC commitments to Brazil, totalled US$395.2million, of which US$265.4 million had been cancelled, repaid or sold. Of thebalance of US$129.8 million, US$98.7 million represent loans and US$31.1million equity. A summary of IFC's investments as of October 31, 1978 is givenin Annex II.

Lending Strategy

19. 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 isto help to intensify the efforts of the Government to identify and developprojects that will increase productivity and income of the lowest incomesegments of the population, to broaden the economic opportunities open to thosegroups, and to improve their living conditions. The loans for nutritionresearch and development, vocational training, agricultural research, agricul-tural extension and polder construction in the Lower Sao Francisco as well asfor integrated rural development in the States of Rio Grande do Norte, MinasGerais, Ceara, Paraiba and Bahia were all designed to assist low-income groupsin rural areas. The loans for water supply and sewerage in the State ofMinas Gerais and in Greater Sao Paulo and for urban transport in five majorcities are assisting to improve the living conditions of the urban population,particularly the urban poor. Additional projects designed to assist low-incomegroups in rural areas are in preparation, including a rural education project,several integrated rural development projects in the Northeast and a secondirrigation project in the lower Sao Francisco river valley. Also, severalprojects to reach low-income groups in urban areas are in preparation: amedium-sized cities development project, a water supply and sewerage projectfor southern Brazil, and a second urban transport project. The proposedproject would better the standard of living of the urban population,particularly the poor, in the Northeast of Brazil by providing water supplyand sewerage services.

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20. Another of the Bank's lending objectives in Brazil is to supportinstitutional development and policy reform designed to develop rationalpolicies and procedures, establish adequate coordination and control, and helpmaximize public savings and ensure that they are used economically throughrational selection of investment projects. This institution-building objectivehas been important in Bank assistance, for example, in the transportationsector where there has been emphasis on the rational selection of investments,the strengthening of railway operations, and the improvement of railways'financial performance and in the power sector as well. The proposed projectwould assist the three beneficiary state water companies to improve theiroperations, strengthen their financial management and enhance their projectplanning and execution capabilities. We expect that the experience gainedfrom structuring the proposed project will be instrumental for the developmentof similar projects in other areas of the Northeast.

21. Another lending objective is to ease the foreign exchange constrainton development, a constraint that has become more critical since the increasein petroleum prices, by supporting projects designed to increase Brazil'sexport capacity and, where economical, to substitute domestic production forimports. As a result of the deterioration in Brazil's terms of trade andbalance of payments which took place at the time of the 1974 energy crisis,this objective was placed in the forefront of the Government's economicpolicy. Lending for the electric power sector supports this objective, sinceit is based primarily on hydroelectric energy, and its development lessens theneed for petroleum imports. Bank support of fertilizer and petrochemicalprojects is assisting Brazil to substitute imports with large-scale efficientdomestic production and aid its balance-of-payments position. Bank lendingfor agro-industries in the Center and South of Brazil is also supporting thisobjective and much of the Bank-assisted investment in the transport sector --railways, ports and highways -- is designed to facilitate the smooth andeconomical flow of exports. Support of the steel expansion program is helpingBrazil to expand domestic output of a traditional import commodity which canbe 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 objectivewould be achieved through the aluminum project being prepared.

22. A final objective which applies to all Bank lending to Brazil is toprovide part of the very large volume of medium- and long-term capital inflowsthat Brazil has needed and will continue for some years to need in order tosustain rapid growth and achieve its employment creation and regional develop-ment objectives. Continued active lending by the Bank in Brazil is regardedby the international financial community as an important sign of confidence inBrazil and encourages others to continue their own programs there. In somesectors, especially in electric power and industry, Bank participation ishelping Brazil obtain additional resources in greater amounts and on morefavorable terms from bilateral credit agencies and private financial institu-tions than may have otherwise been provided. Eight co-financing operationsfor about US$275 million, have been concluded since 1976 with private financialinstitutions and several others are in preparation.

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PART III - THE WATER SUPPLY AND SEWERAGE SECTOR

Introduction

23. The proposed loan to BNH would be the Bank's sixth loan for thewater supply and sewerage sector in Brazil and the first for this purpose inthe Northeast. Five loans totalling US$223 million have been extended. In1971, two loans were made for Greater Sao Paulo, one for US$22.0 million forwater distribution and storage (Loan 757-BR) and the other for US$15 millionfor sewage collection and disposal (Loan 758-BR). These two loans wereassumed by the water company of the state of Sao Paulo (SABESP) in 1974 afterit had taken over the functions of the original borrowers. The originalobjective of Loan 757-BR to help extend water supply services to 2.4 millionpeople in the municipality of Sao Paulo, has been exceeded. By 1977, waterservices had been extended to 3.3 million people. The project financed underLoan 758-BR suffered initial delays resulting mainly from problems in themanagement of the original borrower, SANESP. SABESP, however, brought thesewerage works included under the project to a successful completion.

24. In 1974, a loan was made to Banco Nacional da Habitacao (BNH) forUS$36.0 million (Loan 1009-BR) for relending to the state water company ofMinas Gerais for water supply and sewerage subprojects. A second loan forUS$40 million for the same purpose followed in 1976 (Loan 1309-BR). These twoloans are now fully committed. The first, to 41 subprojects of which 10 areunder construction and 31 completed. The second, to 65 subprojects in citiesof less than 5,000 inhabitants, 38 subprojects in cities of between 5,000 and20,000 inhabitants and several subprojects in Greater Belo Horizonte.Execution of subprojects is well advanced and progressing satisfactorily.

25. The most recent loan for US$110.0 million, and also made to BNH, wasapproved in early FY78 (Loan 1525-BR). It is assisting in the financing of avery large sewage collection and treatment project for Greater Sao Paulo whichforms part of a priority program of water pollution control. Execution ofthis project has started on schedule.

26. The state water companies of Sao Paulo and Minas Gerais, have hadconsiderable financial problems because of their inability to receive adequatetariff increases to finance their operations. Recently, the Government hasapproved a 36% increase in their tariffs effective on January 1, 1979 whichwill allow both companies to achieve a satisfactory financial condition.However, the water company of Minas Gerais may require a further tariffincrease in mid-1979. For the future, it is expected that the application ofthe recently approved tariff legislation (see para. 33) will allow them tooperate within a framework of financial discipline.

Sector Organization

27. Municipalities have traditionally had responsibility for the pro-vision of water supply and sewerage services in Brazil. During the sixties,

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the acceleration of the urbanization process coupled with the financial,technical and managerial inability of the municipalities to provide evenminimum services prompted the Federal and State Governments to build andfinance new water and sewerage systems with budget grants to satisfy the mosturgent needs. In this way, some US$700 million were invested in urban andrural sanitation between 1960 and 1970. However, in 1970, the situation wasfar from satisfactory and rapidly deteriorating. Less than 60% of the urbanpopulation had public water service; and less than 30%, sewage collectionservices. These facts, together with manifest administrative and financialweakness of municipal governments further aggravated by rapid urbanizationmade apparent to the Federal Government the need to establish a nationwideprogram to finance, promote and coordinate the development of the water supplyand sewerage sector.

28. In 1971, the Government launched the Plano Nacional de Saneamento -PLANASA (National Sanitation Plan), under the aegis of the Banco Nacional deHabitacao - BNH (National Housing Bank), to increase the availability of waterand sewerage services to the urban population. The initial goals of theprogram were to provide water services to 80% and sewerage services to 50%of the urban population by 1980. These goals were revised in 1975 to estab-lish more realistic targets for the large cities and include the smallercommunities under the program. The present goals of the program are: toprovide water services to 80% of the urban population in 80% of the urbancommunities (including Brazil's nine metopolitan areas); extensive sewerageservices to all of the state capitals and main urban centers (over 50,000inhabitants); and some sewerage services to smaller urban communities. Inthese respects, it should be noted that the Brazilian definition of urbanpopulation includes people living in small communities which are mostlylocated in rural areas. Over the 1971-83 period, the Government plans toinvest US$6.6 billion equivalent in the sector. So far, about US$2.5 billionhas been invested.

29. The PLANASA program is financed one-half by BNH and one-half bythe states through revolving water and sewerage funds (Fundos de Agua eEsgotos - FAE). BNH makes its loans to its financial agent in each state(usually the state commercial bank) at interest rates varying from 2% p.a. inthe poorest states in the Northeast to 8% p.a. in the relatively more pros-perous states of the South and Center of Brazil. Principal and interest areadjusted in accordance with changes in the national treasury bond index (ORTNindex). 1/ The financial agent relends the proceeds of BNH loans to the statewater company at one percentage point above BNH's rate. The states lendFAE resources to their water companies on somewhat softer terms than thoseapplicable to BNH loans, but in all cases loans are subject to monetarycorrection. FAE resources are obtained from allocations of up to 5% of thestates' annual tax revenues. In cases where 5% of a state's revenues is notsufficient to meet the state's 50% financing commitment to the program, BNHextends supplementary loans to the state to cover this shortfall.

1/ Inflation in Brazil in the years 1975-77 was 28%, 41% and 43% respec-tively and is expected to average about 40% p.a. during 1978-80. TheORTN index used in public sector lending increased by 24%, 37% and 30%over the same period and is expected to increase 32% p.a. on averageduring 1978-80.

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30. Recently, BNH has started a new program in support of small communi-ties (of less than 5,000 inhabitants). This program has two subprograms.Under one subprogram, BNH provides financial assistance to the states forcarrying out water supply projects in small communities. BNH makes loans toits financial agents for relending to their respective states. The amount ofBNH loans is equivalent to the amount that the states make available to theirwater companies, substantially as a capital contribution, for projects insmall communities. Under the other, BNH provides financial assistance to thestate water companies. BNH makes loans to its financial agents for relendingto their respective states. The states make available the proceeds of BNHloans, together with an equivalent amount from their own budgetary resources,to their water companies, substantially as a capital contribution, for projectsin small communities. This new program is expected to allow the state watercompanies to step up the level of their investments in small communitieswithout unduly impairing their financial position.

31. The main focus of the PLANASA program is to help the states developtheir own organizations in the water supply and sewerage sector. To enter theprogram, a state must sign an agreement with BNH establishing a statewidewater and sewerage company, draw up a statewide sector investment plan andprovide for state guarantee of BNH loans. The statewide organization of theprogram has two major advantages. First, it makes possible the establishmentof statewide tariff levels which permit a cross-subsidization mechanismwithin the state. In this way, wealthier cities contribute to support poorerand small communities. Second, the statewide organization derives economiesof scale from centralized management of the water supply and sewerage system,thus ensuring a more efficient use of available human resources.

The Development of PLANASA

32. The PLANASA program is progressing well although at a slower pacethan expected. All of the 23 states of Brazil have entered the program andmore than 2,000 municipalities all over the country have already benefittedfrom it. Six million households comprising about 30 million people have beenconnected to public water supply systems. As a result, about 75% of the urbanpopulation is now receiving water supply services as compared with less than60% of a smaller urban population when the government started the program in1971. It is estimated that PLANASA's water supply objectives will be met by1983. The levels of service attained and projected for the provision ofsewerage services present a different picture. At present, only 35% of thepopulation receives sewerage services as compared with 30% in 1971 when theprogram began. There are two reasons for the slower progress of the sewerageprogram: one is the relatively high cost of providing sewerage services andthe other is the technical complexity of building and operating adequatesewerge systems in some areas in Brazil. It is unlikely that the major citiesof Brazil will receive sewerage services at the levels envisaged by PLANASAmuch before 1990.

