Document of. The World Bank FOR OFFICIAL USE ONLY OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE

Transcription

1 Public Disclosure Authorized FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2253-BR Public Disclosure Authorized REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE Public Disclosure Authorized EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CENTRAIS ELETRICAS BRASILEIRAS S.A. - ELETROBRAS WITH A GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL Public Disclosure Authorized FOR A SOUTH-SOUTHEAST POWER DISTRIBUTION PROJECT March 15, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Calendar 1977 February 17, 1978 Currency Unit - Cruzeiro (Cr$) Cr$ US$1 - Cr$ Cr$l - US$0.07 O.o6 ABBREVIATIONS AND ACRONYMS CELESC = Centrais Eletricas de Santa Catarina S.A. CEMIG = Centrais Eletricas de Minas Gerais S.A. DNAEE = Departamento Nacional de Aguas y Energia Eletrica ELETROBRAS = Centrais Eletricas Brasileiras S.A.- ELETROBRAS ESCELSA = Espirito Santo Centrais Eletricas S.A. ELETROSUL Centrais Eletricas do Sul do Brasil S.A. GCOI = Grupo Coordenador para Operacao Interligada GGF = Global Guarantee Fund GWh = Gigawatt hour kcal = Kilocalorie MME = Ministry of Mines and Energy FISCAL YEAR January 1 to December 31 The exchange rate used in the staff appraisal report (US$1 = Cr$14.35) corresponds to the exchange rate on June 30, 1977.

3 FOR OFFICIAL USE ONLY BRAZIL SOUTH-SOUTHEAST POWER DISTRIBUTION PROJECT LOAN AND PROJECT SUMMARY Borrower: Guarantor: Beneficiaries: Amount: Terms: Relending Terms to Beneficiaries: Project Description: Centrais Eletricas Brasileiras S.A. (ELETROBRAS) Federative Republic of Brazil Centrais Eletricas de Minas Gerais S.A. (CEMIG) Centrais Eletricas de Santa Catarina S.A. (CELESC) Espirito Santo Centrais Eletricas S.A. (ESCELSA) US$130 million equivalent allocated among the three beneficiaries as follows: CEMIG, US$58.1 million equivalent; CELESC, US$43.8 million equivalent; ESCELSA, US$28.1 million equivalent. Repayment in 15 years, including 3 years of grace, at 7.45% per annum. ELETRtOBRAS would relend the proceeds of the loan to the beneficiaries with the same interest rate, maturity and grace period as the Bank loan; the beneficiaries would pay to ELETROBRAS a one-time commission of 1/2 of 1% on the principal amount, and service fees of 1/4 of 1% per annum on the amounts disbursed and outstanding during the disbursement period and 1/8 of 1% per annum thereafter. The beneficiaries would bear the foreign exchange risk. The project is part of the program for the expansion of the power subtransmission and distribution systems during the years 1978 through 1981 of three public electric power utilities in the South and Southeast of Brazil: Centrais Eletricas de Minas Gerais S.A. (CEMIG), Centrais Eletricas de Santa Catarina S.A. (CELESC), and Espirito Santo Centrais Eletricas S.A. (ESCELSA). The utilities' overall program, of which the project forms a part, will provide the facilities required to serve the expected loads in the respective utilities' service areas, mostly related to industrial growth. The program will also be instrumental in making public service electricity available to about 62,000 new low-income urban consumers and in connecting about 48,000 new rural consumers. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 - ii - The project includes the installation of the following: TOTAL CEMIG CELESC ESCELSA (i) Subtransmission lines 34.5 kv to 230 kv (circuit-km) 1, (ii) Substations 34.5 kv to 230 kv (MVA) 1, (iii) Distribution (CELESC's and ESCELSA's full four-year program and about half of CEMIG's program): - MVA of distribution transformers Circuit-km of lines 15,430 5,000 6,430 4,000 - kwh meters (thousands) The project also includes the acquisition of communications and control equipment for CEMIG, and about 80 man-months of consulting services for CELESC and ESCELSA for supervision of construction of 138 kv facilities and for preparation of bidding documents. The project faces no special risks other than those resulting from the relative administrative weakness of two of the beneficiaries (CELESC and ESCELSA), which is being addressed through the use of consultants. Estimated Cost: US$ millions TOTAL CEMIG CELESC ESCELSA Subtransmission lines Substations Distribution Miscellaneous equipment Total base costs Physical contingencies Price contingencies TOTAL ESTIMATED COSTS Of which: Foreign costs Local costs

5 - iii - Financing Plan: TOTAL % CEMIG CELESC ESCELSA US$ millions Financing Requirements /I Proposed project Other works 1, , Interest during construction Working capital , , Financing Sources Net internal cash generation Sector capital investments / Total consumer direct contributions Equity investments (from nonsector sources) Borrowings Existing IBRD loan / Proposed IBRD loan / Other loans 1, , , , /1 Price escalation not included. /2 Includes states and municipalities reinvestment of sole tax proceeds, customer contributions in aid of construction, and ELETROBRAS purchases of new shares. /3 Loan No. 829-BR (Sao Simao Hydroelectric Project). /4 Does not include: (i) price contingencies to be financed out of loan proceeds (US$23.0 million); and (ii) disbursements in 1982 (CEMIG: US$1.5 million; CELESC: US$1.5 million; and ESCELSA: US$1.2 million).

6 - iv - Estimated Disbursements: US$ millions Bank FY Annual Cumulative Rate of Return: 16% for the three beneficiaries' overall investment program. Staff Appraisal Report: Report No. 1846BR, dated March 10, 1978

7 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CENTRAIS ELETRICAS BRASILEIRAS S.A. - ELETROBRAS FOR A SOUTH-SOUTHEAST POWER DISTRIBUTION PROJECT 1. I submit the following report and recommendation on a proposed loan to Centrais Eletricas Brasileiras S.A. - ELETROBRAS with the guarantee of the Federative Republic of BraLzil for the equivalent of US$130.0 million to help finance a power distribution project. The loan would have a term of 15 years, including 3 years of grace, with interest at 7.45% per annum. ELETROBRAS would relend the proceeds of the loan, on the same terms plus commissions (see para. 65), to three state utility companies in the South and Southeast of Brazil, Centrais Eletricas de Minas Gerais S.A. (CEMIG), Centrais Eletricas de Santa Catarina S.A. (CELESC), and Espirito Santo Centrais Eletricas S.A. (ESCELSA). PART I - THE ECONOMY 1/ 2. A report, entitled "Economic Memorandum on Brazil" (1665a-BR), dated October 13, 1977, was distributed to the Executive Directors on October 21, Country data sheets are attached as Annex I to this report. 3. The late s and early 1970s were years of remarkable economic growth and development for Brazil. The 10% average annual rate of growth in GDP during this period was accompanied by a strong balance-of-payments performance. The dollar value of exports rose by 300% from 1967 to 1973 and a process of export diversification significantly reduced Brazil's dependence upon coffee as the single primary source of foreign exchange earnings. At the same time, inflation was brought progressively under control. During the early 1970s prices rose alt less than 20% per annum on average -- a considerable improvement upon the inflation of a decade earlier. The crawling peg exchange rate combined with widespread monetary correction and indexation of financial instruments helped to minimize the distortions which often accompany inflation (although indexing makes it more difficult to reduce the level of inflation). 4. The world economic crisis of 1974 marked a turning point in the recent economic performance of Brazil. Although growth continued at 9.5% in that year, it proved impossible to maintain the good balance-of-payments performance that had accompanied growth in previous years. The continuation of expansionary policies during 1974 in the context of a sharp deterioration in the terms of trade resulted in a trade deficit amounting to US$4.7 billion. The elimination of that deficit has been a major objective of economic policy since that time. To this end the Government fortified simultaneously its policies of export promoltion and of import substitution. As a result of these policies, the trade gap closed progressively year by year. In 1977 exceptionally high coffee prices contributed towards a strong increase of export 1/ This section is substantially unchanged from the section on the economy in the President's Report on the Sao Paulo Sewage Collection and Treatment Project (No. P-2208-BR) distributed to the Executive Directors on February 15, 1978, except that paragraph 8 has been added.

8 - 2 - revenues and the trade gap was eliminated entirely in that year. It is projected that the trade gap will remain closed even though coffee prices have already rolled back significantly from the high levels prevailing in early This expectation is predicated on a major effort to expand other exports, particularly of manufactured goods. 5. Inflation is another problem that has become a focus of attention in recent years. Sharp rises in the prices of petroleum and other imported goods in 1974 gave an added impetus to inflationary pressures which were already building up in the Brazilian economy even prior to the world economic crisis. Inflation increased in 1974 and continued to accelerate in the subsequent two years reaching a peak of 46% in The Government has employed a wide range of monetary and fiscal instruments to combat inflation. Particularly significant is the much greater control now exercised by the Federal Government over the investment programs of public sector decentralized agencies. There is evidence that these policies are having effect. Inflation for 1977 was some 39%, and in the second half of 1977 inflation slowed to a rate of some 30% on an annual basis. If the Government continues to exercise careful control over monetary and fiscal policy, further headway against inflation is likely. 6. Brazil's economic performance since 1974 has been deeply affected by balance-of-payments constraints. Growth fluctuated sharply from 4.2% in 1975 to 8.7% in 1976 and down again to 6% in 1977 as the Government searched for an appropriate balance between expansion on the one hand and, on the other hand, the need to resolve difficulties in the balance of payments and in the domestic inflationary situation. The Government recognizes the need for continued moderation in growth during the next two or three years if inflation is to be kept under control, the balance of payments is to be further improved and a sound basis for longer term development is to be preserved. It is projected that growth may average little more than 6% during the remaining years of the decade. Beyond that, however, there is every indication that Brazil has the potential to sustain higher levels of growth provided (a) that reasonable expansion of output and trade takes place in the industrial countries, and (b) that sound economic policies are consistently pursued in Brazil. In this respect the Government's development strategy provides a sound framework for future development. 7. The second National Development Plan ( ) was published in the wake of the world petroleum crisis and incorporates a sectoral development strategy which focuses sharply upon relieving Brazil's balance-of-payments constraints in the longer term. The export potential of agriculture received explicit recognition in the development plan and the results achieved over the past several years (particularly in soya production) justify the priority given to this sector. Agriculture constitutes a vehicle for raising the living standards of the rural poor and for developing the vast frontier lands of Brazil's interior. In the case of industry, sophisticated incentive schemes have been introduced to encourage exports. However, Brazil's industrial development strategy now concentrates upon import-substitution programs in steel, non-ferrous metals, petrochemicals, fertilizers and capital goods. Brazil aims at self-sufficiency in many of these products by the early 1980s. Beyond that point these same industries may develop a good export potential.

9 8. Public sector investment accounts for more than half of total fixed investment in the IBrazilian economy. Federal investment is heavily concentrated in infrastructure and basic industry. These two areas together account for about 70% of total investment by federal Government agencies and enterprises. Regional development and social programs absorb most of the remaining 30 percent. Until 1975, the rapid expansion of public investment reflected a heavy emphasls on road construction and regional development. The 2nd National Development Plan ( ) added a massive program of import substitution in basic industrial inputs, and an acceleration in the pace of social programs. Since 1977, however, severe restraints have been placed on public investment, in order to reduce a growing public sector savings gap and the accompanying balance of payments deficit. The sectors most affected are road and rail transport, whose ambitious expansion plans have been cut back sharply. Investments in eletric power, on the other hand, are maintained at a high level, and in basic industries such as steel, non-ferrous metals and petroleum, are being stepped up considerably. The share of regional development programs in total federal investment has now stabilized at about 7%. The percentage allocated to social investment is increasing gradually, reflecting continued expansion of federal investment in housing, water supply and sewerage, and other urban development programs. State and municipal governments also devote a substantial portion of their resources to health, education, welfare and other social services. 9. Despite its impressive growth performance and vast future potential, Brazil is still a country with extensive poverty. The present Government acknowledges the country's poverty problem and accepts responsibility for its alleviation. While, like the previous Government, it believes that a high rate of growth is necessary to increase the incomes of the poor, it does not believe that the "trickle down" effects of rapid growth are enough and has formulated a new policy which could be labeled as "redistribution with growth." To implement this policy, in addition to pursuing some of the social programs initiated by its predecessor, the Government is taking new measures in three broad areas: (a) regional development; (b) provision of social services; and (c) wage policy. In addlition, recent tax changes have tended to have a favorable, albeit marginal, impact on income distribution. 10. As one of its measures to help promote development in poorer regions, the Government has formtulated a program known as POLONORDESTE for rural development in the Northeast. The program which covers the period is designed to raise the productivity and incomes of small farmers through inter alia, formulation and execution of integrated rural development projects, which in some cases inc]lude changes in land tenure. POLONORDESTE is based on the assumption that the rural Northeast cannot be regarded as a homogeneous whole. Therefore, the Government has identified 31 sub-regions covering large portions of the Northeast on which POLONORDESTE funds would be used initially. The Bank has made loans for integrated rural development in two of these subregions, a third is presently before the Executive Directors, and others are in preparation. 11. In the area of social services, the Government has created a new Ministry of Social Security in order to consolidate its social benefit programs and to extend these programs to a larger share of the population. The Government is also strengthening the nutrition program which, under the

