Document of The World Bank Public Disclosure Authorized

Report No: 29805-BR

IMPLEMENTATION COMPLETION REPORT (CPL-39150 SCL-3915A)

ON A

LOAN

Public Disclosure Authorized IN THE AMOUNT OF US$102 MILLION

TO THE

FEDERATIVE REPUBLIC OF BRAZIL

FOR

RECIFE METROPOLITAN TRANSPORT DECENTRALIZATION PROJECT Public Disclosure Authorized December 21, 2004

Finance, Private Sector and Infrastructure Department Brazil Country Management Unit Public Disclosure Authorized Latin America and the Caribbean Regional Office CURRENCY EQUIVALENTS (Exchange Rate Effective October 28, 2004) Currency Unit = Brazilian Reais (R$) R$ 2.88 = US$ 1 US$ 0.35 = 1 R$

FISCAL YEAR January 1 December 31

ABBREVIATIONS AND ACRONYMS

ATC Automatic Train Control CAS Country Assistance Strategy CBTU Brazilian Urban Railway Company (Companhia Brasileira de Trens Urbanos) CMU Country Management Unit CTC Centralized Traffic Control CTRM Transport Consortium of the Recife Metropolitan Region (Consórcio de Transportes da Região Metropolitana do Recife) CTTU Recife Municipal Bus and Traffic Company (Companhia de Trânsito e Transporte Urbano) DETRAN Pernambuco State Transit Department (Departamento Estadual de Trânsito de Pernambuco) EIRR Economic Internal Rate of Return EMTU Metropolitan Urban Transport Company (Empresa Metropolitana de Transportes Urbanos) EMU Electric Multiple Unit GOB Government of Brazil ICR Implementation Completion Report IMF International Monetary Fund METROREC Pernambuco Urban Railway Company NPV Net Present Value PIU Project Implementation Unit PSR Project Supervision Report RAP Resettlement Action Plan RFFSA Brazilian Federal Railways RMR Recife Metropolitan Region SAR Staff Appraisal Report SEI Integrated Structural System (Sistema Estrutural Integrado) STU-REC Recife Subdivision of CBTU TOR Terms of Reference VHF Very High Frequency

Vice President: David de Ferranti Country Director Vinod Thomas Sector Manager Jose Luis Irigoyen Task Team Leader/Task Manager: Jorge Rebelo

BRAZIL RECIFE METROPOLITAN TRANSPORT DECENTRALIZATION PROJECT

CONTENTS

Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 13 6. Sustainability 15 7. Bank and Borrower Performance 16 8. Lessons Learned 20 9. Partner Comments 23 10. Additional Information 28 Annex 1. Key Performance Indicators/Log Frame Matrix 33 Annex 2. Project Costs and Financing 34 Annex 3. Economic Costs and Benefits 36 Annex 4. Bank Inputs 40 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 43 Annex 6. Ratings of Bank and Borrower Performance 44 Annex 7. List of Supporting Documents 45

Project ID: P038882 Project Name: BR RECIFE M.TSP Team Leader: Jorge M. Rebelo TL Unit: LCSFT ICR Type: Core ICR Report Date: December 21, 2004

1. Project Data Name: BR RECIFE M.TSP L/C/TF Number: CPL-39150; SCL-3915A Country/Department: BRAZIL Region: Latin America and the Caribbean Region Sector/subsector: Railways (79%); Roads and highways (15%); General transportation sector (4%); Sub-national government administration (2%) Theme: Access to urban services for the poor (P); Decentralization (P); Pollution management and environmental health (S)

KEY DATES Original Revised/Actual PCD: 10/26/1994 Effective: 09/19/1996 Appraisal: 04/13/1995 MTR: 09/19/1998 07/11/2002 Approval: 06/29/1995 Closing: 12/31/2001 06/30/2004

Borrower/Implementing Agency: FED REPUBLIC OF BRAZIL/CBTU Other Partners:

STAFF Current At Appraisal Vice President: David de Ferranti Shahid J. Burki Country Director: Vinod Thomas Gobind T. Nankani Sector Manager: Jose Luis Irigoyen Asif Faiz Team Leader at ICR: Jorge M. Rebelo Jorge M. Rebelo ICR Primary Author: Jorge M. Rebelo; Elisabeth Goller

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S

QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The broad objectives of the Recife Metropolitan Transport Decentralization Project (Ln. 3915-BR) were: (a) the development of an integrated urban transport system for the Recife Metropolitan Region (RMR) under the existing regional transportation coordination commission (EMTU) established to coordinate and recommend common policies on pricing, regulation, financing, project evaluation and selection; (b) the decentralization of the Recife Subdivision of the Brazilian Urban Railway Company (STU-REC) from the Federal to the state level; (c) the reduction of the negative environmental (mainly air quality and noise) impacts on the RMR due to road-based vehicles and the promotion of non-motorized transport modes; and (d) the development of special strategies and actions to improve the accessibility of the poor to employment centers, health centers and education facilities.

These objectives reflected essential priorities of the urban transport sector in Brazil and were consistent with the Bank’s 1993 Country Assistance Strategy (CAS) which put emphasis on efficient resource allocation, increased efficiency in the public sector and the appropriate targeting and delivery of support systems to the poor. Of particular importance is that those objectives were realistic, even if slightly complex and somewhat risky, given the institutional changes required. The implementation agency had already demonstrated their capacity in similar projects and the achievement of those objectives seemed likely given the institutional, political and financial constraints at the moment of loan approval.

3.2 Revised Objective: The broad objectives remained unchanged until loan closing and thus no revision took place. However, the new Federal Government administration, which took office in January 2003, reviewed the original decentralization model because of the significant delays in the completion of the works due to budget constraints. Those delays negatively affected demand forecasts and increased the subsidy requirements, which the State was not willing and able to pay. The budget restrictions were mainly due to the macroeconomic crisis, which had affected the country and the State. For more information see Section 5.1. Moreover, as part of the mid-term review, the Bank had encouraged the study of options for a broader private sector participation in the management and operation of the system. Nevertheless, as both the new decentralization model and the broader private sector participation were consistent with the relatively broad project objectives and in line with the CAS principles, no restructuring was deemed necessary.

3.3 Original Components: The project comprised three inter-related components: (a) an Infrastructure and Equipment component to help (i) building the rail extensions, carrying out the transformation of diesel to electric traction and building additional stations required to enhance modal integration; and (ii) building the transfer terminals and physical accesses required for the actual integration between buses, rail, pedestrians, automobiles and bicycles; (b) an Environmental and Traffic Safety component to support (i) the design of an inspection and maintenance (I/M) program for vehicle emissions and noise; and (ii) the development of a traffic management control and safety program, particularly in the area of influence of the rail system; and (c) an Institutional and Policy Development component to help in: (i) strengthening the EMTU for the RMR; (ii) preparing an integrated Transport Policy, Land Use and Air Quality Management strategy for the RMR to meet both transport and air quality targets and to introduce sound cost-recovery, tariff, regulatory and subsidy policies; (iii) providing an action plan to improve the financial management of the STU-REC; (iv) developing an enabling environment and financial instruments for more substantial participation of the private sector in the investment and operation of the operating agencies; and (v) strengthening air-quality planning and monitoring of vehicle based emissions.

- 2 - Part A - The Infrastructure and Equipment Component This component was designed (i) to extend STU-REC's Central Line from TIP to Timbi, (ii) to convert the South Line from diesel to electric traction operation and to link it to the Central line, and (iii) to separate Brazilians Federal Railway’s (RFFSA) freight line from the passenger lines. These improvements to STU-REC's infrastructure and equipment, were meant to meet the performance targets indicated in Annex 1 and can be summarized as follows.

The Civil Works Program consisted of: (a) Urban Bus Terminals, entailing the construction of three terminals on the Central Line and seven on the South Line; (b) Road Accesses to improve the access to selected stations on both lines; (c) Passenger Stations, consisting of the construction of one station at Timbi on the Central Line, ten new stations and the modernization of two existing stations on the Recife-Cajueiro Seco link of the South Line, and minor rehabilitations of five stations on the Cajueiro Seco-Cabo section of the South Line; and (d) Bridges, Road Viaducts and Pedestrian Over/Underpasses, including the construction of sixteen bridges, four road viaducts, and ten pedestrian over/underpasses.

The Permanent Way Program was designed to include: (a) works on the Central Line, including the construction of a 4.5 km double electrified track extension from the TIP terminal station to Timbi; and (b) works on the South Line, including the construction of 13.5 km of electrified double track from Recife to Cajueiro Seco. To carry out these works, provisions had been made for the necessary land expropriations and resettlements: (a) to build 500 m of tracks, linking the Central with the South Line at Recife and Joana Bezerra stations; (b) to relocate 11 km of one of the existing tracks from Afogados to Cajueiro Seco for exclusive dedication of RFFSA's freight traffic; and (c) to build 11 km of a second track from Pontezinha to Cabo.

The Systems Program was designed to include: (a) an electric system on the Central Line, including: (i) circuit breakers; (ii) 4.5 km of transmission lines and overhead catenary; and (iii) the relocation of feeder lines at Cavaleiro yard; (b) an electric system on the South Line consisting of: (i) 13.5 km of overhead catenary; (ii) 14.5 km of transmission lines; and (iii) the construction of two sub-stations and two sectionalizing cabins; (c) a signaling program that required the installation of: (i) a signaling system on the 4.5 km TIP-Timbi extension, with the same characteristics of the signaling system operating on the Central Line (centralized traffic control - CTC, relay interlocking and automatic train control - ATC); and (ii) track circuits and related elements and remote boxes in the CTC, and eight automatic level crossing barriers on the South Line; (c) telecommunications to include the installation of: (i) a telephone central station for the entire network; (ii) a telecommunication system on the TIP-Timbi extension on the Central line; (iii) 13.5 km of fiber optic cable and of a Very High Frequency (VHF) radio network, public address system, ticketing control, clock and track telephone sub-systems, and a radio communication sub-system at five stations in the Cajueiro Seco-Cabo on the South Line.

The Workshop Program included: (a) the construction of an additional area in the Cavaleiro workshop for major overhauls of the electric multiple unit (EMU) fleet; (b) the construction of a small maintenance shed for the maintenance of diesel locomotives at Cajueiro Seco; and (c) miscellaneous equipment and spare parts for the rolling stock, and maintenance equipment for the track and catenary.

The Rolling Stock Program included: (a) the general overhaul of 25 EMUs and 11 diesel locomotives; (b) the rehabilitation and/or modernization of two diesel locomotives; (c) the installation of air conditioning systems in the EMU fleet; (d) the rehabilitation of 21 passenger coaches; and (e) miscellaneous spare parts for the entire fleet.

- 3 - Part B - The Environmental and Traffic Safety Program The environmental and traffic safety program included: (a) the design of an inspection and maintenance (I/M) program for vehicle emissions and noise to recommend the facilities and equipment required to monitor and enforce national/state standards; and (b) the development of a comprehensive traffic management and safety program to reduce traffic congestion and decrease accidents in the RMR, but with particular emphasis on the area of influence of the rail system.

Part C - The Policy and Institutional Development Action Plan STU-REC's decentralization was not seen by itself as a guarantee that this subdivision would in the future be better managed than its predecessor. Therefore, a package of institutional and policy reforms was deemed necessary to induce modernization changes and motivate management and staff. The financial management and administration, especially in regard to cost-recovery mechanisms of the system, had also to be reformed. Otherwise, the cycle for another emergency program of rehabilitation was likely to repeat itself with negative impacts on the ridership and on the RMR as a whole. Furthermore, actions were deemed essential to change the environment in which STU-REC operated to facilitate the modal integration and sustainability desired in the long term. The basic sub-components of the institutional and policy package in this project are summarized below:

(a) Decentralization. The first set of strategic Action Plans concerned the actual decentralization process and included: (i) institutional and organizational arrangements; (ii) a patrimonial agreement on the valuation of assets to be transferred; (iii) aspects relating to transfer of personnel, pension benefits as well as miscellaneous human resource-related issues; and (iv) legal and administrative aspects for decentralization;

(b) Management. The second set of Action Plans were aimed at improving the management of the new entity which was expected to succeed STU-REC and comprised: (i) the preparation and implementation of a manpower development and organization plan to streamline the management and operations staff in each of the new subdivisions that would propose concise job descriptions and staff them accordingly; (ii) a study and the subsequent implementation of cost accounting, management information systems, and financial management, so that timely and adequate cost management was possible; (iii) the preparation of an action plan to improve inventory management since lack of spares was one of the main causes for the low rolling stock availability rates; (iv) the preparation of an action plan to subcontract maintenance and other operations to the private sector; (v) the preparation of an action plan to increase non-operating revenues by renting station space, advertising, and development of subdivision's real estate; (vi) the provision of technical assistance and training for staff at all levels as proposed in the manpower plan; and

(c) Modal Integration. The objective of the third set of Action Plans was to support the policy framework, and provide practical recommendations for implementing modal integration. This was expected to include studies of existing transport agencies with a view to reducing cross-inefficiencies, namely: (i) a financing mechanisms study focused on achieving formal sources of funds for the urban transport sector, including a tariff study to propose multimodal tariff integration schemes based on the new route structure, including its operationalization; (ii) the update of the Transport, Land Use and Air Quality portion of the Master Plans of the RMR with emphasis on route rationalization and modal and tariff integration; (iii) and a study to propose changes to EMTU's organization structure in view of its expanded role.