Sector Tariffs and Legal Framework

33. In 1975, in order to define a suitable framework for the sector,BNH hired consultants to study the various aspects of water supply andsewerage tariffs, the ownership of water resources and the administrative

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responsibilities for the provision of water supply and sewerage services. Asa result of this initiative, the Brazilian Congress approved a tariff law forthe sector on May 12, 1978. On November 6, 1978, the Government issued adecree regulating the application of the law. The approved legislation

ensures the state water companies sufficient funds to cover their operatingexpenses (excluding financial charges), depreciation, and a rate of return oninvestment (defined as revalued net fixed assets in operation plus capitalized

expenses and current assets) of up to 12% p.a. The legislation establishesthat starting in 1983, each company shall obtain, as a minimum, a return oninvestment at least equal to its debt service payments. Over the 1979-1982period, each company will carry out a financial program to gradually reach theminimum return stipulated in the legislation by 1983.

34. The new legislation also deals with some important aspects of thestructure (as distinct from the level) of tariffs. It establishes fourcategories of consumers: residential, commercial, industrial and official andstipulates a progressive tariff system which allows for cross-subsidizationbetween lower and higher income consumers. Further, it establishes thattariffs for low-income consumers should not exceed a certain percentage ofthe minimum wage. On the institutional side, the new legislation assigns toBNH the responsibility for overseeing the financial situation of the companiesoperating in the sector, including making recommendations to the governmentfor the adjustment of rates.

The Northeast Region and the Project Area

35. With an estimated 33.6 million inhabitants and a per capita productestimated at only 38% of the one for the country as a whole, the northeastregion of Brazil is one of the largest concentrations of poverty in LatinAmerica. The population of the region is growing at an annual rate of 2.5%p.a. while urban centers, particularly capital cities, are growing at 3.2% to4.6% p.a. Life expectancy at birth is only 49 years compared to 61 years forBrazil as a whole and 63 years for countries with similar income levels. Theinfant mortality rate reaches 137 per 1,000 live births against 70 for thecountry and 38 for other countries in the same income bracket. These adverseindices are due partly to poor sanitation conditions.

36. Aware of the serious income disparities and economic and socialdevelopment differences between the Northeast and other more developed regionsof the country, the Government has launched a series of programs aimed atpromoting the economic development of the area. The Government's actions havebeen mainly devoted to heavy investments in transport, power, rural development,

and stimulus to industrialization. These actions have contributed to regionalgrowth. However, together with the population increase, they have built up

pressures on the already precarious public services, especially urban watersupply and sewerage. According to Superintendencia de Desenvolvimento doNordeste - SUDENE (Northeast Development Authority), the regional GDP grewduring 1977 at 8% (compared with 4.7% for the country as a whole). To maintainthis high rate of growth, the Government will have to continue to make substan-tial investments in infrastructure in the region over the coming years. The

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Bank has supported and intends to continue to support the development of theNortheast by financing rural development, education, transport, power, urbanand industrial projects in the region.

37. The project area consists of the states of Bahia, Pernambuco andCeara. These three states account for 9.5% of the area of Brazil and have acombined population of about 20.4 million inhabitants. Their economic andhealth conditions are similar to those prevailing throughout the Northeast.

38. The population and density of the three project states are asfollows:

Bahia Ceara Pernambuco Brazil

Population (1977) 8,850,000 5,409,000 6,141,000 113,209,000

Area (km ) 559,951 146,817 98,281 8,512,000Density (inhabitants/km2) 16 37 62 13

The overall population growth in Pernambuco and Bahia (2.5% and 2.4% p.a.respectively) is below the 2.8% p.a. growth rate for Brazil mainly as a resultof outmigration. In Ceara, the growth rate is 2.9%. The degree of urbani-zation in the project area is below the national average of 61.4% (46% inBahia, 45% in Ceara and 61% in Pernambuco) 1/. Of the three states, onlyPernambuco and Bahia can be expected to approximate the national degree ofurbanization in the near future, as the economic activity in Ceara is stillcentered in rural areas. Urban population in the project states is growing atan average 3.7% p.a. Annual population growth rates in the capital cities areestimated at 4.9% for Bahia, 4.4% for Pernambuco and 5.8% for Ceara, which arein excess of the overall urban growth rates for each state.

39. Service levels for urban water supply are below the national averageof 75% of the urban population as indicated in the following table:

Water Supply Service Levels Bahia Ceara Pernambuco

In capital cities, as a percentageof capital cities population 73 34 71

In state, as a percentageof state's urban population 63 30 56

Although service levels are better in Bahia and Pernambuco than in Ceara,they are all quite inadequate when compared with those for the rest of the

1/ While the generally accepted definition of urban population includespeople living in cities of at least 20,000 inhabitants, the Braziliandefinition also includes people living in communities of smaller sizethat are considered urban on the basis of their administrative status.

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country and with PLANASA's target of 80% of the urban population in 80% of theurban communities. The inadequacy of service is very serious in the capitalcities where a large part of the population, mostly the poor, remain unservedor served on a very restricted basis. Rationing, low pressures, and poorwater distribution are prevalent in the capital cities of the three projectstates, leading to the use of very often heavily contaminated individually dugwells. Also, in these states with relatively large rural populations, theoverall state service levels are very low, compared to the estimated nationalservice level of 46% of the total population.

40. At end 1977, sewerage service levels in urban areas were estimatedat 6% for Bahia, 8% for Pernambuco and 5% for Ceara in comparison with thenational average of 35%. Since most of the sewerage systems are in thecapital cities the situation in secondary urban centers is even more serious,with Bahia and Ceara not having any sewerage systems outside their capitalcities. Because of the unequal, although necessary, expansion in water supplyand sewerage services, water consumption has sharply increased without acorresponding increase in the capacity of waste water disposal systems. As aresult, the population has had to rely basically on septic tanks and latrinesor discharge wastes in the storm drain system. In very poor areas, wherepeople cannot even afford these facilities, sewage is disposed of on thestreets or on sidewalk drainage ditches seriously endangering public health.Under the proposed project, the state water companies would make a firstattempt to correct this situation in the main urban centers of the projectstates.

PART IV - THE PROJECT

Project Origin

41. The Brazilian Government has been considering the possibility ofBank participation in the implementation of PLANASA in the Northeast Regionsince October 1975. The Bank assisted Banco Nacional da Habitacao (BNH) toidentify and subsequently prepare a project focussed on the states of Bahia,Pernambuco and Ceara because these states had the strongest executing capa-cities as well as the largest investment requirements for 1979-1982. Areport entitled "Staff Appraisal Report Northeast Water Supply and SewerageProject" (No. 2183b-BR dated January 17, 1979) is being circulated separatelyto the Executive Directors. Negotiations with the Borrower, Guarantor, statewater companies and related local governments took place from November 6 toJanuary 4, 1979. BNH was represented by Mr. Fabio Alvares. A supplementalproject data sheet, including a timetable of key events and a summary ofspecial conditions, is presented in Annex III.

Project Objectives and Description

42. The proposed project would support, through the provision of basicservices, the Government actions aimed at promoting sustained economic growthand employment in the Northeast Region; improve the living conditions of

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water companies in making institutional improvements in the areas of planning,operations, and finance and accounting, through technical assistance under theSATECIA program; ensure the continuation of their training programs; improvethe financial position of the companies through the establishment of adequatetariff levels and rationalization of operating costs; and contribute to thestrengthening of BNH's capability for project appraisal and upervision.

43. The project consists of all major subprojects to be started and

completed in the States of Bahia, Pernambuco and Ceara in the period 1979-1982.These subprojects represent about 68% of the investment program of the threebeneficiary state water companies. The proposed Bank loan would cover theforeign exchange component of contracts awarded for elegible subprojectsbetween the date of the proposed loan and June 30, 1981. Disbursement of theloan is estimated to be completed by June 30, 1983. The project wouldinclude: (a) water production, treatment, storage, and distribution facilitiesfor the capital cities of Bahia and Ceara; (b) water distribution networks inthe capital city of Pernambuco; (c) provision of about 125,000 new houseconnections in the three capital cities; (d) execution of metering and leakdetection and control programs in the capital cities and major towns;(e) sewage collection and disposal facilities, and house connections in thecapital cities and in about 20 major urban centers of the states; (f) expansionand improvement of water supply systems in approximately 35 medium-sized cities(of more than 5,000 inhabitants); (g) construction or expansion of watersystems in about 285 small villages, most of them rural; (h) tariff studiesfor the three water companies (see para. 50); (i) consulting services providedthrough SATECIA in the area of project management, finance and accounting,systems operations and inventory control (see para. 48); and (j) engineeringservices for detailed design and construction supervision.

The Borrower

44. The Borrower (BNH), was established in 1964 as a financially andadministratively autonomous institution. Since 1967, it has been under theoverall responsibility of the Ministry of the Interior. BNH's main activitiesare to finance, through intermediary institutions, low- and medium-incomehousing, urban development and sanitation programs. A Board of Directors andan Executive Committee administer the institution. BNH has eleven regionalagencies to coordinate its activities at the state level. BNH's principalsource of funds is the deposit of the Fundo de Garantia de Tempo de Servico -FGTS, a national retirement fund. Its other sources of funds include interestand principal repayments on outstanding loans as well as interest and monetarycorrection on funds invested in national treasury bonds. Net receipts of theFGTS increased from US$424.4 million equivalent in 1971 to US$1.5 billionequivalent in 1977 and total funds available for investment increased fromUS$0.7 billion equivalent to US$2.6 billion equivalent in the same period.BNH's financial position is sound and its resources are expected to be suffi-cient to carry out its planned investment program.

45. Within BNH, the Superintendencia do Sistema Financiero do Saneamento -

S/SFS (Sanitation Financial System Department), is responsible for the PLANASA

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program. The administrative capacity of S/SFS was severely taxed as thePLANASA program moved into full operation. In early 1976, BNH decentralized

the administration of the program by giving more responsibility to the regionaloffices. During the execution of previous projects the Bank has maintained acontinuous dialogue with BNH on the evolution of PLANASA. During the executionof the proposed project, the Bank would continue exchanging views with BNH onthe management and regulations of the PLANASA program (Section 4.02 of thedraft Loan Agreement). To provide the S/SFS with adequate support, BNH hascontracted a technical agent for each state to supervise and monitor thedesign and construction of projects. In the Northeast, the technical agent is

the Superintendencia de Desenvolvimento do Nordeste - SUDENE. SUDENE hasqualified staff and should be able to perform its role appropriately in connec-tion with the proposed project.

46. Under the project, BNH would make subloans equivalent to US$151.5million for subprojects in the three project states. Part of these loanswould be financed with the proposed US$100 million Bank loan. BNH would makeits subloans to the State Banks of Bahia, Pernambuco and Ceara, the financialagents for PLANASA in their respective states. In the case of large- andmedium-sized communities, the State Banks would onlend BNH's funds togetherwith funds in equal amounts from the States' water supply and sewerage revolving

funds (FAE) to the beneficiaries, the state water companies. BNH's subloansto the State Banks would be at 3% to 4% p.a. with monetary correction andwould have amortization periods ranging from 19 to 21 years including graceperiods from 1 to 3 years. The State Banks would onlend BNH's subloans to thewater companies at 4% to 5%. Otherwise the same conditions would apply. Inaddition, BNH would charge to the water companies various one-time fees andlevies equal to 2% of each subloan and a commitment charge equal to 1% of

undisbursed balances. In the case of small communities, the same terms andconditions would apply. However, as explained in para. 30 above, therespective states would be responsible for repayments to BNH. BNH's relativelylong amortization periods reflect the long useful life of the subprojectsto be financed. As the interest rate on the Bank loan would be higher thanthe onlending rate and the maturity of BNH's loans would exceed the maturityof the Bank loan, BNH's debt maturity of the Bank loan and BNH's debt service

payments to the Bank would exceed payments to BNH by the state water companies.BNH's financial position is expected to be strong enough to absorb thiswithout difficulty.