10 - 4 - previous Government, got off to a slow start. Greater emphasis is being given by the National Housing Bank to low-income housing, the beneficiaries of which will enjoy better financial terms than in the past. The Housing Bank is also developing a site and services program to encourage construction of self-help housing by families that cannot afford builder-constructed units. In agriculture, the recently reorganized rural extension agency will expand and strengthen its activities directed specifically toward the small-scale farmer; and the new federal agriculture research institution is defining its program to include a selection of crops and farming systems which will ensure that small-scale farms benefit from research efforts. In November 1974, the Government revised the formula governing the adjustment of the union wage scale and real minimum wage was increased in 1975 and again in While in 1977 the Government restricted wage increases as part of a policy package designed to control overall demand and to combat inflation, this does not signify any basic change in its longer term goal of improving income distribution. 12. In order to achieve the twin goals of high growth and an improved distribution of income, Brazil will continue to require large inflows of capital in the medium-term future. These inflows should be less than in the recent past, however. Compared with a US$6 billion annual average for , it is estimated that the annual net inflow of medium- and long-term capital (that is, direct foreign investment and net disbursements from official and private sources) may be in the order of US$4.5 billion for This projection assumes that it will be possible to sustain and subsequently improve upon the trade balance achieved in 1977, with export volume rising at an average rate of 11.5% annually in , and import growth held down to only 2.8% a year in real terms during this period. The outlook for Brazil's principal export commodities is quite favorable for the next several years, and it is expected that the good overall export performance projected here can be achieved, provided that the country continues to follow present exchange rate policies to ensure the competitiveness of manufactured exports. On the import side, several major import-substitution programs are already having a notable impact. The further development of these programs should enable Brazil to continue to restrain imports without jeopardizing growth. 13. On December 31, 1977, Brazil's estimated public external debt amounted to about US$16.6 billion and the public debt service ratio for 1977 is estimated at some 19%. This is somewhat higher than the 15% average public debt service ratio estimated for the first half of the 1970s and reflects a higher proportion of medium-term financial credits within the overall debt structure. Total external debt (both public and private) registered by the Central Bank at end-1977 is estimated at US$29.5 billion and somewhat over two-thirds of this debt (some US$20 billion) is in the form of financial credits. The net debt service ratio on total external debt during 1977 was about 41% compared with an average of 38% during the early 1970s. However, net foreign exchange reserves at the end of 1977 were about US$7.0 billion, equivalent to some six months' imports of goods and non-factor services and sufficient to cover nearly one quarter of the total outstanding external debt. Despite Brazil's heavy debt service burden the substantial level of foreign exchange reserves ensure that the country will have the liquidity to meet its

11 debt service obligations in the short term. The breakdown between public and private debt in the longer run can be projected only tentatively. Much will depend upon the extent to which the Government will extend its guarantee to loans contracted externally by non-government entities. Even assuming that a government guarantee will be granted in an increasing number of cases, it is projected tentatively that the public debt service ratio will peak in the late 1970s at about 20%. Subsequently, a fall to about 16% by 1985 is projected, assuming that Brazil can increase the value of its exports by an average of 17% per annum over the period and that the average maturities of new financial credits gradually improve from six to eight years. The country's record of financial and economic management provides grounds for confidence in the maintenance of creditworthiness over the longer run. Nevertheless, there can be no doubt that very careful management of the external accounts will continue tc) be necessary. PART II - BANK OPERATIONS IN BRAZIL 14. As of January 31, 1978 the Bank had approved 74 loans for Brazil, amounting to US$3,199.4 million, of which 38 were not yet fully disbursed. During FY65-69, disbursements averaged only US$10 million per year, increasing to an average of US$136 million per year during FY70-74, reaching US$225 million in FY74, US$248 million :in FY75 and US$202 million in FY76. US$267 million was disbursed in FY77 and US$129.3 million in the first half of FY78. The decline in disbursements in FY76 was due primarily to the reduced level of lending in FY Disbursements are expected to increase during the next few years. Annex II conitains a summary statement of Bank loans as of January 31, 1978 and notes on the execution of ongoing projects. 15. Since FY75, new loans to Brazil have amounted to between US$400 and US$500 million per year. In FY75, five loans were made totalling US$426.5 million; and in FY76 ten loans totalling US$498 million. In FY77, seven loans totalling US$425 million were approved: US$40 million for a second Minas Gerais water supply and sewerage project, US$83 million for a second agroindustries credit project, US$82 million for power transmission in the south of Brazil, US$42 million for an integrated rural development project in the State of Minas Gerais, US$64 million for a nitrogen fertilizer project, US$82 million for a phosphate fertilizer project, and US$32 million for a vocational training project. So far in FY78, the Bank has approved a loan of US$17 million for a rural development project in the State of Ceara, and a loan of US$110 million for a sewage collection and treatment project for Sao Paulo. At present, a loan of US$24 million for a rural development project in the State of Paraiba is before the Executive Directors. Work is relatively advanced on the preparation of a highways maintenance and rehabilitation project, an urban transport project, a petrochemicals project, an agricultural extension project, a rural development project in the State of Bahia, and an aluminum project. 16. Of Brazil's external public debt outstanding and disbursed at the end of 1977, estimated at US$16.6 billion, the Bank held about 8.5%. The Bank's share of the service on this debt was about 4.5%. If present trends

12 - 6 - continue, as expected, the Bank's share of total external public debt outstanding would increase to 12% by The Bank's share of public debt service would rise in 1980 to about 6% while its share of Brazil's total (public and private) external debt service would remain at the present level of 2.8%. 17. IFC has committed more financial resources to Brazil than to any other country. As of January 31, 1978, IFC had made commitments to Brazil, totalling US$332 million, of which US$203 million had been cancelled, repaid or sold. Of the balance of US$129 million, US$102 million represents loans and US$27 million equity. A summary of IFC's investments as of January 31, 1978, is given in Annex II. Lending Strategy 18. In its lending to Brazil, the Bank has sought to help the Government achieve a number of important development objectives which are interdependent and complementary. One of the Bank's lending objectives in Brazil is to support institutional development and policy reform designed to develop rational policies and procedures, establish adequate coordination and control, and help maximize public savings and ensure that they are used economically. The institution-building objective is one of the principal aims of the proposed electric power distribution loan. It is also an important objective in Bank assistance for vocational training, and for the transportation sector where emphasis has been given to the rational selection of investments, the strengthening of railway operations, and the improvement of the railways' financial performance. Loans for industrial finance, highways, agricultural research and extension, and urban development also have important institutionbuilding objectives. 19. Another important lending objective in Brazil is to help to intensify the efforts of the Government to identify and develop projects that will increase productivity and incomes of the lowest income segment of the population, to broaden the economic opportunities open to those groups, and to improve their living conditions. The loans in preparation for integrated rural development projects in the Northeast, including the proposed loan for the Paraiba Rural Development Project presently before the Executive Directors, are addressed to this objective. They would provide credit, productive services, and social and physical infrastructure to low-income farmers and small-scale enterprises. The recently approved loans for nutrition research and development, vocational training, agricultural research and polders construction in the Lower Sao Francisco Valley as well as for integrated rural development in the states of Rio Grande do Norte, Minas Gerais and Ceara were all designed to assist low-income groups in rural areas. The recently approved loan for sewage collection and treatment in Sao Paulo will expand elementary sanitation services for a low-income urban population. Additional projects designed to assist low-income groups are in preparation, including an agricultural extension project, a rural education project in the Northeast, additional integrated rural development projects in the Northeast, and several projects which will reach low-income groups in urban areas: an urban transport project, a sites and services project, sewerage and water supply projects in several northeastern states, and a medium-sized cities development project.

13 20. Another lending objective is to ease the foreign exchange constraint on development, a constraint that has become more critical since the increase in petroleum prices, by supporting projects designed to increase Brazil's export capacity and, where economical, to substitute domestic production for imports. As a result of the deterioration in Brazil's terms of trade and balance of payments which took place at the time of the 1974 energy crisis, this objective was placed in the forefront of the Government's economic policy. Lending for the electric power sector very much supports this objective, since it is based primarily on hydroelectric energy, and its development lessens the need for petroleum imports. Bank support of fertilizer projects is assisting Brazil to substitute imports with large-scale efficient domestic production and aid its balance-of-payments position. Bank lending for agro-industries in the Center and South of Brazil is also supporting this objective and much of the Bank-assisted investment in the transport sector -- railways, ports and highways -- is designed to facilitate the smooth and economical flow of exports. Support of the steel expansion program is helping Brazil to expand domestic output of a traditional import commodity which can be produced efficiently in Brazil due to the country's ample supply of high-grade iron ore and the scale of its internal markets. A similar objective would be achieved through the petrochemical and aluminum projects now being prepared. 21. A final objective which applies to all Bank lending to Brazil is to provide part of the very large volume of medium- and long-term capital inflows that Brazil has needed and will continue for some years to need in order to sustain rapid growth and achieve its employment creation and regional development objectives. Continued active lending by the Bank in Brazil is regarded by the international financial community as an important sign of confidence in Brazil and encourages them to continue their own programs there. In some sectors, especially in electric power and industry, Bank participation is helping Brazil obtain additional resources in greater amounts and on more favorable terms from bilateral credit agencies and private financial institutions. Five co-financing operations for Brazil, totalling US$204 million, have been concluded since 1976 with private financial institutions and another three are in an advanced stage of preparation. PART III - THE SECTOR Energy Resources and Consumption 22. The principal source of energy used in Brazil is petroleum, which in 1976 accounted for abouit 44% of total energy consumption (estimated to be 105 x 1013 kcal). Prestently about 82% of the country's petroleum requirements are covered by imports. The sudden rise in world oil prices in 1973 and 1974 caused an increase of about US$2 billion in Brazil's annual import bill. In response to this, petroleum exploration has been intensified by the national oil company, PETROBRAS, which has also enlisted the help of foreign oil companies which are exploring under risk contracts. On a conservative assumption as to future production Brazil's dependence on imported petroleum may decline to around 6:3% by 1985.

14 In 1976, 24% of all energy consumption was of hydraulic origin. Brazil is endowed with one of the largest hydro potentials in the world, estimated at about 150,000 MW of which only about 18,400 MW have been developed; plants with an additional capacity of 30,000 MW are under construction or are planned to be installed by Further economic utilization of hydro resources would require construction of long transmission lines. Nuclear power is expected to play a major role in power generation after The first unit of 600 MW is expected to be in operation in 1979, and an additional 2,400 MW is expected to be commissioned by Other fuels used include firewood, charcoal and sugar cane bagasse, which contribute about 29% of Brazil's energy consumption. Their usage is expected to remain stable and thus they will represent a rapidly decreasing proportion of total energy consumption. Coal and gas accounted for 3% of usage in Coal extraction is costly because shaft mining is necessary. Other sources of energy are of insignificant importance at present. Known reserves of natural gas are modest. Few sites for tidal energy can be found along the Brazilian coast and there are no known sources of geothermal energy. 25. The southern and southeastern regions combined, with 60% of Brazil's population, consumed in 1976 about 78% of all energy and 85% of electric energy. Electric energy consumption in these regions has grown at a rate of about 11.7% p.a. in the last five years, mainly due to the rapid increase of industrial use. Consumption is expected to grow at an average rate of 10% p.a. through 1985 and the per capita consumption should reach 2,300 kwh by that year (compared to 1,350 kwh in 1976). The Role of the Power Sector in the Economy 26. The continued growth of reliable electric service is essential for the development of the country's industries, which in 1977 used 57% of all electric energy consumed while accounting for about 40% of Brazil's GDP, contributing about 45% of export earnings and providing for about 33% of all non-agricultural employment. The rate of growth of electricity consumption was 1.20 times that of GDP for the period while from , it was 1.28 times that of GDP. From 1974 through 1977, electricity consumption grew at about 12% p.a. while GDP grew at about 7% p.a., reflecting a trend of substitution of eletricity for other forms of energy following the petroleum price increases in 1973 and 1974 (see para. 22). Sector Organization and Regulation 27. The Brazilian power sector, though large and complex, is well organized and its policies are generally well designed and implemented. The sector is regulated by the National Department of Water and Electric Energy (DNAEE), while operations and financing are in the hands of Centrais Eletricas Brasileiras S.A. (ELETROBRAS) and federal, state, municipal and private utilities, all under the jurisdiction of the Ministry of Mines and Energy (MME).

15 DNAEE is a powerful instrument for implementation of national policy since it grants licenses for hydroelectric sites, assigns concession areas, sets tariffs (subject to approval by the Interministerial Price Commission) and approves expansion plans. ELETROBRAS performs the functions of (a) a holding company for those utilities owned by the Federal Government; (b) a financial institution administering and allocating public funds among its subsidiaries and electric utilities owned by state governments, and coordinating sector borrowings from abroad; (c) a planning body responsible for the overall planning of sector development; and (d) a coordinating and consulting agency assisting the development of the country's electrification programs by providing technical, managerial and training services. 29. The construction and operation of the majority of new power generation facilities is entrusted to ELETROBRAS' four principal subsidiaries, and they share the transmission function with state-owned utilities. To maximize the economic benefits to the country from operation of the generating and transmission facilities and to attain the maximum operating and financial efficiency for the system as a whole, the Federal Government established in 1973 two special coordinating groups (Grupos Coordenadores para Operacao Interligada), one for the South and Southeast regions and one for the Northeast region. ELETROBRAS and the operating utilities participate in these groups, which are responsible for coordinating the operations of the individual generating plants and tralnsmission systems within the respective regions. The power distribution function is carried out mainly by utilities controlled by the state governments (with the exception of the Rio de Janeiro and Sao Paulo metropolitan areas which are served principally by Light - Servicos de Eletricidade, S.A., a privately owned enterprise). The three beneficiaries of the proposed loan are the local utilities in the states of Santa Catarina (Southern Region), Espirito Santo and Minas Gerais (Southeastern Region). Electric Power Tariffs 30. Brazilian legislation concerning the electric power sector assures that electric utilities receive sufficient funds to cover their operating expenses (excluding financial charges), depreciation, "reversion quota," 1/ and a reasonable return on investment. Since 1966, annual revaluation of the assets against which tarilffs are calculated has been mandatory, and the tariff law of 1971 required that: utilities earn a rate of return of not less than 10% and not more than 12%. I]n addition to the tariff, residential and commercial consumers pay the "sole l:ax" (imposto unico) which, since 1972, has been assessed at the rate of about 25% and 30% of their respective tariffs (industrial consumers are exempted). As a result, the electric bill paid by the 1/ The "reversion quota" is assessed at a rate of up to 5% on assets in operation; of this, 60% is lent by the Government to ELETROBRAS which uses the funds to finance investments in the sector and the balance is the main source of funds for the "Global Guarantee Fund" (see para. 32).

