Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 53758-BR

PROJECT APPRAISAL DOCUMENT

Public Disclosure Authorized ON A

PROPOSED LOAN

IN THE AMOUNT OF US$495 MILLION

TO

CENTRAIS ELETRICAS BRASILEIRAS S.A (ELETROBRdS)

WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL

Public Disclosure Authorized FOR AN

ELETROBRdS DISTRIBUTION REHABILITATION PROJECT

April 19, 20 10

Sustainable Development Department Brazil Country Management Unit Latin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Public Disclosure Authorized Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 2009)

Currency Unit = Reais (R$) R$ 1.75 = US$ 1.00

FISCAL YEAR January 1 - December 31

AcreEletroacre Companhia de Eletricidade do Acre EPE Energy Research Institute AmE Amazonas Distribuidora de Energia ERP Enterprise Resource Planning AMI Advanced Metering Infrastructure GIS Geographic Information System ANEEL Agdncia Nacional de Energia MAE Commercial Market Operator ElCtrica (National Regulatory Agency) Boa Vista / BV Boa Vista Energia MF Ministry of Finance Energia CCEE Electricity Commercialization MIS Management Information Chamber Systems CEAL Companhia EnergCtica de Alagoas MME Ministry of Mines and Energy CEPISA Companhia EnergCtica do Piaui M&E Monitoring and Evaluation CERON Centrais ElCtricas de Randonia N Northern region of Brazil, encompassing the states of Amazonas, Acre, Rondonia, and Boa Vista CMS Customer Management Service NE Northeastern region of Brazil, encompassing the states of Piaui and Alagoas CMSE Power Sector Monitoring Committee NPV Net Present Value CNPE National Energy Policy Council ONS National Electric System Operator Discos / EDEs Distribution Companies (Empresas POM Project Operational Manual de Distribuiqiio de Electricidade) DD Department of Distribution of QCBS Quality and Cost Based Selection Eletrobras EDF Finance Department of Eletrobras R$ Reais (Brazil’s currency) ESIA Environmental and Social Impact SIN National Interconnection System Assessment EBITDA Earnings Before Interest, Taxes, TA Technical Assistance Depreciation and Amortization EIRR Economic Internal Rate of Return US$ United States Dollars Eletrobras Centrais Eletricas Brasileiras S.A UGP/PMU Unidade Gestora do Projeto (Project Management Unit) EMP Environmental Management Plan

i FOR OFFICIAL USE ONLY

Vice President: Pamela Cox Country Director: Makhtar Diop Sector Director Laura Tuck Sector Manager: Philippe Benoit Task Team Leaders: Jennifer J. Sara, Leopoldo Montanez

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

ii

BRAZIL ELETROBRh Distribution Rehabilitation Project

CONTENTS Page I . STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Country and sector issues ...... 1 B . Rationale for Bank involvement ...... 6 C . Higher level objectives to which the project contributes ...... 7 I1. PROJECT DESCRIPTION ...... 7 A . Lending instrument ...... 7 B . Project development objective and key indicators ...... 7 C . Project components ...... -7 D . Lessons learned and reflected in Project design ...... 9 E . Alternatives considered and reasons for rejection ...... 11 I11 . IMPLEMENTATION ...... 12 A . Partnership arrangements (if applicable) ...... 12 B . Institutional and implementation arrangements ...... 12 C . Monitoring and evaluation of outcomes/results ...... 13 D . Sustainability ...... 13 E . Critical risks and possible controversial aspects ...... 14 F . Loadcredit conditions and covenants ...... 17 IV . APPRAISAL SUMMARY ...... 17 A . Economic and financial analyses ...... 17 B . Technical ...... 19 C . Fiduciary ...... 19 D . Social ...... 20 E . Environment ...... 21 F . Safeguard policies ...... 22 G . Policy Exceptions and Readiness ...... 24 Annex 1: Country and Sector or Program Background ...... 25 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 40 ... 111

Annex 3: Results Framework and Monitoring ...... 41 Annex 4: Detailed Project Description ...... 45 Annex 5: Project Costs ...... 51 Annex 6: Implementation Arrangements ...... 52 Annex 7: Financial Management and Disbursement Arrangements ...... 61 Annex 8: Procurement Arrangements ...... 69 Annex 9: Economic and Financial Analysis ...... 75 Annex 10: Safeguard Policy Issues ...... 93 Annex 11: Project Preparation and Supervision ...... 104 Annex 12: Documents in the Project File ...... 106 Annex 13: Statement of Loans and Credits...... 107 Annex 14: Country at a Glance ...... 111 Annex 15: Maps ...... 113

iv

BRAZIL

ELETROB'ItiS DISTRIBUTION REHABILITATION

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN

LCSEG

Date: April 19, 2010 Team Leader: Jennifer J. Sara / Leopoldo Montanez Country Director: Makhtar Diop Sectors: Power (1 00%) Sector Manager: Philippe Charles Benoit Themes: Infrastructure services for private sector development (1 00%) Project ID: P114204 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan

[XI Loan [ ] Credit [ 3 Grant [ 3 Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$M.): 495.00 Proposed terms: IBRD Flexible Loan (IFL) with a fixed spread option, payable in 13.5 years

Development Total: 424.30 285.00 709.30

Borrower: Centrais Eletricas Brasileiras (Eletrobras)

Responsible Agency: Eletrobras - Distribution Directorate Avenida Presidente Vargas, 409 12 Andar RJ Brazil 2007 1-003 Tel: (55 21) 2514-6248 Fax: (55 21) 2514-5151 Pedro.hoskenk3,Eletro bras.com

V

Estimated disbursements (Bank FY/US$M) I FY I 2011 I 2012 I 2013 I 2014 I 2015 I I I I I Annual 177 215 74 14 15 Cumulative 177 3 92 466 480 495

Does the project depart from the CAS in content or other significant respects? ]Yes [XINO Ref: PAD I.C. [ Does the project require any exceptions from Bank policies? Ref: PAD IKG. [ ]Yes [XINO Have these been approved by Bank management? ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [XIYes []No Ref: PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [XJYes ]No Ref: PAD IKG. [

Project development objective Ref: PAD II.C., Technical Annex 3 The Project development objective is to improve the financial and operational performance and the commercial management of the six Discos by reducing electricity losses, increasing bill collection rates, and improving quality of service. Project description [one-sentence summary of each component] Ref: PAD ILD., Technical Annex 4 Component I; Service Quality Improvement and Loss Reduction (estimated US$675.3 million, of which US$475 million from IBRD): Improving the quality of service, reducing electricity losses and increasing collection rates in electricity distribution and retail through the acquisition of goods, equipment, works and services. Component 2: Institutional Strengthening (estimated US$ 34 million, of which US$20 million IBRD): Strengthening of the operational capacities of the Discos through the provision of technical assistance, training, consultancy services, studies, equipment and Operational Costs. Which safeguard policies are triggered, if any? Ref: PAD IKF., TechnicalAnnex 10 Environmental Assessment (OP/BP 4.0 1) Natural Habitats (OP/BP 4.04) Pest Management (OP/BP 4.09) Indigenous Peoples (OP/BP 4.10) Physical Cultural Resources (OP/BP 4.1 1) Involuntary Resettlement (OPBP 4.12) Significant, non-standard conditions, if any, for: Ref: PAD III.F. None. Board presentation: Streamlined Loadcredit effectiveness: Each of the six Sub-loan Agreements has been executed on behalf of the Borrower and each of the Discos that is a party thereto; The Borrower has adopted the Project Operational Manual;

Vi

1 The PMU has been staffed in form and substance satisfactory to the Bank. Loan Covenant: The Borrower shall carry out and shall cause each Disco to carry out the Project in accordance with the provisions and recommendations of the Environmental Management Plan (including the Environmental Construction Manual and the guidelines and procedures for chance find of physical cultural resources, natural habitats and forests, pest management and waste management), the Resettlement Framework and the Indigenous Peoples Framework.

vii

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

i. Country issues

1. Brazil is the largest country in South America, bordering every country with the exception of Chile and Ecuador. With a population of 191 million, it is the fifth most populous country in the world and has one-third of the population of the Latin America and the Caribbean Region (LCR). The population is primarily concentrated in the south and southeast regions of the country, with the three states of S5o Paulo, Rio de Janeiro and Minas Gerais accounting for 40 percent of the entire population. Brazil has been enjoying a period of economic stability over the past ten years, has smoothly managed the global financial crisis, and made very good progress in improving income distribution and access to basic services. However, the average per capita income of $10,325 (2008) masks the challenges of meeting the needs of the millions of people who still live in poverty in certain regions of the country. Poverty rates are particularly high in the arid Northeastern states (NE), as well as in the Northern Region (N), encompassing the states making up the Amazon River basin.

ii. Sector issues

2. Consistent with its large population and strong industrial development, Brazil has the biggest electricity market in South America. In 2008, total electricity consumption reached about 385 TWh, which is comparable to that of the United Kingdom and is approximately 40 percent of all electricity consumption in LCR. The main features of the system are:

A system with extensive use of hydro power generation representing 80 percent of the 104 GW installed capacity. The generation system is composed of 13 main generation companies, the majority created decades ago, and several other smaller companies that entered the market more recently.

Brazil’s national interconnection system (“national grid” or “SIN”) includes about 83,000 km of high voltage transmission lines (Le., above 230 KV).

There are currently 64 distribution companies operating in Brazil, serving 60 million residential, commercial and industrial customers.

3. The institutional setting of the sector is still in transition, and its current structure is the result of a series of reforms, initiated in 1993, when the sector was opened up to the market (see Annex 1). There is currently a cabinet-level national energy advisory board (CNPE), coordinated by the Minister of Mines and Energy (MME), with the participation of several ministers, the regulatory agency president, and other government executives. MME sets the sector policies and is aided by the sector planning agency (EPE). The regulatory and supervisory agency (ANEEL) has the power to set tariffs and fines. There is also an independent national system operator (ONS), which, in addition to performing the actual system dispatch (“physical dispatch”), supplies the computational models and data required for the so-called “commercial dispatch” that

1 is used for financial settlements in the short term market operated by the commercial market operator (MAE).

4. Electricity distribution is a public service, governed by concession contracts signed between distribution companies and the Federal Government (which has delegated this function to ANEEL). Close to 80 percent of the consumption in the interconnected system is supplied by private companies. The concession contracts (which apply to private and public distribution companies) set the basic rules on tariff formation, service quality and reliability, consumer rights and obligations, penalties, and universal service provision. Distribution companies also manage transmission lines operating at voltage levels below 230 KV.

5. Electricity service coverage rates in Brazil are relatively high. Electricity service reached 97 percent of the Brazilian population in 2006 (OLADE, 2008 report). Although this rate is above the 94 percent average for LCR (2005 data), it still leaves about 6 million people without access to even a basic level of service. Non-connected households are located in rural areas, mainly in the N and NE regions of the country. The Government is placing a high priority on achieving universal access through its well-funded Program of Luz Para Todos, which has already connected approximately 10 million people in the past few years.

6. There are other challenges of providing electricity in some of the more remote areas of the country. Electricity networks in the state of Amazonas are not yet connected to the national grid, and their electricity supply depends on local generation, based on a mix of hydropower and oil thermal plants. In addition, the distribution companies serving small cities in remote areas use low-efficiency diesel generation units. In sharp contrast to the low carbon footprint of a national power sector largely dominated by hydropower, these inefficient and often poorly operated thermal plants leave much to be desired from an environmental and greenhouse gas emissions perspective.

7. Eletrobras is the country’s state-owned power utility, created in June 1962 to develop hydroelectric and other generation and transmission lines to supply Brazil’s growing electricity demand. It is majority-owned and controlled by the Federal Government whose direct and indirect stakes represent about 66 percent of total capital (the remaining shares are publicly traded in BOVESPA, NYSE and LATIBEX). At the end of 2008, company assets amounted to US$ 63 billion and its total net operating revenues totaled about US$ 12 billon. In addition, and as a result of the major sector and policy reforms and privatization initiatives of the past two decades (described in Annex l), six poorly performing state distribution companies (“DisCos”) were transferred in 1996 to the control of Eletrobras, as they were somewhat “orphaned” during the sector reform process and not picked up in the privatizations of many of the more profitable distribution companies (see Box 1 below for details on Brazil Power Sector Reform).

2 8. E trobras is now the holding company for the following:

Three main generation-transmission subsidiaries (CHESF, Furnas, Eletronorte) through which the company has a 38 percent market share of Brazil’s installed electricity generation capacity and 56 percent share of transmission.

Fifty percent of Itaipu (the other half belongs to Paraguay), one of the largest hydropower plants in the world with an installed capacity of 14 GW.

CGTEE and Eletronuclear, which were created as separate companies for strategic and historical reasons to develop thermal and nuclear generation, respectively.

CEPEL, the largest Electricity Research center in the southern hemisphere.

The afore-mentioned six state Discos, located in the poorer N and NE states, which include: (i) CEAL Company in State of Alagoas, (ii) Boa Vista Energia in Boa Vista

3 City, the capital of Roraima State, (iii) CEPISA in Piaui State, (iv) CERON in Rondonia State, (v) ELETROACRE in Acre State, and (vi) Amazonas Energia in the State of Amazonas (see map below).

9. The six Discos currently supply electricity to slightly over 3 million customers in some of the poorest regions in Brazil. All six states served by the Discos have lower average per capita income than the national average (R$14,183 in 2007); two States had less than half the average income (Piaui and Alagoas), while the remaining ones had incomes ranging from R$8,789 (Rondonia) to R$13,043 (Amazonas). Although the aggregate electricity consumption for the six Discos of 17.2 TWh represents only 3.5 percent of national consumption, their operations encompass a concession area of over 2.2 million km2 (more than 26 percent of the country) and a population of 11.6 million (or 6 percent of the country’s population, including a major industrial pole in Manaus). The companies employ 12,400 employees (about 50 percent of whom are outsourced). The six Discos actively participate in the Luzpara Todos program as many of the largest access gaps are in these states.

Map 1: Geographic Location of Eletrobras Managed Discos

10. These Discos distribute electricity through grid connected and isolated systems to regions characterized by low population density, challenging geographic conditions (especially in the Amazon Region) and low per capita consumption, which results in some of the highest electricity distribution costs in the country. Due to these high costs and the predominance of poor consumers, the companies receive significant financial support as a result of the national policy for subsidization of low-income electricity consumers and fuel costs. The funds for this subsidy come from one of a high number of surcharges that form part of the electricity bill of all

4 consumers in Brazil (see Annex 1 for details), and consist mainly of: (a) a social tariff for low- income users for a basic service, and (b) the Fuel Consumption Fund (CCC), which allows for the reimbursement of fuel utilized in the generation of electricity in isolated systems, recognizing that the cost of generation by diesel units in off-grid systems is high. Thanks to the cross- subsidies, tariffs in this region are comparable to the national average or those in other regions. For example, in 2007, while average residential tariffs in the North was 14.4 USQI/kWh (after subsidies), and the Northeast was 13.9 USQI/kWh, the national average was 14.7 USC/kWh.

1 1. Compounding the challenges of high costs of service provision, the Discos have a history of high losses and poor management, lack of commercial discipline, exacerbated by political interference by local authorities. The non-enforcement of payment for electricity, including from large consumers, and mismanagement have led to a downward spiral of under-investment in basic maintenance, leading to a poor quality service for which consumers do not want to pay. This has resulted in a pattern of extremely high average losses (technical and non-technical) in the order of about 34 percent for 2005-2008 (which is well above the 15 percent national average, or the 13.5 percent weighted average for the Latin America and Caribbean Region - LAC), as well as low bill collection rates, with residential defaults around 40 percent during the same period. As a result, the Discos on average only received payments for less than 50 percent of the power that they purchased.

12. Service quality fares no better; in 2008, the annual average number of interruptions per subscriber ranked from 15 (CEAL) to 93 (Amazonas - interior), compared to 1 1 interruptions for Brazil and 13 interruptions on average for LAC. The duration of interruptions per customer ranged from 15 hours (Eletroacre and BOVESA) to 87 hours (Amazonas - interior), compared to 17 hours for the national average and 14 hours for LAC. The poor service standards and unreliable electricity provided by the Discos are a hindrance to sustainable economic development in the Amazonian region. In addition to the social burden placed on households, there is also a negative impact on business activity in a region that already faces other challenges such as lower per capita income and a difficult geographical context.

13. Even with a high level of subsidy and total allowed revenues set to cover all operating and capital costs, the Discos have not been able to avoid financial losses. According to the audited consolidated financial statements of Eletrobras for the years ended 2006 and 2007, the net balance recorded by the six distribution companies represented a loss of US$244 million and US$ 349 million, respectively. In 2008, due to a one-time $356 million reversal of expenses at Amazonas Energia, the situation showed a slight improvement and a US$ 24 million profit was posted. In comparison, during that same year, Eletrobras posted a net profit of US$2.7 billion. . The inefficiencies of these companies not only adversely affect their respective financial conditions, but also have a negative impact on all electricity consumers in Brazil as they are required to cover the costs of these Discos through their tariffs as part of the national system of cross-subsidy to the poorer regions.

14. After the 1996 transfer of the Discos to Eletrobras management, insufficient attention was paid to their need for a major overhaul. From a financial perspective, they represented only about 5 percent of the consolidated operating profits of Eletrobras and about 10 percent of total revenues. However, in 2006, Eletrobras took action. In an attempt to address the weak

5 performance of the six Discos, it created a new management committee: the Comit@Gestor das Empresas Federais de Distribuiqiio. Later in 2008, as part of the Transformation Plan for the Eletrobras System, the Distribution Unit (Diretoria de Distribuiqiio - DD) was created to unify the management of the Discos, reduce operational costs, consolidate strategic plans, and obtain economies of scale. During the past year, a new experienced management team has been brought on board, and it has seriously taken on a reform agenda for the Discos. At the same time, this new team recognizes that such a reform is a long-term effort which will need to bridge across government administrations and possibly changing institutional and political environments. It is within this context that the World Bank has been requested to support the proposed operation.

B. Rationale for Bank involvement

15. As a means to advance its objective to promote economic development in the economically lagging N and NE regions, the Federal Government has endorsed a request from Eletrobras to seek Bank assistance to improve the performance of the six Discos under its purview. This objective is consistent with the World Bank Group Country Partnership Strategy (CPS) 2008-1 1 (Report #42677-BR) discussed by the Executive Directors on May 1, 2008, and the Progress Report (Report ## 53356-BR) discussed by the Executive Directors on April 20, 201 0, and builds on the Bank’s long-standing and evolving relationship in the energy sector.

16. The CPS and the Progress Report outline Bank support to Brazil around the four pillars of equity, sustainability, competitiveness and improved public sector management - all which are extremely relevant to the Project’s objectives. The Project will also contribute to CPS goals of improving public sector performance by working with poorly performing public Discos, and complements the Bank’s efforts in two specific geographical regions of emphasis: reducing endemic poverty in the Northeast, and re-engaging in the Amazon with a strategy that carefully balances growth with environmental and social sustainability.

17. The Bank has historically been a major partner and lender in the development of the energy sector in Brazil, having financed major power infrastructure in the 70’s and 80’s. Although the Bank’s lending volume declined in the 1990’s, it stayed actively engaged in policy dialogue, making many contributions to this sector in transition, including during the energy crisis of the early 2000’s, notably a large IBRD-funded adjustment operation undertaken with the Federal Government in 2002. The Bank’s active engagement on analytical and policy issues during the past five years, supported by a technical assistance loan (ESTAL) implemented by the MME, several Public-Private Infrastructure Advisory Facility (PP1AF)-funded interventions and AAA, have contributed to important advances in the sector, including: the design of the electricity generation auction process, tariff and regulatory reforms, and identification of environmental licensing issues. On the clean energy and climate change agenda, the Bank has also engaged with a GEF-supported energy efficiency program, several small-scale carbon finance transactions, and a major piece of analytical work to support Brazil’s efforts in identifying opportunities to reduce its emissions in ways that foster economic development (the “Low Carbon Study”).

18. The Bank also adds value by bringing in international best practice to support the reform of the Discos. For example, the Bank is currently engaged in the implementation of a series of 6 similar projects supporting performance improvements of public distribution companies (e.g. in the Dominican Republic, India, and Turkey). In addition, Eletrobras sees the Bank as a provider of best practice to undertake some major reforms of the Discos in areas such as: (i) effective loss reduction programs, (ii) the introduction of performance-based management practices, (iii) state- of the art environmental processes, (iv) clean energy and (v) institutional designs for integrating independent Discos into a common corporate structure.

C. Higher level objectives to which the project contributes

19. The higher level objective of the Project is to improve the quality of electricity service provided by the Eletrobras-managed distribution companies to the population in the States of Acre, Alagoas, Amazonas, Piaui, Rondonia and the City of Boa Vista, as a means to improve quality of life and foster economic growth.

11. PROJECT DESCRIPTION

A. Lending instrument

The lending instrument will be a Specific Investment Loan. The particular financial terms selected by the Borrower are IBRD Flexible Loan with a fixed spread option, payable in 13.5 years, including a 5.5 year Grace Period. A SIL was selected over an Adaptable Program Loan as this represents the first large-scale engagement with Eletrobras and the energy sector since a number of years.

B. Project development objective and key indicators

20. The Project development objective is to improve the financial and operational performance and the commercial management of the six Discos by reducing electricity losses, increasing bill collection rates, and improving quality of service.

21. Project progress will be measured through the following performance indicators:

(i) decrease in the number and duration of service interruptions; (ii) lower total losses (technical and non-technical); (iii) increase in collection rates; and (iv) institutional improvements in the Discos: (a) adoption of environmental management practices, (b) monitoring and evaluation systems based on sound Management Information Systems (MIS), and (c) social action and communication programs to reach intended audiences.

C. Project components

22. The Project consists of the following two components:

Component 1: Service Quality Improvement and Loss Reduction (estimated at US$675.3 million, of which US$ 475.0 million from IBRD). Improving the quality of service, reducing

7 electricity losses and increasing collection rates in electricity distribution and retail through the acquisition of goods, equipment, works and services for the following activities:

a. Distribution Network Reinforcement (estimated at US$ 257.4 million, of which US$ 57.1 million IBRD): Carrying out of activities designed to reinforce, rehabilitate and expand the high, medium and low voltage distribution grids supplying urban areas, including, inter alia: (i) works to improve the operational performance of medium voltage (MV) and low voltage (LV) networks located in areas already receiving electricity supply; (ii) activities in MV and LV networks for regularization of electricity supply to commercial, industrial and service consumers; and (iii) works for the construction of 69 kV lines and substations.

b. Implementation of Advanced Metering Infrastructure (AMI) and other actions to maximize metered consumption (estimated at US$ 387.9 million, all of which IBRD): Carrying out of activities designed to support the reduction of non-technical losses in electricity supply, including, inter alia: (i) the implementation of AMI systems for metering, reading, and monitoring consumption of MV and LV consumers; (ii) the replacement and re-location of existing metering systems; (iii) the implementation of AMI in medium voltage feeders; and (iv) activities for regularization of electricity supply in LV networks, including installation of encapsulated networks and metering boxes.

C. Modernization of Discos Management Information System (MIS) (estimated at US$ 30 million, all of which IBRD): Provision of support for: (i) the acquisition and installation of new management information systems to improve performance in commercial activities, provision of electricity distribution services, and corporate functions; (ii) the updating of the client database and mapping of the distribution network based upon a Geographic Information System (GIs); and (iii) the acquisition of computing equipment and other tools required to put in place an integrated client management system.

Component 2: Institutional Strengthening (estimated at US$ 34 million, of which US$ 20 million from IBRD). Strengthening of the operational capacities of the Discos through the provision of technical assistance, training, consultancy services, studies, equipment and Operational Costs in the following areas, inter alia:

a. Performance-based management (estimated at $13 million, of which $7 million from IBRD), including support to Project implementation, monitoring, reporting and evaluation by the Project Management Unit (UGP in Portuguese) and the six Discos.

b. Management of environmental and social impacts and processes (estimated at $2 million of which $1 million from IBRD), including, inter alia; (a) establishing common policies and procedures across the six Discos; (b) clarifying roles and responsibilities, mobilizing additional support to address day-to-day demands; (c) provision of training on environmental and social impact management issues and best practices; and (d) carrying out of priority studies in areas such as establishment of social and environmental indicators, improving access to GIS data, managing the invasion of rights-of-way,

8 assessing and preparing plans to address eventual liabilities associated with thermal generation.

c. Provision of support to community outreach (estimated at $9 million of which $2 million from IBRD), through the implementation of social action programs and communication campaigns to encourage consumers to legalize connections and pay bills, and to promote energy efficiency, safety and environmental awareness.

d. Provision of support to selected programs delivered at a sectoral training and research center in the Guarantor's State of Acre (estimated at $10 million IBRD), to finance curriculum development, studies, training, scholarships, computers, office and laboratory equipment and supplies for course design and delivery in areas of water resources and environmental management.

23. Financing Plan. IBRD and Eletrobras will each finance their respective activities included in the Project scope at 100 percent. The expected allocation of loan proceeds and counterpart financing to each Disco is summarized in Table 1 below.

Eletro Amazonas World Ceal BoaVista Cepisa Ceron Acre Energia TOTAL

Sub-component (i): Distribution Network World Reinforcement Bank 13.7 3.5 15.8 6.3 8.5 9.3

EletrobrBs 44.0 5.3 67.8 35.1 12.8 Sub-component (ii): Advance Metering World Infrastructure Bank 85.9 20.0 66.6 70.3 25.1 120.0 387.9 387.5 Sub-component (iii): Management information World System Bank 6.0 2.0 6.0 5.0 3.0 8.0 30 0

Bank 1.51 1 .o 2.0 1.51 ('1 11.01 3.01 20.0 EletrobrBs 2.1 1.4 2.8 2.1 1 1.4 4.2 I 14.0 11

D. Lessons learned and reflected in Project design

9 24. Project design has benefited from the Bank?s long track record with similar projects in other countries, as well as from recent experience in Brazil with improving the performance of private and public Discos (such as AMPLA and CEMIG), and in India with the North Delhi Power Limited (NDPL). The specific lessons incorporated into Project design show the need for a comprehensive approach to utility improvement by focusing on interventions that address both technical and non-technical losses and combine equipment acquisitions with adequate institutional strengthening measures.

25. The following lessons regarding structural elements have been incorporated into the Project design:

(a) Advance Metering Infrastructure (AMI) is an effective tool to reduce losses (principally non-technical) in electricity supply through its ability to detect and discourage theft, as shown by recent experiences in Bank projects (in India and Dominican Republic) as well as other Discos in Brazil and Latin America. For instance Ampla (in the State of Rio de Janeiro), Edenorte and Edesur (Dominican Republic) introduced remote metering system in 2003, while NDPL in India recently introduced a similar program. Developed countries have also adopted this approach, such as Italy, which has one of the earliest and largest commercial scale cases starting in 2000. In addition, a dramatic reduction in the prices of metering and telecommunication equipment in the last few years is making their adoption economically feasible.

(b) The use of strategies that rely on market segmentation: a key lesson is that it is critical to start with large consumers, both to regain losses quickly and also to send a signal to all consumers that all electricity consumption must be paid for. After beginning with large consumers, the approach is to implement a gradual shift to the medium and smaller consumers.

(c) Network Reinforcement and Modernization is needed for the sustained improvement of service quality in electricity supply by a distribution company. The cases of Colombia, Chile and more recently, Honduras and Dominican Republic, show that the lack of investment to expand and rehabilitate the distribution grid affects the quality of service by increasing the number and duration of service interruptions. The Project will include significant investments in rehabilitation and upgrading of low, medium and high voltage distribution assets operated by the Discos to better serve current and future demand.

26. In addition, physical investments need to be complemented by improvements in capacity and management systems:

a) Management Information Systems (MIS) and Customer Cadastre: Enhancing the financial sustainability of utilities depends critically on a sustainable reduction in distribution losses and cost recovery of electricity purchased and sold. This requires a sound MIS, including an updated cadastre of users.

10 Capacity building actions are needed to support adequate implementation and improved corporate governance, and to sustain reform in the distribution companies over time. Improving the operational and financial performance of a utility in a sustainable manner requires the introduction of best practices in management, including in fiduciary and environmental aspects. This is demonstrated by experience in the reform of distribution companies in several Latin American countries (Brazil, Colombia, Chile, Peru, El Salvador etc.). In the case of Brazil, emphasis on capacity building has involved both private and state-owned enterprises (such as CEMIG).

Social communication, both at the internal and external levels, is important to carry out the reform process. Successful electricity loss reduction programs typically include measures to ensure ownership of the project within the utility and to gain support for the measures by the general public. The importance of developing communication campaigns is illustrated by the many loss reduction programs developed in Latin America since the 1990s, where loss reduction initially focused on high to medium income consumers, through, among others things, the installation of AMI. This allowed the utilities to gain the social legitimacy needed to then address non-payment by lower- income customers. Successful experiences include among others: (i) the “Program for Reduction and Control of Losses” developed by the Colombian utility Codensa, and (ii) the program developed by Ampla in Brazil, starting in 2000.