The Beneficiaries

47. The three beneficiaries and executing agencies for the project wouldbe Empresa Bahiana de Aguas e Saneamento S.A. (EMBASA), Companhia Pernambucanade Saneamento (COMPESA) and Companhia de Agua e Esgoto do Ceara (CAGECE). The

three state water companies were formed in 1974 through mergers of the waterauthorities in the capital cities with a large number of such authorities insmaller municipalities. They are owned by their respective state governments.Each has a six-member board of directors appointed by the state governor for aperiod of four years. The president is the chief executive officer and thedirectors are the working heads of the functional departments. Organizational

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structures and staffing have evolved with the assistance of SATECIA (the jointBNH-PAHO technical assistance program 1/) and consists of departments forplanning, construction, operations, administration, and finance and accounting.These organizational structures are considered appropriate for the activitiesundertaken.

48. Because a large number of separate operations were merged into anew organization, the three water companies have had some teething problems.The difficulties of consolidation, which are being overcome, have been com-pounded by the large geographic areas covered, lack of accurate fixed assetrecords, and frequent changes in high level management. While all threecompanies have long-range capital budgets, these have been unrealisticallyhigh in relation to their capability to prepare and execute projects andavailability of funds. Up to now, the companies have not been particularlyconcerned with either long-range or short-range cash management as BNH andFAE have fully financed their investment programs. Under the project, thecompanies would put into effect a revised system of accounts by December 31,1980. This system would allow them to prepare adequate cash flow statementsand financial projections. Also they would strengthen the internal auditoffice under the direction of experienced management. Furthermore, under thetechnical assistance component of the project, BNH would cause SATECIA tocontinue to strengthen the technical and financial management of the threecompanies (Sections 5.08, 5.09 and Schedule 1, Part D of the draft LoanAgreement).

49. The three water companies share the common problem of low ratesof return on assets and insufficient internal cash generation primarilybecause of inadequate tariff levels. In 1978 EMBASA and COMPESA had a verymodest net income while CAGECE incurred a loss. All three companies arefinding it difficult to meet their debt service payments. The three companiesand their respective state governments have recognized the need to improvethe companies'financial position. Under the project, they would requestthe Government for approval to set or increase their rates to the satisfac-tion of the Bank over the 1979-1982 period. The (Government, BNI and thecompanies have informed the Bank that they would take all steps necessaryfor EMBASA to earn a rate of return on investment not lower than 6% p.a. forthe years 1979 through 1982; for CAGECE, not lower than 1% in 1979 and 1980,3% in 1981, and 5% in 1982; and for COMPESA, not lower than 5% p.a. for theyears 1979 through 1982. For 1983 and thereafter, EMBASA and COMPESA wouldearn a rate of return on investment of at least 7% p.a. and CAGECE 6% p.a.The Government and BNH would enable the companies to comply with their under-takings. A change in the legal framework affecting the carrying on of thebusiness, or the setting or adjustment of the rates of the companies would bean event of default under the Loan Agreement (Sections 4.07, 5.07 and 7.01 ofthe Loan Agreement, Section 3.02 of the Guarantee Agreement and draft supple-mental letter). The rates of return on investment proposed are satisfactoryin view of the income levels of the population served and cash flow require-ments of the companies. In addition, the three companies would develop

1/ PAHO: Pan-American Health Organization.

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recovery programs encompassing the following actions to improve their financialsituation: (a) increasing the number of metered connections, particularly inhigh income and high consumption areas; (b) increasing water supply by upgradingthe capacity of existing treatment plants; (c) increasing consumer connectionsto existing water distribution systems and sewerage networks; (d) improvingcontrol of operating expenses; and (e) reducing water losses. The threecompanies would set forth the specific objectives of these programs byOctober 31, 1979 (Section 5.11 of the draft Loan Agreement). Accomplishmentof the planned financial performance would require COMPESA to maintain tariffsin real terms and annual tariff increases in real terms of about 21% forEMBASA about 71% for CAGECE. The states would take all necessary actions toallow the water companies to improve their financial performance (Section 6.02of the draft Loan Agreement).

50. Up to now, the three beneficiary state water companies have carriedout across the board tariff increases without giving due regard to the morecomplicated issue of tariff structures. Under the project, by October 31, 1979,the state water companies would carry out studies in the fields of meteringpolicies and water supply and sewerage tariffs, in accordance with terms ofreference and with the assistance of consultants satisfactory to the Bank.These studies are expected to make recommendations regarding the improvementof tariff structures and metering policies taking into account the incomedistribution of consumers, the cost of providing services and the need toprovide for adequate water conservation incentives. The state water companieswould put into effect the recommendations of these studies (Section 5.10 ofthe draft Loan Agreement).

Cost Estimate and Financing Plan

51. The total cost of the project is estimated at US$303 millionequivalent, with a foreign exchange component of US$100 million equivalent.The cost estimate includes, on average, 11% of base project cost for physicalcontingencies, given the relative advanced status of engineering studies. Thecost of the project has been estimated in the indexed monetary unit that BNHuses for all its transactions. Over the years, the relative value of thisunit has remained approximately constant with respect to the US dollar. Thus,price contingencies have been calculated in US dollar terms and reflectworldwide inflation projections. They amount to 7.0% p.a. The estimated costof the project includes consultancy services for detailed engineering, projectsupervision, and technical assistance totalling US$17.7 million at US$6,000equivalent per man-month.

52. The financial plan for the project would consist of subloans fromBNH totalling US$151.5 million equivalent. The proposed Bank loan wouldpartly finance these subloans. The balance of US$151.5 million would beprovided from a revolving fund set up by the states for this purpose (FAE).The increase in the additional working capital requirements of the watercompanies, amounting to US$15.8 million, consequent upon the implementation of

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the project, would be met by internally generated funds by these companies.The Federal and State Governments would provide any additional financing thatmay be needed for the project (Sections 2.02 of the draft Guarantee Agreementand 6.01 of the draft Loan Agreement).

Project Execution

53. EMBASA, COMPESA and CAGECE would execute the project during theperiod 1979-1982. BNH would be responsible for the project coordination.A construction schedule satisfactory to the Bank has been discussed with thewater companies and BNH for subprojects in the capital cities. Schedules forsubprojects in other towns would be prepared annually during project execution.The beneficiary water companies would retain consultants for the design ofindividual subprojects. SUDENE would carry out the technical review of sub-projects and BNH the financial and economic analysis. SUDENE and BNH wouldsupervise the execution of the project.

54. Subprojects for the three capital cities, representing about 61%of total investment, have been reviewed in detail during appraisal and foundtechnically sound and economically justified. The Bank would review allsubprojects costing US$2.0 million equivalent or more. Subprojects costingless than US$2.0 million would be approved by BNH subject to ex-post-factoreview by the Bank, on a selective basis. The delegation of approval authorityto BNH for subprojects under US$2.0 million is consistent with itsproject evaluation capabilities (Section 2.02(b) of the draft Loan Agreement).

Selection Criteria

55. Each subproject would have to meet the following criteria: (a) itwould have to represent the least-cost solution for providing the service toa given community; (b) it would have to be designed in accordance with soundengineering practices. In addition, in the case of small communities of lessthan 5,000 inhabitants, it would have to comply with BNH's standards for smallcommunities which are acceptable to the Bank; (c) in the case of small com-munities, the subproject per capita cost would not exceed US$150 equivalentand it would generate enough revenues to cover its operating and maintenancecosts; (d) in the case of medium-sized communities of 5,000 to 50,000 inhabi-tants it would have a positive internal financial rate of return. If not, itwould be redesigned to lower acceptable standards. If, after redesign, thesubproject still does not meet this financial criterion it would be eligiblefor Bank financing only if acceptable economic and social justifications arepresented to the Bank and if it generates enough revenues to cover its oper-ation and maintenance costs; (e) in the case of communities with more than50,000 inhabitants each subproject would have an internal financial rate ofreturn of not less than 5% (Schedule 4 to the draft Loan Agreement).

Procurement and Disbursements

56. All contracts with estimated values exceeding US$400,000 equivalentfor goods and US$1,200,000 for civil works would be procured after international

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competitive bidding in accordance with the Bank's guidelines. Braziliansuppliers of equipment and materials would receive a margin of preference of15%, or the applicable import duty, whichever is less. All other contracts,of smaller size, would be procured under locally advertised competitivebidding, under procedures satisfactory to the Bank. These procedures wouldallow foreign suppliers and contractors to bid. Due to the large number ofcontracts expected, Bank staff would limit their prior review to contractsover US$2.0 million. For contracts reviewed ex post facto, if it were deter-mined that the bidding and awards had not been conducted in accordance withthe agreed procedures, the Bank would have the right to cancel an equivalentamount of the loan (Section 2.02(b) and (e) of the draft Loan Agreement).Since virtually all the equipment and materials for the project are manu-factured in Brazil and available at competitive prices, most supply contractsare expected to be won by local suppliers. The civil works contracts are alsoexpected to be won by local contractors.

57. Bank disbursements would consist of the reimbursement of 58% ofall BNH disbursements (or 29% in the case of small communities) on its subloansfor eligible subprojects, in accordance with statements of expenditures to besubmitted by BNH to the Bank. BNH subloans would be equivalent to 50% (or100% in the case of small communities) of the direct costs of each subproject.In addition, BNH subloans would also include an amount equal to 6.5% of thedirect cost of each subproject for administrative expenses. Thus Bank dis-bursements would finance 33% of the direct cost of each subproject which isequivalent to the estimated foreign exchange cost. The documentation insupport of the statement of expenditures would be retained by BNH and madeavailable for inspection during the course of project supervision. Bank dis-bursements would also cover 100% of the foreign cost of the technical assis-tance. The loan is expected to be fully disbursed by June 30, 1983 (Sections2.02, 2.03 and 2.04 of the draft Loan Agreement).

Project Benefits and Urban Poverty Impact

58. By 1982, some 2.3 million additional people would benefit fromwater supply and 5.3 million from improved services. The project wouldincrease the overall urban water supply service levels in the three projectstates from 52% in 1977 to about 67% of the urban population. Sewerageservice would be extended to about 1.2 million people, increasing servicelevels from 6.5% to 16% of the urban population. The impact of the projectwould increase as complementary works are completed. The direct impact of theproject on families below the urban poverty level was estimated by calculatingthe proportion of urban poor in the total incremental population that would beserved. In water supply, this rate would be 61%, increasing the proportion ofurban poor served from 53% in 1977 to 73% by 1985. It is expected that insubsequent years most of the remaining portion of the urban poor would beserved. Since the limited information available suggests that the proportionof low income population is higher in the rural areas than in the capitalcities, the impact of investments on poverty outside the capitals (about 40%of total project cost) is likely to be more significant.

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59. Due to present low coverage of sewerage service, the investmentsprogrammed under this project would initially cover commercial and highrisehigh-density residential areas. The proportion of urban poor in these areasis lower than in the areas to be served with water. The percentage of peoplebelow the relative urban poverty level to benefit from new sewage connectionswould be as follows: Salvador: 35%; Recife: 37%; and Fortaleza: 39%. Thedistribution of house connections among the different income groups was notavailable at the time of appraisal and consequently only rough estimates ofthe incremental urban poor to be served are possible. However, it is con-sidered that basic sanitation services for the urban poor are and for someyears to come will continue to be inadequate.