16 Brazilian residential and commercial consumers is among the highest in the world. The proceeds from the imposto unico are used mostly for sector investments and are distributed as follows: 40% to Federal Agencies (ELETROBRAS, DNAEE, MME and the National Development Fund), 50% to the states and 10% to the municipalities. Industrial consumers are required to make a compulsory loan to ELETROBRAS by purchasing 20-year 6% ELETROBRAS bonds (subject to monetary correction). The amount of the compulsory loan is equivalent to about 50% of the tariff for small industrial consumers and to 58% of the tariff for large industrial consumers. 31. While the tariff system has generated adequate revenues for the electric power sector in the past, the high level of investments required in the sector (8% of gross capital formation in 1975) and the Government's need to limit public investments as,a means of controlling inflation may result in financial constraints leading to less expansion of power sector facilities in the future than would be desirable. Serious financial constraints could also originate from the inability of key utilities to generate internally sufficient funds so as to make a reasonable contribution to the financing of their expansion program. This concern has prompted DNAEE to undertake a review of sector financial requirements and the adequacy of tariff levels. This study is currently under way, together with a review of tariff structures, a review previously agreed with the Bank (under Loan 1300-BR). The Government has confirmed that the results of DNAEE's review of tariff levels (including a financial forecast for the sector as a whole through 1986) would be presented to the Bank along with the results of the study on tariff structures. These are expected to be completed by December 30, In 1974, DNAEE began to use its discretionary powers to effect progressive equalization of customer rates throughout Brazil. One result of this action was that rates of return for the comparatively higher cost utilities fell below 10%. To meet this problem, a Global Guarantee Fund (GGF) was created in December 1974, as a mechanism intended to assure qualifying utilities a return of 10%. At the same time, in order to promote the efficiency of those utilities supported by the GGF, DNAEE put into effect a number of measures which restrict the utilities from increasing their operating costs, undertaking investments, and expanding markets without DNAEE's prior approval. 33. Consistent with the efforts of the Brazilian Government to equalize electricity charges throughout the country, it would be agreed that, if transfers from the GGF are required, they will be sufficient to bring the beneficiaries' return to 10% (Guarantee Agreement, Section 3.02; Project Agreement, Section 4.04; and Loan Agreement, Section 6.01(f). Electricity Consumption 34. Electricity consumption is linked with essential economic activity in the country; consumption by industry (which accounted for about 57% of the total in 1977) is the fastest growing category. Below is a summary of electricity consumption since 1965:

17 Average Annual * Growth % Category of Consumer GWh GWh GWh GWh GWh % 1977/73 Residential 5,166 8,522 13,636 14,769 16, Commercial 3,257 5,287 9,153 10,145 10, Industrial 11,536 19,612 36,921 43,444 49, Others 1,356 4,889 8,539 9,273 10, Total 23,315 38,310 68,249 77,631 87, * Preliminary figures. 35. It is estimated that some 74% of the urban population of the country and about 78% of that of the Southern and Southeastern regions receive electric service at the present time and that virtually 100% of the country's urban population has access to service. Judging from partial data from the Northeastern region, service in the rural areas (with 41% of the total population) appears to be extremely low. The proposed project would assist the implementation of the Government's policy to increase electric service by expanding the capacity of lines and substations that would feed both rural areas and low-income urban areas. Rural Electrification 36. In 1974, ELETROBRAS created a rural electrification department to complement the activities carried out since 1970 by the Ministry of Agriculture, with financial assistance from the Inter-American Development Bank. Through this department, ELETROEBRAS provides 50-80% of the cost of individual rural electrification projects, the rest being supplied by the utilities serving the respective areas. ELETROBRAS' loan terms are 15 years, including 5 years grace, and 12% interest on the principal (which is not subject to monetary correction). These ELETROBRAS-assisted programs were instrumental in connecting, in 1976, about 17,000 rural customers (defined as rural cooperatives or agricultural or agro-inclustrial producers), at a total cost of about US$40.0 million equivalent, and in 1977, about 22,600 rural customers at a total cost of about US$55 million equivalent. ELETROBRAS program envisages connecting about 200,000 rural customers at a total cost of about US$540 million equivalent. The Ministry of Agriculture program being assisted by the IDB is providing rural electrification through rural electrification cooperatives in the more remote areas of the country. Sector Planning 37. ELETROBRAS (as part of its coordinating function) is responsible for overall power sector planning. It has carried out this function in a generally satisfactory inanner in the past by preparing medium-term regional

18 development programs. However, ELETROBRAS' current planning methods are not wholly suited to the increasing complexity of the system (which requires an integrated approach, in view of the expected inter-connection of all major regional markets by the mid-eighties). The Bank has offered to assist ELETROBRAS in developing improved planning methods and a more comprehensive approach to sector planning. The introduction of improved sector planning models would permit plans to be continuously revised in light of changes in underlying assumptions--e.g., costs of capital goods, relative prices of fuels--and allow for the timely assessment of the impact of cuts in sector investments (which is not possible under the planning methodologies currently in use). ELETROBRAS has indicated that by December 31, 1979 it will prepare a master plan for power sector expansion for the whole country through the year 2000, and that it will continue to exchange views with the Bank regarding the methodology, scope of work and terms of reference to be followed in such planning. Bank Group Strategy in the Sector 38. Since 1949, the Bank has made 30 loans to the Brazilian power sector, mostly for hydroelectric generation projects in the Southern and Southeastern regions. This lending has helped strengthen sector organization, contributed to the building of efficient power enterprises and facilitated foreign capital inflows to the sector. Bank lending has assisted the Government in its efforts to maintain tariff policies that have enabled the sector to generate a substantial proportion of the funds needed to meet its investment requirements. Project performance audit reports have been distributed to the Executive Directors on both power distribution 1/ and generation projects. 2/ These reports conclude that, despite delays and cost overruns in their execution, the projects supported by Bank loans were basically successful. The most recent loans for power distribution (1257-BR and 1300-BR) included pilot programs for extending service to low-income urban consumers in the states of Parana, Bahia, Ceara and Pernambuco. These programs would be extended under the proposed loan to three more states in the Southern and Southeastern regions. The loan would be similar to Loan 1300-BR (Northeast Power Distribution Project) in concept. It would be made to ELETROBRAS, which would relend the proceeds to the three beneficiaries--centrais Eletricas de Minas Gerais, S.A. (CEMIG), Centrais Eletricas de Santa Catarina, S.A. (CELESC) and Espirito Santo Centrais Eletricas, S.A. (ESCELSA). In addition to financing the distribution facilities needed to support the rapid industrial, commercial and social development of the three states served by the beneficiaries, the project would seek to strengthen the management and planning of the two smaller beneficiaries, CELESC and ESCELSA, and would assist CEMIG (a highly competent utility which has received four Bank loans) in addressing the financial problems resulting from its heavy expansion program. 1/ Loans 475/476/477/478/BR (Sec M of September 4, 1975). 2/ Loan 404-BR (Sec M of June 28, 1977); Loans 442-BR and 566-BR (Sec. M78-34 of January 16, 1978).

19 Over the recent past, Bank lending for power in Brazil has given particular emphasis to powier distribution loans because this subsector is the least attractive to other Eoreign sources of finance, as it involves a large number of relatively small and scattered works, while it has enabled the Bank to continue to provide teclhnical assistance for the sector as a whole. To complement its efforts in lpower distribution, the Bank has continued to support power transmission projects designed to improve the utilization of hydroelectric resources. The most recent loan for power in Brazil (1343-BR in FY1977) supported construction of 500 kv transmission facilities in the Southern system (including the interconnection with the Southeastern system). A similar project is currently being prepared which would link the Northeastern system to the interconnected South-Southeastern system. While the Bank has not lent recently for power generation, it may be requested to resume operations in this subsector (which would provide an excellent vehicle for major co-financing operations) in the next two or three years. 40. A major aspect of the Bank's participation in the power sector has been the provision of a portion of the very heavy financial requirements of the sector directly and through co-financing operations. A co-financing operation with a group of private commercial banks has been successfully concluded in connection with the recent Bank loan for the ELETROSUL Transmission Project 1/, and a second such operation is expected to be concluded shortly in connection with Loan No BR for the COPEL Power Distribution Project. The Bank has also maintained a fruitful policy dialogue with the various sector entities and has supported a series of major initiatives. These have included preparation of a master plan for expansion of the electric power sector (para. 37), initiation of a tariff structure study (para. 31), increased attention to low-income urban consumers (para. 38) and inclusion in Loan 1343-BR of a major training program for high-level sector staff. PART IV - THE PROJECT Background and Objectives 41. CEMIG, CELESC and ESCELSA are faced with rapid growth in electricity demands in their respective service areas. Their construction program through 1981, of which the project is a part, would provide the facilities required to serve the expected loads, mostly related to industrial growth. Failure to provide these facilities would lead to costly curtailments of supply or installation of fuel-based captive generation. The program would also be instrumental in making public service electricity available to low-income customers and for rural electrification. The proposed project was appraised in July Negotiations took place in Washington from February 13-22, The Brazilian delegation was headed by Mr. Jose Augusto Vieira de Carvalho, Attorney for ELETROBRAS, and included, among others, Mr. Oscar Pimentel, Finance Director, 1/ Loan 1343-BR of February 23, See President's Memorandum R of December 15, 1977.

20 DNAEE, and Mr. Luiz Machado Fracarolli, Attorney, Ministry of Finance. A supplemental project data sheet, including a timetable of key events and a summary of special conditions, is presented in Annex III. A report entitled "Staff Appraisal Report - Brazil - South-Southeast Power Distribution Project," No BR, dated March 10, 1978, is being circulated separately to the Executive Directors. Areas to be Served 42. The State of Minas Gerais (served by CEMIG) is one of the larger states of Brazil, and the largest in the Southeast region, with an area of about 490,000 km 2 (representing about 6.9% of the total land area) and a 1977 population of about 13 million of which 61% is estimated to be urban and 39% rural, about the same as for Brazil as a whole. While containing relatively developed and rapidly growing mining and industrial sectors, Minas Gerais also has some very poor agricultural zones, including the northern part of the state which is included in the Northeast "drought polygon." The 1976 GDP per capita for Minas Gerais is estimated at about US$810. The state is the most important producer of mining products, iron and steel, and cement in Brazil. The state of Santa Catarina (served by CELESC), with an area of about 95,000 km 2 (about 1.1% of the total), and a population of about 3.5 million, is the smallest and least-developed of the three states making up the Southern region (the other two are Parana and Rio Grande do Sul). Its estimated 1976 per capita income, however, is the highest of the states which would benefit from this loan, about US$1050. This may be attributed to its relatively prosperous smallholder agricultural sector, characterized by mixed farming, and an expanding light industry. The population is 48% urban and 52% rural. The state of Espirito Santo (served by ESCELSA) is the smallest of the three states included in the project, and the least developed. It has an area of about 46,000 km 2 (about.5% of the total), and a population of about 1.8 million, of which 56% is estimated to be urban and 44% rural. Its 1976 GDP per capita is estimated at US$800 or 67% of the national average. Espirito Santo has the second largest beef and dairy cattle herd in Brazil and it also produces a wide variety of crops including coffee, cocoa, bananas, manioc, corn, and beans. The Borrower 43. The borrower would be ELETROBRAS, a corporation in which the Federal Government has a 99.6% interest. ELETROBRAS acts, inter alia, as the Government's financing agency for the electric power sector in Brazil and may be compared to a development bank in allocating and channelling the funds necessary to support the sector's growth (see para. 28). 44. ELETROBRAS' role in the project consists of coordinating and supervising its implementation, and serving as a channel for on-lending the proceeds of the proposed Bank loan to the beneficiaries. It would agree to review and report to the Bank every six months on progress of the project and on performance of the beneficiaries during construction and start of operations (Loan Agreement, Section 3.02).