- 4 - The project design was adequate to attain the objectives set at appraisal and to further the agenda for more private sector participation. The implementation capacity of the agency was also adequate to implement the project and there was a clear learning curve in procurement and supervision, particularly, in rolling stock rehabilitation. The implementation agency benefited from the experience gained in previous projects.

3.4 Revised Components: The components remained the same with minor adjustments to reflect lower spending in the institutional development component and higher spending in the infrastructure and equipment component. This implied some changes in the amount of works carried out and led to a few of the envisaged studies to be dropped or consolidated into selected main studies. For more details see Section 4.2.

3.5 Quality at Entry: The quality at entry was satisfactory for the following reasons: a) the project was consistent with the CAS, government priorities and Bank safeguard policies (see Section 7.1); b) the project's main beneficiaries were the low-income populations in Camaragibe and Cabo, two of the poorest areas of the RMR (see Section 4.1, Objective d); c) there was an extensive technical and economic evaluation of the project; and d) most of the assumptions and risks estimated regarding external factors were widely discussed and there was a consensus about them.

Although the present quality at entry procedures were not in place, this project underwent several internal reviews to assess its technical feasibility and economic viability. Several experts from the Transport and Urban Development Department of the World Bank (TUDTR), namely the Transport and the Railways Advisers, were called in to provide their inputs and to participate in the identification mission. A comprehensive technical, economic and financial evaluation of the project was carried out by senior staff and consultants. The Staff Appraisal Report (SAR) provides an in-depth analysis of major issues in the sector and addressed the probable risks that were likely to occur at the time, e.g. the delays in the actual transfer of STU-REC ownership to the State, the political reluctance of the State in forcing bus integration due to the bus operators’ lobby, the timely availability of government funds to CBTU, and possible delays in the procurement process. To minimize delays in the actual transfer of ownership, the Loan Agreement linked disbursements with the date set for the transfer. All parties had also agreed on the need to take over the system and for an integrated network, to be implemented as the key stations had become available for operation. At the moment of project design there was also a strong commitment to the environmental and safety program from the governments involved. The mitigation strategy that was proposed for minimizing procurement delays consisted in starting at pre-appraisal the pre-qualification for lots in the critical path of project implementation, in the use of standard bidding documents, and in requiring the Borrower to produce the major tender documents at the moment of negotiations. The timely availability of counterpart funds was addressed by seeking assurances that they were included in the GOB’s 1996 and subsequent budgets.

4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The ICR assesses the Recife Metropolitan Transport Decentralization Project (Ln. 3915-BR) as satisfactory. The broad objectives of the project were achieved in an adequate manner, even if the system is not yet fully operational in the South Line at loan closing and nor the decentralization process fully completed. The satisfactory rating is justified by the fact that, considering the current progress, the project is on an irreversible path towards these accomplishments and is likely to be sustainable (for details see Section 6). Moreover, the slowdown in some project activities and the adjustments to single project or subproject components, which led to minor deviations from original targets, were mainly imposed by the

- 5 - chronic lack of fiscal space, policy changes at Federal government level, and a project cost overrun. The latter was mainly due to higher costs than estimated at appraisal for expropriations and resettlements and unexpected additional activities, such as the sewage of the housing areas surrounding the South Line, which was necessary in order not to endanger the track base. These sewage works should have been done by the Municipal Governments who did not have the resources they promised to have.

It is also noted that the project has a NPV of 67,502,000 and an EIRR of 22.3%. For details see Annex 3.

The level of attainment of each of the specific project objectives is described in greater detail in the subsequent paragraphs, while the project results for the key performance indicators are given in Annex 1.

The development of an integrated urban transport system for the RMR (Objective a) was achieved with the establishment of the Recife Metropolitan Transport Consortium (Consórcio de Transportes da Região Metropolitana do Recife - CTRM), which will replace EMTU in its role as urban transport coordinator in the RMR and is described in Section 10.

Modal and tariff integration was substantially realized with the implementation of the Integrated Structural System (Sistema Estrutural Integrado - SEI) in 1998. The SEI is designed as a trunk and feeder system that provides physical and tariff integration between modes. It does not cover the whole RMR and is supplemented by the complementary system, which is expected to gradually merge with the SEI, insofar as this is appropriate. The SEI is currently composed of 64 of the total 364 bus lines in the RMR and the metro. Eighteen private bus companies operate the bus lines. The SEI has been progressively implemented and consolidated and is currently already serving 33% of the public transport demand, with eight terminals, five of which integrated with the metro. Forty five percent of the demand of the metro comes from the SEI.

Fare levels are set by the Metropolitan Council for Urban Transport, and fare revenues are managed and controlled by EMTU. Bus operators are part of a tariff clearing house (Câmara de compensação) managed by EMTU, which includes all inter-municipal and municipal bus operators in the RMR, even if they are not in the SEI. The metro is not yet part of the tariff clearing house, mainly because of the great differences in its operating costs compared to the provision of bus services, and fare integration is currently rooted in the principle of “who collects the fare, keeps it ”. This is founded in the assumption that most trips have two legs, such as home-work and work-home, meaning that in one direction the bus operators collects the revenue of the integrated ticket, and in the other the metro, or vice versa. The inclusion of the metro in the tariff clearing house system, in addition to requiring a complete reformulation of the mechanisms and criteria, will only be possible once the Federal Government has clearly defined the subsidy levels to the metro. A more detailed description of the SEI is included in Section 10.

During this project the transport sector in Recife has not only greatly advanced as far as integration between modes and collaboration between transport authorities at different levels of government is concerned. STU-REC’s staff also actively interacted with colleagues in other sectors, especially in the field of urban planning, with the revision of a municipal law allowing for the change in the zoning regulation to permit the creation of additional floor space along the metro lines as an outstanding example of such successful dialogue. This revised law constitutes an essential cornerstone for the currently ongoing study to update the Transport, Land Use and Air Quality Strategy of the RMR Master Plan, since it provides greater flexibility, thus a wider range of potential options and solutions. Based on all these achievements, the achievement of this objective is rated satisfactory.

The decentralization of the STU-REC subdivision from the Federal to the State Government (Objective b) was only partially implemented. Nevertheless, the objective is rated satisfactory since first

- 6 - concrete steps towards decentralization have been given. Indeed, notwithstanding the delays and adjustments to the original model, the decentralization process is set on an irreversible path, accepted by all parties and confirmed by the new Federal Administration. An additional reason for the satisfactory rating lies in the fact that the delays in this process have greatly been dependent on macroeconomic and fiscal-political circumstances and administrative hurdles.

The decentralization model currently followed in Recife is different from the ones used in São Paulo and Rio, even if it started out in a similar way at project effectiveness, with a detailed transfer schedule already agreed upon. In line with this schedule, the Government of Pernambuco approved a law creating a new company (COPERTRENS) that was supposed to absorb STU-REC. The director of this new company was appointed after the approval by the Congress of the decentralization law to transfer the system to the State. However, it was not until 2000 that the Attorney General approved the articles of agreement for that company. In the meantime, the incumbent Government of Pernambuco was defeated and a new director of COPERTRENS had to be appointed. Moreover, since the start of operations of the TIP-Timbi link, an important connection to increase the economic potential of the system, was delayed, both the State and the Federal Government decided to postpone the decentralization process until these operations would start. They also reached an agreement that the Federal Government would pay the STU-REC’s staff salaries until six months after the completion of the works. Nevertheless, the transfer of the system was not formalized since the preparation of the Provisional Measure (Medida Provisória), a legal instrument to guarantee this payment, was delayed. This meant that its approval slipped under the auspices of the Transition Commission of the new elected Federal Government (end of 2002), which refused to approve it because the latter was heavily under the pressure of the railway unions and defended the Federal employee status that traditionally guaranteed more stability than the one of State employee.

With the taking over of the new Federal Government in January 2003, the project was transferred to the Ministry of Cities, which deals with urban development, urban mobility, housing, water and sanitation. The Ministry decided to change its decentralization policy. The new model recognized that the State finances had worsened since the enactment of the decentralization law, mainly due to the macroeconomic crisis that affected the country. It also took into account that the Federal government’s restrictions on disbursements in the last three years had delayed the completion of the works. Therefore, a gradual decentralization process was proposed, during which all operating and management responsibilities of the system, including the supervision of the ongoing works financed under the loan, as well as the responsibility for covering operational costs (except staff salaries) would first be decentralized, with full decentralization to follow after the completion of the works. This model was worked out in detail by CBTU, and envisages a management contract as the basis for the payment of salaries and operating subsidies by the Federal Government. It also requires the creation of a mixed federal-state company for the management of the system, in which the Federal Government continues to be shareholder for a percentage proportional to the amount of subsidy.

Again, it took some time before the State and the Federal Government formally reiterated their will to decentralize and to receive the system, and the Federal Government presented its new decentralization model to the Bank in September 2003. Subsequently, the State accepted the new model and prepared drafts of the necessary legal documents to implement the model. In addition, METROREC, a State company to receive the system was created. In June 2004, the State, the Federal Government through CBTU, and the Municipality of Recife each nominated one director for the joint management of the system. In that occasion, CBTU also passed the responsibility for the supervision of the final works to the local level.

- 7 - Important Decentralization Milestones

Date Achievements September 1996 Detailed transfer schedule agreed upon Beginning of 1997 Approval of State law creating a new company (COPERTRENS) to absorb STU-REC December 1997 Approval by Congress of decentralization law to transfer the system to the State 1998 Appointment of the director of COPERTRENS, but articles of agreement with Attorney General for approval 1998 State election and defeat of incumbent government, need to appoint a new director 2000 Decision to decentralize only upon readiness of TIP-Timbi link End of 2000 Approval of articles of agreement for COPERTRENS January 2002 Appointment of the interlocutor for the transfer, completion of the decentralization agreement and preparation of the separation protocol (protocolo de cisão) by the State January 2002 Opposition by the Attorney General to the immediate transfer of the system and request of a technical audit of the system by an independent consultant October 2002 Indication by CBTU and the State Government of their will to decentralize on December 20, 2002, support of the Ministry of Transport for the issue Provisional Measure (Medida Provisória) to pay the salaries of the employees of the new State company until 6 months after completion of the works End of December 2002 Opposition of the Transition Commission of newly elected Federal Government to the Provisional Measure, without which the State was not prepared to accept the decentralization, suspension of disbursements by the Bank March 2003 Reiteration by Federal Government of its willingness to decentralize and proposal of a new gradual decentralization model to be completed by June 2004 End 2003 Declaration by the State of its willingness to negotiate the proposed decentralization model 2004 Preparation by State of drafts of the necessary legal documents for decentralization June 2004 Nomination of a joint management team to implement the decentralization process of STU-REC

The reduction of the negative environmental impacts, mainly air pollution and noise (Objective c), in the RMR due to road-based vehicles and the promotion of non-motorized transport modes was achieved with the decrease in congestion in the Caxangá Avenue due to a significant shift of passengers from road to rail (since project start rail ridership increased by 10 million per year, or about 25%). More positive environmental effects will further arise as soon as the South Line is in operation. In addition, specific measures, such as the construction of bridges, road viaducts, pedestrian over/underpasses and the improvement of accesses to stations considerable improved the conditions of people walking to stations. Moreover, during the project implementation period, road signs and traffic lights were improved, circulation and parking policies strengthened, and speed bumps to reduce speed in selected zones introduced and enforced. These measures do not only have positive impacts on the environment, but also increase pedestrian safety, thus again promote walking. A final measure that is also likely to increase the share of non-motorized transport is the creation of a bicycle path in the city center, which is very popular. For more details see Section 4.2. Based on these achievements, the objective is rated satisfactory.

The development of special strategies and actions to improve the accessibility of the poor to employment centers, health centers and education facilities (Objective d) was substantially achieved on the TIP-Timbi link and on the existing (still incomplete) South Line mainly due to the savings in travel time and costs. The profile of metro users from 1997 to 2003 (see graph below) shows that the metro system is mainly used by lower income groups to reach work places and health and education facilities. Indeed, 79% of the users in 2001 belonged to households earning less than four minimum salaries, with 22% earning less than one minimum salary and only 8% earning more than seven. These percentages were nearly identical in 1997, thus the increase in ridership is proportionally distributed among the different income groups.

- 8 - RENDA FAMILIAR 100

80

55 58 59 57 57 60 50 54 % 40 24 24 23 22 22 18 20 18 17 20 14 11 12 10 15 11 13 7 8 7 8 8 0 1997 1998 1999 2000 2001 2002 2003

ATÉ 1 SAL DE 1 A 4 DE 4 A 7 MAIS DE 7

Source: CBTU Legend: Renda Familiar = Family Income; Até 1 Sal = Until 1 minimum salary; De 1 a 4 = From 1 to 4; Mais de 7 = More than 7.