60. The recently approved tariff laws for the sector (para. 33) estab-lishes that charges for water supply for low-income consumers should notexceed 5% of the monthly minimum wage and the combined charges for watersupply and sewerage should not exceed 7%. Current monthly charges for thoseconsumers are within the established limits. However, since between 1979 and1982 the three state water companies would maintain or increase tariffs inreal terms, charges may have to be made more progressive if revenue objectivesare to be met without exceeding the Government's guidelines for the low-incomepopulation. Since approximately-70% of the poor earn more than one time theminimum wage per family, it may be concluded that water would be provided tomost families at affordable prices. However, even 5% of one minimum wage maybe too large a sum for 30% of the poor and greater cross-subsidization thannow exists would have to be incorporated into the tariff structure to servethese persons. It is estimated that although 61% of the incremental populationserved with water would belong to the poverty group, only 28% of the incre-mental quantity of water produced would be consumed by these groups. Therefore,the possibilities of cross-subsidization between low-income and high-incomegroups are feasible with an appropriately designed tariff structure. A tariffstudy to be undertaken by the three water companies will include these con-siderations (para. 50).

Internal Rate of Return and Long-Run Marginal Cost

61. The combined internal financial rate of return for subprojects andtheir complementary works in the three capital cities is estimated at 10%;these subprojects, which would cost US$250.1 million, account for 61% oftotal project costs. Of these subprojects, the rates of return for Recife,Fortaleza, and Salvador are estimated at 13%, 12%, and 7% based on projectedtariff levels. These three subprojects account for 17%, 15%, and 29% oftotal project costs, respectively. Since subprojects outside capital citiesare numerous, and at various stages of preparation, their internal rateof return has not been calculated. The financial rate of return, which usesexpected revenues as a proxy for economic benefits, probably underestimatesthe economic return. Water sales to the urban poor (about 28% of totalincremental volume), while priced at a reduced tariff, represent in factsubstantial benefits to the urban poor. Improvements in public health, laborproductivity, infrastructure for economic development and institutionalcapabilities, are only partly reflected in most cases in revenues from tariffs,and provide evidence that economic and social benefits of the proposed projectexceed its financial benefits.

- 22 -

Project Risks

62. The proposed project involves the administrative risks associatedwith the carrying out of complex and large investment programs by the statewater companies. Furthermore, not all of the project components are yetfirmly identified, nor have all of them been subject to prior appraisal byBank staff. However, the project execution experience gained by the companieswhile carrying out PLANASA, and the subproject preparation and eligibilitycriteria developed, should ensure the soundness and the successful executionof the investments undertaken.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

63. The draft Loan Agreement between the Bank and Banco Nacional daHabitacao, the state water companies of Bahia, Pernambuco and Ceara and theirrespective state governments as well as the draft Guarantee Agreement betweenthe Federative Republic of Brazil and the Bank and the draft Report of theCommittee provided for in Article III Section 4(iii) of the Articles ofAgreement are being distributed to the Executive Directors separately.Special conditions of the project are listed in Section III of Annex III.

64. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATION

65. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamaraPresident

Attachments by I. P. M. CargillJanuary 17, 1979Washington, D.C.

-23- Page I

BRAZIL - SOCIAL INDICATORS DATA SHEET

BRAZIL REFERENCE GROUPS (ADJUSTED AVERAGES

LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)TOTAL 8512.0 SAME SAME NEXT HIGHERAGRICULrURAL 2066.0 HOST RECENT GEOGRAPHIC INCOME INCOME

1960 Lb 1970 Lb ESTIMATE /b REGION c GROUP ld GROUP le

GNP PER CAPITA (USS) 320.0 580.0 1390.0 1066.7 1796.4 2839.0

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 332.0 474.0 670.0 911.1 1525.0 2376.4

POPULATION AND VITAL STATISTICSTOTAL POPULATION, ItID-YEAR

(MILLIONS) 69.8 92.8 113.2URBAN POPULATION (PERCENT OF TOTAL) 44.5 55.7 61.4 57.9 52.2*

POPULATION DENSITYPER SQ. EM. 8.0 11.0 13.3 25.6 27.6 55.8PER SQ. RM. AGRICULTURAL LAND 44.0 49.0 55.0 77.6 116.4 83.6

POPULATION AGE STRUCTURE (PERCENT)0-14 YRS. 43.0 42.0 41.7 42.0 34.8 40.0

15-64 YRS. 54.0 55.0 55.1 52.2 56.0 55.365 YRS. AND ABOVE 3.0 3.0 3.2 3.7 5.7 3.8

POPULATION GROWTH RATE (PERCENT)TOTAL 3.0 3.0 2.8 2.7 1.6 2.9URBAN 5.5 5.0 4.4 4.3 3.4

CrRUDE BIRTH RATE (PER THOUSAND) 40.8 38.4 37.1 35.8 27.0 31.7CRUDE DEATH RATE (PER THOUSAND) 11.7 9.9 8.8 9.1 9.9 7.9GROSS REPRODUCTION RATE 2.6 2.6 2.5 2.6 1.9 1.6FAMILY PLANNING

ACCEPTORS, ANNUAL (THOUSANDS) .. 111.0 203.6USERS (PERCENT OF MARRIED WOMEN) .. 1.6 *- 15.1 19.3

FOOD AND NUTRITIONINDEX OP FOOD PRODUCTIONI

PER CAPITA (1970-100) 87.8 100.0 112.3 102.1 103.8 114.7

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 102.0 104.0 105.0 103.9 110.4 113.4PROTEINS (GRAMS PER DAY) 61.0 64.0 62.1 60.3 77.7 89.9

OF wEICH ANIMAL AND PULSE 38.0 39.0 33.6 26.7 22.2 48.0

CHILD (AGES 1-4) MORTALITY RATE .. .. .. 8.7 1.9

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 56.0 59.4 61.4 62.6 63.0 60.2INFANT MORTALITY RATE (PERTHOUSAND) 180.0 110.0 .. 56.9 38.2 22;1

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOTAL .. 56.3 71.7 60.7 67.7 83.0URBAN .. 77.7 83.2 78.0 83.5 100.0RURAL .. 29.0 52.9 34.9 41.5

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL .. 59.9 65.5 61.1 70.3 57.8URBAN .. 86.1 86.3 80.3 90.7 99.3RURAL .. 26.5 39.0 25.4 38.3

POPULATION PER PHYSIC7AN 2110.0 1910.0 1650.0 /f 1899.3 1310.8 976.9POPULATION PER NURSING PERSON .. 3220.0 2920.0 /f 1220.1 849.2 676.1POPULATION PER HOSPITAL BED

TOTAL 275.0 260.0 260.0 422.3 275.4 325.8URBAN .. .. .. 258.2 129.9 250.0RURAL .. .. .. 2281.6 965.9 770.0

ADMISSIONS PER HOSPITAL BED .. 18.0 .. 25.6 18.9 18.7

ROUSINGAVERAGE SIZE OP HOUSEHOLD

TOTAL 5.1 4.8 .. 5.2 3.9URBAN .. 4.6 ..RURAL .. 5.2 ..

AVERAGE NUNMER OF PERSONS PER ROOMTOTAL .. 1.1 1.1 /f 2.0 0.9URBAN .. 1.0 1.2 7T 2.1 0.8RURAL .. 1.2 1.2 If 2.7 1.0

ACCESS TO ELECTRICITY (PERCENTOF DWELLINGS)

TOTAL 38.7 47.6 55.1 51.2 59.2URBAN *- 75.6 77.9 77.3 78.0RURAL ., 8.4 1.2.5 12.8 12.5

-24-

Page 2

BRAZIL - SOCIAL INDICATORS DATA SHEET

BRAZIL REFERENCE GROUPS (ADJUSTED AVERAGES

/a- MOST RECENT ESTIMATE)

SAME SAME NEXT HIGHERMOST RECENT GEOGRAPHIC INCOME INCOME

1960 /b 1970 lb ESTIMATE /b REGION /c GROUP Ld GROUP /e

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 95.0 83.0 90.0 103.5 97.6 104.1FEMALE 93.0 83.0 90.0 102.9 87.4 120.3

SECONDARY: TOTAL 11.0 27.0 26.0 37.2 47.8 44.7FEMALE 10.0 27.0 20.0 37.9 42.6 46.0

VOCATIONAL (PERCENT OF SECONDARY) 19.0 17.0 47.0 14.7 22.7 18.7

PUPIL-TEACHER RATIOPRLMARY 33.0 28.0 22.0 32.8 25.4 30.6SEGONDARY 13.0 13.0 11.0 17.8 24.9 16.3

ADULT LITERACY RATE (PERCENT) 61.0 66.0 .. 74.9 96.3

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPULATION 7.0 25.0 35.0 26.9 32.3 53.4RADIO RECEIVERS PER THOUSAND

POPULATION 66.0 60.0 60.0 173.5 201.9 195.5TV RECEIVERS PER THOUSAND

POPULATION 18.0 66.0 83.0 69.4 97.7 108.4NEWSPAPER ("DAILY GENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION 54.0 37.0 39.0 72.8 70.9 108.0CINEKA ANNUAL ATTENDANCE PER CAPITA 5.0 1.9 .. 4.3 4.4

EMPLOYMENTTOTAL LABOR FORCE (THOUSANDS) 22700.0 29400.0 34100.0

FEKALE (PERCENT) 17.5 20.4 21.6 21.4 17.4 26.9AGRICULTURE (PERCENT) 52.0 40.4 37.8 37.8 38.4 25.7INDUSTRY (PERCENT) 14.8 18.3 ..

PARTICIPATION RATE (PERCENT)TOTAL 32.0 31.6 31.5 30.8 33.7 40.1MALE 52.7 50.3 49.5 47.2 50.8 55.8FEMALE 11.2 12.8 13.6 13.2 12.6 24.7

ECONOMIC DEPENDENCY RATIO 1.6 1.5 1.4 1.7 1.4 1.6

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5 PERCENT OF HOUSEHOLDS 27.7 /h 34.9 / .. 28.9 20.2HIGHEST 20 PERCENT OF HOUSEBOLDS 54.4 62.2 / .. 57.7 47.9LOWEST 20 PERCENT OF HOUSEHOLDS 3.5 h 3.2 y .. 3.2 3.2LOWEST 40 PERCENT OF HOUSEHOLDS 11.6 /h 10.0 /h .. 10.7 13.7

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. .. 251.9RURAL .. .. 150.0 200.6 157.9.

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN *- *- 465.0 403.1 448.8RURAL .. .. 332.0 258.0 313.1

ESTIMATED POPULATION BELOW POVERTYINCOME LEVEL (PERCENT)

URBAN .. .. 34.0 24.8 23.2RURAL .. .. 55.0 65.2 54.5

Not availableNot applicable.

NOTES

/a The adjusted group averages for each indicator ore population-weighted geometric means, excluding the extremevalues of the indicator and thq most populated country in each group. Coverage of countries aong theindicators depends on availability of data and is not uniform.

/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, betveen 1973 and 1977.

/c Latin America & Caribbean; /d Upper Middle Income (S1136-2500 per capita, 1976); /a High Income(over $2500 per capita, 1976); If 1972; LI Beginning 1973, duration of general education reducedfrom 7 to 4 years, therefore data my not be comparable to those of earlier years; /h Data referto economically active population.

