Document of The World Bank Public Disclosure Authorized

Report No: 29806-BR

IMPLEMENTATION COMPLETION REPORT (SCL-3916A CPL-39160)

ON A

LOAN

Public Disclosure Authorized IN THE AMOUNT OF US$99 MILLION

TO THE

FEDERATIVE REPUBLIC OF BRAZIL

FOR A

BELO HORIZONTE METROPOLITAN TRANSPORT DECENTRALIZATION TRANSPORT

Public Disclosure Authorized December 21, 2004

Finance, Private Sector and Infrastructure Department Public Disclosure Authorized Brazil Country Management Unit 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

AMBEL Metropolitan Assembly of the Belo Horizonte Metropolitan Region BHMR Belo Horizonte Metropolitan Region BHBUS Plan to restructure the municipal bus system BHTRANS Belo Horizonte Municipal Transport And Transit Company (Empresa de Transporte e de Trânsito de Belo Horizonte) CAS Country Assistance Strategy CBTU Brazilian Urban Railway Company (Companhia Brasileira de Trens Urbanos) CMU Country Management Unit CTC Centralized Traffic Control DER-MG Transport Directorate (Direção de Transportes) responsible for state roads and intermunicipal bus services EIRR Economic Internal Rate of Return EMU Electric Multiple Unit GOB Government of Brazil ICR Implementation Completion Report IMF International Monetary Fund NPV Net Present Value METROMINAS Company expected to take over STU-BH (formerly called TMBH) PIU Project Implementation Unit RAP Resettlement Action Plan PSR Project Supervision Report RTCC Regional Transportation Coordination Commission SAR Staff Appraisal Report SEAIN State Secretariat for Foreign Affairs STU-BH Belo Horizonte Subdivision of CBTU TMBH Trem Metropolitano de Belo Horizonte S.A. TOR Terms of Reference TRANSCON Bus operator of the Municipality of Contagem

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

BRAZIL BELO HORIZONTE 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 3 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 14 6. Sustainability 16 7. Bank and Borrower Performance 17 8. Lessons Learned 21 9. Partner Comments 23 10. Additional Information 29 Annex 1. Key Performance Indicators/Log Frame Matrix 31 Annex 2. Project Costs and Financing 32 Annex 3. Economic Costs and Benefits 34 Annex 4. Bank Inputs 38 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 40 Annex 6. Ratings of Bank and Borrower Performance 41 Annex 7. List of Supporting Documents 42

Project ID: P006564 Project Name: BELO H M.TSP Team Leader: Jorge M. Rebelo TL Unit: LCSFT ICR Type: Core ICR Report Date: December 21, 2004

1. Project Data Name: BELO H M.TSP L/C/TF Number: SCL-3916A; CPL-39160 Country/Department: BRAZIL Region: Latin America and the Caribbean Region Sector/subsector: Roads and highways (47%); Railways (46%); Central government administration (7%) 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: 04/19/1996 04/19/1996 Appraisal: 04/24/1995 MTR: 04/19/1998 07/18/2002 Approval: 06/29/1995 Closing: 12/31/2001 06/30/2004

Borrower/Implementing Agency: FED REPUBLIC/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: 3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective: The broad objectives of the Belo Horizonte Metropolitan Transport Decentralization Project (Ln.3916-BR) were: (a) the development of an integrated urban transport system for the Belo Horizonte Metropolitan Region (BHMR) under a Regional Transportation Coordination Commission (RTCC) established to coordinate and recommend common policies on pricing, regulation, financing, project evaluation and selection; (b) the completion and decentralization of the Belo Horizonte Subdivision of the Brazilian Urban Rail Company (STU-BH) from the Federal to the State and municipal levels; (c) the reduction of the environmental (mainly air quality and noise) impacts on the BHMR due to motor vehicles and the promotion of non-motorized transport modes; and (d) the development of special strategies and actions to improve the accessibility of the low-income population to employment centers, health 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.

3.2 Revised Objective: The objectives remained the same until loan closing and no revision took place. However, the new Federal Government, that took office in January 2003, reviewed the original decentralization model because of the delays in the completion of the works and in the full modal integration, which in turn slowed down the expected rise in ridership and, consequently, increased the operating subsidy requirements. Since the State and the Municipality of Belo Horizonte were not willing to pay such subsidies without the completion of the works and most of the delays were due to the lack of adequate budgets to the project by the Federal Government, the latter proposed a gradual decentralization model to mitigate those problems. The inadequate budgetary resources were mainly the consequence of a lack of fiscal space, causing budget restrictions in all investment projects in light of the macroeconomic crisis that affected the country and the State after the Argentine crisis. For more information see Section 5.1. The Bank also encouraged a broader private sector participation in the project through a study which evaluated the options of concessioning the system. As both the new decentralization model and broader private sector participation in the system were consistent with the relatively broad project objectives, and with the objectives of the CAS, no restructuring was deemed necessary.

3.3 Original Components: The project comprised three inter-related components: (a) an Infrastructure and Equipment component to help build (i) the rail extension of STU-BH and the additional stations required to enhance modal integration; (ii) the transfer terminals and physical accesses required for the actual integration between buses, rail, pedestrians, automobiles and bicycles; and (iii) a centralized road traffic signal control system to improve traffic management and control at about 250 road intersections in Belo Horizonte; (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) a traffic management and safety program; and (c) an Institutional and Policy Development component to help in (i) strengthening the RTCC for the BHMR; (ii) preparing an integrated Transport Policy, Land Use and Air Quality Management strategy for

- 2 - the BHMR to meet both transport and air quality targets and to introduce sound cost-recovery, tariff, regulatory and subsidy policies; (iii) implementing a cost-based financial management system in the STU-BH; (iv) developing and 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.

Part A - The Infrastructure and Equipment Component This component was designed to improve the infrastructure and equipment of STU-BH to a level which would allow it to meet the operational and financial performance targets set for the project and specified in Annex 1. The component can be summarized as follows:

The Civil Works Program consisted of: (a) intermodal integration works including: (i) the construction of three integrated bus-to-rail terminals; (ii) improvements to road accesses to STU-BH stations; (iii) the construction of sidewalks and pedestrian over/underpasses; and (iv) the provision of a centralized road traffic signal control system and bus locator; (b) passenger station works for the construction of nine new stations and enlargement/improvements of the São Paulo station; (c) bridges, road viaducts, and pedestrian over/underpasses, which included the construction of four bridges, two road viaducts, and six over/underpasses for pedestrians; and (d) the construction of a building for STU-BH’s administration.

The Permanent Way Program included: (a) the provision of track materials for a 5 km line from Santa Inês to São Gabriel (ex São Paulo); and (b) the construction of a 7 km line extension from São Gabriel (ex São Paulo) to Vilarinho, including the construction of a 225 m tunnel.

The Systems Program consisted of: (a) electrification, including the installation of 7 km of overhead catenary, 7 km of transmission cables, one substation and one sectionalizing cabin; (b) signaling, comprising of (i) the replacement of the existing Central Traffic Control (CTC) from Eldorado to São Paulo; (ii) the installation of vital interlocking relaying circuits in the 5 km section from Santa Inês to São Paulo with materials and equipment in stock; and (iii) the supply and installation of a new signaling system in the 7 km extension; and (c) telecommunications, including the provision of a central station, an integrated telecommunication system on the São Gabriel (ex São Paulo) - Vilarinho extension and ticketing control equipment in all 20 stations.

The Workshop Program included the provision of miscellaneous equipment for the new Matadouro workshop, and of equipment for general maintenance of the permanent way and systems.

The Rolling Stock program consisted of: (a) the general overhaul of five electrical multiple units (EMUs) and (b) the acquisition of ten EMUs.

Part B - The Environmental and Traffic Safety Program The environmental and traffic safety program envisaged: (a) the design of an inspection and maintenance (I/M) program for vehicle emissions and noise; and (b) the development of a traffic management and safety program.

Part C - The Policy and Institutional Development Action Plan STU-BH's decentralization was not by itself a guarantee that this CBTU subdivision in the future would be better managed than its predecessor. A package of institutional and policy reforms were therefore considered essential to induce modernization changes and motivate management and staff. The financial

- 3 - 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 would have repeated itself with negative impacts on the ridership and on the BHMR as a whole. Furthermore, actions were needed to change the environment in which STU-BH operated in order to facilitate modal integration and sustainability desired in the long term. The basic sub-components of the institutional and policy package proposed are summarized below:

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

(b) Management. The second set of Action Plans were meant to improve the management of the STU-BH subdivision, including: (i) the preparation and implementation of a manpower development plan to streamline the management and operations of STU-BH’s staff through the proposal of concise job descriptions and adequate staffing; (ii) the study and implementation of cost accounting, management information systems, and financial management, so that timely and adequate cost management would become 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 the STU-BH's real estate; and (vi) technical assistance and training for staff at all levels as proposed in the manpower plan.

