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FILECopy Report No. 570a-BR Brazil Appraisalof a Public Disclosure Authorized SecondRailway Project December 20, 1974 Latin America and CaribbeanProjects Department Not for PublicUse Public Disclosure Authorized Public Disclosure Authorized Documentof the InternationalBank for Reconstructionand Development Public Disclosure Authorized InternationalDevelopment Association Thisreport was preparedfor official use only by the BankGroup. It maynot be published, quoted or cited without BankGroup authorization. The Bank Group does not accept responsibility for the accuracyor completenessof the report Currency Equivalents National currency is the Cruzeiro (Cr$) divided into 100 centavos US$1.00 = Cr$ 7.00 (selling) US$142.86 = Cr$ 1,000 (August 1974) Fiscal Year January 1 - December 31 Weights and Measures Metric System Metric US Units 1 ton = 1.102 short tons 1 km = 0.621 mile 1 ton-km = o.684 short ton-mile 1 pass-km = 0.621 pass-mile 1 meter = 3.281 feet 1 kg = 2,205 pounds Abbreviations COSIPA - Companhia Siderurgica Paulista CSN - Companhia Siderurgica Nacional CVRD - Campanhia Vale do Rio Doce DNEF - Departamento Nacional de Estradas de Ferro EFVM - Estrada de Ferro Vitoria a Minas ENEFER - Engenharia Ferroviaria FEPASA - Federacao de Estradas de Ferro Paulista, S. A. GEIFOT - Empresa Brasileira de Planejamento de Transportes MBR - Mineracoes Brasileiras Reunidas RFFSA - Rede Ferroviaria Federal S.A. BRAZIL APPRAISAL OF A SECOND RAILWAYPROJECT (RFFSA) TABLE OF CONTENTS Page No. SUMIARY AND CONCLUSIONS ............................ i-iii 1. INTRODUCTION ...................................................I 2. BACKGROUND .......................................... 2 3. THE FEDERAL RAILWAY SYSTEM ................. 2 A. Organization, Management and Staff .. ............ 2 B. Railway Property ...... .............. 4 C. Productivity of Operations ................ 5 D. Uneconomic Lines ......... ....................... 5 4. THE PLAN AND THE PROJECT ............................ S A. The Five-Year Investment Plan, 1975-1979 .......... 5 B. The Project and the Program of Action ............ 6 C. The Proposed Loan ................... 7 D. Execution, Procurement and Disbursement .......... 9 55. ECONOMIC EVALUATION .. ...............................ll A. General .. l1........................................ B. Traffic Forecasts ................................11 C. Cost Benefit Analysis ............................. 12 6. FINANCES ............................................ 16 A. Accounts,, Budget and Audit ................... .... 16 B. Present Financial Position .......................17 C. Tariffs and Costs ................................18 D. Future Prospects ................................... 18 7. AGREEMENTS REACHED AND RECOMMENDATION ................ 22 This Appraisal Report has been prepared by Messrs. Karman (engineer), Jones (financial analyst), Blanc and Taborga (economists) and Sander (financial analyst consultant) and has been edited by Miss Foster. Table of Contents (Continued) TABLES 1. Statistics 1969-1973and Projection for 1979 (3 pages) 2. Details of the Project (2 pages) 3. Doubtful or Remote Items Excluded from the Project 4. Items to be Financed by the Proposed Loan 5. Intercity Freight Transport Statistics (1960-1972) 6. Traffic Statistics (1968-1973)and Forecasts (1974-1979) (6 pages) 7. Intercity Passenger Traffic 8. Breakdown of the Project for the Economic Evaluation 9. Truck and Railroad Costs (3 pages) 10. Statement of Revenues and Expenses for the Years 1963 and 1968 through 1973 in Current Cruzeiros 11. Statement of Revenues and Expenses for 1973 by Region 12. Balance Sheets for the Years 1968 through 1973 in 1973 Cruzeiros 13. Analysis of 1979 Forecast Income Account by Region 14. Forecast Income Account 15. Cash Flow and Financing Plan 16. Summary Forecast Balance Sheets as of December 31, 1974 through 1979 ANNEXES 1. RFFSA Organization Chart 2. Action Taken on Uneconomic Lines 3. Uneconomic Lines and Services to be Studied 4. Brief Descriptionof Items in the Project 5. Doubtful Items Excluded from the Project 6. Program of Action, 1975-1979 7. Terms of Reference for Technical Assistance 8. RFFSA's Department of Human Development 9. Estimated Schedule of Disbursements 10. Traffic Forecasts 11. Economic Justificationof the Items in the Project 12. Future Expansion of the Steel Industry 13. Tariffs and Costs 14. Assumptions Used in Making Forecast Income Account 15. Details of the FinancingPlan MAPS IBRD 11,109 - Brazil Railroads IBRD 11,110 - Central Region System IBRb 11,111 - Southern Region System IBRD 11,112 - Rio de Janeiro Suburban Railroad System IBRD 11,113 - Sao Paulo Suburban Railroad System BRAZIL APPRAISAL OF A SECONDRAILWAY PROJECT (RFFSA) SUMMARYAND