September, 1978

-25-ANNEX I

DEFINITIONS OP SOCIAL INDICATORS Page 3

hSaz: The adjusted group average* for each iodicator are populetion-weighted gometric "ans, excluding the extrme values of the indicator and the mostpopulated country in each group. 'Coverage of countries mong the indicators depends on availability of date and is not unifom. Due to lack of data,group averages for Capital Surplus Oil Exporters and indicators of access to water and excrete disposal, housing, income distribution and poverty aresimple population-waighted geometric mes without the exclusion of extreme valus.

LAND AREA (thousand sq. b) Population per hospital bed - total, urban, snd rural - Population (tota1.7otal - Total surface area comprising land ares and inland waters, urban, end rural) divided by their respective number of hospital bedsAgricultural - Most recent estimate of agricultural area used tmporarily available in publ]ic and private general and specialized hospital and re-nr permanently for crops, postures, market and kitchen gardens or to habilitation centers. Hospitals are establishments permanently staffed bylie fallow. at least one physician. Establishments providing principally custodial

care are not included, Rural hospitals, however, include health and medi-GNP PER CAPITA (US$) - GNP per capita estimates at current mrket prices, cal ceters not permanently staffed by a physician (but by a nedical a-

calculated by same conversion method as World Bank Atlas (1975-77 basis); sistant, nurse, midwife, etc.) which offer in-patient accommodation and1960, 1970, and 1977 data. provide a limited range of medical facilities.

Admissions per hospital bed - Total number of admissions to or dischargesENERGY CONSUMPTION PER CAPITA - Annual consumption of comercial energy from hospitals divided by the number of beds.

(coal and lignite, petroleum, natural gas and hydro-, nuclear and geo-thermal electricity) in kilograms of coal equivalent per capita. HOUSING

Average size of household (persons per household) - total, urban, and rural-POPULATION AND VITAL STATISTICS A household consists of a group of individuals who share living quartersTotal population. mid-year (millions) - As of July 1; if not available, and their main mals. A boarder or lodger may or may not be included in

overage of two end-year estimates; 1960, 1970, and 1977 data, the household for statistical purposes. Statistical definitions of house-Urban population (percent of total) - Ratio of urban to total popula- hold vary.

tion; different definitions of urban areas may aftect comparability Average number of persons per room - total, urban, and rural - Average our-of data among countries, ber of persons per room in all, urban, and rural occupied conventional

Population density dwellings, respectively. Dwellings exclude non-permanent structures andPer q. kh. - Mid-year population per square kilometer (100 hectares) unoccupied parts.of total ares. Access to electricity (percent of dwellings) - total, urban, and rural -

Per sq. kh. alriculture land - Computed as above for agricultural land Conventional dwellings with electricity in living quarters as percentageonly. of total, urban, and rural dwellings respectively.

Populatino age structure (perc-nt) - Children (0-14 years), working-age(15-64 years), and retired (65 yearn and over) as percentages of mid- EDUCATIONyear population. Adjusted enrollment ratina

Population growth rate (percent) - total, and urban - Compound annual Primary school - total, and female - Total and female enrollment of all agesgrowth rates of total and urban mid-year populations for 1950-60, at the primary Level as percentages of respectively primary school-age1960-70, and 1970-75. populations; normally includes children aged 6-11 years but adjusted for

Crude birth rate (per thousand) - Annual live births per thousand of different lengths of primary education; for countries with universal edo-mid-year population; ten-year arithmetic ayerages ending in 1960 and cation enrollment ay eoceed 100 percent since some pupils are below or1970 and five-year average ending in 1975 for aost recent estimate, above the official school age.

Crude death rate (per thousand) - Annual deaths per thousand of mid- Secondary school - total, and female - Computed as above; necondary educa-year population; ten-year arithmetic averages ending in 1960 end 1970 tion requires at least four years of approved primary instr-ction; pro-and five-year average ending in 1975 for most recent estimate. vides general vocational, or teacher training instructions for pupils

Gross reproduction rate - Average number of daughters a woman will bear usually of 12 to 17 years of age; correspondenco courses are generallyin her normal reproductive period if she experiences present age- excluded.specific fertility rates; usually five-year averages ending in 1960, Vocational enrollment (percent of secondary) - Vocational institutions in-1970, and 1975. clde technical, industrial, or other programs which operate independently

Family planning - acceptors, annual (thoueands) - Annual number of or as departments of secondary institutions.acceptors of birth-control devices under auspices of national family Pupil-teacher ratio - primary, and secondary - Total students erolled inplanning program. primary and secondary levels divided by numbers of tescheru in the corre-

Family planning - users (percent of married women) - Percentage of sponding levels.married women of child-bearing age (15-44 year.) who use birth-control Adult literacy rate (percent) - Literate adults (able to read and rite) andevices to a11 married women in sane age group, a percentage of total adult population aged 15 years and over.

FOOD AND NUTRITION CONSJMPTIONinden of food production per capita (1970-100) - Indeo number of per Passenger cars (per thousand population) - Passenger cars comprise outer cars

capIta annual production of a11 food commodities, seating less than eight persons; eacludes ambulances, hearses and militaryPer capita supply of calories (percent of requirements) - Computed from vehicles.

energy equivalent of net food supplies available in country per capita Radio receivers (per thousand population) - All types of recefver- for radioper day. Available oupplien comprise domestic production, imports less broadcasts to general public per thousand of population; eocludes unlice-nedexportn, and changes in stock. Net supplies exclude animal feed, seeds, receivers in countries and in years when registration of radio sets wa inquontities used in food processing, and losses in distribution. Re- effect; data for recent years may not be comparable since mosc coot trionquire.ento were estimated by FAO based on physiological needs for nor- abolished licensLng.

al activity and health considering environmental temperature, body TV receivers (per thousand population) - TV receivers for broadcast to generaiweights, age and sex distributions of population, and allowing 10- per- public per tho-eand populatisn; exclude- unlicensed TV cec-iver- in coon-cent for waste at household level, tries and in yearn when registration of TV sets wan in eifect.

Per capita supply of protein.(grasd per doy) - Protein content of per Newspaper circolotion (per thousand popaulatio) - Shos tc at ergod circ-lo-capita net sapply of f..d per day. Net supply of food is defined as tion of "daily general interest newspaper", defined aso.p-riodic-l pbliC-

above. Requirements for a11 countries established by USDA provide for cation devoted primarily to recording general news It is considered too mininum allowance of 60 grams of total protein per day and 20 grsas be "daily" if it appears at leant foor tines a wek.of animal and pulse protein, of which 10 grams should be animal protein. Cinema annual attendance per capita per year - Bosed on the nuner i f ticketsThese standards are Iower than those of 75 grams of total protein and Sold during the year, inclading admissions to drive-in cinemas and rohblc23 grams of animal protein as an average for the world, proposed by units.FAO in the Third World Food Survey.

Per capita protein supply from animal and pulse - Protein supply of food EMPLOYMENTderived from animals and pulses in grams per day. Total labor force (thousands) - Economically active persons, including -r-ed

Child (ages 1-4) mortality rate (per thousand) - Annual deaths per thous- forces and unemployed but excluding housewives, stcdents, etc. Defic-and in age grasp 1-4 years, to children in this age group, tion in various countries are not comparable.

Pemale (percent) - Fesale labor force as perc--tage cf totol lhuab- f-r-HEALTHi Agriculture (percent) - Labor farce in farming, forectry, hunting and fishing

Life expectancy at birth (years) - Average number of years of life as percentage of total labor force.remaining at birth; usually five-year averages ending in 1960, 1970, lndustry (percent) - Labor force in ining, consruacton, manafactaring andand 1975. electricity, water and gas as percentage of totai labor force

Infant mortality rate (per thousand) - Annual deaths of infants under Participstion rate (percent) - total, male, and female - Total, nair, andone year of age per thousand live birhts. cexale labor force as percentages of their respe-tive poyalations

Access to safe water (psrcent of population) - total, urba, and rs 1 - These are 7Li's adjucted participation rates rrtlecoccg age-sexNumber of people (total, urban, and rural) with reasonable access to - troctore or che popsiatio.n and I0cc tisc cred.

safe water supply (iocludes treated surface waters or untreated but cv_epdency ratjc - Ratio of poptiai ode 1 ac 65 cd -c rooccnttaminated water su.h an that from protected boreholes, springs, the labor force in age poup of 15-6h year.-nd sanitary cell.) as percentages cf their respective populatc.too.In an urban area a publ-c fountric or standpost located not rore inclli (:ISTi BUiTlJNthan 200 neters from a house may be considered as being within rea- Percentage of private income (both in coIc and kind) received l} ricnest 5senable access of that house. In r-ral areas reasonable access would percent, richest 20 percent, poorest 20 percent. and pccrect 401 pe-centimply that the housewife or members of the housshold do not have to of household.spend a disproportionate part of the day in fetching the family'swater needs. POVERTY TARGET GROUPS

Access to excreta dis2os.I (perceot of population) - total. urban, and Estimated absolute poverty income level (DS$ per capita) -arban and ror, -rural - Nuhber of people (total, urban, and rural) nerved by e.creta Absolute poverty Income level is that ircome level beciw wcchch a inica

dinposal as percentages of their respective populations. Excreta nutritionally adequate diet pluu essential non-focd reqai--cocts is nodisposal nay include the collection and disposal, with cr without affordable.treat-ent, of human eacreta and waste-water by water-banns systemn Ertinoted -elative poverty incone level (i- er oopcco) - orcac rcralor the use of pit privies and similar installations. Relative poverty incone level is that income level less tho c-third

Pocplation per phyaician - Populatton divided by number of practicing per capita personal income of the country.physicians qualified fron a pedical school at university level. Etinated popuirtion below poverty income level (Percent) - urbio and rol -

'opalatioc per nursing persoc - Popolatio- divided by number of Percent cf p,,pulatios (urban and rural) vho are either -aicsolutt poor" crpracticing tale and female graduate torsos, practical nurses, and "relative po-r" whichever is greater.assistant nurses.er

Econcoic and Sociul Dats LiiccoucEcon-ic Analysis cod Projecticns Dep-tnces-

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ft~~~ ~~~ W - *' - -0 - -W~ 'Z 0AW < r ....... ,_ i>oo........