21 -, -~~~~~ ELETROBRAS is managed by a Board and an Executive Directorate. The Board is composed of a President appointed by the President of the Republic, and 9 to 13 other members., The Executive Directorate is composed of the President and five Directors. The Board has been entrusted with the responsibility for devising fundamental policies. The Executive Directorate has all top-level management functions. ELETROBRAS has built up a large, competent organization with a staff of about 1,600. Through the leverage obtained from its financing role, ELETROBRAS has been able to supervise operations of the utilities and coordinate system expansion and in general has provided the necessary guidance for economical and orderly sector growth. 46. ELETROBRAS' outstanding capital at year-end 1976 amounted to Cr$22 billion (about US$1.5 billion equivalent). Its resources consist of net internal cash generation (dividends received, interest on its loan portfolio, loan amortization receipts and miscellaneous other income, less debt service and less net dividend payment) which in the period averaged 34% of total resources; sole tax (para. 30), 8%; reversion reserve (para. 30), 22%; compulsory loans (para. 30), 21%; federal budgetary appropriations, 3%; and borrowings, 12%. Outstanding long term borrowings at year-end 1976 totalled Cr$28.3 billion (about US$2.3 billion equivalent), of which 40% was in the form of debentures arising from the compulsory loans, 29% represented reversion accruals to the Federal Government, 20% came from foreign borrowings (IDB, bilateral agencies, commercial banks and utility holding companies) and 11% from domestic loans. ELETROBRAS' large and growing sources of funds constitute a broad base for expanding its borrowings, and it is becoming increasingly active in foreign financial markets. 47. The proposed Bank loan of US$130 million is not large in relation to ELETROBRAS' total resources which at year end 1976 amounted to about Cr$67 billion (US$5.4 billion). As in the case of the Northeast Power Distribution Project (Loan No BR), the financial appraisal of the beneficiaries shows they should not encounter difficulty in servicing their respective portions of the proposed loan. It was therefore not considered necessary to conduct an appraisal of ELETROBRAS' future finances. The Beneficiaries CEMIG 48. Centrais Eletricas de Minas Gerais S.A. (CEMIG) is the utility responsible for power distribution in the state of Minas Gerais. It also has a fairly large role in power generation. CEMIG is controlled by the Minas Gerais State Government (which owns 68% of its shares, with the rest being held by ELETROBRAS (16%) and the public (16%)). It is managed by its tenmember Board and an Executive Directorate, composed of seven Directors elected by the Shareholders' meeting for a three-year period. The President of the Board is the Chief Executive Officer. CEMIG has a properly designed organization and is capably staffed. CEMIG's staff numbers 8,600 and staff relations are good. The utility serves 1.1 million customers (about 131 customers per employee which is adequate considering the characteristics of its service area).

22 CEMIG has received four previous Bank loans for a total of US$142.9 million equivalent. The first three projects have been completed. The two major projects, the Jaguara and the Volta Grande hydroelectric schemes, for -which the Bank made loans in 1966 and 1968, were completed 5-1/2 years and nine months, respectively, later than the appraisal estimate, with cost overruns amounting to US$61.4 million equivalent (68% of appraisal estimate) and US$123.6 million equivalent (130% of appraisal estimate), respectively. The cost overruns were due to local and foreign costs higher than expected at appraisal which resulted from foundation problems, inflation and increasing lag between rising local construction costs and exchange rate readjustments. The fourth (the 1,000 MW Sao Simao hydroelectric project, financed under Loan 829-BR of June 14, 1972) is well advanced and the first units have started operation about three months before the date estimated at the time of appraisal. Costs, now estimated, at about US$750 million, are about 90% over the appraisal estimate of US$396 million, due mostly to higher than expected inflation, although changes in the number and size of the units and more excavation than expected have also contributed to the overrun. The cost overruns on the above projects did not affect their justification. CELESC and ESCELSA 50. Centrais Eletricas de Santa Catarina S.A. (CELESC) is the utility responsible for power distribution in the state of Santa Catarina. CELESC is controlled by the Santa Catarina state government (which owns 80% of its shares). It is guided by a General Assembly which appoints, for a four-year period, a Directorate which is composed of a President and four Directors and which is in charge of the day-to-day management functions. Responsibility for objectives, policies, organization and direction of the company is vested in the President. CELESC has about 3,900 employees and serves about 420,000 customers (a ratio of 107 customers per employee which is adequate considering the characteristics of its service area). 51. Espirito Santo Centrais Eletricas S.A. (ESCELSA) is the utility responsible for electricity distribution in the state of Espirito Santo. ESCELSA is controlled by ELETROBRAS (which owns 92% of its shares). It is managed by a Board of Directors appointed for a three-year period by the Shareholders' Assembly. The Board is composed of a President and five Directors who are in charge of the day-to-day operations. ESCELSA has about 1,800 employees and serves 174,000 customers (87 customers per employee which is also adequate). 52. Both CELESC's and ESCELSA's organizational structures are well designed. However, in each company there is a lack of effective coordination among departments. CELESC and ESCELSA would engage organization/management consultants, having qualifications and experience and upon terms and conditions satisfactory to the Bank, to make recommendations by March 31, 1979 for improving coordination among their respective departments as well as financial forecasting, budgeting controls, auditing, accounting and management information system, and in preparing training program for their respective professional staffs. The consultants' recommendations and the companies' proposals for implementing appropriate corrective programs would be presented to the Bank by June 30, 1979 (Sections 2.09 of CELESC's and ESCELSA's Project

23 Agreements). Employment of these consultants would be conditions of disbursement respectively for CELESC's and ESCELSA's portions of the loan (Loan Agreement, Schedule 1, paragraphs 3(d)(i) and 3 (e)(i))). Earnings and Financial Position 53. The three benefilciaries face financial problems arising from the rapid growth of their markets and the need to make investments which exceed their capacity to generate funds internally (despite a satisfactory level of tariffs). They have had to rely to an increasing extent on borrowed funds adversely affecting their debt service coverage in the case of CEMIG and ESCELSA; CELESC's financial problems have manifested themselves largely in the form of an unsatisfactory current position. The problems of CEMIG should receive especially close attention in view of the utility's important role in the development of- one of Brazil's most dynamic industrial areas. If CEMIG will be allowed to earn only the minimum 10% return on remunerable investment provided under the tariff system (see paras. 30 to 32), CEMIG's financial projections show that its borrowing needs will continue to grow rapidly, with a concurrent: decrease in equity as a proportion of long-term capitalization, and in nel: internally generated funds as a proportion of financing requirements. In the past DNAEE has been responsive to CEMIG's needs and has allowed it to earn returns above the 10% minimum (12% in 1976 and 1977). Without careful management (including such measures as the provision of new equity, continuing to allow a higher return on assets, or deferral of major new projects), the situation would be unsatisfactory in , when debt service will increase at a much faster rate than gross internal cash generation. The trend in CEMIG's financial indicators is a matter of concern and the Bank will continue to monitor the utility's financial position and borrowings closely over the project construction period. CEMIG would continue to be bound by the existing debt limitation covenant in the Loan Agreement for Loan 829-BR (Sao Simao Hydroelectric Project), which requires the Bank's agreement before the utillty incurs long-term borrowings whenever its annual internal cash generation Ls less than 1.5 times its maximum future debt service requirement (CEMIG's Project Agreement, Section 4.05), and the Bank would review CEMIG's borrowing program annually under this covenant. Additionally, CEMIG would submit ito the Bank by June 30, 1979 a review of its investment and financing plans Eor the remainder of the project construction period, which would include proposals for achieving an annual debt service coverage of at least 1.5 times in those years (CEMIG's Project Agreement, Section 4.05). The Federal Government, the State of Minas Gerais and ELETROBRAS would cooperate in the review and would use their best efforts, in accordance with their overall policies, to assist CEMIG in achieving an annual debt service coverage of at least 1.5 during thes remainder of the project construction period (Guarantee Agreement, Section 3.03; Minas Gerais Shareholder Agreement, Section 4; and Loan Agreement, Section 3.05). 54. The financial outlook of the other two beneficiaries, CELESC and ESCELSA, is relatively favorable, provided measures are taken by their principal shareholders (the state of Santa Catarina and ELETROBRAS, respectively) to provide them with an adequate equity capitalization. As part of the financing plan, CELESC expects relatively large equity contributions (US$26.7

24 million in constant mid-1977 prices) from the Santa Catarina State Government, which the latter would pay according to an agreed schedule (State of Santa Catarina Shareholder Agreement, Section 5). Presentation of evidence that the State's quarterly payments are current would be a condition of the first disbursement of CELESC's portion of the loan (Loan Agreement, Schedule 1, paragraph 3(d)(ii)). ESCELSA's debt service burden as projected is excessive, and ELETROBRAS would maintain ESCELSA's annual debt service coverage at 1.5 (Loan Agreement, Section 3.04). The submission by ELETROBRAS to the Bank of a plan of action satisfactory to the Bank to enable ESCELSA to achieve a current debt service coverage of 1.5 to 1 for 1978 and thereafter until the completion of its part of the project would be a disbursement condition for ESCELSA's portion of the loan (Loan Agreement, Schedule 1, paragraph 3(e)(ii)). CELESC and ESCELSA would also be subject to a debt limitation covenant similar to that proposed for CEMIG (CELESC's and ESCELSA's Project Agreements, Section 4.05). 55. If CEMIG or CELESC proved not to have sufficient funds to assure the timely completion of the Bank project, the states of Minas Gerais or Santa Catarina, respectively, would provide them in a form satisfactory to the Bank (Minas Gerais and Santa Catarina Shareholder Agreements, Section 3). ELETROBRAS would assume a similar obligation with regard to ESCELSA (Loan Agreement, Section 3.01(a)). The Federal Government would make arrangements satisfactory to the Bank for providing funds to complete the project if the funds available to any of the beneficiaries are insufficient for this purpose (Guarantee Agreement, Section 2.02). Demand Forecast 56. Public-service electricity consumption in the areas served by CEMIG, CELESC and ESCELSA grew at an average annual rate of about 14%, 23%, and 22%, respectively, during the period The growth in the average consumption per customer was about 6%, 11% and 7% and in the number of customers about 8%, 12% and 14%. The power market of all three companies has been increasingly dominated by the industrial market (76%, 59% and 67% of all sales to the ultimate consumers in 1976, up from 72%, 52% and 61% in 1972). 57. The forecast of energy sales to the industrial sector is based on a detailed analysis made by the companies and reviewed by ELETROBRAS, regarding the status of implementation of major industrial projects. Demand of smaller industries as well as residential, rural and commercial consumers has been forecast on the basis of past trends. The resulting sales forecasts, highlighted in the table below, indicate that the three power markets will maintain high average growth rates through the project construction period. The average annual rate of growth of sales from 1976 to 1982 is forecast to be 16.5% for CEMIG, 17.3% for CELESC and 29% for ESCELSA.

25 ACTUAL AND FORECAST POWER tarket Average Annual Growth /1982 Sales (GWh) CEMIG 9,180 13,090 18,490 23, % CELESC 1,880 2,650 3,620 4, % ESCELSA 1,010 1,990 3,130 4, % Customers (average) (thousands) CEMIG 1,030 1,230 1,440 1, % CELESC % ESCELSA % The Beneficiaries' Programs 58. Of the three project beneficiaries, only CEMIG has a program for installing generating facilities. The program to be executed between 1978 and 1981 has, for the most part, been carefully studied by CEMIG and has been properly coordinated withl ELETROBRAS and neighboring utilities to ensure that the interconnected system is expanded and operated in an optimum manner. CEMIG's program includes the completion of the first phase (1,800 MW) of the Sao Simao hydro station (partially financed by Loan 829-BR) and the start of construction of the 1,000 MW Emborcacao hydro station (partially financed by IDB), the first units of which are expected to be commissioned by late CEMIG has also proposed to start during this period the construction of other hydro stations, but it has not yet demonstrated that these additions to capacity would be the least cost alternatives for adding capacity to the interconnected system. The Bank would have an opportunity to review these planned investments under the limitation on major investments outside the project recommended in para The proposed expansion plans for transmission lines and substations would allow the utilities; to transmit the energy to be generated by existing and future plants to meet their anticipated load growth without reducing the quality of their services. The utilities are expected to increase the total length of their transmission lines (34.5 kv to 500 kv) from about 17,100 km at the beginning of 1978 to 22,140 km at the end of The distribution expansion program to be carried out by the utilities during the project construction period would provide adequate capacity at

26 appropriate points of the system for the expected increases in loads while ensuring the continued high reliability of service to all customers. The program would allow connection of low-income households, particularly those which presently have access to service by virtue of being near existing distribution lines but are not connected to the system. These prospective customers can be connected with a minimum of investment. The utilities expect to connect a total of about 62,000 new low-income customers in the period Household connections would be financed by the utilities over not less than 18 months and on terms which would enable low-income customers to meet monthly charges (Section 2.10 of respective Project Agreements). 61. In addition to the expansion of the urban systems, the utilities have on-going rural electrification projects with ELETROBRAS' assistance (para. 36). These projects envisage the installation of about 32,000 circuit km of lines and the connection of about 48,000 new rural customers between 1978 and Project Components 62. The project to be financed by the proposed loan would focus on the subtransmission-distribution sub-sector. In the case of CEMIG, acquisition of communications and control equipment would also be included. The individual project components are summarized in the project summary above (see p. ii). Expansion of the subtransmission and distribution facilities would be commensurate with the expected growth rate of sales on different parts of the systems, and duly takes into account the concentration of loads, the state of existing facilities and the particular requirements of specific customers. For some of the equipment included in the program, such as transformers or meters, no reasonable alternative exists. Where alternatives do exist, e.g., in routing, sizing or voltage of transmission lines and location and reserve capacities of substations, the utilities have selected or will select the least-cost solution which is compatible with safety and environmental considerations. Project Cost 63. The total cost of the project has been estimated at US$427.0 million (Cr$6,126.8 million) of which US$129.8 million (Cr$1,863.2 million) is the foreign component. A summary of project costs is set out in the project summary above (see p. ii). The base costs were estimated by each utility on the basis of prevailing prices as of mid-1977 and are reasonable. The engineering and administration costs for the project, as well as applicable taxes and duties (estimated at about 10% of base costs), are included in the base cost estimates. The cost of consulting services to be required by CELESC and ESCELSA (para. 68) has been estimated at about US$6,000 per man-month, excluding subsistence and travel expenses, and is included as part of the cost of the 138 kv facilities. Physical contingencies have been estimated at 8% to 20% of the base cost estimates of the individual components of the program, depending on the status of the engineering; the overall average is about 12%. The price contingencies have been calculated on the basis of assumed annual rates of inflation of 7.5% from 1977 to 1979 and 7% thereafter for foreign