Accessibility for the poor has also improved through the road/rail integration terminals. Indeed, through the construction of the Camaragibe station and the bus integration terminal, the population of the low income villages of Tiuma and Alberto Maia in the municipality of Camaragibe already enjoy (i) a 41% travel time reduction from the suburbs to the city center, (ii) a decrease in the home-to-work travel cost, and (iii) a considerable improvement in travel comfort and life quality. Consequently, the travel demand of this people increased by approximately 110%. In addition, there was also a reduction of the bus fleet by about 30% and a decrease of the bus trips to the city center of more than 78 trips/vehicle/day. This elimination of vehicles on the Av. Caxangá corridor led to a decrease in the pollution levels and reduced congestion, and thus improved the quality of life of those areas.

Moreover, the project has helped to greatly increase accessibility to stations for pedestrian and cars and put specific focus on people with reduced mobility. Indeed, in addition to the improvement in pedestrian accesses, the new metro stations are equipped with elevators for the old and disabled people and escalators.

Accessibility to social, health and community services is enhanced by bringing such services directly to metro stations. Examples of events organized in stations include (i) community shows for children, during which emphasis is placed on safety and disease prevention methods for mothers; (ii) beginners’ computer classes; (iii) Health Week during which free health services are offered; (iv) Citizens’ Week during which identity cards, work permits, birth certificates and other documents are issued and information on basic consumer rights given, (v) Children’s Week during which they can visit the stations and the administrative buildings of the metro; and (vi) education programs for dwellers in houses along the right-of-way to teach them not to litter and the planting of local plants in the right-of-way to prevent proliferation of weeds.

Considering these achievements, the objective is rated satisfactory.

4.2 Outputs by components: Part A - The Infrastructure and Equipment Component (planned US$ 191,130,000; actual US$ 249,840,000) This component was designed to extend STU-REC's Central Line from TIP to Timbi, to convert the South Line from diesel to electrical traction and to link it to the Central line, and to separate RFFSA's freight line from the passenger lines. The TIP-Timbi link is completed, except for signaling, and operations are successful, even if based on manual signaling, which is restricting the train frequency. The signaling system was awarded in 2002 and is now being implemented. The delays were due to lack of federal budget. The South Line is 69% completed and connected to the Central Line. Electrification is advancing and the

- 9 - signaling design work is in progress. Operations, however, have not yet started. The freight rail diesel line to access the port is ready and separated from the passenger system. Overall this component's output is about 78% finished and, even if its costs were approximately 30% higher than budgeted due to a number of additional interventions, those provide a very high social benefits (for details see section 5.4.), thus it is considered as satisfactory. The non-timely completion of this component is mainly due to (i) implementation delays first caused by a chronic shortage of counterpart funds, and since 2002 by a lack of resources due to fiscal space restrictions, (ii) the late effectiveness of the project, (iii) the longer than expected delays in the approval of environmental licenses, (iv) unexpected additional civil works and resettlements, (v) procurement delays in one station lot and in the train rehabilitation, and (vi) underperformance of winning contractors. Each subcomponent is examined in detail as follows.

The Civil Works Program is 84% completed and includes: (a) the construction of three terminals on the Central Line (all completed) and seven on the South Line (two ready and five to be completed); (b) the improvement of road accesses to selected stations on both lines (47% completed, with the rest underway); (c) the construction of one passenger station at Timbi on the Central Line (100% completed), and the construction of ten new stations and the modernization of two existing stations on the Recife-Cajueiro Seco link of the South line (79% completed); and (d) the construction of sixteen bridges, four road viaducts, and ten pedestrian over/underpasses (96% completed).

The Permanent Way Program is 100% completed and includes: (a) the construction of a 4.5 km double electrified track extension from the TIP terminal station to Timbi (100% completed) and (b) the construction of 13.5 km of double electrified track from Recife to Cajueiro Seco (100% completed). It also implied (a) the building of 500 m of tracks, linking the Central with the South Line at Recife and Joana Bezerra stations (100% completed); and (b) the relocation of 11 km of one of the existing tracks from Afogados to Cajueiro Seco for exclusive dedication of RFFSA's freight traffic (100% completed). The 11 km of second track from Pontezinha to Cabo was not constructed because part of the tracks disappeared and because the land along the right of way has been illegally invaded.

The Systems Program is 36% completed and consists of: (a) the installation of the electric traction system on the Central Line (100% completed); (b) the installation of the electric system on the South Line (85% completed); (c) the installation of the signaling program on the 4.5 km TIP-Timbi extension (the final design of the system is completed and installation is underway) and the improvement of the signaling system on the South Line (detailed project design under preparation); and (c) the telecommunication system including the installation of: (i) a telephone central station for the entire network (procurement process cancelled and not yet reopened due to a lack of resources); (ii) a telecommunication system on the TIP-Timbi extension on the Central Line (100% completed); (iii) 13.5 km of fiber optic cable (6%), a VHF radio network (95%), public address system (20%), ticketing control (procurement process not yet started due to lack of resources), and clock and track telephone sub-systems (20%).

The Workshop Program is 100% completed and consists of: (a) the construction of an additional area in the Cavaleiro workshop for major overhauls of the EMU fleet; (b) the construction of a small maintenance shed for the maintenance of diesel locomotives at Cajueiro Seco; and (c) miscellaneous equipment and spare parts for the rolling stock, and maintenance equipment for the track and catenary.

The Rolling Stock program is 26% completed and consists of: (a) the general overhaul of 25 EMUs and the installation of air conditioning systems (two EMUs delivered and the other 23 EMUs 6% completed) and 2 diesel locomotives (100% completed); (b) the rehabilitation and/or modernization of 9 diesel locomotives (100% completed); (c) the rehabilitation of 20 passenger coaches (100% completed); and (d)

- 10 - miscellaneous spare parts for the entire fleet (67% delivered).

Part B - The Environmental and Traffic Safety Program (planned US$ 345,800; actual US$ 0) Under the environmental and traffic safety program it was envisaged to: (a) design an inspection and maintenance (I/M) program for vehicle emissions and noise to recommend the facilities and equipment required to monitor and enforce national/state standards; and (b) develop a comprehensive traffic management and safety program to reduce traffic congestion and decrease accidents in the RMR, putting particular emphasis on the area of influence of the rail system. This component was not implemented with loan funds as originally planned because after loan signature a notorial transit law which municipalized the traffic management functions was approved. This meant that the traffic management components became the responsibility of the Recife Municipal Bus and Traffic Company (CTTU), while the inspection/maintenance function was taken over at a federal level by the Ministry of Environment. The former carried out the following measures: (i) introduction and maintenance of road signs in heavy traffic corridors; (ii) establishment and maintenance of speed bumps and other traffic calming measures; (iii) creation of a bicycle path in the city center; (iv) expansion of the zone for limited duration parking; (v) implementation of a project to re-qualify the areas around public markets; (vi) introduction of traffic lights with LEDs and regressive chronometers; (vii) introduction of 17 photo sensors; and (viii) traffic inversion in the Boa Viagem district. This contributed to the improvement of the circulation in Recife and enhanced road safety. The Federal Ministry of Environment is currently studying a plan to control vehicle maintenance through the inspection of the mechanical conditions and the emission levels of vehicles at the moment of their licensing. Since this component has only been partially completed, it is rated as marginally satisfactory.

Part C - The Policy and Institutional Development Program (planned US$ 12,324,000, actual US$ 14,960,000) This component, which included support for the decentralization and modal integration process, improvement in the system management, and a road map for the Government to decide whether to concession out the system to the private sector, either partially or fully, is rated as satisfactory. Even if not everything that was originally envisaged was carried out because of consolidation of some of the studies, the late award of the Urban Transport, Land Use and Air Quality Long-term Strategy and the delay in the decentralization of the system, some of the results on the institutional front are remarkable and are described below in a more detailed way.

Support to the decentralization process was provided through a series of conferences, which allowed for the design of Action Plans concerning the actual decentralization process. The main outputs of this subcomponent are: (i) a blueprint of the institutional and organizational arrangements for the decentralization; (ii) an inventory of STU-REC’s assets and the assessment of their value; (iii) an action plan regarding transfer related human resource issues; (iv) drafts of the decentralization agreement to be signed between the Ministry of Cities and the State of Pernambuco, the Management Contract to be signed between the Ministry of Cities and STU-REC, the operational agreement between STU-REC and EMTU, and the service contract between STU-REC and the RMR Transport Consortium (CTRM); and (v) legal opinion regarding the creation of METROREC, a State company that will finally take over the operations of STU-REC.

Providing support to the management of the decentralized system was not possible since the full decentralization has not yet completely taken place. Nevertheless, STU-REC improved its management information systems through new software, hardware and training, and undertook a comprehensive study on the options for private sector participation in STU-REC, which comprised all aspects related to the economic and financial situation of the system, modal integration, and forecasts under the new

- 11 - macroeconomic scenarios of the technical and financial situation of the system. It also included a road map for State decision makers to decide not only on the extent of subsidies and private sector participation required, but also on the institutional changes necessary in the RMR to actually pursue more private sector participation. A first step in this direction is STU-REC’s effort in attracting additional revenues through advertising in stations and on vehicles, even if there is very little incentive to do so since these revenues end up in the treasury and not in the account of the Recife subdivision. Finally, CBTU also organized a seminar on management in public administration, during which national and international organizations (Consórcio de Madrid, RATP) presented their experiences with management contracts that are necessary for the implementation of the gradual decentralization model proposed by the Federal Government.

Support to modal integration was done through several studies and other activities, including, among others, a study which focused on the use of stations as community hubs, an analysis of the accessibility to the stations of the system, and a study tour to the Transport Consortium in Madrid to learn from their well-known experience in terms of institutional integration as well as a training course on Regulation sponsored by the Bank on the Canary Islands.

The study to update the Transport, Land Use and Air Quality portion of the RMR Master Plan with emphasis on route rationalization and modal and tariff integration is still ongoing. The TOR for this study were ready in early 1999 but the consultants only started their work in the beginning of 2002 due to a lengthy procurement process and a lack of funds for the down-payment. Soon afterward the start of the work, the consulting firm went bankrupt, thus the contract was canceled and re-awarded to the second-placed bidder.

In preparation for the transfer of the rail system, the State of Pernambuco had also created a commission to review the role of EMTU, the SEI and the tariff clearing house mechanism. Their activity provided valuable input for the establishment of the RMR Transport Consortium .

Additional studies and consulting activities that took place under this project include the technical assistance in the resettlement operations, engineering studies to finalize the expropriation project, and technical project supervision.

In summary, some of the results achieved by the project particularly on the institutional component are noteworthy and include:

(i) the nomination of the joint management team for STU-REC, composed of a representative of CBTU (Federal Government), the State of Pernambuco and the Municipality of Recife;

(ii) the establishment of the Recife Metropolitan Transport Consortium to promote modal integration and discuss metropolitan transport issues; this is a major achievement because the State and the Municipality of Recife, which are run by different political parties, formed a common front to manage urban transport problems in the RMR, including the elimination of informal transport (illegal vans), which was proliferating during project implementation;

(iii) a study to evaluate options to concession out the urban rail system to the private sector, which served as a road map for future decision making by the State of Pernambuco, including the hiring of IFC Corporate Advisory Services to help with the concessioning of the system; and

- 12 - (iv) the strengthening of the SEI system through free transfer integration terminals.

4.3 Net Present Value/Economic rate of return: Project works, which accounted for a total investment of US$ 183.375 million, yielded a project net present value (NPV) of US$ 67.502 million, and an economic rate of return (EIRR) of 22.3%. These calculations also include the benefits of the externalities stemming from project implementation, i.e. improved air quality and reduced accidents, but do not include the social benefits deriving from the additional interventions carried out in the framework of this project (see section 5.4.).

4.4 Financial rate of return: Not applicable.

4.5 Institutional development impact: The institutional development impact of the project was substantial, as described under Section 4.2 above. The project allowed for the negotiation of a new decentralization model with the Federal Government, the preparation of the legal documents for the transfer of the system and the creation of a joint STU-REC management team to finalize the decentralization process of the system. In addition, it led to the establishment of the RMR Transport Consortium, which has a representation of the State and the municipalities in the RMR. The restructuring of EMTU to become part of the Transport Consortium is underway.

The impact of this institutional progress and the power of enhanced collaboration have already been shown in the very successful battle of State (EMTU) and the municipality in the RMR against the informal transport providers (vans) who caused increased congestion and environmental problems and constituted a threat to the formal transport system (for more details see Section 8 under Lessons Learned). Moreover, the project also saw successful institutional collaboration between STU-REC and the land use sector, which led to the revision of a municipal law regarding zoning (see Section 4.1, Objective a).

5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Substantial fluctuations of its local currency and economic crisis During project implementation Brazil’s economy was affected by the repercussions of the severe economic crisis that hit Argentina in 2001 and by substantial fluctuations of its local currency (from 0.96 BRL for 1US$ at the moment of appraisal to 3.1 BRL for 1US$ at project closure). This decreased the availability of the necessary counterpart funds for the project, and consequently was greatly detrimental to its timely completion.