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-27- ANNEX I

Page s

BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE

(Mi 11 Irw US$)

A C T U A L PR OJECTED1974 1975 1976 1977 1978 1979 1980 1985 1990

A Summary of Balance of Payments

1. Exports (incl. NFS) 8,471 9,376 10,797 12,826 12,772 15,373 17,775 40,115 76,8922. Imports (incl. NFS) 14,678 14,308 14,440 13,847 14,194 15.749 16,987 35,166 73,0943. Resource Balance -6,207 -4,932 -3,643 -1,021 -1,422 - 376 788 4,949 3,7984. Net Factor Service Income - 916 -1,770 -2,339 -2,859 _3,440 -3,873 -4,374 -7,068 -10,1291. Net Interest Payments - 652 -1,498 -1.809 -2,103 -2,284 -2,412 -2,521 -3,538 -4,6042. Direct Investment Income - 248 - 235 - 380 - 455 - 493 - 542 - 590 -1,030 -1,7753. Other Factor Service Income - 16 - 37 - 150 - 301 - 663 - 919 -1,263 -2,500 -3,7505. Current Transfers (Net) 1 2 4 6 7 7 7 7 76. Balance on Current Account -7,122 -6,700 -5,978 -3,8V44 -4,855 -4,242 -3,579 -2,112 -6,324

7. Net Private Direct Investment 887 892 962 840 780 770 760 750 750Medium and Long Term Loansa. Tradi tional Sources-X

8. Disbursements 1,956 1,612 2,054 2,553 3,303 3,571 4,005 6,599 10,3289. ADortization t 739 - 992 -1,350 -1,701 -1,280 -1,218 -1,518 -3,818 -6,14610. Net Dlsbursements 1,217 620 703 852 2,023 2,353 2,487 2,781 4,182b. Financial Credits11. Disbursements 5,103 4,524 5,978 5,940 5,671 5,644 6,603 3,574 8,52312. Amorti zat i on -1,181 - 93 -1,664 -2,426 -3,526 -4,150 -5,008 -3,907 -4 ,94713. Net Disbursements 3,922 3,331 4,314 3,514 2,145 1,494 595 - 333 3,57614. Use of IMF Resources - 7 -15. Short-trm Capital and Gaepital 3.e.i. 138 788 -2,25f i - -16. Reserves (- increase)

1. Reserve Accumulation_/ 958 1,062 -2,255 -699 -93 -375 -263 -1,086 -2,1832. Dollar Valuation Adjustme,)t 185 176 -252 -16 _ - - -3. Changes in Reserve Level-/i 1,143 1,238 -2,507 -715 -93 -375 -263 -1,086 -2,18317. Foreign Exchange Reserves 5,272 4,034 6,541 7.296 7,349 7,724 7,987 11,894 20,160(End of Period)

B. Grant and Loan Commitments

1. Total MiLT Loans 7,179 7,005 9,482 9,637I1.. IBRD 242 426 498 4251.2. IDB 723 167 186 2701.3. Governments 518 512 1,251 1,1841.4. Suppliers 1,088 1.376 1,300 1.1001.5. Bonds 25 - 269 7181.6. Financial Credits 5,103 4,524 5,978 5,940

C. Memorandum Items

1. Grant Element of Total Commitments 2.5 2.5 2.5 2.82. Average Interest (Percent) 9.5 9.5 9.4 9.33. Average Maturity (Years) 9.0 9.9 8.3 8.9

a/ Includes Multilateral agencies, bilateral lenders, supplIers' credits and bond issues.bh IFS Line 79d.c/ IFS Line ld.

September 1, 1978

ANNEX I

-28- Page

DEBT AND CREDITWORTHINESS

Actual1974 1975 1976 1977

A. Medium and Long-Term Debt(Disbursed only)

1. Total Debt Outstanding (end of period) 17,166 21,171 25,985 32,0371. By type of Debt

1, Financial Credits 11,211 14,561 18,194 21,528

2. Traditional Lenders±' 5,955 6,610 7,791 10,5092. By type of Borrower

1. Public and Publicly Guaranteed 8,533 11,461 14,852 19,3092. Private 8,633 9,71u 11,133 L2,7a9

2. Net Debt Service 2,572 3,6°3 4,825 6,2301. Total Interest 1,370 1,863 2,091 2,4622. Net Interest 652 1,498 1,810 2,103

3. Public Debt Service 1,287 1,550 1,982 2,500

B. DIebt Burden

1. Net Debt Service Ratio b/ 30.4 39.3 44.7 48.62. Total Net Debt Service Ratio - 33.3 41.8 48.2 52.13. Public Debt Servicp Ratio 15.2 16.5 18.4 19.64. Liquidity Ratio - 23.0 33.3 43.0 39.25. Net Debt Service/GDP 2.6 3.0 3.6 4.06. Public Debt Service/GDP 5! 1.3 1.3 1.5 1.67. Total DOD/GDP e/ 17.0 17.2 19.2 20.5

C. Terms

1. Interest on Total DOD/Total DOD A! 10.9 10.9 9.9 9.52. Net Debt Service/Total DOD f/ 20.5 21.5 22.8 24.0

D. Dependency Ratios for MiLT Debt

1. Gross Disbursements/Imports (incl. NFS) 48.1 42.9 55.6 61.32. Net Transfer/Imports (incl. NFS) 25.7 14.6 20.3 13.83. Net Transfer/Gross Disbursements 53.4 34.0 36.4 22.4

E. Exposure

l. IBRD Disb./Gross Total Disb. 3.5 4.1 2.2 3152. IBRD DOD/Total DOD 4.9 5.2 5.0 4.83. IBRD Debt Service/Net Debt Service 3.0 2.5 2.4 2.9

F. External Debt (Disbursed Only) Outstanding December 31, 1977Amount Percent

1. IBRD i,540 4.82. Other Multilateral 815 2.53. Governments 2,939 9.24. Suppliers 3,773 11.85. Bonds 1,222 3.86. Financial Credits 21,528 67.27. Other 219 0.78. Total M&LT Debt 32,037 100.09. Total Public M&LT Debt 19,309 60.3

G. DebtLProfilJe

1. Net Debt Service 1978 4-95/Total DOD end of 1977 199.0

a/ Includes multilateral agencies, bilateral lenders, suppliers' credits, bond issues and M&LT loans n.e.i.b/ Net Debt Service as percent of exports of goods and NFS.c/ Including Direct Investment Income in debt service.d/ Net Debt Service as a percent of exports of goods and NFS plus exchange (at beginning of year)

in excess of 3 months imports.e/ In constant 1975 prices.f/ As percent of DOD at beginning of year.

Note: Debt service ratios have been calculated on the basis of net ratherthan gross interest payments in order to take into account interestearned upon 3razil's international reserves.

September 1, 1978

- 29 -

ANNEX IIPage 1

THE STATUS OF BANK GROUP OPERATIONS IN BRAZIL

A. SUMMARY STATEMENT OF LOANS(As of December 31, 1978)

Amount lessLoan # Year Borrower Purpose Cancellations Undisbursed

(US$ Million)

Forty-three loans fully disbursed 1,360.5

756 1971 Brazil Ports 45.0 12.2828 1972 Companhia Siderurgica Industry 64.5 1.0

Paulista829 1972 Centrais Eletricas de Minas Power 60.0 .1

Gerais - Sao Simao853 1972 Brazil Land Settlement 6.7 3.2923 1973 Furnas Centrais Eletricas - Power 125.0 38.7

Itumbiara924 1973 Brazil Agro-Industry 54.0 31.21008 1974 Cia. Ridro Eletrica do Sao Power 81.0 33.7

Francisco-Paulo Afonso IV1009 1974 Banco Nacional de Habitaco Water Supply 36.0 4.01067 1974 Brazil Education 23.5 19.21074 1975 Rede Ferroviaria Federal Railways 175.0 33.31075 1975 Brazil Roads 110.0 42.31151 1975 Companhia Siderurgica Nacional Industry 95.0 82.41152 1975 Companhia Siderurgica Paulista Industry 60.0 55.01153 1975 Brazil Agriculture 23.0 16.81171 1975 FEPASA - Ferrovia Paulista Railways 75.0 40.51195 1976 Brazil Rural Development 12.0 11.21206 1976 Brazil Development Bank 85.0 72.31207 1976 Brazil Feeder Roads 55.0 53.01249 1976 Brazil Agriculture 40.0 37.01256 1976 Petrobras Fertilizantes Fertilizer 50.0 28.61257 1976 Companhia Paranaense de Power 52.0 37.3

Energia Eletrica - COPEL

- 30 -

ANNEX IIPage 2

A. SUMMARY STATEMENT OF LOANS (Continued)(As of December 31, 1978)

Amount lessLoan # Year Borrower Purpose Cancellations Undisbursed

(US$ Million)

1300 1976 Eletrobras Power 50.0 41.01302 1976 Brazil Nutrition 19.0 18.21309 1976 Banco Nacional de Habitacao Water Supply 40.0 32.21317 1976 Brazil Agro-Industry 83.0 83.01343 1977 ELETROSUL Power 82.0 52.21362 1977 State of Minas Gerais Rural Development 42.0 32.71406 1977 Petrobras Fertilizantes Fertilizer 64.0 60.41411 1977 Fertilizantes Vale do Fertilizer 82.0 59.2

Rio Grande S.A.-VALEFERTIL1452 1977 Brazil Education 32.0 31.31488 1977 Brazil Rural Development 17.0 16.61525 1978 Banco Nacional de Habitacao Sewerage 110.0 110.01537 1978 Brazil Rural Development 24.0 24.01538 1978 ELETROBRAS Power 130.0 130.01557 1978 Brazil Roads 114.0 114.01562 1978 COPESUL Petrochemicals 85.0 83.31563 1978 Brazil Urban Transport 88.0 86.71568 1978 Brazil Agric. Extension 100.0 100.01589 1978 Brazil Rural Development 37.0 37.0

Total 3,887.1 /

Of which has been repaid to the Bank 520.7

Total now outstanding 3,366.4

Amount sold 45.8of which has been repaid 35.3 10.5

Total now held by Bank 3.355.9-

Total undisbursed 1.764.8

/1 No IDA credits have been made to Brazil.

- 31 -

ANIEX IIPage 3

B. STATEMNT OF IFC INVESTMENTS (as of December 31, 1978)

Fiscal Year Obligor Type of Business Amount in US$ millionLoans Equity Total

1957 Siemens do Brasil Cia. de Eletricidade Electrical Equipment 2.00 - 2.00

1958 Olinkraft, S.A. Celulose e Papel Pulp and Paper 1.20 - 1.20

1958 D.L.R. Plasticos do Brasil, S.A. Automotive Parts 0.45 - 0.45

1958 Willys-Overland do Brasil, S.A.Industria e ComIercio Motor Vehicles 2.45 - 2.45

1959 Companhia Mineira de Cimento Portland, S.A. Cement 1.20 - 1.20

1959 Champion Celulose, S.A. Pulp 4.00 - 4.00

196611968/1972 Acos Villares, S.A. Steel 8.00 1.93 9.93

1966/1969 Papel e Celulose Catarinense, S.A. Pulp and Paper 3.78 3.41 7.19

1967/1972 Ultrafertil, S.A. - Industria e Comerciode Fertilizantes Fertilizers 8.22 3.03 11.25

1969 Petroquimica Uniao, S.A. Petrochemicals 5.50 2.88 8.38

1970 Poliolefinas, S.A. Industria e Comercio Petrochemicals 5.50 2.88 8.38

1971 Oxiteno, S.A. Industria e Comercio Petrochemicals 4.60 1.44 6.04

1971 Rio Grande - Companhia de Celulose do Sul Pulp 4.90 - 4.90

1972/1975 Companhia de Cimento Nacional de Minas Cement 29.14 3.20 32.34

1973/1974/1977 Companhia Siderurgica da Guanabara - COSIGUA Steel 76.96 7.50 84.46

1973 Capital Market Development Fund - FUMCAP Capital MarketUevelopment 5.00 - 5.00

1973/1978 Empresa de Desenvolvimento de Recursos Nickel Mining andMinerais - CODEMIN, S.A. Refining 85.00 8.34 93.34

1974 Industrias Villares, S.A. Elevators and Indus-trial Equipment 6.00 - 6.00

1974 Fabrica de Tecidos Tatuape, S.A. Textiles 31.00 - 31.00

1975 Capuava Carbonos Industrias Ltd. Carbon Black 6.18 1.08 7.26

1975 Oxiteno Nordeste, S.A. Petrochemicals 10.00 - 10.00

1976 Santista Industria - Textil do Nordeste, S.A. Textiles 6.45 1.00 7.45

1976 Tecanor S.A. - Textil Catarinense do Nordeste Textiles 6.00 - 6.00

1977 FMB S.A. Productos Metalurgicos Iron and AluminumCastings 20.00 - 20.00

1977 Mineracao Rio do Norte S.A. Mining 15.00 - 15.00

1978 Cimetal Siderurgia S.A. Iron and Steel 7.0 3.0 10.0

Total Gross Commitments 355.53 39.69 395.22

Less Cancellations, Terminations, Repayments and Sales 259.70 8.51 268.21

Total Commitments Now Held by IFC 95.83 31.18 127.01

Total Undisbursed 10.38 6.94 17.32

-32-

ANNEX IIPage 4

C. PROJECTS IN EXECUTION I/

There are now 40 effective Bank loans under disbursement:

Loan No.

