IMPLEMENTATION COMPLETION AND RESULTS REPORT (COFN IBRD IBRD-75360) ON A LOAN IN THE AMOUNT OF US$304.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (COFN IBRD IBRD-75360) ON A LOAN IN THE AMOUNT OF US$ MILLION TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR SÃO PAULO METRO LINE 4 (PHASE 1) PROJECT FINAL DRAFT FOR COMMENTS June 1, 2012 Sustainable Development Department Brazil Country Management Unit Latin America and Caribbean Regional Office

2 CURRENCY EQUIVALENTS (Exchange Rate Effective May ) Currency Unit = Brazilian Real (R$) R$1 = US$0.49 US$1.00 = R$2.02 FISCAL YEAR January 1- December 31 ABBREVIATIONS AND ACRONYMS ATC Automatic Train Control BUI Single Integrated Fare Ticket (Bilhete Único Integrado) CBTU Brazilian Urban Train Company (Companhia Brasileira de Trens Urbanos) CDTI Integrated Transport Coordination Commission (Comité Diretor de Transporte Integrado) CEPAC Certificates of Additional Construction Potential (Certificado de Potencial Adicional de Construção) CPTM São Paulo Metropolitan Train Company (Companhia Paulista de Trens Metropolitanos) CVA Consórcio Via Amarela, the construction consortium selected for Line 4 CVQ Consórcio Via Quatro, the operating concessionaire selected for Line 4 EIA Environmental Impact Assessment IERR Internal Economic Rate of Return METRO São Paulo Metro Company (Companhia do Metropolitano de São Paulo). PCU Project Coordination Unit PITU Integrated Urban Transport Plan (Plano Integrado de Transporte Urbano) PMU Project Management Unit PPP Public-Private Partnership SPMR São Paulo Metropolitan Region SSP State of São Paulo STMSP São Paulo State Secretariat for Metropolitan Transport (Secretaria de Transportes Metropolitanos Região Metropolitana de São Paulo) Vice President: Hasan Tuluy Country Director: Deborah L. Wetzel Sector Manager: Aurelio Menendez Project Team Leader: Georges Darido ICR Team Leader: Georges Darido i

3 BRAZIL São Paulo Metro Line 4 Project CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Profile 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Beneficiary Survey Results Annex 6. Stakeholder Workshop Report and Results Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders Annex 9. List of Supporting Documents MAPS ii

4 A. Basic Information Country: Brazil Project Name: Project ID: P L/C/TF Number(s): ICR Date: 06/01/2012 ICR Type: Core ICR São Paulo Metro Line 4 Project COFN-04520,IBRD ,IBRD Lending Instrument: SIL Borrower: STATE OF SÃO PAULO Original Total Commitment: Revised Amount: USD M Environmental Category: A Implementing Agencies: Companhia do Metropolitano de São Paulo USD M Disbursed Amount: USD M Cofinanciers and Other External Partners: Japanese Bank for International Cooperation (JBIC) B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 01/11/2001 Effectiveness: 09/05/ /05/2002 Appraisal: 07/23/2001 Restructuring(s): 06/12/2008 Approval: 01/22/2002 Mid-term Review: 09/05/ /16/2005 Closing: 06/30/ /31/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Satisfactory Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Moderately Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Moderately Satisfactory iii

5 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Performance any) Potential Problem Project at any time (Yes/No): No Problem Project at any time No (Yes/No): DO rating before Closing/Inactive status: Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Sector Code (as % of total Bank financing) General transportation sector 100 Actual Theme Code (as % of total Bank financing) Infrastructure services for private sector development 40 Pollution management and environmental health 20 Urban services and housing for the poor 40 E. Bank Staff Positions At ICR At Approval Vice President: Hasan A. Tuluy David de Ferranti Country Director: Deborah L. Wetzel Vinod Thomas Sector Director/Manager: Aurelio Menendez Danny M. Leipziger Project Team Leader: Georges Bianco Darido Jorge M. Rebelo ICR Team Leader: Georges Bianco Darido ICR Primary Author: Georges Bianco Darido / Fabio Hirschhorn F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The main objective of the project is to improve the quality and long-term sustainability of urban transport in the São Paulo Metropolitan Region (SPMR) by interconnecting the existing subway, commuter rail and bus networks through the construction of São Paulo Metro Company (METRO)'s Line 4. Subsidiary objectives are: i) to improve the accessibility of the low-income population who are the main users of the São Paulo s Metro to employment centers and health and education facilities; and ii) to seek private sector participation in the development of Line 4. iv

6 Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Percentage of Line 4 stations integrated with bus lines Metro share of urban transport motorized trips (%) Generalized cost of travel (travel time plus fare plus reliability) between Vila Sonia and Luz in minutes (*baseline value revised in 2008 from 89) Metro s working ratio of operating costs divided by operating revenues (excluding depreciation, cost of capital and Line 4 operations) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years 0% 90% 100% 100% 16% 23% 17.5% 19.3% 104* <1 < (b) Intermediate Outcome Indicator(s) Indicator Percentage of infrastructure completed Percentage of stations completed Percentage of system works completed Percentage of rolling stock delivered Financial management and cost recovery review of the Metro Follow-up study on private sector participation Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years 0 100% 100% 0 100% 100% 0 100% 100% 0 100% 100% Recommendations Implemented Study Completed Study was concluded and recommendations were implemented. Study was concluded. v

7 G. Ratings of Project Performance in ISRs No. Date ISR Actual Disbursements DO IP Archived (USD millions) 1 05/08/2002 Satisfactory Satisfactory /08/2002 Satisfactory Satisfactory /10/2002 Satisfactory Satisfactory /22/2002 Satisfactory Satisfactory /21/2003 Satisfactory Satisfactory /04/2003 Satisfactory Satisfactory /28/2003 Satisfactory Satisfactory /28/2003 Satisfactory Satisfactory /10/2003 Satisfactory Satisfactory /09/2003 Satisfactory Satisfactory /29/2004 Satisfactory Satisfactory /12/2004 Satisfactory Satisfactory /09/2004 Satisfactory Satisfactory /07/2005 Satisfactory Satisfactory /14/2005 Satisfactory Satisfactory /18/2006 Satisfactory Satisfactory /10/2006 Satisfactory Satisfactory /15/2006 Satisfactory Satisfactory /08/2007 Satisfactory Satisfactory /11/2007 Satisfactory Satisfactory /21/2008 Satisfactory Satisfactory /19/2008 Satisfactory Satisfactory /08/2009 Satisfactory Satisfactory /14/2009 Satisfactory Satisfactory /14/2010 Satisfactory Satisfactory /11/2010 Satisfactory Satisfactory H. Restructuring (if any) First closing date extension was approved in March An Additional financing, second closing date extension, and revised target values for indicators approved in April vi

8 I. Disbursement Profile vii

9 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Brazil s Economy: By 2001, when the Project Appraisal Document (PAD) was finalized, Brazil s economy had taken a positive turn thanks to several market-friendly and macroeconomic reforms, and political stability. The results suggested Brazil would enter into a sustained growth path. The main outcomes were (see also Table 1): (a) Inflation had been curbed and lowered to less than one digit. In 1986, inflation was 146% per year, while in 1997 it was 6.9%. Following the signing of the IBRD loan in 2002, annual inflation peaked in 2003 (14.7%) and then fluctuated between 4% and 6% in the following years. (b) The exchange rate R$ per US$ observed significant fluctuations that affected the life of the project. It was below 2 in June 2000, much lower than by the time the loan agreement with the Bank was signed (2.7 in June 2002) and then peaked in 2004 (above 3 in June that year), remaining high after that. (c) Economic growth was positive, but still low. After the lost decade of the 1980s, Brazil s economy was growing at positive but low rates until 2004 when a stronger growth trend started and persisted until the global crisis in 2008/2009. (d) Foreign Direct Investment flows were increasing by the end of the 1990s as the country was seen as one of the emerging economies with a brighter future, becoming part of the BRIC group. These investments decreased, however, between 2002 and 2006, growing significantly from then on. Table 1. Key Economic Indicators for Brazil Sources: World Bank s World Development Indicators; Brazilian Central Bank; OECD. Item/Year Inflation Consumer Price (annual %) GDP growth (annual %) Foreign Direct Investment Net (BoP) Current US$ (millions) 30,497 24,714 14,108 9,894 8,694 12,549 9,420 27,518 24,601 36,033 36,919 Exchange rate R$ per dollar (by June of each year) (from June 1st to June 1st) Primary Fiscal Balance (% of GDP) Economy and Urban Transport in the São Paulo Metropolitan Region (SPMR): With 8050 sq. km and 16.8 million inhabitants spread irregularly over 39 individual municipalities, the SPMR generated over 20% of Brazil s GDP by the time of appraisal. The most important economic region in the country has observed a shift of mature industries from the city to smaller urban centers with the substitution of 1

10 manufacturing by service activities in the last 20 years. However, the loss of traditional manufacturing jobs in the eastern districts of the city has not been compensated by new business activities in these areas. In addition, São Paulo s extremities in the North and South attracted new residents, but have struggled to generate stable employment growth. The factors mentioned above resulted in uneven wealth distribution and lack of access to job opportunities, in addition to increased traffic congestion and atmospheric pollution. Despite an existing 270 km rail network, the lack of integration between the Metro and the suburban trains discouraged more rail trips in favor of buses and the automobile, thereby creating heavy congestion during peak hours and significantly increasing travel times. In sum, (i) shortage of capacity at peak hours, (ii) long work journeys (2.5 hours/day) from the Metropolitan periphery to the urban centers, with often more than two modal transfers; and, (iii) high fares were the main problems faced by the urban poor the main users of public transport in the SPMR Rationale for the Project: The project rationale was (i) the significant need for enhancing public transport infrastructure and services, (ii) the significant financing constraints that limited infrastructure investments (which required the phasing of this project); and (iii) a general interest in benefiting from private sector involvement in infrastructure financing. Moreover, the project responded to the Bank's urban transport strategy in Latin America and for the SPMR that was anchored in improvements to public transport complemented by four strategic pillars: a) to establish a regional transport coordination commission (RTCC) with the municipalities, operators and users, which has already occurred; b) to develop and update on a periodic basis an integrated land use, urban transport and air quality strategy; c) to introduce financing mechanisms which will guarantee the long-term sustainability of the urban transport systems; and d) to promote progressive private sector participation in the investment and operations management of those systems. Line 4 project represented a priority undertaking for the State of São Paulo (SSP) within the Integrated Urban Transport Plan (Plano Integrado de Transporte Urbano PITU) for the SPMR. As designed, the new underground Line 4 would (i) serve as a "bridge" between METRO's Line 5 and Companhia Paulista de Trens Metropolitanos (CPTM) western commuter lines to the rest of the Metro network, (ii) interconnect with all three existing Metro lines to provide a grid flexibility to the Metro network which does not exist with the present radial configuration, and (iii) interconnect two CPTM commuter rail lines. The Line 4 project also consolidated and deepened previous efforts from the World Bank, initiated under the São Paulo Metropolitan Transport Decentralization Project (Ln BR) and the Barra Funda-Roosevelt project (Ln BR), which assisted respectively in the decentralization of the federally-owned Brazilian Urban Train Company (Companhia Brasileira de Trens Urbanos CBTU) to the State to allow for more effective modal and tariff integration, and in connecting the two suburban rail systems. The project was designed as a vehicle to promote greater private sector participation in the investments and operation of urban rail systems, a catalyst for physical and tariff 2