E. Alternatives considered and reasons for rejection

27. Alternatives were considered at two different levels: (i) aspects relating to the scope of the Project (restructuring of Eletrobras, access expansion, energy efficiency), and (ii) arrangements for the flow of IBRD funds (i-e., lending directly to the Discos or through Eletrobras).

28. Supporting a broader restructuring of the Eletrobras Holding: consideration was given in discussions with the Government and Eletrobras regarding the possibility of supporting other areas of reform in the wider Eletrobras Holding, including the generation and transmission subsidiary companies. This broader approach was rejected in favor of an approach focused on the challenges facing the.distribution companies specifically to provide a clearer initial focus for engagement between Eletrobras and the Bank.

29. Financing access expansion was rejected because it is covered by the national government program “Luz para Tudus”. This highly visible Federal program has been successful in reaching the unserved and recently expanded to a wider set of beneficiaries through 2012. It is worth noting that in the states where the six Discos operate, Luz para Tudus program has invested about R$ 2.7 billion and reached 221,796 homes (52 percent of the total target) as of September 2009. Once connected, households are serviced by the distribution companies. Therefore, supporting investments in the existing grids, and improving the operating and financial conditions of the Discos is necessary to allow them to have sufficient resources to ensure the quality of service for all customers (existing and future). Although the Project will not directly finance the new connections, it will complement the Government access program by

11 reinforcing and modernizing the existing grids of the relevant Discos which will allow them to better serve the newly connected customers.

30. Including a stand-alone energy efficiency (EE) program component was considered but not included as part of the Project because each Disco has ongoing initiatives in this area. For example, the six Discos recently acquired 27,000 low consumption refrigerators to be used in their respective programs: “Energy Efficiency for Low Income Consumers”. The efficient refrigerators will substitute higher consuming units that required higher consumption and undermined the affordability of electricity. The energy efficiency program will also substitute incandescent lamps with compact fluorescent lamps, whose efficiency can be up to 5 times greater. More than 250,000 lamps were purchased and will be introduced in more than 30 municipalities within the concession area of the six Discos; 140,000 households are to be targeted. The Project will focus on increasing revenues by improving billing and collection functions, which will then strengthen the ability of the Discos to carry out energy efficiency programs. In addition, the Project includes under Component 2 outreach activities such as educational campaigns that inform customers about rational use of energy and other commercial services.

31. IBRD lending to Eletrobras was preferred to direct lending to the Discos because centralizing IBRD lending through Eletrobras, which is the holding company for the Discos, allows a simpler structure under which financial flows are centralized through one company, as

, opposed to dispersed under six separate loans.

111. IMPLEMENTATION

A. Partnership arrangements (if applicable)

32. There are no relevant partnership arrangements

B. Institutional and implementation arrangements

33. The Project will be implemented by the six Discos, with Eletrobras playing an oversight and coordinating role. Eletrobras will borrow directly from the Bank, with a guarantee provided by the Federal Government. Funds will be channeled from the Bank through the Eletrobras to the Discos. The Distribution Directorate (DD) of Eletrobras will have overall oversight and responsibility for project implementation and reporting to the Bank, including oversight of implementation by the Discos. Each Disco in turn will be responsible for implementing its respective Project activities. Once the annual investment program and individual projects (Fichas de Projeto) are approved by the DD, each Disco will be responsible for managing procurement processes and contracts, including supervision of works and - when applicable - payments. It is anticipated, however, that given the unified Board of Directors of the 6 Discos and commonality in expenditures, the vast majority of Project activities will be centrally procured (by one of the Discos on behalf of the others) in order to benefit from economies of scale and closer control by the DD. In addition, and within this context, Eletroacre will implement activities related to the delivery of training and research programs described in Component 2.d.

12 34. The Finance Directorate of Eletrobras will manage all of the financial flows of the Project (withdrawals from World Bank, on-lending to Discos, contractor and other payments) on behalf of the DD and the six Discos. All disbursement requests for the Discos or contractors will be made by the respective Disco, approved by the Financial Director of the Disco and channeled through the Project Management Unit to the Finance Directorate of Eletrobras for payment.

35. A dedicated Project Management Unit (Unidade de Gestio do Projeto - UGP) was established in the DD through Eletrobras Executive Board Resolution 272/2010 of March 23, 2010. The UGP is responsible for the general coordination, management and monitoring of the Project during its implementation, as well as for the consolidation of progress reports and any other information required to be submitted to the World Bank and Eletrobras. The central UGP will be composed of a Coordinator (the “UGP Coordinator”) and full time staff (seconded employees or consultants) with the following individual responsibilities: engineering and technical aspects, financial management, procurement, environment and safeguard issues, social communication and information technology. In addition, each Disco will select one representative (“Disco Coordinator”) among its staff as its representative within the UGP, responsible for the coordination of Project activities across the different functional units of the individual Disco and the consolidation of reporting, including indicators required for Project M&E.

C. Monitoring and evaluation of outcomedresults

36. The M&E of Project activities will be performed by the respective units of each Disco, under the responsibility of the Disco Coordinator and the UGP. Two primary indicators that have been established by the regulatory agency, ANEEL, will be used to measure improvements in service quality: DEC (Equivalent duration of interruption by consumer) and FEC (Equivalent frequency of interruption by consumer). In addition, an indicator on losses and a financial indicator on collection rates of billed electricity will be tracked (including public entities). Indicators will follow standard industry practice, including improvements in collection rates of billed energy.

37. The UGP will be responsible for overseeing the functioning of the M&E system, with primary responsibility for information management assigned to the IT specialist with inputs from the Discos. Measures will be set up to measure progress towards the achievement of intermediary and final outcomes. Each Disco will have its own M&E system based on the systems that were recently installed in the companies to monitor investments. Key performance indicators and M&E arrangements are specified in Annex 3.

D. Sustainability

38. Improving the financial and operational performance of the six Discos in a sustainable manner is the main objective of the Project. The Project components are designed to combine improvements in hardware and capacity to promote sustainable improvements in performance. These include the following:

13 a) The installation of AMI and implementation of state-of-the-art commercial, technical service and accounting systems will contribute to the improvement in the commercial and financial management of each company.

b) Combined with AMI and new management information systems, reinforcement of distribution networks will help create a virtuous circle for the companies: quality of service will improve, leading to a reduction in fraud, as consumers will be more willing to pay for a reliable service. This in turn, will contribute to an increase in billing and collection, thereby freeing up resources to ensure maintenance of the existing infrastructure.

c) Strengthening the institutional capacity of the Discos will also promote sustainability of Project activities, especially related to fiduciary aspects and environmental and social best practices, as well as through a study to promote more efficient management of the Discos within the Eletrobras group.

d) The two-way social communication program is designed to promote understanding by all consumers of the importance of payment for regularized electricity service by all, benefits of improved Disco performance, energy efficiency measures, consumer complaint mechanisms, etc, as a means to enhance participation by the different stakeholders and sustain project benefits.

39. Sustainability of the improvements will also depend on the overall governance environment under which the Discos operate. The recent actions by the Government to place a greater emphasis on the commercial nature of the operations of Eletrobras, (including with respect to revenue collection), are expected to further help sustain the improvements anticipated under the Project. In addition, improvements in the financial position of the Discos, and related greater capacity to fund improvements in service, should reinforce the increased emphasis on running these companies on a commercial basis. Increased politicization of the decision-making processes of the Disco would, however, undermine the anticipated benefits.

E. Critical risks and possible controversial aspects

40. The overall Project risk is considered to be moderate. The provision of technical assistance will help improve the implementation capacity of the Discos. The political risk is rated as substantial due to the potential for political interference in the types of activities to be undertaken in a loss reduction program of this nature, as well as in the context of the forthcoming electoral period. Mitigation measures will include a solid communication strategy on the importance of paying for electricity, as well as publicizing performance improvements of the Discos.

14 Risk rating Risk Risk mitigation measure with mitigation Eletrobras does not give Eletrobras management has already fully L sufficient priority to the delegated responsibility for project Project given its numerous implementation to the DD, and the Project other competing tasks. provides a major source of funding for the reform program of the Discos over the next few years . Lack of coordination between An effective UGP has been established within L the decision-makers and the structure of the DD. Clear implementation technical staff in each Disco procedures for the Discos have been defined and with the DD of and are reflected in the POM. In addition, all Eletrobras delays Project legal and financial obligations between implementation. Eletrobras and each Disco will be spelled out in a subsidiary agreement (Convenio), which also defines clear responsibilities and accountabilities at each level. Discos have low capacity to The UGP will provide critical guidance to the M implement the Project, which Discos, while longer term capacity will be built delays execution of the through the institutional strengthening activities. comDonent of the Proiect. Because of the lack of Eletrobras has considerable experience with M experience with Bank environmental and social safeguard policies, environmental and social especially in the context of hydropower and safeguards, the Discos fail to transmission projects. It has prepared an implement the policies Environmental Assessment of the Project and adequately. defined the environmental and social management frameworks and procedures to be included in the POM and followed during project implementation. The Discos, in turn, are also interested in improving E&S management practices. They have participated in a safeguard training program conducted by the Bank and will have access to further training and consultant support during implementation. The Discos and Eletrobras The detailed assessment of procurement and M are unfamiliar with Bank financial management practices in each Disco fiduciary procedures. and the relevant parts of Eletrobras rated this risk as Myand the results of such assessments were used to define procedures to be included in the POM. There will be continued extensive engagement between Bank staff and Eletrobras during Project implementation. Political or other interference The Project will contribute to developing S

15 Risk rating Risk Risk mitigation measure with mitigation within each state impedes community outreach and information campaigns achievement of loss reduction (at all levels of society and government) as a targets in the Discos (for contribution to the loss reduction and Disco example, related to payment reform program. of tariffs and cut-off of illegal connections, as well as collecting outstanding receivables from public sector customers) Delays in project Eletrobras demonstrated, throughout Project M effectiveness due to slow preparation, its commitment and capacity to approval process by Federal theproject. It also showed agility in securing Government and Senate prompt approval from Federal authorities for negotiations and the same is expected for amroval of the loan bv the Senate. Cost overruns and delays Only well proven technology will be used. L hinder execution of the Close supervision of the Project activities activities through the establishment of a performance indicators framework and capacity strengthening programs (defined during preparation) will enable the Eletrobras/Disco Project team to identify issues in time and take necessarv actions. Lack of availability of The Project cost structure has been designed so L counterpart funds and budget that Bank and Eletrobras each finances its priority delay implementation respective contributions independently, namely of Project activities at 100 nercent of cost. By supporting this Project, Scope of Bank support is clearly defined and M Bank may be associated with ring-fenced in the DD and Discos, and other activities of the larger separated from other Eletrobras operations. In Eletrobras Holding and addition, a communications strategy is subsidiaries (such as developed to explain Project contents. hydropower in Amazon, corporate governance issues that have recently been in the mess. etc) Overall Risk Rating M Rating of risks on a four-point scale-High, Substantial, Moderate, and Low-according to the probability of occurrence and magnitude of adverse impact

16 F. Loanhredit conditions and covenants

41. The following are the conditions for Effectiveness for the Loan:

A. Conditions for effectiveness:

a. Each of the six Sub-loan Agreements has been executed on behalf of the Borrower and each of the Discos that is a party thereto. b. The Borrower has adopted the Project Operational Manual. c. The PMU has been staffed in form and substance satisfactory to the Bank.

B. Covenants: a. The Borrower shall carry out and shall cause each DiscCo to carry out the Project in accordance with the provisions and recommendations of the Environmental Management Plan (including the Environmental Construction Manual and the guidelines and procedures for chance find of physical cultural resources, natural habitats and forests, pest management and waste management), the Resettlement Framework and the Indigenous Peoples Framework.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

i. Economic Analysis

42. The economic benefits of this Project include: (a) lower electricity generation (and related resource savings) due to the reduction in technical losses and in consumer demand; (b) increased availability of electricity supply to consumers through the reduction in the frequency and duration of interruptions in supply derived from improved service quality; and (c) lower resources spending on service interventions and maintenance as a result of improved service quality and operational efficiencies, such as in meter reading.

43. The ERR and NPV (at a 10 percent discount rate) in the Base Case scenario are 18.5 percent and US$260 million, respectively, using a ten-year1 stream of benefits. The results are provided in the following table:

' The investment, benefits and costs were projected over a 10 year period. Although investments related to network upgrades typically have longer lives (up to 35 years), approximately 70 percent of the project investments are concentrated in metering equipment, which typically have shorter lives (around 10-15 years). As a result, both the economic and financial analysis' results are considered conservative given that they do not include an additional 10- 15 years of benefits, or the residual value of network investments. 17 Summary Results for the Project’s Economic Analysis US$ in 000s @ Discount Rate of 10.0% Present Value of Costs $ (637,573) Present Value of Benefits $ 897,628 Net Present Value $ 260,055 ERR 18.5% I

44. An additional benefit from the lower electricity generation required to meet demand is the reduction in C02 emissions as part of the portion of generation that comes from thermal plants burning fossil-fuels (diesel, bunker, natural gas). In quantitative terms this reduction is particularly significant in the case of Amazonas Energia so long as its networks remain isolated from the integrated grid, SIN (a situation which is expected to continue until at least 2012) as the generation mix used to supply the Disco’s consumers relies more than 70 percent on fossil fuels. After Amazonas Energia will be connected to the SIN, the impacts of the reduction of C02 emissions due to lower electricity generation will be less significant as the Brazilian power system relies primarily on hydropower. Though noteworthy, the savings in C02 emissions are small relative to other benefits and so have not been included in the Base Case economic analysis.

45. A sensitivity analysis was run assuming that the size of the decrease in generation (the principal economic benefit valued in the Base Case) is 20 percent less. In this event, the ERR and NPV drop to 13.8 percent and US$ 11 1 million respectively. ii. Financial analysis

46. The financial benefits of this Project were calculated from the perspective of the six Discos in the aggregate and include: (a) lower electricity purchases by the Discos due to reduction in technical losses and lower demand from electricity users given reduced unmetered consumption; (b) increased electricity revenues from increased sales due to reduced unmetered consumption (non technical losses) and a decrease in the duration and frequency of interruptions in electricity supply; (c) reduction of costs to operate and maintain the electricity networks; and (d) lower amounts of regulatory penalties paid by the Discos due to better compliance with standards of service quality.

47. Assuming a ten-year2 stream of benefits in the “Base Case”, and a loan maturity of 15 years, with a 5-year grace period and 10 years of amortization, yields a financial rate of return (FRR) of 40.7 percent and a net present value (NPV) of US$ 1.38 billion (at 10 percent discount rate) for the Discos on an aggregate basis. The related payback period for the aggregate of US$ 709 million in loans from IBRD (US$ 495 million) and Eletrobras (US$ 214.3 million) to the Discos is 3.6 years.

2 See comment in footnote 1. 18 Summary Results for the Project's Financial Analvsis I USS~~OOOS I @ Discount Rate of 10.0% Present Value of Costs $ (1,141,405) Present Value of Benefits $ 2,519,788 Net Present Value $ 1,378,383 FRR 40.7% Payback Period (Yrs) 3.61

B. Technical

48. The Project presents no unusual construction or operational challenges. The equipment and technology involved in construction and operation of the distribution networks and metering systems are well known and proven. In addition, the Project will be implemented according to internationally accepted technical criteria and standards. The technical parameters and estimated costs for all the Project components have been established by Eletrobras and reviewed by an international consultant.

49. Eletrobras has its own strong capacities to prepare technical specifications of almost all Project components, evaluate the proposals received in the calls for bids and supervise and monitor the execution of works. In a few cases, such as the MIS, it is envisaged that the Project team will be supported by international consultants.

C. Fiduciary

50. A financial management assessment for the Project was carried out at Eletrobras and at the Discos, in accordance with OP/BP 10.02 and the Financial Management Practices in World Bank Financed Investment, dated March 5, 2009. The purpose of the assessment was to determine whether the executing agencies, Eletrobras and the Discos, have acceptable financial management and disbursement arrangements in place to adequately control, manage, account and report on Project funds. This assessment was completed based on FM Missions to all six Discos and Eletrobras Headquarters. Based on the assessment of the executing agencies, the financial management arrangements as set out for this Project satisfy the Bank's minimum fiduciary requirements. Annex 7 details the procedures that will be followed and actions to be taken prior to Project effectiveness.

5 1. The overall financial management risk associated with this Project is considered Moderate.

52. A procurement capacity assessment was carried out for the six Discos and the related functions of Eletrobras. The review covered the Procurement Departments of all companies

19 including the Permanent Bidding Committees. The capacity assessment included an analysis of the organizational aspects, skills of the staff, quality and adequacy of supporting and control systems, and suitability of the laws, rules and regulations applicable to the agency. The following areas were covered: Legal Aspects and Procurement Practices, Procurement Cycle Management (including procurement planning, preparation of bidding documents, management of the bidding process, bid evaluations, contract award, and contract management), organization and functions, support and control systems, record keeping and staffing. Three procurement scenarios are envisaged, namely: i) Centralized procurement by one Disco on behalf of the others, with coordination support from the UGP; ii) Framework contracts for procurement of goods carried out by individual Discos and for which all 6 Discos can adhere to; and iii) procurement of goods, services and works carried by each individual Disco.

53. A dedicated Project Management Unit (Unidade de Gestgo do Projeto - UGP) has been established in the DD. The central UGP will be composed of full time staff (seconded employees or consultants), in addition to the Project Coordinator and others, and will include one procurement specialist and a financial management specialist. Each Disco will also appoint one Coordinator to represent the Disco in the UGP, to be responsible for the coordination of Project activities across the different functional units of the Disco. The UGP will consolidate inputs from the Discos to prepare progress reports, procurement plans and disbursements/replenishment requests, while ensuring compliance with Bank guidelines and requirements stated in the POM.

54. Based on the above analysis, the procurement risk has been rated as Moderate.

D. Social

55. The Project seeks to improve the quality of electricity services in six of the poorest states of Brazil. Country studies show that the poor suffer disproportionately with low quality and irregular supply of electricity. Lack of reliable access to electricity services in the 118 municipalities covered by the Project has been a serious and long-standing bottleneck to sustainable economic development and job opportunities. The Project will thus directly contribute to growth and improving the quality of life of approximately 3 million customers. The Bank will work with Eletrobras and the distribution companies to strengthen their management of social issues and participation strategies, aiming to sustain and expand social achievements beyond the life of the project.

56. Regarding the possible social impacts of the Project during its implementation, the investments in distribution network reinforcement in Amazonas Energia, Ceal, Ceron, Eletroacre, and Boa Vista Energia (corresponding to about 80 percent of total Project investments) are strictly limited to improvements of medium and low voltage distribution networks in urban areas, while those in Cepisa (corresponding to the remaining 20 percent) also involve high voltage peripheral and inter-urban connections. Investments in distribution network reinforcement will focus on consolidated urban neighborhoods and entail minor interference with ongoing activities during implementation, given that disturbance is minimal and of short duration. Also, considering that residents, commercial and service customers in those neighborhoods are the primary beneficiaries of improved services, it is expected that these

20 investments are unlikely to raise social concerns. The expansion of Cepisa’s high voltage (69 kV) distribution lines and substations will reinforce the network in the periphery of Teresina and Parnaiba (the State’s two largest cities) and three networks linking mid-sized cities within largely low-density, agricultural and cattle ranching areas. While lands will be needed for the passage of rights-of-way and for substations, no significant impact on people or their livelihoods is foreseen as such land has already been acquired or is abundant in urban peripheries. No impacts are foreseen on indigenous peoples.

57. Investments in advanced metering infrastructure will concentrate on high and medium- income customers, which are expected to account for 85 percent of the energy recovered. The remaining 15 percent involve regularizing energy services in low-income, informal, usually peripheral neighborhoods that are in the process of being incorporated into the formal urban structure by municipal governments. In such cases, regularization of energy services will entail replacement of improvised line connections (with some rerouting), and introduction of metering and billing. This could have two potential social impacts: (i) resettlement and (ii) a financial burden for households. As per ANEEL guidelines, the Discos will only invest when there is a formal request from the municipality. Although improvised, the settlements, for the most part already have roadways; thus resettlement is not expected. Regularization of electricity service will however entail an obligation for payment, which may constitute a financial burden for lower-income households. Nevertheless, such households will benefit from subsidized “social” tariffs.

58. Activities in these and other neighborhoods will be accompanied by a communications program to engage with local residentsklients, explain project objectives and plans, minimize misunderstandings, and address potential vulnerabilities or discontent. The program will help build public awareness and consensus on the importance of the reduction of technical and non- technical losses, creating an environment favorable to the gradual change of inadequate behaviors, both by small and large consumers. The Discos can also draw on extensive recent experience from other distribution companies in Brazil (e.g., regarding the regularization of electricity supply to slums such as Dona Marta as well as to higher-income suburbs (condominiox) in Rio de Janeiro over the past year).

E. Environment

59. As noted above, improvement of service quality and loss reduction by the six Discos will require the strengthening and rehabilitation of medium and low-voltage lines and substations and equipment to better control and improve reliability of distribution networks in urban areas. These urban investments -- whether focused on consolidated areas, as is the case for distribution network reinforcement or on neighborhoods in transition, as for advanced metering infrastructure -- will have insignificant environmental impacts, of short duration, largely related to execution of works and handling, storage, transportation and final disposal of waste material. Where transformers have to be replaced, removal and disposal will be undertaken by specialized contractors. Brazil has experience in this regard: over the course of several years, all Polychlorinated Biphenyl (PCB) have been removed and disposed of as per requirements of the Brazilian legislation. Other obsolete material (e.g., cables, meters) will be sold off in auctions that are held by the Discos periodically. Safety procedures have been addressed in a

21 Construction Manual, and Guidelines for Waste Management have also been prepared. These will be attached to contracts and will apply to implementation of sub-projects in these two typologies. In addition, suitable social communication actions will be necessary

60. Investments in high voltage distribution systems will occur only in the case of Cepisa. As indicated in the previous section, five networks will be reinforced - Teresina, Parnaiba, Campo Maior, Ribeiro Gonqalves, and Valenqa. The first two are located in the outskirts of two major cities and will follow existing rights-of-way (already occupied by other lines, one of which will be replaced), existing low-density urban roads or national highways. Land acquisition for construction of associated substations (equivalent to about a 100-meter square block or less) has already taken place - and was found acceptable by the Bank- or does not present a problem, given the abundance of unoccupied plots in these peripheral areas. In the case of the three interconnections between mid-sized cities, lines will follow state highways and other rural roads. As indicated above, these are low-density largely agricultural and cattle ranching regions, characterized by “cerrado” (savanna) landscape, much of which already has been removed to form pastures. No significant impact on natural habitats is foreseen. Rights-of way can often be shared with those already existing; land for substations has already been acquired or is available in the periphery of urban areas.

F. Safeguard policies

61. An Environmental and Social Impact Assessment (ESIA) was conducted during Project preparation. Based on the results of this assessment, the rating for the Project is Category By given the low social and environmental impacts foreseen. Annex 10 discusses environmental and social issues in greater detail.

62. Face-to-face consultations were held in Manaus in December 2009 and in Teresina in January 201 0, with participation of the state environmental agencies and key organizations, to discuss the objectives, scope and timing of the Project, the environmental and social issues that may potentially arise during implementation, and proposed actions to address any adverse Project impacts. Similar consultations were also held with ANEEL. In all cases, the Project was very well received.

63. The following environmental and social documentation has been prepared: an ESIA of the overall Project, which includes: (a) detailed environmental management guidelines and procedures (EMP) comprising environmental assessment, natural habitats, cultural heritage, and management of pesticides and hazardous waste, and (b) a resettlement framework and an indigenous peoples framework. The ESIA also provides a set of construction guidelines for minimizing environmental and social impacts. The ESIA and its accompanying procedures and social frameworks will be included in the POM. The ESIA was released in-country and filed in the Bank’s Infoshop on January 13,2010 (Doc. E2344).

64. The proposed approach to managing environmental and social impacts of the Project reflects its implementation schedule. In Year 1 of Project implementation, investments will mainly focus on installation of meters, the design of physical works, and preparation of bidding documents; construction is scheduled to occur only in Years 2 to 5 of Project implementation.

22 Investment plans for physical works are currently available at the pre-feasibility level -- in the case of urban system improvements, priority neighborhoods have been identified; in the case of peripheral or inter-urban connections, indicative routing of distribution lines and substation sites is available. Thus environmental and social safeguards will be addressed through a twofold, sequenced approach:

(i) Safeguards procedures have been prepared and are of two types: (a) mandatory, Le., guidelines that will be applied to all sub-projects that may potentially have an environmental or social impact (EA, Environmental Construction Manual, and Waste Management Guidelines), and (b) precautionary, i.e., guidelines that will be applied if the specific impacts are identified during sub-project preparation or should these arise during implementation (Resettlement Framework, Indigenous Peoples Framework, Natural Habitats Framework, Physical Cultural Resources Framework, and Pest Management Framework, which are included in the ESIA disclosed in-country and in Infoshop on January 13,2010).

(ii) Site-specific simplified EAs will be conducted for all sub-projects that may potentially have an environmental or social impact, and will be focused on measures to address eventual specific impacts identified during the detailed sub-project design stage. The Environmental Construction Manual and Waste Management Guidelines will apply to all sub-projects. Other (i-e., the precautionary) safeguard frameworks will be triggered if identified during the EA process and/or in the event that unforeseen environmental and social impacts should be encountered during Project implementation.

65. The site-specific EAs will be conducted and impact mitigatiodcompensation plans drawn up, as needed, during Year 1 for investments to be made during Year 2, in accordance with the guidelines and procedures set forth in the frameworks referred to above; a similar procedure will be adopted for subsequent years. For effective and informed decision-making on the need to conduct detailed assessments on investments to be undertaken in Year 1 and beyond, screening, supervision and monitoring mechanisms have been included in the frameworks.

66. It should also be noted that, through Component 2, the Project will strengthen the environmental and social management capacity of the Discos, helping them to better manage current facilities and tackle future challenges. Through its research and training programs in Acre, it will also build capacity of a much wider range of sector professionals in areas of water resources and environmental management related to the electricity sector, The proposed institutional strengthening program is detailed in Annexes 4 and 10.

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [XI [I

23 Physical Cultural Resources (OP/BP 4.1 1) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [XI [I Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OPBP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI

G. Policy Exceptions and Readiness

67. No policy exceptions are requested. The Project satisfies Regional guidelines for project preparedness as follows:

a) The UGP has been established by Eletrobras and its staffing was agreed between Eletrobras, the Discos and the Bank at negotiations. The full staff will be on board by effectiveness.

b) The contents of the POM, including procedures for environmental and social management, were agreed among Eletrobras, the Discos and the Bank at negotiations.

c) The contents of the Sub-loan agreements were agreed among Eletrobras, the Discos and the Bank at negotiations.

d) An updated Procurement Plan was approved by the the Bank at negotiations. Eletrobras has initiated the preparation of bidding documents for Year 1 activities.

' By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination ofthe parties' claims on the disputed areas 24 Annex 1: Country and Sector or Program Background BRAZIL: ELETR0BR.h Distribution Rehabilitation Project

I. Country background

1. Brazil is the largest country in South America, bordering every country with the exception of Chile and Ecuador. With a population of 191 million, it is the fifth most populous country in the world, and has one-third of the population of the Latin America and the Caribbean Region (LCR). The population is primarily concentrated in the south and southeast regions of the country, with the three states of SZio Paulo, Rio de Janeiro and Minas Gerais accounting for 40 percent of the entire population. Brazil has been enjoying a period of economic stability over the past ten years, and has made very good progress in improving income distribution and access to basic services. However, the average per capita income of $10,325 (2008) masks the challenges of meeting the needs of the millions of-people who still live in poverty in certain regions of the country. Poverty rates are particularly high in the arid Northeastern states (NE), as well as in the Northern Region (N), encompassing the states making up the Amazon River basin. The majority of low income households are concentrated in the north and northeast regions of the country, including in the six States where the Project will be located. Human Development Index data for 2007 show that the two states with the lowest HDI are Piaui and Alagoas where the index is between 0.600-0.699, compared to the highest index other regions of 0.900.

2. The main socioeconomic and demographic characteristics of the six states included in the Project are summarized below:

0 Acre: The State has 655,385 inhabitants with a population density of 4.3 inhab./km2, and 67 percent of the population living in cities. Agriculture and agro-forestry are the main economic activities of the State. Indigenous lands in Acre account for about 15 percent of the State territory.

Alagoas: The State has approximately 3 million inhabitants, 59 percent of whom live in urban centers, and an average population density of 109.4 inhab./km2. Alagoas has the lowest HDI in Brazil, 0.677. The cities on the coast and in the center have an average HDI between 0.551 and 0.750. However, cities in the western side of the State have very low Human Development indices, from 0.460 to 0.560. There are few indigenous communities in this very small state.