755 Education Project: US$8.4 million loan of June 21, 1971; EffectiveDate: October 28, 1971; Closing Date: June 30, 1978. The projectis substantially completed. Final project costs are US$25.2 millionwith a cost overrun of US$4.2 million (20%) being met by the Borrower.Final disbursements of the Bank loan are underway.

756 Santos Port Project: US$45 million loan of June 21, 1971; EffectiveDate: October 29, 1971; Closing Date: June 30, 1979. After longdelays, project execution is proceeding satisfactorily. Constructionof the railway access Paratinga-Pereque by FEPASA is completed. Theinability of RFFSA to pay its share of the costs for the left bankrail access was overcome by PORTOBRAS which obtained a loan fromBanco do Brasil for this purpose. Because of insufficient increasesin tariffs to compensate for inflation, Santos port is experiencingfinancial difficulties.

828 COSIPA Steel Expansion Project, Stage II: US$64.5 million loanof June 14, 1972; Effective Date: October 5, 1972: ClosingDate: June 15, 1979. The Stage II project will be substantiallycomplete by December 1978 at a total project cost of US$970 million.This is thirty months behind the appraisal schedule and at a cost ofUS$593 million (157%) higher than anticipated at the time of appraisal.However, the project is still justified. Production reached 1.54million tons of raw steel equivalent in 1977. Production reachedthe project's design capacity of 190,000 tons of raw steel per month(the annual equivalent of 2.3 million tons) during one peak month inmid-1978.

829 Sao Simao Hydroelectric Project: US$60 million loan of June 14,1972; Effective Date: September 20. 1972; Closing Date:September 30, 1979. Construction of the project is proceedingaccording to schedule, and is expected to be completed by March of1979. An anticipated 50% cost overrun, which does not affect theeconomic justification of the project, is being covered by local andforeign borrowing. The first four units of the power plant werecommissioned in June of 1978.

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report any prob-lems which are being encountered, and the action being taken to remedythem. They should be read in this sense, and with the understandingthat they do not purport to present a balanced evaluation of strengthsand weaknesses in project execution.

-33-

ANNEX IIPage 5

Loan No.

853 Alto Turi Land Settlement Project: US$6.7 million loan of July 24,1972; Effective Date: February 15, 1973; Closing Date: June 30, 1980.

The settlement agency, COLONE, has prepared revised farm development

plans whose credit component, to be financed by public financial

institutions, will be significantly higher than originally estimated,although still low in comparison to other settlement projects.Administrative delays in the release of public funds for farm

credit, road construction and COLONE working capital requirementsand difficulties in recruiting project staff delayed the startof project execution. COLONE continues to be hampered by lack of

assured financing, and this problem is compounded by cost overruns

presently amounting to about 240%.

923 Itumbiara Hydroelectric Project: US$125 million loan of August 1,1973; Effective Date: October 30, 1973; Closing Date: December 31,1982. Construction of the earth-fill dam was delayed by about

nine months due to very heavy rains. However, construction of theconcrete dam and power house is ahead of schedule. FURNAS expects

to complete the power plant in December 1981, about four months

behind schedule. The present cost estimate is about 88% over the

appraisal cost estimate, 13% of which is due to the need for

increased physical quantities due to geological problems. The rest

of the increase is due to a substantial increase in the size of the

transmission works and to an increase in the cost of civil works.

However, the project remains economically justified.

924 Agro-Industries Credit Project: US$54 million loan of August 1,

1973; Effective Date: March 11, 1974; Closing Date: December 31,1978. Disbursements for sub-loans totalling US$14.7 million were

made during 1975-76 under procedures which were not in accordancewith the Loan Agreement. These funds have now been prepaid by

the Government, reducing the effective loan amount to US$39.3

million. Commitments under this loan are almost at a standstill as

a result of competing credit lines at subsidized rates and a generalslow-down in industrial investments. However, disbursements are

expected to improve in 1979, as the Government now plans to restrictthe availability of subsidized credit at the end of 1978. The

Government has indicated it will request a postponement of the

Closing Date.

1008 Paulo Afonso IV Hydroelectric Power Project: US$81 million loan of

June 17, 1974; Effective Date: April 15, 1975; Closing Date:December 31, 1978. Resettlement of the 9,700 families displaced by

the Sobradinho reservoir has been satisfactorily completed, and new

towns and villages to house the displaced population have been con-structed. The construction of the underground power station and

Sobradinho Dam is proceeding on schedule. Construction of thetransmission lines and sub-stations is about 12 months behind

schedule. A postponement of the Closing Date will be required.

-34-

ANNEX IIPage 6

Loan No.

1009 Minas Gerais Water Supply Project: US$36 million loan of June 17,1974; Effective Date: January 9, 1975; Closing Date: August 15,1979. Difficulties in subproject preparation, which are now resolved,caused disbursements to fall behind schedule. The loan is now fullycommitted to 41 subprojects of which 10 are under construction and31 completed. The 10 subprojects under construction are expected tobe completed in early 1979.

1067 Second Education Project: US$23.5 million loan of December 27,1974; Effective Date: April 17, 1975; Closing Date: December 31,1979. Project execution is one year behind schedule mainly becauseof delays by the government in providing counterpart financing.Project implementation units have been established in all eightproject states and these, together with the main project unit,PREMEN, are working well. The pre-investment studies in theNortheast, financed under the loan, have been completed and haveyielded useful information for future sector investment planning.

1074 Second Railway Project: US$175 million loan of January 17. 1975;Effective Date: June 17. 1975; Closing Date: June 30, 1979.Project execution is progressing satisfactorily and appropriatesteps are being taken to strengthen project management and control.Cost estimates for the Investment Plan, of which the project is apart, have increased substantially on several items. Therefore,the Plan has been revised and several items have been deleted orpostponed. This revision is not expected to affect significantlythe items included under Bank financing. Although the financialsituation of the borrower has improved, further improvement isnecessary for it to be able to effectively carry out its investmentprogram. The Government has decided to deregulate most freighttariffs and is expected beginning in 1979 to make payments to therailways to meet deficits on uneconomic services which it requiresto remain in operation. These actions should significantly improvethe borrower's financial position.

1075 Fifth Highway Project: US$110 million loan of January 17, 1975;Effective Date: May 15, 1975; Closing Date: December 31, 1979.Project execution is proceeding satisfactorily. Roadworks areprogressing well, and detailed engineering studies for road con-struction and road rehabilitation are now completed. Implementa-tion of the road maintenance component is making progress.

-35-

ANNEX IIPage 7

Loan No.

1151 CSN Steel Expansion Project - Stage III: US$95.0 million loan ofAugust 4, 1975; Effective Date: April 30, 1976; Closing Date:December 31, 1982. The latest cost estimate is US$3,530 million, anincrease of about 67% over the appraisal estimate due to a slowerthan expected start of project implementation, higher than expectedconstruction costs, difficulties in holding the scope of the projectto its essentials and some problems in the management of the expan-sion program. At the request of the Bank, a thorough review of theproject was made. Substantial changes were made resulting in bettermanagement and control of the project. The project is now progress-ing satisfactorily in line with the revised cost estimate andschedule, and remains economically justified.

1152 COSIPA Steel Expansion Project - Stage III: US$60.0 million loanof August 4, 1975; Effective Date: March 4, 1976; Closing Date:June 30, 1980. The project is about two years behind schedule. Thecold mill has been deleted from the project to reflect changes inforecast demand. The Bank has recently agreed to three additionalchanges in the project's scope as follows: construction of a con-veyor belt system to deliver iron ore to the raw materials yard(in lieu of a second rail line), an additional reheating furnace forthe hot strip mill, and changes in the port layout. COSIPA is pre-paring for Bank review a comprehensive report on Stage III includingrevised project capital cost, implementation time schedule andfinancial projections. Due to a shortfall in the government'sequity contributions, COSIPA is experiencing some financial dif-ficulties in spite of its improved operations.

1153 Lower Sao Francisco Polders Project: US$23.0 million loan ofAugust 4, 1975; Effective Date: November 25, 1975; Closing Date:December 31, 1979. CODEVASF made only limited progress on construc-tion for this project during 1977 and 1978 because of heavy rains inthe project area. Physical completion of the project will probablyextend to 1981, and postponement of the closing date will be required.Current cost estimates show an 80% increase over the appraisalestimate of US$56.5 million. These increases have resulted fromdesign changes, rapid increases in the costs of civil works andequipment, and in the cost of land expropriation. Modifications inthe design of emergency and irrigation works are being studied byCODEVASF and its consultants with a view to limiting further costincreases. Project implementation had encountered certain opposi-tion from the population of the project area, which disagreed withthe principles and procedures for land expropriation, settlement,future land tenure and the structure of the proposed cooperativesystem. The implementing agency CODEVASF has revised the socialstrategy to be followed under the project and is improving communi-cations and relations with the area population.

-36-

ANNEX IIPage 8

Loan No.

1171 Third Railway Project (FEPASA): US$75.0 million loan of November 12,1975; Effective Date: March 24, 1976; Closing Date: June 30, 1979.Project execution is proceeding satisfactorily. The TransportMaster Plan Study for Sao Paulo is presently under way and the firstresults are expected shortly. The technical assistance programwhich is intended to improve FEPASA's operations, marketing and dataprocessing systems is showing results. FEPASA's financial positionis not satisfactory. The Government recently deregulated mostfreight tariffs and is starting to make payments to the railways tomeet deficits on uneconomic services which it requires to remain inoperation. These actions should assist in improving FEPASA'sfinancial position. However, the need for a significant redimen-sioning of FEPASA's operation is becoming apparent.

1195 Rio Grande do Norte Rural Development Project: US$12.0 million loanof March 1,1976; Effective Date: July 30, 1976; Closing Date:June 30, 1981. Progress is being adversely affected by fundingdelays and marketing problems in the principal project crop, peren-nial cotton. Means of resolving the problem are under discussion.Implementation of the research and credit components of the projecthas been successful. Disbursements are behind the original appraisalschedule, partially because of funding delays.

1206 Development Banking Project: US$85.0 million loan of March 1, 1976;Effective Date: August 26, 1976; Closing Date: March 31, 1979.Project implementation is behind schedule. The major reasons are:(i) an initial delay in the commitment of funds under this projectbecause of differences between the relending terms of the agenciesconcerned and those required under the Loan Agreement. Thesedifferences are now partly resolved; (ii) a leveling off of theindustry's demand for investment financing; and (iii) resourceconstraints of the National Development Bank (BNDE). To acceleratecommitment of the loan, the Bank agreed to amend the Loan Agreementso as to finance the full foreign exchange cost of subprojects.However, commitment of the loan is progressing slowly because ofthe existence of competing credit lines at subsidized rates and ageneral slow-down in investments.

1207 Secondary and Feeder Roads Project: US$55.0 million loan ofMarch 1, 1976; Effective Date: July 13, 1976; Closing Date:December 31, 1981. Five sub-loans totalling US$101 million havebeen committed with a total Bank contribution of US$23.5 million.Prospects are good that the full amount of the loan will be com-mitted by the end of 1978 or in early 1979.

-37-

ANNEX IIPage 9

Loan No.