11 integration in the SPMR and to provide more credibility and ensure accountability in the preparation and bidding process of Line 4. These roles were aligned with the then current Bank's assistance strategy to Brazil (approved by the Board on March 30, 2000). The Line 4 project included an operating concession with private financing, which is considered the first urban rail PPP in Brazil and one of the first in the world. It also incorporated a turnkey contract and achieved significant additions of much-needed infrastructure capacity in a challenging economic and practice environment. 1.2 Original Project Development Objectives (PDO) and Key Indicators The project objectives were: (a) to improve the quality and long-term sustainability of urban transport in the SPMR by interconnecting the existing subway, commuter rail and bus networks through the construction of Line 4; (b) to improve the accessibility of the low-income population of the areas served by Line 4 to employment centers and health and education facilities; and (c) to seek private sector participation in the development of Line 4. The original performance indicators were: 90% of the stations of Line 4 integrated with buses; Average generalized travel costs considering travel times, fares, and reliability for users between Vila Sonia and Luz would be reduced from 89 to 51 (quantified in minutes using a value of time methodology, a 42% reduction) with Line 4 in operations compared to without; Higher mode share (23%) of Metro in total urban transport motorized trips in the SPMR reflecting increase Metro ridership and reduced bus and automobile trips in the Line 4 corridor; METRO will not require an operating subsidy for its operation as represented by its working ratio. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification There were no changes to the PDOs. The target values or dates for some indicators were changed in conjunction with the additional financing approved in 2008 for Phase 1 mainly to reflect the realities of the implementation (including the delays described further in Section 2.2) and the following considerations: Increasing the target percentage of Line 4 Phase 1 stations integrated with buses to 100% reflecting a greater coordination in the region between city and state. Average generalized travel costs between Vila Sonia and Luz would be reduced from 104 to 82 minutes with Line 4 Phase 1 in operations (a 21% reduction). The higher value for the baseline reflects the growing traffic congestion between this origin and destination during the more than 3-year delay to complete Phase 1. The revised target value also reflects higher than expected growth in traffic and an updated methodology for value of time. A revised methodology to calculate the base mode share for Metro in 2001 also required the target mode share to be adjusted to 17.5% in 2010; 3

12 Clarifying that METRO s working ratio (operating costs over operating revenues) is to remain less than one, excluding depreciation, cost of capital and the operations of Line Main Beneficiaries The expected beneficiaries during appraisal were the residents of the SPMR, but particularly low-income households (earning up to four minimum salaries) who are major users of public transport. Being a link between suburban railway and the Metro network, the Line 4 catchment area is not limited to the neighborhoods directly served by its stations and attracts a significant number of transit users. Line 4 is located in the southwestern quadrant of the SPMR, but trip origins are not restricted to this area: as an example, 20% of the trips on Line 4 are originated in the peripheral districts of the eastern part of the SPMR (which are amongst the poorest areas in the SPMR), thanks to the good connection between the rail network and Line 4. In this sense, Line 4 was to increase the number of jobs accessible from the periphery, as well as health and education centers. Moreover, it also improved the travel conditions of public transport users. With the use of a turnkey and concession contracts to the private sector, the SSP was also expected to benefit by not assuming construction cost escalation and operating subsidies while expanding its Metro system (operated by the METRO). The construction of the new underground Line 4 would also divert a substantial number of commuters from roadbased mode, thereby reducing vehicle-kilometers and congestion in the area of influence of the line, and resulting in positive economic and environmental impacts in the long-run. METRO was also expected to be a beneficiary because the project piloted several innovations (a turnkey contract and private operating concession in a type of Build- Operate-Transfer arrangement) to help METRO contain cost growth and develop the needed network. 1.5 Original Components At the time of loan approval in 2002, São Paulo Metro Line 4 project already envisaged a Phase 2 since the SSP did not have the debt capacity required by the Federative Republic of Brazil (guarantor) to complete all the 11 stations planned. As such, the project was divided in two phases: Phase 1 in which at least five stations would be fully completed, and Phase 2 in which the remaining stations would be finalized and a new station would be built. The following components were approved as the Line 4 (Phase 1) Project: Part A: Infrastructure and Equipment Investment Construction of, provision of equipment for, and operation and maintenance of, the line of the SP Metro which will link the SP Metro s Vila Sonia yard facility to the SP Metro s Luz station (Line 4), consisting of about 12,800 meters of double underground track, 5 stations and 4 station shells, acquisition and installation of system-wide facilities (including fixed installations for electrification), and acquisition and operation of 16 train sets. Part B: Technical Assistance 4

13 Provision of technical assistance for: (1) the management oversight and supervision of the carrying out of Part A of the Project; (2) the carrying out of a financial management and cost recovery review (including recommendations on tariff structure) of the SP Metro operations; and (3) for a follow-up project finance study on alternatives for private sector participation in the carrying out of Part A of the Project. Phase 1 of the project was co-financed by the Japanese Bank for International Cooperation (JBIC) in the same amount as the Bank s financing (US$209m), by the State of São Paulo (US$332m) and by a private consortium (US$183m) who in 2006 was competitively awarded the concession to operate the system for 30 years in exchange for the provision of rolling stock and systems. 1.6 Revised Components The following changes consistent with the objectives of the project and scope of Part A and B of the loan were made between approval in 2002 and project restructurings in 2007 and 2008: Inclusion of a sixth station, Faria Lima, in Phase 1; Change in the construction method from Shields to NATM in parts of Lot 2 (was done by the project with all risks assumed by the turnkey contractors); Delivery of 14 train sets instead of 16 (was done by the operating concessionaire); Inclusion of the executive project (advanced engineering design) for supply and implementation of platform door system (PSD) for the Phase 1 and Phase 2 stations; Inclusion of the executive project for the production, supply and implementation of data transmission system (STD); Inclusion of the executive project for the production, supply and implementation of the passenger fare collection system (SCAP) Line 4, phases 1 and 2, including Vila Sonia yard; Inclusion of the executive project for the supply and implementation of moving walkways. 1.7 Other significant changes A centerpiece of this project was the turnkey contract for civil works and electrification, financed by the Bank and JBIC loans, as well as by the SSP. After the effectiveness of the turnkey contract, two trends in the Brazilian economy occurred and significantly affected the initial financial equilibrium of the project: the R$ started to unexpectedly appreciate in relation to the US$ and the inflation rate held steady with very small growth. This affected all of the annual price readjustment formulas in the turnkey contract and led the SSP to request additional financing to cover a portion of the financing gap associated with the devaluation of the US$ in relation to the Brazilian currency. In April 2008 the Bank approved an additional loan (IBRD-75360) of US$95.0 million to compensate for the effect of the US$ devaluation and of inflation over the turnkey contract costs and the respective annual price readjustment clause. The same co-financing ratio for the Bank and JBIC was maintained for the additional financing. The closing date of the original loan was extended two times. The first extension was from June 30, 2007 to June 30, 2009 occurred in March A second extension to 5

14 June 30, 2010 occurred in conjunction with the approval of the additional loan. The original loan was closed and fully disbursed by June 30, In May 2010, the Bank approved a 9-month extension of the closing date of the additional financing loan from June 30, 2010 to March 31, 2011 to allow for the completion of civil works and systems for full operations and full disbursement of funds. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry: The Project quality at entry was satisfactory for the following reasons: a) The Project and PDO were solidly conceived and structured given what was known at appraisal. The first PDO was designed to be achieved by financing the construction of Line 4 of the São Paulo Metro which will ultimately link the Vila Sonia suburb with the Luz station (Phases 1 and 2) with a 12.8 km underground line and at least five stations for Phase 1. The second PDO would be achieved by promoting modal and fare integration between buses, subway and rail, in such a way as to minimize the overall generalized cost of travel (including fare, travel time, and reliability) particularly to the low income users of the system from peripheral areas like Embu and Taboão da Serra. The third PDO would be met through either a concession agreement or other private sector participation arrangement to obtain at least 20% of the cost of the project. b) The Line 4 project consolidated and deepened previous efforts from the World Bank, initiated under the São Paulo Metropolitan Transport Decentralization Project (Ln BR) and the Barra Funda-Roosevelt project (Ln BR), which assisted respectively in the decentralization of the federally-owned CBTU to the State to allow for more effective modal and tariff integration, and in connecting the two suburban rail systems. The Bank s participation (including IBRD and IFC) promoted a wider private sector participation in the investments and operation of urban rail systems, physical and tariff integration in the SPMR and as provided more credibility and ensured accountability in the preparation and bidding process of Line 4. c) Moreover, the project was fully aligned with the Bank's assistance strategy for Brazil at the time of preparation (approved by the Board on March 30, 2000). The five pillars that support the overall poverty reduction strategy of the Country Assistance Strategy (CAS) were: (a) targeted interventions to reduce poverty, among others through the provision of urban services to the poor, (b) sustainable fiscal adjustment, among others through reform of public enterprises, (c) renewed growth, among others through private sector participation in infrastructure provision, (d) improved government effectiveness, and (e) effective environmental management. The project constituted an important element to allow the program to meet the CAS objectives (especially in terms of targeted provision of services to the poor, fiscal adjustment and economic growth). d) The project incorporated in its design the lessons identified in previous urban transport and urban projects around the world: the need to include institutional strengthening in all levels of government involved with urban transport, ensure adequate and timely 6

15 counterpart funds, and measures to deal with different factors (such as lack of familiarity with Bank procedures, overoptimistic scheduling at appraisal, lack of final engineering designs at appraisal, changes in political commitment) that may lead to slow project implementation. e) The creation of a Secretariat for Metropolitan Transport indicated the importance attached to the provision and maintenance of an efficient Metro and suburban rail (CPTM) system by the SSP. Metro Line 4 project was considered a priority by the State administration as soon as the Federal Government authorized the resumption of borrowing from the Bank. f) At project preparation the overall risk rating was moderate. A range of risks were evaluated during project preparation and appropriate mitigation measures were considered. Among the most relevant risks: cost increases, delays in procurement and resettlement, limited private sector interest in the concession, and tariffs too high for lowincome users after private sector participation. Intrinsic risks such as construction accidents were not itemized in the original PAD, but are typically mitigated as part of the design and implementation of civil works. While currency risk was not explicitly considered among the causes of potential cost increases (the impacts of which are described in 2.2b below), this risk could not have been credibly forecast at preparation. 2.2 Implementation International experience shows that due to the high and intrinsic complexity of major infrastructure projects such as Line 4, it is not uncommon to observe unforeseen implementation problems and delays. The integration between public and private sectors in these transactions also brings additional complexity to the design and implementation of these operations. Line 4 Phase 1 was completed and fully operational by September 2011, over 3 years later than the estimated completion date at appraisal in 2001 for the reasons described below. As described in Annex 2, all outputs were substantially delivered with very few changes. a) Delays: An initial 14-month implementation delay was caused by a combination of procurement litigation and a delay in expropriation due to a protracted strike of the official evaluators of property values. The unavailability of counterpart funds in the first year may have also delayed implementation. As it is common for these kinds of projects in Brazil, the awarding of the civil works turnkey contract was protested in the court by joint-ventures that were initially pre-qualified and subsequently eliminated in the second review. Finally, the project schedule and disbursement were also delayed by more than one year following a fatal construction accident in 2007 (described further below) as authorities had to show that designs and civil works were safe and redesign parts of the Pinheiros station. b) Devaluation of the Dollar: The project included two main contracts both designated in Brazilian Reais: (a) a turnkey contract for the provision of civil works and electrification for the 12.8 km of Metro line which is financed by the Bank, JBIC and State; and (b) a concession to operate the system for 30 years, in exchange for the provision of the rolling 7

