Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. P-6907-BR

MEMORANDUMAND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$350 MILLION

TO THE

FEDERAL REPUBLIC OF

FOR A

FEDERAL RAILWAYS RESTRUCTURING AND PRIVATIZATION PROJECT

May 29, 1996

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (as of May 14, 1996)

Currency Unit = Real (R$) US$1 = R$0.995

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

BNDES - Banco Nacional de Desenvolvimento Economico e Social National Bank for Economic and Social Development COFER - Commissao Federal de Transportes Ferroviarios Federal Rail Transport Commission CVRD - Companhia Vale do Rio Doce Vale do Rio Doce Company DTF - Departamento de Transportes Ferroviarios Rail Transport Department of the Ministry of Transport FEPASA - Ferrovia Paulista S.A. Sao Paulo State Railway ICB - International Competitive Bidding ICR - Implementation Completion Report IERR - Internal Economic Rate of Return MT - Ministerio dos Transportes Ministry of Transport NCB - National Competitive Bidding NPV - Net Present Value PIP - Project Implementation Plan PMU - Project Management Unit RFFSA - Rede Ferroviaria Federal S.A. Federal Railways SRP - Staff Retrenchment Program FOR OFFICIALUSE ONLY

BRAZIL

FEDERAL RAILWAYS RESTRUCTURING AND PRIVATIZATION PROJECT

Loan and Project Summary

Borrower: Federative Republic of Brazil

Implementing Agency: Rede Ferroviaria Federal S.A. (RFFSA)

Beneficiary: Rede Ferroviaria Federal S.A. (RFFSA)

Poverty: Not applicable

Amount: US$350 million equivalent

Terms: Repayment in 15 years, including five years of grace, at the Bank's standard variable interest rate for currency pool loans

Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing, less any waiver

Onlending Terms: Not applicable

Financing Plan: See para. 13 and Schedule A

Net Present Value: R$2.6 billion

Staff Appraisal Report: No. 15580-BR

Map: IBRD No. 27392

Project Identification Number: BR-PA-40028

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwiLhout World Bank authorization.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR A FEDERAL RAILWAYS RESTRUCTURING AND PRIVATIZATION PROJECT

1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Federative Republic of Brazil for the equivalent of US$350 million to help finance a project for the restructuring and privatization of the federal railways. The loan would be at the Bank's standard variable interest rate, with a maturity of 15 years, including five years of grace.

2. Country Background. The macroeconomic policy framework in Brazil remains within the parameters outlined in the Base Case of the Country Assistance Strategy. Core inflation remains below its targeted level with a rate of under one percent per month, and actual inflation for 1995, at 15 percent, was the lowest in decades. The balance of payments also remained strong, and gross international reserves have continued to accumulate, reaching $52 billion by December 1995, or 11 months of imports of goods and nonfactor services. This has occurred despite a weakening of the current account deficit to 2.6 percent of GDP, higher than anticipated as a result of more rapid growth in 1995 and an appreciation of the real exchange rate. These positive outcomes for inflation and the balance of payments appear set to continue in the medium term.

3. Fiscal policy, however, weakened in 1995, with the operational balance of the public sector declining from a surplus of 0.5 percent of GDP in 1994 to a deficit of 5 percent in 1995. The primary balance remained in surplus in 1995 (0.4 percent of GDP), but was significantly lower than in 1994 (4.3 percent of GDP). The most important factors behind this deterioration were an increase in wages and a much higher domestic interest bill resulting from tight monetary policy and an accumulation of internal debt by Federal and State governments. While the Government is committed to reducing fiscal deficits over the medium term, it has been hampered by structural rigidities in public sector accounts (revenue earmarking, payroll and pension rigidities and interest consume almost all the budget). The structural reforms required to improve the situation (privatization, pension, administrative and tax reforms) have been progressing slowly through the political system, but should provide the basis for fiscal improvements on both operational and primary balances in 1997 and 1998. The sectoral adjustment supported by the project would contribute positively to this medium-term fiscal improvement.