1249 Agricultural Research I Project: US$40.0 million loan of June 23,1976; Effective Date: September 21, 1976; Closing Date:December 31. 1981. The project is progressing well and in someareas ahead of schedule. Implementation of the civil works programis actively in progress at 10 of the 21 research stations includedin the project, and is expected to be accelerated during 1979.Facilities and research programs at seven experiment stations in thethree priority regions (North, Northeast and Central-West) areproceeding in accordance with project goals. Staffing is in advanceof project goals, but technical assistance being provided by consul-tants and the training program are somewhat behind schedule.

1256 Araucaria Fertilizer Project: US$52.0 million loan of May 19. 1976;Effective Date: July 20, 1976; Closing Date: December 31, 1980.

Project completion is expected to be delayed by about 15 months dueto delays in delivery of equipment to be provided by Braziliansuppliers. Total project cost has increased to US$321 million,which is US$49 million over the appraisal estimate of US$272 million.All the increase is in local currency and with the planned increasesin local loans and equity commitment the project has no financinggap.

1257 COPEL Power Distribution Prolect: US$52.0 million loan of May 19,1976; Effective Date: August 17, 1976; Closing Date: December 31,1979. Project execution is on schedule and about 60% completed.Disbursements are behind appraisal forecast, mainly because of delaysin procurement of major subtransmission equipment. The Borrower isupdating its 1976-79 distribution expansion program, and the adjustedprogram should bring disbursements closer to the original scheduleby year-end 1978.

1300 Northeast Power Distribution: US$50.0 million loan of August 27,1976; Effective Date: January 31, 1977; Closing Date: June 30,1980. Project implementation is about 12 months behind schedulebecause of initial difficulties in obtaining a Government definitionregarding participation by Brazilian suppliers. Procurement isnow progressing satisfactorily.

1302 Nutrition Research and Development: US$19.0 million loan ofOctober 1, 1976; Effective Date: December 30. 1976; ClosingDate: December 31, 1980.The INAN project unit is seriously under-staffed which is adverselyaffecting the progress of the project. The nutrition deliverysystem's field tests are proceeding reasonably well. Disbursementsunder the industrial credit components are behind schedule becauseof competitive programs at subsidized rates. Measures to deal withthese problems are under study.

-38-

ANNEX IIPage 10

Loan No.

1309 Second Minas Gerais Water Supply and Sewerage Project: US$40.0million loan of August 27, 1976; Effective Date: January 18, 1977;Closing Date: September 30, 1980. The loan is now fully committedto 65 subprojects in cities of less than 5,000 inhabitants, 38subprojects in cities of between 5,000 and 20,000 inhabitants andwater supply and sewerage subprojects in Greater Belo Horizonte.Execution of the project is progressing satisfactorily.

1317 Second Agro-Industries Credit Project: US$83.0 million loan ofSeptember 22, 1976; Effective Date: March 25, 1977; Closing Date:December 31, 1982. Because of commitment delays under the FirstAgro-Industries Credit Project, commitments for the second loanhave not started.

1343 ELETROSUL Transmission Project: US$82.0 million loan of February23, 1977; Effective Date: June 13, 1977; Closing Date: December31, 1981. The project is about 30% complete and about 60% of thecontracts for supply of equipment and materials to be financed underthe loan have been awarded; the remainder are expected to be awardedby mid-1979. With the exception of a relatively minor component,project execution is on schedule. The shortfall (25%) in loandisbursements, caused by delays in the procurement process, isexpected to be reduced to 10% by mid-1979 and eliminated by the endof that year.

1362 Minas Gerais Rural Development Project: US$42.0 million loan ofFebruary 23, 1977; Effective Date: June 29, 1977; Closing Date:December 31, 1981. Organization of this project is progressingsatisfactorily after initial delays. The credit component isexpected to gather momentum in the near future. Mainly as a resultof administrative difficulties, participation in this project bylandless producers is significantly lower than originally envisaged,but concerted efforts by the State Government and the participatingbanks have improved this situation recently. Both the health andeducation components have advanced significantly.

1406 Sergipe Fertilizer Project: US$64.0 million loan of April 29, 1977;Effective Date: August 31. 1977; Closing Date: November 30, 1981.Plant buildings and equipment foundations are under construction,but some delays have been experienced in procurement of importedequipment which may delay the project completion date by about ninemonths.

1411 VALEFERTIL Phosphate Fertilizer Project: US$82.0 million loan ofApril 29, 1977; Effective Date: July 29, 1977; Closing Date:May 31, 1980. The project has been progressing satisfactorilywithin the original budget estimate, and the plant start-up willexperience only a minor delay. The reorganization of VALEFERTILin December 1977 should improve the efficiency of project execution.Personnel recruitment and training are underway.

-39-

ANNEX IIPage 11

Loan No.

1452 Vocational Training Project: US$32.0 million loan of September 7,1977, Effective Date: April 5, 1978; Closing Date: December 31, 1982.Construction of training centers and procurement of equipment areproceeding according to schedule. With one exception (FUNDACENTRO),the technical assistance program is underway at the training centers.

1488 Ceara Rural Development Project: US$17.0 million loan ofNovember 17. 1977; Effective Date: March 28, 1978, Closing Date:December 31, 1982. The implementation of the project has proceededsatisfactorily after initial local funding delays. Agriculturalextension and experimentation services, agricultural credit, inputsupply, marketing and storage services are making good progresswhile the parts of the project relating to land purchase credit,agricultural mechanization and cooperative societies organizationare progressing at a slower than expected rate.

1525 Greater Sao Paulo Sewage Collection and Treatment Project: US$110.0million loan of March 10, 1978; Effective Date: August 7, 1978;Closing Date: September 30, 1984. The project is proceedingaccording to schedule.

1537 Paraiba Rural Development Project: US$24 million of May 8, 1978;Effective Date: October 19, 1978; Closing Date: September 30.1983. The project is proceeding according to schedule.

1538 South-Southeast Power Distribution Project: US$130.0 million loan ofMay 1, 1978; Effective Date: September 14, 1978; Closing Date:December 31, 1982. Initial disbursements have been delayed by aboutsix months due to necessary revisions of the beneficiaries' construc-tion programs caused by changes in the power market; however, it isnot certain that project completion will also be delayed.

1557 Sixth Highway Project: US$114.0 million loan of May 8. 1978;Effective Date: October 13, 1978; Closing Date: December 31, 1982.The project is proceeding according to schedule.

1562 COPESUL Petrochemical Project: US$85.0 million loan of July 6, 1978;Effective Date: October 30, 1978; Closing Date: June 30, 1982. Theproject is proceeding according to schedule.

1563 Urban Transport Project: US$88.0 million loan of May 22, 1978;Effective Date: September 1, 1978; Closing Date: December 31, 1981.The project is proceeding according to schedule.

1568 Agricultural Extension Project: US$100.0 million loan of May 22, 1978;Effective Date: September 22, 1978; Closing Date: December 31, 1982.The project is proceeding according to schedule.

1589 Bahia Rural Development Project: US$37.0 million loan of May 22, 1978;Effective Date: December 5, 1978; Closing Date: December 31, 1983.

The project is proceeding according to schedule.

-40-

ANNEX III

Page 1

BRAZIL

NORTHEAST WATER SUPPLY AND SEWERAGE PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I - Timetable of Key Events

(a) Time taken by country to prepare project: Approximately 1 year

(b) Project prepared by: State water companies with assistance ofconsultants

(c) First presentation to the Bank: July, 1977

(d) Departure of Appraisal Mission: April, 1978

(e) Completion of Negotiation: January 4, 1979

(f) Planned Deadline for Effectiveness: May, 1979

Section II - Special Bank Implementing Actions

None

Section III - Special Conditions

(a) BNH to exchange views with Bank on the management and regulationsof the PLANASA program (para. 45);

(b) EMBASA, CAGECE and COMPESA to establish a revised system of accounts(para. 48);

(c) EMBASA, CAGECE and COMPESA to establish an internal audit office(para. 48);

(d) BNH to cause SATECIA to continue strengthening financial planningand managerial systems of EMBASA, CAGECE and COMPESA (para. 48);

(e) EMBASA, CAGECE and COMPESA to obtain established rates of returnon investment in any single year (para. 49);

(f) Government and BNH to enable EMBASA, CAGECE and COMPESA to attaindetermined rates of return (para. 49);

(g) EMBASA, CAGECE and COMPESA to prepare and carry out financialrecovery programs (para. 49);

- 41 -

ANNEX IIIPage 2

(h) EMBASA, CAGECE and COMPESA to carry out studies on meteringpolicies and water supply and sewage tariffs and put into effectthe recommendations of these studies (para. 50);

(i) State and Federal Governments to provide any additional financingthat may be needed for the project (para. 52);

(j) BNH to approve subprojects under US$2.0 million subject to ex-post-facto review by the Bank (para. 54);

(k) BNH, EMBASA, CAGECE and COMPESA to propose for Bank financing onlysubprojects selected in accordance with established criteria(para. 55);

(1) Bank to have the right to cancel from loan account amount equivalentto cost of subprojects incorrectly approved by BNH (para. 55); and

(m) Bank disbursements to finance BNH subloans (para. 57).

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5-- 4 ~ ~ _9 M ARANH 2- 4a0,9 0> M NAS ERA S> :i . Io 0-o S

2.3.;70Civr

Q ur NrBeet eoont unV

G 0 ? >> 1 A I I

~~19 / 9 ffi z E S P I R I TO w ' o/sw=6 .......... w*Wws .. rz~~~~~~~~~~~~~~~~.. .... ...

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IBRD 137184 00. F S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~EPTEMBER 1978

f* ~, g i B \ ( /9 l)/OCFA

CANDEIASj~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

BRAZILI ' 0\ </ B R AZ I L

S9U TH

2D ii '.n.nOs'|gg tE R I C A ,/ \ , t X - X /CAMACARIt ;i U i i 0m.;; °~'gioXisi=eih > t '' . J t \ A ( SIMOES FILHO

40~~~~~~~~~~~~ ~~~~~~~~ DO~~~~~~~~~0 JOANES

N) A 5 _ , i; . JA 1 i g / t / j./: ) > t \ \ / > <~IRITAIVGA

?F55R VOIR ~ ~ ~ ~ ELWOA

0 2 3 2

B BOMETB LAROD

TODOS 0S SANTOS

BA Y CAAER

/4 t r 0 : : ; 0Q ALVADTOR WATER \SUJPPLY AND SEWERAGE PROJECTCity of Salvador

Treatment WaterWater Maino Plats SToroge Ton \s

-: fMain ABss Roadst Proposed a .-ISecondr Aces4 Roads, , Future '

Railroads IExisting U Built-up Areas - - - Under Construction

IBRD 13719

SEPTEMAER 197

\ , e ' a 'K : 0SS \: f 2 ': dii )EV 0 0 Vi ' 4 ' 0 \fu'\t ' 0 Ce' f" A SEff U D

Go OD ~

N`~~~~~~~~~~~~~>

KR~~~~~~~~~~~~~~~~.

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I BR 13720

'5- A

-5'~~~~~~~~-

S-? -n j:X ~~~~1$..- pt W n -

R-10 N ~ 0 RLREII

L/ : 0 / i *; 47 \/ \ U .. - - 'Water Supply ond Sewerage ProjectCASTELAO ~~~~~~~~~~~~~~CITY OF FORTALEZA

WATER SUPPLY.

Tron--ssorm- n°e Wt.peeereplt

A,w-t ,1-t t-t.Wm nt

O Water treatment plant

Storage tanks

Mai roads

Bailwaysre0 R ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~Rvt_________

Enilt- p

u1up areas

/Dlworz / N W An-r ! t o r ; 5 .e,',,sSv| nt,v in,

o_rb -vrd v; Mlen

"A-- R.-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I

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