27 costs and 9% from 1977 to 1980 and 8% thereafter for local costs, in U.S. dollar terms. The use of different escalation factors for foreign and local costs is appropriate because the foreign costs relate mainly to equipment and materials for which the price variations have normally followed world-wide inflation and the local costs relate mainly to materials, labor, and activities for which the inflation rate has been somewhat higher. Financing Plan 64. The project accounts for 14% of the utilities' investment requirements of US$2,346.8 million equivalent (excluding price contingencies). The proposed Bank loan would cover the full foreign exchange component (32% of project cost). Local costs would be covered by the utilities' internal cash generation, equity contributions and borrowings from ELETROBRAS, and equity contributions from the states. The Bank would assist ELETROBRAS in securing funds through appropriate co-financing arrangements, similar to those recently approved for the ELETROSUL Transmission Project (see para. 40). A summary of the beneficiaries' financing plans for their programs (in the course of which most of the loan is expected to be disbursed) is contained in the project summary above (see p. iii). Financial projections were prepared in constant June 1977 Cruzeiros to ensure consistency with financial projections made by Brazilian authorities for the eletric power sector. They have been converted into US dollars at the exchange rate on June 30, 1977 (US$1= Cr$14.35). 65. The proposed US$130 million Bank loan would be made to ELETROBRAS for a term of 15 years including 3 years grace. The interest rate to the beneficiaries was assumed in the projections to be 8.5%. The proceeds of the loan would be on-lent to the three beneficiaries under terms and conditions acceptable to the Bank, which are expected to provide for the same maturity, grace period and repayment schedules as on the Bank loan, plus commissions (a one-time commission of 1/2 of 1% on the loan amounts, and service fees of 1/4 of 1% p.a. on the disbursed amount during the disbursement period and 1/8 of 1% p.a. thereafter); the beneficiaries would assume the foreign exchange risk. 66. The beneficiaries' investment programs include sizable expenditures for projects which have yet to be justified in detail and for which financing has not yet been obtained. The beneficiaries would agree that they would not undertake any major new investments outside the project until completion of the project, unless they had provided evidence satisfactory to the Bank that such investment was economically justified; that the beneficiary had adequate financial resources to carry it out and that it was in accordance with plans for power generation and transmission approved by ELETROBRAS for the Southeast and South regions of Brazil or, in the case of an investment in the distribution subsector, that it has been approved by DNAEE (Project Agreements, Section 4.06).

28 Execution 67. The utilities' own personnel would carry out most of the necessary engineering and supervision of construction for the project. This is acceptable as the utilities have proven experience in similar works completed recently or still under construction. However, CELESC and ESCELSA have staff limitations and would require assistance for engineering and supervision of construction for 138 kv facilities, and would therefore employ consultants for these purposes. In view of the limited experience of these two utilities with international procurement, consultants would also assist them in the preparation of the general contract documents and in bid evaluation (see CELESC's and ESCELSA's Project Agreements, Section 2.09). The employment of these consultants would be conditions of disbursement respectively of CELESC's and ESCELSA's portions of the loan (see Loan Agreement, Schedule 1, paragraphs 3(d)(i) and 3(e)(i). The utilities' own personnel would install the distribution equipment and build short distribution extensions. Local contractors are expected to install substations and build all 230 kv, 138 kv and 69 kv lines and major distribution lines. Procurement of equipment for the project is scheduled to start in June 1978 and the expected project completion date is December 31, Procurement 68. Procurement of the equipment to be financed by the Bank would be through international competitive bidding (ICB) in accordance with the Bank's guidelines. Manufacturers of equipment financed by the proposed loan, whose bids contain components manufactured in Brazil equal to at least 50% of the value of the bid would be given a margin of preference of 15%, or the applicable import duties, whichever is lower. Brazilian suppliers of the items included in the project are reasonably competitive. Foreign cost estimates assume that: (i) about US$130 million equivalent of equipment and materials would be acquired through ICB in accordance with Bank guidelines; and (ii) Brazilian suppliers would be awarded up to two-thirds of the value of the contracts placed through such bidding. The equipment component of the project which would not be financed under the proposed loan, such as line supports and low voltage equipment, would be procured locally under the beneficiaries' normal procedures, as Brazilian legislation precludes ICB for items that can be produced locally and are not financed by long-term foreign loans. However, as noted above, the locally produced items for this project (such as concrete poles) are reasonably competitive in price with imported products and project cost should not increase significantly over the estimate as a result of that restriction. Disbursement 69. Disbursements would be for 100% of the foreign expenditures for imported equipment and materials (including, where applicable, installation and erection) or the ex-factory cost of locally manufactured equipment and materials.

29 Return on Investment 70. The return cn investment was estimated as the discount rate which equates the present values of the benefits and costs stemming from the combined investment program of the three utilities as well as those of each individual program. Benefits were measured by the forecast revenues from the sales of electricity at the retail levels, using the tariffs in effect at December 1976 plus the sole tax (see para. 30). The equalizing discount rate for the combined program is about 16%, as are the equalizing rates for CEMIG's and ESCELSA's individual programs, while that pertaining to CELESC's program is about 15%. These discount rates compare favorably with the opportunity cost of capital for Brazil, estimated to be around 11%. These equalizing rates understate the real economic rate of return of the programs, as electricity tariffs, which are, administratively determined rather than established through market forces, are probably lower than what consumers would be willing to pay. Risks 71. The project faces no major technical risks, other than those resulting from the relative administrative weakness of CELESC and ESCELSA. The construction schedule assumed for the project is reasonable and takes into consideration normal engineering, administative and construction procedures but it contains no provision for unusual delays. CEMIG is not expected to have any difficulties in meeting the schedules. However, timely completion of the project by CELESC and ESCELSA will depend on the appropriate use of consultants to assist them with the 138 kv facilities and in the preparation of the contract documents for ICB. It is more difficult to assess the impact of the uncertainty relating to the financial outlook of CEMIG (para. 53). However, the competence of the Brazilian authorities in the past management of the power sector supports the view that CEMIG will be able to surmount its problems in this area. PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Bank and Centrais Eletricas Brasileiras S.A. - ELETROBRAS, the draft Guarantee Agreement between the Federative Republic of Brazil and the Bank, the draft Project Agreements between the Bank and CEMIG, CELESC and ESCELSA, the draft Shareholder Agreements between the Bank and the states of Minas Gerais, Santa Catarina and Espirito Santo, and the Report of the Committee provided for in Article III, Section 4(iii), of the Articles of Agreement are being distributed to the Executive Directors separately. 73. Special conditions of the project are listed in Section III of Annex III.

30 Conditions of disbursement of CELESC's and ESCELSA's portions of the loan respectively are that they have employed organization consultants and consultants to assist with 138 kv facilities (see paras. 52 and 67). Additionally, it is a condition of the first disbursement of CELESC's portion of the loan that the State of Santa Catarina is current in its quarterly payments of its equity contribution to CELESC and a condition of disbursement of ESCELSA's portion of the loan that ELETROBRAS has submitted to the Bank a plan of action for enabling ESCELSA to maintain a current debt service coverage ratio of 1.5 to 1 during the project construction period (see para. 54). 75. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 76. I recommend that the Executive Directors approve the proposed loan. Attachments March 15, 1978 Washington, D.C. Robert S. McNamara President

31 ANNEX I Page 1 hauzl. * SOCIAL IN*DICATORS DATA SMETg LAND AREA (THOU K8).2... BRAZIL REFERENCE COUNTRIES (19701 TA7'L R5~2.0mnT RECENT ARITC 2D29.6 1Q ESTIMATE MEXICO URUGLUAY JAPAN** OND PER CAPTTA (USS) S50.0* * /8 *690.0* 940.0* *... PDPJLATIIN AND VITAL STATISTTCS... POPULATIOnx (MyO.R. WLLIDfl 46.B 92, /a a.3 2DPULATI1N DENSITY 'E* 50 c. R*n Ia PEQ 90, :i, A&QICJLTIRAL LAND e ;i s VITAL S,;TTSTTCS CRuDEf R7 0 TD &ATE /Tiu. AV) V I.P 38,4A CRUDTE SATA RATE (/TW7U,Av Q 9,8 A TtA.NT cnqrtality RBTI t(tj ul IAO.O 1l0... SA,5., 13.1 LIFE E.PECTa 4 CY 1 LInT. (yrso se.o %9b,461,4* 6I 69:,3 71,1 GROIR RFPRODUCTIV' B4TF ,1 la 1.0 'DPU ATIl. GRnTN &ATL (t)- TDtAL l.n 2.Q 2,9 3.t IRRsA 5.5 S.t 4.0 * R 1.2 *40 JRqAN CD JLAToio (2 r TOTAL) 46.0 S 5* B7 7e.1 S4 A*F ST8UCTURE (IFQCEN 1 I) 0 VTo I YEARS 43,n 42,0 A1 7 * a.0 1S Ti 6*4 YEARS S4n ,1 3,5 68,0 SS YF At A40 IvER ' ,2 3' AGE tepemoency RATII 0, A 1.n ECTAJTMY TE rnoency Ry TI.b /b e.o I 'A,I11 LANNTNG accepto0r (CUL4JLAT!YVF TinU) ,5.. IS'Qs 't nf MARBlE) women).. I E4pL1Y-F%T 0 TtTAtL L I`PCE,1mR CT.JTUSAInM) D?700, n n0n.n I D0, LAc JR~r' IsTJ ASRICJLTI,RE (Z) , us.n q.0 JANEA 0 L'Y'T tx OF LAS)1R FORCE) 7 5 5, 0 8 /a 1.2 IAJbO.E ntsttsyart)n t AE PRTVATT INCOME PLC'S RY. 4Ir.ST st OF HO4JSENOLVA 3,9 la 35,0 /a 7.R 29.0 /b 14,2 3 wigrfst 20S 07 lj%e'holds 6217; b2,0 7;,, , LJWE T2I LlEr20S OC ITN.5EOD H3JSEWItL!)R 3.57j 3.E io7a 304,.. A,?A4*7S, ; 4 a, L3wEST 405 OF M4jSw.OLTAS 20.3/a Io o7.h b t2.3 olstrlrhtrin nr LAN) ONER9S.rP ' 80FF w Tip lot J' WNiFR3. is, is 0 nf-lf 9v SMALLEST 10 W*NEQS.. '.5. '01 `EAbT' AN) JUTRTTInN R>I,LaTTi.. PeR RAYoSICIA.., Q /c 1480.n )P3ULAtITI..I PER v'jrsi'fl pp.vn ,0 /b )2Q2.6 0/d 160.m /a 334n0, 240,0 2P,IL.ATIoN PER S0ITAl BOF r).fl 2b R o0.0 DER 'ADIRT SUPPLY IF3 I IL lpos rn 78 LJv3JIF..F`Tqo b0.0 RPIItal C FA4IY VIAT b '. 6.O f Ai * TMl A 'ID P)LRE 38.n I9.0,, 2'10 /b )EATW PATF ttiu) AIER 1.4., EDJCAT TYN ASIURTrot ONROLLYENt RTIO1 PRIME R 1COL 95.0 n I7 In YEARrlO0 qr43nl jj P YEARS OF R4C4IMLIN& PRJvITED CR ANO RECON) LEVFL) 11.0 U ViAtITrNA[ ENPOLLMEOT t 0 SFCnNrAARy) I8./d P IL % I FPACY F BATE (41b.0 64,oI ,0 'E00iae PER *i7' (JRil., I,0 1.t Ic ICCUPIFO mafll`i4gs BTTwOUT IPEt ATE9 (SI * 7. 0/c 66.2 /a 61.0 /c. 5.0 &CCEqS Ti FL T CR TB t5 00 ALL 5wELLING!I * RuRAL T.ELLINGS C3ONnCTED T1 ELETTQtCTTY (1) *' 8, P.0 C...i... OAV)T fl-ctvors (REV l.je4 Rt,PR) '.6.0 '.0n ,n '\te ''.000 TACR (PEP T'tU PnP) 7.n 25, , ,0 0LFCtQTrTTY IwO/lyB PER CAP) s24.n 001,0 bsa.o 5S7.n 762, NE,SRPI.T INoBYR PER CAP _? 7,0 18,9 SEE..T...E...