0 Amazonas: The State of Amazonas accounts for 18.5 percent of the total territory of Brazil. Despite vast natural resources, the population located in the interior of the State is very poor, with an HDI of between 0.4 and 0.6. The State has a population of 3.2 million inhabitants, and a density of 2.05 inhab./km2. One of the main characteristics of the State is its difficult accessibility, due mainly to its large territory. According to FUNAI, the State has 103,066 indigenous inhabitants, divided into 65 ethnicities, corresponding to 4 percent of the State’s total population.

25 0 Piaui: The State of Piaui has 3.0 million inhabitants, and a population density of 12.0 inhab./km2. Most of its economic activity comes from the services sector.

Rondonia: With a total population of 1.45 million inhabitants, the State of RondBnia is an agricultural state and relies notably on the production of latex and cacao. With recent federal development programs, the population density of RondBnia has been growing to 6.1 inhab./km2. The population is one of the most diverse of Brazil, comprised of immigrants from all other regions of the country.

0 Roraima: The State of Roraima is the northernmost and least populated State of Brazil (395,725 inhabitants). Population density is low at 1.76 inhab./km2.

Table 1 - Socioeconomic and demographic data, by State Main cities Total Population Socio economic Indicators Acre Rio Branco 290,639 44.35% Cruzeiro do SUI 73,948 11.28% GDP (2006, R$ millions) 4,835 Sena Madureira 34,230 5.22% GDP per capita (2006, R$ 000s) 7,041 Tarauach 32,172 4.91% HDI (2005) 0.751 Feij6 31,288 4.77% Poverty Index (2003, YO population) 42.29% Brasileia 19,065 2.91% Gini index (2003) 0.53 Senador Guiomard 18,863 2.88% Aphabetization index (PNAD 2008, % of pouplation) 86.20% Total 655,385 100.00% Main cities Total Population Socio economic indicators Aiagoas Maceio 896,965 29.53% Total population (2007) 3,037,103 Arapiraca 202,398 6.66% GDP (2006, R$ millions) 15,753 Palmeira dos [ndios 70,151 2.31% GDP per capita (2006, R$ 000s) 5,164 Rio Largo 65,432 2.15% HDI (2005) 0.677 Uniao dos Palmares 60,619 2.00% Poverty Index (2003, % population) 59.00% Penedo 59,020 1.94% Gini index (2003) 0.47 Coruripe 51,027 1.68% Aphabetization index (PNAD 2008, YO of pouplation) 74.30% Total 3,037,103 100.00%

Main cities Total Population Socio economic indicators Amaronas Manaus 1,646,602 51.11% Total population (2007) 3,221,939 Parintins 102,044 3.17% GDP (2006, R$ millions) 39,166 ltacoatiara 84,676 2.63% GDP per capita (2006, R$ 000s) 11,829 Manacapuru 82,309 2.55% HDI (2005) 0.780 Coari 65,222 2.02% Poverty Index (2003, % population) 48.44% Tee 62,920 1.95% Gini index (2003) 0.50 Maub 47,020 1.46% Aphabetization index (PNAD 2008, % of pouplation) 91.70% Total 3,221,939 100.00% Main cities Total Population Socio economic indicators Piaui Teresina 779,939 25.72% Total population (2007) 3,032,421 Parnaiba 140,839 4.64% GDP (2006, R$ millions) 12,790 Picos 70,450 2.32% GDP per capita (2006, R$ 000s) 4,213 Piripi ri 60,249 1.99% HDi (2005) 0.703 Floriano 56,090 1.85% Poverty Index (2003, % population) 53.11% Barrras 43,328 1.43% Gini index (2003) 0.46 Unilo 40,661 1.34% Aphabetization index (PNAD 2008, % of pouplation) 75.70% Total 3,032,421 100.00%

26 Main cltles Total Population Socio economic indicators Rondhia Port0 Veiho 369,345 25.41% Total population (2007) 1,453,756 Ji-ParanB 107,679 7.41% GDP (2006, R$ millions) 13,110 Ariquemes 82,388 5.67% GDP per capita (2006, R$ 000s) 8,391 Cacoal 76,155 5.24% HDI (2005) 0.776 Vilhena 66,746 4.59% Poverty Index (2003, YO population) 27.02% Jaru 52,453 3.61 Yo Gini index (2003) 0.46 Rolim de Moura 48,894 3.36% Aphabetization index (PNAD 2008, % of pouplation) 90.80% Total 1,453,756 100.00% Main cities Total Population Socio economic indicators Roraima Boa Vista 249,853 63.14% Total population (2007) 395,725 Rorain6polis 24,466 6.18% GDP (2006, R$ millions) 3,660 Caracara1 17,981 4.54% GDP per capita (2006, R$ 000s) 9,075 Alto Alegre 14,386 3.64% HDI (2005) 0.750 Mucajal 12,546 3.17% Poverty Index (2003, YO population) 39.13% CantB 11,119 2.81% Gini index (2003) 0.44 Bom Fim 10,231 2.59% Aphabetization index (PNAD 2008, YO of pouplation) 90.70% Tota I 395,725 100.00% Source: IBGE, Contagem da Populaqlio 2007.

11. Sector background

3. With one-third of the population of LCR, Brazil has the largest electricity market in South America. In 2008 total electricity consumption reached about 385 TWh, comparable to that of the United Kingdom. The country’s total generation capacity was 104 GW, dominated by hydropower, which accounted for 78 percent of the total installed capacity, followed by gas-fired power plants with almost 11 percent. Between 2000 and 2008, electricity demand increased by 3.1 percent per year on average and is expected to grow on average 3.5 percent per year in the next five years. Electricity service covered 97 percent of the population (OLADE, 2008 based on 2006 data), which was above the 94.6 percent average for LAC region in 2005. Non- connected households are located mostly in rural areas, mainly in the North and Northeast of the country.

4. The Brazilian electricity market is structured into four regional sub-markets. Consumers are separated in two groups: 1) large consumers who are allowed to buy directly from the free energy market (the free market represented 26 percent of the total consumption in 2007); and 2) captive consumers who buy from the distribution companies under conditions regulated by ANEEL. While bulk energy prices are set through the competitive process, transmission prices are set by the regulator.

A. Brief overview of the sector reform

5. The first steps for the implementation of the power sector reform were initiated in 1996. The objective of the reform was to build a more competitive power sector with the creation of a level playing field for private sector participation. Some of the state-owned generation capacity was acquired by foreign and local investors. Other companies such as Electricit6 de France, Endesa and Chilectra focused on the distribution segment, a segment in which privatization brought improved quality of service and a reduction of theft, non-payments and technical losses. Most of distribution was privatized (85 percent of the energy distributed at that time). During

27 this period (1996), the six state distribution companies in the less prosperous Northern and Northeast regions of the country were transferred to Eletrobras’ control, with the objective of improving their financial condition and preparing them for privatization. However, given their precarious financial and operating conditions, the privatization process never occurred.

6. The 2001 crisis: The reforms were not successful in preventing the energy crisis that was to unfold in, 2001 , as a result of: (i) the continued decrease in the water storage levels of the reservoirs required for the operation of hydropower plants, (ii) delays in the commissioning of new generation plants, and (iii) transmission problems in the third circuit from the Itaipu hydropower plant. Instead of resorting to rolling blackouts, the Government chose to apply a quota system. Quotas were established for all the consumers based on historical and target consumption level, applying bonuses for consumption well below the prescribed level, penalties for over-consumption and some freedom for the large users to trade their quotas in a secondary market. The Government’s goal of reducing historical consumption levels by at least 20 percent for an eight-month period was successfully achieved, with the Government having to pay over US$200 million in bonuses to residential, industrial, and commercial customers.

7. The 2003-2004 Reforms and the Energy Auctions: Following the election of the Lula administration in 2003 , Government decided to consolidate the regulatory and institutional framework for the power sector. The administration decided to take stock of some of the limitations of the market-centered development model being applied in an electricity sector that relied very heavily on hydropower. In addition to reviewing the supply model to reduce the risk of future shortages, the reforms included clarifying the roles of the power regulatory agency (ANEEL), sector planning agency (EPE) and system operation coordination entities (ONS), as well as reinforcing the overall coordination of the Ministry of Mines and Energy in policy setting. In particular, the Government recognized the need to strengthen the holding company Eletrobras in the face of the structural changes that had resulted from the privatization and unbundling of the sector. The pending privatizations of three large generation subsidiaries of Eletrobras were stopped.

B. Demand and Access

8. Electricity demand growth rates in Brazil have been historically high, mostly due to the industrialization effort. In the 1970~~average annual demand growth was 11 percent, and even during the 1980s severe recession, the mean growth rate was 4 percent. After a recovery to the 6 percent growth level with the stabilization plan that ended inflation, in the early 1990~~demand growth started to oscillate as a result of economic difficulties. Between 2000 and 2008, electricity demand increased by 3.1 percent per year on average and is expected to grow an average of 3.5 percent per year the next five years.

9. Electricity service covered 97 percent of the population in 2008 (above the 94.6 percent average for LAC region (in 2005). Non connected households are located in mostly rural areas, mainly in the North and Northeast of the country. As shown in the figure below, the Southeast region accounts for most of the consumption in the country (the region encompasses >50 percent of total population) and the industrial sector accounts for about 46 percent of the total.

28 Figure 1: Electricity Consumption by Region and Sector --~ __I__-. _____^ ______-. - .- ~ Electricity Consumption by Region l--I Electricity Consumption by Sector

Source: Eletrobrds

C. Institutional framework

10. The following diagram shows the current institutional organization of the electricity sector in Brazil:

The Conselho Nacional de Politica Energetica (CNPE) is a cabinet-level advisory board reporting to the President. It is coordinated by the Minister of Mines and Energy, with the participation of several ministers, the regulatory agency president, and other government executives. Its responsibilities include: (i) to propose the national energy policy for the President; (ii) to propose the generation supply reliability criterion (risk of rationing) for the country; and (iii) to approve the auction of certain power projects which are not competitive in economic terms, but which are considered as “strategic” for the country.

The Ministry of Mines and Energy (MME) is responsible to formulate and implement the directives approved by the CNPE. The Ministry is also in charge of the sector’s planning and assumes the fbnction of the conceding power, the monitoring of the system supply through the CMSE, and the definition of preventive measures required to assure power supply.

29 The Empresa de Pesquisas Energeticas (EPE), which was created in 2004 with the objective of giving technical support to the MME in its energy planning studies. Previously, those studies were carried out by the state-owned utilities, in particular Eletrobras.

The Comite de Monitoramento do Setor Eletrico (CMSE) is an advisory board, coordinated by MME and composed of representatives from ANEEL, ONS, EPE and others. Its objective is to monitor short-term supply reliability and to anticipate any supply problems due to, for example, delays in the construction of new generation capacity.

The National Electric Power Agency - “Aghcia Nacional de Energia Eletrica” (ANEEL) is the Electric Sector regulator and supervisory agency. Its mandate includes, among other functions, to mediate, regulate and monitor the well function of the power sector.

The National Electric System Operator - “Operador Nacional do Sistema” (ONS) is a private agent overseen by ANEEL. In addition to performing the actual system dispatch (“Physical Dispatch”), the ONS also supplies the computational models and data required for the so- called “Commercial Dispatch”, used for financial settlements, in the short term “market”.

The CAmara de Comercializaviio de Energia Eletrica (CCEE) was created to replace the former MAE (Wholesale Energy Market). It remains a private organization, under ANEEL’s regulation. CCEE’s functions include: to manage energy trades; to promote energy purchase auctions when delegated by ANEEL; and to conduct market clearing in both the regulated and deregulated trading environments.

D. Electricity System: Generation, Transmission and Distribution

Generation 11. Brazil’s power system is highly dominated by hydroelectric power plants, which represent 80 percent of the 104 GW installed capacity. The generation system is composed of 13 main generation companies, the majority created decades ago, and several other smaller companies.

12. Eletrobras is the holding company for the three main regional (Federal) utilities3:

Chesfi the largest generation company in the country with an installed capacity of app.10,600 MW, and assets concentrated in the Northeast region along the Siio Francisco basin. Chesf is also a transmission agent with 18,400 km of transmission lines and 96 substations.

Furnas: is a generation and transmission company located in the Southeast region and a total installed capacity of 9,600 MW. The company also has 19,000 km of transmission lines, and is responsible for the 900 km Itaipu-Sao Paulo line. Furnas is responsible for the commercialization of the energy produced by Eletronuclear (2,000 MW), and the Brazilian quota in the Itaipu binational power plant.

’ Eletrobrb also controls CGTEE, a thermal generation company with assets in the South region totaling 490MW installed coal generation capacity. 30 Eletronorte: is a state owned generation and transmission company with assets in the North region that totalize 9,100 MW of installed capacity, including the Tucurui power plant located in the Tocantins River (8,300 MW).

13. The fourth federal generation utility, located in the South region and originally named Eletrosul, was under Eletrobras’ control until 1998, when it was split into a transmission company and a generation company. The generation company was privatized and sold to Tractebel (part of the Suez Group) and now has an installed capacity of 6,953 MW.

14. In addition, Petrobras, the integrated oil company controlled by the Federal State, started to invest in natural gas thermal generation power plants after the launch of a power thermal priority program, and it is now becoming an important generation company.

Transmission 15. Brazil’s national interconnection system (“national grid” or SIN) is composed of the transmission lines whose tension is greater than 230 kV4. The country is interconnected by 83,000 km of a high voltage transmission network, with voltages ranging from 230 kV to 765 kV AC and two 900 km bipolar 600 kV DC links from the binational Itaipu plant. With the attribution of over 40 concessions, private investors now hold minority shares in local transmission companies still operated under the umbrella of Eletrobras.

Distribution 16. Electricity distribution is a public service, ruled by concession contracts signed between distribution companies and ANEEL. There are currently 64 distribution companies in Brazil and 78 percent of the consumption in the interconnected system is supplied by private companies. The concession contracts set the basic rules in areas such as tariff formation, service quality and security, consumer rights and obligations, penalties, and universal service provision.

17. The main five distribution companies, which account for about 50 percent of total electricity distributed, are presented in Table 1. For purposes of comparison, Eletrobras’ Discos are presented at the bottom of the table. Altogether the six Eletrobriis Discos service over 3 million consumers. The combined concession area of all Discos is over 2.2 million km2, which is more than four times the size of the concession area administered by CEMIG, one of the largest distribution companies with respect to concession area size. This large concession area and the smaller number of consumers illustrates the level of population dispersion encountered in the region (mainly in the Amazonas).

’ The installations below 230 kV are considered part of the distribution concessions 31 Total Controlling Company State Concession Total Consumption Shareholder Area (km’) Consumers GWh - 2007 CEMlG MG 567,740 6,439,823 20,693 MG State Govt Eletropaulo SP 4,526 5,651,696 32,548 AES Corp COELBA BA 563,374 3,897,048 11,403 Neoenrgia-lberdrola LIGHT RI 10,970 3,483,256 18,235 Rio Minas Energia COPEL PR, SC 194,854 3,437,061 18,523 PR State Govt CPFL SP 90,440 3,334,889 18,866 VBC Energia Eletrobras’ Discos CEPISA PI 251,529 848,763 2,931 Eletrobras CEAL AL 27,768 804,964 3,295 Eletrobras Amazonas Energia AM 1,570,746 658,551 7,102 Eletrobras CERON RO 237,576 437,471 2,622 Eletrobras ELETROACRE AC 152,581 177,883 770 Eletrobras Boa Vista RR 5,687 75,064 545 Eletrobras Consolidated 2,245,887 3,002,696 17,266

E. The important role of Eletrobras

Overview 18. Centrais Ele‘tricas Brasileiras SA (Eletrobras) was created in June 1962. Eletrobras was initially given responsibility for the development of hydroelectric generation, transmission lines and power stations to supply Brazil’s growing electricity demand. Eletrobras is majority-owned and controlled by the Federal Government whose direct and indirect stakes represent about 66 percent of total capital. Over time, Eletrobras has become the holding company for a much larger group which now comprises:

0 Five main generation-transmission subsidiaries (CHESF, Furnas, Eletronorte, CGTEE, Eletronuclear) through which the company has a 38 percent market share of Brazil’s installed electricity generation capacity (32.4 GW excluding 7GW from Itaipu) and 56 percent share of transmission. CGTEE and Eletronuclear, for strategic and historical reasons were created to develop thermal and nuclear generation. In addition, Eletrobras controls 50 percent of Itaipu, one of the largest hydropower plants in the world.

0 Six (at the time, financially-troubled) state distribution companies, located in the poorer North and Northeastern parts of the country (CEAL, Boa Vista Energia, CEPISA, CERON, Eletroacre, and Amazonas Energia).

0 CEPEL, the largest Electricity Research center in the southern hemisphere.

19. Eletrobras is currently engaged in a restructuring process that is designed to put the company on a stronger commercial basis, more similar to Petrobras as distinguished from a more traditional parastatal. A new law was enacted in April 2008 (Lei nO11.65 l), which defined new roles and functions for Eletrobras. The major tenets of this law are to find ways to enhance the company’s capacity by: (i) opening the long awaited leeway and mandate for the holding company to adapt, expand its business investments, decisions and partnership structuring in

32 competitive ways with the private sector; (ii) the nomination of a new President and Board, both committed and mandated to restructure and realign the company with strictly commercial and private management principles; (iii) establishing clear support of major shareholders on the need to improve governance and enhance overall efficiency of the group’s 4 regional subsidiaries and the six power distribution companies located in the North and Northeast regions.

20. An important issue that will need to be defined by Eletrobras in its restructuring process is how to address the large financial deficits of the 6 distribution companies while continuing to provide quality services to poor consumers. This requires comprehensive and coordinated actions aimed at improving corporate governance, as well as the operational and financial performance of those companies.

Eletrobrsis Distribution Companies 21. The six Discos currently supply electricity to slightly over 3 million customers in some of the poorest regions in Brazil. All six states served by the Discos have lower average per capita income than the national average (R$14,183 in 2007); two States had less than half the average income (Piaui and Alagoas), while the remaining ones had incomes ranging from R$8,789 (Rondonia) to R$13,043 (Amazonas). Although the aggregate electricity consumption for the six Discos of 17.2 TWh represents only 3.5 percent of national consumption, their operations encompass a concession area of over 2.2 million km2 (more than 26 percent of the country) and a population of 1 1.6 million (or 6 percent of the country’s population, including a major industrial pole in Manaus). The companies employ 12,400 employees (about 50 percent of whom are outsourced). The six Discos actively participate in the Luz para Todos program as many of the largest access gaps are in these states.

Map 1: Geographic Location of Eletrobrsis Managed Discos

\

33 22. These Discos distribute electricity through grid connected and isolated systems to regions characterized by low population density, challenging geographic conditions (especially in the Amazon Region) and low per capita consumption, which results in some of the highest electricity distribution costs in the country. Due to these high costs and the predominance of poor consumers, the companies receive significant financial support as a result of the national policy for subsidization of low-income electricity consumers. The funds for that subsidy come from one of a high number of surcharges that form part of the electricity bill of all consumers in Brazil (see Annex 1 for details), and consist mainly of: (a) a social tariff for low-income users for a basic service, and (b) the Fuel Consumption Fund (CCC), which allows for the reimbursement of fuel utilized in the generation of electricity in isolated systems, recognizing that the cost of generation by diesel units in off-grid systems is high. Thanks to the cross- subsidies, tariffs in this region are comparable to the national average or those in other regions. For example, in 2007, while average residential tariffs in the North was 14.4 USQlkWh (after subsidies), and the Northeast was 13.9 USQlkWh,the national average was 14.7 USQlkWh.

23. Compounding the challenges of high costs of service provision, the Discos have a history of high losses and poor management, lack of commercial discipline, exacerbated by political interference by local authorities. The non-enforcement of payment for electricity, including from large consumers, and mismanagement have led to a downward spiral of under-investment in basic maintenance, leading to a poor quality service for which consumers do not want to pay. This has resulted in a pattern of extremely high average losses (technical and non-technical) in the order of about 34 percent for 2005-2008 (which is well above the 15 percent national average, or the 13.5 percent weighted average for LAC), as well as low bill collection rates, with residential defaults around 40 percent during the same period. As a result, the Discos on average only received payments for less than 50 percent of the power that they purchase.

24. Service quality fares no better; in 2008, the annual average number of interruptions per subscriber ranked from 15 (CEAL) to 93 (Amazonas - interior), compared to 11 interruptions for Brazil and 13 interruptions on average for LAC. The duration of interruptions per customer ranged from 15 hours (Eletroacre and BOVESA) to 87 hours (Amazonas - interior), compared to 17 hours for the national average and 14 hours for LAC. The poor service standards and unreliable electricity provided by the Discos are a hindrance to sustainable economic development in the Amazonian region. In addition to the social burden placed on households, there is also a negative impact on business activity in a region that already faces other challenges such as lower per capita income and a difficult geographical context.

25. Even with a high level of subsidy and total allowed revenues set to cover all operating and capital costs, the Discos have not been able to avoid financial losses. According to the audited consolidated financial statements of Eletrobras for the years ended 2006 and 2007, the net balance recorded by the six distribution companies represented a loss of US$ 244 million and US$ 349 million, respectively. In 2008, due to a one-time $356 million reversal of expenses at Amazonas Energia, the situation showed a slight improvement and a US$ 24 million profit was posted. That year, Eletrobras posted a net profit of US$ 2.7 billion. However, the weak financial and operational performance of the Discos has adversely affected the position of Eletrobras as a national service provider.

34 Table 2: Distribution Companies’ Main parameters

Year 2003 2004 2005 2006 2007 2008 Total number of consumers 2,376,727 2,465,889 2,574,481 2,724,847 2,868,792 3,002,696 Employees 4,325 4,576 4,746 5,002 5,500 6,005 Consumers per employee 550 539 542 545 522 500 New urban connections 264,75 1 252,423 270,821 272,s 17 300,403 114,830 New rural connections 28,171 30,393 44,165 55,055 50,803 40,389 Total losses (Mwh) 4,184,498 4,536,466 4,911,157 5,295,800 5,890,317 5,961,748 Market/MWh Energy required 12,920,541 13,750,228 14,812,196 15,677,112 16,868,794 17,266,583 Energy purchased 13,049,676 13,995,821 15,012,012 15,829,582 16,907,959 12,906,505 Energy sold 8,734,020 9,151,253 9,885,817 10,363,848 10,976,100 11,304,835 Own generation 2,390,790 2,284,871 2,634,849 2,583,651 2,459,186 4,374,460 Generation from IPPs 3,027,938 3,513,281 3,655,726 4,071,591 4,818,924 3,474,673 Ope rations Power phnts in service 136 137 133 139 144 167 Substations 225 227 232 235 249 267 Distribution nehvorks (h) 86,125 8&010 92,059 105,396 1 13,562 125,365 EBITDA Ceal 15.2 51.5 84.8 42.3 48.6 39.0 Ceam (76.7) (71.2) (67.6) 190.8 (348.8) Cepisa (33.3) (41.2) (25.9) 4.4 22.8 (99.0) Ceron 0.6 20.0 10.2 15.3 15 1 (50.0) Ektroacre (3.5) 0.9 25.9 18.9 23.5 0.2 Boa Vista Energia (70.4) (24.1) (19.6) (11.1) (13.8) (38.0) Manaus Energia / Amazonas Energia (58.6) (48.1) 73.1 (134.1) (408.2) 501.0

26. Presented below is the consolidated uncollected billing per customer class. For the most part, public sector customers accounted for over 40 percent of the uncollected, with industrial customers around 25 percent and residential at 18 percent.

Table 3: Uncollected billing per customer class

Uncollected Billing - R$ Ooos Class 2004 2005 2006 2007 2008 Residential 191,550 196,969 213,461 264,616 245,998 Comercial 82,783 100,064 101,092 117,130 125,467 Industrial 82,247 93,100 112,288 150,014 173,203 Rural 31,571 33,757 34,107 40,824 46,462 Public Power 119,590 112,707 123,822 135,479 143,700 Public Service 157,679 215,355 291,974 372,062 254,116 Public Illumination 22,586 28,682 30,074 35,269 51,312 Total 690,010 782,639 908,824 1,117,401 1,042,266 %change 13.4% 16.1% 23.0% -6.7% Source: Elerrobras Dernonstracoes Financeiras ZOO8 27. As of December 31, 2008, the Discos’ financial situation was critical, due to the large amount of cumulative losses, highly leveraged balance sheets, and the need of permanent shareholder (Eletrobras) capitalization. This has resulted in systematic underinvestment, which has deteriorated service quality, particularly the rural areas. This tends to reduce the already low willingness to pay of certain consumers, which leads to even poorer values of billing and collection indexes and creates a vicious circle or “low level trap”. Their current financial

35 situation and poor service standards reflect poorly on Eletrobras and are a hindrance to sustainable economic development in the region.

28. The cumulative financial losses registered by the six Discos in 2008 totaled US$ 2.1 billion. In spite of a US$723 million equity infusion from the parent, Ceron and Cepisa presented negative equity of US$ 48 million and US$ 1 18 million, respectively, primarily due to the large cumulative losses of $562 million and $527 million respectively. Manaus did not register a negative equity because of a one-time US$356 million expense reversal.

29. Although the distribution companies only represent about 5 percent of the consolidated operating profits of Eletrobras, and about 10 percent of consolidated revenues, their operations encompass a concession area of over 2.2 million km2 (>26 percent of the country), including a major industrial pole in Manaus, a population of 11.6 million (or 6 percent of the country’s population), and employ 12,400 employees (including over 6,400 outsourced employees). These distribution companies also bring electricity to isolated regions either through grid connected or isolated systems. According to the audited consolidated financial statements of Eletrobras for the years ended December 31, 2008, 2007 and 2006, the net profit recorded by the North and Northeastern distribution companies were US$ 24.09 million, a loss of US$ 349.3 million, and a loss of US$ 244.4millionYrespectively5 (while Eletrobras posted a net profit of USD$2.7 billion in 2008 ).

Individual Distribution Companies 30. Some of the main parameters characterizing the individual Discos are presented below and specificities of each Disco’s market is described in Appendix 1.A.

Table 4: FYE 2008 - Summary of Individual Distribution Companies’ Data Amazonas Eletro Boa USD% in millions Energia CEAL CEPISA CERON Acre Vista Consolidated State Amazonas Alagoas Piaui Rondonia Acre Roraima State GDP 39,166 15,753 12,790 13,110 4,835 2,600 88,254 Consumers 658,551 804,964 848,763 437,471 177,883 75,064 3,002,696 Population 3,221,939 3,037,103 3,032,421 1,453,756 655,385 249,853 11,650,457 Density (hab/km2) 2 109 12 6 4 44 5 Energy Required (MWh) 7,102,100 3,295,395 2,931,094 2,622,015 770,351 545,628 17,266,583 Total Loss Index 38.2% 30.0% 36.1% 33.5% 26.2% 16.5% 34.3% Net Revenues 450.5 289.5 249.5 225.0 70.0 51.4 1,336.4 Operating Profit 179.5 47.3 20.5 2.3 4.5 (20.0) 234.5 Reversal of ICMS liability paid t 356 EBITDA excluding Reversal (128.2)

EBiTDA (including Reversal) 227.7 60.5 30.9 12.7 10.0 (17.7) 144.5 EBITDA Mavin 50.6% 20.9% 12.4% 5.7% 14.3% -34.5% 10.8% Net Profit / (Loss) 90.5 18.2 (44.5) (22.3) (0.2) (16.8) 24.1

Amazonas Energia (‘anaus Energia and CEAM) is the resulting company after the merger in 2008 of Manaus Energia (capital) and CEAM (interior), the two distribution companies in the state of Amazonas. Amazonas Energia has approximately 1.88 GW of installed hydro and thermal generation (including 380MW through 150 isolated diesel generators), which will be connected towards the beginning of 2012 through a

Year-ended exchange rates (US$/$R): 2008 = 2.200,2007=1.7713;2006=2.138 36 transmission line (500 KV) between Tucurui and Manaus (excluding the diesel generators). Amazonas Energia is the third largest of the six distribution companies in terms of consumers, but the largest with respect to revenues as it comprises the Manaus industrial pole. Although the overall population density for its concession area is low (at 2 inhabitants/km2), it is important to note that this combines both the interior and the capital of the state of Amazonas, giving the impression of less density when in fact the capital has a population density of about 144 inhabitants/km2. It has the highest loss index of all the Discos at 38.17 percent.

0 CEAL, located in the Northeast state of Alagoas is the third largest of the six distribution companies in terms of consumers, but second with respect to revenues. It also has the greatest overall density within its concession area with 109 inhabitants per km2 versus a consolidated figure of 5 inhabitants per km2.

0 CEPISA is located in the state of Piaui, in the Northeast and is the largest of the six Discos with respect to customers, with 848,763 customers, but third with respect to revenues, with a population density of 12 inhabitantsh2. It also has one of the highest loss indexes, 36.14 percent in FY 2008..