(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 included studies of existing transport agencies with a view to reducing intermodal inefficiencies, namely: (i) a financing mechanism study focused on achieving formal sources of funds for the urban transport sector, including a tariff study focused on achieving multi-modal tariff integration and its operationalization; (ii) updating of the Transport, Land Use and Air Quality portion of the Master Plans of the BHMR with emphasis on route rationalization and modal and tariff integration; and (iii) BHTRANS/DER-MG route management and rationalization study.

This component also included training and technical assistance of the relevant sector staff of STU-BH, and staff of participating agencies in the RTCC.

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

3.4 Revised Components: The components remained the same with minor adjustments on the infrastructure and equipment side, the dropping of a few studies and their consolidation into main items, and local financing of some of the activities, especially those in the environmental and safety component. For more details see Section 4.2.

- 4 - 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 of the Venda Nova (Vilarinho station area) and Eldorado areas, some of the poorest areas of the BHMR; 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. 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 accompany the identification mission. During project identification and preparation the project team engaged in a constructive debate with the Borrower regarding the role of the Bank and it was decided that the World Bank’s role as “honest broker” between the GOB and the State/Municipalities was crucial for the decentralization process because of the lack of trust between those two parties. Project preparation was satisfactory as it forced CBTU to reenergize its staff and evaluate options from an economic, technical and financial standpoint instead of a purely political standpoint. A comprehensive technical, economic and financial evaluation of the project was carried out by senior staff and experienced 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 that time, i.e. the delays in the timely transfer of STU-BH to the local authorities, delays in the dialogue between the two levels of government for the actual start of operations of the RTCC, the political reluctance to introduce regulatory and air quality related policies, the timely availability of government funds to CBTU, and procurement delays. To minimize delays in the actual transfer of ownership, the Loan Agreement linked disbursements with the date set for the transfer. At the moment of project design, all three levels of government had progressed very well in the modal and tariff coordination dialogue and a forerunner of a RTCC had already been established. All parties had also agreed on the need for an integrated project and recognized that the risks were mainly associated with their reluctance to relinquish some of their powers to a RTCC. Also, at the moment of project design, there was a strong commitment to the environmental and traffic 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 1995 and subsequent budgets. Finally, the resettlement assessment and the environmental impact analysis were very thorough and paid off as described in Section 10.

4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The ICR assesses the Belo Horizonte Metropolitan Transport Decentralization Project (3916-BR) as satisfactory.

The broad objectives of the project were achieved in an adequate manner, even if the system is not yet totally integrated, the new link between São Gabriel and Vilarinho is operating only with manual signalling

- 5 - and the decentralization process is not fully completed. The satisfactory rating is justified by the fact that, considering the current progress, the project is on an irreversible path towards meeting those final goals and is likely to be sustainable (for details see Section 6). Moreover, the slowdown in some project activities and the minor adjustments to single project or subproject components, that led to some deviations from the original targets, had mainly been imposed by the chronic lack of counterpart funds and later of fiscal space due to the macroeconomic policy changes at Federal government level after the Argentine crisis. It must also be noted that the project has a NPV of US$ 48,907,000 and an EIRR of 17.1. 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 BHMR (objective a) was achieved with a substantial rail - municipal bus integration under BHTRANS, particularly at the São Gabriel station, and with the integration of some of the intermunicipal buses at São Gabriel and Eldorado, which in 2003 provided 25% of the rail ridership. The integration at the Vilarinho station has started but at a much smaller scale due to the low frequencies of the train system, which is still operating under manual signaling in the São Gabriel-Vilarinho link. Overall, from 1995 to 2004, the number of bus lines physically and, to a certain extent, also fare integrated with the metro system has increased by 91.4%.

Number of bus lines with fare and/or physical integration by operator Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 BHTRANS 20 28 47 58 60 60 60 64 64 64 DER 45 50 53 55 56 56 56 56 56 58 TRANSCO 16 21 21 19 22 31 31 33 33 33 N Total 81 99 121 132 138 147 147 153 153 155 Source: STU-BH

The table clearly shows the key role played by the Municipality of Belo Horizonte, through BHTRANS, in this process, which promptly restructured the municipal bus system through a plan called BHBUS, to optimize it and facilitate integration. BHTRANS is continuing to have a very close collaboration with STU-BH as far as transport planning is concerned, a best practice case in Latin America.

The State, on the other hand, has been less effective in its integration policies, mainly because the Transport Directorate of the State Roads Agency (DER-MG), responsible, among others, for intermunicipal bus services, was not very cooperative and always dominated by the strong bus owner lobby that fears a loss in ridership to the metro and is opposing route rationalization. Nevertheless, DER-MG is currently developing a project for the restructuring of the intermunicipal public transport network in BHMR, which aims at the highest level of integration with the metro and the rationalization of the system through the elimination of competing lines. Moreover, the State has also approved a law (Delegated Law - Lei Delegada No. 100 from 2003) which mandates the transfer of the management of all public bus services in the BHMR to the new company that is expected to receive the metro system, as soon as the decentralization to the local authorities is completed. This is a key element in the complete integration between these modes and was a bold step of the State government.

The Municipality of Contagem, through TRANSCON, is also closely working with STU-BH and integration is realized at the Eldorado Station.

The following table only looks at full physical and fare integration and shows that it has increased by 35%

- 6 - since 1995.

Increase in fare integration since 1995 Year Integrated Demand 1995 10,485,053 1996 10,157,690 1997 10,260,665 1998 11,277,398 1999 12,823,386 2000 13,618,444 2001 12,810,313 2002 12,356,055 2003 14,160,371 Source: STU-BH

This percentage is likely to increase considerably as soon as the smart card-based electronic ticketing system, already available on the whole municipal bus fleet, becomes operational also in the metro system. As required by the project, STU-BH, BHTRANS and DER-MG regularly met during most of the project implementation period under the auspices of a commission (RTCC) operated as a thematic chamber of the Metropolitan Assembly (AMBEL). These regular meetings allowed for the coordination of transport activities between the State and the municipalities. Initially they were very productive, but lost some of their effectiveness because of political differences between the State and the Municipality of Belo Horizonte. These meetings got even interrupted for a short period of time, but were resumed with the discussions for the completion of the METROPLAN, the new transport, land use and air quality master plan for the BHMR, financed under this loan. In addition, the State Government is currently proposing a reorganization of AMBEL to give the State greater control over its decision making, with the aim to facilitate regional transport coordination. This is likely to be the basis for the formalization of the regional coordination entity.

The municipality of Belo Horizonte was also successful in eliminating the illegal vans, which started to proliferate in the city after the appraisal of this project. This, as well as the institutional progress in terms of metropolitan coordination, are two important achievements in Brazil and were part of the context of the project.

Finally, it should also be noticed that BHTRANS concessioned out the municipal routes through competitive bidding instead of operating “with permissions”, being the first Municipality in Brazil to do so. The lines of the intermunicipal bus system, operating under State jurisdiction, will also be concessioned in the near future via competitive bidding using the METROPLAN as a basis. This will be another important achievement. Based on all these results, the achievement of this objective is rated satisfactory.

The decentralization of the STU-BH from the Federal to the State and municipal levels (objective b) was only partially implemented. Nevertheless, the objective is rated satisfactory since concrete steps towards decentralization have been given with the joint management of the system by the local authorities. 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, which took over in January 2003. An additional reason for the satisfactory rating lies in the fact that the delays in this process were greatly dependent on macroeconomic and political circumstances and administrative

- 7 - hurdles.

The decentralization model currently followed in Belo Horizonte is different from the one in Rio de Janeiro and São Paulo, even if it started out similarly, with a detailed transfer program approved as early as November 1995. It then took until 1997 for the State of Minas Gerais to approve a law for the creation of the new company, Trem Metropolitano de Belo Horizonte S.A. – TMBH, later called METROMINAS, to absorb STU-BH. The municipalities of Belo Horizonte and Contagem authorized the subscription of respectively 35% and 10% of the shares of TMBH in December 1997 and July 1998, respectively. However, at that point, neither the State nor the municipalities wanted to accept the transfer of the system because the works were not even competed at the São Gabriel station. They also wanted assurances that the salaries of the staff would be paid by the Federal Government until the completion of the works included in the project.

Later in 1998, the incumbent State Government was defeated, and that brought in a new government which was faced with a major financial crisis since even payments to civil servants could not be made. Relations between the Federal and the new State Government were strained due to the debt negotiations between them and that made it very difficult to progress with the decentralization because of a lack of trust, between the two administrations. Again, only in 2000, and under Bank’s pressure to comply with the decentralization clause, the articles of agreement for TMBH were approved and the Board of Directors and the Fiscal Council were elected. The decentralization date was then set for December 2000 to allow for the hiring of new operating staff (mainly train drivers), but was not complied with because the Federal Government had not approved the law, which guaranteed the payment of salaries to the staff until the completion of the works. Instead, a new detailed transfer program was prepared with the decentralization date of June 2001. Again this deadline was not respected, since a number of issues related to the transfer had still to be resolved, such as the payment of bonuses, which in the opinion of the State were part of the staff salaries and which the Federal Government refused to pay to the State. The State had also requested an increase in the rail fare to a level closer to the municipal bus fares but wanted the Federal Government to increase it prior to decentralization, so that the political responsibility would not be theirs. Other issues included the role of the State in the federally financed Calafate-Barreiro extension, and, above all, the agreement by the Federal Government to support the payroll of STU-BH staff until 6 months after the completion of works. Moreover, political factors also played an important role since the Federal Government wanted the system to be inaugurated in an election year (2002). All these postponements had been accompanied by strict warnings of the Bank and culminated in the suspension of disbursements in October 2001, lifted 3 months later.