16 stock and systems, financed mainly by the private sector and the State. The turnkey contract, accounting for about 80% of total project cost, was signed in August 2003, when the exchange rate was R$2.993 per US$. As of March 2007, the exchange rate had dropped below R$2.00. The continuous devaluation of the US Dollar vis-à-vis the Brazilian Real during project implementation put a major strain on counterpart funds. This coupled with the annual price readjustment formulas in the turnkey contract resulted in the need for the withdrawal applications submitted to the Bank and JBIC to use a much larger amount of dollars to cover the costs of the R$ than foreseen. An additional loan for US$95 million was approved by the Bank in April 2008 to help cover this financing gap to complete Phase 1. c) Capital Cost Increase: As detailed in Annex 1, the variation between the total public sector contribution in 2003 and 2012 is US$ million, an increase of 72%. This variation was primarily due to: (1) changes in the scope or schedule of the project including amendments and change in construction methods (about 47% or US$ million), (2) variation in the exchange rate (about 28% or US$ million) given that the financing was in US Dollars while main contracts were in Brazilian Reais, and (3) increase in prices due to the annual readjustment formula (inflation) in the contracts (about 25% or US$ million). d) Construction Accident: On January 12, 2007 a construction accident involving the collapse of the shaft at the future Pinheiros station caused seven fatalities. The people killed were passengers in one informal minivan that was wrongly in the area, one truck driver and one pedestrian walking on a nearby street. No construction workers were killed or hurt. Several homes and other structures were affected. Six homes were demolished shortly after the accident and others were evacuated by Civil Defense authorities. The Bank monitored the review of the construction safety standards with recommendations for their enhancement and better enforcement. The causes of the accident have been thoroughly investigated by the relevant authorities and a report was produced by the renowned São Paulo Technological Research Institute (Instituto de Pesquisas Tecnológicas - IPT). The investigation concluded that a number of factors contributed to the accident including weaknesses in project engineering, civil works implementation (particularly supervision of tunnel settlement), and overall risk management. Even though it was preventable, the accident caused an unforeseeable delay in the project, as works had to be stopped. The Bank also monitored and documented the successful mitigation of all social and environmental impacts of the accident. In the immediate aftermath, all the evacuated families were accommodated at five-star hotels at the expense of the construction consortium, Consórcio Via Amarela (CVA). The Bank requested the Borrower to submit detailed monthly reports which confirmed that all required compensation and pending cases were being resolved appropriately. Settlement negotiations involved the claimants, CVA, Unibanco AIG and METRO, with oversight by São Paulo Public Defender and the State Justice Department which ratified all decisions. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 8

17 2.3.1 M&E Design: The project was monitored through an appropriate set of indicators adopted by the Borrower to reflect the achievements of the PDOs (see Section F of Datasheet). Two indicators (percentage of integrated stations, the share of Metro in urban transport motorized trips) address the first part of the PDO, which is related to the integration and quality of services in the region. The third indicator (generalized cost of travel in minutes) addresses the second PDO related to the accessibility of low-income population from areas served by Line 4 to employment centers and health and education centers since a majority of these trips are made by low income people (those earning less than the equivalent of 4 minimum salaries). In addition, the project had the objective of seeking private sector participation in the development of Line 4, which was achieved through a concession agreement signed with CVA. Regarding the M&E of outputs, four indicators were defined for Part A (% of infrastructure completed, percentage of stations completed, percentage of systems works completed, and percentage of rolling stocks delivered). Two indicators were defined to monitor the institutional development promoted by the project - Part B (financial management and cost recovery review of the Metro, and follow up study on private sector participation) M&E Implementation and Utilization: The Project team appropriately used the outcome and output indicators to supervise the progress of the objectives and implementation. As described in Section 1.3, some of the original targets for the outcome indicators were revised in 2008 to reflect the changing conditions of the project. Annual or semi-annual monitoring reports included useful updates on institutional objectives such as integrated modal tariffs (Bilhete Único Integrado, BUI), creation and maintenance of a regulatory commission, and environmental management programs. The ISRs were timely and usually included an Aide Memoire as an attachment. In the first few years of the project, the ISRs and monitoring reports included updates on two output indicators related Part B of the loan agreement: Financial management and cost recovery review and follow-up study on private sector participation that were completed and implemented. 2.4 Safeguard and Fiduciary Compliance Procurement: The procurement component was well designed and supervised. The implementing agency had good procurement capacity, as assessed during preparation, and was knowledgeable of Bank procurement procedures Financial Management: Financial management was in compliance with Bank procedures. Both the State and METRO had previous experience with Bank loans and were able to handle all aspects related to the financial management of the project including accounting, disbursement and auditing functions. Auditing was carried out annually by independent consultants selected on a competitive basis according to Bank procurement guidelines. Financial management reporting and auditing have been satisfactory Environmental: The Project was rated Category A (Full Assessment) and triggered the Environmental Assessment and Involuntary Resettlement policies of the Bank. The 9

18 project was expected to have a net beneficial impact on society and the environment. The new subway link would help relieve congestion in major transport corridors and central areas, resulting in lower emission of pollutants per vehicle-kilometer. Junction improvements and pedestrian overpasses would improve safety and quality of life. The Line 4 Phase 1 Project had a full environmental assessment, which was submitted by the Board prior to its approval. The project has been successful in preventing or mitigating direct environmental and social impacts. The procedures and supervision given to the project were adequate. The environmental impacts of the accident at Pinheiros station during the implementation of Phase 1 were minor. Subsequent to this accident and as a prerequisite for the Additional Financing (loan 7536-BR), the Bank required a detailed social assessment, periodic monitoring of those affected by the accident, and an environmental assessment of the accident Social: The Line 4 project included a significant amount of resettlement that was conducted by METRO in a manner consistent with the agreed plan and Bank policy. As is common for underground civil works, minor damage to structures along the alignment were recorded during implementation and appropriately repaired or compensated by the turnkey contractor under the supervision of METRO. Other direct impacts of the project include increasing the accessibility of low-income population to public transport and to employment centers, health, education, and leisure facilities. The main beneficiaries of Line 4 are the populations of Embu, Taboão da Serra, Cotia, Embu Guaçu, Itapecerica da Serra, Juquitiba, São Lourenço e Vargem Grande Paulista whose accessibility to the Central Business District (CBD) and other areas of employment, health and education facilities was greatly enhanced. At least 50% of Metro users are considered low income and live in the suburbs of the greater SPMR. 2.5 Post-completion Operation/Next Phase The operating concessionaire CVQ is successfully operating Line 4 with generally smooth relationship with both METRO and SSP. Both public and private sector parties are generally living up to their contractual obligations. User satisfaction with Line 4 is high and there are some elements of service that are particularly note-worthy, such as attendants at stations to orient passengers and assist disabled travelers. A Bank loan for US$130 million was approved in 2010 for Line 4 Phase 2 which includes the civil works and systems to complete the 12.8 km subway with 11 stations. This loan was matched by financing from JBIC for an amount of US$130 million. The State and private sector concessionaire are to provide counterpart funds. Besides the financing of infrastructure and equipment for the additional stations, Phase 2 is also composed of a technical assistance component for: (i) the management oversight and supervision of the carrying out of the works for the construction of the stations; and (ii) the carrying out of specific studies or assessments required during the execution the Project. The Bank also required an interface agreement for the implementation of Phase 2 while Phase 1 is in operations between METRO, the State s regulating commission, and the private operating concessionaire. The recently signed civil works contracts of Phase 2 also include a provision to abide by this agreement. 10

19 The latest step in the evolution of the engagement between the State of São Paulo and the World Bank involving urban public transport enhancement, in particular regarding an increased participation of the private sector in the investment and operations management of transport systems, is the April 2012 signing of a Fee Based Service contract. Through this agreement the Bank will support the State of São Paulo in developing and implementing an evaluation framework for private sector proposals for new infrastructure projects as well as building the SSP's capacity in PPPs. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation The PDOs remained relevant throughout the life of the two loans and did not require any changes in response to changing government priorities or external conditions. The objectives also stayed relevant in light of Bank s priorities regarding Brazil. For example, the objective of improving quality of urban transport by developing an integrated mass transport system was in line with the CAS (Report no ) priority of Investing in growth, including enhanced emphasis on improving competitiveness and investing in infrastructure. A high-quality integrated transit system is an investment in infrastructure that promotes urban competitiveness and efficiency by requiring fewer resources to move passengers, hence also promoting growth. The PDOs are also in line with the Country Partnership Strategy (CPS, Report no ) which identifies as Brazil s country goals: (i) to improve competitiveness by investing in the transport system, and (ii) to reduce inequality by providing, among others, job opportunities for the poor. The improvements to the integrated system benefit mainly the poor residing in the periphery of SPMR. Project amendments, including the additional financing and extensions of the closing date, reflected an appropriate level of flexibility by the Bank that allowed the completion of the Project. The planned implementation period of 5 years was appropriate given the risks identified during preparation but turned out to be too short given the complexity of the project and unforeseen delays regarding resettlement and the construction accident. 3.2 Achievement of Project Development Objectives a) Achievement of the first PDO, to improve the quality and long-term sustainability of urban transport in the SPMR by interconnecting the existing subway, commuter rail and bus networks through the construction of Metro's Line 4, is considered Satisfactory based on the following: The stations planned for Phase 1 began operations gradually between May 25, 2010 and September 15, 2011 and six stations are now fully operational. The Phase 1 portion of Line 4 was moving over 600,000 passengers per day after 6 months in operation with a strong growth trend. This ridership meets the projections at the time of preparation and during implementation. In the last decades, very few new metro lines in the world have achieved this level of ridership, which validates the soundness of the project and the significant projected benefits. Line 4 is no doubt an essential integration line of the São Paulo metropolitan public transport system. 11

20 The share of Metro trips among motorized trips in the Region increased from 16% estimated for 2001 to 19.3% estimated for This is a significant achievement considering the rapid growth in motorization during this period that is highly correlated to rising incomes. The other rail ridership and mode share of CPTM also increased significantly in this period. This positive trend is attributable to a portfolio of investments made by the SSP, including the implementation of Line 4, improved reliability and service frequencies on CPTM lines, and extensions to Lines 1, 2 and 3. The integration of municipal and inter-municipal bus lines was achieved in all six stations of Phase 1. This allowed for the efficiency benefits of transferring passengers from the surface roads to rail-based modes in a new underground line. Metro s working ratio (defined as operating costs divided by operating revenues) has always remained below one as planned and has actually improved with the introduction of Line 4. While the financial impact cannot be fully assessed because detailed operating cost data is not publically available from the concessionaire, this result suggests that the public sector s burden has remained the same or decreased with Line 4. This is a very important achievement for the financial sustainability of the metropolitan transport network. b) Achievement of the second PDO, to improve the accessibility of the low-income population of the areas served by Line 4 to employment centers and health and education facilities, is considered Satisfactory based on the following: Although, the original target for the generalized travel cost indicator was only partially achieved, the target revised in 2008 was more than fully achieved by Line 4 is effectively interconnecting the western part of the SPMR with the rest of the Metro and suburban rail network with greatly improved travel times, convenience and reliability (a 30% improvement in generalized travel costs from 104 to 73 minutes). The trip between Luz station (center) and Vila Sonia (Western periphery) used to be made only by car on congested corridors or by bus with multiple transfers but now is served by Line 4 Phase 1 between Luz and Butantã (Phase 2 is expected to be operational to Vila Sonia in 2014). In addition, and perhaps less obvious, Line 4 has significantly increased mobility and accessibility for residents of low-income areas in the eastern and northern periphery of the SPMR by virtue of significant improvements in physical, operation and fare integration in SPMR in the last decade. Physical and operational integration refer to the investments made to transfer stations, platforms, and extension of the network including Line 4. Line 4 is physically or operationally integrated with Lines 1, 2 and 3 of Metro and Lines 7, 9, and 12 of CPTM. Fare integration refers to the implementation of the Bilhete Único starting in 2006 which provides free transfers between Metro, CPTM, municipal buses, and some inter-municipal buses by way of especially branded contactless farecards. c) Achievement of the third PDO, to seek private sector participation in the development of Line 4, is considered Satisfactory based on the following: The Line 4 project represents a significant achievement in the involvement of the private sector in new urban rail project development and operations in Brazil. Line 4 was the first Metro project developed under federal and state Public-Private Partnership (PPP) laws, breaking the paradigm that had always relied on public funds 12