32 ANNEX I Page 2 Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961, for 1970 between 1968 and 1970 and for Most Recent Estimate between 1973 And NOTES * GNP per capita data are based on World Bank Atlas methodology ( basis), Japan has baen selected as an objective country since the Brazilian Government has shown particular interest in Japan's development experience, elon the two goverrunents have conducted joint studies to identify possible future economic problenm of Brazil on the basis of the experience in Japan. BRAZIL 1960 /a Economically active population /a Economically active population; /b Hospital personnel; /c Inside only. MOST RECENT ESTUIATh a 1976; /b Ratio of population under 15 and 65 and over to total labor force; /c 1972; /d 1971; /e Inside only. MEXICO 1970 /a Including assistant nurses; /b ; /c Inside only. URUGUAY 1970 /a Montevideo only; /b R13, August 2, 1977 DDUNITIOIS OF SOCIAL I]IDICATOR Land Area (thou ha 2 ) Population per nursing person - Population divided by number of practicing Total - Toetl surface area cosprising land area nd inland waters male and female graduate nurses, "trained" or "certified" nurses, and Agri. - Most recent estimate of agricultural area used temporarily or perma- auxiliary personel with training or experience, nently for crops, pastures, market 6 kitchen gardens or to lie fallow. Poplation per hospital bed - Population divided by number of hospital beds available in public and private general and specialized hospital and GNP per capita (US$) - GNP per capita estimates at current market prices, rehabilitation centers; excludes nursing homes and establishnents calculated for by same con-erai method as World Bank AtlaS ( basis); custodial and preventive care 1960; 1970 and 1975 data. Per capita supply of calories f7 of ra-uiremoents) - Computed from energy equivalent of net food supplies available in roentry per capita per day; Population and vital statistic! available supplies comprise domestic production, imports less exports, and Population (mid-year million) As of July first: if not available, average changes in stock; net supplies exclude animal feed, seeds, quantities used of two end-year estimates; 1A60, 1970 and 1975 data, in food processing and losses in distribution; requirements were estima ted by FAO based on physiological needs for nornal activity and health con id- Population density - per square ko - Mid-year population per square kilometer ering environm,ental tmaperature, body weights, age and sax distributiona of (100 hertares) of total area, population, and allowing 107. for wste at household level. Population density - per sqore Im of grir, land - Computed as above for Per capita supply of protein (Igras per day) - Protein content of per capita agricultural land only, net supply of food per day; met supply of food is defined as above; requiremenot for a11 countries established by USDA Economic Research Sfrvi-s vital statistics provido for a minimum allowance of 60 gra-m of total protein per day, and Crude birth rate per thousand, average - Annual live births per thousand of 20 grams of snimal and pulse protein, of which 10 grams should be animal mid-year population; ten-year arith etic verages ending in 1960 and 1970, protein; these standards are lower than those of 75 gram of total and fivc-year protein average ending in 1975 for most recent estimate, nd 23 grams of animal protein as an average for the world, proposed by FAO Crude death rate Per thousand, average - Annual deaths per thousand of mid-year in the Third World Food Survey. population; ten-year arithoetic averages ending in 1960 and 1970 and five- Per capita protein supply from animal and pulse - Protein supply of food year average ending in 1975 for most recent estimate, derived from animals and pulses in gr m per day. Infant mortality rate (/thou) - Annual deaths of infants under one year of age Death rate f/thou) ages Annual deaths per thousand in age group 1-4 per thousand live births. years, to children in this age group; suggested as an indicator of Life expectancy at birth (yr.) - Average number of years of life remaining at malnutrition. birth; usually five-year averages ending in 1960, 1970 and 1975 for developing countries Education Gross reproduction rate - Average number of live daughters a woman will bear Adus ted enrollment ratio - primary school - Enrollment of a11 ages in as her normal per- reproductive period if she experiences present age-specific rentage of primary school-age population; includes children aged 6-11 years fertility rates; usually five-year averages ending in 1960, 1970 and 1975 but adjusted for different lengths of primary education; for countries with for developing countries, universal education, enrollment may exceed 100% since eaoe pupils are below Population growth rate (%) - total - Compound annu-l growth rates of mid-year or above the official school age. population for , and Adjusted enrollment ratio - secondary school - Computed as above; secondary topulation growth rate (.) - urban - Computed like growth rate of total education requires at least four years of approved primary instruction; population; different definitious of urban areas may affect comparability of provides general, vocational or teacher training instrrotion for pupils data mong countries, of 12 to 17 years of age; correspondence courses are generally secluded. Urban population (f of total) - Ratio of urban to total population; different Years of schooling provided (first and second levels) - Total years of definitione of urban areas may effect conparability of data among countries, schooling; at secondary level, vocational instruction my be partially or completely secladed. Age structure (percent) - Children (0-14 years), working-al (15-64 yeaur), Vocational enrollment (% of secondary) - Vocational institutions inclode and retired (65 years and over) as percentages of mid-year population, technical, indu trial or other programs which operate independently or as Agc dependency ratio - Ratio of population under 15 and 65 and over to those dspartnents of secondary institutions. of ages 15 throogh 64. Adult literacy rate (T) - Literate adults (able to read and write) as per- Economic dependency ratio - Ratio of population under 15 and 65 and over to centage of total adult population aged 15 years and over. the labor force in age group of years. Ponily planning - acceptors (cumulative, thou) - Cumulative number of acceptors Housing of birth-control devices under auspices of national family planning program Persons per room (urban) - Average number of persons per room in occopied since inception conventional dwellings in urban areas; dwellings exclude non-permanent Family planning - users (% of married women) - Percentages of warried women of structures and unoccupied parts. child-bearing age (15-44 years) who one birth-control devices to all married Occupied dwellings without piped water (/) - Occupied conventional dwelliing womnen is sane arg group. in urban and rural arsas without inside or ooaide piped wacer facilities as percentage of all occupied Bspsloynnt dwellings. Access to electricity (% of all dwellings) - Conventional dwellings with Total labor force (thousand) - iconomicolly active persons, including armed electricity in living quarters as percent of total dwellings in urban forces and and un-mployed but excluding housewives, students, etc.; definitions rural areas, in various countries are not comparable. Rural dwellingc connected to electricity (T) - Cmputed as above for rural Labor force in agriculture (E) - Agricultural labor force (in farming, forestry, dwellings only. hunting and fishing) as percentage of total labor force. Unemployed (% of labor force) - Unemployed are usually defined as parsons who Consumption are able and willing to take a Job, out of a job on a given day, remained out Radio receivers (per thou pop) - All types of receivers for radio broadcasts of a job, and seeking work for a specified inimom period not exceeding one to general public per thousand of population; excludea unlicensed receivers week; may not be cmparable between countries due to different definitions in countries and in years when registration of radio of sets unemployed was in effect; and source of date, e.g., employment office statistics, asmple data for recent years may not be coparable since most countries abolished sorveys, compulsory unemployment insurance, licensing. Passenger cars (per thou Pop) - Passenger Income cars distribution comprise motor - Percentage tare seating of private income (both in cash and kind) less then eight persons; e-cludes ambulances, hearses and oflitary received hy richest 5%, richest 20%, pooreot 20D, and poorest 40% of house- vehicles. holds. lectricity (kwb/yr per cap) - Annual consusption of industrial. coercil, public and private electricity In kilowatt hours per capita, generally Distribution of land ownership - Percentages of land owned by wealthiest 10% based on production data, ithout allowance for losses and in poorest grids hut 10% of allow- land owners. ing for imports and exports of electricity. Newsprint (kg/yr per cap) - Per capita annal conumption in bilagrame Health and Nutrition estimated from domestic produtipn plus net imperts of nesprint. Population per physician - Population divided by number of practicing physicians qualified from a medicai school at university level.

33 66072 I vcrmqmlc 07.W.6.096RT DATA S077ET. A~ ~ ~ ~ ~ ~~~~~~~~~~~~~~lot.1t L. - L14.-ef 70.,jIj. C,.,,o,d Ave,fte 0,-o?, 1.t. t fy-6 TV- 98" I%*% ~~~~~19qri! A. 00AT061.ALCCOUNTS 011l.,- US$ * n.le d Zo,.... A. P.,.,..t.fj697_ I ,l,,,~~~~~~~~~~~ (0,,k,.o ,361 its,934 96, , ,3 4l.5 D.7I let.7 I r 7, I.!"I 7,. T.,-..I Tr,.A, I D-t1l0. T- ~ , ' ,797 0,10,279 R.9 I.205 I ?. 5. 7x7.., 1. -Vo_.., 0, ,31 7, S.$ o7.,.tI TT Adjolood ,597 16, I9. It I. o......p (446) 91I I ' C--,o..otfo , , I O I..,l~~~~~~~~~...t ~~~~~~~17,263" , II II mv'.1.5 o1,, 10, I , IL. 9...I e e1 1,041.6 to , B. 6fC n0i7talt mill1i at C,... 7,.,.,. A. P.,.-,t of I.t.t 1.6M.26 C,1,,.- 00.M, ,1 1, ,e.,,,.d -. 6oI,6, ,62, , ,0-41d.tl co-d n004 3, wP 1 t.. 1 C-ed. 2,143 3,1116 3,932 1, , ,793 : T,t.l (700) , e Ig C07700 ~~~~~~ ~~~~~~~~ ~~~~1,344 2, S6.. 0In...,l, ~~~~ ~~~~ 641 ~~~~~~ ~~~406 1, " IS I Ag,l-,It-,,I 12~.0..24( , Itl.,0e., C...d , III.S ,e,,,o...,. 1,326 2,060 2, , noj.e, 161~~~~~~~~~~~~~~~~li "I.497 SOS ' Tot.l , ,136 12,934 10, t00." C. SECT06 out70 [T!.ct of pop at TaIt-o Mot at ,6.,..,W ei...aot I. A.I,lt,o G., l..ot I".) 3. I... 1., ,z ; I.1 D. PICE77S Jt ) I. 7~~~o.,.,t lode., 7, ~~~~~~~to l~~~~o,7 In,le., 7,1,. 16~~~~~~~~~~0 116 I7l ' Too..,!too. W,,6. too Be S CZ... I l Ao.r... F-h-g,e0 R., `.0 II6ICATORS V1.MJ6t 1070 it7, 1960 I (9 3.4~~~~~~~~~~~~~~~~~~~~~~ 0 I Loh.,70, ( ) I 'CO opo,00 7. S : A.,e.oo,; 6, , 100_ (I ) 4. -e81,.1i 0.ti I... S-.ml, ,. K.PIo.;Q:O (Wilt-.) I 9. lop.ort./c.97 ~~~~~~~~~~~~v (2.4,...) I. I,.e. t, I- r Ag,t..lt-, l~le.plemp %.rt,y C. 71J61.IC C.,r,,.t 00--., C,,.oo.,l 7.,7,1..610,.,oo 4.1~~~~~~N 9.: To, O,.,,o.,. ~~~~ ~ ~~~~ ~ ~~~ o,d Oo.,oo.oo.,,0 Covital 7o,,..tloo ~ E X P.,e.,t f.l.tta o.I t06.- FI.lo1.,1, AA..t-,1tI..oo., 6.1.,.., fot., T.,lol C.,,-t E...peelt-, ( f 9..It., o to t.l '.-,o..6 1 n46 JO..., 1070

34 ANNEX 1 BALANCE OF PAYNANTS AND EXTERNAL ASSISTANCE Page 4 (Million US$) _ A C T U A L Preliminary Estimate P R 0 J E C T E D A. Summary of Balance of Payments 1. Exports (incl. NFS) 6,596 8,471 9,255 10,657 13,583 15,464 17,374 20,232 46, Imports (incl. NFS) 7,577 14,678 14,296 14,435 14,902 16,829 18,948 21,276 44, Resource Balance ,207-5,037-3,778-1,319-1,365-1, , Net Factor Service Income ,735-2,288-2,624-3,051-3,383-3,791-5, Net Interest Payments ,463-1,758-2,159-2,533-2,810-3,155-4, Direct Investment Income , Other Factor Service Income Current Transfers (Net) Balance on Current Account -1,688-7,122-6,772-6,062-3,933-4,407-4,948-4,825-3, Private Direct Investment i,eld 1,050 1,100 1,265 1,455 2,340 Medium and Long Term Loans - a. Official Sources 8. Disbursements ,024 1,234 1,404 1,585 2, Amortization , Net Disbursements ,203 b. Private Sources r 11. Disbursements 3,993 6,080 5,974 7,388 5,218 6,354 7,416 7,370 9, Amortization -1,455-1,716-1,868-2,488-2,992-3,892-4,649-4,989-7, Net Disbursements 2,538 4,364 4,106 4,900 2,226 2,462 2,767 2,381 2, Use of IMF Resources _ 15. Short-tera Capital and Capital NEI , _ 16. Change in Reserves (- = increase) -2, ,046-2, , Foreign Exchange Reserves 6,551 5,598 4,552 6,745 7,000 7,000 7,000 7,000 11,202 (End of Period) B. Grant and Loan Commitments 1. Totai MELT Loan - 4,770. 7,034 6,946 8, IBRD IDB Governments , Suppliers 857 1,088 1,376 1,300 1,5. Bonds Financial Credits 3,146 5,103 4,515 6,076 C. Memorandum Items 1. Grant Element of Total Commitments , Average Interest (Percent) Average Matturity (Yeairs) JanuarY 1978

35 - 29 _ a! ANNEX I DEBT AND CREDITWORTHTIES; - Page A. Medium-and Long-Ter-i rob: (Disbursed only) 1. Total Debt Outstanding (ead of period) 12,571 17,166 21,171 25, Financial Credits.. 7,848 11,211 14,561 18, Others (Bii., Multi., Bonda, Suppliers) 4,723 5,955 6,610 7, Public and Publicly Guaranteed 6,496 8,533 11,461 14, Private 6,075 8,633 9,710 11, Net Debt Service 2,186 2,572 3,583 4, Total Interest 840 1,370 1,828 2, Net Interest ,463 1,758 3, Public Debt Service 1,28 1,550 1,990 B. Debt Burden 1. Net Debt Service Ratic 28, Total Net Debt Sarv!Lcz Ratio b/ Public Debt Service Ratio -- 15, Liquidity Ratio c/ , Net Debt Service/GP d.l Public Debt Service/GDP 'Total DOD/GDP / C. Terms 1. Interest on Total DOD/Total DOD Net Debt Service/Total DOD r D. Dependency Ratios for M.&LT Debt 1. Gross Disbursements/Imports (ind. NFS) Eet.Transfer/Imports (ind. NFS) Net Transfer/Gross Disbursements E. Exposure 1. IBRD Disb./Gross Total Disb IBRD DOD/Total DOD IBRD Debt Service/Net Debt Service F. External Debt (Disbursed Only) Outstanding December 31, 1976 Amount Percent 1. IBRD 1, Other Multilaterai Governments 2, Suppliers 2, Bonds Financial Credits 18, Other Total M&LT Debt 25, Total Public M&LT Dett 14, G. Debt Profile 1. Net Debt Service /Total I)OD end of Details of debt for end 1977 are not vet available; 1977 figures quoted in text are preliminarv estiniares. b/ Including Net Direct I..vestrent Income. c/ Net Debt Service as a percent of exports plus reserves in excess of 3 months imports, d/ In constant 1973 Prices, January Noxt Available

36 _ 30 _ ANNEX II Page 1 THE STATUS OF BANK GROUP OPERATIONS IN BRAZIL A. SUMMARY STATEMENT OF LOANS (As of January 31, 1978) Amount less Loan # Year Borrower Purpose Cancellations Undisbursed (US$ Million) Thirty-six loans fully disbursed Furnas - Centrais Eletricas Power Marimbondo Centrais Eletricas do Sul Power do Brasil - Salto Osorio Brazil Education Brazil Ports Rede Ferroviaria Federal Railways Companhia Siderurgica Nacional Industry / 1971 Brazil Roads Companhia Siderurgica Industry Paulista Centrais Eletricas de Minas Power Gerais - Sao Simao Brazil Land Settlement / 1973 LIGHT - Servicos de Power Eletricidade S.A Furnas Centrais Eletricas - Power Itumbiara Brazil Agro-Industry Cia. Hidro Eletrica do Sao Power Francisco-Paulo Afonso IV Banco Nacional de Habitaco Water Supply Brazil Education Rede Ferroviaria Federal Railways Brazil Roads Companhia Siderurgica Nacional Industry Companhia Siderurgica Paulista Industry Brazil Agriculture FEPASA - Ferrovia Paulista Railways Brazil Rural Development / Fully disbursed during February 1978.