With the suspension of disbursements, both parties started talking again and all the steps were given to finally decentralize the system. By end of October 2002, the State and the Municipalities had signed the documents accepting the transfer, which was conditional to the approval of the law guaranteeing the payment of staff salaries until 6 months after the completion of the works. This law was submitted for approval, but at that time the new Federal Administration was already elected and its Transition Commission, negotiating the handover with the outgoing government, refused to pass it. Indeed, the newly elected Government was heavily under the pressure from the railway unions, which defended the Federal employee status since it traditionally guaranteed more stability than the one of State employee.

With the taking over of a 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 of the Cities proposed a change in the decentralization model. 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

- 8 - restrictions on disbursements in the last three years had delayed the completion of the works. Therefore, a gradual decentralization process was proposed (instead of outright decentralization) 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.

The new model, worked out in detail by CBTU and the Ministry of Cities, was only presented in September 2003. It envisages a management contract as the basis for the payment of salaries and operating subsidies by the Federal Government and the constitution 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, at least until the works are completed.

The State and the Municipalities accepted in principle the new model, but reserved their right to work out more details with CBTU. In June 2004, a joint management team composed of a representative of the State, the Federal Government (CBTU) and the Municipality of Belo Horizonte was nominated and thus started the gradual decentralization process of STU-BH. In that occasion, CBTU also passed the responsibility for the supervision of the final works to the local level. With this action the first and irreversible steps of the new model were given.

Important Decentralization Milestones Date Achievements November 1995 Detailed transfer program approved May 1997 Creation of the Special Commission for the Transfer of the System that met regularly throughout the project implementation period July 1997 Approval by State of Minas Gerais of a law to create a new company (Trem Metropolitano de Belo Horizonte S.A. - TMBH) to abosrb STU-BH December 1997 Approval of a decree authorizing the Municipality of Belo Horizonte to subscribe 35% of the shares of TMBH July 1998 Approval of a municipal law authorizing the Municipality of Contagem to subscribe 10% of the shares of TMBH Beginning 1998 Appointment of the directors of TMBH by both levels of government, as well as indication by the State of the intention to concession out the system to the private sector 1998 State election and defeat of incumbent government, which meant uncertain about concessioning the system out and the need to nominate a new director February 2000 Approval of articles of agreement for the new company, election of the Board of Directors and the Fiscal Council December 2000 Approval of a new detailed transfer program 2001 Appointment of new director by State October 2001 Suspension of disbursements since several decentralization deadlines had not been complied with End of December 2002 Opposition of the Transition Commission of newly elected Federal Government to support the payroll of STU-BH staff until 6 months after copletion of work March 2003 Announcement of the new Federal Government of its intention to change the decentralization process with a gradual model to be completed by June 2004 September 2003 Ministry of Cities presented new decentralization model, elaborated by CBTU October 2003 State and Municipality showed their satisfaction with the model and worked with CBTU on the details June 2004 Nomination of a joint management team and delegation of the supervision of the works to the local level

- 9 - The reduction of the environmental impacts on the BHMR due to motor vehicles and the promotion of non-motorized transport modes (objective c) was substantially completed with the introduction of the new centralized traffic light system, which is already operating but is expected to become fully functional at “real time” in the beginning of 2005. The new system already provides for more efficient traffic management since traffic light maintenance is simplified and errors in the system are automatically detected. Enhanced user information through message panel is also available. All this has reduced the environmental burden from motorized traffic, and will, once the system is fully functional, further improve traffic circulation, speed up bus operations, and consequently decrease energy consumption, reaching the desired environmental benefits, which are estimated at a 23% reduction of emissions (CO, Nox, VOC and CO2), an annual saving of 7.7 million l of gasoline and 1.1 million l of diesel. The installation of less energy consuming LED lighting constitutes a further progress in the same direction.

Pedestrian safety and security is already improved through a considerable expansion of crossings with pedestrian lights, longer pedestrian cycles and an important increase in lights that can be activated by pedestrians. It will be further improved once the centralized traffic light system is operating in real time due to reduced pedestrian waiting times at traffic lights and more efficient LED lighting. Other measures to promote walking include the improvement of accesses to stations through sidewalks and overpasses, better parking policies and traffic safety campaigns. BHTRANS also carried out a detailed safety audit, with the respective recommendations being under implementation.

Bicycle facilities exist in the São Gabriel and the Eldorado stations and are planned at Vilarinho and José Cândido. The construction of bikeways in the catchment area of the metro is also envisaged.

Based on these considerations, the objective is rated as satisfactory.

The improvement of the accessibility of the low-income population to employment centers, health and education facilities (objective d) was achieved in a number of ways. First of all, the metro system is mainly used by lower income groups to reach work places and health and education facilities. Indeed, according to a user survey carried out by CBTU in 2000, about 50% of the users of the metro system belong to households earning less than 5 minimum salaries, with 23% earning less than 3 minimum salaries and only 17% earning more than 7. This user profile is also reflected in their education, with 28% being illiterate or not having completed the first 8 years of compulsory school attendance. In particular, the extension of the system to Vilarinho, in Venda Nova, and the integration of the system at São Gabriel attends the mobility needs of some of the poorest areas in the BHMR. Even with a lower than projected frequency (due to manual signalling) in the São Gabriel to Vilarinho link, the lower income users living in the areas of influence of the new stations have lower out-of-pocket costs with a combination of access by foot/rail and/or municipal bus/rail/municipal bus. The impact will be more significant when the signaling of the new link is completed and the train frequency increased.

Low income populations are also considerably better off because of the improvement of the accesses to the Vilarinho and Eldorado stations and the increased integration possibilities. Moreover, the project put specific focus on people with reduced mobility. Indeed, in addition to the questions of accesses, all metro stations are equipped with elevators for the elderly and disabled people and escalators. This has been accompanied by a strong committment by BHTRANS to favor those with “reduced mobility”. This led to equipping 13% of their bus fleet with elevators/low floor. Full conversion of the fleet is expected by 2006. In addition, special minibus lines were created to serve people with reduced mobility. The latter are also privileged in the new parking strategy, with the provision of a considerable number of reserved parking spaces.

- 10 - Another aspect that furthers inclusion, is the creation of seven minibus lines with reduced fares (R$ 0.35 instead of the basic fare of R$ 1.45) to serve slums (vilas and favelas). Bicycle facilities will also facilitate the metro-bicycle integration and reduce transport costs for users.

Based on all these considerations, the objective is rated as satisfactory.

4.2 Outputs by components: Part A - The Infrastructure and Equipment Component (planned US$ $ 182,700,000; actual US$ 191,598,000) This component was designed to extend STU-BH’s rail system and to build the additional stations required to enhance modal integration, to build transfer terminals and improve physical accesses required for the actual integration of buses, rail, pedestrians, cars and bicycles, and to install a road traffic signal control system to improve traffic safety at 263 intersections. It was 72% completed at the closing date of the loan, thus can be 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 budget allocation for fiscal space reasons, (ii) the late effectiveness of the project, and (iii) some procurement delays due to court litigation. Each subcomponent is examined in detail as follows.

The Civil Works Program (93.3% completed) consisted of (i) Lot A, including the construction of two stations, one tunnel, two railway viaducts, one road viaduct and two pedestrian overpasses (100% completed); (ii) Lot B, comprising of the construction of one station, one tunnel, one road viaduct and two pedestrian overpasses (100% completed); (iii) Lot C, consisting of the construction of one station (100% completed); (vi) Lot D, consisting of the construction of one station, one pedestrian underpass, one road viaduct, one pedestrian overpass (100% completed); (v) the construction of one station and the building for STU-BH’s administration (100% completed); (vi) the construction of two terminals (one 100% completed and one in the bidding phase for the design); (vii) the acquisition of elevators and escalators for all stations (100% completed); and (viii) improvements of accesses to stations and the construction of two pedestrian passages (100% completed).

The Permanent Way Program (100% completed) included (i) the provision of track materials for a 5 km line from Santa Inês to São Gabriel and (ii) the construction of a 7 km line extension from São Gabriel to Vilarinho.