21 to fully finance greenfield Metro systems. Moreover, the concessionaire s successful operations using new technologies such as driverless train operation (Communications-Based Train Control) and station platform doors suggest greater operating efficiencies (lower costs) and improved safety performance. Metro Line 4 introduced an innovative structure for Brazil including the owner (METRO), operating concessionaire established by a consortium of private companies, and a turnkey contract signed in 2003 for the construction works. Infrastructure and part of the rolling stock were financed by the SSP (with the support of loans from the World Bank and JBIC) and by private partners at 80% and 20% respectively. The 30-year concession contract includes the operation of Metro Line 4, as well as the investment and installation for rolling stock, signs, track connections and data transmission with the train networks. The operating company supplied 14 trains in this phase. An estimated $183 million of private investment was made in Line 4 although the actual figures are not publicly available. The concessionaire received a loan from the private arm of the Inter-American Development Bank to finance its obligations. The risk allocation structure attempted to leverage each partner s strengths: construction which is difficult to finance was handled primarily by the public authority with support from international agencies. All aspects related to operations (including rolling stocks and systems) are financed by the operator. Finally, METRO and a Regulatory Commission for the São Paulo State Secretariat for Metropolitan Transport (STMSP) ensure coherence for the transit system. Delays in construction were covered by the turnkey contract. Demand risks (revenues) are shared in that the operator may receive compensation or remunerate the transit authority if actual demand is beyond a predefined band for an initial period of Phase 1 and Phase 2 operations. Beyond this initial time frame, the operator covers the commercial risk of Line Efficiency A conventional cost-benefit analysis for Phase 1 was carried out using by using the latest cost and benefits estimates available. The situation with the project was compared against the situation without the project. The methodology used was the same as the one used during appraisal for Phase 1 and Phase 2 to ensure comparability of results. The revised Net Present Value (NPV) of benefits calculated for this report is $364M and Economic Internal Rate of Return (EIRR) is 13.8%. This ex-post assessment confirms a positive economic efficiency of the project and the EIRR is higher than international experience with metro projects of this kind, which average around 8%. The result is also generally consistent with, though lower than, the NPV and EIRR calculated at Phase 1 appraisal in 2001 ($554M, 17.7%) and at Phase 2 appraisal in 2008 ($825M, 15.6%) primarily due to an increase in costs and updated assumptions. The following conservative assumptions were made in this analysis with respect to the situation at appraisal: 1. Updated investment cost stream to reflect the changes to the components and timing 2. Updated benefits stream to reflect the approximately 4-year delay in the start of Phase 1 operations since the original appraisal 13

22 3. Maintained the reduction in wages and the incremental increase in operating and maintenance cost which were consistent with appraisal 4. Updated value of time coefficients to account for the differences in time-savings for home to work, business and other trip types 5. Updated travel purpose distribution based on latest estimates 3.4 Justification of Overall Outcome Rating Rating: Satisfactory The rating of Satisfactory is based on: (i) the continued relevance of the project objectives and design; (ii) the satisfactory achievement of the three development objectives; and (iii) the estimated positive economic efficiency of the investments despite significant cost increases and delays to complete the Project. As evidence of this and according to KPMG s publication Infrastructure 100 World Cities Edition to be issued in July 2012, Line 4 is one of the 100 most innovative infrastructure projects in the world. The selection was made by international specialists based on project scale, feasibility, complexity, innovation and impact on society. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development Poverty Impact: As described above, Line 4 has improved the access of low-income populations to educational centers, medical centers and to the commercial centers of Butantã, Pinheiros, Faria Lima, Paulista and downtown region of the city of São Paulo. A long-term study of the travel conditions of the poor population in the areas influenced by the Line 4 project was begun in 2010 with a survey before the project entered operations. A second survey is planned in 2012 approximately one year after Phase 1 operations began. A final survey will be conducted after Phase 2 is in operations. Preliminary results from the initial survey and the Bank s analysis suggest that low-income commuters from the periphery of the region benefited the most from the combination of the single integrated fare (BUI) and Line 4. The majority of accessibility benefits (proximity to land uses that generate social and economic opportunities) and mobility benefits (generalized travel savings) were accrued to low-income families in the periphery of the SPMR who now use Line 4 as one of the legs of journey to cross the city or region. Residents of all income classes in the immediate vicinity of Line 4 stations also experienced significant benefits that became apparent in the rise in real estate values. This effect and the relative values of real estate in the region continue to be studied by METRO with support from the Bank under the Phase 2 project to better understand the long-term impacts of such major investments. Private Sector Participation: In addition to jump-starting a public-private partnership in the construction of a new subway line under a turnkey contract and an operating concession (a major reform supported by the project), the Line 4 project helped to create the enabling environment to attract private sector investment for future projects in urban transport. The operating cost recovery of the Project and the importance of maintaining the working ratio of METRO with the Line 4 were also aspects addressed by the project. Line 4 provides a benchmark against which the other privately operated urban rail lines will be measured. 14

23 Urban Development: A long-term study of properties values and real estate dynamics in the areas surrounding Line 4 is being conducted by METRO with the support of a specialized consultant. Quantifying the urban development impacts of transport projects is a step towards refining the instruments available to the city or state administration, for example urban operations and the sale of Certificado de Potencial Adicional de Construção (CEPAC), a type of densification credit. There were three urban operations in the vicinity of the Project-- Nova Luz, Faria Lima and Vila Sônia, all which are or plan to leverage investments in public transport. Based on the experience of Faria Lima Urban Operation, the Vila Sônia Urban Operation and CEPAC sale may be able to raise as much as R$300 million in revenues. Vila Sônia Urban Operation is currently in draft pending approval by the Environmental Council of the City of São Paulo. These estimated resources would be directed, firstly to projects of low-income housing, secondly to the environmental valuation and, thirdly to structural urban planning transformations (improvement of roads, sidewalks and urban equipment). (b) Institutional Change/Strengthening PPP Capacity Building: In November 2006, SSP successfully awarded a 30-year concession for system operation including private financing. This was a landmark event and the first project (considered a PPP in Brazil) signed by any public sector agency in Brazil since the passage of federal PPP legislation in The Bank and Project were instrumental in building capacity through the institutional component of the loan (Part B) and supervision activities. Overall, most urban transport specialists would agree that the Line 4 experience opened a number of horizons, changed attitudes, and made the sector more friendly to private investment while expanding the planning in areas such as poverty impact, urban operations, integrated fare structures. The present administration is seeking new PPPs on the basis of this positive experience. Regulation: One of the requirements of the loan was that the Borrower should establish a Regulatory Agency or Transitional Regulatory Entity independent of the State Secretary for Metropolitan Transport no later than one year after signing. This was partially achieved with the implementation of the Regulatory Commission in However, the Regulatory Commission continues to be attached to STMSP. Regional Coordination: The institutional coordination developed as part of this project was part of the foundation for strengthening metropolitan governance, an idea supported by the Bank as a means of improving the quality and the efficiency of transport policies in the SPMR. Of special importance is the operationalization of the Regional Transport Coordination Commission with participation of the City of São Paulo and the other municipalities of the SPMR. An entity was formed around 2004 and is now referred to as the Integrated Transport Coordination Committee (Comitê Diretor de Transporte Integrado - CDTI). The SSP's strategy with the support of the Bank was to create a regional coordination entity empowered to do the planning, coordinating and priority-setting for new investments and modal integration in the SPMR. Its first and perhaps most important initiative taken up by the CDTI was the 15

24 design and introduction of the BUI in CDTI continues to meet regularly and is primarily a forum for discussion of metropolitan transport policies and projects. (c) Other Unintended Outcomes and Impacts (positive or negative) The 2007 construction accident at the Pinheiros station not only had a large impact on project implementation but also in raising and addressing several issues within METRO and the SSP, including improvement in delineating contractual responsibilities, quality control, and construction site work safety requirements. The Bank has also been monitoring and documenting the successful mitigation of the social and environmental impacts of the accident. The response to the accident was an opportunity to strengthen METRO s systems through increased monitoring of the Project. The Bank requested the Borrower to submit regular reports immediately following the accident with the following information: a) census survey of the displaced persons and valuation of assets; b) description of compensation and other resettlement assistance provided to date; c) description of initial and ongoing consultation processes with displaced people to define acceptable alternatives; d) institutional responsibilities for the implementation of the remedial resettlement action plan, including the period after available insurance resources are exhausted; e) description of existing procedures for grievance redress; f) arrangements for ongoing monitoring (suggested to include monthly reports to the Bank until final resolution is has been reached with all affected individuals and households on settlement); and g) indication of the timetable for the remaining assistance to be provided, as well as source of budget. The Borrower submitted monthly reports beginning in June 2007 and reduced the frequency to semester reports once all pending cases of resettlement were substantially resolved. The Borrower also committed to an independent ex-post evaluation of livelihood restoration actions to be carried out by an entity independent of the Project or the construction consortium, CVA. It was determined that settlements were made at fair market value for lost assets, new appliances to replace those damaged during the power cuts, payments for pain and suffering, lost profits for business owners, financial support for late rent payments, as well as significant levels of support for temporary housing, food, transportation, medications, and psychological counseling. While it is hard to judge if any level of monetary payment can be adequate to compensate families for the psychological trauma and inconvenience they underwent, many families emerged from the crisis with increased assets. Several renter families were able to make down payments on new homes and some business persons invested in new or expanded businesses. The resettlement and restitution process is substantially complete except for very few families who have filed suit to recover damages they claim to have suffered in excess of the payments already made to them. 4. Assessment of Risk to Development Outcome Rating: Moderate The risk to development outcome of this operation is moderate for the following reasons: Construction risk: The two main civil work contracts for Phase 2 (to include the finishing of 5 stations, Vila Sonia yard and a short tunnel segment) were signed in 16

25 February 2012 and May 2012 and work is about to begin with a new contractor. Considering the nature of the project and the complexity of the civil works, it is impossible to eliminate all risks going forward. Nonetheless, METRO and the parties involved in building Phase 1 improved their practices and risk mitigation measures. Interface/operational risk: There is moderate risk in problems arising during the implementation of Phase 2 civil works (completion of 4 stations shells in intermediate stations) while Phase 1 is in operations. By request of the Bank and in order to ensure sustainability throughout different phases of the Project, a series of procedures were agreed on the coexistence of civil works and system implementation activities connected to Phase 2 with the ongoing operations of Phase 1. As such, rules regarding access to Metro facilities (both of material and personnel), as well as interface committee meetings with representatives of CVQ, METRO, and Regulating Commission were established. This goal is improved communication among the parties to promote safety and efficiency. There is modest risk of the achievements in metropolitan and institutional coordination (CDTI) being undone due to political pressures or other circumstances in the SPMR. There is modest risk that the continued expansion of the Metro and CPTM network under the current fare structure (flat fares with BUI) could upset the equilibrium of operating revenues in the metropolitan network and negatively impacting METRO or Line 4 operations in the future. This can be mitigated by studying the possibilities of making the fare structure less rigid, for example by gradually introducing zonal fares or more targeted subsidies designed to minimize any negative impact on low-income passengers in the periphery that currently benefit from flat fares. There is a modest risk of the operating concessionaire deferring maintenance of the fleet and facilities or not meeting the performance standards of the contract, thereby affecting the long-term sustainability of Line 4. The Regulatory Commission should be an independent agency approved by the State legislature with clear authority. The current risk of macroeconomic or fiscal conditions adversely affecting the planned Phase 2 expansion and future operations is low. However, significant additional investments in rolling stock, stations, and system upgrades are needed to increase operating capacity in the SPMR and alleviate the continued growth in congestion. These investments in transport infrastructure are among the highest priorities for municipal and state governments in SPMR. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Ensuring Quality at Entry Rating: Satisfactory At entry, the Task Team designed an urban transport operation that entailed sound and innovative features that are still very much valid and appropriate today. These included: (i) capacity building and support for the development of a successful PPP, promoting progressive private sector participation in the investment and operations management of urban transportation systems; (ii) institutional development to promote metropolitan 17