37 ANNEX II Page 2 A. SUMMARY STATEMENT OF LOANS (Continued) (As of January 31, 1978) Amount less Loan # Year Borrower Purpose Cancellations Undisbursed (US$ Million) Brazil Development Bank Brazil Feeder Roads Brazil Agriculture Petrobras Fertilizantes Fertilizer Companhia Parahaense de Power Energia Eletrica - COPEL Eletrobras Power Brazil Nutrition Banco NacionaL de Habitacao Water Supply Brazil Agro-Industry ELETROSUL Power State of Minas Gerais Rural Develop Petrobras Fertilizantes Fertilizer Fertilizantes Vale do Fertilizer Rio Grande S.A.-VALEFERTIL 1452/ Brazil Vocational Training / Brazil Ceara Rural Develop Total 3,199.4 /2 Of which has been repaid to the Bank Total outstanding 2,764.1 Amount sold 45.6 of which has been repaid Total held by Bank 2_,745.9 Total undisbursed 1j325.5 /1 Not yet effective. /2 No IDA Credits have been made to Brazil. On February 28, 1978, the Executive Directors approved a loan of US$110 million for a sewage collection and treatment project for Sao Paulo (see Report No. P-2208-BR dated February 8, 1978). The loan was signed on March 10, 1978 (Loan 1525-BR).

38 ANNEX II rage 3 B. STATEMENr OF IFC INVESTMENTS (As of.tonstnyflj2)f Fis-al Yesr Obligor Type of Business Amount in US$ tilljon Loans Ettifty Total_ 1957 Siemens do Brasil Cia. de Eletricidade Electrical Equipment Olinkrsft, S.A. Cellose e Papel Pulp and Paper D.L.R. Plasticos do Brasil, S.A. Automotive Parts 0.45 _ Willys-Overland do Brasil, S.A. Industria e Comercio Motor Vehicles Conpanhia Mineira do Ci..nto Portland, S.A. Cement Chanpion Coluloso, S.A. Pulp !1968/ 1972 Aco Villares, S.A. Steel /1969 Papel e Celoloso Catarinense, S.A. Pulp and Paper /1972 Ultrafertil, S.A. - Industria e Comercio de Fertilitantes Ferilizers Petroquinica Uniao, S.A. Petrochemicals Poliolefinas, S.A. Industria e Comercio Petrochenicals Oit-no, S.A. Ioduorrta e Conercio Pecrochenical, Industria de Celulose Borregaard, S.A. Pulp /1975 Companhia de Cimento Nacional de Minas Cement /1974/1977 Coop-nhia Sider-rgica da Guanabara - OOSIGUA Steel Capital Market Development Fund - FUMCAP Capital Market Development 5.0O Empresn de Desenvolvisento de Recursos Minerais - CODEMIN, S.A. Nickel Mining ond Refining Indontrias Villars, S.A. Elevators and Indostrinl Equipment Fabrica de Tecidos Tatuape, S.A. Textiles Capuava Carbonos Industriais Ltd. Carbon Black Oxiteno Nordeste, S.A. Petrochstiecals Santista Iodustria - Textil do Nordeste, S.A. Textiles Tecanor S.A. - Teatil Catarinonse do Nordesrt Teartll FiB S. A. Prod-ctos Metalurgicos Iron and Aluomisuo Castings Mineracao Rio do Norte S.A. Mining Ci-setal Siderurgia S.A. Iron and Steel 7.0 3, Total Grons Conmr,itmeonts Less Cancellations, Temrminations, Repayments and Sales Total conmmitments Now held by IFC Total Undisbursed

39 ANNEX II Page 4 C. PROJECTS IN EXECUTION 1/ There are now 34 effective Bank loans under disbursement: Loan No. 677 Marimbondo Hydroelectric Project: US$80 million loan of May 25, 1970; Effective Date: September 29, 1970; Closing Date: August 31, The Marimbondo hydroelectric station and the bulk of the related transmission lines were completed on schedule, and the Marimbondo power plant (1440 MW) was inaugurated on May 28, The project has been successfully implemented by FURNAS, the consultants and the contractors, in spite of a cost overrun of about 43%. In part, the cost overrun resulted from an increase in the scope of the transmission system component to allow for the construction of a more economical and reliable system, and from larger civil works as a result of unforeseen geological problems. The cost overrun, however, does not affect the economic justification of the project. 728 Salto Osorio Hydroelectric Project: US$70 million loan of April 5, 1971; Effective Date: July 19, 1971; Closing Date: May 31, The physical comlponents of the project have been successfully completed. Four of the six generating units are now in commercial operation. A cost overrun of about US$120 million, 79% of the original cost estimate, has not significantly affected the economic justification of the project. This cost overrun was financed by loans from ELETROBRAS and a commercial bank. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

40 ANNEX II Page 5 Loan No. 755 Education Project: US$8.4 million loan of June 21, 1971; Effective Date: October 28, 1971; Closing Date: June 30, Progress on the construction and equipping of the project schools is now proceeding satisfactorily, and 80% of the project has been completed. A 20% cost overrun, mainly for civil works, is being financed by the Government. Project implementation is behind the original schedule due to initial delays in establishing and staffing the project unit and because of subsequent changes in project content. 756 Santos Port Project: US$45 million loan of June 21, 1971; Effective Date: October 29, 1971; Closing Date: June 30, After long delays, project execution is now proceeding satisfactorily. Construction of the railway access Paratinga-Pereque by FEPASA is completed. The inability of RFFSA to pay its share of the costs for the left bank rail access was overcome by PORTOBRAS which obtained a loan from Banco do Brasil for this purpose. Because of insufficient increases in tariffs to compensate for inflation, Santos port is experiencing financial difficulties. 786 Railway Project - MBR: US$46 million loan of August 25, 1971; Effective Date: February 4, 1972; Closing Date: March 31, The project is now completed, except for the construction and equipping of the Borrower's main workshop at Jaceaba. The purchase of equipment for this workshop was delayed because of a change in the location of the workshop resulting from the Government's decision to build a new railway line between the cities of Belo Horizonte and Volta Redonda. 797 CSN Steel Expansion Project, Stage II: US$64.5 million loan of February 8, 1972; Effective Date: August 31, 1972; Closing Date: March 31, Although one year behind schedule and with a significant increase in cost, the project is now physically complete. Final payments on equipment contracts are being made now and are expected to be completed by March 31, COSIPA Steel Expansion Project, Stage II: US$64.5 million loan of June 14, 1972; Effective Date: October 5, 1972; Closing Date: June 15, The latest cost estimate is US$862 million, an increase of about 60% over the appraisal estimate due primarily to increased local construction costs. This will not significantly affect the economic justification of the project. The project is now expected to be completed in June, 1978, about 24 months behind the original schedule.

41 _ 35 _ ANNEX II Page 6 Loan No. 829 Sao Simao Hydroelectric Project: US$60 million loan of June 14, 1972; Effective Date: September 20, 1972; Closing Date: September 30, Construction of the project is proceeding according to schedule. An anticipated 50% cost overrun, which does not affect the economic justification of the project, is being covered by local and foreign borrowing. 853 Alto Turi Land Settlement Project: US$6.7 million loan of July 24, 1972; Effective Date: February 15, 1973; Closing Date: December 1, 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, roald construction and COLONE working capital requirements and difficulties in recruiting project staff delayed the start of project execution. COLONE continues to be hampered by lack of assured financing, and this problem is compounded by cost overruns presently amounting to 130%. 923 Itumbiara Hydroelectric Project: US$125 million loan of August 1, 1973; Effective Date; October 30, 1973; Closing Date: December 31, Construction of the earth-fill dam was delayed by about nine months due to very heavy rains. However, construction of the concrete 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 iestimate, 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, Disbursements for sub-loans totalling US$14.7 million were made during under procedures which were not in accordance with the Loan Agreement. These funds have now been prepaid by the Government, reducing the effective loan amount to US$39.3 million. During the second half of 1977, the Government restricted the funds available for sub-loans under this project in line with its policy of restricting credit expansion to control inflation. However, budgetary allocations for 1978 will allow commitments to continue at the rate envisaged in earlier forecasts.

42 ANNEX II Page 7 Loan No Paulo Afonso IV Hydroelectric Power Project: US$81 million loan of June 17, 1974; Effective Date: April 15, 1975; Closing Date: December 31, Resettlement of the 9,700 families being displaced by the Sobradinho reservoir is nearly completed, and new towns to house the urban portion of the population have been constructed. The rural population is being offered the opportunity of resettlement in a promising new agricultural area in the Corrente River region in the western part of the State of Bahia. Those who prefer to remain near their present houses are being resettled in new villages on the edge of the future reservoir. The construction of the Paulo Alonso IV underground power station and Sobradinho dam is proceeding on schedule. Construction of the transmission lines and sub-stations is about 12 months behind schedule Minas Gerais Water Supply Project: US$36 million loan of June 17, 1974; Effective Date: January 9, 1975; Closing Date: August 15, Difficulties in subproject preparation, which are now resolved, caused disbursements to fall behind schedule. However, the loan is now fully committed to 41 subprojects of which 29 are under construction and 12 completed Second Education Project: US$23.5 million loan of December 27, 1974; Effective Date: April 17, 1975; Closing Date: December 31, Project execution is proceeding reasonably well, and is expected to be completed by the target date. Project implementation units have been established in all eight project states and these, together with the main project unit, PREMEN, are working well. The pre-investment studies in the Northeast, financed under the loan, have been completed and have yielded useful information for future sector investment planning Second Railway Project: US$175 million loan of January 17, 1975; Effective Date: June 17, 1975; Closing Date: December 31, Project execution is progressing satisfactorily and appropriate steps are being taken to strengthen project management and control. Cost estimates for the Investment Plan, of which the project is a part, have increased substantially on several items. Therefore, the Plan has been revised and several items have been deleted or postponed. This revision is not expected to affect significantly the items included under Bank financing. Although the financial situation of the borrower improved in the first nine months of 1977, further improvement is necessary for it to be able to effectively carry out its investment program. The Government recently decided to deregulate most freight tariffs. Beginning in 1978, it will make payments to the railways to meet deficits on uneconomic services which it wishes to remain in operation. These actions should significantly improve the borrower's financial position.

43 ANNEX II Page 8 Loan No Fifth Highway Project: US$110 million loan of January 17, 1975; Effective Date: May 15, 1975; Closing Date: December 31, Project execution is proceeding satisfactorily. Roadworks are progressing well, and detailed engineering studies for road construction and road rehabilitation are now completed. Implementation of the road maintenance component is making progress CSN Steel Expansion Project - Stage III: US$95.0 million loan of August 4, 1975; Effective Date: April 30, 1976; Closing Date: December 31, The latest cost estimate is US$3,025 million, an increase of about 67% over the appraisal estimate due to a slower than expected start of project implementation, higher than expected construction costs, difficulties in holding the scope of the project to its essentials and some problems in the management of the expansion program. At the request of the Bank, a thorough review of the project was made. Substantial changes were made resulting in better management and control of the project. The project is now progressing satisfactorily in line with the revised cost estimate and schedule COSIPA Steel Expansion Project - Stage III: US$60.0 million loan of August 4, 1975; Effective Date: March 4, 1976; Closing Date: June 30, The project is about two years behind schedule. The cold mill has been deleted from the project due to changes in forecast demand., The effect of this change on the economic justification of the project and its financial implications is presently being investigated Lower Sao FranciLsco Polders Project: US$23.0 million loan of August 4, 1975; Effective Date: November 25, 1975; Closing Date: December 31, CODEVASF made only limited progress on construction for this project during 1977 because of heavy rains in the project area. Physical completion of the project will probably extend to 1980, and postponement of the closing date may be required. Cujrrent cost estimates show an 80% increase over the appraisal estimate of US$56.5 million. These increases have resulted from design changes, rapid increases in the costs of civil works and equipment, and in the cost of land expropriation. Modifications in the design of emergency and irrigation works are being studied by CODEVASF and its consultants with a view to limiting further cost increases. Project implementation has encountered certain opposition from the population of the Project area, which disagreed with the principles and procedures for land expropriation, settlement, future land tenure and the structure of the proposed cooperative system. The implementing agency CODEVASF is revising the social strategy to the followed under the project by improving communication and relations with the area population.