The Systems Program (83.9% completed) included (i) the installation of 6.6 km of overhead catenary and transmission cables, one sub-station and one sectionalizing cabin (100% completed); (ii) the replacement of the existing Central Traffic Control (CTC) from Eldorado to São Gabriel (100% completed); (iii) the installation of vital interlocking relaying circuits in the 5 km section from Santa Inês to São Gabriel with materials and equipment in stock (100% completed); (iv) the supply and installation of a new signaling system in the 6.6 km extension (47.2% completed); (v) the installation of a Virtual Integrated Internal Phone Network (100% completed); (vi) an integrated telecommunication system on the São Gabriel-Vilarinho extension (100% completed); and (vii) ticketing control equipment in all 19 stations (100% completed).

The Workshop Program (51.6% completed) included the provision of miscellaneous equipment for the new Matadouro workshop, and of equipment for general maintenance of the permanent way and systems.

The Rolling Stock Program (75% completed) included (i) the improvement of five EMUs (bidding process to be launched); and (ii) the acquisition of ten EMUs (all delivered).

- 11 - Part B - The Environmental and Traffic Safety Program (planned US$ 360,000; actual US$ 500,000) 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; and (b) develop a traffic management and safety program. In 1997, the Municipality of Belo Horizonte, through BHTRANS, asked the Bank to replace the study regarding traffic safety and the design of the inspection and maintenance (I/M) program with the acquisition and installation of two air pollution monitoring stations. The Bank agreed with this replacement (see Aide Memoire of July 14 to 15, 1997), but the bidding process was only launched in June 2004 due to a lack of resources. The design of the I/M program will be undertaken by the State/Municipality following guidelines by the Federal Ministry of Environment.

As far as traffic management is concerned, however, the Municipality of Belo Horizonte carried out a number of important activities, namely the installation of new pedestrian lights, the application of pedestrian activation devices, and the preparation of the network for the electric feeding of lights. A new control software is operational, and 244 new traffic light controllers, nine area concentrators and ten electronic message panels were installed. The control center and the data transmission network are also ready. It is expected that the system will be fully real-time operational by the beginning of 2005. In terms of traffic safety, BHTRANS carried out a complete Transit Safety Audit to assess the operating conditions of crossings, the programming of traffic lights and their visibility, the geometric conditions, the existence of safety devises for pedestrians and the quality of road markings and signs. The recommendations of this audit are under implementation. The Municipality of Belo Horizonte is also currently investing about US$ 5.5 million for the improvement of the principal transport corridors, the introduction of bus lanes and the elimination of bottlenecks. This is expected to further increase public transport speed and improve pedestrian safety. Other measures implemented by BHTRANS include the introduction of parking policies and the organization of traffic safety campaigns.

Considering the large amount of activities related to traffic management and safety carried out by the Municipality of Belo Horizonte and the fact that the bidding for the air monitoring stations was launched before the closure of the project, this component is rated satisfactory.

Part C - The Policy and Institutional Development Action Plan (planned US$ 14,280,000; actual US$ 14,995,000) This component embraced training, technical assistance and studies to facilitate and assure the long run sustainability of the decentralization process. It included support for the decentralization and modal integration processes and improvements in the STU-BH’s system management. It is rated satisfactory, even if not everything that was originally envisaged was carried out because of the replacement of some studies and consolidation of others into major activities, as well as the delay in the decentralization of the system. Nevertheless, some of the results on the institutional front are very important and are described below in a more detailed way.

In terms of support to the decentralization process the main outputs are: (i) a blueprint for the institutional and organizational transfer arrangements; (ii) the evaluation of STU-BH’s assets and completion of an inventory required for the transfer; (iii) an action plan regarding the human resource needs, which led to the hiring of more operating personnel; and (iv) the preparation of the legal documents for the decentralization.

Providing support to the management of the decentralized system was not possible since the first step to decentralization only took place just prior to loan closing. Nevertheless, STU-BH improved the management information systems, carried out a study regarding alternative institutional models, considering partnerships with the private sector. This study also known as the “concession study” was very

- 12 - comprehensive since it started by examining the technical, staffing, and financial situation of the system and then proposed and evaluated several private sector participation options for different scenarios. As mentioned above, the comprehensiveness of the study allowed the State to decide the extent of subsidies and private sector participation required. On the other hand, private financing in Belo Horizonte is already a reality, with 13.3% of STU-BH’s revenues in 2003 coming from non operational sources, mainly through advertisement in stations and on vehicles, which at appraisal only amounted to 6.2%. Another study analyzed the structure of the public transport fare system for the BHMR.

Staff from the STU participated in several seminars on procurement, disbursement, privatization and regulation of transport services, transport coordination and decentralization and other public transport related topics, which were financed under this component.

Support to modal integration was provided through several studies, including (i) the Origin/Destination (O/D) survey for the BHMR, the first in 10 years, which is now completed; (ii) the METROPLAN, that is the study to design an Integrated Urban Transport , Land Use and Air Quality Management Strategy for the BHMR, which will be the first ever done in the region; (iii) the rail passenger master plan (plano diretor de transporte de passageiros sobre trilhos) of RMBH; (iv) the elaboration of a study regarding the fare structure of the public transport system in the BHMR; and (v) the elaboration of the basic projects for Lines 2 (Calfate-Hospital) and Line 3 (Lagoinha-Savassi) to prepare the system for future expansions.

Additional studies and consulting activities that took place under this project include the technical assistance in the resettlement and expropriation operations, environmental assessments for the extension to Vilarinho, engineering studies and designs, and technical project supervision.

In summary, some of the results achieved by the project particularly on the institutional component are noteworthy and draw intensively on this component. They include:

(i) the beginning of the decentralization of STU-BH from the Federal Government to State of Minas Gerais and Municipality of Belo Horizonte, including the realization of a seminar on international experience to assist the new Federal Government in strengthening their new decentralization model; with participation from the Consórcio de Transportes of Madrid and the Paris public transport operator (RATP);

(ii) the creation of a new company, TMBH or METROMINAS, to operate the transferred assets;

(iii) the hiring of additional operating staff which had been blocked for years;

(iv) the regular functioning of a regional transport coordination commission, and the proposal of a law to restructure AMBEL, which is likely to formalize this entity;

(v) a concession study to evaluate options to increase private sector participation in the decentralized system, so that the State could decide a road map for its future;

(vi) the introduction of the BHBUS system by the Municipality, which emphasized hub and spoke networks and re-routed several lines to serve the rail system.

4.3 Net Present Value/Economic rate of return: Project works, which accounted for a total investment net of taxes and duties of US$ 123.425 million, yielded a project net present value (NPV) of US$ 48.907 million, and an economic rate of return (EIRR) of

- 13 - 17.1%. These calculations also include the benefits of the externalities stemming from project implementation, i.e. improved air quality and reduced accidents.

4.4 Financial rate of return: Not applicable.

4.5 Institutional development impact: The institutional development impact of the project was substantial, as the activities described under Section 4.2 above indicate. The project provided resources for training, improved STU-BH’s management, created a strong incentive for the rail and bus sectors to regularly meet and 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-BH management team to implement the new decentralization model of the system. The other main institutional development impact was to make STU-BH fully aware of how to prioritize its investments and to be commercially oriented, trying to reduce subsidies and at the same time providing a service that benefits the low income classes.

5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Substantial fluctuations of local currency and economic crisis During project implementation, Brazil’s economy was effected 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 highly detrimental to its timely completion.

Since project costs had been estimated and were partly payable in dollars, the currency devaluation required a considerably 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.

5.2 Factors generally subject to government control: Shortage in counterpart funds and fiscal space The shortage in counterpart funds 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). While a tight control of public expenditures has helped the Government to maintain 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. The question was of fiscal space, i.e. the budget authorized to be spent in the project, from loan sources or from counterpart funds, was always smaller than the loan proceeds available and what was required to meet the proposed implementation schedule. This reduction of budget coupled with very frequent delays in allowing payments of the already limited budget led to delays in issuing bids and in the suspension of works by contractors, which had outstanding invoices. From 2003 to project closing in June 2004, this situation aggravated even further and led to the impossibility of using US$ 6.5 Million of the Bank loan funds. No further extensions of closing date were

- 14 - possible because of the age of the project and the systematic lack of compliance by the Federal Government.

Lack of leadership in the decentralization process Further factors subject to the Federal Government control were the lack of leadership in the decentralization process and the change of the model, which ultimately were responsible for the fact that the decentralization process was started very late. The Ministry of Transport and the CBTU, as the original representatives of the Federal Government, were never champions in assuring the State’s compliance with the original decentralization model, as it was the case, particularly with CBTU in São Paulo and Rio. The Ministry of Cities, which succeeded the Ministry of Transport, together with the newly appointed CBTU presidency, also contributed to the delay in the implementation of the new decentralization model, as outlined in Section 4.1, despite Bank requests for a faster definition of their model.

Late signing of the loan agreement and delays in effectiveness The Federal Government signed the Loan Agreements with a four-month delay, thus contributing to the postponement of the effectiveness date to 10 months after Board Approval, which caused considerable project implementation and disbursement delays. The main delays in signing were due to delays in the Senate approval process. The delays in effectiveness were mainly related to problems in registering the loan with the Central Bank, a process which should be easy to comply with but was complicated by unacceptable bureaucracy.