Since project costs had been estimated and were partly payable in dollars, the currency devaluation required a considerable higher amount of counterpart funds than originally estimated, even if the loan proceeds in dollars compensated for some of the exchange rate losses as far as the local project component is concerned. Overall, however, the devaluation of the Real was mostly negative for the project. The substantial fluctuations of the Brazilian currency also required great flexibility by the project team, which had to adjust to a strengthening dollar by reprogramming project investments and trying to spend more to ensure adequate disbursements, and then readjusting, as the dollar weakened.

Unexpected problems with the soil and increases in real estate prices Other factors outside the control of the government or the implementation agency included a considerable rise in the real estate prices in the areas around the system, which increased expropriation costs, and unexpected problems with the soil on the South Line requiring additional foundations and drainage works.

- 13 - These incidents led to an increase in project costs and delayed the execution of the project.

5.2 Factors generally subject to government control: Lack of Fiscal Space The small budgets provided to the project implementation since early 1999 cannot only be blamed on the economic situation in the country, but is also directly attributable to the Federal Government that made it a priority to meet the surplus targets agreed with the International Monetary Fund (IMF). The sectoral Ministries claimed that they were not given an appropriate budget by Planning and Finance. Finance indicated that the sectoral Ministries had to prioritize. While tight budget control of public expenditures has helped the Government in maintaining a stable and positive macroeconomic outlook, as a matter of fact, the budgets assigned to the project the last three years before project closure were not sufficient to carry out the works at the planned speed.

Lack of leadership in the decentralization process Further factors depending on the Federal Government were the lack of leadership in the decentralization process and the change of the model, which ultimately are responsible for the fact that the decentralization process has not yet been completed. The Ministry of Transport, as the original representative of the Federal Government, was never a champion in assuring the State’s compliance with the decentralization model. Moreover, as outlined in Section 4.1, delays in the preparation of the Provisional Measure required a new start in the decentralization process, with further delays in the presentation of the details of the new model and the first steps towards its implementation.

Late signing of the loan agreement The Federal Government, but even more the State of Pernambuco, were also responsible for the late signing of the loan agreement, thus the postponement of the effectiveness date to 15 months after Board Approval, which caused considerable project implementation and disbursement delays. The reason for the late signing was mainly ascribable to the fact that the State had been trying to obtain from the Federal Government a larger project than the one agreed at appraisal.

Ambiguousness of the Brazilian procurement law Finally, it should also be highlighted that the ambiguousness of the Brazilian procurement law, as far as the applicability of the Bank procurement procedures is concerned, had an important impact on the project duration because it caused a number of court litigations. They were generally resolved but they cost time and delays.

5.3 Factors generally subject to implementing agency control: Management and supervision of civil works and equipment rehabilitation at central level The fact that CBTU’s central organization in Rio insisted in directly managing and supervising the civil works and the equipment rehabilitation, instead of delegating it to the local level, considerably reduced the speed of project implementation because decisions often were slow and CBTU’s legal department did not quickly respond in case of litigation. When pressed by the project team, the argument used by CBTU’s management to keep the project under their direct responsibility was that in case of fraud and/or corruption they would be personally responsible (not the local authorities), with a risk of confiscation of their own assets. This also created a level of tension between the local staff of STU-REC and CBTU’s staff, and between the State and the Federal Government, and did not facilitate rapid project implementation. Several requests from the Bank team for more delegation of activities to the local level were met with promises that did not materialize until nearly the end of the project, with the delegation of the day-to-day project supervision to the field in June 2004.

- 14 - Delays in the official mapping of the areas near the rail system Since the implementation agency did not move faster with the official mapping of the areas and identification of families near the rail system, they were invaded by additional squatters, which required additional resettlements at the expense of higher project cost and implementation delays.

5.4 Costs and financing: Actual costs were about 30% higher than appraisal estimates (US$ 203,800,000 versus US$ 264,780,000 at appraisal). These cost overruns were due to a need for additional resettlements (see Section 10 on Resettlement), increased market values for land, additional costs to comply with the Banks resettlement requirements, other works not envisaged at appraisal and activities subsequently requested by local authorities. In general terms, the delays in the completion of works due to a lack of resources from the Federal Government augmented their costs in terms of contract price adjustments and increased supervision and management costs.

For example, the additional requests by local authorities amounted to a total value of US$ 5,577,500 and included (i) the construction of the base of the Cosme e Damião Station on the link TIP-Timbi, including the complementary road system and an underpass to the station, (ii) a pedestrian underpass in Travessa do Raposo, (iii) the replacement of and existing viaduct in Travessa do Raposo to comply with the building standards, (iv) the inclusion of part of the Eastern costal road into the road access component, (v) sanitation works for neighboring low-income housing areas particularly sewage and drainage system to prevent damage to the track base, especially in certain parts of the municipality of Jaboatão, and (vi) the construction of a railway viaduct over the canal of the Jordão River to improve the neighboring road system required by the Municipality of Recife.

Additional works not envisaged at appraisal included (i) the underpass on the section of Açonorte to comply with forest preservation requirements, (ii) a protection wall in the fenced areas to comply with environmental requirements, (iii) the removal of soft clay soil and the reinforcement of station foundations, especially on parts of the South Line, (iv) the replacement of the metal bridges on the dry arm of the Capibaribe River and the Tejipió River, (v) the diversion of the traffic from the South Line to the Curado Station on the Central Line, (vi) two new locomotives, and (vii) the engine replacement with single static converters as well as the structural reinforcement for the EMUs. For detailed figures on costs see annex 2.

The project suffered considerable disbursement delays in the range of 10 to 44 months, mainly due to its late effectiveness, delays in procurement and above all the unavailability of counterpart funds. As a partial remedy to the latter, three loan proceeds reallocations were granted, adjusting the percentages of expenditure financed by the Bank. At the original closing date the Bank loan was 61% disbursed. Three project extensions were granted. At project closure the disbursements amounted to 94.3% of the Bank loan. A four-month grace period for the payment of invoices issued before loan closure was granted, at the end of which 98.56% of the loan funds were disbursed. The lack of full loan funds disbursement is caused by the insufficient budget allocation of the Federal Government to this project. The mismatch of project cost overruns and the incomplete disbursement of loan funds is explained by the fact that the cost overruns mainly affected cost items not financed by the Bank or financed only at a low percentage. Finally, the risk that CBTU is not committed to conclude the original works and the equipment program is low because it is part of its contract with the State and those works are underway.

6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is rated as likely. The effective implementation of the SEI, the establishment of the RMR

- 15 - Transport Consortium, the joint campaign of State and the municipalities in the RMR against informal transport, the creation of a joint management team to implement the new decentralization process agreed with by the Federal Government and the State of Pernambuco, the hiring of IFC to help with the concessioning of the system are all factors that bolster project sustainability.

The extension of the metro network in Recife increased its potential for commercial viability and the rehabilitation of rolling stock and track infrastructure arrested the deterioration of the system. In fact, even if this process is not yet finalized, it has already prompted a significant recovery in daily passenger levels. Once the South Line is completed, with the signaling system on the overall network fully functional, and all rehabilitated rolling stock air conditioned and in operation, the improved service levels and the increased train availability will automatically attract additional users and should lead in a natural way to full integration, increasing the ridership to levels that will make the system economically interesting, with good chances that it will culminate in a concession to the private sector, as happened in Rio de Janeiro. The operational achievements of the TIP-Timbi link bode well for the future success of the South Line.

Moreover, the interest of the private sector in the system should also be seen as an indication for its likely sustainability. Indeed, the Recife Airport Authorities agreed to pay for a link via an overpass walkway to the Boa Viagem station, while other private entrepreneurs are willing to invest in a cable link between the metro system and the biggest shopping center of the city, and in the construction of a station on the South Line to serve a new University already located there. More private sector participation is expected with the revised zoning law.

Finally, the recent reelection of the Mayor of Recife means continuity in the work with the State and thus is a further point in favor of sustainability.

6.2 Transition arrangement to regular operations: This is not applicable because the rail system has been in operation throughout project implementation.

7. Bank and Borrower Performance Bank 7.1 Lending: During identification, the project team engaged in a constructive debate with the Borrower regarding the role of the Bank in this operation. It was decided that the World Bank as “honest broker” would be best poised to assist the GOB in the decentralization process. The project team made a strong case that this project provided a unique opportunity to restructure the urban transport sector in Recife, support the transition of STU-REC to become a more cost-efficient and user oriented operation, and provide the stepping stone for the eventual concession of the rail system to the private sector. The profile of the users who are mainly of low-income and also the extension of the rail system to some very poor areas of the RMR was important in the decision to support the project.

In this sense, the project was fully in line with the 1993 CAS which put emphasis on efficient resource allocation, increased efficiency in the public sector and the appropriate targeting and delivery of support systems to the poor. The project aimed at these objectives by (i) promoting reforms and financial viability of the train operator, including the decentralization of the system to the State, (ii) fostering private participation in its operation, (iii) increasing the efficiency of infrastructure investments, (iv) contributing to improved access for the poor, and (v) reducing government subsidies. The project is also consistent with the 2003 CAS that sets as goals greater equity, sustainability and competitiveness through: (i) investments in people, (ii) growth through productivity, (iii) stabilization of the economy, (iv) delivery of government services to all, and (v) management of the natural inheritance. Indeed, the improvement of the urban

- 16 - transport system leads to greater productivity of cities and the greater accessibility to health, education and leisure facilities, enhancing the investment in people and decreasing social exclusion. Also, greater financial viability of the system and thus a decrease in State operating subsidies contributes to improving the finances of the State.

The Bank’s role in project preparation stimulated CBTU to reenergize its staff and evaluate options from an economic and financial instead of a purely technical standpoint. The project design that resulted from this interaction was adequate because it did not only consider the technical aspects, but focused on the four pillars essential for the proper management of urban transport systems. Indeed, it strived for the establishment of some form of regional coordination entity and the integration of transport, land use and environmental aspects. It also stressed the need to look for financing mechanisms for the sector, such as advertising, use of the right-of-way for fiber optics and cableways, use of the station space for shops and community events, and investigated the potential of private sector participation. Nevertheless, the complexity of the decentralization process in Recife was somewhat underestimated. And, so was the magnitude of the lack of fiscal space and counterpart funds shortage due to the stringent Brazil-IMF surplus targets, which led the Treasury Sector priorities to prioritize their projects, relegating investment on infrastructure to a very low priority and causing considerable delays. Finally, the schedules for works and rolling stock rehabilitation, which had been based on similar experiences in Brazil, turned out to be very optimistic because of worst than expected poor performance of both well-known local and international manufacturers.

During project appraisal, a comprehensive technical, economic and financial evaluation of the project and a thorough analysis of the actors and stakeholders was carried out by senior Bank staff and consultants in rolling stock and systems. The economic evaluation was done in great detail, including a very thorough sensitivity analysis for several scenarios, and the financial analysis of the system evaluated the situation with and without the project, as described in the SAR. The latter also provides an in-depth analysis of major issues in the sector and addressed the probable risks that were likely to occur at the time, e.g., delays in the actual transfer of the system, the timely availability of counterpart funds, and procurement delays. Lessons from previous urban transport projects in Brazil, in particular in Rio de Janeiro and São Paulo, were taken into account in the project design, and performance indicators were defined. The lending instrument was suitable since the thrust of the project was investment-related. There were no problems as far as the consistency with the Bank’s safeguards was concerned.

Based on all these considerations, lending is considered as satisfactory.

7.2 Supervision: Sufficient resources were allocated towards project supervision, which allowed for the constant monitoring of the project. Supervision comprised 65.2 staff weeks, of which nearly half were spent in the field. Supervision missions took place on average every three to four months, were small in Bank staff, but made efficient use of local consultants, and lasted a relatively short time. Bank staff tended to combine supervision mission with other missions to the region under the same implementation agent (CBTU), which proved to be very cost-effective, particularly insofar as travel is concerned. Staff continuity permitted a high level of vigilance and a comprehensive understanding to guide the Borrower through implementation difficulties.

Supervision was particularly intense for the works on the South Line and the TIP-Timbi link and for rolling stock rehabilitation, and great resources were allocated in the first half of the project to assist CBTU in preparing the difficult decentralization process, developing the necessary legal and regulatory framework to undertake the transfer, and ensuring that the necessary institutional restructuring took place. Also, the

- 17 - studies that laid the ground for the decentralization of the system and investigated the options for private sector involvement were closely followed. Supervision intensified even more when the several deadlines for decentralization were near and also when the bid for the completion of the stations was cancelled.

For each supervision mission the Implementation Agency prepared a detailed project status report. This allowed for a timely identification of problems, implementation delays and spending shortages, and pushed for the necessary actions. All supervision missions were documented in the PSRs and the Aide Memoires.

At the mid-term review, the progress indicator targets were revised since their timely achievement had resulted unrealistic in light of the delays in the completion of the works and the rehabilitation of the rolling stock. Thus, the targets set at appraisal, still to be met when the works are fully completed and the trains rehabilitated, were adjusted to reflect these implementation delays.

The Bank team also reviewed the Resettlement Action Plan (RAP) and made several suggestions that were accepted by CBTU’s resettlement team. A number of adjustments in the plan had to be made over the life of the project, and these were supervised carefully by the Bank. In all, there were more than six resettlement supervision visits and the team also kept in close touch with CBTU and the Resettlement Consultant who designed the plan and supervised its implementation.