26 transport coordination and integration, and (iii) improved and increased accessibility of low-income populations to the public urban transport system. In this context, the Bank and the Borrower prepared the project by: (i) carrying out a solid background analysis; (ii) evaluating lessons learned from previous operations and appropriate alternatives; (iii) holding detailed missions with specialized teams of consultants; (iv) designing a technically well-conceived project; (v) evaluating a range of foreseeable risks and proposing appropriate mitigation measures; (vi) paying attention to institutional aspects, such as ensuring that the project had support from the METRO Employee Union as well as from all São Paulo political parties; and (vii) ensuring the availability of the necessary funding for the project. While some implementation problems (such as early delays and the risk of a construction accident) in retrospect could have been evaluated further by the Bank during preparation, these risks ultimately had to be borne by the implementing agency. Finally, the project development objectives were comprehensive and flexible enough to remain valid. In sum, the rating of Satisfactory reflects the absence of significant shortcomings in identification, preparation, and appraisal. (b) Quality of Supervision Rating: Satisfactory Bank supervision is rated Satisfactory on the following basis: (i) frequent supervision missions (26 ISRs filed between August 2002 and December 2011, or more than 2 per year, not including FM, safeguards, and Procurement supervision missions which took place at least once every year); (ii) prompt identification of implementation problems such as delays and the construction accident with appropriate responses, including additional reporting and supervision requirements from the Borrower with the support of the PMOC; (iii) high-quality advice and support to the Borrower during the entire process of developing and implementing the turnkey and concession contracts; and (iv) Bank follow-up actions to deal with unexpected implementation problems in a timely and appropriate manner, for example by agreeing to increase Bank financing due to Brazilian R$ appreciation and inflation. Overall, the Task Team showed deep knowledge of the client s needs, excellent engagement, and appropriately adapted the project to ensure maximum relevancy and achievement of PDOs in light of changing conditions and delays mostly outside the Bank s control. By the mid-term review (between December 2004 and May 2005), the main concerns were issues largely out of control of the Bank: the expropriation delay that impacted the start of construction and the interest of the private sector in investing in the project considering the market and economic conditions. The Bank team, however, kept assisting Metro in all of those aspects, providing the international experience required for METRO to design locally acceptable options. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory 18

27 The Bank helped the Borrower in the adequate preparation of the project and provided instrumental assistance in developing and implementing the structure of the PPP. The Bank also actively addressed implementation problems thanks to a careful, versatile and proactive supervision. This helped adapt the project to changing circumstances and resulted in the full achievement of the PDOs. In addition, it can be argued that the Bank s participation was key to ensure that the private sector felt more comfortable in investing in this pioneering project. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Satisfactory SSP was effective in implementing the necessary fare integration as well as physical/operation integration between Line 4 and the other lines of the Metro, CPTM and bus systems. However, delays and the initial unavailability of counterpart funds impacted the scope and implementation in the first years of the project (but improved later on). Moreover, the Regulatory Commission was not properly staffed in the beginning with a clear mandate as recommended by the Bank. Legal and contractual expertise is needed in addition to technical skills offered by METRO. Although their performance has significantly improved, the Commission was not transformed into a more independent Regulatory Agency approved by the State legislature (as required by the loan agreement). Thus, the government s performance is rated Moderately Satisfactory. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory The METRO is an experienced organization with a department dedicated to supervising Line 4 implementation and an appropriate Project Management Unit (PMU) focused on institutional, financial, fiduciary, reporting and safeguards issues of the Bank loan. The PMU continues this role for the Line 4 Phase 2 Project. In addition, the PMU is supported by a Project Management Oversight Consultant (PMOC) financed by the loan, which issues monthly and ad hoc reports to the State Secretary of Metropolitan Transport (STMSP) and to the Bank. Finally, there was always an appropriate Project Coordination Unit (PCU) reporting to the STMSP Secretary and to the Governor on strategic aspects of the project. While the project was successfully implemented, the schedule, cost, and disbursements were significantly impacted by problems of early litigation delays and the construction accident. Although METRO tried to follow sound procedures, neither local litigation nor the international litigation worked well. Having all documents and litigation in English was a burden and time-consuming exercise for METRO. On the other hand, national litigation can suffer from the potential influence of contractors in the domestic market. These problems, while never entirely preventable, could have been better anticipated by METRO in their procedures and schedules. Therefore, the implementing agency s performance is rated Moderately Satisfactory. 19

28 (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory The overall Borrower performance is Moderately Satisfactory based on the performance of the SSP and METRO. Despite a significant delay in project completion and other implementation problems, all project outputs were delivered and outcomes were substantially achieved. 6. Lessons Learned Line 4 was a landmark project that demonstrated that PPPs are viable for urban rail in Brazil and provided a platform for further development in the country and elsewhere. Regulatory commissions and strong supervision by the State or its representative is needed during construction and operation, and training must be provided to those responsible for these functions. PPP contracts must have very stiff penalties for delays in construction as well as bonus for earlier completion. They must also have very stiff penalties for non-compliance during operations and key performance indicators must be carefully designed and enforced. Other specific lessons in risk management emerge at the conclusion of the project: Turnkey Model: A turnkey approach for civil works presents advantages and disadvantages in relation to traditional procurement by government. Uncertainties with regard to soil and geological conditions discovered during construction of Line 4 are the basis for an ongoing legal dispute between METRO and the turnkey contractor over the additional costs. When a turnkey is used, mechanisms to handle changes in the project design, either requested by the State or in view of unanticipated geological or construction reasons, must be clearly defined between the parties. This will ultimately protect public interest and facilitate the acceptance of these changes by overseeing Accounts Tribunals. Turnkey and concession contracts should require a Project Integrator or Interface Consultant to be hired as early hired as early as the time signing the concession contract (as suggested by the Bank for Line 4). This consultant could have been paid in equal parts by METRO and by the concessionaire to have a role in ensuring that interface problems between civil works and systems are resolved and shared risks properly are mitigated. Construction Safety: Clear lines of responsibility and response mechanisms need to be established since the safety of civil works and operations is ultimately a shared risk between government (and its agencies) and the contractor regardless of contract terms. As recognized by METRO, International Tunneling Insurance Group's Code of Practice for risk management of tunnel works should be observed. This considerably reduces risks connected to the design and execution of subterranean works. Implementation Time: The Line 4 experience confirms that the expropriation process, environmental licensing and advance procurement must be carefully planned from the beginning and executed by the Government to avoid costly delays in project implementation. To the extent foreseeable, potential litigation and potential 20

29 procedural delays should be factored in implementation time and the procurement process should ensure that the possibility of such litigation is minimized. Regulatory Agency: As recommended by the Bank for any PPP, a formal agency should be given a clear mandate or established early enough to ensure that it is properly staffed. The agency must be considered sufficiently independent and credible to conduct its duty. For example, it is important that a Regulatory Agency periodically verifies the emergency evacuation plans and readiness to implement such plans by the contractor in case of accidents. As shown by the Pinheiros station accident, better evacuation and emergency procedures are fundamental in projects of this type. PPP Design: The ideal situation in PPP projects is to have the concessionaire execute all works and acquisition of equipment and systems to ensure that opportunities for efficiencies and improvements are well aligned and realized. The State could finance the civil works and part of the systems but actual implementation could be entrusted to the concessionaire to avoid interface problems. The State should remain as regulator and supervisor with minimum interference using a project management oversight consultant. This was the original design of Line 4 but because of delays in the approval of the PPP law and internal resistance, the State opted to procure civil works and electrification separately from the operating concession. In future similar projects, the full project implementation and operation could be entrusted to a concessionaire selected on an open and competitive basis. Bidding Process: The bid for the PPP concessionaire should have been completed at the time the civil works were bid so that the concessionaire could have actively participated in the implementation of the civil works and possibly requested adaptations to accommodate the equipment it intended to buy. This was the original intent for Line 4 but the PPP law was only approved much later than the start of the civil works and the concession law (which existed at that time) did not allow risk mitigation or operational subsidies. Contract Mediation: Contracts for concession should be clear about mediation procedures as well as include clauses to allow government to demand proactive measures from the concessionaire to repair defects and indicate measures to be taken in case a defect cannot be immediately repaired. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies A summary of the Borrower s completion report is included in Annex 7. The Borrower, through METRO and their consultants, describe the project, its changes, and explain the factors that led to delays in the completion of the project. These factors are consistent with those presented in this report. The Borrower s report assesses the Bank s role and acknowledges the Bank s contribution both through the availability of financial resources and the active advisory role through frequent missions. The Borrower also comments on the numerous benefits brought by Line 4 to the low-income population and significant technological innovations. Finally, the borrower evaluates its own role and the role of the METRO, by highlighting some of the problems faced during implementation and the actions taken. The Borrower concludes that the project fully achieved its objectives. 21

30 Representatives of the Borrower and implementing agency also reviewed this report and found it to be consistent with their conclusions. (b) Cofinanciers JBIC representatives confirmed that they had no comments to the report. (c) Other partners and stakeholders None. 22

31 Annex 1. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Component Appraisal Estimate Original Appraisal Estimate Adapted Revision 2003** Actual 2012 Percentage Variation of Appraisal*** A B C D (D/B)-1 Infrastructure and Equipment Component (Part A) Project Design 24,80 24,80 14,03 20,80-16,1% Expropriations 46,00 46,00 35,19 71,49 55,4% Civil Works 324,70 324,70 349,07 884,55 172,4% Permanent Way 52,00 52,00 23,84 56,40 8,5% Systems 156,50 103,20 184,84 448,83 334,9% Rolling Stock 154,20 Others 27,32 Technical Assistance (Part B) Administration / Supervision and 15,20 Technical Assistance 17,80 33,00 25,50 15,84-52,0% Total Baseline Cost 791,20 583,70 632, ,83 161,7% Front End Fee 2,09 2,09 1,60 4,94 136,4% Physical Contingencies (1) 63,81 63,81 197,80-0,0% Price Contingencies (2) 76,80 76,80 58,75-0,0% Total Public Sector 933,90 726,40 890, ,16 110,6% Private Sector - PPP Concession item3.4 Rolling Stock 154,20 117,96 189,12 22,65% Systems 53,30 40,77 56,98 13,18% Total Private Sector* 207,50 158,73 246,10 18,60% Total Project Cost 933,90 933, , ,26 90,20% Notes: * The private sector costs are estimates (including in 2012) since actual figures are not publically disclosed. Therefore the table above separates the public sector costs (Government contribution) from the private sector costs. 23