0 CERON is located in the state of Rondonia, in the Northwest and is the fourth largest with respect to consumers and also with respect to revenues generated. It has a low population density of 6 inhabitantskm2 and one of the highest loss indexes at 33.5 percent.

0 Eletroacre is located in the state of Acre, bordering Peru and Bolivia as Brazil’s most Northernwestern state. It is the second smallest distribution company of the six with respect to consumers and revenues. Its population density is also one of the smallest, at 4 inhabitants per km2. Eletroacre has one of the lower loss indexes at 26 percent.1 for FY 2008.

Boa Vista Energia is located in the state of Roraima, in the Northern part of Brazil, bordering Venezuela and Guiana. It is the smallest of the six Discos with respect to consumers and revenues. It also has the lowest loss index of around 16 percent.

F. Energy Pricing Policy and Tariff Structure

3 1. ANEEL determines the allowed revenues of the distribution companies through a defined regime of economic regulation of power distribution and retail. The allowed tariff applied to final customers can be divided into three main components: (i) generation costs, (ii) transmission and distribution costs, and (iii) sector taxes and charges. Each component represents approxirnatelyl/3 of the total tariff.

32. The electricity price charged by the generator covers its capital remuneration, energy production costs (fixed and variable O&M costs) and also sector charges applied over the generation activity. Electricity transportation from the power plant to the end-user is the

37 responsibility of the transmission and distribution companies, and both services are charged through the transmission and distribution tariffs that also cover investment, O&M costs and sector charges associated with these businesses.

33. As a result of the vast differences in economic conditions among and within regions, as well as other factors such as the varied population demographics throughout the country, Brazilian electricity tariff structures have several peculiarities. Residential and commercial customers cross-subsidize rural consumers, public lighting, and low income consumers. Consumers in the northern region of the country, primarily in the Amazon region (including the concession areas of Eletrobras' Discos), are supplied through isolated diesel-based systems which require expensive transport to remote areas, in addition to the high cost of the fuel. High- voltage industrial consumers pay substantially less (26 percent) than the residential consumers who are supplied at low voltage. Funds for the cross-subsidies come primarily from three main energy charges, RGR (Reversion Global Reserve, CDE (Energy Development Account), and CCC (Fuel Compensation Account). The cross-subsidies are expected to be phased out gradually, with RGR ending in 20 10, and CCC in 2022, as the regions are interconnected to the SIN over the next several years.

Table 5: Average Tariffs by Region and Consumption Class

Average Tariffs by Class of Consumption (2007)

US$/NNVh North Northeast Southeast South Center Brazil

Residential 144.7 139.4 151.6 137.2 151.4 146.8 Industrial 109.9 104.6 111.4 103.9 109.9 108.3 Commercial 144.1 146.3 136.2 124.6 142.3 136.5 Rural 107.5 86.2 96.4 74.0 96.3 87.3 Public Sector 151.8 160.2 143.7 134.9 147.1 147.2 Public Lighting 82.2 86.0 83.9 72.0 82.4 82.1 Public Service 97.7 92.9 98.6 89.9 93.3 95.6 Self Consumption 143.0 153.6 145.9 116.9 150.6 141.9 Total Average Tarifl 131.3 125.5 131.0 113.2 130.4 126.5 Source: AB

34. As reflected in Table'5, total average tariffs in 2007 varied from 11.3 cents/KWh in the South, to 13.1 centsKWh in the North. Residential tariffs varied from 13.7 cents/KWh in the South to 15.1 cents/KWh in the Southeast and Center. Average tariffs in the six Discos ranked from 12.2 cents/KWh in CEAL to 19.1 centsKWh in Eletroacre, mainly because the first is interconnected to the national system while the latter operates as an isolated system. Tariffs in CERON (1 5.6 cents/KWh), Boa Vista Energia (13.9 cents/KWh), and Amazonas Energia (13.6 cents/KWh) are also high because these companies are isolated and depend heavily on diesel- based generation.

38 Attachment 1 to Annex 1

Composition of the market served by each of the Six Eletrobras Discos

Market Structure and Consumption - May 2009 Boa CEAL Amazonas CEPISA CERON Eletroacre Vista

Residential 36.7% 26.3% 41.8% 35.4% 44.4% 47.8% Industrial 16.1% 36.5% 12.5% 17.1% 5.5% 3.2% Commercial 21.1% 18.6% 20.3% 22.3% 21.6% 22.8% Public Illumination 5.9% 2.5% 6.5% 4.2% 5.0% 4.9% Rural 7.4% 0.7% 4.4% 10.0% 5.0% 1.5% Other 12.9% 15.3% 14.5% 11.0% 18.6% 19.9% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Total Customers 813,985 663.532 867.111 446.314 182.673 77.044

39 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies BRAZIL: ELETROBdS Distribution Rehabilitation Project

Financing Name of the Project Amount Dates ICR/ISR Results / Lessons Institution Rating learned

PPIAF 'A to Eletrobras US$380,000 NOV.2008 - NIA NIA - ongoing P115550) April. 2010 IBRD inergy Sector US$12M May 2003- DO: N/A - ongoing 'echnical Assistance Dec. 2010 IP: MSS ,oan (ESTAL) P076977) GEF hergy Efficiency US$lSM Oct. 1999 - MS Facilitated the removal P047309) June 2006 of market barriers to EE and energy conservation; For EE programs to be successful, underlying incentives of the regulatory framework should be in place; A large IBRD component was canceled as companies did not borrow for EE. PPIAF Regulatory Options for US$225,000 2004 NIA Instrumental the Power Sector - contributions to PPIAF Grant Phase 11 regulatory agency. (PO9 1503) IBRD Energy Sector Reform US$455M June -Dec. S The DPL successfully Loan (P076905) 2002 supported: A first attempt to establish an energy market in Brazil; Vertical separation of accounts; Tariff rationalization; and Improved hnctioning of the wholesale market. PPIAF rnproving Electricity US$467,975 I2002 rl/A Helped design a blueprint Legulation and Market for the auction nd System Operations mechanism; Revised the PPIAF Grant Phase I pass-through normative P020402) value mechanism; Addressed issues of regulator and as policy maker; Provided a tariff

I .evision study. ICWISR ratings: HS: Highly Satisj ctory; S: Satisfactory, MS Moderate1 Satisfactory; MU: Moderately Unsatisfactory; U: Unsatisfactory. DO: Development Objective; IP: Implementation Progress.

40 Annex 3: Results Framework and Monitoring BRAZIL: ELETROBdS Distribution Rehabilitation Project

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information Improve the financial and (i) Decrease in the number and Eletrobrhs and the DD will review operational performance and the duration of service interruptions by the information on a regular basis to commercial management, of each Disco assess progress. The Government, as Eletrobrhs’ six Discos through the the main shareholder of Eletrobrhs, reduction of electricity losses, and (ii) Reduction of losses in each will also be interested in assuring increase in bill collection rate and Disco that main performance indicators are service quality. achieved. (iii) Increase in collection rates in each Disco

(iv) Institutional improvements: adoption by Discos of sound environmental management practices, improved M&E and effectiveness of social action and communication programs. Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring 1. Tools for an improvement in - Installation and operation of AMI Identify issues during commercial management are devices implementation and adjust installed and functioning - Full implementation of Customer correspondingly implementation Management Service and Enterprise arrangements and design. Resource Planning Systems in the six Discos 2. Upgrading of distribution - Acquisition, installation and networks inihe six Discos bringing into operations of equipment - Construction of 69Kv lines and substations in Piaui 3. Strengthening of institutional -Support to Project management capacity of Discos (UGP) and exposure of Disco staff to new performance-based management systems -Design and implementation of standardized environmental and social guidelines across the six Discos -Design and implementation of a social communication campaign internal to Discos and as an outreach to customers -Design and delivery of research and training programs in water resources and environmental management in Acre

41 I 5

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3 1 -r T Annex 4: Detailed Project Description BRAZIL: ELETROBaS Distribution Rehabilitation Project

1. The Project development objective is to improve the financial and operational performance and the commercial management of the six Discos by reducing electricity losses, increasing bill collection rates, and improving quality of service. Below is a detailed description of each component, followed by a table which sets out how the Project activities and funding are distributed across the six Discos.

2. Component 1: Service Quality Improvement and Loss Reduction (estimated US$ 675.3 million, of which US$ 475.0 million from IBRD). Improving the quality of service, reducing electricity losses and increasing collection rates in electricity distribution and retail through the acquisition of goods, equipment, works and services for the following activities:

3. Activity 1.1: Distribution Network Reinforcement (estimated at US257.4 million, of which US$ 57.1 million IBRD and US$200.3 million Eletrobrtis). The objective is to reinforce, rehabilitate and expand the high, medium and low voltage distribution grids supplying urban areas, including the strengthening and rehabilitation of substations. The proposed Activity aim to overcome the effects of a long period of systematic under-investment in distribution grids, as well as the lack of operational flexibility inherent to their outdated design. They comprise the replacement or upgrading of overloaded and ageing equipment (line conductors, cables, power transformers, breakers and other switchgear), and the installation of new components allowing to improve operational flexibility and enhance quality in electricity supply (automatic reclosers, switches, isolators, voltage regulators, banks of capacitors, etc.).

4. The Activity will consist of carrying out of activities designed to reinforce, rehabilitate and expand the high, medium and low voltage distribution grids supplying urban areas, including, inter alia: (i) works to improve the operational performance of medium voltage (MV) and low voltage (LV) networks located in areas already receiving electricity supply; (ii) activities in MV and LV networks for regularization of electricity supply to commercial, industrial and service consumers; and (iii) works for the construction of 69 kV lines and substations.

5. The estimated costs for this Activity amount to US$ 257.4 million of which US$ 200.3 million will be financed by Eletrobras and US$ 57.1 million by the World Bank. The table below (Table 4.1) shows the allocation of costs by Disco and by source. The World Bank is financing supplies and works to improve operational flexibility and quality in electricity supply (automatic reclosers, switches, isolators, voltage regulators, banks of capacitors, etc.) in the six Discos, while Eletrobras will take care of the rehabilitation and upgrading of medium and low voltage networks in the six Discos, as well as in the medium voltage grids (69 kV) in Cepisa. Components to be financed by Eletrobras could be replaced by others; as long as the new ones meet the Bank’s safeguards and economic analysis.

6. Activity 1.2: Implementation of Advanced Metering Infrastructure (AMI) and other actions to maximize metered consumption (estimated at US$ 387.9 million, of which US$ 387.9 million IBRD). The objective of this Activity is to yield a sustainable reduction of non- technical losses (unmetered consumption) in electricity supply by the Discos and will include

45 the carrying out of activities designed to support the reduction of non-technical losses in electricity supply, including, inter alia: (i) the implementation of AMI systems for metering, reading, and monitoring consumption of MV and LV consumers; (ii) the replacement and re- location of existing metering systems; (iii) the implementation of AMI in medium voltage feeders; and (iv) activities for regularization of electricity supply in LV networks, including installation of encapsulated networks and metering boxes.

7. The design of this Activity takes into consideration the concept of customer segmentation in order to maximize the effectiveness in the application of AMI (note market segmentation in Attachment 1 to Annex 1). In some companies, such as Amazonas Energia, as little as 0.9 percent of total customers (those supplied in high and medium voltage) represent close to 60 percent of current sales (in MWh). Immediate application of AMI to all users with currently recorded monthly consumption equal to or above 600 kWh is expected to have a big impact on amounts of electricity billed. Overall, this process will involve around 12 percent of consumers (375,000 out of a total number of around 3,500,000) served by the companies. Following Bank’s advice during the identification mission in February 2009, Eletrobras is already implementing AMI for high and medium voltage consumers in Amazonas Energia, using its own financial resources. The Project will extend these activities.

8. Activity 1.3: Modernization of Discos Management Information Systems (MIS) (estimated at US$ 30 million IBRD): Provision of support for: (i) the acquisition and installation of new management information systems to improve performance in commercial activities, provision of electricity distribution services, and corporate functions; (ii) the updating of the client database and mapping of the distribution network based upon a Geographic Information System (GIs); and (iii) the acquisition of computing equipment and other tools required to put into place and integrated client management system.

9. In order to achieve sustainable improved commercial performance, the six Discos will incorporate a state-of-the-art Customer Management System (CMS) allowing proper execution and monitoring of all activities related to: (i) commercial cycle (regular metering, billing, and collection); (ii) servicing customers at commercial agencies or by phone (call centers); (iii) disconnection and reconnection of electricity supply related to commercial debts; and (iv) connection of new customers.

10. Incorporation of the new CMS will involve building, maintaining, and regularly updating a reliable customer database. It will be complemented with the formulation and application of new operational procedures for “customer oriented” execution of all the activities related to commercial attention of customers, supported by the MIS. Activities to be re-engineered include: (i) commercial cycle metering, billing (including delivery to customers) and collection; (ii) detection and regularization of frauds and not metered connections; (iii) disconnection and re-connection of customers related to debts and/or frauds; (iv) servicing of customers at commercial agencies; (v) attention by phone of customers’ claims related to bad quality of electricity supply and commercial matters through a call center; and (vi) other consumer relations strategies. Re-engineering of commercial processes will be driven by the concept “every kWh supplied must be metered, billed and collected”. This will allow quick recovery of debts and fast detection and elimination of losses. A re-engineering process applied to the

46 above-described activities must take into account the specific characteristics of the market served by each Disco.

11. Management of corporate resources of a commercial company, regardless of its field of activity, is supported by a specific MIS, usually identified as “Enterprise Resource Planning (ERP)”. It a non-utility specific system that provides support for efficient and transparent execution of processes and activities related to the following corporate functions: accounting; asset management; financial management (budget, treasury, receivables, payments); human resources (administration, payroll, organizational structure, occupational health and safety, training); procurement and logistics (warehouses, etc.); project management; business planning and intelligence; and information management. Thus, the six Discos and the holding company, Eletrobras, will incorporate the same ERP to optimize management of corporate resources and, at the same time, maximize transparency and enhance corporate governance in the whole group. In addition to the classic functionality of an ERP for utilities, the MIS to be incorporated will meet the specific requirements imposed by the regulatory framework applied to the Discos, in particular those derived from the implementation of the contents of the “Manual de Controle Patrimonial do Setor Eletrico (MCPSE)”.

12. Component 2: Institutional Strengthening (estimated total of US$34 million, of which US$ 20 million IBRD). Strengthening of the operational capacities of the Discos through the provision of technical assistance, training, consultancy services, studies, equipment and Operational Costs in the following areas, inter alia:

a. Performance-based management, estimated at $13 million of which $7 million financed by IBRD, including support to Project implementation, monitoring, reporting and evaluation by the PMU and the six Discos.

b. Management of environmental and social impacts and processes, estimated at $2 million of which $1 million IBRD including, inter alia: (a) establishing common policies and procedures across the six Discos; (b) clarifying roles and responsibilities, mobilizing additional support to address day-to-day demands; (c) provision of training on environmental and social impact management issues and best practices; and (d) carrying out of priority studies in areas such as establishment of social and environmental indicators, improving access to GIS data, managing the invasion of rights-of-way, assessing and preparing plans to address eventual liabilities associated with thermal generation.

c. Provision of support to community outreach, estimated at $9 million of which $2 million IBRD, through the implementation of social action programs and communication campaigns to encourage consumers to legalize connections and pay bills, and to promote energy efficiency, safety and environmental awareness.

d. Provision of support to selected programs delivered at a sectoral training and research center in State of Acre (estimated at $10 million IBRD), to finance curriculum development, studies, training, scholarships, computers, office and laboratory equipment and supplies for course design and delivery in areas of water resources and environmental

47 management. The training and research programs aim at addressing Amazonian region challenges in clean and renewable energy and water resources, and will serve as a point- of-contact and resource hub for best practices, innovative curriculum, and professional development opportunities. The programs will also produce content for Discos and energy sector specialists to support targeted research and demonstrate new technologies.. The Bank will support the initial curriculum design for the activities related to research and training in water resources and environmental management in the electricity center, and assist in identifying international best practices and forging partnerships with renowned training institutes in this field.

13. Strengthening environmental and social practices. Although attention to date has mostly focused on their immediate environmental or municipal licensing requirements, the Discos and Eletrobras see the Project as an opportunity to strengthen their environmental and social management capacity capacities, remedying gaps in the near-term and better aligning themselves to best practices established within other companies in the Brazilian power sector in the medium-term. In addition to the site-specific environmental and social activities associated to the annual investment plans that will be prepared starting in Year 1 of project implementation under Component 1, the Project will support a program of institutional strengthening through Component 2, with the following lines of activities:

1. Establishing common policies and procedures across the six Discos regarding (a) appropriate mainstreaming of environmental and social considerations in the operation and expansion of their distribution systems, and (b) facilitating the timely licensing of future investment projects. This activity would be undertaken in step-wise manner as follows: (1) mapping of current procedures and adoption of the set of safeguard frameworks proposed through the project EIA process; (2) design of detailed guidelines and procedures, structured per different stages of the project cycle, for different typologies of projects - and their discussion within the Discos and with the DD beginning in 20 10; (3)piloting of the guidelines and procedures during the first year of project implementation (in 201 1); and (4) evaluation, adjustment and formal adoption (by 2012).

9. 11. Strengthening of current management capacity by clarifying roles and responsibilities, mobilizing additional staff andor consultants to address day-to-day demands within the Discos, supplemented by the Project UGP that will be providing general oversight of project implementation. Alternative strategies may also include twinning with one of the larger power sector companies, drawing on resources made available through Eletrobras’ Environment Department, and support through the Environment Sub-committee (SCA) of the Eletrobras Group (which focuses on issues of common interest to member companies and, among its eight working groups, has one specifically dedicated to Disco issues). ... 111. Training on environmental and social impact management issues and best practices, targeting both managers and technical staff, through courses, seminars or TV LUME (an internal VC and TV system that Eletrobras has recently set up), tapping into the experience of other distribution companies in Brazil, and sharing experience across project Discos. . Potential topics to be addressed include environmental regulations, implementation of Environmental Management Systems, environmental risk management,

48 and environmental audits. Relevant recent experience from other distribution companies in Brazil includes e.g., the use of vegetable oil in transformers by Coelce in Ceara; and regularization of electricity supply to slums such as Dona Marta as well as higher-income suburbs (condominiox) in Rio de Janeiro. These programs may be implemented through partnerships with other distribution companies, environmental licensing agencies, and universitiesiv. Priority studies on current and future challenges, including topics such as establishment of a small set of social and environmental indicators to be tracked and reported on a regular basis, improving access to GIS data, managing the invasion of rights-of-way, assessing and preparing plans to address eventual liabilities associated to thermal generation in isolated systems, and others that are unrelated to the investment plan of the current project but may need to be addressed by the companies in other contexts. Preparation of these studies will take into account the Bank's safeguard policies, especially with respect to assessment of potential environmental and social impacts, design of mitigation and compensation programs, and consultation.

14. Communications Strategy. External and internal communication will be fundamental to support Project implementation, not only to disseminate and share information among service users, the general population and distribution company staff, but also to help build the adequate framework to change inappropriate consumer behaviors (for all customers, small to large), harmonize program identity and main public messages, prepare public opinion for changes in the relation with the distributing companies, and build public awareness and consensus about the importance of the reduction of technical and non-technical losses. As communication and dissemination are critical tools for Project implementation, a communication strategy will be implemented throughout the life of the Project. Specialized communication experts and the communications staff of the DD are developing this strategy based on consultations, focus groups and general feedback from key stakeholders. A separate internal communications strategy will be devised aiming to provide knowledge about the Project and the DD and Discos reform process to key involved groups in the Eletrobras system, especially those directly affected by or involved in the Project. The internal strategy will also pay particular attention to capacity

' building and training of communication staff in the Discos, and its integration into the broader communication strategy.

15. The harmonization of internal and external communication programs is paramount for the development of both common identity and the desired image of the Project, and is thus a major prerequisite for the effectiveness and ultimate achievement of Project objectives. The UGP, working under the supervision of the DD communication advisor, will be in charge of communication programs to be implemented in partnership with the Discos.

16. Social Communication Program. The purpose of this program is to foster the implementation of the Project through the involvement of the consumers directly and indirectly benefited by the interventions in the urban areas of influence of the Project. The program will carry out actions dealing with social communication and community interaction. Specific activities include:

(i) identify relevant stakeholders and mapping audiences;

49 design an external communication strategy, including definition of Project messages for each target audience, languages, tools, media channels, materials and products;

implement the external communication strategy;

collect and disseminate information relevant to the quality enhancement and loss reduction programs, providing technical assistance services;

risk management and monitoring; and

monitor and evaluate Project implementation, in particular regarding the relationship between consumers and other stakeholders and social and environmental issues.

17. Products will include: broad and focused media educational and awareness campaigns, educational materials for consumers, production and dissemination of manuals, magazines, a project website, videos, and technical assistance.

18. Internal Communication Program. This program aims to improve capacity, coordination and communication between the Discos and Eletrobras; and between staff and policy setting bodies, creating a workforce that understands the mission, goals, values and procedures of the Eletrobras and the Discos, as well as of the project. Key activities include:

maintain an open channel of communication between Eletrobras and Discos;

design and implementation of an internal communication strategy, including information flow, messages, tools, and materials;

monitor and evaluate project implementation, regarding communications issues; and

Implement a training program for communication capacity building in the Discos.

19. Investments will include: videoconferencing materials, brochures, magazines, intranet, and videos, internal campaigns, communication events, and technical assistance.

50 Annex 5: Project Costs BRAZIL: ELETROBRbiS Distribution Rehabilitation Project A. TOTAL PROJECT COSTS (US$ Million)

Total Local US$ Foreign US$ Total US$ Including Project Cost by Component andor Activity Million Million Million Contingencies

1. Service Quality Improvement and Loss Reduction Program 340.2 233.8 ' 574.0 675.3 1.1 Distriiution Network Reinfbrcement 170.3 48.5 218.8 257.4 1.2 Implementation of Advanced Metering Infrastructure 170.0 ' 159.7 329.7 387.9 1.3 Modernization of Discos Management Systems 25.5 25.5 30.0

2. Institutional Strengthening 20.4 8.5 28.9 34.0

Total Base Cost 360.6 242.3 602.9

Physical Contingencies (5%) 21.2 14.3 35.5 Price Contingencies (1 0%) 42.4 28.5 70.9

Total Project Cost 424.3 285.0 709.3 709.3

B. PROJECT COSTS BY DISCO (US% Million) (*) Boa Eletm Amazonas Ceal Vista Cepisa Ceron Acre Enetgia Total Activities 1. Service Quality Improvement and Loss Reduction Program 26.2 132.7 99.3 41.9 146.7 574.0 I. 1 Distribution Network Reinforcement World Bank 3.0 13.41 5.4 7.2 7.9 48.5 Eletrobras 4.5 57.6 29.9 10.8 30.0 170.3 1.2 Implementation ofAdvanced Metering Infrastructure World Bank Ektrobras 1.3 Modernkition ofDisCos Management Systems World Bank Ektrobras 2. Institutional Strengthening 3.1 World Bank 1.3 Ektrobras 1.8 Total Base Cost 130.3 Physical Contingencies (5%) 7.7 Price Contingencies (1 0%) 15.3 3-31 16.11 12.01 6.21 18.01 70.9 Total biectCost '153.3 33.21 160.91 120.41 61.71 179.81 709.3 (") Estimated costs including taxes.

51 Annex 6: Implementation Arrangements

BRAZIL: ELETROBdS Distribution Rehabilitation Project

1, The Project involves seven legally distinct entities, namely Eletrobras and its six wholly- owned subsidiary distribution companies (the Discos). The six Discos implement the Project activities (the Implementing Entities), under the general coordination and oversight of Eletrobras. This annex sets out: (a) the general corporate structure of the relevant Eletrobras departments and of the Discos; (b) on-lending arrangements and flow of funds; (c) overall Project coordination and reporting arrangements, and (d) detailed Project implementation arrangements.

A. Corporate Organizational Structure and General Implementation Responsibility

Eletrobras 2. Eletrobras is the sole shareholder of each of the Discos. The Discos are managed by Eletrobras through its Directorate of Distribution (DD), which is one of five Directorates of the Eletrobras Holding company. Eletrobras is organized as follows:

0 Presidency e Directorate of Administration e Directorate of Planning and Engineering 0 Directorate of Finance and Relations with Investors

0 Directorate of Technology

0 Directorate of Distribution

3. The President and Directors of Eletrobras report to an Administrative Council (Board) made up of nine members (chaired by the Minister of Mines and Energy) and including, inter alia, representatives from the Ministries of Finance, Planning and Casa Civil, academia, among others. There is a Consultative Council made up of 2 ex-ministers and 3 ex-presidents of Eletrobras, as well as an 8-member Fiscal Council.

4. The following Figure shows the functional relation of the six Discos within the Eletrobras organizational structure. The Director of Distribution is also the President of each of the six Discos.

52 Figure 6.1: Eletrobris management and the Discos

Eletrobrds Directorates I I

The Discos 5. Although the six Discos have separate operations, they have a unified management structure similar to the one put in place for the overall Eletrobras Holding Company. In addition to an Administrative Board and a Fiscal Council that provide oversight, there are six Directorates, each led by a Director. The six Directors cover the following areas: Management, Finance, Commercial, Planning and Expansion, Operations, and Regulation. They all report to the President (Director of DD and President of Discos) and have the same functional attributions in regards to their managing each of the six Discos.

Figure 6.2: Management Structure of the 6 Discos

I I I I I I

53 6. Eletrobras has recently put in place a new organizational structure for the Discos as a means to promote standardization of functional and operational procedures across the companies. The six Directorates are represented in the core organizational structure of each Disco, which is made up of eight Advisory Units and 15 Departments, the heads of which have a direct reporting relationship with a respective Director or the President (see paragraphs 7 and 8 below). Each Disco has an appointed Representative of the President who is the highest authority at the local level In addition to a basic structure common to all companies, some of the Discos have additional departments to take into account the specific nature of their business and geographic context of the states in which they operate. For example, the larger states have decentralized departments located in the interior of the state.

7. Within the Disco, the Departments and Advisory Units are responsible for planning, orienting, executing and control of the work program, project and activities for which they are responsible. Each Disco has the following Departments:

Human Resources, Administration, IT, Supplies (representing Directorate of Management) Accounting, Finance and Treasury, Planning and Financial Control (subordinated to Financial Directorate) Operation of Distribution, Distribution Services, Maintenance, Metering and Supervision, Geographic Departments (the number and titles of these vary with company and they are subordinate to the Operations Directorate) Consumer Affairs, Commercial (representing Commercial Directorate) Engineering and High Tension works, Engineering and Distribution works (representing Planning and Expansion Directorate)

8. The Advisory Units of each Disco provide support to the President or a respective Director in the following specific areas:

Legal Regulatory Issues (linked to Regulatory Directorate) Energy Efficiency and R&D Environment Communications and Institutional Relations Planning and Control Sustainability General Secretariat Luz para Todos (as a special program) Ouvidoria (Ombudsman)

9. In addition, there is an internal audit unit that reports directly to the Administrative Board of the Company.

10. Finally, on an as needed basis, three different types of additional organizational units can be formed on a temporary basis, all of which require a Resolution of the Directorate to become functional: (a) Commissions to evaluate and judge issues such as bidding processes, special

54 investigations, disciplinary measures, etc; (b) Working Groups to study, evaluate and develop options for specific problems or programs of the company, and (c) Project Management Units (PMU or UGP in Portuguese) which are formally created for a specific duration with the function of managing and implementing special projects. They report directly to the President or Director responsible for the project.

11. In the case of the Bank-funded Project, a UGP is being created through a Resolution of the Directorate and will report directly to the President of the 6 Discos. The UGP will have a core unit within the DD and a local representative provided by each Disco (see section D below).

B. On-Lending Arrangements and Flow of Funds

12. Eletrobras will borrow directly from the Bank, with a guarantee provided by the Federal Government. As is usual practice for Eletrobras, loan proceeds will be on-lent from the holding company to each Disco in local currency in line with the current commercial interest rates in Brazil to cover the financial, administrative and risk-bearing costs by Eletrobras.

13. The contractual arrangement relating to the on-lending of funds will be as follows. Eletrobras, through the Eletrobras Directorate of Finance (EDF), will enter into an umbrella Sub- loan agreement (Eletrobras Contrato de Financiamento - ECF) with each Disco, which will reflect the detailed terms and conditions for the on-lending, as specified in the Loan Agreement and Project Operational Manual (ensuring inter-alia that all Bank safeguards and fiduciary procedures are adequately reflected, as well as the anti-corruption guidelines). One ECF will be signed by each Disco for the entire project. Note, that in the case of Eletroacre, the US$10 million allocated to research and training activities will be included in its ECF, however the DiscCo will only manage the implementation of these activities on behalf of Eletrobras and therefore will not be required to repay corresponding funds.