Overall, the Bank team literally had to act as a “honest broker” because of the constant bickering between the State and the Federal Government. The chronic counterpart fund shortage and the non-compliance of decentralization related clauses led the task manager to send various strong warning signs and even suspend the execution of the project. Several requests for additional budget resources were sent and a number of meetings took place among the Directors of the CMU, the task manager and the representatives of the Federal and State Governments, especially when an extension of the closing date was requested. Two extensions were granted to give the new administration a chance to reformulate the decentralization model according to its views and to start its implementation. Meetings with the Ministry of Transport, initially, and the Ministry of the Cities, later, were held at different stages of the original decentralization process and after the proposal of the new model. Finally, the close pursuit of this objective paid off.

Based on all these considerations, supervision is considered satisfactory.

7.3 Overall Bank performance: The Bank team played an important role during project identification, preparation and appraisal, and its performance was fully satisfactory. The supervision of the system was particularly intense to ensure that the infrastructure and studies were completed and, at the same time, that the decentralization process stayed in motion. Throughout this project the Bank was credited for its role as mediator between the Federal Government, the State and the Municipality. It facilitated the creation of the RMR Transport Consortium and the nomination of the joint management team for the operation of the metro, both structures bringing together all three levels of authority in a formal way. Bank support through the procurement of works and train rehabilitation was also crucial in helping CBTU to push ahead with these tasks. Finally, the efforts by the Bank team to obtain from the Ministry of Planning and Transport/Ministry of Cities the allocation of more resources to the project was highly valued by CBTU and the State. Thus, overall, Bank performance was satisfactory.

Borrower 7.4 Preparation: The Borrower's participation, through the Ministry of Transport and CBTU, in the preparation of the project was satisfactory. It adequately identified the required civil works, assessed the status of the rolling

- 18 - stock, estimated the investment needs and recognized the institutional weaknesses in the sector. It supported the Bank team in the preparation of the project and facilitated all contacts with local authorities, industry representatives and real estate companies. CBTU also prepared the equivalent of the current project implementation plan and assisted the Bank in the economic evaluation and financial analysis of the project.

The CBTU team clearly understood the environmental and resettlement impacts of the project and the proposed mitigations, something new in CBTU’s activities, and mastered well the safeguard requirements. Preparations for timely procurement were taken and demand analysis and project economic and financial evaluation techniques were re-introduced in CBTU, as a by-product of the intensive participation in project preparation.

In summary, the Ministry of Transport and CBTU worked in good faith throughout project preparation and provided substantial logistical support and the necessary information to appraise the project. Nevertheless, they underestimated the complexity of the decentralization process as well as the expropriation requirements, and were not quick enough to prevent the invasion by squatters of the areas around the rail system after appraisal.

7.5 Government implementation performance: As already mentioned, the Ministry of Transport, as the original representative of the Federal Government, was never a champion in assuring the compliance of the State with the decentralization model agreed at appraisal. Most of the initiatives to keep the decentralization process moving were pushed by the Bank, while the Ministry was passive and did not use all possible remedies to accelerate the transfer. Once the new Federal Government was elected (end of 2002), the original decentralization process which was almost complete was brought to a halt and the responsibility for the project transferred to the newly created Ministry of Cities. This Ministry also took very long to present its new decentralization model and was slow in implementing it.

The low budget allocations to the project in the last three years are also a sign of the relatively poor performance of the Federal Government, which did not comply with its commitments albeit, according to them, due to the macroeconomic crisis and the surplus target agreements with the IMF. When contacted, the Ministry of Finance argued that allocating more or less within the Ministry’s allocation was a prerogative of the Ministry of Cities. The State and the Federal administrations also failed in seeking appropriate and quick solutions for the commitments they had assumed.

The State of Pernambuco was not very cooperative on the decentralization process until the Bank suspended disbursements. Nevertheless, after they had reached an agreement that the Federal Government would pay the salaries for a certain period after the completion of the works (Provisional Measure), the State promptly prepared all the documentation necessary to receive the system. And again, once the new decentralization model was proposed in September 2003, the State supported it with enthusiasm and completed the steps for the joint management of the system in an exemplary way.

Based on the above, the implementation performance of the Federal Government in the decentralization process and in the provision of adequate financial resources is considered as unsatisfactory. Insofar as the State of Pernambuco is concerned, their considerable effort towards the end of the project make their performance marginally satisfactory.

7.6 Implementing Agency: The Project Implementation Unit (PIU) of CBTU was adequately staffed with well-skilled engineers and planners, and supported by a good project implementation consultant. Moreover, the head of the

- 19 - Implementation Unit did not change throughout the project, which provided for continuity. With staff training in procurement sponsored by previous Bank projects, CBTU was able to adequately master the Bank’s procurement guidelines and standard bidding documents. Overall the PIU was a diligent implementation agent, correctly applying the Bank’s rules and requirements. Progress reports were duly and timely submitted throughout the project and were very detailed, following a format agreed with the Bank. In general, the audit reports as well as the entity financial statements were submitted on time and accepted without reservations. There was compliance with all the Bank safeguard policies, and the handling of the resettlement issues in this project was outstanding.

Even if the PIU performed well, problems during project implementation arose at the decision-making level. The fact that CBTU’s central organization in Rio insisted in directly managing the civil works and the equipment rehabilitation, refusing until nearly the end of the project to delegate it to the local level, despite several requests from the Bank, reduced the speed of the implementation process. For more details see Section 5.3. Indeed, although CBTU had a good field manager, which visited the project frequently, decisions at the level of the Presidency and the Technical Directorate were slow and its Legal Department did not quickly respond to litigation because of inadequate staffing. In particular, CBTU’s management from 1997-2002 was not very committed to the decentralization, showing more interest only on the works and equipment. The Technical Directorate from 2003-June 2004 did not accomplish much, except for a bid for the completion of stations on the South Line, which had been rejected by the Bank and was re-bid with success.

Moreover, the new CBTU presidency took long to work out the details of the new decentralization model and even longer to start implementing it due to internal problems. The underlying argument for the change of the model, rooted in the financial weakening of the State, seems justified, but the elaboration of the model could have been done more quickly through a management contract with the State that allowed the payment of a specified decreasing subsidy. Instead, it was decided to still keep the presence of the Federal government in the decentralized system, more for reasons of political control or to please the unions or both than for technical ones. Finally, it has to be mentioned that the CBTU presidency since 2003 has been more sensitive to the regional coordination and integration issues.

Considering the good performance of CBTU’s PIU, the performance of the Implementation Agency overall is still rated as marginally satisfactory.

7.7 Overall Borrower performance: Overall the Borrower performance was marginally satisfactory during project preparation and implementation, given the shortcomings at CBTU decision-making and Federal Government level. Nevertheless, since the rating scale only allows for satisfactory or unsatisfactory ratings, and considering the strong performance of the PIU, the Borrower performance overall is rated satisfactory.

8. Lessons Learned Several lessons can be derived from the implementation of this project. They are summarized below.

Decentralization: The decentralization of urban rail systems from the Federal to the State or a lower level of government is desirable because it brings the operator closer to the users, thus allows for the service to be more responsive to user needs and wishes. The decentralization is also likely to facilitate integration with other urban transport modes since there will be fewer levels of government that have to be in agreement on tariff and subsidy policies. Moreover, in Brazil the Federal Government is not allowed to concession out urban rail systems to the private sector, while States can do so, thus decentralization opens a door for this

- 20 - additional possibility. Despite all these reasons in favor of decentralization, this project showed that the process can be very lengthy and complicated. Indeed, transferring the system also means losing political power, and receiving it requires the necessary financial means to operate/subsidize and maintain it. Thus, it is a highly political process that requires agreements on issues, such as financing and timely management of system rehabilitation and modernization, the status of staff and the payment of salaries, and subsidization. These agreements are not always easy to reach and have a potential to jeopardize the implementation process if the parties are not fully committed to it. Therefore, the main lesson that should be taken from this project is that decentralization should either be a condition of effectiveness for a rehabilitation and modernization loan, with the respective rights and obligation of the transferring and receiving parties laid out in a binding way in advance, or it has at least to be made sure that the State possesses the finances to receive the system and again that all main rights and obligations are stated in a binding way in advance. This was done in the case of the Fortaleza decentralization project, which was prepared after the Recife project.

Fight against informal transport: All over Latin America and in many other parts of the world, informal transport is provided with small and often old and very polluting vehicles, that bring congestion and air pollution to intolerable levels. These services also create a strong competition for regular public transport operators and so put the viability of less polluting and more space efficient systems at stake. The fight against this phenomenon is no easy battle and very few cities have yet been fully successful. This is because often informal transport operators are organized in very powerful association (lobbies) that have significant political influence, while the authorities responsible for the area in which they operate do not talk to each other. In addition, for many drivers this activity is their only means of revenue. Informal transport also provides a door-to-door service that is often valued by its users, despite their complaints about unsafe driving and crowding.

During project implementation, Recife, as the rest of Latin America, saw a strong proliferation in small vehicles providing transport services in an illegal way, which the authorities were able to successfully overcome. Due to a joint effort by the State and the municipalities which consisted in effective regulation and strict controls, the abuses could be considerably reduced and the informal services were integrated into the network as feeders, using these vehicles for lines compatible with their characteristics and capacity. The results have been very positive in terms of road circulation and profitability of the overall formal transport system, due to a significant increase in demand. Environmental gains have also been obtained.

The reasons for this success, in the first place, lie in the strong will of all the stakeholders and their joint effort. Secondly, the problem was caught in its beginning, with the driver lobby not yet having grown very strong. Thirdly, the solution not only consisted in repression of the services, put their constructive inclusion, as much as possible, into the structural system.

Public Transport Integration and the Creation of RMR Transport Consortium: As mentioned before, the integration of the bus and rail system in Recife was very successful. Indeed, insofar as the completion of civil works in stations allows it, physical integration between the rail and bus is achieved. Fare integration, however, with the full inclusion of the rail system into the tariff clearing house mechanism, requires a complete reformulation of the current compensation criteria and procedures, which will only be possible once the Federal Government subsidies are clearly defined. Nevertheless, free transfer from rail to bus and vice versa is currently based on the principle that “who collects the fare, keeps it”. This is rooted in the assumption that most integrated trips have two legs, such as home-work and work-home, thus in one directions the bus operators collect the ticket revenue and in the other, the train operator, or vice versa. In addition, Recife created a Transport Consortium for the Metropolitan Region, an entity representing the State, the Municipality of Recife and progressively also the other municipalities in the RMR, that will take

- 21 - over the public transport coordination functions already carried out by EMTU and enlarge them in qualitative, quantitative and geographical terms. With this important step, Recife went further than envisaged in this project and achieved something that few cities in the developing world have been able to implement. The reasons for Recife’s success are based on its “collaborative culture” that has been in existence for a long time in the RMR, where EMTU successfully coordinated all aspects of municipal and inter-municipal buses. In addition, Recife had two strong champions (Mayor and Governor) that realized the importance and value of working together, especially after having successfully fought the battle against informal transport. Moreover, this project provided the necessary infrastructure/rolling stock to make train integration physically possible.

Train rehabilitation: This project confirmed that private firms responsible for the delivery of rehabilitated rail cars in Brazil have great difficulties in keeping to the schedules agreed in their contracts. In the case of Recife the difficulties were of technical (e.g. problems with converters, which did not work and had to be remanufactured), administrative (CBTU delayed contract signatures because there was disagreement at local and central level regarding the amount of work to be carried out) as well as financial nature (e.g. firms within the winning consortium had cash problems and financial difficulties). While trains had been expected to be ready in December 2002 (within 24 months), the delivery of all EMUs is now envisaged for December 2007. This means an average delivery time of 54 months. In other similar projects in Brazil (Rio and São Paulo) average delivery times amounted to 31 months. All this showed that the time that it takes to rehabilitate rolling stock cannot be underestimated since delays in making the trains available can have devastating and sometimes irreversible impacts on demand diversion to other modes. Moreover, improved contract design and strict enforcement of compensation clauses without fear of the power of the rolling stock manufacturers' lawyers may also have improved this situation. Finally, certain delays could have been avoided by passing the final responsibility for train rehabilitation to the local level, thus avoiding unrealistic expectation as far as the amount of works to be done is concerned.

Civil works: The construction works for the stations on the South Line was split into three lots and they were all bid at the same time. This implied that payments also had to be carried out at the same time. However, due to the budget restrictions that accompanied the implementation of this project, payments suffered delays and so did the progress of some of the construction works. Therefore, the system now ended up with some of the intermediate stations being completed, while other stations at the beginning of the line are still under construction, which makes operations on a partial network impossible. The lesson to be learned from this experience is that it is essential to get the scheduling of civil works right, even if at the time of bidding no foreseeable problems with budget allocations were expected. One way to do so is to bid the stations in a progressive way, in line with the available budget. Although this scheduling aspect is obvious, the Borrower argued that politically it needed to advance with all stations at the same time.