Ambiguousness of the Brazilian procurement law Finally, it should also be highlighted that due to the ambiguousness of the Brazilian procurement law, as far as the applicability of the Bank procurement procedures is concerned, a small contractor association challenged the applicability of the Bank’s standard bidding documents in court. This delayed the start of the civil works and thus impacted on the project duration.

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 component, 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 asked for delegation of responsibilities to the local level CBTU’s management argued that it had to keep the project under its direct responsibility because in case of fraud and/or corruption they would be personally responsible, with a risk of confiscation of the Director own personal assets. This also created a level of tension between the local staff of STU-BH and CBTU’s staff, and between the State and the Federal Government, leading to a situation which was not favorable to 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 STU-BH’ staff in June 2004.

Lack of leadership in the decentralization process As already briefly mentioned in Section 5.2, CBTU’s presidency since 1997 was unable to provide any leadership in the decentralization process and seemed at times less interested in it than the State. While in the case of São Paulo and Rio there was a major effort by CBTU’s Board of Directors to push for the compliance with the decentralization clauses, in the case of Belo Horizonte it seemed at times that the Board of Directors would create rather than remove obstacles for the transfer of the system. Part of this negative attitude can probably be related to the political power that would be lost by CBTU’s leadership after transferring the Belo Horizonte system. CBTU’s leadership from 2003 onwards also seemed very

- 15 - undecided on how to implement the new model. Moreover, it was pressured by the railway unions, which preferred to continue under the Federal Government mainly because they feared a greater likelihood of system concessioning to the private sector under the State and Municipal authority. A strong intervention of the Ministry of the Cities almost at the end of the project was necessary to force the start of the decentralization process.

5.4 Costs and financing: Actual project costs were slightly higher than appraisal estimates (US$ 207.09 million versus US$ 197.34 million at appraisal). The cost overruns were mainly due to a need for additional resettlements (see Section 10 on Resettlement), increased market values for land, additional activities or details not envisaged at appraisal or required by the 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.

The project suffered considerable disbursement delays, that at project closure reached 47 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, four loan proceeds reallocations were granted, adjusting the percentages of expenditure financed by the Bank. At the original closing date (December 2001) the Bank loan was 75% disbursed. Five project extensions were granted. At project closure the disbursements amounted to 92.16% of the Bank loan. A four-months grace period for the payment of invoices issued before loan closure was granted, at the end of which 93.05% 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 the contracts are signed and undergoing.

6. Sustainability 6.1 Rationale for sustainability rating: Sustainability is rated as likely. The successful collaboration in terms of integration with BHTRANS, the constant dialogue among all bus operators and the metro, and the creation of a joint management team to run the system and complete the decentralization process agreed with by the Federal Government, and a number of legal changes to facilitate full integration and coordination are all factors that bolster project sustainability (for details see Section 4.1).

The extension of the metro network in Belo Horizonte increased its potential for commercial viability and the rolling stock and track infrastructure component arrested the deterioration of the system. In fact, even if this process is not yet completely finalized, it has already prompted a significant recovery in daily passenger levels, which nearly doubled since appraisal. Once the automatic signaling system on the Vilarinho link is working, the train frequency will be increased, and with all rolling stock 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.

Equally, the improvement of the traffic light system and the reorganization of the bus system are two aspects which will improve road circulation, thereby decreasing congestion, reducing negative externalities and strengthen the overall level of performance of the urban transport sector.

- 16 - Furthermore, the existence of a blueprint for the integrated urban transport, land use and air quality strategy as a result of the METROPLAN and the study of the two extensions for the system will allow decision makers to consider, in a very rational way, the best options for improving the overall urban transport system of the BHMR.

The interest of the private sector in the system should also be seen as an indication of its likely sustainability. Indeed, the Oiapoque terminal was implemented with a private investment of US$ 135,000. The private investments in the Barreiro integration station totaled US$ 13,500,000 and another private partnership that brought investments of US$ 330,000 took place for the installation of shelters for public transport users.

Finally, the recent reelection in the first round of the incumbent Mayor of Belo Horizonte means continuity 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 rail transport sector in Belo Horizonte, support the transition of STU-BH 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. Also the extension of the rail system to some very poor areas of the BHMR was important in the decision to support the project.

In that sense, the project was fully in line with the 1993 CAS that 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 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, a 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 or political 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,

- 17 - land use and environmental aspects. It also stressed the need to look for financing mechanisms for the sector, such as advertising, the use of station space for shops and community events, the use of the right-of-way for cable and fiber optics, and investigated the potential of private sector participation. Nevertheless, the complexity of the decentralization process in Belo Horizonte was somewhat underestimated by the successes in São Paulo and Rio. And, so was the magnitude of the counterpart funds shortage due to the stringent Brazil-IMF surplus targets, which led the Treasury to prioritize its projects, relegating investment on infrastructure to a very low priority and causing considerable delays. Finally, the schedules for works, which had been based on similar experiences in Brazil, turned out to be very optimistic, particularly due to litigation in the procurement process and because some firms lacked the working capital to survive the long delays in payment by CBTU.

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 senior consultants in works, 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 non 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 main part 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 of 63.8 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 duration. 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 strong institutional memory to guide the Borrower through implementation difficulties.

Supervision was particularly intense for the works between São Gabriel and Vilarinho, 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 studies that laid the ground for the decentralization of the system and that investigated the alternative institutional models, including the private sector involvement, were closely followed. Supervision intensified even more when the several deadlines for decentralization were near. The project team met several times with the representatives of the State, Municipalities and Federal Government trying to act as an honest broker in the delicate negotiation process. Several meetings were held with the Ministries of Transport and Cities to discuss the issues and changes in the model. The Federal Secretary of Foreign Affairs (SEAIN) was periodically informed of the status of the project, the budget constraints, and the delays in the decentralization process.

For each supervision mission, the Implementation Agency prepared a detailed project status report. This allowed for timely identification of problems, implementation delays and spending shortages, thereby

- 18 - facilitating the corrective actions. All supervision missions were documented in the PSRs and the Aide Memoires.

During 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 full integration of the system. Thus, the targets set at the appraisal, still to be met when the works are fully completed and the integration realized, were adjusted to reflect these implementation delays.

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 changes in the political composition at State and federal level required the task manager to send several 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 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 relentless pursuit of this objective paid off.

Based on all these considerations, supervision is considered fully satisfactory.

7.3 Overall Bank performance: The Bank team played an important role during project identification, preparation and appraisal and their 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 Government and the Municipality. It facilitated the continuous dialogue between the metro and the bus operators at municipal and intermunicipal level and the creation of the joint management team for the operation of the metro. 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 the 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. Both adequately identified the required civil works, assessed the status of the rolling stock, estimated the investment needs and recognized the institutional weaknesses in the sector. They supported the Bank team in the preparation of the project and facilitated all the 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

- 19 - provided substantial logistical support and the necessary information to appraise the project. Nevertheless, they also underestimated the complexity of the decentralization process and the extent of the resettlement and expropriation needed.

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, the original decentralization process which was about to be implemented was brought to a halt and the responsibility for the project transferred to the newly created Ministry of Cities. The latter also took very long to present its new decentralization model and together with CBTU 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 Ministry of the Cities claimed its budget was insufficient. The State and the Federal administrations also failed in seeking appropriate and quick solutions for the commitments they had assumed.

The State of Minas Gerais and the Municipality of Belo Horizonte were not very cooperative on the decentralization process either since it took them a very long time until they created the company expected to take over STU-BH. The process improved when the Bank suspended disbursements and, after they had reached an agreement that the Federal Government would pay the salaries for a certain period after the completion of the works, the State/Municipality promptly prepared all the documentation necessary to receive the system. Nevertheless they took long to do so. Once the new decentralization model was proposed in September 2003, the State and the Municipality supported it with enthusiasm and completed the steps for the joint management of the system. The State was also unable to put effective pressure on the DER-MG to produce a rationalization of the intermunicipal bus system and a more efficient modal integration.

Based on these considerations, 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 Minas is concerned, their effort towards the end of 2002 to receive the system and the law delegating to the new company the management of all intermunicipal buses make its performance marginally satisfactory.

The Belo Horizonte Municipality’s performance was satisfactory because it supported the bus rationalization and system integration through the BHTRANS, worked effectively with CBTU and the State, provided the technical support in the implementation of the traffic light system and had also prepared all the documentation to receive the system by the end of 2002.