14. Eletrobras, through its Directorate of Finance (EDF), will manage all of the financial flows of the Project (withdrawals from World Bank, on-lending to Discos, contractor and other payments) on behalf of the Directorate of Distribution and the 6 Discos. All payment requests for the Discos or contractors will be made by the respective Disco, approved by the Financial Director of the Disco and channeled through the UGP to the Eletrobras Directorate of Finance for payment. The details of the financial flows are described in Annex 7.

C. Functional Responsibilities for Project Implementation and the UGP 15. Responsibility for Project implementation lies within the six Discos with respect to all aspects of the Project. The President of each Disco (namely the DD of Eletrobras) and, through his delegation, the respective Directors of the Discos, will have overall responsibility for Project implementation and reporting to the Bank, including oversight of implementation by the Departmental staff of the Discos. Each Disco, in turn will be responsible for implementing its respective project activities, including planning, project design, procurement, financial management, M&E and reporting, under standardized implementation procedures defined in the POM.

55 16. A dedicated Project Management Unit (UGP) was established within the Directorate of Distribution. It isresponsible for the general coordination, management and monitoring of the Project during its implementation, as well as the consolidation of progress reports and any other information required to be submitted to the World Bank and Eletrobras (see Figure 6.3). It will also provide technical assistance and guidance to the Discos for project implementation and directly oversee the execution of the activities of Component 2.

Figure 6.3: General Implementation Arrangements and the UGP

I I I I I I I

17. The central UGP (see Figure 6.4) has a coordinator and includes the following full time staff (seconded employees or consultants) with these individual responsibilities: (i) engineering and technical aspects (2-3 people), (ii) financial management, (iii) procurement, (iv) environment and safeguard issues, (v) communication, (vi) information technology, and (vii) system management. The UGP will be supported by a management firm (“escritorio do projeto”) who will provide additional consultants and administrative support. In addition, each Disco will assign one person among its staff as the local representative of the UGP (Disco Coordinator), who will be responsible for the coordination of Project activities across the different functional units of the Disco and the consolidation of reporting procedures, including indicators required for project M&E. This person will also ensure the two way flow of information between the Disco and the central UGP. As required, the Discos will hire additional specialists required for strengthening their capacity for Project implementation.

56 Figure 6.4: Project Coordination Unit (UGP) -1 -1 General Coordlnation I Administrative, Support Specialists Local Coordination

I Financial Management I I Local Coordinator Boa Vista Loss Reduction and Local Coordinator Eletroacre Power Engineer I I Local Coordinator Ceron Procurement -I Local Coordinator Cepisa I Environment I Local Coordinator Ceal I Social Communication Local Coordinator IT ...... __._.._._...... _..._...._.. ~ ...... _ ~ ..... ___...... System Management 18. The UGP will consolidate inputs from the Discos to prepare progress reports, procurement plans and disbursementsheplenishment requests, while ensuring compliance with Bank guidelines and requirements stated in the POM. Specifically, the UGP will review and make sure all approvals have been given for the projects being put forth by the Discos for financing (using a standardized Fichas de Projetos form), from a technical, financial economic and safeguards perspective, and also sign off on.all payment requests from the Discos. When applicable, the UGP will, on behalf of the Discos, directly implement Project activities related to Component 2, and will take the lead in structuring the social communications activities of the Project. In addition, the Discos will hire specialized consultants, as needed.

D. Procurement and Contracting Arrangements

19. The six Discos will each be procuring goods and services. In order to benefit from economies of scale and also reduce transaction costs, procurement activities will be coordinated so that the purchases of similar goods across the Discos will be done in centralized lots. In the case of consolidated procurement, one Disco will take the lead to manage the procurement process using existing procurement procedures and commissions. However, the actual contracting will be done by each Disco on an individual basis, Le. each Disco will sign and administer its own contract. The same procedures will be followed for the procurement of services referring to Component 2 of the Project. As the Discos have the relevant legal and technical structures to undertake procurement, a specific Disco will be assigned responsibility for procuring on behalf of the UGP. The resulting contract will be signed by the DisCo(s) that will benefit for the services rendered, and the contractual payments pro-rated to each Disco in accordance to the services received. The details of the procurement arrangements are in Annex 8.

57 Attachment 1 to Annex 6

Specific Functions of the Discos in Project Implementation

1. The Discos, working through their respective Departments, will be responsible to undertake the following:

e Elaborate and execute the Annual Operating Plan and the procurement plan, in accordance to the directions of the respective Directors of the Discos;

e Prepare and execute all procurement processes, including preparing TORS and bidding documents;

e Prepare Basic Project Designs and social and environmental studies and submit these via Fichas de Projeto to the respective Directors for approval;

e Request, coordinate, execute and receive works and services;

e Prepare the financial statements, including statement of expenditures, and progress reports in the timeframe required for the World Bank;

e Accompany the measurement of the Component 1 indicators (FEC, DEC, total losses, financial indicators);

e Actively participate and implement activities of Component 2;

e Prepare suggestions for modification of the Operational Manual, as needed;

e Prepare and implement a database to manage all information required for project implementation and monitoring;

e Provide support, technical advice and information to the management of the Project by the UGP; and

e Support the UGP in dissemination events related to the Project.

2. The Directors of the Discos will be responsible to:

Provide information to the Discos and make sure the proper application of the procedures of the Project Operational manual, technical norms of Eletrobras and national laws;

Articulate and develop the activities that are common to all 6 Discos;

Define the guidelines for the Annual Operating Plans and the Procurement Plan;

58 0 Approve the basic Project Designs and related social and environmental analysis (Ficas de Projetos);

0 Approve the financial reports and progress reports;

0 Approve financial reconciliations, ensuring that all expenditures meet the strictest fiduciary and eligibility criteria of the World Bank and Brazilian legislation;

Deliberate on the progress and difficulties of the Project; and

Oversee the physical and financial indicators of the Project

3. The responsibility for Project execution lies within each Disco. The following describes the roles of the main departments that will be involved in project implementation in each Disco:

Procurement Department: prepare and update the procurement plan (in coordination with the Directorate of Planning and Expansion), undertake procurement including preparing TORS and bidding documents, oversee the management of the contracts signed and the materials and services provided, prepare progress reports and other information that will be required by the UGP.

IT Department will oversee the implementation of the new Management and Commercial Information Systems that will be undertaken by the project and also provide IT-related support to all project activities.

Financial Planning and Control Department: develop, along with the Engineering and Procurement Departments, the required budget for the project and accompany its financial execution, provide all information required to UGP.

Accounting Department: monitor financial execution of project, prepare financial reports, prepare disbursement requests, provide all information required to UGP.

The Operational (Metering and Supervision) Department will be directly responsible for the control of energy theft by undertaking metering and supervision of works and customer connections.

Department of Engineering and Works will elaborate and monitor the annual operating plan, support the Procurement Department in procurement planning and implementation, prepare technical specifications of works, prepare basic engineering designs and cost estimates, coordinate, execute and receive works and services, monitor project indicators, prepare the physical implementation progress report of the project, in coordination with the environment unit, and support and prepare all required information to the UGP;

Environmental Management Unit: reporting directly to the President of the Discos will make sure all required Brazilian legislation and Bank safeguards are being met,

59 assist in obtaining all required environmental licenses, prepare the environmental section of the project progress report, assist UGP and Discos in all environment- related issues of the project, including those related to building capacity of staff in Discos to management environmental issues. h) Social Communication Unit: also reporting to the Presidency, responsible for planning, promoting, and guiding all communication activities related to the project, preparing and disseminating information related to the project through various media channels, organizing and participating in promotional events facilitate internal communication and submitting all required information to UGP.

60 Annex 7: Financial Management and Disbursement Arrangements

BRAZIL: ELETROBdS Distribution Rehabilitation Project

1. A financial management assessment for the Eletrobras Distribution Compan Improvement Project was carried out at Eletrobras and at the Distribution Companies (Discos)l , in accordance with OP/BP 10.02 and the Financial Management Practices in World Bank Financed Investment, dated March 5, 2009. The purpose of the assessment was to determine whether the executing agencies, Eletrobras and the six Discos, have acceptable financial management and disbursement arrangements in place to adequately control, manage, account and report on Project funds .

2. This assessment was completed based on FM Missions to all six Discos and Eletrobras Headquarters.

3. Based on the assessment of the executing agencies, the financial management arrangements as set out for this Project satisfy the Bank's minimum fiduciary requirements.

4. The overall financial management risk associated with this Project is considered Moderate: FM is adequate, but (a) the entities have no previous experience with Bank projects; (b) a Project Management Unit (UGP) has been recently created, and the roles and responsibilities of the financial management staff of this UGP have been established; (c) Eletrobras and the six Discos have different Financial Management Systems, that must be adjusted to accommodate specific Financial Management needs of the Project, and (d) Eletrobras processes are slow. These characteristics are offset and mitigated by the generally strong financial management systems and controls at Eletrobras and the Discos. Also, Eletrobras has significantly improved the funds flow process for the Project.

A. Risk Assessment Matrix

Rlsk R2sk Risk issuedmeasures rating Inherent Risk Country-level L

Entity-/project-specific S The legal and institutional arrangements are adequate; however, the roles and responsibilities of the financial management staff within the UGP - EletrobrNDisCos must still be formally adopted. This risk is relevant at project startup but is expected to decrease over time. Control Risk

6 Distribution Companies (Discos): Amazonas Energia-Amazonas, Eletroacre-Acre, CERON-RondBnia, CEPISA- Piaui, CEAL-Alagoas and Boa Vista Energia-Roraima. 61 Budget preparation Budget will be clearly defined, reflected in annual budgetary authorization, and approved by the Bank. FM system EletrobrhsDisCos’ systems are adequate, but not integrated. Reporting/monitoring IFRs are new to the client and a new process has been designed to report on the Project.

Funds flow S An improved funds flow process has been designed for the project. Eletrobras has developed a new centralized disbursement process that will increase control over payments but it will be used for the first time.

Staffing M EbrhsDisCos and UGP FM staff have significant experience implementing Eletrobras-financed investment projects but little prior experience with Bank projects. Accounting procedures L Accounting procedures and internal controls are adequate. and system External audits L Eletrobrhs auditor is a Big-4 accounting firm. H-High S-Substantial M-Moderate L-Low

B. Implementation Arrangements

5. Eletrobras will be directly responsible for the fiduciary and legal aspects of the loan, and cause the UGP and/or Discos to perform the following: (a) prepare the Project’s budget proposal, (b) implement and maintain adequate Financial Management Information Systems (FMIS); (c) keep all Project documentation properly filedlarchived; (e) prepare and forward to the Bank quarterly interim unaudited financial reports (IFRs); (f) regularly reconcile information that was entered in the FMIS (financial management information system) on Project expenditures, and assure timely follow-up on discrepancies; (8) prepare and forward to the Bank timely disbursement applications (h) reconcile Project designated account and the operating account; and (i) prepare and provide all financial documentation and reports requested by external auditors and Bank staff.

6. The UGP (Unidade de Gerenciamento do Projeto - Project Management Unit) was established as the Project operating arm of the Holding for the six Discos. Adequate controls over Disco operations currently exist but tend to be administratively slow. More efficient and effective controls have been agreed to with the Bank and are being developed and implemented by Eletrobras, the UGP and the Discos.

The proposed institutional arrangements are as follows: the UGP will work under a matrix format with each Disco. The financial management of the Project would be implemented using the regular day-to-day financial management processes of each Disco, under the overall coordination of the UGP Coordinator assigned to each company as defined in Annex 6.

62 C. Internal Control

7. Eletrobras and the Discos have several different financial management information systems (FMIS) in place capable of ensuring the control over: (i) investment projects, (ii) Disco debt to Eletrobras arising from investment decisions, (iii) payments to suppliers and contractors and investment reporting by Discos to Eletrobras, (iv) Eletrobras review of expenditure reports and physical progress on investment projects, and (v) fund flows from Eletrobras to Discos. As mentioned above, while Eletrobras adequately controls Disco operations, the efficiency and effectiveness of control mechanisms are being improved for the Project and institutionalized within the UGP and Discos.

8. In accordance with Bank policies, the Project Operational Manual will include for each Disco: (i) the internal control system and procedures to be implemented (ii) Chart of Accounts for the Project; (iii) format and contents of the reports that will be consolidated into the IFR; and (iv) terms of reference for external auditing.

D. Accounting

9. ELETROBdS is a public company headquartered in Brasilia - DF, registered with the Brazilian Securities and Exchange Commission (CVM) and with the Securities and Exchange Commission (SEC), whose shares are listed at the stocks exchanges of Si50 Paulo, Brazil (BOVESPA), Madrid, Spain (LATIBEX), and New York, USA (NYSE). The individual and consolidated financial statements of the Company are presented in accordance with the accounting practices adopted in Brazil, and in consonance with the provisions of the Corporate Law (no. 6.404/76), and regulations and complementary instructions of the Committee of Accounting Pronouncements (CPC), Federal Accounting Council, Brazilian Securities and Exchange Commission (CVM) and Brazilian Electric Power Agency (ANEEL).

10. Law 11.638/2007 of December 28, 2007 and Executive Act 449/2008 of December 3, 2008, amended and canceled certain provisions of Law 6.404/76. They aim to coordinate the accounting practices adopted in Brazil with International Financial Reporting Standards (IFRS) and the Committee of Accounting Pronouncements (CPC) was created to align Brazilian technical accounting practices with international standards.

11. The Company fully adopted for the first time the applicable pronouncements issued by the Committee of Accounting Pronouncements (CPC) in the preparation of the Financial Statements of the year 2008, without audit qualifications. The financial statements of the Project will therefore fully adhere to international accounting standards as required by the Bank.

12. Eletrobras/DisCos will maintain accounting records encompassing all Project activities. They will reconcile these records on a monthly basis. It will be the responsibility of each Disco to provide proper accounting information regarding its Project counterpart funding to the UGP, as part of the process.

63 E. Financial Management System

13. Each Disco will use its own integrated financial management information system (IFMIS) for the management and control of the Project. These systems are already in use by the Discos. These systems provide reliable financial reports as demonstrated by the Discos unqualified audit opinions prepared by a Big-4 audit firm. The table below shows the IFMIS used at each Disco. The UGP will consolidate information from each Disco and generate the IFRs for the Project.

Disco IFMIS Amazonas Energia Oracle (ERP) Eletroacre Microsiga CERON Cataguazes CEPISA OFM CEAL OFM Boa Vista Energia Oracle (ERP)

F. Flow of Funds and Disbursement Arrangements 14. Eletrobras will borrow directly from the Bank - with a guarantee provided by the Federal Government. The Eletrobras Finance Department will enter into an umbrella subsidiary finance agreement (Eletrobras Contratovenio de Financiamento - ECF7) with each Disco that will reflect the general terms and conditions for the on-lending, as specified in the Loan Agreement and Project Operational Manual. One ECF will be signed by each Disco for the entire Project.

15. The Eletrobras Finance Department will manage the financial flow of the project (withdrawals from the World Bank, on-lending to Discos and vendor payments) on behalf of the Directorate of Distribution (DD) and the six Discos. All payment requests to contractors will be approved by the Disco Finance Director and will be channeled through the UGP to the Eletrobras Finance Department for payment.

16. In consonance with the Bank’s country systems agenda, each Disco will use its Integrated Financial Management Information System (IFMIS) for the budgeting, commitment and recording of payables. The IFMIS of each Disco will be configured to meet the financial reporting requirements of the Project.

17. Management of the primary project cycle activities would be undertaken by the Discos with supervision and support from the UGP. This includes budget preparation and execution, technical and financial supervision of investment project implementation, payment authorization, request to Eletrobras for payment to vendors, accounting, and financial and Project progress reporting - all in accordance with the procedures that will be described in the Project Operational Manual. Each Disco will be responsible for generating financial and progress reports that the

7 ECF - EmprCstimo de Contrato de Financiamento 64 UGP will consolidate and send to the Bank. All disbursement requests and reporting to the Bank will also be channeled in a parallel process through the Eletrobras Finance Department to the Debt Division (which will liaise with the WB) and the Internal Finance Division (which monitors the ECF).

18. Eletrobras will open an overseas account at the Banco do Brasil S/A in U.S. dollars, in New York, to receive the loan proceeds. This segregated Designated Account (DA) will be used exclusively by the Eletrobras Distribution Company Improvement Project. Eletrobras will convert the currency from USD to Reais (BRL) that will then be deposited in the FFD (Fundo de Financiamento das Distribuidoras), created exclusively for the Project. Although denominated a Fund, the FFD is actually the Eletrobras?payment or ?Operations Account,? where the funds will be transferred periodically. No legal fund is being established. This account, controlled by the Eletrobras Finance Department, will be used to centralize Project payments to Disco suppliers and contractors. The FFD was created with the purpose of eliminating foreign exchange risk to the Discos. Eletrobras has defined an internal procedure to process payment requests from the Discos that will be documented in the MOP.

19. The financial flow is shown below:

(Advanceolleimbunemento)

W + Counterpart (Quarterly)

Funds Flow (Currency) Amazonas Energia Boa Vista Energia CEAL -- Reporting CEPISA Contracts CERON -t---+ Eletroacre

20. The Bank disbursement methods for the Project will be Advances, with the option of also using Reimbursements and Direct Payments, for expenditures eligible for financing, in accordance to the Loan Agreement (?eligible expenditures?). Advances and Reimbursements will use the interim un-audited financial reports (IFRs) to document eligible expenditures, with Direct Payments documented by Records. The Minimum Application Size for Direct Payments

65 and Reimbursements will be USD 5,000,000 equivalent. The UGP will use the quarterly interim un-audited financial reports (IFRs) to reflect the amount of the advance requests for the following two periods (six months). The DA will thus have a variable ceiling. The frequency for reporting eligible expenditures paid from the DA will be quarterly.

21. Retroactive financing will be available for this Project in the amount of USD 90 million (18% of loan) for payments made under any of the eligible expenditures undertaken in a period of up to one year prior to loan signature, but in no case, prior to January 13,2010.

22. The quarterly IFRs, consolidated by the UGP, will also be used to document the use of loan proceeds to the Bank. In consonance with country systems, Discos will use Eletrobras' current system, with minor modifications, to document investment expenditures to the UGP. The on-lending, from Eletrobras to the Discos will not be the eligible expenditures but rather the use by the Discos for investments and Technical Assistance as defined in the PAD.

23. IBRD Loan Disbursement Schedule

Allocation of Loan Proceeds

Loan Amount Expenditure (US$ Financing Pe Rentage Million)

(1) Goods, works, Consultant services and Non-consultant services for Part I of the 446,500,000 100% Project (2) Goods, Consultant services and Non- consultant services, Training and Operating 20,000,000 100% Cost for Part I1 of the Project (3) Unallocated 27,262,500

Amount payable pursuant to Section 2.03 ofthe Loan (4) Front-end Fee 1,237,500 Agreement m accordance with Section 2.07 (b) ofthe General Conditions I (5) Premia for Interest Rate Caps and Amount payable pursuant to Interest Rate Collars Section 2.07 (c) ofthe Loan 0 Agreement Total 495,000,000

66 24. As shown above, the Bank will finance 100 percent the activities described in the Loan Agreement. Eletrobras will finance 100 percent of other complementary Project activities.

G. FM reports and Project monitoring

25. The IFMIS systems are already in place at the Discos. Automated financial reporting will be able to produce the Interim un-audited Financial Reports (IFRs) according to the report format to be agreed with EletrobrasAJGP. The UGP will forward the consolidated IFRs to the Bank no later than 45 days after each quarter. The IFRs will show the total expenditures for the quarter, calendar year and the accumulated total since Project effectiveness (including counterpart amounts), and be used for project financial monitoring purposes, as well as to support disbursement requests as described above. The year-end IFRs, complemented by Explanatory Notes, may serve as the Project’s year-end financial statements. In summary, Eletrobras/DisCos will prepare and forward to the Bank the following IFRs: e IFR-1: Sources and Applications of Funds by Disbursement Category as per Loan Agreement. IFR-2: Statement of Investments by Project Components and Activities. IFR-3: Disbursement Forecast IFR-4: Designated Bank Account Reconciliation - Summary. IFR-4B: Designated Bank Account Reconciliation - Detailed. IFR-5 : Operations Bank Account Reconciliation. IFR-6: Disbursement Reconciliation with Bank’s Client Connection IFR-7: Consolidated Disbursement Report by Category

H, External Auditing Arrangements

26. An independent auditing firm, acceptable to the Bank, will be hired, under TOR that are satisfactory to the Bank, to carry out the annual external audit of the Project. Yearly audit reports for the Project will be sent to be Bank within six months after the close of each calendar year. The Bank will include the cost of this external audit as an eligible expenditure to be fully financed by loan proceeds.

27. The auditors will issue a single opinion on (a) the financial statements; (b) eligibility of expenses, (c) loan contractual agreements; and (d) the Project designated account. The auditors’ opinion will cover all sources and applications of funds for the Project, including Eletrobras counterpart. In addition, the auditor will issue a management letter on internal controls and other matters that came to the auditors’ attention during the audit.

67 I. Summary of FM actions to be taken

Action Responsible Deadline Party

Core staff working in UGP (including FM Specialist) By effectiveness EletrobrBsDisCos Open designated account and operational count Loan effectiveness EletrobrBsDisCos

Finalize Operational Manual and adoption by By effectiveness EletrobrBsDisCos EletrobrBs through Board Resolution

J. Supervision Plan.

28. The Bank will undertake semi-annual supervision missions to monitor the implementation and performance of the Project and confirm that the financial management arrangements, including staffing, disbursement, reporting ,and audit arrangements agreed to during project preparation and loan negotiations are being adhered to and continue to be valid. FM supervision should pay particular attention to the following matters:

The reliability and consistency of Disco payment requests, Eletrobras payments and payments reported on IFRs (given that the Eletrobras vendor payment module is not integrated with IFMIS of Discos) Effectiveness of physical and financial supervision of Disco investment projects Eletrobras control over loan proceeds in the DA, FFD and payment or “Operational” account

68 Annex 8: Procurement Arrangements

BRAZIL: ELETROBRh Distribution Rehabilitation Project

A. General

1, Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004, revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan/, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs and improvements in institutional capacity.

2. Procurement arrangements for the proposed Project follow one of two schemes: (i) for major procurement, i.e. ICB, a consolidated effort by one Disco which will procure on behalf of the other six, with the assistance of the dedicated procurement consultant who will form part of the UGP (this procurement consultant will need to have knowledge of Bank Procurement Guidelines and fluency in English), and (ii) for smaller amounts, i.e. NCB and shopping, procurement will take place at individual Discos, through their Permanent Bidding Committees. The UGP procurement specialist/consultant will work closely with the respective procurement specialists in each Disco as well as with the technical staff in the UGP and Directorate for Distribution.

3. Procurement of Works: Works procured under this Project will include: (i) works for improvement of operational performance of medium voltage (MV) and low voltage (LV) networks located in regular urban areas already receiving electricity supply; (ii) works in medium voltage (MV) and low voltage (LV) networks for regularization of electricity supply to commercial, industrial and service consumers located in consolidated urban; (iii) construction of 69 kV lines and substations (SS); and (iv) works for regularization of electricity supply in low voltage (LV) networks located in non-consolidated and low-income urban areas, including installation of encapsulated networks and metering boxes. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank.

4. Procurement of Goods: Goods procured under this Project will include: (i) implementation of advanced metering infrastructure (AMI) for metering, reading, and monitoring consumption; (ii) replacement and reallocation of existing metering systems; (iii) new management information systems for commercial activities (reading, billing, collection, customer services, etc) and corporate resources (e.g. accounting, budgeting, procurement, and financial and asset management). The MIS system is defined as an "Enterprise Resource

69 Planning (ERP)”; (iv) computing equipment and other tools required to put in place an integrated client management system. Major ICB contracts are expected to be “supply and installation” and procurement will be done using the Bank’s SBD for all ICB and National SBD agreed with or satisfactory to the Bank.

5. Procurement of non-consulting services: Non-consulting services under the Project will include capacity building support to Eletrobras and the Discos for Project implementation, monitoring, reporting and evaluation. It would include various training events, workshops, seminars, logistics such as hotel services, catering, travel services, printing services, videoconferencing materials, brochures, magazines, intranet, and videos, internal campaigns, communication events, etc. In addition, the Project will support community outreach through the implementation of social action programs and communication campaigns to educate consumers. The procurement will be done using the Bank’s SBD for all ICB and National SBD agreed with or satisfactory to the Bank.

6. Selection of Consultants: Consulting services under the Project will include, inter alia: engineering services, various studies, design and implementation of an external communication strategy. Short lists of consultants for services estimated to cost less than $ 500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The need to engage universities, government research institutions, public training institutions, NGOs, or any special organizations was not identified during Project preparation.

7. Incremental Operating Costs: During Project preparation, it was agreed that incremental operating costs will include staff related expenses, travel, supplies, and miscellaneous expenses. The incremental operating costs to be financed by the Project will be procured using the implementing agency’s administrative procedures which were reviewed and found acceptable to the Bank.

8. Others: The need of special arrangements for scholarships was identified during Project preparation under Component 2: Institutional Strengthening, to strengthen the operational capacities of the Discos and support selected programs of a sectoral training and research center in State of Acre. Financing of curriculum development, studies, training, scholarships, computers, office and laboratory equipment and supplies for course design and delivery in areas of water resources and environmental management are expected under this component in the estimated amount of $10 million.

9. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Operational Manual.

10. All bidding documents and respective contracts will be required to include the Bank’s anticorruption clauses.

70 B. Assessment of the agency’s capacity to implement procurement

1 1. The procurement capacity assessment included the six Eletrobras distribution companies, namely: Amazonas Energia, EletroAcre, CERON (Rondonia), CEAL (Alagoas), CEPISA (Piaui) and Boa Vista (Roraima). The review covered the Procurement Departments of all companies including the Permanent Bidding Committees. The capacity assessment included an analysis of the organizational aspects, skills of the staff, quality and adequacy of supporting and control systems, and suitability of the laws, rules and regulations applicable to the agency. The following areas were covered: Legal Aspects and Procurement Practices, Procurement Cycle Management (including procurement planning, preparation of bidding documents, management of the bidding process, bid evaluations, contract award, contract management), organization and functions, support and control systems, record keeping and staffing.

12. The Directorate for Distribution (DD) of Eletrobras will have overall responsibility for Project implementation and reporting to the Bank, including oversight of implementation by the Discos. Each Disco, in turn will be responsible for implementing its respective Project activities. Each Disco will be responsible for managing procurement processes and contracts, including supervision of works and - when applicable - payments. As mentioned here above in the second paragraph, in order to benefit from economies of scale and closer control by the DD, it is expected that the vast majority of Project activities, i.e. supply and installation ICB, will be centrally procured and contracted.

13. A dedicated Project Management Unit (Unidade de Gestgo do Projeto - UGP) was established in the DD. The central UGP will be composed of full time staff (seconded employees or consultants), in addition to the Project Coordinator and others. The procurement specialist/ consultant will be located into the UGP. The UGP will also appoint one Coordinator in each Disco (EDE Coordinator), responsible for the coordination of Project activities across the different functional units of the Disco. The UGP will consolidate inputs from the Discos to prepare progress reports, procurement plans and disbursementsheplenishment requests, while ensuring compliance with Bank guidelines and requirements stated in the Operational Manual of the Project.

14. Being public companies, all Discos use either COMPRASNET or Banco do Brasil “pregao electronico” systems. Considering the specialized nature of the procurement to be carried out, all bidding documents should be made available for download in the Eletrobras website to ensure that they attract sufficient bidders.

15. Based on the above analysis and on the fact that most procurement will be subject to prior review, the procurement risk has been rated as MODERATE.

16. The key issues and risks concerning procurement for implementation of the Project have been identified and include the corrective measures which have been agreed are:

71 I 2. Lack of procurement I Develop and implement a procurement I 6 months after I monitoring tool planninglmonitoring module and integrate effectiveness with the accountinghinance system.

17. The recommended procurement method thresholds and the prior review thresholds considering that the overall Proiect risk for procurement is MODERATE are:

Expenditure Contract value Procurement Processes subject to prior review category I thr;.;;;d a I method I

I and Agreements

C. Procurement Plan

18. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan was agreed between the Borrower and the Project Team during negotiations on March 29, 2010 and is available at Eletrobras and Discos websites. It will also be available in the project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

72 D. Frequency of Procurement Supervision

19. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended yearly supervision missions to visit the field to carry out post review of procurement actions.

E. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

(a) List of contract packages to be procured following ICB and direct contracting:

1

Contract (Description)

Remotely controlled re- connecters Voltage regulators

MV Electronic meters LV Electronic meters Meters replacement

Suppliers remote meters +metering at US$ 17 ICB Ye5 Prior million

(b) ICB contracts for works estimated to cost above US$ 15 million per contract, contracts for goods and non-consulting services estimated to cost above US$3 million and all direct contracting will be subject to prior review by the Bank.

2. Consulting Services

(a) List of consulting assignments with short-list of international firms. Not applicable at this stage

73 (b) Consultancy services estimated to cost above US$200,000 per contract and single source selection of consultants (firms and individuals) will be subject to prior review by the Bank.