CONCLUSIONS i. The development plans of the Government of Brazil for the next five years are based in part on a substantial increase in the mining and steel industries and in agricultural production, both for local consumption and for export. Higher oil prices and Brazil's dependence on imported crude for 75% of its needs give greater urgency to self-sufficiency schemes in which the comparative advantages are in the country's favor; the steel industry and agriculturaldevelopment are examples of this situation. Railways will play a very important role in this anticipateddevelopment since there is no economic alternativefor transportingiron ore, steel, and agricultural products in bulk over long distances. The Government has therefore rightly decided to give more emphasis to rall investmentsnow than in the past. ii. This report appraises the Government'splans for the Brazilian Federal Railways (RFFSA) and concludes that they warrant Bank support. It is worth noting that RFFSA is one of the largest publicly owned corporations in Brazil, but that its organizationand management are weak. Its poor financialposition, although improving, has resulted in a continuous drain on the Federal Treasury. It is believed that Bank lending, by being associated with firm Government objectives for strengthening RFFSA's operational effi- ciency, management and planning capacity, could support both important institution-buildingand financialobjectives. iii. A loan of US$175 million is recommended to help finance a five-year (1975-1979)Investment Plan amounting to about US$4.5 billion, with a foreign exchange componentof US$2.2 billion equivalent. The present RFFSA Investment Plan, as amended by the new Governmentwhich took office in March 1974, re- flects the very high priority which the Government has placed on the improve- ment and expansion of railway services but includes items for which economic justification and optimum timing are still uncertain. Furthermore, implement- ing the entire Plan would seriously strain RFFSA's project implementation capacity. Therefore, in this report, the Plan has been divided into two parts: (a) the Project, consisting of items to be started in 1975 or 1976 and showing good justification;and (b) those items excluded from the Project because of their doubtful or remote nature. An agreementwas obtained during negotiations that execution of any major item not in the Project will not proceed until RFFSA has demonstratedsatisfactorily to the Bank that the item is economically justified and that satisfactoryfinancing would be available. Agreement was also obtained with RFFSA and the Government that implementation of certain investmentsin the Project for new construction,for which final engineering is not yet available, will not commence until final engineering is completed and the economic feasibilityis reconfirmed. The total cost of the Project - ii - is estimated at US$3.0 billi6n with a foreign exchange component of US$1.5 billion. The proposed loan of US$175 million would represent less than 6% of the total cost of the Project. iv. This would be the second Bank loan to RFFSA. The first, Loan 786-BR (US$46 million), made in 1971, helped finance facilities required to trans- port 12 million tons of iron ore annually under the MBR (MineracoesBrazileiras Reunidas) Project. Traffic started on time in July 1973, but iron ore trans- port was hindered by operational problems, mainly derailments on the existing central line whose rehabilitationwas not carried out as scheduled. Other delays were encountered,e.g., for the bridge strengtheningprogram and for providingnew workshops. The situation is improving, however, and traffic reached the forecast level monthly by November 1974. v. As the industrial and agriculturalsectors of Brazil developed, especially during the last several years, it became obvious that the country lacked capacity for transporting large volumes of bulk goods, particularly in the Rio-Belo Horizonte-SaoPaulo region,which carried about 60% of the net ton-km on 35% of the track in 1973. The developmentof a rail network to support further growth in agriculture and in the steel industry is the main objective of RFFSA's Investment Plan and comprises a major step toward correcting what would otherwise be a growing imbalance in the Brazilian transport sector. Improvement and expansion of railway services have lagged behind what would be economicallyjustified. Investments are therefore planned to rehabilitateexisting track, build new lines, strengthen bridges, eliminate level crossings,improve signalling and communications facilities, add motive power and rolling stock, concentrate and modernize workshops, and expand stations and yards. vi. A part of the proposed investments is directed toward improving the quality, and increasing