32 **The difference in the total public sector contribution between the Adapted Appraisal in 2001 (estimate that considers the PPP component in the original appraisal amount) and 2003 Revision is equivalent to US$ million, an increase of 22.6%. This increase is primarily due to the large increase in physical contingency included for the procurement and implementation of the main contracts (Lots 1, 2, and 3). *** Between 2001 (Adapted Appraisal) and 2012, the total increase the public sector costs was approximately US$ million, a variation of 110.6%. However, given the basic level of design at Appraisal, it was only possible to compare the variation between the total public sector cost in 2003 and in 2012 which came to US$ million (an increase of 72%). This was primarily due to: (1) variation in the exchange rate (estimated at US$ million) as described above, where the financing was in US Dollars while main contracts were in Brazilian Reais, (2) increase in contract prices due to the annual readjustment formula in the contracts that was also adversely affected by the combination of the US Dollar devaluation and inflation observed in the period (estimated at US$ million) and (3) changes in the scope or schedule of the project including amendments and change in construction methods (US$ million) including the following: o Inclusion of Faria Lima station in Phase 1; o Change in the construction method from Shields to NATM in parts of Lot 2; o Executive project, supply and implementation of platform doors' system (PSD) for the Phase 1 and Phase 2 stations; o Executive project, production, supply and implementation of data transmission system (STD); o Executive project, production, supply and implementation of Collection and passengers system (SCAP) Line 4, phases 1 and 2, including Vila Sonia's yard; o Executive project, supply and implementation of moving walkways. (b) Financing Source of Funds Appraisal Estimate Current Percentage Variation of Appraisal IBRD (1) 209,00 209,00 0,0% JBIC (2) 209,00 209,00 0,0% Aditivos - (3) IBRD (1) - 95,00 JBIC (2) - 95,13 Total Financing 418,00 608,13 45,5% State of São Paulo 308,40 922,03 199,0% Total Public Sector 726, ,16 110,6% Private Sector - PPP Concession 207,50 246,10 18,60% Total Source of Funds 933, ,26 90,20% 1 - International Bank for Reconstruction and Development 2 - Japan Bank for International Cooperation 3- Due to exchange rate fluctuation until 2007, São Paulo s State government requested a contractual amendment for an additional loan of US$ 190,0 million (IBRD US$ 95,0 million and JBIC US$ 95,0 million). However the exchange rate fluctuation continued after that date. 24

33 Annex 2. Outputs by Component Part A: Infrastructure and Equipment Investment Construction of, provision of equipment for, and operation and maintenance of the line of the SP Metro which will link the SP Metro s Vila Sonia yard facility to the SP Metro s Luz station (Line 4), consisting of about 12,800 meters of double underground track, 5 stations and 4 station shells, acquisition and installation of system-wide facilities (including fixed installations for electrification), and acquisition and operation of 16 train sets. This component was later revised and, among other changes, a sixth station was included as one of its outputs (Faria Lima station). Part B: Technical Assistance Provision of technical assistance for: (1) the management oversight and supervision of the carrying out of Part A of the Project; (2) the carrying out of a financial management and cost recovery review (including recommendations on tariff structure) of the SP Metro operations; and (3) for a follow-up project finance study on alternatives for private sector participation in the carrying out of Part A of the Project. Sub- Component Output Indicators % target achieved Part A: Infrastructure and Equipment Investment (original) Permanent Way ( km, double track link between the Vila Sonia yard facility located south-west of the Pinheiros river and the Luz station) (i) 1478m of double track tunnel (one 8.43m internal diameter tunnel) constructed using the shield method in soil between North of Luz station and the 24 de Maio works shaft (ii) 150m part in double track tunnel and part in single track (two tunnels) constructed by the New Austrian Tunneling Method (NATM) in soil between 24 de Maio works shaft and Republica station (iii) 136m of single track NATM tunneling in soil and 68m of double track tunnel constructed by cover-and-cut between Republica station and the Hilton works shaft (iv) 1324m of double track shield tunneling in soil from the Hilton works shaft to Cel Jose Eusebio ventilation shaft (v) 507m of triple track NATM tunneling in soil between Cel Jose Eusebio ventilation shaft and Paulista station (vi) 2335m of double track shield tunneling in soil between Paulista and Fradique Coutinho stations (vii) 5239m of double track shield tunnel and Comments (including reasons for changes) 100% (ii) 150m part in double track and part in single track, and (iii) 136m single track and 68m double track were all changed to double track tunnel. (iv), (v), (vi) remained unaltered, as original. (vii) 1000m from Fradique Coutinho station to Faria Lima station remained double track shield tunnel, otherwise, 4239m from Faria Lima to cut and cover (transition to the surface in Vila Sonia) were changed to NATM double track. 25

34 Stations System- Wide Facilities 354m of cover-and-cut tunnel both constructed in soil and rock from the Fradique Coutinho station to the transition to the surface to access the Vila Sonia yard 5 completed stations (Butanta, Pinheiros, Paulista, Republica and Luz) and 4 station shells (Faria Lima, Fradique Coutinho, Oscar Freire and Higienopolis) High and medium-voltage (AC) electrical power system, including one primary substation of 138/88-22 KV, which will support a network of medium voltage, DC traction power substations with their respective rectifiers and transformers DC traction contract line system for distributing 1500 V power to the trains via a overhead conductor system in the tunnel section and via a conventional overhead centenary system in the parking and maintenance yard Low voltage electrical system comprising switchboards, transformers, diesel generator group and no break for all electrical systems below 460 V including illumination and cable trays 100% An additional station (Faria Lima) originally planned for Phase 2 was also delivered. 98% Power substation has pending issues. Medium and high tension stations are concluded. 100% Completed 100% Completed Ventilation system in stations and tunnels 97% Contract is 97% concluded. Vibration tests still to be concluded. Delivery of as built documents is pending. Activities for closing the contract (TAP and TAD issuing) to be carried out. Amendment to reduce scope about to be issued. Elevators for physically disadvantaged and escalators for passengers Auxiliary systems such as pumps, fire detection, illumination, panels, etc. Telecommunication system, data transmission, voice and video 100% Completed 100% Completed 95% Fixed communication system implementation ongoing 100% Completed Communications based train control system for signaling- CBTC On-board equipment for signaling; 100% Completed Passenger and fare control system- CBTC Supervision and control system for traffic, 90% Conclusion is pending. 26

35 Rolling Stock energy and auxiliary All system facilities for the Vila Sonia maintenance and parking yard, including electrical power supply, telecommunications, signaling and auxiliary systems 100% Completed 16 trainsets to operate this line in Phase 1 100% 14 trainsets were delivered according to revised Phase 1. Maintenance facility at Vila Sonia to Due to Phase 2 accommodate up to 25 trainsets Maintenance shop facilities, including all equipment for maintaining the revenue and non-revenue vehicles, will be part of the yard complex 100% Both the Vila Sonia Yard and the maintenance services currently in operation are able to meet the needs of the 14 trains running along Line 4 Phase 1. Part A: Infrastructure and Equipment Investment (revised) Inclusion of Faria Lima Station in Phase 1 100% Completed 14 trainsets 100% Completed Change from Shields to NATM construction method for parts of Lot 2 Executive project, supply and implementation of platform door system (PSD) for the Phase 1 and Phase 2 stations Executive project, production, supply and implementation of data transmission system (STD) Executive project, production, supply and implementation of Collection and passengers system (SCAP) Line 4, phases 1 and 2, including Vila Sonia s yard. 100% Amendment was necessary for the change in constructive method. 100% 97% of contract and respective amendments (Phase 1) concluded. Software for data transmission to center of operational control still missing. Phase 2 works not started yet. 97% 97% of contract and respective amendments (Phase 1) concluded. Phase 2 works not started yet. Software for data transmission to center of operational control still pending. 100% Phase 1 concluded. Phase 2 depends on finishing the stations Service order issued in March 1 st

36 Executive project, supply and implementation of moving walkways. Part B: Technical Assistance Project Management Oversight Consultant (PMOC) assisting the Project Coordination Unit Financial management and cost recovery study (including recommendations on tariff structure) 100% 93% of contract delivered. Performance evaluation to be done and as built documents to be delivered. 100% PMOC under contract since August 2004 and issuing reports to METRO, STMSP and Bank. 100% Completed by 2006: - METRO studies that resulted in the development and introduction of the BUI in Study of Line 4 fare and revenue allocation arrangement between METRO and concessionaire considering passengers of Line 4 and other lines. Follow up of the project finance studies 100% Completed by 2005: - Report by financial advisor on private participation in the operation of Line 4. - Review PPP studies developed by METRO by consultants. - Study of urban operations (including financial implications) by consultants. Project Component 1 (original) An Infrastructure and Equipment Investment Component (Part A): to build the METRO s Line 4 between Vila Sonia and Luz, including the transfer stations between road and rail based systems. This is an underground rail rapid transit connection which will link CPTM s south line, METRO s Line 1 at Luz Station, METRO s Line 2 at Consolacao Station and METRO s Line 3 at República Station. Line 4 of the METRO will be a km, double track link between the Vila Sonia yard facility located south-west of the Pinheiros river and the Luz station. This component will comprise: 28

37 a) Civil Works: Line 4 is to be constructed entirely underground from its tail track north-east of Luz Station to the maintenance facility portal at Vila Sonia. Track will be standard gauge. The line sections will consist of: (i) 1478m of double track tunnel (one 8.43m internal diameter tunnel) constructed using the shield method in soil between North of Luz station and the 24 de Maio works shaft; (ii) 150m part in double track tunnel and part in single track (two tunnels) constructed by the New Austrian Tunneling Method (NATM) in soil between 24 de Maio works shaft and República station; (iii) 136m of single track NATM tunneling in soil and 68m of double track tunnel constructed by cover-and-cut between República station and the Hilton works shaft; (iv) 1324m of double track shield tunneling in soil from the Hilton works shaft to Cel Jose Eusebio ventilation shaft; (v) 507m of triple track NATM tunneling in soil between Cel Jose Eusebio ventilation shaft and Paulista station; (vi) 2335m of double track shield tunneling in soil between Paulista and Fradique Coutinho stations; and (vii) 5239m of double track shield tunnel and 354m of cover-and-cut tunnel both constructed in soil and rock from the Fradique Coutinho station to the transition to the surface to access the Vila Sonia yard. At the end of the proposed project there will be 5 completed stations (Butantã, Pinheiros, Paulista, República and Luz) and 4 station shells (Faria Lima, Fradique Coutinho, Oscar Freire and Higienopolis). When Phase 2 of line 4 is completed, there will be in addition two more passenger stations on the line, Morumbi and Tres Poderes. When completed, in the end of Phase 2, the project lin 4 will have 11 stations. The stations have off-street entrances and 132m train platforms. At the end 6 stations would be constructed using NATM and the 5 remaining stations would be constructed using cover-andcut. b) System-Wide Facilities include the following components: (i) a high and mediumvoltage (AC) electrical power system, including one primary substation of 138/88-22 KV, which will support a network of medium voltage, DC traction power substations with their respective rectifiers and transformers; (ii) a DC traction contract line system for distributing 1500 V power to the trains via a overhead conductor system in the tunnel section and via a conventional overhead centenary system in the parking and maintenance yard; (iii) a low voltage electrical system comprising switchboards, transformers, diesel generator group and no break for all electrical systems below 460 V including illumination and cable trays; (iv) a ventilation system in stations and tunnels; (v) elevators for physically disadvantaged and escalators for passengers; (vi) auxiliary systems such as pumps, fire detection, illumination, panels, etc.; (vii) a telecommunication system, data transmission, voice and video; (viii) a communications based train control system for signaling; (ix) on-board equipment for signaling; (x) a passenger and fare control system; (xi) a supervisory and control system for traffic, energy and auxiliary; (xii) all system facilities for the Vila Sonia maintenance and parking yard shall be provided including electrical power supply, telecommunications, signaling and auxiliary systems. c) Rolling Stock comprising a fleet of 16 trainsets to operate this line in Phase 1 and additional 8 trainsets to complete 24 trainsets to operate this line in Phase 2. As in the existing Metro system, these trains will operate under Automatic Train 29