(c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$ 500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

74 Annex 9: Economic and Financial Analysis BRAZIL: ELETROBRbiS Distribution Rehabilitation Project

1. This annex sets out the evaluation of the economic and financial benefits of the proposed project. Economic benefits are those associated with net savings in resources for the Brazilian society, while financial benefits are those associated with improvements in the current cash flows of the Discos. As described in detail in paragraph 16 below, the Project constitutes the lowest cost option that makes possible to achieve a fast and sustainable reduction in total losses in electricity distribution and supply services provided by the Discos, together with an improvement in quality of those services and a significant enhancement of transparency and corporate governance in performance of the companies.

A. Economic Analysis

2. Project implementation implies savings for Brazil in spending in resources and emissions of greenhouse gases (GHGs), which represent economic benefits for the country. Those benefits are summarized in the following Table 9.1. In order to quantify those economic benefits, representative country’s costs are considered for the main involved parameters, such as project investments and power generation and transmission expansion costs, as explained in detail in the following paragraphs. This implies, in particular, to exclude all Brazilian taxes in investments and other costs.

Table 9.1: Type of E :onomic Benefits Economic Benefit Source

1) Lower electricity generation to meet 0 Reduction in technical losses demand 0 Lower demand from electricity users due to actions to reduce unmetered consumption (non-technical losses).

2) Increased availability of electricity supply 0 Improvement of service quality (reduction of duration and frequency of interruptions in electricity supply, elimination of abnormal voltage drops) as a consequence of rehabilitation and reinforcement of distribution networks

3) Lower resources from enhanced efficiency 0 Reduction in number of customers’ claims and related field interventions as a consequence of rehabilitation and reinforcement of distribution networks Reduction in meter reading costs due to the implementation of AMI

75 4) Reduction in COZemissions e Lower electricity generation e 5) Lower expenditures of electricity a Improvement of service quality consumers in alternative energy resources (reduction of duration and frequency of to replace non supplied amounts of interruptions in, electricity supply) electricity due to bad service quality

i. Assumptions and Intermediary Results for the Economic Evaluation

3. In order to quantify the economic benefits described in the table above, the following assumptions were made:

4. Lower electricity generation: This economic benefit has two components:

(i) Lower electricity generation due to the reduction of technical losses. Power dissipation in components of distribution networks (lines, power transformers, customers’ connections) is the source of technical losses. Investments in rehabilitation, reinforcement and upgrading of currently undersized andor overloaded distribution networks to be carried out under the project (Sub-component 1.1) will allow for a reduction in technical losses. Based on detailed information on current operating conditions of the electricity grids and demand forecasts, and with the support of state-of- art models and other tools, the planning team of each Disco determined, during each year of project execution, the “without and with project implementation” values of technical losses. The total reduction in required electricity generation derived from the implementation of this Sub-component over the 10-year period is 5,464 GWh, which represents 2.1 percentage points of the total amount of energy required during the period. The average expansion cost of the SIN considered by the Government’s planning agency EPE for the period 2008-1 3 (R$156/MWh equivalent to US$89.l4/MWhy including generation and transmission) was used to quantify the economic benefit resulting from this reduction in electricity generation.

(ii) Lower electricity generation due to lower consumer demand. Comprehensive experience in reforming Latin American countries, including most of Brazilian Discos, shows that electricity users with under-billed or not-billed consumption reduce their demand once they are billed according to their real metered consumption. This is a significant effect expected from implementation of Advanced Metering Infrastructure (AMI) and other activities aimed at reducing currently unmetered consumption (Sub-component 1.2 - see Attachment 1 to Annex 9 for more details). Specific figures for each Disco were obtained applying benchmarks for response of medium and low voltage users derived from other Brazilian companies operating in similar conditions to its market structure. The total reduction in electricity generation derived from implementation of this Sub- component over the 10-year period is 8,562 GWh, representing 3.3 percentage points of the total amount of energy required during the period (a detailed description of the approach for quantifying this amount of electricity is presented in the Attachment 3 to this Annex). The average expansion cost of the SIN (R$156/MWh equivalent to

76 US$89.14/MWh) considered by the Government’s planning agency EPE for the period 2008-13 is once again used to quantify the economic benefit resulting from this lower electricity generation.

5. Intermediary Results. The following table 9.2 shows the estimated values (over the 10- year period) of the economic benefits derived from the main assumptions described above.’ The lower electricity generation resulting from the reduction in technical losses and in currently unmetered consumption amounts to 14,026 GWh over the period, with a related total economic benefit of US$ 1,250.4 million.

Table 9.2: Intermediary results: Economic Savings from Reduced Generation from Lowered Technical Losses and Consumption

~~

I Distribution Company Total Investment lower Electricity Generation

US$ million MWh US$ Million

Arnazonas Energia 139.9 6,102,039 544.0 CEAL 122.1 2,601,026 231.9 CEPISA 127.6 ,3,025,646 269.7 CERON 95.0 1,712,616 152.7 ELETROACRE 39.4 386,335 34.4 Boa Vista 24.5 198,707 17.7 594.4 14,026,368 1,250.4

6. Increased availability of electricity supply. The reduction in the frequency and duration of interruptions in electricity supply derived from improved service quality (Sub-component 1.1) would result in an increase of electricity supply of 606.8 GWh in the base scenario, as Discos’ customers would be able to consume electricity during periods in which they currently suffer interruptions in supply and abnormal voltage drops, being forced to resort to reduce consumption or to use alternative energy sources. The economic value of the currently not supplied electricity could be assessed taking as reference the tariff; alternative valuations could include the relatively higher willingness-to-pay or the cost of the alternative energy sources. However, for simplicity, in the present economic analysis the net benefit of this effect has not been taken into account.

7. Lower resources from enhanced efficiency. Expenditures under the project aimed to improve service quality and reduce unmetered consumption (Sub-components 1.1 and 1.2) result in: (i) savings in material resources allocated to operation and maintenance activities, as both the number and scope of field interventions carried out to attend customers’ claims due to bad service quality and meter consumption are expected to decrease, and (ii) lower metering and reading costs due to the deployment of AMI and MIS. These economic benefits can be quantified based on the specific characteristics of the action plans prepared for each Disco, as well as those

The economic analysis takes into account total investments excluding all types of domestic (national and state) taxes. 77 of the geographic area and market served. Consolidated results obtained for the 10 year period are: (i) related to improved service quality: US$59.5 million; and (ii) related to implementation of AMI and MIS: US$73.2 million

8. Reduction in COz emissions. Lower electricity generation deriving from implementation of Sub-component 1.1 and 1.2 will also yield a reduction in COz emissions, since part of that generation comes from thermal plants burning fossil-fuels (diesel, bunker, and natural gas). In quantitative terms this reduction is particularly significant in the case of Amazonas Energia whose networks are currently isolated from the SIN (scenario expected to remain at least until 2012). Currently, the generation mix used to supply the Disco’s consumers relies more than 70 percent on fossil fuels. After Amazonas Energia’s networks are connected to the SIN, the impacts of the reduction of C02emissions due to lower electricity generation will be less significant, as the Brazilian power system relies heavily on hydropower. Due to the small amount of reductions and corresponding benefits relative to the other economic benefits, these positive impacts have not been included in the Base case calculations.

9. Treatment of Capacity Building Activities. It is more difficult to quantify the benefits generated from the capacity building activities under Sub-component 1.3 (the modernization of Discos Management Information Systems) and Component 2 (institutional strengthening); accordingly these benefits have not been included in the Base case economic analysis as a benefit, but have been included on the cost side (as a conservative approach). ii. Results of the Economic Analysis

10. Quantification of economic benefits only encompasses the benefits generated from Sub- components 1.1 (distribution network reinforcement) and 1.2 (implementation of advanced metering infrastructure (AMI) and other activities to maximize metered consumption). Due to these assumptions, as well as those described in paragraph 5 of this Annex, the economic evaluation carried out is considered to be conservative.

1 1. Base case evaluation. A ten-yearg stream of benefits from the “Base Case” considering the assumptions described above results in an economic rate of return (ERR) of 18.5 percent and a net present value (NPV) of US$ 260 million at a 10 percent discount rate (see Table 9.3 -- for additional details, see Attachment 2 to Annex 9)

9 The investment, benefits and costs were projected over a IO year period. Although investments related to network upgrades typically have longer economic lives (up to 35 years), approximately 70 percent of the project investments are concentrated in metering equipment, which typically have shorter lives (around 10-15 years). As a result, both the economic and financial analysis’ results are considered conservative given that they do not include an additional IO- 15 years of benefits, or the residual value of network investments. 78 Table 9.3: Economic Analvsis - Base Case Results Summary Results for the Project's Economic Analvsis US$ in 000s @ Discount Rate of 10.0% Present Value of Costs $ (637,573) Present Value of Benefits $ 897,628 Net Present Value $ 260,055 ERR 18.5%

12. Sensitivity analysis. Sensitivity analysis were carried out assuming:

(i) Savings in generation are less than expected, either because the amounts are lower or the unit cost of avoided expansion is less." Taking into consideration that the main component (in quantitative terms) of the economic benefit derived from Project implementation is related to the lower electricity generation, a sensitivity analysis was carried out assuming that the reduction in electricity generation is 20 percent lower than in the Base Case, decreasing from 14,026 GWh to 11,221 GWh in the 10 year period. In this lower benefits alternative scenario (see Table

I. lo The economic welfare loss due to the project. It could be argued that the reduction in electricity demand from users with currently unmetered consumption (i.e., the reduction in overconsumption from consumers who are obtaining the electricity for free) may imply a loss of welfare for them and this could be considered an economic cost related to the project implementation. This is an expansive (Le., conservative relative to the economic benefits) evaluation that recognizes the possibility of some economic benefit to the consumers who might have consumed electricity if it were priced above zero but below the current tariff (including the impact of social tariffs). It is worth mentioning that most of the reduction in demand is expected to occur in medium and large residentiai and commercial users, who belong to the medium and high socioeconomic segments of the served markets, and which in general, demonstrate high responsiveness to price signals and have significant ability to improve their consumption efficiency. In order to contemplate this aspect, an alternative economic analysis including the reduced demand of regularized users as a project cost was carried out. According to these results, the loss of welfare can be valued by up to 3.9 U$ cents per kWh of the reduced demand (equivalent to 8,562 GWh) and the ERR would still remain at 12 percent or above. Table 9.5 below illustrates this scenario.

Table 9.5: Valuing Loss in Benefit from reduced Overconsumption Summary Results for the Project's Economic Analysis US$ in 000s @IDiscount Rate of 10.0% Present Value of Costs s (637,573) Present Value of Benefits s 695,158 Net Present Value s 57,585 ERR 12.0%

79 9.4), the ERR is 13.8 percent (4.7 percentage points lower than in the Base Case), and the NPV drops to US$ 1 1 1.1 million over the period (from US$ 260 million in the base case). Similar quantitative results are obtained when the average expansion cost, used to value economic benefits deriving from lower electricity generation, is reduced by 20 percent (from US$ 89.1 to US$ 71.3/MWh).

Table 9.4: Sensitivity with 20 percent Reduction in Generation ! avings Summary Results for the Project's Economic Analvsis ~~ US$ in 000s @ Discount Rate of 10.0% Present Value of Costs $ (637,573) Present Value of Benefits $ 748,752 Net Present Value $ 111,179 ERR 13.8%

I

(ii) Project costs higher than expected. Table 9.6 shows the results of economic analysis assuming project costs 20 percent higher than in the Base Case. In this case, the ERR is 14.0 percent (4.5 percentage points lower than in the Base Case), and the NPV drops to US$ 141.1 million over the period (from US$ 260 million in the base case).

Table 9.6: Sensitivity with 20 percent Increase in Project Costs Summary Results for the Project's Economic Analysis US$ in 000s @ Discount Rate of 10.0% Present Value of Costs $ (756,456) Present Value of Benefits $ 897,628 Net Present Value $ 141,172 ERR 14,O %

13. Conclusion of economic analysis. The Project shows robust values of its main indicators (ERR and NPV) even if the quantitative impacts of some important benefits are not taken into account in the economic evaluation. These values remain acceptable even assuming more conservative assumptions on the main sources of benefits (lower electricity generation and the country average expansion cost used to value the related economic benefits), as well as more challenging assumptions on project costs.

80 14. Efficient option for loss reduction. There currently are two approaches to reduce electricity losses: (i) the conventional method which is based on the installation of electronic meters and the inspection of consumer installations , and (ii) the modern method which includes not only the use of new technology but also new commercial management systems. Comprehensive experience in Brazil and other developing countries in Latin America and other regions that reformed their power sectors in the 90s show that, although conventional approaches to reduce theft and other sources of losses in electricity supply are in general effective, annual rate of reduction is very low. The Project constitutes the lowest cost option that makes possible to achieve a fast and sustainable reduction in total losses in electricity distribution and supply services provided by the Discos, together with an improvement in quality of those services and a significant enhancement of transparency and corporate governance in performance of the companies. This is a consequence of application of state-of art management procedures and techniques, supported by information technology tools, such as Advanced Metering Infrastructure (AMI) for consumption metering, reading and monitoring, and information systems (MIS) to maximize effectiveness in execution of main activities (commercial, operation and maintenance of electricity networks, corporate resources). Besides, sustainability of those reductions is a critical issue, particularly in companies showing bad operational performance and poor corporate governance, which is the current condition of the 6 Discos owned by Eletrobras.

B. Financial Analysis

15. Financial analysis refers to the actual financial costs and benefits for the Discos (higher revenues and lower expenditures) deriving from Project implementation. Those benefits are summarized in Table 9.7 and have four main sources: (i) higher electricity revenues due to billing and collected of amounts of energy currently consumed by users but not sold to them, and to the reduction of frequency and duration of interruptions in electricity supply; (ii) lower electricity purchases due to reduction in amounts of energy that are currently injected into the distribution networks but not billed to consumers, corresponding both to lower technical losses (energy dissipated in the grids) and lower non-technical losses (electricity consumed by users but not billed to them); (iii) lower spending in resources, due to reduction in number of customers’ claims and related field interventions, as a consequence of rehabilitation and reinforcement of distribution networks, and reduction in metering and reading costs due to the implementation of AMI; (iv) lower amounts of penalties paid due to failure to accomplish standards on service quality, as a consequence of rehabilitation and reinforcement of distribution networks.

81 Table 9.7: Key Financial Benefits Financial Benefit 1) Higher electricity revenues due to (a) higher billing and collected of amounts of energy currently consumed by users but not sold to them, and (b) to reduction of frequency and duration of interruptions in electricity supply. 2) Lower electricity expenditures due to reduction in amounts of energy that are currently injected into the distribution networks but not billed to consumers, corresponding both to lower technical losses (energy dissipated in the grids) and lower non-technical losses (electricity consumed by users but not billed to them). 3) Lower expenditures by Discos due to (a) respond to customers’ claims and related field interventions as a consequence of rehabilitation and reinforcement of distribution networks, and (b) for metering and reading. 4) Lower amounts of penalties paid by Discos for failure to accomplish standards on service quality, as a result of immovement of service aualitv. i. Assumptions for the Financial Evaluation as compared to the Economic Analysis

16. In order to quantify the impacts of the financial benefits described in Table 9.7, the actual financial scenario faced by each Disco is considered. The assumptions for the financial analysis are different from those made for the economic analysis, as follows: (i) the total project cost considered for the financial analysis includes taxes and totals US$709.3 million; (ii) while the increase in electricity revenues of each Disco was taken into consideration in the financial analysis, this effect was not included in the economic analysis as it primarily involves transfers from consumers to the Discos; (iii) the lower amount of electricity generation was valued at the country’s average generation and transmission expansion cost in the economic analysis, while in the financial analysis the same factor was considered as the nominal value of actual expenditures for electricity purchases by the Discos, whose unit price is set annually for each company by the electricity regulator ANEEL.

17. Total increased energy for which Discos receive revenues (i.e. KWh billed and collected) represents 13,880 GWh over the 10 year-period. Accordingly, a total related financial revenues (i.e. KWh*sales prices) of almost US$2.3 billion. Additional amounts of electricity billed and collected by the Discos are valued at the sales prices (nominal tariff) set annually by ANEEL for each company (see table 9.8 below).

82 Table 9.8: Sales Prices by Disco

~~ ~~ ~ ~~~

US/ MWh Amazonas Energia CEAL CEPISA CERON ELETROACRE BOA VISTA Scenario Financial Analysis

lAvg LTTariff 175.6 167.4 199.8 205.6 211.9 ' 190.8

18. Lower electricity purchases due to reduction in amounts of energy that are currently injected into the distribution networks but not billed to consumers: The effect described in detail in paragraph 3 of the economic analysis implies a financial benefit for the Discos, as they reduce in 14,026 GWh over a 10-year period the currently unbilled amounts of electricity they purchase to supply demand. As described in paragraph 3, that reduction in electricity purchases has two sources: lower technical losses in electricity networks and lower demand (amounts of energy supplied to consumers but not-billed to them). This financial benefit is calculated considering the purchase price set annually by ANEEL for each company to be passed-through into its sales tariffs and amounts to US$ 1.1 billion.

19. Lower spending in resources. This effect is described in paragraph 6 of the economic analysis. Values including local taxes are considered in this case.

20. Lower amounts of penalties paid due to failure to accomplish standards on service quality. This effect is quantified for each Disco based on the current situation on service quality and improvements expected from implementation of Sub-component 1.1 ii. Results of the Financial Analysis

21. Following the same criterion applied in the economic analysis (see paragraph lo), the quantification of financial benefits only encompasses those of activities under Activities 1.1 (distribution network reinforcement) and 1.2 (implementation of advanced metering infrastructure (AMI) and other activities to maximize metered consumption). Therefore, the financial evaluation carried out under these assumptions is considered to be conservative. Consequently, the results regarding net present value (NPV) and financial rate of return (FRR) should be considered as lower bounds relative to the actual financial indicators.

22. Base case evaluation. A ten-year" stream of benefits from the "Base Case" considering the assumptions described above results in a financial rate of return (FRR) of 40.7 percent and a net present value (NPV) of US$ 1.38 billion at a 10 percent discount rate. Related payback period (for the US$ 699.3 million total investments) is 3.6 years.

" See comment in footnote 1. 83 Table 9.9: Financial Analvsis - Base Case Results Summary Results for the Project's Financial Analvsis US$ in 000s @ Discount Rate of 10.0% Present Value of Costs $ (1,141,405) Present Value of Benefits $ 2,519,788 Net Present Value $ 1,378,383 FRR 40.7% Payback Period (Yrs) 3.61

23. Sensitivity analysis.

Simultaneous reduction in higher electricity sales and lower electricity purchases. Taking into consideration that the main components (in quantitative terms) of the financial benefit derived from project implementation are related to the higher electricity sales and lower electricity purchases, a sensitivity analysis was carried out assuming the simultaneous occurrence of: (i) a reduction in electricity generation 20 percent lower than in the base case (equivalent to 2,805 GWh in the 10 year period); (ii) an increase in electricity sales (in R$) 30 percent lower than in the base case. In this pessimistic alternative scenario the FRR decreases to 29.1 percent (1 1.6 percentage points lower than in the base case). The NPV drops to US$ 798 million over the period (from US$ 1.37 billion in the base case), while the payback period increases from 3.6 years to 4.4 years.

Table 9.10: Sensitivity: Simultaneous reduction in higher electricity sales and lower electricity purchases

Summary Results for the Project's Financial Analysis US$ in 000s @ Discount Rate of 10.0% Present Value of Costs $ (1,141,405) Present Value of Benefits $ 1,939,572 Net Present Value $ 798,167 ERR 29.1% Pavback Period (Yrs) 4.36

(ii) Project costs higher than expected. Table 9.11 shows the results of economic analysis assuming project costs 20 percent higher than in the Base Case. In this

84 scenario the FRR decreases to 33.1 percent (7.6 percentage points lower than in the base case). The NPV drops to US$ 1.17 billion over the period. Table 9.11: Sensitivity: 20 percent Increase in Project Costs

Summary Results for the Project’s Financial Analysis US$ in OOos @ Discount Rate of 10% Present Value of Costs $ ( 1,287,716) Present Value of Benefits $ 2,460,781 Net Present Value $ 1,173,065 ERR 33.1% Payback Period (Yrs) 4. c

24. Conclusion of financial analysis. The project shows robust values of its main indicators (FRR and NPV) even when assuming significantly more conservative simultaneous assumptions on the main sources of benefits (lower electricity purchases and higher electricity sales), as well as a more challenging scenario concerning project costs.

25. Financial Position of the Discos. It is possible to observe the strengthening of the financial condition of the Discos as a result of the WB Project and its investments in operational improvements. The total cumulative increase in revenues and operating cash flows over the 2010-2015 period with the WB project versus the scenario without the WB project equal to US $1.16 billion and $1.6 billion respectively. Cumulative net profits over the same period in the scenario with the WB project are US $1.32 billion more than in the scenario without the WB project over the same period. Discos’ financial projections are described in greater detail in Attachments 3 and 4 to this Annex 9. Attachment 3 presents a brief historical summary of Eletrobras and the six individual Discos’ operating and financial performance, as well as the Discos’ consolidated financial projections for the 2009-201 5 period. Attachment 4 sets out historic financial results by each Disco and their individual expected financial results.

85 ’ Attachment 1 to Annex 9

Approach adopted to quantify lower electricity demand related to implementation of Advanced Metering Infrastructure (AMI) and other activities to reduce unmetered consumption

1. AMI is implemented to all medium (MV) and low voltage (LV) users with currently billed consumption above 600 kWh per month. Following Bank’s advice in the identification mission, Eletrobras is already implementing AMI for MV consumers in Amazonas Energia. The project to be financed by the Bank includes AMI for LV users in that company and for MV and LV users in the other 5 Discos.

2. Actions to replace defective and old consumption meters, rehabilitate networks in areas with current losses above 50 percent (applying design and construction procedures to minimize chance of theft), and installation of AMI in condominiums and selected MV feeders are also included in the scope of Activity 1.2 of the project.

3. In order to quantify the expected impacts of each action, information on market structure and demand (users in each tariff category, monthly consumption, etc.) in each Disco’s commercial database is considered.

4. Total current non-technical losses are allocated to users in MV and LV using the ratios (billed MV consumptiodtotal billed consumption) and (billed LV consumptiodtotal billed consumption), respectively (simple proportionality).

5. For MV consumers, it is assumed that current total losses are eliminated through AMI. 90 percent of the currently unmetered consumption becomes increased sales, while the remaining 10 percent corresponds to reduced demand. This reflects the fact that most of MV consumers are industries, with limited availability to manage consumption of their production processes.

6. Total current non-technical losses allocated to users in LV as described above are distributed between AMI consumers (600 kWWmonth and above) and non-AMI consumers applying the ratios (billed AMI-LV consumptiodtotal billed LV consumption) and (billed non- AMI- LV consumptiodtotal billed LV consumption), respectively (simple proportionality in total LV consumption).

7. For LV consumers, it is assumed that current total losses are eliminated through AMI. 60 percent of the currently unmetered consumption becomes increased sales, while the remaining 40 percent corresponds to reduced demand. This reflects the fact that most of medium and large LV consumers are residential and commercial, with significant responsiveness to pricing signals (high price elasticity) and ability to increase efficiency in consumption. It corresponds to the medium and high income segment of the market served by each Disco. The ratios are taken from comprehensive experience of successful reforming Discos in Brazil (both private and state- owned) and other Latin American countries (Colombia, Peru, and Chile).

86 8. Reduction in demand related to actions mentioned (see paragraph 2) is estimated on a case by case basis, considering the above-described assumptions where AMI is implemented (condominiums, areas with current losses above 50 percent).

87 31""rt

00 00 Attachment 3 to Annex 9

Financial Review of Project Implementing Entities

1. This section presents a brief historical summary of Eletrobras and the six individual Discos’ operating and financial performance, as well as the Discos’ summary financial projections for the 2009-201 5 period.

Eletrobrits

2. As of FY 2008, Eletrobras had a total of R$138 billion in assets, consisting primarily of generation assets (32 GW of hydro, thermal and nuclear). The non-core distribution business allocated to Eletrobras in the 1990s represents a small fraction of the company’s total assets (4.5 percent) and contribution to cash flows of approximately 8.3 percent of total in FY 2008. Eletrobras’ total revenues and EBITDA during 2008 were R$ 30.7 billion and $ 8.5 billion respectively.

3. It is important to note that Eletrobras has low operating costs, due to the nature of its electricity generation sources, allowing it to generate adequate cash flow to cover its expenses and debt service. Due to this internal cash generation, as well as access to capital markets (domestic and international), Eletrobras is able to provide funds to other utilities at lower rates. Total debt, including intercompany debt was R$ 18.3 billion as of FY 2008, at total leverage of 2.3x, and total debt to capitalization of 18.9 percent. As of FY 2008, Eletrobras had cash and equivalents of R$ 13.5 billion. Eletrobras is a strategic player in the country’s electricity sector, due to its significant ownership of electricity generation assets, as well as serving as a financial agent for the sector, and its role as coordinator of sector-expansion planning and social programs. Given its importance and relevance to the sector, it would be fair to assume that it would enjoy government support, if necessary.

Distribution ComDanies

4. The combined distribution companies provide electricity distribution services to over 1 1 million people, in a concession area of 2.2 million km2, representing 26.5 percent of the country’s land area, but only 6 percent of the country’s total population. Total combined revenues and EBITDA for FY 2008 was R$ 4.1 billion and R$ 707 million respectively, while total debt was R$ 4 billion. Comparatively, the combined Discos’ total revenues and EBITDA represented 7.5 percent and 5 percent of Eletrobras’ total revenues and EBITDA in 2008.

5. The Discos hold regulatory concessions to service their respective regions until July 2015. Although at this time the Government has not taken a decision on the issue, a working group created by the Ministry of Mines and Energy has recently prepared a preliminary report recommending the extension of the concessions. Thus, it is reasonable to assume that the Discos will continue to operate within the existing regulatory framework after 201 5.

89 6. Discos Results from 2006-2008. All of the Discos have generated net losses from 2005- 2008, with the exception of Eletroacre. Amazonas Energia posted a net profit in FY 2008 as a result of a one-time US$ 356 million expense reversal, and Ceal also posted a net profit in FY 2008. The financial losses result primarily from the low bill collection rates and high technical and non-technical losses. Further, the Discos operate in low density areas with high levels of low income consumers averaging 58 percent of total consumers. All of the Discos have generated negative free cash flow over the past three or four years (operating cash flow after Capex), with the exception of Boa Vista. For the most part, all of the Discos generate sufficient cash to cover its operations, with the exception of Cepisa and Amazonas Energia in FY 2007. However the Discos do not generate sufficient cash to cover their capital expenditures and debt service which must be financed (primarily by Eletrobras). As a result, the Discos are mostly heavily indebted, as evidenced by Cepisa’s, Ceron’s and Amazonas Energia’s total debt to capitalization of 158 percent, 125 percent, and 75 percent respectively as of FY 2008. Over the past few years, Eletrobras has provided over 90 percent of the financing required by the Discos or approximately R$ 2.8 billion of the R$ 3 billion combined total debt as of April 2009. As a result of the Improvement Plan and the Consultancies conducted by both Price Waterhouse and Thoreos Consulting, Eletrobras intends to recapitalize the Discos in order to reach debt to capital structures of 50 percent and a debt to EBITDA ratio of < 2.5~. Please see Attachment 2 to Annex 9 for further details.

Discos Financial Proiections

7. This section summarizes the financial projections for each individual Disco considering two scenarios provided by Eletrobras, which include the envisioned capital restructuring of the Discos: (i) before WB project implementation, and (ii) after WB project implementation. According to the projections, the WB project will improve the Discos’ financial situation by increasing their cumulative revenues and operating cash flows by US$1.16 billion US$ 1.6 billion respectively over the 201 0-201 5 period.

Scenario 1: before WB project implementation (after Capital Restructuring).

8. The general current situation of each company, prior to the capital restructure and the implementation of the WB project over the 2010-2015 period can be characterized as follows: increasingly high levels of indebtedness, insufficient cash flow generation for company investments and debt service with third parties and intercompany debt (mainly Eletrobras). As a result, the Discos (with the exception of Eletroacre) require additional financing resources from the holding in order to service their debt (to the holding). This financing scheme also generates the following fiscal inefficiency: since the Discos currently generate financial losses they are unable to benefit from what should result in effective lower taxes due to the incurrence of financing expenses, which in turn would reduce taxable income. This renders a lose-lose situation for Eletrobras, which pays taxes on unreceived financing income from the Discos, and to the Discos which cannot benefit from lower taxes on account of financing expenses incurred but unpaid.