As far as station designs are concerned, lower costs could have been achieved by planning them slightly simpler and making greater use of modular design.

Another aspect of project implementation related to civil works that is worthwhile mentioning is the experience with small companies. Since the latter complained that they had no access to civil works, CBTU requested smaller bids, which, on the one hand, required lower turnover and working capital requirements. The provision allowed a number of small companies to participate in this project and to carry out works, such as the provision of accesses or pavements. However, the results were not very satisfactory because most of them did not have the necessary capacity to provide quality work on time, thus their involvement caused delays and additional costs.

An additional problem that effected the duration and the costs of civil works was the unexpected increase in

- 22 - the number of resettlements to be carried out and in the overall expropriations values to be paid. The higher number of resettlements was due to the fact that, once the project had became known, right-of-way invasions took place before the area could be mapped out family by family. The considerable increases in land values in the areas surrounding the rail system was based on the expected improvements that the project would make to the transport system. The lesson to be taken from this aspect is that additional resettlements and increased land values have to be expected and factored into the project design. The new Bank rules that allow for the use of loan funds for expropriations may help in the process of cutting delays due to untimely availability of funds for that purpose.

Resettlement: The experience of resettling small, informal businesses was fairly unique in Brazil and in fact in the Bank. Its success was due to the detailed information collected by CBTU and its consultant and the good relationship built with the affected business people.

The municipalities could have provided more assistance in the development of the resettlement plan and the rehabilitation of the resettled families. They might also have been more cooperative in providing necessary social and physical infrastructure in a timely manner. This is a problem that occurs fairly frequently with projects managed and financed by state and federal governments in Brazil that have a tendency to ignore local governments. For more details on the resettlement see Section 10. CBTU should have involved local governments early in the planning stage of the project in addition to the links it established with the affected communities.

9. Partner Comments (a) Borrower/implementing agency: CBTU - Companhia Brasileira de Trens Urbanos Loan Agreement Nbr. 3915-BR Brazil Preface

This is the final report on the Recife Metropolitan Transport Decentralization Project implemented with the participation of CBTU - Companhia Brasileira de Trens Urbanos, the Government of the State of Pernambuco and the Federal Government of Brazil, which was awarded US$ 102 million financing by the IBRD – World Bank under a Loan Agreement signed on April 3, 1996.

The Agreement was completed on June 30, 2004, which represented an extension of 30 months on the date of completion originally agreed, that is, December 31, 2001.

The last disbursement was made on June 30, 2004, and US$ 100,531,900.05 out of the resources made available by the IBRD have been spent.

Introduction

The Federal Government, which is the operator and administrator of the urban rail transport networks in the entire country; as carried out by CBTU pursuant to the constitutional precepts that establish that the administration and operation of urban transport is to be under the care of the local administration authorities, prepared the Metropolitan Rail Transport Decentralization Program designed to implement the transferal of such networks to their respective local administrative authorities. The World Bank partly financed the Projects for São Paulo, Rio de Janeiro, Belo Horizonte and Recife, and is financing the

- 23 - Projects for Salvador and Fortaleza.

The Project for Recife was submitted to the Executive Board of Directors and was approved in its final version on June 29, 1995.

Project Objectives

On April 3, 1996 the following documents were signed: Loan Agreement LN-3915-BR, between the Federative Republic of Brazil and the IBRD; Project Agreement, between a CBTU and the IBRD; and Shareholder Agreement, between the Government of the State of Pernambuco and the IBRD. The Loan Agreement signed with the IBRD was for US$ 102 million. By adding US$ 101.8 million, which represented the counterpart to be disbursed by the Federal Government, the Project value was a total of US$ 203.8 million to be invested in the Recife Metropolitan Rail Network for the implementation of contracts under three major classes: works, goods, and consultant and training services. The objective of such contracts were the implementation of improvements at the Central Line, expanding it to the TIP-TIMBI section; modernization on the South Line between Recife and Cajueiro Seco; overall overhaul and air conditioning of EMU's, and the preparation of consultant studies addressed to the Network operator's institutional and managerial development.

The project objectives are as follows: establishing an integrated transport network in the Recife Metropolitan Area in accordance with the guidelines as developed by the committee formed to coordinate the common policies in respect of fares, regulation, financing and development of Projects for the transport area; implementing a decentralization of the network operated by CBTU in Recife, and transferring such network from the federal authority to the State of Pernambuco; reducing the rates of environmental pollution brought about by combustion motor vehicles; and improving the quality of life and the conditions of access afforded to the lower income populations to the employment, health and education centers.

The CBTU-IBRD Recife project development was considered to be of foremost importance to enable CBTU to discharge its mission of promoting the improvement in urban transport with the implementation of its integration to other modes, thus introducing a substantial improvement of the quality of population traveling in the urban area. The model adopted for this Project implementation was similar to the ones developed for São Paulo, Rio de Janeiro and Belo Horizonte.

Experience Acquired in the Implementation and Results

Project structure was based on three major components:

· a physical component that involved expanding the Metropolitan Rail Network with the incorporation of more than 4.5 km of electrified and signaled double tracks on the TIP-TIMBI section (form Rodoviária to Camaragibe) with the construction of 13.5 km of electrified double track on the Recife-Cajueiro Seco section, and the construction of 11 km of the second track between Pontezinha and Cabo. A substantial improvement in operational conditions was contemplated with the implementation terminals for the integration with the bus services, as well as an improvement in terms of user comfort by building new stations and updating and rehabilitating those already in existence. The installation of the fiber optics cables integrated telecommunications system, including the radio communication, station sound, chronometry and automatic ticketing systems and the installation of a telephone post were also contemplated. An overall EMU overhaul and the installation of air conditioning and the acquisition of workshop equipment were also contemplated;

- 24 - · a component of environmental and traffic safety that involved the preparation of a program for the inspection and servicing of motor vehicles with a view to controlling the emission de polluting elements and of noise, and included a wide reach program to improve the management and safety of road traffic conditions in the metropolitan area, including a plan of action for the implementation thereof;

· a political and institutional development component that offered a set of technical resources to the new local operators in the areas of administration, finance, operation and expansion of urban transport networks that may result in improved network operation, permit integration with the bus services, substantially improve the economic-financial balance of the various networks with the possible adoption of an integrated fare network, and increased extra-operational income with the participation of partnerships with private enterprise institutions.

A study was prepared for the institutional area of alternatives of institutional models contemplating the formation of partnership efforts with private enterprise agencies and to promote the acquisition of data processing equipment with their associated software and training, to bring about an improvement in the local operating company rate of data processing facilities to make the administration thereof more agile and to improve its efficiency, productivity and results ratings. A contract has already been entered into and is under way for the preparation of a new urban transport master plan for the Recife Metropolitan Area.

Institutional actions were implemented by the State of Pernambuco, such as the formation of the “Companhia de Trens Metropolitanos de Pernambuco – COPERTRENS” in December, 1996, to incorporate CBTU’s Superintendência de Trens Urbanos de Recife to be transferred by the Federal Government.

The integration of the Metrô into the local transport network has benefited with the existence of a metropolitan transport management system under the charge of Empresa Metropolitana de Transportes Urbanos – EMTU, formed in 1979 as a State owned company that is in charge of managing the metropolitan lines and the Recife municipal lines.

The World Bank loan contract of April 3, 1996 became effective on September 19 of that same year. The contemplated deadline for implementation of the Project was five years (1996 to 2001), to be completed on December 31, 2001. Such deadline has had to be extended by another 30 months, and completion occurred on June 30, 2004.

The main reasons that lead to the extension of the deadline for Project implementation by a further 30 months were as follows:

· institutional issues resulted in a delay of approximately 5 months between the date set for the commencement of the services and the effective data of the Loan Agreement;

· issues in respect of the South Line's civil works that showed at the time costs well in excess of the originally estimated costs and necessitated reviews and adaptations that resulted in the fact that the civil works could only be procured as from January, 1998, which was responsible for an additional 15-month Project delay;

· legal and commercial issues in respect of the rolling stock sub-program due to the economic-financial fragility of the suppliers that compromised the accomplishment of operational targets;

- 25 - · issues in respect of the international market economic conjuncture had a fundamental impact on the procurement of global credits, and the Brazilian Government was forced to introduce adjustments in the releasing of budgetary resources for the implementation of the Project. In view of such budgetary restrictions CBTU had to review the overall planning for implementation, to make the disbursements under the contracts compatible with the resources so released. The completion of works already under contract was delayed, and even bidding processes were postponed together with supplementary procurement actions for the construction of the integrated terminals, automatic ticketing, telephone post and the duplication of the track on the Cajueiro Seco-Cabo section.

Project performance appraisal criteria as contemplated under the Loan Agreement comprised operational and financial targets to be met along certain stages of project development. The most relevant completions amongst those was the one in respect of the completion of the South Line construction works, the commissioning of the signaling system on South Line and on the TIP-TIMBI section and the completion of the EMU overall oveerhaul and air-conditioning facilities. The rolling stock sub-program – 25 EMU’s overhaul and air conditioning – is the one that has been presenting the most significant degree of difficulty in meeting the contemplated targets. At the time the Project was launched the railway industry was very much affected by the almost total absence of investments in the activity. It was very difficult for such industries to be responsive to the technical requirements and the deadlines under contract for their respective supplies, which caused very long delays in delivery of EMU’s to be put in operation. Thus, in view of the failure to restore the stock into operation within the contemplated deadline, and of the fact that works are not yet entirely completed, the originally contemplated increase in demand could not be met.

Yet, an overall appraisal of the program shows that since 2003 when the Central Line expansion of Rodoviária (TIP) – Camaragibe (TIMBI) section operation was started the volume of passengers carried has been having substantial increases with successive record ratings, and recently achieved the expressive volume of 195 thousand passengers/weekday. And as from 2005, with the completion of the works for the South Line stations and the network electrification (that will lead to the beginning of the operation of the Recife-Cajueiro Seco section) the threshold of passengers carried will be in excess of the 300 thousand mark, if the EMU’s are made available, and the targets contemplated under the Agreement will have been met.

World Bank Participation

This Project added to the partnership between CBTU and the World Bank. From the very beginning of the Metropolitan Rail Transport Project identification missions and the preparation of the Staff Appraisal Report, the World Bank's degree of interest and desire to cooperate in the implementation of the Project could be noted.

After signing the Loan Agreement and during the Project implementation stages up to its Completion Date such interest could be noted in the form of:

· training efforts, seminars, talks and materials to support CBTU teams and government entities in decision-making activities;

· project supervision missions that followed-up its progress, identifying departures, recommending corrections, intervening as necessary or cooperating in the quest for solutions and also acknowledging what was being done right so that the same actions could be adopted as recommended procedures;

- 26 - · timely transfer of financial resources upon legally supported request, which were vital to permit the discharging of CBTU financial obligations with suppliers and consultants, which definitely affords tranquility to the administration of any type of project.

In view of such unfailing support to CBTU as can be verified in affective actions, our appraisal of the performance by the World Bank can only be highly satisfactory.

Borrower Participation

Pursuant to the World Bank appraisal, as comprised under the Staff Appraisal Report, the most significant risks in respect of the program would be delays in the effective transferal of the operator company to the local authorities; the political State reluctance to enforce integration due to the lobbying activities of the bus networks operators; the possible bidding processes delays; and the availability of counterpart funds. Such risks did occur in various degrees of intensity and were commented upon hereinabove.

The studies of causes and consequences of the errors and right actions in respect of this Project are duly documented and were at times evaluated to exhaustion and accordingly rectified or on occasion avoided, and the history thereof is in the records so that it will be possible at any time to use them as reference at least insofar as the Administration of this Company is concerned.

In respect of the Network decentralization, a New Decentralization Model was prepared by CBTU and by the Federal Government that contemplates at the initial stages the formation of local federal companies as decreed by the provisions under Art. 3 of Law 8693/93. Even with controlling capital stock being held at present by the Federal Government, local government would hold a share of participation in the actions and Board of Directors.

Such structure would be maintained for as long Federal Government continues to supply investment funds and subsidize the operation. Subsidizing would only cease upon the institution of a fiscal adaptation by the State that would ensure the quality of the network operation and maintenance, preserving the universal nature of the users right to travel comfortably in a reliable network at reasonable fares.

The Model contemplates the existence of an agency to be in charge of the management of the transport networks by local governments, and the preparation of a management contract that would define the responsibilities of such agency with goals that would ensure the preservation of transport quality, and the responsibility of the Federal Government in respect of the supply of the resources as agreed.

The stages as contemplated for the establishment of region distribution under the Model that is being developed follow:

· Signing a new Decentralization Agreement;

· Forming the local operating company. To begin with the Federal Government controlling capital stock shareholding, to be gradually transferred to the States or Municipalities;

· Preparation of a services rendering contract between the operating company and the local agency in charge of transport management;

· Preparation of a management contract between the Ministry of Cities and the operating company

- 27 - with intervention by CBTU.

The Empresa Metropolitana de Transportes Urbanos – EMTU, of the State of Pernambuco is being transformed into the public company called Consórcio de Transportes da Região Metropolitana, as the local transport networks management agency, which will become effective upon the enactment by the National Congress of the law that will regulate public consortiums as corporate persons of public law.