- 20 - 7.6 Implementing Agency: The Project Implementation Unit (PIU) of CBTU was adequately staffed with well-skilled engineers and planners, and supported by a project implementation consultant. Moreover, the head of the PIU 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 CBTU's decision-making level. The fact that CBTU’s central organization in Rio insisted in directly managing the civil works and the equipment component, 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’s staff 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 to June 2004 was slow in accelerating the signaling works and the completion of the Vilarinho terminal as well as in finding ways to use the outstanding loan funds through agreements (convênios) with the municipality which could have increased loan disbursement. When they tried it was too close to the closing date. 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, arguably more for reasons of political control 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 than before but unfortunately its Technical Directorate was weak and uninspiring in finding ways to overcome work stoppages by subcontractors.

Considering the good performance of CBTU’s PIU, the performance of the Implementation Agency overall is 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 rating, and considering 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.

- 21 - 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 agree upon integration, 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 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 required by the local authorities, 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 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.

Public Transport Integration: As mentioned before, the bus and metro operators in the BHMR have more or less regularly met throughout the implementation of the project under the auspices of a commission operated as a thematic chamber of AMBEL, and the integration of the bus and rail system in Belo Horizonte has been very successful as far as the municipal area is concerned. The introduction of smart card-based ticketing, already available on all municipal buses, is only a step away from becoming a reality also on the metro system.

Regarding integration with the intermunicipal buses under the responsibility of the State, however, the process is slower, mainly due to the strength of the bus lobby and the absence of a strong champion. This confirms that even in a “collaborative environment” public transport integration needs strong political champions that have the courage to take on the fight against bus lobbies to impose the changes necessary to rationalize the system.

Fight against informal transport. One of the reasons for the success of BHTRANS was the courage of the mayor’s office of Belo Horizonte to prevent and eliminate the proliferation of informal transport. Only few mayors in Brazil had the courage to do so and, if not handled properly, it normally leads to the quick deterioration of formal bus operations, the increase of congestion and a rise in the accident numbers.

Resettlement: It is a good idea to build a strong communication program and linkages to affected communities in order to create a favorable atmosphere for negotiations. In this case, a strong neighborhood leader was able to win significant enhancements to the project design, largely because of his skillful management of political relations in the municipality. It is best not to delay releasing information about the exact dimensions of a resettlement plan. With good communication, the proponent can explain a certain degree of uncertainty regarding actual displacements to the public. It is more damaging to leave the public in the dark about whether they will be displaced or not.

- 22 - A recommendation from this project is that better follow-up on families that accepted cash compensation should be carried out to determine whether they were able to restore their previous quality of life and incomes. It also resulted that assistance to the formation of neighborhood associations is a good idea and it helps create self-sufficiency for the resettled population, as opposed to their depending on the project management to solve all their problems for them.

Another lesson is that precautionary inspections of all homes and other structures in the vicinity of large-scale works should be made to assure that claims made against the project are valid and, where necessary, to shore up homes that are likely to undergo damage from blasting or the movement of heavy equipment. Finally, project proponents should be proactive in securing titles for families resettled to housing projects. Experience has shown that delaying issuance of titles does not retard the process of sales and the lack of a legal title will simply lower the sales value to the seller and make it more difficult for the buyer to regularize his/her purchase.

9. Partner Comments (a) Borrower/implementing agency: CBTU - Companhia Brasileira de Trens Urbanos Loan Agreement Nbr. 3916-BR Brasil

Preface This is the final report on the Belo Horizonte Metropolitan Transport Decentralization Project implemented with the participation of CBTU - Companhia Brasileira de Trens Urbanos, the Government of the State of Minas Gerais, the Belo Horizonte Mayor Office and the Federal Government of Brazil, which was awarded US$ 99 million financing by the IBRD – World Bank under a Loan Agreement signed on November 30, 1995.

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 18, 2004, and US$ 92,123,140.96 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 Projects for Salvador and Fortaleza.

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

- 23 - Project Objectives

On November 30, 1995 the following documents were signed: Loan Agreement LN-3916-BR, between the Federative Republic of Brazil and the IBRD; Project Agreement, between a CBTU and the IBRD; and Shareholders Agreement, between the Government of the State of Minas Gerais, the Belo Horizonte Mayor Office and the IBRD. The Loan Agreement signed with the IBRD was for US$ 99 million. By adding US$ 98,34 million, which represented the counterpart to be disbursed by the Federal Government, the Project value was a total of US$ 197,34 million to be invested in the expansion of the Belo Horizonte Metropolitan Rail Network for the implementation of contracts under three major classes: works, goods and consultant and training services.

The project objectives are as follows: establishing an integrated transport network in the Belo Horizonte 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 Belo Horizonte, and transferring such network from the federal authority to the State of Minas Gerais and the Municipality of Belo Horizonte; 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 Belo Horizonte Project was considered to be of foremost importance to enable CBTU to promote the improvement in urban rail transport with the implementation of its integration to other modes, thus introducing a substantial improvement of the quality of population mobilization in the urban area. The model adopted for project implementation was similar to the ones developed for São Paulo, Rio de Janeiro e Recife.

Experience Acquired in the Implementation and Achieved 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 6.6 km of electrified and signaled double tracks observing the technical standards, as could be found in the section in operation, but with substantial improvement in operational conditions, with the implementation terminals for the integration with the bus services, as well as an improvement in terms of user comfort by introducing escalators and elevators in stations platform access ways, including the sections already in operation, introducing the automatic ticketing system (integrated with the bus ticketing system), and by acquiring equipment for the O.C.S., superstructure and workshops maintenance network;

· 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 portion of the investments to improve the road traffic conditions in the Belo Horizonte Metropolitan Area by implementing the Area Road Traffic Control Network – CTA, thus showing that the Belo Horizonte Metropolitan Rail Transport Project was not an isolated Project but that it resulted in upgraded conditions for the urban population as a whole;

· a political and institutional development component that offered a set of technical resources to the new local operators in the areas of administration, finances, operation and expansion of urban transport

- 24 - 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.

Institutional actions were implemented by the State and the Municipalities, such as the formation of the “Trem Metropolitano de Belo Horizonte” company, with the State of Minas Gerais subscribing 55% of the capital, the Municipality of Belo Horizonte 35%, and the Municipality of Contagem 10%, to incorporate CBTU’s Superintendência de Trens Urbanos de Belo Horizonte. On January 29, 2003, Delegate Law No. 100 was enacted authorizing the change of the company corporate name to “Transportes Metropolitanos de Belo Horizonte S/A”, and included in the corporate object the responsibility to administer, regulate and supervise the inter-municipal mass road transport in the Belo Horizonte Metropolitan Area.

Upon entering into the World Bank loan contract, such contract became effective on April 19, 1996, institutional model alternatives for the institutional area were studied, considering the idea of partnership with private enterprise efforts, mass transport network fare structure, and the Metropolitan Area mass rail transport master plan elaborated, which permitted the signature of contracts for the Belo Horizonte transport metropolitan plan in progress.

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 reason 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;

· late completion of basic projects and of terms of reference in respect of the four major lots comprising the civil works for section expansion (São Gabriel – Vilarinho), together with a legal injunction filed during the pre-qualification stages of bidding processes in respect of two of such lots that led to a one-year delay in the signing of their respective contracts, and the works that should have been started in the first half of 1996 were started in June 1997;

· problems with expropriations in one of the lots, the accident with the Heliópolis tunnel and the need for Project alterations in all lots resulted in the need for added services and deadline extension for the completion of civil works. Such facts and instances of late payment due to budgetary-financial limitations, as explained hereinbelow, led to a term of 36 months instead of the 24 months contemplated under the original contract schedule, and the works could only be completed at the end of May 2000;

· 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 strategy adopted was that of assigning priority to the completion of the civil works and the discharging of all commitments already undertaken,

- 25 - and the postponement of all procurement activities in respect of the fixed systems (signaling, power and telecommunications) related services;

· legal and administrative appeals filed by a bidder during the bidding process stage for the railway signaling system have delayed in practically one year the beginning of the services, and problems in the releasing of resources under the budgets for 2003 and 2004 led to the necessity to rework the implementation schedule. Thus, the completion that was initially contemplated to occur at the same time as the date of completion of the IBRD financing agreement had to be postponed to the end of 2005, and the São Gabriel-Vilarinho section is expected come into operation under local control from Vilarinho in June, 2005;

· legal problems involving the bidding process for the Vilarinho Terminal resulted in the annulment of the bidding process and the consequent termination of the contract that had been prepared in respect thereof. The concept Project for such Terminal is in its final stages and it is contemplated that the bidding process and implementation mode should observe criteria as defined by the principle of public-private enterprise partnership (PPP).

Project appraisal criteria as contemplated under the Loan Agreement comprised operational and financial targets to be met along certain stages of project development. The final target as established had its implementation dependant amongst other principles on the prior completion of the signaling system and the integration terminals that should be already in operation. The most relevant completion amongst those is the one in respect of the Vilarinho Terminal. Pursuant to the information hereinabove the signaling system and the terminal in question could not be completed within the date of completion of the financing by the World Bank. It follows that if such aforementioned limitations had not occurred the Belo Horizonte Metropolitan Rail Transport Network Project would have been completed and ready to meet a demand figure of 335 thousand passengers/day. As of today’s date, the network's weekday average daily passenger number is 110,000 passengers/day.