44 _ 38 _ ANNEX II Page 9 Loan No Third Railway Project (FEPASA): US$75.0 million loan of November 12, 1975; Effective Date: March 24, 1976; Closing Date: June 30, Project execution is proceeding satisfactorily. The Transport Master Plan Study for Sao Paulo is presently under way and the first results are expected shortly. The technical assistance program which is intended to improve FEPASA's operations, marketing and data processing systems is showing results. Although FEPASA's financial position has improved, it is still not satisfactory. The Government recently deregulated most freight tariffs. Beginning in 1978, the state government will make payments to the railways to meet deficits on uneconomic services which it wishes to remain in operation. These actions should assist in significantly improving FEPASA's financial position Rio Grande do Norte Rural Development Project: US$12.0 million loan of March 1, 1976; Effective Date: July 30, 1976; Closing Date: June 30, Progress is being adversely affected by funding delays and marketing problems in the principal project crop, perennial cotton. Means of resolving the problem are under discussion. Implementation of the research and credit components of the project has been particularly successful. Disbursements are behind the original appraisal schedule, partially because of funding delays Development Banking Project: US$85.0 million loan of March 1, 1976; Effective Date: August 26, 1976; Closing Date: March 31, Project implementation is behind schedule. The major reasons are: (i) an initial delay in the commitment of funds under this project because of differences between the relending terms of the agencies concerned and those required under the Loan Agreement. These differences are now resolved; (ii) a leveling off of the industry's demand for investment financing; and (iii) resource constraints of the National Development Bank (BNDE). Measures to accelerate commitment of the loan are under study Secondary and Feeder Roads Project: US$55.0 million loan of March 1, 1976; Effective Date: July 13, 1976; Closing Date: December 31, After some initial delays, project execution is now progressing satisfactorily. Three sub-loans totalling US$12.6 million of Bank financing have been approved and two more are expected to be approved soon Agricultural Research I Project: US$40.0 million loan of April 27, 1976; Effective Date: September 21, 1976; Closing Date: December 31, The project is progressing well and in some areas ahead of schedule. Implementation of the civil works program is actively in progress at 21 research stations. Facilities and research programs at seven experiment stations in the three priority regions (North, Northeast and Central-West) are proceeding in accordance with project goals. Staffing is in advance of project goals.

45 _ 39 _ ANNEX II Page 10 Loan No Araucaria Fertilizer Project: US$52.0 million loan of May 19, 1976; Effective Date: July 20, 1976; Closing Date: December 31, The project is proceeding according to schedule COPEL Power Distribution Project: US$52.0 million loan of May 19, 1976; Effective Date: August 17, 1976; Closing Date: December 31, Project execution is on schedule and about 30% completed. Disbursements are considerably behind appraisal forecast, mainly because of delays in procurement of major subtransmission equipment. The Borrower is updating the distribution expansion program, and the adjusted program should bring disbursements closer to the original schedule by year-end Northeast Power Distribution: US$50.0 million loan of August ; Effective Date: January ; Closing Date: June 30, Project implementation is about 12 months behind schedule due to initial difficulties in obtaining a Government definition regarding participation by Brazilian suppliers. Procurement is now progressing satisfactorily Nutrition Research and Development: US$19.0 million loan of October 1, 1976; Effective Date: December 30, 1976; Closing Date: December 31, Disagreements, now resolved, on nutritional and technical criteria have delayed BNDE participation in the project. The INAN project unit is staffed with seven professionals out of the ten needed. The nutrition delivery system's field tests are proceeding reasonably well. The other components of the project are proceeding on schedule Second Minas Gerais Water Supply and Sewerage Project: US$40.0 million loan of August 27, 1976; Effective Date: January 31, 1977; Closing Date: September 30, The Bank has approved sub-loans for 75 sub-projects in cities of less than 5,000 inhabitants, 14 sub-project in cities of between 5,000 and 20,000 inhabitants and 3 sub-projects in cities of more than 20,000 inhabitants. Several additional sub-projects are being reviewed Second Agro-Industries Credit Project: US$83.0 million loan of September 22, 1976; Effective Date: March 25, 1977; Closing Date: December 31, Because of commitment delays under the First Agro-Industries Credit Project, commitments for the second loan are not expected to begin until later in Budgetary allocations for 1978 will allow commitments to continue at the rate envisaged in earlier forecast.

46 4o- ANNEX II Page 11 Loan No ELETROSUL Transmission Project: US$82.0 million loan of February 23, 1977; Effective Date: June 13, 1977; Closing Date: December 31, Procurement and construction are now underway and proceeding according to schedule, with no major problems encountered. Disbursements are lagging behind the appraisal forecast because of delays in preparing bidding documents which resulted in delays of contract awards. However, disbursements are expected to be on schedule by year-end Minas Gerais Rural Development Project: US$42.0 million loan of February 23, 1977; Effective Date: June 29, 1977; Closing Date: December 31, Organization of this project is progressing well. However, because of the agricultural credit restrictions imposed by the Government during the second half of 1976 and in early 1977, as part of its program to control inflation, credit for this project was delayed. However, Banco do Brasil has recently agreed to release the necessary funds, and the credit program is expected to resume according to the agreed schedule. Due mainly to administrative difficulties, participation in this project by landless producers is significantly lower than originally envisaged, but the Government and the participating banks have given assurances that this would be corrected in the future. Both the health and education components have advanced significantly Sergipe Fertilizer Project: US$64.0 million loan of April ; Effective Date: August 31, 1977; Closing Date: November 30, The Project is proceeding according to schedule VALEFERTIL Phosphate Fertilizer Project; US$82.0 million loan of April 29, 1977; Effective Date: July 29, 1977; Closing Date: May 31, The Project is proceeding according to schedule.

47 ANNEX III Page 1 BRAZIL SOUTH-SOUTHEAST POWER DISTRIBUTION PROJECT SUPPLEMENTARY PROJECT DATA SHEET Section I - Timetable of Key Events (a) Time taken to prepare project: approximately 15 months. (b) Project prepared by: the beneficiaries with the assistance of ELETROBRAS. (c) First presentation to the Bank: December, (d) Departure of Appraisal Mission: July (e) Completion of Negotiations: February 22, (f) Planned Date of Effectiveness: July 15, Section II - Special Bank Implementation Actions None. Section III - Special Conditions (a) ELETROBRAS to review and report regularly on progress of project and performance of beneficiaries (para. 44). (b) ELETROBRAS to prepare a master plan for power sector expansion (para. 37). (c) CELESC and ESCELSA to retain organization consultants and consultants to assist with 138 kv facilities (Conditions for Disbursement, paras. 52 and 67). (d) States of Minas Gerais, Santa Catarina (in relation to CEMIG and CELESC respectively) and ELETROBRAS (in relation to ESCELSA) to guarantee provision of funds to the respective beneficiaries for project completion (para. 55). (e) Equity contributions to CELESC by state of Santa Catarina payable quarterly withl quarterly payments current as condition for first disbursement of CELESC portion of loan (para. 54). (f) beneficiaries not to undertake major investments outside project without adequate technical and economic justification and available financing (para. 66).

48 ANNEX III Page 2 (g) beneficiaries not to incur long term debt unless gross internal cash generation covers maximum future debt service at least 1.5 times; ELETROBRAS to maintain ESCELSA's annual debt service coverage at 1.5 (paras. 53 and 54); submission by ELETROBRAS of plan of action to maintain ESCELSA's annual debt service coverage at 1.5 to 1 condition of disbursement of ESCELSA's portion of loan (para. 54). (h) CEMIG to review its investment and financing plans by June 30, 1979 and to propose measures to achieve annual debt service coverage of at least 1.5 to I for remainder of project construction period; Federal Government, State of Minas Gerais, and ELETROBRAS to use best efforts to assist CEMIG to achieve such annual debt service coverage (para. 53). (i) beneficiaries to earn a minimum return on remunerable investment of at least 10% (para. 33).

49 ~~~~~~~~~~~~~~~~ BRD ' RD 40' 44' 42' 40' E P FBRA /97~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 17 -r PEDRO [5 ~~~~~~~~ SOP LOGOAD "0'-~~~~~~~~~ BRAZIL * ~~~~~~~SOUTH -SOUTHEAST A ~~~~POWER DISTRIBUTION PROJECT (-ID. NB. OR ""N..* N. ~ ~~~~~~~~~~~~State of Minas Gerais OJDIRHRR0 TENDRO -OA i i - ROOD r-- I I N~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ DISTRICT j. AOB G S ) L-- 50' J 7~~~~~~~~~~~ OLOMETORO PNHIR ITOLMAGNO 5LMA FROM CACHOEFRA ~ TOMB ARA MA IANA RS G E RA I DOUBATA OJRNAS;] ROER MAMROAS ~~CHO~~~~ ~/CPRM RI,*,.PATOS D IA VOLTA~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ATF AAAE R HE OTOMOLV ORAAEOSAGADA0 PRA0 'I'I'IVR I~TABIR IGA copcs SDMON BELSPLONORAGO MASCARENHAS ( TOM lfornas) FURTO0 GAAA C PT TO E S P IR I TO K l 0B IODOOI o (IAIII Vi~~~~~~~JOIRA 0TOP01do -ooidply. 0. P pa,l f PD' BELC) NS LAFAIETE OVA 1 ~~~~~~~~~~~~~~~7 World 6ank,,d OS W.00lo, n o,do,noo -o san /000d 005- PROJECT EXISTING PNA Transmission Lines ALE1 345 or 230 kv ~~138 kv CABOIA-J OE "- ~~~~69 kv T RITA DO00 CA AMBPAIAsA 0" P0050 otosots,. ;7_ -22' FO\,O ALEG 00 ETOBAS> 22 Under Construction 00T0.0.OF2ANRIO B A ER -tt U Power Plants t ' -000O 011 Q TH, In Under Coostroction ' MRC 71Plonned. - S/orts Bounsdaries 4 ia c OIAA N~ ' do' ~2 44', Ar~~~4,1

50

51 IR&D A 53 ho SI~~~~~~~~~~~~~~~~~ ho 49 To CURITIRA URTIA FESTOARY SUAY17 970~~~.-% P A R A N CANOINHA '- FROM jz '/'- > 5 OSORIU.~~~~~~~Ih T~~~~~~~~~~IC NEGRINHO R- flu' / vts_ ${ - > t us BRACINHOC S FRANCFSCO -. \ ~~~~~~~~~~~~~~~~~~~~~~ U wd 0.4 oz g \ ~~~~~~~~~~~~~~~~~us C.RAMO 5 -us PALMEIRAS/CEDROS ".: MIGUEL 2 SAO MODELO i-t? CACADOR BLMMENA &, CHAPECC5/ z, A~~~~~~~~~~~~~~~~~~~~~ GMEARCIA CAMBORIU SEARA@.1 O~~~~~~~~~~~~~~~~' ~~~~~S CRISTOVO0 9WR R O ALT OTACRLIT COSTA LSrA D c CCND TRO BRAZIL U5 CAVEIRA E BRITO 24 SOUTH - SOUTHEAST W=Aolakhtaheiruv ho POWER DISTRIBUTION PROJECT bo ddmonsildoms State of Santa vd nd Catarina th DO BRAIO NORTE, ddombonther,rglttuotjf I ts JOACUIM PA hwoodt 1j12 GRAVATAL 1 orhs9fphfycakhcrtahh t?~~~~ GOIARDAg0 i :d JLAC 5 RO; i0 f SJO U T H E <<,< KILOMETER5 PROJECT EXISTING BRAZIL / hi' X M A E 5 R I C A 138 k TO FORQUILHINH 0d ks <7 SubsIstwian. U S ARARANGUA i' ao 0 LLE fa- - Stte Boundaries >.i 0 'rhrdouly TO : ktemnco:ol Boundory : r 10 LAcE DA HAEN _ J RA LLE 'h; e ia,. r f' -&,LI * = S A -, 1' L"AO $ T TlVA 5 '. ' I I~~~~~~~~~~~~~~~~~~~~~~~~~I

52

53 'APAPIg F%NA II J,..,,,.., ~ f\ *=S -n( ce- N. MUCLRICI ~~~~~~~~~~~~~~~ OCEAA // \,.. SOUTH Th-MUCURICI Zf t \\ / BRA ZI.. tl / /-.. \1i,< X \MONTANHA. * I <- tx ~~~~~~~AMERICAI CAMPO GRANDE t / PAd K< ) t PINHEIROS P/ INEIO : t i \ '. \\, N EA LEOTA PEDRO CANARIO N. 1 -~~~7. -ao tti~~~~~ ~ ~ ~,Rw b o e E... S BE5 S siy BOA ESPERANOA W ' KIWAETEIRS ; : 7 :; 0 0 V z -- _la. :BARRA DE SAG FRANCISCO NOVA VEC U V ral A GO, VALADARES \I S MATEd FRN J AS WIG \RHOL "N ( S~~~~~~ GABRREt CA M I N A S ' VuL:A E S P I R I T 0 r 0 G E R I A ''--. 5 RScAR' COLATINA -_ = / ARACRUT 0 OARRA-RS REIRAC nac.o, /, CARBO / LAUDIO SF / R10 SONlrO- S LEOEOLD NA AL, ~~~~~DUSTR IHE SUA ASE. SEBRA 'S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~E ISNA O ulage BRAZIL SOUTH - SOUTHEAST ( /*+ POWER DISTRIBUTION PROJECT Jff State of Espirito Santo MUNIZ PREIRE 4 g<> o JABAO 0 A ALEGRE RCONTR 4 5%s ARA ' itea t UNDER CACER. DANETA PROJECT CONSTRUCTION EXISTING I I ~~~~~~~~~~~~~~~~~~~~~~ Lines \ VIVA U 3f45 k- / fs rt _ \ I/~PE.A Elb N 138 kv I 69 kv g ff ff ~~MARATAIZES */ ** 34.5 kv S (1 0 ~~~~~~SubstatiOnJs..,' * UoMSOSOt POWer Plonts a 30 so - State Bouindaries R I O D E vvfgr f \ KIL0OMETIES J A N EI R 0N DS~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~rkr