At the time when the Federal Government set the new parameters for the decentralization program, the Government of Pernambuco prepared a technical document that gave a new format to its procedure and offered drafts for the new deeds, the Decentralization Agreement, the Assignment or Sub-Assignment Contract and the Management Contract. The beginning step will be the formation of the new Decentralization Agreement, the spinning-off of CBTU - Superintendência de Trens Urbanos de Recife, with the formation of the local operating company “Trem Metropolitano de Recife S/A -METROREC” – and entering into the Assignment or Sub-Assignment Contract between EMTU and METROREC.

In view of the aforementioned we come to the conclusion that the implementation of this Project, and all other decentralization Projects implemented by CBTU, will certainly serve as a reference for the modeling of future projects.

Flávio Mota Monteiro CBTU/IBRD Project Coordinator

Approved João Luiz da Silva Dias President of CBTU (b) Cofinanciers:

(c) Other partners (NGOs/private sector):

10. Additional Information Resettlement In spite of the fact that the project utilized the right-of-way of an existing railway, the works for the development of the Southern Line of the Recife Metro caused considerable resettlement involving the movement of some 2,542 families, as indicated in the table below. The need to resettle people was related to the fact that, over a long period, many households had encroached on the railway right-of-way. A comprehensive resettlement action plan (RAP) was prepared and approved by the Bank prior to appraisal. During construction, however, it was found that engineering works to allow for proper drainage necessitated widening the right-of-way requiring the resettlement of nearly 500 additional families (included in the total given above). The project was managed locally by STU-REC with only minimal involvement of local jurisdictions (state and municipal).

The quality of housing ranged from very poor to fairly substantial one and two-story homes that could be considered to be middle-class dwellings. Among the poorer families, there was usually no one with a permanent job in the formal sector while among the better-off resettlers, there were many one and two-income households where people held jobs in the formal sector, both private and public and many had middle-class consumption standards such as private automobiles.

- 28 - A team of social workers was hired to establish ties with the affected population and they visited households one by one on a frequent basis, and also held numerous public hearings and neighborhood meetings to discuss the project and hear the concerns of the affected parties.

STATUS OF RECIFE JABOATÃO DOS CAMARAGIBE TOTAL OCCUPANT GUARARAPES Lote 1 Lote 2 Lote 3 Lote 4 Lote 6 Owners 537 334 310 691 111 1,983 Renters 188 66 45 258 2 559 Totals 725 400 355 949 113 2,542 Source: World Bank staff

About 22% of the total were tenants. Under the RAP, tenants were given a six-month rent allowance and assistance in finding a new place to live and moving assistance. Given the large housing market in Recife, this was an acceptable procedure. Under the RAP, non-resident property owners were compensated for their property at replacement value; those who lacked legal title were compensated only for the improvements such as housing, outbuildings, fencing, trees, etc. Resident homeowners were afforded a choice between cash compensation and new housing.

Two large housing projects, Cafezópolis and Fernandinho, and several smaller ones were built. Both large projects were located in areas convenient to transport and employment so that most families were able to continue practicing their original profession which, for many poorer families involved domestic service, unskilled construction work, etc. The social workers provided assistance to families in locating new sources of employment. The municipality of Recife built a public elementary school, a senior-citizens center and a health post on the Cafezópolis site along with the 228 new homes. The total number of housing units built was 357 of which 29 were built on three small sites scattered at the southern end of the metro. Although a formal survey of the outcome of resettlement has not yet been conducted, it appears that the resettlement project was successful and the satisfaction of the affected families appears to be quite high. The exception is the Fernandinho area where the housing design and site were not optimal since it involved duplex dwellings, in which some families lived up a single flight of stairs above their neighbors. Families accustomed to living in single-story, dirt-floor mud huts actually complained about having to live below other neighbors even though their new homes were much larger and better constructed. Also, Fernandinho is located near the downtown business center of Recife, close to a large slum known as Coque, where there is a thriving drug trade controlled by gangs. These gangs extended their influence over Fernandinho very soon after it was occupied, making it difficult for CBTU to continue providing social services. In Cafezópolis, in contrast, CBTU helped start a neighborhood association, which became an effective voice for community concerns and was able to obtain a number of community improvements.

There were some substantial construction delays due to delayed fund transfers from the federal government, but there were no major hardships imposed on the resettled families. The contractors observed safety rules and kept their sites secure and attempted to control dust and vibration. Where problems arose, they were generally promptly attended to. Unfortunately, the three municipalities in which the project was built contributed little or nothing to the project, partly because CBTU did not take timely steps to involve them in the planning stage. In particular, the municipal administration of Jaboatão dos Guararapes adopted a passive approach, attempting to make CBTU responsible for drainage and other problems not caused by the project. In some cases, CBTU acceded to this in order to avoid delays and friction, causing some cost overruns.

- 29 - Due to the construction of a metro station it was necessary to expropriate a site, where there was a covered market with several dozen informal-sector business operated such as clothing stores, candy shops, barber shops and the like. These businesses posed a problem because they kept no records and paid no taxes that could be used to estimate the value of their losses. In close consultation with the Bank, CBTU’s resettlement consultant carried out a survey of inventories and estimated weekly revenues based on interviews and direct observation. The small business owners received cash compensation equivalent to three months of estimated lost revenues and assistance in finding new business locations. Larger, more established businesses that were affected were compensated according to the legal norms.

Public transport integration in the Recife Metropolitan Region The public transport system in the RMR consists of an integrated structural system (SEI – Sistema Estrutural Integrado) and a complementary system. The SEI is designed as a trunk and feeder system and provides for effective and efficient transfers, supported by fare integration. It gives the user the impression of trip continuity. The complementary system is expected to gradually merge with the SEI, insofar as this is effective and efficient. The SEI is currently serving 33% of the demand in the RMR and 45% of the demand of the metro comes from this system.

The SEI is based on a transport plan for the RMR that aims at a rational use of the public transport system. It was designed in 1985, slightly modified in 1992, and progressively implemented since 1998, with the integration of a number of bus lines and the metro and the inauguration of a number of terminals. Currently the SEI is composed of 64 out of 364 bus lines in the RMR, one metro line and eight terminals, five of them integrated with the metro. 18 private bus companies operate the bus lines. The SEI has six radial and four transversal corridors that cross and form a network. The trunk lines are operated by buses and the metro. Feeder or circular lines assure the transport of passengers from the suburbs to the integration terminals. Services between these terminals are provided through inter-terminal lines.

EMTU, a State agency, coordinates the all inter-municipal and municipal bus services in the RMR, the latter by delegation. This includes the SEI and the complementary system. EMTU is also responsible for some of the lines in the Municipality of Jaboatão, included in the integrated structural system. EMTU defines the bus services, timetables and itineraries, and supervises and controls the service provision. All other municipalities coordinate their own local lines. These municipal systems are composed of conventional bus lines or lines operated by smaller vehicles. Only in some municipalities these lines are regulated. The metro system is managed by CBTU/AC – STU/REC, a federal entity under the Ministry of Cities.

The SEI also provides an arena for the collaboration in the field of urban development and traffic circulation because it interferes directly with land use and the design of the road structure. It is an important driver for development because it allows for a more democratic use of the urban space and permits a planned growth of the city that takes the environmental quality into account. The construction of integration terminals and bus corridors stimulates development and land use at the same time as it interferes with the use of public roads, modifying the characteristics of the city.

The complementary system is composed of conventional radial, transversal, diametric and circular lines, operated through buses and smaller vehicles. It is proposed to progressively migrate these lines into the integrated structural system, thus reducing their share to 30% and limiting them to low and medium capacity lines, which for specific reasons, cannot be incorporated into the integrated system.

The current fare structure in the RMR is characterized by three circular fare zones, defined by the length of the bus lines: zone A is for lines until 32 km, zone B for lines between 32 and 45 km and zone C for lines

- 30 - over 45 km. In addition, on the trunk lines of the structural corridors, i.e. the radial and the transversal lines, there is special fare E, inferior to the one in zone A. Minibuses use fare D, which is higher than the fare in zone C. The lines in zones A, B, and C may belong to the SEI as well as to the complementary system. The lines of zone E only belong to the structural system, and those of zone D only to the complementary system. Thus, according to the current fare policy, each time that parts of the complementary system are replaced with the SEI, the interested communities enter in a different tariff zone with a lower fare.

Fare levels are set by the Metropolitan Council for Urban Transport, based on studies and evaluations on the operating costs of the road system carried out by EMTU, since this cost has to be completely covered through fare revenues. Fare revenues are managed and controlled by EMTU. It carries out the payment to the bus operators in relation to the cost borne by them for the provision of the service and the collected revenues. Since the profitability is different in the different areas, there is an important instrument, a fare clearing house (Câmera de compensação), that assures a uniformity in the remuneration of operators and a minimum service level for the whole RMR, including social requirements. All inter-municipal and municipal bus services in the RMR are part of the fare clearing house, even if they are not part of the SEI.

Finally, it is important to highlight the metro system, even if effectively included in the integrated structural system, is not yet part of the tariff clearing house, mainly due to very different operating costs compared to bus operators and the difficulties in designing an adequate compensation criteria within the current reimbursement model. Indeed, operating costs of the metro system are much higher than those of the buses and it is not possible to cover them without operating subsidy. Thus the inclusion of the metro in the tariff clearing house system, in addition to requiring a complete reformulation of the mechanisms and criteria currently used by the tariff clearing house, will only be possible once the Federal Government has clearly defined the subsidy levels to the metro. Nevertheless, fare integration for metro passenger was a reality even before the implementation of the SEI. In fact, with closed transfer stations and direct transfer of passengers before the implementation of the SEI, an integration ticket bought on a bus or in the metro system, allowed the passenger to subsequently use a bus or to obtain a ticket for the metro system. Under that system EMTU and the metro operator met on a monthly basis to divide the revenues from the sale of integration tickets on buses and in the metro system. With the implementation of the SEI the criteria of “who collects the fare, keeps it” was adopted. This is based on the assumption that most trips have two legs, such as home to work and work to home, meaning that in one direction the bus operators collects the revenue of the integrated ticket, and in the other the metro operator, or vice versa.

The Recife Metropolitan Transport Consortium (Consórcio de Transportes da Região Metropolitana do Recife - CTRM) This Consortium is a natural evolution of the model that has been used since 1980, consisting in the establishment of EMTU and the creation during these years of an “informal” metropolitan vision that longed for urban transport solutions at a regional level.

The Consortium acts in form of a public State company, with the majority participation owned by the State of Pernambuco and the Municipality of Recife. The other municipalities in the RMR have minority shares. The Consortium is in charge for the management of the public transport system in the RMR. Its guiding principles are to: l Assure an increased social inclusion, enhancing urban mobility and transport accessibility to improve the life quality of the urban population; l Increase the metropolitan integration through the combination of municipal and intermunicipal services, thus allowing for a universal movement between all municipalities in the RMR;

- 31 - l Facilitate urban development through an efficient public transport management; and l Assure the sustainability of public passenger transport in the RMR. l Its main functions are: l Planning, managing and contracting out of public transport services in the RMR; l Managing the financing of the system; l Assuring financial resources from outside the system; and l Guaranteeing a universal access to public transport.

The State law authorizing the Consortium is already approved, while a similar law is currently on the agenda of the Municipality of Recife. The Municipality of Olinda has prepared a draft law and is in discussions with the State, waiting for the approval of the law in Recife. The other municipalities in the RMR are expected to prepare similar draft laws as Olinda. Once these legal activities are accomplished, the staff of EMTU will be transferred to CTRM and its structure reorganized.