An appraisal of the Project in its entirety shows us that the investments made are perfectly compatible with the originally contemplated technical premises as comprised under the Staff Appraisal Report, and only the current shortcomings that prevent the increased demand in transport need to be eliminated.

World Bank Participation

This Project added to the partnership between CBTU and the World Bank. From the very beginning of the Metropolitan Transport Decentralization 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 dialogue between the two government levels for the effective formation of the Regional Transport Coordination Committee to be set-up to coordinate and recommend common policies in respect of the setting of fares, regulation, financing and Projects appraisal; the reluctance in introducing air quality regulatory policies that would be unpopular; possible delays in the procurement proceedings; the delays in the effective transfer of the operating company to the local authorities; and the availability of counterpart financial resources. Such risks did materialize in various degrees of intensity and were described 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.

This Project has made it possible to start the reorganization of the management and operation of mass transport activities in the Metropolitan Area of Belo Horizonte, and for CBTU to approach the agencies in charge of the various road transport modes in the State and in the Municipalities involved. The result was that a New Decentralization Model was established.

The New Decentralization Model proposed by CBTU and by the Federal Government 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 encourages the formation of an agency to be in charge of the management of the transport network 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.

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

· Signing a new Decentralization Agreement;

- 27 - · 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 with intervention by CBTU.

We have observed that upon the enactment of Delegate Law N. 100 that assigned the responsibility for the management, establishment of norms and supervision of the Belo Horizonte Metropolitan Area inter-municipal mass road transport to the Transportes Metropolitanos de Belo Horizonte S/A company, it has been ensured that the State Government took steps to reestablish the mass transport metropolitan management, as the new shareholders are the State and the Municipalities of Belo Horizonte and Contagem. Under such arrangement, the Transportes Metropolitanos Company may become the forming cell for the development of the metropolitan transport consortium as the management agency for local transport networks.

At the beginning stage in which the Decentralization Agreement is being entered into and the spin-off of CBTU Superintendência de Trens Urbanos de Belo Horizonte is effected, and in addition to the Federal Government, the State and the Municipalities of Belo Horizonte an Contagem become shareholders, there is the beginning of a network under multiple management. The Transportes Metropolitanos (TMBH) company is at that stage a company concessionaire of the metropolitan inter-municipal lines and of the mass rail passenger transport. The Metrô System will be a sub-concessionaire thereof, the same as the bus operating companies. Networks financial integration will be through Clearing Chambers.

At a second stage the transformation of the TMBH into a public consortium will be implemented after the enactment of a law by the National Congress, thus promoting the admission of other metropolitan Municipalities. In its capacity as a government company of public law the consortium will assume the status of public power in charge of assigning inter-municipal and even municipal lines pursuant to the provisions under the metropolitan pact.

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):

- 28 - 10. Additional Information Resettlement The resettlement for this project required complex negotiations with the affected communities in order to be completed. A total of some 548 families had to be displaced to make way for the metro system and stations. Additionally, some 27 commercial establishments were displaced. Of these, only 60 families had legal title to the land on which their homes were built. Another 38 families were renters. The resettlement plan was well designed with alternatives offered to families that lived along the offset of the rail line. There were some problems in completing the plan because CBTU was delayed in releasing the final design of the rail line and stations, which caused delays in the completion and the implementation of the resettlement plan. This may have been the consequence of excessive caution on CBTU’s part because it did not want to create false expectations on the part of families whose homes may not need to be moved. In hindsight, it would appear that the uncertainty that the affected families experienced was more damaging to the project than if CBTU had simply admitted that it was uncertain whether or not the project would affect certain homes.

During the construction period some families in middle-class areas complained that cracks had developed in the walls of their homes due to blasting and the movement of heavy equipment. Contractors visited these homes and, where necessary, made repairs.

The resettlement design called for cash compensation for any family that preferred this option. Renters were provided with a cash allowance equivalent to six-months of rent and assistance with finding new housing. The owners of rental homes received cash compensation for their property losses according to their assessed value. The compensation scheme provided for a subsidy above the level of the assessed value of property and improvements inversely related to the value of the assets. Under Brazilian law, occupants who lack legal title to their lots may not be compensated for land but may be compensated for the improvements on that land. Families with total assets below a specific floor were entitled to a minimum cash compensation that included a heavy subsidy component to assure that they would be able to purchase a new home elsewhere.

Most of the very poor families, however, preferred to accept the alternative of resettlement in a housing project that was built in the Arco Iris neighborhood. In some cases families that had migrated to Belo Horizonte from rural areas used their cash compensation to return to their original homes in their home towns. Many affected families resided in a neighborhood known as Primeiro de Maio which consisted mainly of very low quality housing all of which constituted an informal neighborhood with no legally titled owners. The entire neighborhood was required by a station site for the rail system as well as works for the Belo Horizonte sanitation project, PROSAM. A local priest became the chief spokesperson for the families in Primeiro de Maio and he demanded a quality of housing that went well beyond the standard usually provided in such cases. The result was a standard home of 45m2 of built space on a 150m2 lot (the original design called for a 35m2 house on a 100m2 lot). The new housing project brought together families displaced by both the Metro and PROSAM projects involving some 350 homes on a hillside site that provided many amenities to the resettlers. Of these families, some 548 were displaced by metro construction, of which 141 opted for resettlement in a housing project, while 407 preferred cash compensation.

Surveys conducted after resettlement in the housing project in 1998 indicated a very high level of satisfaction with the quality of the housing and the convenience of the site which was only a few hundred meters away from the Primeiro de Maio neighborhood, close to a Metro station, schools and other social services, and far superior in quality to the housing that most of these families had previously occupied. To

- 29 - date, none of the families resettled in the housing project has received title to the property, apparently because the land on which the homes were built itself is not yet fully regularized.

With the assistance of the Metro and PROSAM social workers, a neighborhood organization was formed and it tackled a number of social problems that arose. In general, it can be concluded that resettlement for the Belo Horizonte Metro project resulted in a substantial improvement in the quality of life for the families that accepted housing. These families were, generally speaking, the poorest and most vulnerable of the families who were displaced. There does not appear to have been a systematic ex-post survey of families that opted for cash payments. However, most of these were middle-class families for whom moving into a housing project was regarded as a humiliating loss of status. It is fairly certain, however, that these families were able to find new housing fairly easily in the large and dynamic housing market of Belo Horizonte and it is very likely that the move had little or no effect on the incomes of the affected families. In the housing development, many families that had run small businesses from their homes were able to resume their activities in the new neighborhood and the project team made it possible for them to do so.

- 30 - 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 with joint management and proposed by the Federal Government operational autonomy 2. Construction and full operation of the line 2. Construction and full operation of the line 2. New link ready but signalling incomplete extension from Sta. Inês to Vilarinho (Via extension from Sta. Inês to Vilarinho (Via Norte) Norte) 3. Improved Accesibility and level-of-service 3. Improved Accesibility and level-of-service 3. Improved Accesibility and level-of-service for low income classes for low income classes for low income classes achieved 4. Private Sector Participation in system 4. Moderate Private participation in the 4. Moderate Private participation in the system system 5. Substantial integration with buses 5. Integration in most stations with buses 5. Integration in most stations with buses

Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1) Million passengers/year 1) 2002 revised end of project target: 34 1) 28.76 million (conservative estimate based million on the fact that there were 14.38 million passenger by June 30, 2004 2) Staff Cost as % of Total Revenue 2) 2002 revised end of project target: 100 2) 115.8

3) Revenue Cost Coverage 3) 2002 revised end of project target: 54 3) 45.1 4) Working Ratio 4) 2002 revised end of project target: 2.12 4) 2.57

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

- 31 - 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 Expropriation 4.60 14.83 322.35 2. Civil Works 54.23 47.54 86.66 3. Permanent Way 31.30 60.56 193.48 4. Systems 11.05 9.99 90.41 5. Rolling Stock 21.47 27.14 126.41 6. Goods 30.72 32.21 104.85 7. Consultant Services 12.44 14.82 119.13 Total Baseline Cost 165.81 207.09 Physical Contingencies 16.58 Price Contingencies 14.95 Total Project Costs 197.34 207.09 Total Financing Required 197.34 207.09

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 128.77 17.44 0.00 28.39 174.60 (75.13) (10.72) (0.00) (0.00) (85.85) 2. Goods 7.96 0.12 0.00 0.00 8.08 (6.60) (0.10) (0.00) (0.00) (6.70) 3. Services 0.00 0.00 14.66 0.00 14.66 (0.00) (0.00) (6.45) (0.00) (6.45) 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 136.73 17.56 14.66 28.39 197.34 (81.73) (10.82) (6.45) (0.00) (99.00)