38 Control (ATC). The maintenance facility at Vila Sonia will accommodate up to 25 trainsets. Maintenance shop facilities, including all equipment for maintaining the revenue and non-revenue vehicles, will be part of the yard complex. Project Component 1 (revised) The Turnkey agreement allowed for modifications in the project (Clause GCC 39 Modificação das Instalações ) that were discussed and approved. In addition, other significant component changes were: Inclusion of Faria Lima station in Phase 1; Change in the construction method from Shields to NATM in parts of Lot 2; Executive project, supply and implementation of platform doors system (PSD) for the Phase 1 and Phase 2 stations; Executive project, production, supply and implementation of data transmission system (STD); Executive project, production, supply and implementation of Collection and passengers system (SCAP) Line 4, phases 1 and 2, including Vila Sonia s yard; Executive project, supply and implementation of moving walkways. Project Component 2 A technical Assistance Component (Part B) to finance: a) the Project Management Oversight Consultant (PMOC) who will assist the Project Coordination Unit; and the supervision of the works and goods financed under the project; b) a financial management and cost recovery study (including recommendations on tariff structure) designed to propose far reaching cost cutting measures and revenue maximization to improve METRO s working ratio by 2006; and c) a follow up of the project finance studies. There were no changes to the original components. 30

39 Annex 3. Economic and Financial Analysis A conventional cost-benefit analysis was adapted from the March 2010 appraisal for the Line 4 Phase 2 Project (which included both Phase 1 and 2) to assess the effectiveness of the Phase 1 project with the latest available information. The situation with the project was compared to the situation without the project. For this analysis, METRO estimated the passenger hours and passenger-kms with and without the Project through demand modeling and converted them into time savings and operating cost savings. The results of the revised cost-benefit analysis are a net present value (NPV, discounted at 10%) of US$364 million and an internal economic rate of return (IERR) of 13.8%. The following benefits were considered for this analysis: Benefits: The evaluation considered the same benefits as for the evaluation of Phase 2. These are: 1. Travel time savings: These are estimated by determining the passenger-hours saved, by type of trip (home to work, business or other) and multiplied by the value of time for each type of trip. The demand model estimates passenger hours with and without the project mode. Value of time was kept at the same as the Phase 2 Analysis. 2. Operating cost savings: These are savings resulting from the lower costs of operating all modes with and without the project. The demand model estimates the passenger-kms with and without the project and these are multiplied by the respective estimated unit operating costs. The project decreases the number of bus-kms traveled on the urban bus network through the re-routing of the buses to the main stations. The bus-kms saved per year are estimated by the demand model. The costs of operating the Metro are included. The result is the net savings. 3. Reduction in road maintenance/management costs due to the reduction of bus-kms with the project (minor). 4. An estimate for the reduction of accidents and road-based vehicle emissions was available but not considered for this analysis as direct benefits (a conservative assumption). Other Assumptions: All cost and benefit figures were calculated at 6/11 from 2013 of their values to account for only Phase 1, which consists of 6 out of the 11 total stations analyzed in Phase 2 presentation. The following were other assumptions made in the analysis with respect to the situation at 2010 appraisal: 1. Investment Plan: To match the Annex1 of Phase 1 Investments, Investment Costs from the Phase 2 analysis are weighted as follows:. a. Years are weighted at 100% of Phase 2 Projections. b. Year 2009 is weighted at % of Phase 2 Projections to match the total Phase 1 investment cost in Annex 1 of the Phase 1 actuals. 31

40 c. In Year 2036, there is a tax payment based on 6/11 of the Phase 2 amount, based on the number of total stations. 2. Benefits: a. Year is weighted at 100% of Phase 2 Projections as only Phase 1 was in operation. b. The following years are weighted at 6/11 of Phase 2 Projections based on the total number of stations. 3. Operating and Wage Costs: a. Years are weighted at 100% of Phase 2 Projections as only Phase 1 was in operation. b. The following years are weighted at 6/11 of Phase 2 Projections based on the total number of stations. 4. NPV and IRR: a. Calculated using only the direct benefits, including travel time savings, calculated as mentioned above. b. 10% discount rate, as in Phase 2 analysis. 32

41 BENEFITS COSTS Net Benefit Net Benefit TRAVEL OPERATING MAINTENANCE BUS MANAGING TOTAL OPERATING TOTAL Direct Direct TIME COST COST COST DIRECT and INVESTMENT WAGE and only PROJECT COSTS COSTS COSTS YEAR YEAR SAVINGS SAVINGS SAVINGS SAVINGS BENEFITS Indirect ,518 81,518-81,518-81, ,268 89,268-89,268-89, , , , , , , , , , , , , , , , , ,557 16,698 13,768 29, ,253 26,843 26, , , ,013 16,865 13,906 29, ,525 53,687 53, , , ,503 17,033 14,045 29, ,841 62,634 62, , , ,011 12,564 10,360 21, ,011 34,240 34, , , ,611 12,689 10,463 22, ,611 54,638 54, , , ,237 12,817 10,568 22, ,237 50,387 50, , , ,890 12,945 10,674 22, ,890 51,627 51, , , ,568 13,074 10,780 22, ,568 50,581 50, , , ,274 13,205 10,888 23, ,274 54,063 54, , , ,007 13,337 10,997 23, ,007 55,446 55, , , ,767 13,471 11,107 23, ,767 53,711 53, , , ,555 13,605 11,218 23, ,555 53,230 53, , , ,371 13,741 11,330 24, ,371 51,891 51, , , ,214 13,879 11,444 24, ,214 55,987 55, , , ,086 14,017 11,558 24, ,086 57,296 57, , , ,987 14,157 11,674 24, ,987 52,808 52, , , ,917 14,299 11,791 25, ,917 56,624 56, , , ,876 14,442 11,908 25, ,876 52,821 52, , , ,865 14,587 12,027 25, ,865 57,717 57, , , ,883 14,732 12,148 25, ,883 53,735 53, , , ,933 14,879 12,269 26, ,933 55,625 55, , , ,012 15,028 12,392 26, ,012 56,423 56, , , ,122 15,179 12,516 26, ,122 59,447 59, , , ,263 15,331 12,641 26, ,263 60,520 60, , , ,435 15,484 12,767 27, ,435 54,662 54, , , ,435 15,484 12,767 27, ,435 56,822 56, , , ,640 15,639 12,895 27, , ,168 54, , ,129 1,033,037 NPV and IRR Calculations based only on direct benefits NPV: $364, IRR: 13.77% 33

42 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Lending Names Title Unit Responsibility/ Specialty Supervision/ICR Susana Amaral Financial Management Specialis LCSFM Armando Ribeiro Araujo Consultant AFTEG Judy L. Baker Lead Economist FEUUR Jose Augusto Carvalho Consultant LCSPT Tulio Henrique Lima Correa Financial Management Specialis LCSFM Georges Bianco Darido Transport Specialist LCSTR Marilda Stenghel Froes Consultant LCSTR Daniel R. Gross Consultant LCSEN Jose C. Janeiro Senior Finance Officer CTRFC Ralf-Michael Kaltheier Senior Transport Economist LCSTR Paul Procee Senior Infrastructure Speciali EASCS (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY FY FY FY FY FY FY FY FY FY FY FY Total: Supervision/ICR FY FY FY FY

43 FY FY FY FY FY FY FY FY Total:

44 Annex 5. Beneficiary Survey Results None 36

45 Annex 6. Stakeholder Workshop Report and Results None 37

46 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR Borrower s Evaluation Report State of São Paulo São Paulo Metro Line 4 Project Loan Agreements No BR and No BR Preface This is the final report relating to the São Paulo Metro Line 4 Project Phase 1, undertaken with the participation of the State of São Paulo Government and Brazil s Federal Government. The Project was supported with the sum of US$209 million of IBRD financing under the terms of a first Loan Agreement signed in June An additional Loan Agreement for the amount of US$95 million was signed in June Introduction The State of São Paulo (SSP) urban transport strategy for the São Paulo Metropolitan Region (SPMR) is anchored in 4 pillars: a) to establish a regional transport coordination commission (RTCC) with the municipalities, operators and users, which has already occurred; b) to develop and update on a periodic basis, an integrated land use, urban transport and air quality strategy; c) to introduce financing mechanisms which will guarantee the long-term sustainability of the urban transport systems; and d) to promote progressive private sector participation in the investment and operations management of those systems. The construction of Line 4 under a public-private partnership is aligned with SSP s strategy. It will be a pioneer project because it starts a trend towards investment of the private sector in the construction of new infrastructure and equipment. SSP's strategy is therefore to integrate the existing systems, to offer an acceptable level of service to the user and to eliminate operating subsidies. Therefore, the main reform supported by the project is the pioneering of a public-private partnership in the construction of a subway line under a turnkey with private sector participation (PSP) scheme. In the past, METRO always relied on SSP funds for the construction of its lines. The State budgetary constraints in the last ten years prevented the Metro network to grow as fast as was desirable in a city with the population density of São Paulo. This project is not only jump-starting a public-private partnership but also creating the enabling environment to attract private sector investment for future projects in urban transport. The other key policy reform supported by the project addresses the issue of cost-recovery by the METRO and stresses the importance of covering working costs with operating revenues. The project is fully consistent with the Bank s Country Assistance Strategy of supporting policies and investments that will encourage economic growth and social development in a context of macroeconomic stability. This project also contributes to the attainment of state creditworthiness and fiscal improvement because the new line will not have an operating subsidy. The proposed project is also a follow-up to the efforts started with the CBTU São Paulo Metropolitan Transport Decentralization Project and the Barra Funda- 38

47 Roosevelt Project which aimed respectively at decentralizing the federally-owned CBTU to the State to allow for more effective modal and tariff integration and to link the two existing commuter railways of the region. Project Objectives The project objectives, as indicated in the loan instrument and in the Project Appraisal Document were: (a) to improve the quality and long-term sustainability of urban transport in the SPMR by interconnecting the existing subway, commuter rail and bus networks through the construction of Metro's Line 4; (b) to improve the accessibility of the lowincome population of the areas served by Line 4 to employment centers and health and education facilities; and (c) to seek private sector participation in the development of Line 4. The first objective was designed to be achieved by financing the construction of Line 4 of METRO which links the Vila Sonia suburb with the Luz station and would have, by the end of the proposed project, 12.8 km of double underground track, 5 stations, one yard, one workshop and 13 trainsets (Phase 1). Later, these project infrastructure components for Phase 1 were revised (as described below). When fully built, i.e., after the proposed project, Line 4 will have in total 14 stations and 23 trainsets. The proposed project would be undertaken under a turnkey contract with private sector participation (concession or other arrangement), in which 80% of the project will be financed by the public sector and the remainder by the private sector. The second objective will be achieved by promoting modal and fare integration between buses, subway and rail, in such a way as to minimize the overall generalized cost of travel (tariff, travel time, reliability and safety) to the low income users of the system, particularly those from Embu and Taboão da Serra. The third objective will be met through either a concession agreement or other private sector participation (PSP) arrangement to obtain at least 20% of the cost of the project. The Line 4 Project is a priority undertaking within the Integrated Urban Transportation Plan (PITU) for the SPMR. The Project will (i) serve as a "bridge" between METRO's Line 5 and Companhia Paulista de Trens Metropolitanos (CPTM) West commuter line to the METRO network, (ii) interconnect with all three existing METRO lines to provide a grid flexibility to the Metro network which does not exist with the present radial configuration, and (iii) interconnect two CPTM commuter rail lines. At the end of the project, the whole metrorail network will be interconnected thereby facilitating access to most of the sectors of the SPMR. Through its involvement the Bank has already helped accelerate the private sector participation process in METRO and will stimulate a thorough review and improvements of sub-sector policies particularly financial and modal integration - at the state and municipal levels. Project Description Part A: Infrastructure and Equipment Investment Construction of, provision of equipment for, and operation and maintenance of the line of the SP Metro which will link the SP Metro s Vila Sonia yard facility to the SP Metro s 39