- 32 - Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1. Decentralization of the system 1. Decentralization according to model 1. First step of decentralization realized proposed by the Federal Government through the joint management of the system

2. Construction and full operation of 2. Construction and full operation of Metrorail 2. 100% construction and operation of the Metrorail lines of TIP-Timbi and South Line lines of TIP-Timbi and South Line TIP-Timbi link and 80% construction of South Line 3. Improved accessibility and level-of-service 3. Improved accessibility and level-of-service 3. Very good integration at Timbi & Central for low income classes for low income classes Line

4. Environmental and safety 4. Reduced traffic congestion and improved 4. Reduced congestion at Caxangá Avenue safety and safety improvements in the road and rail system

Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1) Millions of passengers /year 1) 2002 Revised target for project end: 69 1) 52 (conservative estimate based on the fact that there were 26 million passengers until June 30) 2) Working ratio 2) 2002 Revised target for project end: 2.65 2) 4.8 3) Staff cost as % of revenue 3) 2002 Revised target for project end: 140 3) 267 4) Revenue cost coverage % 4) 2002 Revised target for project end: 40 4) 23.5

1 End of project Note 1: This project was prepared using the SAR format that did not include the log frame matrix.

- 33 - Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million 1. Land Expropriations 7.80 26.22 336.2 2. Relocation of Transmission Lines 3.70 6.15 166.3 3. Civil Works 50.30 67.08 133.4 4. Permanent Way 17.91 61.50 343.4 5. Systems 17.10 17.56 102.7 6. Rolling Stock 11.01 18.55 168.5 7. Goods 51.36 52.73 102.7 8. Consulting 10.65 14.99 140.8

Total Baseline Cost 169.83 264.78 Physical Contingencies 16.99 0.00 Price Contingencies 16.98 0.00 Total Project Costs 203.80 264.78 Total Financing Required 203.80 264.78

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB 2 N.B.F. Total Cost NCB Other 1. Works 151.51 20.98 0.00 15.96 188.45 (83.63) (11.13) (0.00) (0.00) (94.76) 2. Goods 2.68 0.00 0.00 0.00 2.68 (1.67) (0.00) (0.00) (0.00) (1.67) 3. Services 0.00 0.00 12.67 0.00 12.67 (0.00) (0.00) (5.57) (0.00) (5.57) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 154.19 20.98 12.67 15.96 203.80 (85.30) (11.13) (5.57) (0.00) (102.00)

- 34 - Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB 2 N.B.F. Total Cost NCB Other 1. Works 180.69 15.12 18.72 33.51 248.04 (80.05) (7.63) (6.82) (0.00) (94.50) 2. Goods 1.75 0.00 0.00 0.00 1.75 (0.87) (0.00) (0.00) (0.00) (0.87) 3. Services 0.00 0.00 12.78 2.21 14.99 (0.00) (0.00) (5.16) (0.00) (5.16) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 182.44 15.12 31.50 35.72 264.78 (80.92) (7.63) (11.98) (0.00) (100.53)

1/ Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2/ Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. 1. Land Expropriation 0.00 7.80 0.00 2.74 23.49 0.00 0.0 301.2 0.0 2. Reloc. Transm. Lines 0.00 3.70 0.00 4.12 2.04 0.00 0.0 55.1 0.0 3. Civil Works 26.56 23.74 0.00 29.18 37.92 0.00 109.9 159.7 0.0 4. Permanent Way 9.73 8.18 0.00 32.55 28.97 0.00 334.5 354.2 0.0 5. Systems 9.03 8.07 0.00 4.79 12.78 0.00 53.0 158.4 0.0 6. Rolling Stock 5.78 5.23 0.00 6.80 11.76 0.00 117.6 224.9 0.0 7. Goods 29.21 22.15 0.00 15.22 37.43 0.00 52.1 169.0 0.0 8. Consulting 4.69 5.96 0.00 5.13 9.88 0.00 109.4 165.8 0.0 Price Contingencies 8.51 8.47 0.00 0.0 0.0 0.0 Physical Contingencies 8.50 8.48 0.00 0.0 0.0 0.0 Total Project Cost 102.00 101.80 0.00 100.53 164.27 0.00 98.6 161.4 0.0

- 35 - Annex 3. Economic Costs and Benefits The ex-post cost benefit analysis for this project uses the same methodology, assumptions and values for unit costs as indicated in the 1995 SAR (annex 9).

The following scenarios have been considered:

Best Case: South Line: Benefits start in 2006, growth at 2%/year, investment costs US$ 139,600,000 Tip-Timbi: Benefits start in 2004, growth at 2%/year, investment costs 52,500,000 Base Case: South Line: Benefits start in 2006, growth at 1%/year, investment costs US$ 149,600,000 Tip-Timbi: Benefits start in 2004, growth at 1%/year, investment costs US$ 54,600,000 Worst Case: South Line: Benefits start in 2006, growth at .5%/year, investment costs US$ 163,600,000 Tip-Timbi: Benefits start in 2004, growth at 0.5%/year, investment costs US$ 59,600,000

Best Case Base Case Worst Case ERR (%) NPV@10 B/C ERR (%) NPV@10 B/C ERR (%) NPV@10 B/C % % % South Line 23.4 38,522,000 1.47 21.3 33,853,000 1.4 18.9 28,232,000 1.31 Tip-Timbi 24.3 37,681,000 2.12 23.2 33,648,000 1.98 22 30,254,000 1.84 South Line 23.9 76,214,000 1.66 22.3 67,502,000 1.56 20.4 58,486,000 1.46 plus Tip-Timbi

- 36 - This shows that in the Base Case the project investment overall yields an ERR of 22.3% and a NPV of US$ 67,502,000.

TOTAL BENEFITS (US$ THOUSANDS) DIRECT EXTERNALITIES BENEFIT S Project Calendar Travel Time Operating Road Bus System Invest. Accident Air Total year year Savings Cost Maintenanc Cost which will Savings Pollution Benefits (B) Savings e Cost Savings be avoided Savings Savings 1 1995 0 0 0 0 0 0 0 0 2 1996 0 0 0 0 15,000 0 0 15,000 3 1997 0 0 0 0 13,000 0 0 13,000 4 1998 0 0 0 0 15,000 0 0 15,000 5 1999 0 0 0 0 15,000 0 0 15,000 6 2000 0 6,833 0 547 0 0 0 7,380 7 2001 0 6,833 0 547 0 0 0 7,380 8 2002 0 6,901 0 552 0 0 0 7,453 9 2003 0 6,970 0 558 0 0 0 7,528 10 2004 8,199 13,432 28 1,075 0 182 367 23,283 11 2005 8,281 13,566 28 1,085 0 184 371 23,515 12 2006 14,551 13,353 60 1,068 0 569 1,190 30,791 13 2007 20,820 20,252 60 1,620 0 574 1,202 44,529 14 2008 20,917 20,332 61 1,627 0 580 1,214 44,730 15 2009 21,015 20,411 61 1,633 0 586 1,226 44,933 16 2010 21,113 20,492 62 1,639 0 592 1,239 45,137 17 2011 21,213 20,574 63 1,646 0 598 1,251 45,345 18 2012 21,426 20,780 63 1,662 0 604 1,264 45,798 19 2013 21,640 20,988 64 1,679 0 610 1,276 46,256 20 2014 21,856 21,198 64 1,696 0 616 1,289 46,719 21 2015 22,075 21,409 65 1,713 0 622 1,302 47,186 22 2016 22,296 21,624 66 1,730 0 628 1,315 47,658 23 2017 22,518 21,840 66 1,747 0 634 1,328 48,134 24 2018 22,744 22,058 67 1,765 0 641 1,341 48,616 25 2019 22,971 22,279 68 1,782 0 647 1,355 49,102

- 37 - TOTAL COSTS (US$ THOUSANDS) Project Calendar Investments Operating Total Costs year year Costs Costs (C) Wages & Maintenance Salaries Cost 1 1995 0 0 0 0 0 2 1996 7,229 0 0 0 7,229 3 1997 23,261 0 0 0 23,261 4 1998 21,856 0 0 0 21,856 5 1999 22,446 0 0 0 22,446 6 2000 17,869 0 0 0 17,869 7 2001 12,395 0 0 0 12,395 8 2002 27,000 0 0 0 27,000 9 2003 27,939 0 0 0 27,939 10 2004 24,142 103 516 58 24,819 11 2005 20,000 104 521 59 20,684 12 2006 0 1,237 2,685 426 4,349 13 2007 0 1,249 2,712 430 4,392 14 2008 0 1,262 2,739 435 4,436 15 2009 0 1,275 2,767 439 4,480 16 2010 0 1,287 2,794 443 4,525 17 2011 0 1,300 2,822 448 4,570 18 2012 0 1,313 2,851 452 4,616 19 2013 0 1,326 2,879 457 4,662 20 2014 0 1,340 2,908 461 4,709 21 2015 0 1,353 2,937 466 4,756 22 2016 0 1,366 2,966 471 4,804 23 2017 0 1,380 2,996 475 4,852 24 2018 0 1,394 3,026 480 4,900 25 2019 (20,762) 1,408 3,056 485 (15,813)

- 38 - BENEFITS MINUS COSTS (US$ THOUSANDS) (B - C) Project year Calendar year Total Benefits (B) Total Costs (C) Benefits minus Costs (B - C) 1 1995 15,000 7,229 7,771 2 1996 13,000 23,261 (10,261) 3 1997 15,000 21,856 (6,856) 4 1998 15,000 22,446 (7,446) 5 1999 7,380 17,869 (10,489) 6 2000 7,380 12,395 (5,016) 7 2001 7,453 27,000 (19,547) 8 2002 7,528 27,939 (20,411) 9 2003 23,283 24,819 (1,536) 10 2004 23,515 20,684 (2,832) 11 2005 30,791 4,349 26,443 12 2006 44,529 4,392 40,137 13 2007 44,730 4,436 40,294 14 2008 44,933 4,480 40,453 15 2009 45,137 4,525 40,612 16 2010 45,345 4,570 40,774 17 2011 45,798 4,616 41,182 18 2012 46,256 4,662 41,594 19 2013 46,719 4,709 42,010 20 2014 47,186 4,756 42,430 21 2015 47,658 4,804 42,854 22 2016 48,134 4,852 43,283 23 2017 48,616 4,900 43,716 24 2018 49,102 (15,813) 64,915 25 2019 EIRR = 22.3

- 39 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation February 1994 3 SENIOR TRANSPORT PLANNER (2); SENIOR RAILWAY ENGINEER (1)

Appraisal/Negotiation March 1995 9 SENIOR TRANSPORT PLANNER (2); SENIOR RAILWAY ENGINEER (1); FINANCIAL ANALYST (1); RESETTLEMENT SPECIALIST (1); METRO INFRASTRUCTURE CONSULTANT (1); SENIOR LEGAL COUNCIL (2); TRANSPORT DEMAND SPECIALIST (1)

Supervision 08/01/1995 2 RESETTLEMENT HS HS SPECIALIST (1); SR. TRANSPORT PLANNER (1) 11/30/1995 1 SR. TRANSPORT PLANNER S S (1) 03/01/1996 3 SR. ANTHROPOLOGIST (1); S S SR. TRANSPORT PLANNER (1); SR. RAILWAY ENGINEER (1) 10/11/1996 1 PRIN TRANS SPECIALIST (1) U S 03/07/1997 2 TRANSPORT PLANNING (1); S S RESETTLEMENT SPECIALIST (1) 06/12/1997 1 TRANSPORT SPECIALIST (1) S S 07/09/1997 1 TRANSPORT SPECIALIST (1) S S 11/21/1997 1 TRANSPORT SPECIALIST (1) S S 02/20/1998 2 TRANSPORT SPECIALIST (1); S S RESETTLEMENT SPECIALIS (1) 05/04/1998 1 TRANSPORT SPECIALIST (1) S S 07/14/1998 2 TRANSPORT SPECIALIST (1); S S RESETTLEMENT SPECIALIS (1) 12/03/1998 1 TRANSPORT SPECIALIST (1) S S 02/04/1999 2 TRANSPORT SPECIALIST (1); S

- 40 - S RAILWAY ENGINEER (1) 04/01/1999 2 TRANSPORT SPECIALIST (1); S S RESETTLEMENT SPECIALIS (1) 05/25/1999 1 TRANSPORT SPECIALIST (1) S S 06/11/1999 1 TRANSPORT SPECIALIST (1) S S 08/12/1999 2 RESETTLEMENT SPECIALIS S S (1); TRANSPORT SPECIALIST (1) 02/21/2000 1 TRANSPORT SPECIALIST (1) S S 02/21/2000 3 PR. TRANSPORT SPECIALIST S S (1); CIVIL WORKS CONSULTANT (1); RESETTLEMENT CONS (1) 10/04/2000 2 PRINCIPAL TRANSPORT SP S S (1); RESETTLEMENT SPECIALIS (1) 03/15/2001 2 LEAD TRANSP. SPECIALIS S S (1); FINANCIAL MGMT. SPE. (1) 08/08/2001 3 LEAD TRANS. SPEC (1); S S CIVIL INFRAS. SPEC (1); RESETTLEMENT SPECIALIS (1) 03/26/2002 2 TASK MGR.-TRANSP. SPE (1); S S INFRASTRUCTURE ENG. (1) 07/11/2002 2 LEAD TRANSPORT SPECIAL S S (1); INFRASTRUCTURE CONSULT (1) 10/07/2002 1 LEAD TRANSPORT SPEC. (1) U S 12/30/2002 1 LEAD TRANSPORT SPECIAL U S (1) 06/25/2003 1 LEAD TRANSPORT SPECIAL S S (1) 09/24/2003 2 LEAD TRANSPORT SPECIAL S S (1); SECTOR LEADER (1) 10/24/2003 1 LEAD TRANSPORT SPEC (1) S S 03/04/2004 1 LEAD TRANSPORT SPECIAL S S (1) ICR 06/23/2004 2 LEAD TRANSPORT S S SPECIALIST (1); TRANSPORT SPECIALIST (1)

- 41 - (b) Staff:

Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 17.8 70.5 Appraisal/Negotiation 7.6 35.5 Supervision 65.2 382.5 ICR 5.5 27.2 Total 96.1 515.7

- 42 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA

Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA Resettlement

- 43 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU

6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU

- 44 - Annex 7. List of Supporting Documents List of supporting documents in ICR file, such as aide-mémoire, details of IRR calculations, comments by borrower, cofinanciers and other partners, beneficiaries survey and map

Project documents, such as the Staff Appraisal Report, the Legal Agreements, Project Supervision Reports, project reports, aide-memoires and other documentation related to this project are on file.

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