- 32 - 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 111.23 3.40 0.00 45.44 160.07 (69.19) (1.86) (0.00) (0.00) (71.05) 2. Goods 22.65 9.56 0.00 0.00 32.21 (10.56) (5.64) (0.00) (0.00) (16.20) 3. Services 0.00 0.00 14.21 0.61 14.82 (0.00) (0.00) (4.87) (0.00) (4.87) 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 133.88 12.96 14.21 46.05 207.10 (79.75) (7.50) (4.87) (0.00) (92.12)

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 4.60 0.00 0.00 14.83 0.00 0.0 322.4 0.0 2. Civil Works 31.02 23.21 0.00 27.32 20.22 0.00 88.1 87.1 0.0 3. Permanent Way 18.06 13.24 0.00 39.42 21.14 0.00 218.3 159.7 0.0 4. Systems 7.29 3.76 0.00 4.31 5.68 0.00 59.1 151.1 0.0 5. Rolling Stock 0.86 20.61 0.00 0.00 27.14 0.00 0.0 131.7 0.0 6. Goods 20.77 9.95 0.00 16.20 16.02 0.00 78.0 161.0 0.0 7. Consultant Services 5.47 6.97 0.00 4.88 9.94 0.00 89.2 142.6 0.0 Price Contingencies 7.19 7.77 0.0 0.0 Physical Contingencies 8.35 8.23 0.0 0.0 Total Project Cost 99.00 98.34 0.00 92.12 114.97 0.00 93.1 116.9 0.0

- 33 - 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: Full benefits start in 2005, growth at 4%/year, investment costs US$ 136,600,000 Base Case: Full benefits start in 2005, growth at 2%/year, investment costs US$ 143,700,000 Worst Case: Full benefits start in 2005, growth at 0.5%/year, investment costs US$ 153,700,000

Best Case Base Case Worst Case EIRR NPV@ B/C EIRR NPV@10 B/C EIRR NPV@ B/C (%) 10% (%) % (%) 10% Eldorado- 19.1 66,229,000 1.66 17.1 48,907,000 1.48 15.3 35,479,000 1.34 Vilarinho

- 34 - This shows that in the Base Case the project investment overall yields an EIRR of 17.1% and a NPV of US$ 48,907,000.

TOTAL BENEFITS (US$ THOUSANDS) DIRECT EXTERNALITIES BENEFITS Project Calendar Travel Operating Road Bus Invest. Accident Air year year Time Cost Maintenanc System which will Savings Pollution Savings Savings e Cost Cost be avoided Savings Savings Savings 1 1995 0 2 1996 14000 14,000 3 1997 14000 14,000 4 1998 7000 7,000 5 1999 3500 3,500 6 2000 0 0 0 0 0 0 0 7 2001 0 0 0 0 0 0 0 8 2002 0 0 0 0 0 0 0 9 2003 0 0 0 0 0 0 0 10 2004 18,704 12,255 55 980 0 617 32,611 11 2005 19,078 12,500 56 1,000 351 629 33,615 12 2006 19,460 12,750 57 1,020 358 642 34,287 13 2007 19,849 13,005 58 1,040 365 655 34,973 14 2008 20,246 13,265 60 1,061 372 668 35,672 15 2009 20,651 13,531 61 1,082 380 681 36,386 16 2010 21,064 13,801 62 1,104 388 695 37,113 17 2011 21,485 14,077 63 1,126 395 709 37,856 18 2012 21,915 14,359 64 1,149 403 723 38,613 19 2013 22,353 14,646 66 1,172 411 737 39,385 20 2014 22,800 14,939 67 1,195 419 752 40,173 21 2015 23,256 15,238 68 1,219 428 767 40,976 22 2016 23,721 15,542 70 1,243 436 783 41,796 23 2017 24,196 15,853 71 1,268 445 798 42,631 24 2018 24,680 16,170 73 1,294 454 814 43,484 25 2019 25,173 16,494 74 1,319 463 830 44,354

- 35 - 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 10,698 0 0 0 10,698 3 1997 10,406 0 0 0 10,406 4 1998 36,791 0 0 0 36,791 5 1999 14,917 0 0 0 14,917 6 2000 45,480 0 0 0 45,480 7 2001 10,000 0 0 0 10,000 8 2002 7,399 0 0 0 7,399 9 2003 8,000 0 0 0 8,000 10 2004 0 1,529 2,268 422 4,219 11 2005 0 1,560 2,313 430 4,303 12 2006 0 1,591 2,360 439 4,389 13 2007 0 1,623 2,407 448 4,477 14 2008 0 1,655 2,455 457 4,567 15 2009 0 1,688 2,504 466 4,658 16 2010 0 1,722 2,554 475 4,751 17 2011 0 1,756 2,605 485 4,846 18 2012 0 1,791 2,657 494 4,943 19 2013 0 1,827 2,710 504 5,042 20 2014 0 1,864 2,765 514 5,143 21 2015 0 1,901 2,820 525 5,246 22 2016 0 1,939 2,876 535 5,351 23 2017 0 1,978 2,934 546 5,458 24 2018 0 2,017 2,993 557 5,567 25 2019 (20,266) 2,058 3,052 568 (14,587)

- 36 - BENEFITS MINUS COSTS (US$ THOUSANDS) (B - C) Project year Calendar year Total Benefits (B) Total Costs (C) Benefits minus Costs (B - C) 1 1995 0 0 0 2 1996 14,000 10,698 3,302 3 1997 14,000 10,406 3,594 4 1998 7,000 36,791 (29,791) 5 1999 3,500 14,917 (11,417) 6 2000 0 45,480 (45,480) 7 2001 0 10,000 (10,000) 8 2002 0 7,399 (7,399) 9 2003 0 8,000 (8,000) 10 2004 32,611 4,219 28,392 11 2005 33,615 4,303 29,311 12 2006 34,287 4,389 29,897 13 2007 34,973 4,477 30,495 14 2008 35,672 4,567 31,105 15 2009 36,386 4,658 31,727 16 2010 37,113 4,751 32,362 17 2011 37,856 4,846 33,009 18 2012 38,613 4,943 33,669 19 2013 39,385 5,042 34,343 20 2014 40,173 5,143 35,030 21 2015 40,976 5,246 35,730 22 2016 41,796 5,351 36,445 23 2017 42,631 5,458 37,174 24 2018 43,484 5,567 37,917 25 2019 44,354 (14,587) 58,941 EIRR = 17.1

- 37 - 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 SPECIALST HS HS (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); U S RESETTLEMENT SPECIALIS (1) 07/16/1997 1 TRANSPORT SPECIALIST (1) S S 10/08/1997 1 TRANSPORT SPECIALIST (1) S S 11/21/1997 2 TRANSPORT SPECIALIST (1); S S RESETTLEMENT SPECIALIS (1) 02/20/1998 2 TRANSPORT SPECIALIST (1); S S RESTTLEMENT SPECIALIST (1) 05/07/1998 3 TRANSPORT SPECIALIST (1); S S INFRSTRUCTURE ENGINEER (1); TRANSPORT PLANNER (1) 12/03/1998 2 TRANSPORT SPECIALIST (1); S S TRANSPORT ENGINEER (1)

- 38 - 02/10/1999 2 TRANSPORT SPECIALIST (1); S S RAIWAYS SPECIALIST (1) 06/12/1999 2 TRANSPORT SPECIALIST (1); S S STATION SPECIALIST (1) 06/12/1999 2 PR. TRANSPORT SPECIALI S S (1); INFRASTRUCTURE CONSULT (1) 06/12/1999 1 TRANSPORT SPECIALIST (1) S S 06/12/1999 2 PR. TRANSPORT SPECIALIST S S (1); CIL WORKS CONS. (1) 10/29/2000 1 PRINCIPAL TRANSPORT SP U S (1) 03/21/2001 2 LEAD TRANSPORT SPECIAL S S (1); FIN. MGMT. SPECIALIST (1) 08/14/2001 2 LEAD TRANSPORT SPECIAL S S (1); INFRASTRUCTURE SPECILA (1) 03/14/2002 1 TSK. MGR. AND TRA. SPE (1) S S 05/23/2002 3 TRANSPORT SPECIALIST (1); S S TRANSPORT PLANNER (1); SYSTEMS SPECIALIST (1) 12/30/2002 1 LEAD TRANSPORT SPECIAL U S (1) 06/27/2003 2 LEAD TRANSPORT SPECIAL S S (1); FINANCIAL MANAGEMENT (1) 06/27/2003 2 LEAD TRANSPORT SPECIAL S S (1); SECTOR LEADER (1) 10/28/2003 1 LEAD TRANSPORT SPECIAL S S (1) 02/06/2004 1 LEAD TRANSPORT SPEC (1) S S ICR 06/26/2004 3 LEAD TRANSP. S S SPECIALIS (1); TRANSPORT SPECIALIST (1); SIGNALLING CONS. (1)

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 37.7 97.8 Appraisal/Negotiation 2.8 34.1 Supervision 63.8 423.0 ICR 5.5 27.24 Total 109.8 582.14

- 39 - 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

- 40 - 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

- 41 - Annex 7. List of Supporting Documents 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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