48 Luz station (Line 4), consisting of about 12,800 meters of double underground track, 5 stations and 4 station shells, acquisition and installation of system-wide facilities (including fixed installations for electrification), and acquisition and operation of 16 train sets. Part B: Technical Assistance Provision of technical assistance for: (1) the management oversight and supervision of the carrying out of Part A of the Project; (2) the carrying out of a financial management and cost recovery review (including recommendations on tariff structure) of the METRO operations; and (3) for a follow-up project finance study on alternatives for private sector participation in the carrying out of Part A of the Project. Revised Components Part A: Infrastructure and Equipment Investment: The Turnkey agreement allowed for possible modifications in the project (Clause GCC 39 Modificação das Instalações ) that were discussed and approved. Significant component changes were: Inclusion of Faria Lima station in Phase 1 Change in the construction method from Shields to NATM in parts of Lot 2 Executive project, supply and implementation of platform doors system (PSD) for the Phase 1 and Phase 2 stations Executive project, production, supply and implementation of data transmission system (STD) Executive project, production, supply and implementation of Collection and passangers system (SCAP) Line 4, phases 1 and 2, including Vila Sonia s yard. Executive project, supply and implementation of esteiras rolantes.therefore, the revised components encompass the delivery of 6 complete stations (Butantã, Pinheiros, Faria Lima, Paulista, República e Luz), 4 shell stations (Morumbi, Fradique Coutinho, Oscar Freire e Higienópolis), 1 maintenance yard and train parking at Vila Sonia station, 12,8 Km of double underground track, 13 (treze) ventilation wells and acquisition of 14 trains. Phase 1 also includes the Operational Control Center (Centro Controle Operacional - CCO) at Vila Sônia yard, and Electrification and Signalization of entire length. There were no changes to the original components of Part B. Experience acquired in the implementation of the project and results achieved The results obtained from the implementation of Metro Line 4 Project can be considered satisfactory. A 14-month delay for the beginning of the project, a judicial dispute concerning one of the proposals (Lot 3) and a long expropriation process (due to a strike in the judiciary) had to be overcome. From then on, Metro Line 4 project had a good evolution in all different areas, including the civil works and the regulatory reforms associated to it 100% of the civil works were concluded, institutional studies were completed and respective recommendations were implemented. The project was fully compatible with Operação Urbana da Faria Lima. There are no outstading audits and the financial management of the project can be considered satisfactory. 40

49 Objectives a (to improve the quality and long-term sustainability of urban transport in the SPMR by interconnecting the existing subway, commuter rail and bus networks through the construction of METRO's Line 4) and b (to improve the accessibility of the low-income population of the areas served by Line 4 to employment centers and health and education facilities) of the project are being met in a satisfactory manner. With the full operation of Phase 1 the main benefits for the population (listed in Annex 2) are being achieved. Objective c (to seek private sector participation in the development of Line 4) is also being achieved in a satisfactory manner. A Public-Private Partnership (PPP) is complementing government s investments in the expansion and enhancement of the urban public transport system in the SPMR. The PPP agremement for Line 4 establishes the concession of its commercial operations to a private agent (Consorcio Via Quatro CVA) for a term of 30 years. CVA will also be responsible for the investments for the acquisition of the train fleet and other operational systems, such as signaling and control, mobile telecommunication and supervision, and centralized control. The infrastructure component presented satisfactory results. All stations for Phase 1 were delivered (Paulista, Faria Lima, Butantã, Pinheiros and República) and are currently in full operation, from 04:40am to 00:00am, with a fleet of 14 6-car trains. Technical assistance services component also showed satisfactory results. The technological innovations implemented in Line 4 represent one of the most significant gains brought to the Metro system in São Paulo by the project. Innovations that should be highlighted include: Signaling and rail control system based in digital radio communication CBTC- Communication Based Train Control; Automated driverless train operation; Platform doors in the stations that will only open for embarkment/disembarkment, avoiding passengers access to the tunnel. Trains equipped with internal security video cameras. The most relevant lessons learned are based on events that had a very high impact on the development and conclusion of the project: Scope Management: projects involving Turnkey agreements must be thoroughly studied and drafted in order to avoid significant modifications in its scope and, in consequence, changes in the contracted prices; Time Management: the expropriation process necessary for the implementation of the project must be concluded before the beginning of the civil works chronogram agreed with the constructing consortium. The government should avoid the risk of not meeting contractual deadlines as this may trigger indemnification rights to the consortium against the government; Environmental Licensing: a detailed schedule for obtaining environmental licenses must be prepared by the beginning of the works and followed on from then on. Any issues must be discussed and corrected immediately to avoid delays and price changes; 41

50 Risks Management: ITIG s Code of Practice for risk management of tunnel works must be observed. This considerably reduces risks connected to the conception and execution of subterranean works; Follow up on Excavation Method: the conventional excavation method (NATM) may be safely applied to subterranean urban works, but it requires technical follow up and detailed analysis of instruments and mapping for the ongoing revision of the project; Procurement Management: Projects must only be executed after previous approval from the Owner. Moreover, the Owner must have adequate capacity to verify, control and approve projects within contractual deadlines; Defects Correction: the agreement between government and Consortium should include clauses that allow the government to demand proactive attitude from the Consortium to repair defects, as well as clauses that indicate measures to be taken in case a defect cannot be immediately repaired; Agreement Penalty Fees: the government has to be stricter when requiring possible contractual penalty fees. This could avoid contractual breaches by contracted companies; Safety Management (Project Management Institute (PMI) construction extension): the bidding process documents must contain strict rules and procedures concerning the safety of employees and population (identification of stakeholders and transparency for instance). Institutional aspects: The Secretary of Metropolitan Transport of the State of São Paulo (STMSP) is the main Government agency responsible for the Project. METRO reports to the STMSP. The Borrower is the State of São Paulo who will delegate the Project implementation to METRO. Overall project oversight will be the responsibility of STMSP on behalf of the State through an established Project Coordination Unit (PCU) that will oversee the implementation of this Project and other ongoing projects, including Line 4 (Phase 1). In addition, METRO will continue to have a Project Management Unit (PMU) which will be in charge of the implementation of its respective components. The PMU is headed by a Project Coordinator who reports directly to the Director in charge of the implementation of the Project. The PMU is staffed with regular staff from METRO and supported by Project Management Oversight Consultants (PMOC) in charge of providing technical support in areas such as engineering, procurement, environment and financial management. METRO has considerable experience with this PMU unit, acquired in ongoing and/or previous Bank-financed projects. Social and Environmental aspects: Line 4 was the first METRO venture to be subject to the environmental legislation since the elaboration of Environmental Impact Assessment and Environmental Impact Report (EIA-RIMA) to obtaining LP, LI and LO licenses. All the stages in this process were accomplished within the applicable deadlines and did not cause any delay for the works. Physical impacts inherent to this sort of work in an urban area (disposal of waste, noise, ar pollution, demolitions etc.) were treated in a satisfactory way by monitoring and mitigation plans previously established. Concerning social impacts, expropriations were conduced based on evaluations prepared in advance. The final report on environmental 42

51 evaluation and detailed resettlement plan were prepared according to World Bank s guidelines and approved by the METRO board of directors. Implementation and results: An initial loan agreements were signed between the São Paulo s state government and the IBRD (2002), as well as a co-financing agreement with the JBIC (2004), each of them in the amount of US$ million. These contracts had ending date on June 30, Due to delays in the civil works schedule, contracts were closed only in March 31, The consistent US Dollar devaluation since 2004 affected the project, as the financial realization of the contract in Brazilian Reais is converted in US Dollars by the rate on the date of use and the initial cost converted in US Dollars in the date in which the agreement was signed - R$ 3,0257/USD. In this sense, the appreciation of the Brazilian Real throughout Phase 1 implementation, associated to the agreements price correction, led to an increase in the implementation costs (in Brazilian Reais) and decrease in the funding source (in US Dollars). In order to bring back the initially estimated parity, two additional loan agreements of US$95 million each were signed with the IBRD and the JBIC (2008 and 2010, respectively). In addition, the change in the construction method of the tunnel for Lot 2 (from Shields to NATM) also impacted the project cost and chronogram. This process is under dispute. The most relevant reasons for the delay in concluding the project were: (i) delay in the liberation of expropriated areas for the start of the civil works due to the strike in the judiciary; (ii) strengthening of Consolata building s foundations; (iii) problems with expropriation of Kenji Isuka s house; (iv) recuperation of contaminated areas; (v) accident at Pinheiros station. World Bank Participation The financial resources were released according to the expected cash flow. The World Bank team had an active role through frequent missions. Borrower Participation The government of the state of São Paulo, represented by its secretaries, acted in an agile manner to enable financing and counterpart resources. Execution Body As the execution body, the METRO had a decisive role for the implementation of the project. 43

52 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders None 44

53 Annex 9. List of Supporting Documents IPT. Final Report Investigation and Analysis of the collapse at Pinheiros Station in São Paulo s Metro Line São Paulo Metro (PMU). Completion Report São Paulo Metro (PMU). Performance Monitoring Indicators São Paulo Metro (PMU). Report on Project Implementation. Jan 2010 Aug São Paulo Metro (PMU). Project Costs and Investment Analysis Report. April World Bank. Brazil: Quarterly Knowledge Report. April World Bank. Project Appraisal Document (Phase 1), December World Bank. Project Appraisal Document (Phase 2), March World Bank. Loan Agreement 4646-BR, June World Bank. Additional Loan Agreement 7635-BR, June World Bank. Project Paper on an Additional Financing Loan, March World Bank. ISRs and Aide-Memoires:

54 R.B. DE VENEZUELA GUYANA French Guiana (Fr.) SURINAME C O L O M BI A AMAPÁ RORAIMA BRAZIL AT LA NT I C O CEA N Boa Vista METROPOLITAN REGION OF SÃO PAULO Macapá STATE CAPITALS Belém NATIONAL CAPITAL São Luís Manaus STATE BOUNDARIES Teresina MARANHÃO AMAZONAS PARAÍBA PIAUI Rio Branco TOCANTINS M AT O G R O S S O PE RU BRASÍLIA BRASÍLIA B O LI VI A GOIAS BAHIA Goiânia MINAS GERAIS Vitória SÃO PAULO PARAGUAY São Paulo PARANÁ Curitaba STA CATARINA Florianópolis RIO GRANDE DO SUL Porto Alegre Rio de Janeiro RIO DE JANEIRO BRAZIL Metropolitan Region of São Paulo AT LA NT I C O CEA N This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. IBRD FEBRUARY 2009 URUGUAY ESPÍRITO SANTO Belo Horizonte Campo Grande A R GE N TI N A Maceió ALAGOAS Aracaju SERGIPE F.D. MATO GROSSO DO SUL CHILE João Pessoa Recife Salvador Cuiabá PAC IF IC OC E AN PERNAMB UCO Palma RONDÔNIA RIO GRANDE DO NORTE Natal CEARÁ Porto Velho ACRE INTERNATIONAL BOUNDARIES Fortaleza PARÁ

55 Map of the São Paulo Metropolitan Transport System Metro Line 4 Phases 1 and 2 47

56 Alignment and Stations by Implementation Phase for Metro Line 4 48