9. As a consequence, Eletrobras is in the process of restructuring the capital structure of each Disco (as well as its other subsidiaries), with the intent to optimize their structure and eliminate

90 fiscal inefficiencies. The recapitalization of the Discos would include the elimination of intercompany debt with Eletrobras, of approximately US$2.75 billion, and an additional R$ 2 billion in future capital requirements in order to enable the Discos to achieve a 50 percent debt to total capitalization ratio, and a 2.5~Debt/EBITDA leverage ratio. One of the main results of the capital restructuring would be a reduction in additional required borrowing by the Discos from Eletrobras by US$ 3.9 billion (over the period 2010-2015), and the ability to generate positive cash flows for investment and debt service in the near future.

10. This scenario demonstrates an improvement in the cash flows of each Disco and the elimination of fiscal inefficiencies (described above). Although the capital restructuring alone would serve to immediately improve the financial situation of the Discos in the short-term, in the absence of investments in operational improvements (such as the ones envisioned by the WB Project), the Discos would eventually head towards the same path of continued financial and operating instability in the medium to long-run.

Scenario 2: after WB Project implementation.

11. In this scenario it is possible to observe the strengthening of the financial condition of the Discos as a result of the WB Project and its investments in operational improvements. The total cumulative increase in revenues and operating cash flows over the 2010-2015 period with the WB project versus the scenario without the WB project equal to US $1.16 billion and $1.6 billion respectively. Cumulative net profits over the same period in the scenario with the WB project are US $1.32 billion more than in the scenario without the WB project over the same period.

12. As a result of the operational improvements through the WB project, the Discos’s financial results are anticipated to improve significantly, enabling the companies to generate increasingly positive cash flows in the long term to cover their own investment and debt service costs, and a decreasing requirement for external financing (Eletrobras), thus allowing for their financial and operating sustainability. The table below summaries the results from the financial projections over the 2010-2015 period for the scenarios prior to and after the WB project implementation. Please see Attachment 2 to Annex 9 - Financial Projection Results, for further details by company.

Co nso lidat ed Finan cia1 Projections (US$ mil lions)

I 2009 2010 2011 20 12 201 3 20 14 2015 ICum. 2010-2015 Net Revenues Before WBProject 1,852.0 1,994.9 2,226.3 2,453.1 2,708.6 3,019.4 3,376.0 15,778.3 After WB Project 1,852.0 1,926.9 2,378.5 2,720.1 3,031.0 3,335.1 3,552.4 16,944.1 Operating Cash Flows Before WBProject (145.14) (25.71) 65.14 193.71 182.86 272.57 374.86 1,063.43 After WB Project (145.14) 184.31 273.84 441.02 525.92 608.22 642.77 2,676.07 Net Profits(Losses) Before WBProject (296.57) (145.71) (97.71) (34.29) (47.43) 4.00 69.14 (252.00) After WB Project (296.57) 84.43 96.04 185.21 206.31 244.27 257.36 1,073.61

91 Attachment 4 to Annex 9

Distribution Companies

Historic Financial Results

2008 Summary Income Statement US$ in 000s AMAZONAS CEAL CEPISA CERON ELETROACRE BOA VISTA CONSOLIDATED Revenues 783,235 498,673 465,341 388,287 131,886 89,881 2,357,304 Gross Profit 106,019 200,299 170,234 115,610 45,023 25,408 662,593 Gross Profit Margin 14% 40% 37% 30% 34% 28% 28% 5ITDA 286,234 75,730 38,351 13,947 12,693 (22,466) 404,489 EBlTDA Margin 37% 15% 8% 4% 10% -25% 17% Interest expense (57,186) (30,827) (42,571) (27,745) (1,874) (5,357) (165,561) Income from continuing ops 113,626 22,564 (56,421) (28,662) 87 (20,936) 30,258 Net income 113,626 22,564 (56,421) (28,662) 87 (20,936) 30,258 Average ROEexcl extr. kern 30% 36% 14% 6% 0% -46%

Summary Cash Flow Statement US$ in 000s AMAZONAS CEAL CEPISA CERON ELETROACRE BOA VISTA CONSOLIDATED Funds from operations 214,450 77,348 (32,999) 21,650 14,944 (1,287) 294,106 +I- VVC changes (160,971) (29,043) 54,950 (1,571) (7,029) 31,310 (1 12,354) - Capex (334,202) (50,122) (51,259) (40,546) (10,746) (28,243) (515,l 18) - Divaends 0 0 0 0 0 0 0 Free Cash Flow (280,723) (1,817) (29,308) (20,467) (2,831) 1,779 (333,367)

Change in Debt 285,188 58,390 (26,965) 8,893 (3,133) (1,441) Change in Equity 0 0 0 0 0 0 320893; Change in Cash 30,979 1,544 4,595 (2,195) (3,195) 338 . 32,066 I Ending Cash Balance 42,129 9,098 18,714 4,733 6,783 2,386 83,843

Summary Balance Sheet 8 Credit Metrics US$ in 000s AMAZONAS CEAL CEPISA CERON ELETROACRE BOA VISTA CONSOLIDATED Balance Sheet Debt 1,302,304 257,671 400,314 299,511 41,014 31,311 2,332,125

Total Shareholder's Equlty 430,840 75,815 (430,482)(471,321) (35,391) 34,967 (395,572) Total Capltallzation 1,733,144 333,486 252,328 238,869 87,520 66,278 2,711,625

Debt I EBITLM 4.5 3.4 10.4 21.5 3.2 (1.4) 5.8 EBKDA I Merest 5.0 2.5 0.9 0.5 6.8 (4.2) 2.4 FFO + interest / interest 4.8 3.5 0.2 1.8 9.0 0.8 2.8 FFO / Debt 16% 30% -8% 7% 36% -4% 13% Debt / capitalization 75% 77% 159% 125% 47% 47% 86%

92 Annex 10: Safeguard Policy Issues

BRAZIL: ELETROBRk Distribution Rehabilitation Project

A. The Environmental and Social Impact Assessment Process for the Project

1. In compliance with the World Bank’s OP/BP 4.01, an Environmental and Social Impact Assessment (ESIA) was conducted during preparation of the project. The ESIA process comprised: (i) a review of investment plans, (ii) preliminary assessments of areas where project interventions are planned in the cities of Boa Vista, Maceio, Manaus, Port0 Velho, Rio Branco and Teresina, and preliminary assessments of peripheral and interurban routes in the State of Piaui; (iii) review of regulatory and institutional frameworks; (iv) assessment of environmental and social procedures followed by Eletrobras and the Discos; and, (v) interviews and meetings with technical staff at Eletrobras and the Discos.

2. Face-to-face consultations were held in Manaus in December 2009 and in Teresina in January 2010, with participation of the state environmental agencies and key organizations, to discuss the objectives, scope and timing of the proposed Project, the environmental and social issues that may potentially arise during implementation, and proposed actions to address any adverse project impacts. Consultations were also held with ANEEL in Brasilia in December 2009. The Project was very well received and all comments have been documented.

3. This annex summarizes the findings of the ESIA and describes the programs that have been designed to address Project impacts and to strengthen the management of environmental and social issues within the Discos. The ESIA was released in-country and filed in the InfoShop in Washington D.C. on January 13,2010. It also has been incorporated into the POM.

B. Potential environmental and social impacts of the Project

4. The EA identified the following typology of Project interventions with potential environmental and/or social impacts:

i. Investment in improvements of medium and low voltage lines (34.5 kV and below) in urban neighborhoods that are already serviced by the utilities but are currently operating at overcapacity and/or with high levels of technical losses - in all six states.

a. 11. Investments in regularization (Le,, reduction of non-technical losses) of low and medium voltage connections to industrial, commercial and service sector consumers and to low-income residential neighborhoods that have been recently incorporated (or will be incorporated) into the formal urban structure - in all six states. iii Construction of high voltage distribution lines (69 kV) and substations in the periphery of large urban areas or interconnecting mid-sized urban areas, replacing,

93 reinforcing or expanding systems that are currently operating at overcapacity - only in the State of Piaui.

5. Typologies 1 and 2: Investments in medium and low voltage lines, undertaken in urban areas - whether focused on’ consolidated areas, as in investments in Distribution Network Reinforcement, or on neighborhoods in transition, as in the case of the Advanced Metering Infrastructure activities - correspond to about 80 percent of total Project investments and are expected to have insignificant environmental and social impacts.

1. Environmental impacts in both typologies are expected to be of short duration, largely related to execution of works (e.g., replacement of poles, cables, transformers, meters) and handling, storage, transportation and final disposal of waste material (e.g., construction debris and obsolete equipment). Where transformers have to be replaced, removal and disposal will follow the established practice and will be undertaken by specialized contractors. (Over the course of several years, all PCBs have been removed and disposed of as per requirements of the Brazilian legislation.) Other obsolete material (e.g., cables, meters) is usually sold off in auctions held by the Discos periodically. Safety procedures have been addressed in a Construction Manual, and Guidelines for Waste Management have also been prepared. These will be attached to contracts and will apply to implementation of sub-projects in these two typologies. In addition, suitable social communication actions will be necessary. .. 11. Investments in Distribution Network Reinforcement, focused on technical losses, will target consolidated urban neighborhoods (Typology I) and entail minor interference with ongoing activities during implementation. Given that disturbance is minimal and of short duration, and thatresidents, commercial and service customers in those neighborhoods are the primary beneficiaries of improved services, it is expected that these investments are unlikely to raise social concerns.

iii. Investments in Advanced Metering Infrastructure, meant to reduce non-technical losses (Typology 2), will concentrate on high and medium-income customers, which are expected to account for 85 percent of the energy recovered (resulting from the increase in energy sold and reduction in energy purchased). The remaining 15 percent involve regularizing energy services in low-income, informal, usually peripheral neighborhoods that are in the process of being incorporated into the formal urban structure by municipal governments. In such cases, regularization of energy services will entail replacement of improvised line connections (with rerouting in a few cases), and introduction of metering and billing. This could have two potential social impacts: (i) resettlement, and (ii) a financial burden for households. As per ANEEL guidelines, the Discos will only invest when there is a formal request from the municipality. Although improvised, the settlements, for the most part already have roadways; thus resettlement is not expected. Regularization of electricity service will however entail an obligation for payment, which may constitute a financial burden for lower-income households. Nevertheless, such households will benefit from subsidized “social” tariffs.

94 6. Typology 3: Investments in high voltage (69 kV) distribution systems (lines and substations) will occur only in the case of Cepisa, in the State of Piaui, and correspond to about 20 percent of total Project investments.. Five networks will be reinforced - Teresina, Parnaiba, Campo Maior, Ribeiro Gonqalves, and Valenqa.

i. The first two are located in the outskirts of two major cities and will follow existing rights-of-way (already occupied by other lines, one of which will be fully replaced and upgraded), existing low-density urban roads or national highways. Land acquisition for construction of associated substations (equivalent to about a 100-meter square block or less each) has already taken place or does not present a problem, given the abundance of unoccupied plots in these peripheral areas. No resettlement or adverse impact on livelihoods is foreseen. .. 11. In the case of the three interconnections between mid-sized urban areas, lines will follow state highways and other rural roads. These are low-density, largely agricultural and cattle ranching regions, characterized by “cerrado” (savanna) landscape, much of which already removed to form pastures. No significant impact on natural habitats is foreseen. Rights-of way can often be shared with those already existing; land for substations has already been acquired or is available in the periphery of settlements. There is no impact on indigenous peoples; while lands will be needed for the passage of rights-of-way and for substations, no resettlement or other significant impact on people or their livelihoods is foreseen.

7. In sum, based on the type of infrastructure to be put in place, the pre-feasibility documents available, the site visits conducted during the ESIA process undertaken during project preparation, it is foreseen that the project will not have large scale, significant and/or irreversible environmental and social impacts. The proposed rating for the project is Category B.

C. Regulatory framework applicable to Project investments

8. The environmental licensing process in Brazil is regulated by resolutions issued by the National Environment Council (Consellho Nacional de Meio Ambiente - CONAMA). Resolution 00 1/86 establishes the general licensing framework, including what types of interventions are subject to licensing, the scope and timing of assessments, and procedures to be followed throughout the licensing process. Of special relevance also are Resolutions 006/87 (licensing of power sector projects), 009/87 (public hearings), and 237/97 (licensing of infrastructure projects). This regulatory framework is complemented by extensive legislation pertaining to water, fisheries, forests, wildlife protection, gaseous emissions, water discharges, and hazardous waste management, among others. Table A10.1 of this Annex provides a brief summary of the key regulations.

9. Three environmental licenses (Preliminary, Installation and Operation) are usually required at successive stages of the project cycle (respectively, before the conclusion of feasibility studies, before construction begins, and before operations begin, subject to periodic renewal). For projects such as power plants and transmission lines, which can be expected to

95 have significant and/or irreversible impacts, a detailed and comprehensive environmental impact assessment (EIA) must be presented to environmental authorities approximately six months before conclusion of the feasibility study. An environmental impact statement (RIMA), summarizing project objectives, impacts, and mitigatiordcompensation plans presented in the EIA, isalso prepared and forms the basis for discussions with government agencies and the general public.

10. The legislation stresses the importance of public participation and recommends that the dialogue with stakeholders begin with a formal request for the Preliminary License, early in the feasibility stage. It also requires public disclosure of all EIAs. Public hearings, although not mandatory, may be called for at the end of the feasibility stage to address public concerns and other issues before the Preliminary License is issued. They may be called for either by the licensing agency, an NGO, the Public Prosecutor (MinistCrio Publico) or by a group of at least 50 people.

11. In the case of the power sector, Resolution 001/86 establishes that power plants with nominal capacity of 10 MW and above, and transmission lines 230 kV and above, require preparation of full EIAs and are subject to detailed procedures described in this same resolution and others referred to above. Distribution systems at voltages equal to or above 69 kV and below 230 kV (as is the case of the urban periphery or inter-urban connections to be constructed by Cepisa under the project) are called upon to follow a simplified licensing process, in accordance with guidelines established by the Ministry of Mines and Energy, through Portaria MME 328/05. This entails preparation of a plan (rather than a full ETA) focused on addressing eventual specific impacts identified during the detailed design stage. In the case of investments in expansion, rehabilitation and strengthening of urban distribution systems, environmental mitigation plans are not called for and licenses are not required, given the low impact typically associated with these types of interventions.

12. Primary responsibility for environmental licensing and enforcement lies with the state agencies. In the case of Project interventions, only the 69 kV distribution lines in Cepisa will require an environmental license, to be issued by the environmental agency of the State of Piaui. For investments in urban areas, authorizations from the municipality are required with respect to conformity of facilities with urban land use plans, identification of potential neighborhood impacts, the removal of vegetation, the disposal of waste, and the control of emissions.

13. In addition to the prevailing regulatory framework, specific technical guidelines for managing environmental and social impacts in power sector projects have been developed over the years to instruct project preparation, licensing, implementation and operation, notably: Environmental Impact Studies Manual (1 986), policy guidelines (for resettlement, indigenous peoples, flora and fauna, coal-fired thermal plants, among others) featured in the Power Sector Environmental Master Plan (1 990), public consultation and negotiation (1993), and environmental/social cost accounting (1 995). Such guidelines, largely developed by Eletrobras in close collaboration with regional and state utilities and the power sector’s research center (CEPEL), continue to be used as technical references, although not mandatory for projects designed since the transition to the sectoral governance model established in the last decade, that promotes greater private sector involvement in electricity service provision.

96 D. Approach to addressing environmental and social impacts of the Project

14. Given this approach to Project implementation, site-specific environmental and social impact assessments were not conducted before appraisal. Environmental and social safeguards will be addressed through a twofold, sequenced approach:

1. Safeguards procedures and frameworks have been prepared and are of two types: (a) mandatory, Le., guidelines that will be applied in all sub-projects that may potentially have an environmental or social impact (EA, Environmental Construction Manual, and Waste Management Guidelines), and (b) precautionary, Le., guidelines that will be applied if the specific impacts are identified during project preparation or should these arise during implementation (Resettlement Framework, Indigenous Peoples Framework, Natural Habitats Framework, Physical Cultural Resources Framework, and Pest Management Framework),

9. 11. Site-specific simplified EAs, will be carried out for all sub-projects with potential environmental and/or social impacts and impact mitigation/ compensation plans drawn up, as needed, during Year 1 for investments to be made during Year 2; a similar procedure will be adopted for subsequent years. For effective and informed decision making on the need to conduct detailed assessments on investments to be undertaken in Year 1 and beyond, screening, supervision and monitoring mechanisms have been included in the frameworks. . 15. The site-specific review, although simplified will be comprehensive, and will identify the need to apply any one of the precautionary frameworks. It is not expected that the precautionary frameworks will be called upon given the typology of project impacts identified through the appraisal stage. If needed, however, the guidance is available in the EA. For instance, the Discos do not use pesticides to control vegetation growth in rights-of-way, but resort to manual cropping instead. A Pest Management Framework has been prepared although it is not foreseen that it will be triggered and that a pest management plan will be necessary.

16. The safeguard procedures and frameworks and sub-project screening process are in line with Bank policy and the Brazilian legislation. A summary of the guidelines and frameworks is presented in Attachment A10. I to this Annex. These lay out:

1. Guidelines and procedures for (a) environmental assessment, including natural habitats, cultural heritage, and pest management; and (b) social assessment, including involuntary resettlement, and management of impacts on indigenous peoples;

11... Guidelines and procedures for general construction work and management of hazardous and other waste;

111.... Criteria for screening and classification of sub-projects from an environmental and social impact perspective, flagging the appropriate guidelines and procedures to be followed during sub-project design and implementation;

97 iv. A timeframe for sub-proj ect screening and preparation of appropriate assessments and mitigation plans as needed, taking into account typical contracting, preparation, consultation, and licensing times that may be required; and

v. Coordination, supervision, monitoring and evaluation mechanisms to ensure the effective and timely implementation of environmental and social activities during the annual project cycle.

17. Project activities will be accompanied by a social communications and outreach program (See also Annex 4 -- Project Description). The program will engage with local residentsklients, explain Project objectives and plans, minimize misunderstandings, and address potential vulnerabilities or discontent. It will help build public awareness and consensus on the importance of the reduction of technical and non-technical losses, creating an environment favorable to the gradual change of inadequate behaviors, both by small and large consumers.

E. Project implementation arrangements

18. The Directorate for Distribution (DD) of Eletrobras will have overall responsibility for Project implementation and reporting to the Bank, including oversight of implementation by the Discos. A dedicated Project Management Unit (Unidade de Gesttio do Projeto - UGP) is being established in the DD. The central UGP will be composed of full-time staff (seconded employees or consultants), in addition to the Project Coordinator, with the following individual responsibilities: engineering and technical aspects, financial management, procurement, environment and social safeguard issues, social communication and information technology.

20. Each Disco, in turn, will be responsible for implementing its respective Project activities, and will undertake detailed project design, including environmental and social impact assessment and mitigation, as needed, and supervision of project works. Each Disco will select one representative to liaise with the UGP (Disco Coordinator), responsible for the coordination of Project activities across the different functional units of the Disco, including those engaged in the management of environmental and social issues. The UGP will consolidate inputs from the Discos to prepare progress reports and will ensure compliance with Bank guidelines and requirements stated in the Project Operational Manual,

2 1. The Project Coordinator, the Environmental and Social Safeguard focal point in the UGP and the Disco Coordinators, will be responsible for: (i) coordinating the social and environmental activities of the project within Eletrobras and within each Disco; (ii) screening proposed sub-projects, guiding social and environmental assessment and mitigation plan preparation as required, and analyzing and approving specific Environmental Management Plans (EMP) and social safeguard procedures for the interventions to be executed; (iii) inspecting, following-up and providing guidance during implementation of mitigation measures, required by the environmental licensing authorities and recommended by the EMP and application of social safeguard frameworks; (iv) supervising implementation of the Policy Framework for Civil Works; and, (vi) supervising, monitoring and evaluating implementation of the institutional strengthening program focused on environmental and social management issues (see below).

98 F. Strengthening Disco capacity to manage environmental and social issues

22. At present, the capacity of the six Discos to manage environmental and social issues varies significantly but overall is inferior to that of other distribution companies in Brazil against which they might be benchmarked. Of the six DisCos, Amazonas Energia is best positioned, with an environmental unit of around 30 staff, largely resulting from prior company mergers. In the five other Discos there is at best a “focal point” for environmental/social issues, with limited capacity and stability, within each company. The Discos generally rely on outside technical expertise to support the licensing process and address issues as they arise.

23. Although attention to date has mostly focused on their immediate environmental or municipal licensing requirements, the Discos and Eletrobras see the Project as an opportunity to reduce existing environmental/social management capacity gaps in the near-term and better align themselves to best practices established within other companies in the Brazilian power sector in the medium-term. In addition to the site-specific environmental and social activities associated to the annual investment plans that will be prepared starting in Year 1 of Project implementation under Component 1, the Project will support a program of institutional strengthening through Component 2 (see also Annex 4 -- Project Description). Eletrobras will also support research and training programs on environmental and water resources management issues through the training center located in the State of Acre.

24. In addition, a Social Communication Program and an Internal Communication Program will be prepared and implemented under Component 2. The purpose of these programs is to support implementation of the Project, through the involvement of the consumers directly or indirectly benefited/affected by Project interventions. These programs will help build public awareness and consensus on the importance of the reduction of technical and non-technical losses, creating an environment favorable to the gradual change of inadequate behaviors, both by small and large consumers. It will harmonize program identity and main public messages, and prepare public opinion for changes in their relationship with the Discos. (See also Annex 4.)

99 Table A1O.l: Summary of Key Legal Framework with respect to Environmental and Social Issues in the Brazilian Power Sector

Legislation Brief Summary of Contents

Constitution Enacted in 1988, it deals with the environment, in several of its provisions, covering about 20 different articles, one of which, no. 225, deals exclusively with ‘this subject. For this reason, it has been called by some jurists the “Green Constitution.” It defines the environment, biodiversity and ecological systems and services as public goods, assigning their guardianship to public authorities in the country’s different political and administrative units, to the Public Prosecutor (Ministe‘rio Publico), to communities and citizens. It prescribes instruments and means to this end: environmental impact assessments (EIAs) which will be publicized; concurrent federal, state and municipal legislation; and public participation in processes relating to creation of environmental regulations, in the formulation and implementation of environmental policies and in actions carried out through the Judiciary.

Law 693 818 1 Institutes the National Environmental Policq (PNMA), creates the National Environmental System (SISNAMA), establishes as key instruments of the PNMA environmental impact assessments (EIAs) and the licensing of projects and activities that are likely to have environmental impacts, and requires public disclosure at different stages of the project cycle. SISNAMA is comprised of: a Government Council (not created); the National Environment Council (CONAMA), a consultative and deliberative body, responsible for establishing national environmental guidelines and regulations; MMA, as central agency; IBAMA, as executing agency; state environmental agencies and entities; and municipal agencies or entities. This law was regulated by Decree 99.274/90, which confirmed the practices recommended by CONAMA with regard to environmental licensing throughout the 1980s, as well as the diverse, collegiate composition of CONAMA.

Law 7347185 Regulates citizens‘ suits regarding responsibility for environmental damages and provides other measures. It emphasizes injunctions under the initiative of the Public Prosecutor (Ministe‘rio Pziblico), the federal government, states and municipalities and environmental associations. It calls for the Public Prosecutor to be a law enforcement agent with respect to the environment.

Law 9605198 Establishes, among other things, penalties for citizens, companies and their responsible agents who cause damage to the environment, as well as for public employees who commit crimes against environmental administration.

Law Establishes the National System of Protected Areas (SNUC), considering various categories 9985100 of sustainable management and integrated protection of natural resources. It provides the government with instruments for the effective implementation of the System, calls for the involvement of populations residing within and outside the protected areas (conservation units), and establishes fines and penalties on offenders. It recognizes officially established private reserves, and institutes incentives for collaboration of the private sector with country’s biodiversity conservation goals.

CONAMA CONAMA established relevant environmental concepts, practices and requirements, Resolutions through numerous resolutions issued since 1986. Those having major sectoral repercussions (and their relevance to power transmission and distribution) are as follows: 001/86, requiring EIAs for power plants larger than 10 MW and transmission lines above 230kV; 006187, establishing guidelines for environmental licensing of power sector projects; 009187, regulating public hearings; 237197, updating 001/86 and 006/87 and seeking to clarify jurisdictional responsibilities and scope of mandate for licensing agencies.

100 ATTACHMENT A1O.l: SUMMARY OF SAFEGUARDS FRAMEWORKS

25. In compliance with the World Bank?s OP/BP 4.01, an Environmental and Social Impact Assessment (ESIA) was conducted during preparation of the Project. The draft ESIA comprises: (i) a summary of the Project, including planned investments; (ii) a summary of the relevant regulatory and institutional frameworks; (iii) a set of safeguard frameworks to address environmental and social issues during project implementation; and (iv) an institutional strengthening program.

26. Safeguards guidelines and frameworks were prepared for the following topics: a Environmental Assessment a Involuntary Resettlement a Indigenous People e Physical Cultural Resources a Natural Habitats and Forests a Civil Works Management a Management of Pesticides and Hazardous Materials

27. The specific content of the each of these is summarized below.

28. Environmental Impact Assessment (OP/BP 4.01): The adverse impacts of the Project are expected to be small, localized and reversible. Nonetheless, given that detailed design of sub- projects will only occur during project implementation, an Environmental Impact Assessment Framework has been prepared to ensure compliance with the Bank?s OP 4.01 and with Brazilian environmental legislation. The framework identifies the potential impacts associated with the typology of Project investments; calls for minimization of Project impacts; specifies the guidelines and procedures to be used in assessing environmental and social impacts during the sub-project design stage; and provides guidance on the preparation of Environmental Management Plans to address impacts during sub-project implementation. Depending on the results of initial screening of sub-projects (to be conducted jointly by the project Coordinator, the UGP?s Environmental and Social Focal Point, and the EDE Coordinator), the scope of the EA, including the EMP, will be determined. The latter would, in principle, include: (i) a description of the sub-project, and assessment of alternative options; (ii) identification of Project impacts; (iii) mitigation programs; (iv) arrangements and timetable for consultations, where appropriate; (v) specification of grievance mechanisms, (vi) institutional responsibilities, (vii) timetables, (viii) budgets, (ix) monitoring and evaluation plan. In line with OP 4.01 , the framework provides the general reference for and establishes linkages to the other frameworks discussed in following. The ESIA and its accompanying procedures and social frameworks have been incorporated into the POM. The ESIA was released in-country and filed in the Bank?s Infoshop on January 13, 2010 (Doc. N. E2344).

29. Involuntary Resettlement (OP/BP 4.10): Although involuntary population displacement and/or impacts on livelihoods is not envisaged at present, the policy could potentially be triggered by land acquisition required for installation of substations or

101 establishment of rights-of-way for distribution lines. A Policy Framework for Involuntary Resettlement was prepared summarizing guidelines and procedures to be followed in urban and rural contexts, Should involuntary resettlement be unavoidable, the framework calls for preparation of a Resettlement Plan, including: (i) a full justification of the case for resettlement, including assessment of alternative options; (ii) preparation of cadastres with detailed information on numbers and characteristics of affected people; (iii) compensation programs and respective eligibility criteria; (iv) arrangements and timetable for consultations; (v) grievance mechanisms, (vi) institutional responsibilities, (vii) timetables, (viii) budgets, (ix) monitoring and evaluation plan. The Framework for Involuntary Resettlement is part of the ESIA and was filed in the InfoShop on January 13,2010 (Doc. N. E2344).

30. Indigenous Peoples and other Ethnic Groups (OP/BP 4.10) : The locations selected for Project interventions do not include any areas traditionally occupied or used by indigenous communities or “quilombolas”, as defined under the Federal Constitution, the Indian Statute and other national legal and administrative provisions, regardless of whether such areas are formally demarcated or not. No negative impacts are thus foreseen on indigenous people or other ethnic groups. As a precaution, in accordance with the Bank’s OP 4.10, a Policy Framework for Indigenous Peoples Framework (IPF) was prepared for the Project, containing guidelines and procedures for the preparation and disclosure of an Indigenous People Plan in the event that any intervention affect indigenous communities. In the event that urban works on low and medium- voltage distribution lines in Manaus occur in neighborhoods where indigenous peoples are significantly present, they will be consulted in a culturally appropriate fashion in order to inform them of project objectives, scope and timing and to avoid or minimize potential adverse impacts. The Indigenous Peoples Framework is part of the ESIA and was filed in the InfoShop on January 13,2010 (Doc. N. E2344).

31. Physical Cultural Resources (OP/BP 4.11): It is not expected that Project implementation will have negative impacts on physical cultural resources. However, civil works such as the construction of substations in urban or rural areas, and the installation of posts, cables, transformers, and other equipment outside urban areas could uncover cultural properties. To handle such chance finds, Brazil has a well-developed legislative and normative framework, which is under the oversight of the National Institute for Protection of Historical and Archeological Sites (IPHAN). Additionally, guidelines and procedures to be followed in rural and urban areas where the Project interventions will be implemented have been prepared, in line with the Bank’s OP 4.1 1. 20. The procedures to handle Physical Cultural Resources are described in the ESIA and it was filed in the InfoShop on January 13,2010 (Doc. N. E2344).

32. Natural Habitats (OP/BP 4.04): Project interventions are predominantly urban with the exception of the investments in high-voltage distribution in Cepisa. These, however, will not take place in areas that constitute “Critical Natural Habitats” according to Bank policies, and which would include Areas of Permanent Preservation (APPs), composed of strips along water courses and mangroves; Legal Reserves as defined by the Forestry Code; officially protected conservation units under the National Protected Areas Legislation (SNUC), such as parks, national and state forests, ecological reserves; and unaltered areas outside the conservation units which are needed to maintain their environmental integrity. As a precautionary measure, procedures for addressing Natural Habitats and Forests safeguards have been prepared providing

102 definitions of key concepts (e.g., critical habitats, conversion, degradation, forest-dependent people) and specifying guidelines and procedures to be adopted during project implementation to ensure that these areas are preserved, including preparation of management plans if needed. The Natural Habitas Framework is part of the ESIA and was filed in the InfoShop on January 13, 2010 (Doc. N. E2344).

33. Civil Works: Project impacts are mostly envisaged as being the result of the small-to- medium-scale construction activities. Although these impacts are expected to be small, transitory and of short duration, a Procedures for Civil Works have been prepared specifying guidelines and procedures to be followed by the construction contractors, covering aspects such as location of construction camps, clearance of vegetation, noise, traffic control, safety signaling, disposal of construction debris and waste material, and requiring compliance with the frameworks referred to above. These will constitute an Environmental Manual for Civil Works to be incorporated in the bidding documents for civil works. Compliance with the practices outlined in the Manual will be a contractual obligation of the contractors, The Manual for Civil Works is part of the ESIA and was filed in the InfoShop on January 13,2010 (Doc. N. E2344).

34. Management of Hazardous Material: Hazardous material may be present in batteries, transformers, capacitors and other equipment used in distribution systems. Guidelines and procedures for the handling of equipment that contain oils, compressed gas, corrosive substances, SF6, and other hazardous substances, that may negatively impact human health and the environment have been developed. These guidelines are meant to ensure that Discos screen facilities for potential sources of risk, prevent or respond to accidents in a timely and effective manner, and avoid or address potential liabilities resulting from improper management over time. Preparation of a Hazardous Materials Management Plan is proposed. The Plan should contain procedures for (i) reception, storage, handling, treatment, and disposal of hazardous material; (ii) periodic risk assessment; (iii) measures to avoid or minimize accidents involving workers or others; (iv) contingency plans in response to accidents; (iv) communications programs to inform relevant stakeholders; and (v) capacity building and awareness raising programs. It would also spell out guidelines and procedures for different stages of the project cycle. The procedures for Management of Hazardous Material are described in the ESIA and it was filed in the InfoShop on January 13,2010 (Doc. N. E2344).

35. Pest Management (OP 4.09): The need to use pesticides or herbicides could come up clearance and maintenance of distribution line rights-of-way. This should be indicated in each sub-project, as well as the measures for Integrated Pest Management (IPM) to be adopted. When the use of pesticides or herbicides is justified, an analysis of potential negative impacts resulting from the use of these chemicals and the risks associated to the inappropriate handling or storing of their containers should be conducted. The sub-projects should also include measures to reduce those risks, in compliance with Law No. 7802/89. The procedures to handle with for Pest Management are described in the ESIA and it was filed in the InfoShop on January 13, 2010 (Doc. N. E2344).

103 Annex 11: Project Preparation and Supervision BRAZIL: ELETROBdS Distribution Rehabilitation Project

Planned Actual PCN review August 24,2009 August 3 1, 2009 Initial PID to PIC September 8,2009 September 13,2009 Initial ISDS to PIC September 8,2009 October 8,2009 Appraisal January 15,2010 January 19,2010 Negotiations March 15,2010 March 30,2010 BoardRVP approval May 27,20 10 Planned date of effectiveness July 1, 20 10 Planned date of mid-term review March30, 2013 Planned closing date June 30,2015

Key institutions responsible for preparation of the project are Eletrobras Distribution Division and its Project Management Unit (UGP) and the Directorate of the Discos.

Bank staff and consultants who worked on the project included:

Name Title Unit Jennifer Sara Sector Leader, co-TTL LCSSD Leopoldo Montanez Sr. Energy Specialist, co-TTL LCSEG Mark R. Lundell Sector Leader LCSSD Pedro Antmann Sr. Energy Specialist ETWEN Sinue Aliram Procurement Specialist LCSPR Mauro Azeredo Sr. Communications Officer LCREA Karen Bazex Energy Specialist LCSEG Jennifer Chang Financial and Economic LCSEG Analyst Regis Cunnigham Sr. Financial Management LCSFM Specialist Eduardo Franca Financial Management LCSFM Specialist Ashish Khanna Peer Reviewer SASDE Bernadete Lange Environmental Specialist LCSEN Rocio Manrique Program Assistant LCSEG Luiz Maurer Peer Reviewer AFTEG Karina Marceiino Program Assistant LCC5C Fernanda Pacheco Program Assistant LCSEG Catarina Portelo Senior Counsel LEGLA Luis Prada Sr. Procurement Specialist LCSPR Frederico Rabello Procurement Specialist LCSPR Jose Guilherme Reis Peer Reviewer RMTR Salvador Rivera Peer Reviewer EASIN Teresa Serra Environmental and Social LCSSD 104 Specialist, Consultant

Bank funds expended to date on project preparation: 1. Bank resources: $430,000 2. Trust funds: $16,818 3. Total: $446,8 18

Estimated Approval and Supervision costs: Remaining costs to approval: $30,000 Estimated annual supervision cost: US$l 10,000

105 Annex 12: Documents in the Project File BRAZIL: ELETROBdS Distribution Rehabilitation Project

1, “Avaliaqiio Socioambiental do Projeto de Melhoria de Desempenho Operacional das Empresas de Distribuiqilo de Energia do Sistema Eletrobras”, Clarisse Borges Dall’Acqua, December 2009.

2. “Projeto de melhoria de gestiio”, Fernando Urbina, December 2009.

3. Manual de Operaqtio do Projeto, March 2010

4. PPIAF - Mid review and Final Reports 5. Detailed aide memoires from Project preparation missions

6. Eletrobras Financial Projection Results

106 Annex 13: Statement of Loans and Credits BRAZIL: ELETROBdS Distribution Rehabilitation Project

Difference between expected and actual Original Amount in US$ Millions disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd ID PO99469 2010 (APL 2) 2ndNational Environment 24.30 0.00 0.00 0.00 0.00 24.30 0.0 0.00 PI01508 2010 BR-RJ Sustainable Rural 39.50 0.00 0.00 0.00 0.00 39.40 1.83 0.00 Development PI19215 2010 BR AF Minas Gerais Swap 461.0 0.00 0.00 0.00 0.00 461.00 0.00 0.00 PI16170 2010 BR Silo Paulo Metro Line 5 650.0 0.00 0.00 0.00 0.00 650.00 0.0 0.00 PI08654 2010 BR Pernambuco Sustainable Water 190.00 0.00 0.00 0.00 0.00 190.00 0.00 0.00 PI06663 2010 BR Sao Paulo Feeder Roads Project 166.65 0.00 0.00 0.00 0.00 55.73 -1 10.50 0.00 PI03770 2010 BR ALAGOAS Fiscal & Public 195.45 0.00 0.00 0.00 0.00 74.96 -120.00 0.00 Mgmt Reform PI04995 2010 BR Municipal APL5: Santos 44.00 0.00 0.00 0.00 0.00 44.00 0.00 0.00 PI11996 2010 BR RJ Mass Transit II 211.70 0.00 0.00 0.00 0.00 210.67 -0.50 0.00 PO06553 2010 BR SP APL Integrated Wtr Mgmt 104.00 0.00 0.00 0.00 0.00 104.00 3.78 0.00 PI17244 2010 BR Rio State DPL 485.00 0.00 0.00 0.00 0.00 485.00 0.00 0.00 PI04752 2009 BR Paraiba 2nd Rural Pov Reduction 20.90 0.00 0.00 0.00 0.00 20.90 0.00 0.00 PO99369 2009 BR Ceara Regional Development 46.00 0.00 0.00 0.00 0.00 45.89 0.07 0.00 PO95205 2009 BR 1st Prog. DPL for Sust. Env 1,300.00 0.00 0.00 0.00 0.00 1,300.00 1.30 0.00 Mgmt PO94315 2009 BR Municipal APL4: Sao Luis 35.64 0.00 0.00 0.00 0.00 33.49 -1.90 0.00 PI06208 2009 BR Pernambuco Educ Results& 154.00 0.00 0.00 0.00 0.00 97.84 -55.77 0.00 Account. PI06765 2009 BR Ceara Inclusive Growth (SWAp 240.00 0.00 0.00 0.00 0.00 137.05 27.29 0.00 11) PI06767 2009 BR RGS Fiscal Sustainability DPL 1,100.00 0.00 0.00 0.00 0.00 450.00 0.00 0.00 PI07146 2009 BR Acre Social Economic Inclusion 120.00 0.00 0.00 0.00 0.00 104.00 -0.70 0.00 Sust D PI07843 2009 BR Fed District Multisector Manag. 130.00 0.00 0.00 0.00 0.00 129.68 29.23 0.00 Proj. PI10614 2009 BR: Sergipe State Int. Proj.: Rural 20.80 0.00 0.00 0.00 0.00 17.55 2.81 0.00 Pov PO88716 2009 BR Health Network Formation & 235.00 0.00 0.00 0.00 0.00 234.41 4.07 0.00 Quality Im PI06038 2008 BR Sao Paulo Trains and Signalling 550.00 0.00 0.00 0.00 0.00 307.04 34.30 0.00 PO83997 2008 BR Alto Solimoes Basic Services and 24.25 0.00 0.00 0.00 0.00 21.59 5.04 0.00 Sust PI01324 2008 BR-Second Minas Gerais Dev't 976.00 0.00 0.00 0.00 0.00 235.40 6.34 0.00 PArtnership PO88966 2008 BR Municipal APL3: Teresina 31.13 0.00 0.00 0.00 0.00 28.64 4.42 0.00 PO95626 2008 BR (APL2)Family Health Extension 83.45 0.00 0.00, 0.00 0.00 83.24 26.15 0.00 2nd APL PO89013 2008 BR Municipal APL: Recife 32.76 0.00 0.00 0.00 0.00 32.68 13.96 0.00 PO94199 2008 BR-(APL) RS (Pelotas) Integr. Mun. 54.38 0.00 0.00 0.00 0.00 39.36 5.42 0.00 Dev. PO89929 2008 BR RGN State Integrated Water Res 35.90 0.00 0.00 0.00 0.00 3 1.20 20.73 0.00

107 Mgmt PO82651 2007 BR APL 1 Para Integrated Rural Dev 60.00 0.00 0.00 0.00 0.00 51.20 45.20 0.00 PO89793 2007 BR State Pension Reform TAL I1 5.00 0.00 0.00 0.00 0.00 4.99 3.17 0.00 PO95460 2007 BR-Bahia 1ntegr.Hway Mngmt. 100.00 0.00 0.00 0.00 0.00 87.90 24.43 0.00 PO8901 I 2007 BR Municipal APLI: Uberaba 17.27 0.00 0.00 0.00 0.00 13.05 9.49 0.00 PO50761 2006 BR-Housing Sector TAL 4.00 0.00 0.00 0.00 2.70 0.96 3.66 -0.29 PO90041 2006 BR ENVIRONMENTAL SUST. 8.00 0.00 0.00 0.00 0.00 4.88 4.85 0.69 AGENDA TAL PO89440 2006 BR-Brasilia Environmentally 57.64 0.00 0.00 0.00 0.00 21.22 19.30 0.00 Sustainable PO93787 2006 BR Bahia State lnteg Proj Rur Pov 84.35 0.00 0.00 0.00 0.00 30.72 0.22 0.00 PO92990 2006 BR - Road Transport Project 501.25 0.00 0.00 0.00 0.00 228.70 209.95 0.00 PO81436 2006 BR-Bahia,Poor Urban Areas 49.30 0.00 0.00 0.00 0.00 38.96 38.96 0.00 Integrated Dev PO83533 2005 BR TA-Sustain. & Equit Growth 12.12 0.00 0.00 0.00 0.00 7.70 7.70 0.00 PO69934 2005 BR-PERNAMBUCO MTEG DEVT: 3 1.50 0.00 0.00 0.00 0.00 9.15 9.15 0.00 EDUC QUAL IMPR PO8771 1 2005 BR Espirito Santo Wtr & Coastal 107.50 0.00 0.00 0.00 0.00 31.06 -40.26 -17.93 Pollu PO76924 2005 BR- Amapa Sustainable Communities 4.80 0.00 0.00 0.00 0.23 2.35 2.58 1.99 PO60573 2004 BR Tocantins Sustainable Regional 60.00 0.00 0.00 0.00 0.00 18.19 18.19 0.00 Dev PO76977 2003 BR-Energy Sector TA Project 12.12 0.00 0.00 0.00 0.00 5.63 5.63 0.00 PO49265 2003 BR-RECIFE URBAN UPGRADING 46.00 0.00 0.00 0.00 0.00 8.13 8.13 0.00 PROJECT PO66170 2002 BR-RGN Rural Poverty Reduction 45.00 0.00 0.00 0.00 0.00 15.49 -6.95 15.55 PO60221 2002 BR FORTALEZA 85.00 0.00 0.00 0.00 62.60 9.79 65.37 13.65 METROPOLITAN TRANSPORT PROJ PO51696 2002 BR SA0 PAUL0 METRO LINE 4 304.00 0.00 0.00 0.00 0.00 27.67 -67.10 27.90 PROJECT PO06449 2000 BR CEARA WTR MGT 239.00 0.00 0.00 0.00 0.00 96.74 -6.00 1 .oo PROGERIRH SIM Total: 9,595.66 0.00 0.00 0.00 65.53 6,403.44 253.04 42.56

BRAZIL STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic ABN AMRO REAL 98.00 0.00 0.00 0.00 15.77 0.00 0.00 0.00 2005 2005 ABN AMRO REAL 98.00 0.00 0.00 0.00 15.77 0.00 0.00 0.00 200 I AG Concession 0.00 30.00 0.00 0.00 0.00 30.00 0.00 0.00 2002 Amaggi 17.14 0.00 0.00 0.00 17.14 0.00 0.00 0.00 2005 Amaggi 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 2002 Andrade G.SA 22.00 0.00 10.00 12.12 22.00 0.00 10.00 12.12

108 2001 Apolo 6.04 0.00 0.00 0.00 3.54 0.00 0.00 0.00 1998 Arteb 20.00 0.00 0.00 18.33 20.00 0.00 0.00 18.33 2006 BBM 49.40 0.00 0.00 0.00 49.40 0.00 0.00 0.00 200 1 Brazil CGFund 0.00 19.75 0.00 0.00 0.00 18.15 0.00 0.00 2004 CGTF 54.01 0.00 7.00 65.12 54.01 0.00 7.00 65.12 1994 CHAPECO 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 I996 CHAPECO 1.50 0.00 0.00 5.26 1.50 0.00 0.00 5.26 2003 CPFL Energia 0.00 40.00 0.00 0.00 0.00 40.00 0.00 0.00 1996 CTBC Telecom 3.00 8.00 0.00 0.00 3.00 8.00 0.00 0.00 1997 CTBC Telecom 0.00 6.54 0.00 0.00 0.00 6.54 0.00 0.00 1999 Cibrasec 0.00 3.27 0.00 0.00 0.00 3.27 0.00 0.00 2004 Comgas 11.90 0.00 0.00 11.54 11.90 0.00 0.00 11.54 2005 Cosan S.A. 50.00 5.00 15.00 0.00 50.00 5.00 15.00 0.00 Coteminas 0.00 1.84 0.00 0.00 0.00 1.84 0.00 0.00 1997 Coteminas 1.85 1.25 0.00 0.00 1.85 1.25 0.00 0.00 2000 Coteminas 0.00 0.18 0.00 0.00 0.00 0.18 0.00 0.00 1980 DENPASA 0.00 0.52 0.00 0.00 0.00 0.48 0.00 0.00 1992 DENPASA 0.00 0.06 0.00 0.00 0.00 0.06 0.00 0.00 Dixie Toga 0.00 0.34 0.00 0.00 0.00 0.34 0.00 0.00 1998 Dixie Toga 0.00 10.03 0.00 0.00 0.00 10.03 0.00 0.00 1997 Duratex 1.36 0.00 3.00 0.57 1.36 0.00 3.00 0.57 2005 EMBRAER 35.00 0.00 0.00 145.00 35.00 0.00 0.00 145.00 1999 Eliane 14.93 0.00 13.00 0.00 14.93 0.00 13.00 0.00 1998 Empesca 1.33 0.00 2.67 0.00 1.33 0.00 2.67 0.00 2006 Endesa Brasil 0.00 50.00 0.00 0.00 0.00 50.00 0.00 0.00 2006 Enerbrasil Ltda 0.00 5.50 0.00 0.00 0.00 0.00 0.00 0.00 2006 FEBR 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2000 Fleury 0.00 0.00 6.00 0.00 0.00 0.00 6.00 0.00 1998 Fras-le 4.00 0.00 9.34 0.00 4.00 0.00 6.04 0.00 2006 GOL 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 GP Capital 111 0.00 14.00 0.00 0.00 0.00 0.14 0.00 0.00 GP Cptl Rstrctd 0.00 2.22 0.00 0.00 0.00 2.16 0.00 0.00 200 1 GPC 0.00 0.00 9.00 0.00 0.00 0.00 9.00 0.00 GTFP BIC Banco 44.91 0.00 0.00 0.00 44.91 0.00 0.00 0.00 GTFP BM Brazil 4.22 0.00 0.00 0.00 4.22 0.00 0.00 0.00 GTFP lndusval 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 1997 Guilman-Amorim 18.08 0.00 0.00 14.37 18.08 0.00 0.00 14.37 I998 lcatu Equity 0.00 5.46 0.00 0.00 0.00 4.16 0.00 0.00 1999 lnnova SA 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 1980 lpiranga 0.00 2.87 0.00 0.00 0.00 2.87 0.00 0.00 1987 lpiranga 0.00 0.54 0.00 0.00 0.00 0.54 0.00 0.00 2006 Ipiranga 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 Itambe 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 Itau-BBA 12.86 0.00 0.00 0.00 12.86 0.00 0.00 0.00 2002 Itau-BBA 70.61 0.00 0.00 0.00 38.47 0.00 0.00 0.00 1999 JOSAPAR 7.57 0.00 7.00 0.00 2.57 0.00 7.00 0.00 2005 Lojas Americana 35.00 0.00 0.00 0.00 35.00 0.00 0.00 0.00 1992 MBR 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 2006 MRS 50.00 0.00 0.00 50.00 0.00 0.00 0.00 0.00 2002 Microinvest 0.00 I .25 0.00 0.00 0.00 0.82 0.00 0.00 Net Servicos 0.00 10.93 0.00 0.00 0.00 10.93 0.00 0.00 2002 Net Servicos 0.00 1.60 0.00 0.00 0.00 I .60 0.00 0.00 2005 Net Servicos 0.00 5.08 0.00 0.00 0.00 5.08 0.00 0.00 1994 Para Pigmentos 2.15 0.00 9.00 0.00 2.15 0.00 9.00 0.00 1994 Portobello 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 2000 Portobello 4.28 0.00 7.00 0.00 4.28 0.00 7.00 0.00 2002 Portobello 0.00 0.90 0.00 0.00 0.00 0.90 0.00 0.00 2000 Puras 0.00 ,o.oo 1.oo 0.00 0.00 0.00 1 .oo 0.00 2003 Queiroz Galvao 26.67 0.00 10.00 0.00 26.61 0.00 10.00 0.00 2004 Queiroz Galvao 0.60 0.00 0.00 0.00 0.08 0.00 0.00 0.00 2006 RBSec 22.83 1.51 0.00 0.00 0.00 1.51 0.00 0.00 Randon Imp1 Part 2.33 0.00 3.00 0.00 2.33 0.00 3.00 0.00 I997 Sadia 2.55 0.00 2.33 3.28 2.55 0.00 2.33 3.28 1997 Samarco 3.60 0.00 0.00 0.00 3.60 0.00 0.00 0.00 I998 Saraiva 0.00 I .24 0.00 0.00 0.00 1.24 0.00 0.00 2000 Sepetiba 26.24 0.00 5.00 0.00 11.24 0.00 5.00 0.00 2002 Suape ICT 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 I999 Sudamerica 0.00 7.35 0.00 0.00 0.00 1.35 0.00 0.00 2006 Suzano petroq 50.00 0.00 10.00 140.00 39.50 0.00 10.00 110.50 2001 Synteko 11.57 0.00 0.00 0.00 1 1.57 0.00 0.00 0.00 2006 TAM 50.00 0.00 0.00 0.00 17.00 0.00 0.00 0.00 1998 Tecon Rio Grande 3.55 3.71 0.00 5.50 3.71 3.55 0.00 5.50 2004 Tecon Rio Grande 7.87 0.00 0.00 7.76 7.59 0.00 0.00 7.48 2001 Tecon Salvador 2.95 I .oo 0.00 3.10 2.95 0.77 0.00 3.10 2003 Tecon Salvador 0.00 0.55 0.00 0.00 0.00 0.55 0.00 0.00 2004 TriBanco 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2006 TriBanco 0.35 0.00 0.00 0.00 0.35 0.00 0.00 0.00 2002 UP Offshore 9.01 9.51 0.00 23.29 0.00 2.51 0.00 0.00 2002 Unibanco 16.89 0.00 0.00 0.00 16.89 0.00 0.00 0.00 Total portfolio 1,164 15 253 88 14484 50345 70391 22386 141 54 40038

Approvals Pending Commitment FY Approval Company Loan EquQ Quasi Partic 2000 BBA 0.01 0.00 0.00 0.00 1999 Cibrasec 0.00 0.00 0.00 0.00 2006 lpiranga II 0.00 0.00 0.00 0.10 2002 Banco Itau-BBA 0.00 0.00 0.00 0.10 Total pending commitment: 0.01 0.00 0.00 0.20

110 Annex 14: Country at a Glance BRAZIL: Eletrobrhs Distribution Rehabilitation Project

Brazil at a dance t2/9/09

Latin Upper- POVERTY and SOCIAL Amerlca mlddle- Developmntdiancmd Brazil (L Carib. income 2008 Population midyear (millions) 192 0 555 949 Life expectancy GNIpercapita (Allasmethod US%) 7 300 6,781 7,878 GNI (Atlas method US$ billions) 14013 3,833 1,472 Average annual growth, 2002.08 T Population (%) 12 12 0.8 Gross Laborforce (Sy 21 2.2 17 Most recent estimate (latest year available, 2002.08) capita Povert y (% o f populatio n below natio nal po verty IIne) 22 Urban population (%oftotalpopulation) 84 79 75 Lfe expectancy at birth (wars) 72 73 71 Infant mortality (per 1WOlive biiihs) 8 22 21 Child malnutntion (%ofchildren under5) 2 5 Access to improved water source Access to an improvedwater source (%ofpopulation) 91 91 94 Literacy (%ofpopulation age 90 91 94 Gross pnmary enrollment (%of school-age population) 00 17 lu Male 04 119 m Female 125 115 08

KEY ECONOMIC RATIOS and LONG.TERM TRENDS 1988 1998 2007 2008 Economlcratb$ GDP (US$billions) 3304 8438 1333.3 1575.2 Gross capital formatioWGDP 227 8.9 70 7.7 Trade Exports of goods and services/GDP I39 69 0.7 14.3 Gross domestic savings1GDP 279 150 8.3 8.1 Gross national savings/GDP 239 00 7.6 7.1 T Current account balance1GDP 13 40 0.1 -18 Interest payments/GDP 19 17 11 10 Domestic Capital savings formation Total debt/GDP 307 266 7.3 8.2 Total debt service/exports 259 807 24.2 25.1 Present value of debt/GDP 8.6 15.6 Present value of debt/exports 17.2 in2 Indebtedness 1988-98 1998.08 2007 2008 2008.12 (average annualgrowth) GDP 23 33 57 51 26 GDP percapita 07 20 46 41 08 Ex$mrts of goods and services 54 91 67 06 14.8

STRUCTURE Of the ECONOMY ' 1988 1998 ' Growth ofcapitll and GDP(%) (%of GDP) I Agnculture 01 55 60 Industry 436 257 281 280 M anufactunng 310 157 74 80 Services 462 688 08 Household final consumption expenditure 595 643 608 607 -" General gov't final consumption expanditure t26 206 89 202 GCF -WP Imports of goods and services 57 89 111 142

1988.98 1998.08 2007 2008 ' Growth of expolts and impotts (Oh) (average annual growth) Agnculture 25 44 59 58 I Industry 15 28 48 43 Manufactunng 26 30 47 32 Services 33 40 60 53 Household final consumption expenditure 39 30 88 69 General gov't final consumption expenditure 07 29 47 56 Gross capital formation 26 28 05 08 Imports Of goods and SeNlCeS 146 55 208 85

Note 2008dataare preliminaryestimates This tablewas producedfrom the Development Economics LDB database 'Thediamonds showfour keyindicators in thecountry(in bo1d)comparedmth its income-group average fdataaremissing thediamondwll be incomplete

111

Brazil

PRICES and GOVERNMENT FINANCE 1988 1998 2007 2008 Inflation (Ob) Domestic prices (%change) 15 Consumer prices 980.2 1.7 4.5 71 10 Implicit GDP deflator 6511 4.2 3.7 5.9 Government finance 5

(%of GDP, mcludes current grants) 0 Current revenue 0.8 18.8 23.9 24 8 03 04 05 06 07 08 Current budget balance -2.0 0.4 2.3 3.0 GDP deflator +CPI I Overall sumlusideficit ###### -0.8 -2.3 - 16 I

TRADE 1988 1998 2007 2008 Export and import levels (USmill.) (US$ mdlions) Totalexports (fob) 32.809 50,736 180.649 184,28 200000 Coffee 2,091 3,253 11629 - I 20,183 Soybeans 3,175 2.m 8,030 0.462 Manufactures 18,389 29,387 87.254 88.483 Total imports (cif) 14,605 57.714 120,622 155,475 Food 376 2,514 0 2,582 Fuel and energy 4,04 4,09 8,345 24,978 Capital goods 4.85 8,093 25,94 32,190

Export pnce index (2000=WO) 88 99 114 128 02 03 04 05 06 07 08 Import pnce index (2000=WO) 44 04 94 00 UExports llmports Terms of trade (20OO=WO) 199 95 121 127 I BALANCE of PAYM ENTS 1988 1998 2007 2008 Current account balance toGDP(%) (US$mill/ons) Exports of goods and services 35,650 59,037 184,603 228,393 I imports of goods and services l7,500 75,722 157,795 220,247 Resource balance 18,150 -16,685 26,808 8,146

Net income -0,776 -18,188 -29,291 -40,562 Net current transfers -20 2458 4,029 4,224 Current account balance 4,180 -33,416 1,551 -28,192 Financing items (net) -2.931 25,446 85,933 31,181 Changes in net reserves -1.249 7,970 -87,484 -2,969 Memo: Reserves including gold (US$millions) 9,140 44,556 180,334 28.881 Conversion rate (DEC, local/US$) 9.53E-8 1.2 1.9 18

EXTERNAL DEBT and RESOURCE FLOWS 1988 1998 2007' 2008 Composition 2008 debt (US$ mill.) (US$ miilions) of Total debt outstanding and disbursed r)1,295 224,632 231032 255,614 IBRD 1,824 I71 6,704 8,150 IDA 0 0 0 0 Total debt service 9,448 48.465 53,941 55,420 IBRD 429 77 480 481 IDA 0 0 0 0 Composition of net resource flows Official grants 46 03 l78 2 11 Official creditors -340 3,632 -754 2,076 Private creditors 3,194 15,728 B,05 27,188 Foreign direct investment (net inflows) 2,804 3 1,9 0 34,585 45.058 Portfolio equity(net inflows) B9 -1,766 26,2l7 -7,565 195,817 World Bank program Commitments 0 0 1,335 2,962 Disbursements 0 0 374 1,606 A- IBRD E - Bilateral Principal repayments 268 61 115 146 8- IDA D - Other rnulblaterd F- Private C. IMF G - Short-term Net flows -268 -6 1 258 1,459 I Interest payments 81 15 364 335 Net transfers -429 -77 -06 1P5

Note:This tablewas producedfrom the Development Economics LDB database. Pi9i09

112

MAP SECTION

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SEPTEMBER 2009 0 200 400 600 Kilometers 30°S ARGENTINA 30°S IBRD 33377R This map was produced by the Map Design Unit of The World Bank. To Buenos Aires 0 200 400 Miles The boundaries, colors, denominations and any other information URUGUAY 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 70°W 60°W 50°W 40°W endorsement or acceptance of such boundaries. To Montevideo