4. Sector Background. Brazil has the largest railway system in Latin America, with 30,000 km of track and a freight traffic of 120 billion ton-km. Railways play an important role in the country's economy, accounting for over 25% of total freight ton-kmn,particularly long- haul bulk cargo movements in the mineral, petroleum product and export sectors. Inter-city passenger rail transport is insignificant since line geometry does not allow for competitive speeds. Rede Ferroviaria Federal S.A. (RFFSA), which owns and operates 22,000 km of track countrywide and carries about 38 billion ton-km of cargoes in many sectors, is Brazil's main -2- railway. Two other railways, owned by Companhia Vale do Rio Doce (CVRD), mostly carry iron ore from CVRD mines to export terminals. The Sao Paulo State Railway (FEPASA) operates freight and some passenger services essentially within the state of Sao Paulo.

5. RFFSA was created in 1957 under the Federal Government's jurisdiction by consolidating 18 formerly privately-owned and operated railways which, facing competition from trucking and shifts in the location of industry, required increasing Government subsidies. But RFFSA's performance has been poor in both operational and financial terms. Operationally, its 12 regions still function basically as autonomous units. The railways' traffic is predominantly in the export- import corridors. Rail transport is insignificant along the eastern seaboard, where highways are increasingly congested. Inappropriate government regulations and excessive political interference have hampered the railway to adjust to the changing market environment. The railway's poorly designed rate structure has encouraged high-value cargoes to shift to trucks. Government- imposed uniform pricing policies and restrictions on line and service abandonment have led to extensive cross-subsidization, underinvestment in economically viable operations, deferred maintenance and consequent deterioration and low productivity of rolling stock and track, to mediocre quality of service, and to further traffic losses. The availability of RFFSA's locomotives has already fallen to 50 percent as a system-wide average, and as low as 30 percent in some regions, which compares with some of the worst railways of the world.

6(. RFFSA's staff has been reduced from 110,000 to 40,000 over the past twenty years. However, labor productivity remains low compared to North American railways, and even to the recently-concessioned railways in Argentina and Chile. Labor costs still represent 70 percent of RFFSA's revenues. Further staff reductions are therefore critical to the success of the railway reform. But RFFSA's employees, who in general have had little education or have excessively specialized skills, an average 18 years of service in the company, and salaries 10 to 30 percent higher than the corresponding labor market averages, would have difficulties in finding new jobs, and they are likely to be paid less. Brazil's regional labor markets are characterized by the modest qualifications of the labor force and a capacity to generate jobs of poor quality. Unemployment rates are about 5 percent in most regions, except in the Northeast where they reach almost 8 percent. But due to the high turnover, the average duration of unemployment ranges from less than 200 days in the South to almost 400 days in the Northeast.

7. During most of its history, RFFSA has generated substantial annual operating losses, which, exacerbated by the unstable macroeconomic environment, reached the US$300-400 million range in the early 1990s, after insufficient government compensation for public service obligations. RFFSA's debt (almost US$3.0 billion as of December 1995) consists essentially of rapidly increasing short-term liabilities to Government entities such as the social security system (US$1.9 billion including interest and monetary correction), financial institutions (US$400 million), contractors (US$200 million), and the staff pension fund (US$300 million); its long term debt is only about US$200 million. RFFSA's assets total about US$16 billion; the non-operational assets are estimated at about US$1.0 billion in market value, but they cannot be sold in the short term due to past legal decisions on actions by creditors.

8. The Government has decided to restructure and privatize RFFSA's operations in order to stop the deteriorating trend in RFFSA's performance and to improve the efficiency of rail - 3 - transport. The National Bank for Economic and Social Development (BNDES) prepared, and the interministerial National Destatization Council recently approved, RFFSA's restructuring and privatization plan. The plan basically consists of restructuring RFFSA's operations into six regional systems and of transferring operation and maintenance to private concessionaires who would lease the necessary assets from RFFSA. The Bank assisted through policy dialogue and the preparation of a comprehensive analysis of the railway subsector and of alternative public policy options (Report No. 11752-BR, The Brazilian Railroad Industry: Options for Organizational Restructuring, February 15, 1994). The proposed project would assist the Government and RFFSA in effectively implementing the plan.

9. Project Objectives. The project aims to reduce the cost of freight 's main corridors by restructuring and privatizing the federal railways. Specific objectives would be to:

(a) improve performance by restructuring and concessioning RFFSA's operations to private operators, and by restructuring its finances to settle debts and labor liabilities;

(b) increase productivity through staff retrenchment and emergency rehabilitation of critical assets in order to make the proposed concessions viable, while minimizing the social cost of staff retrenchment;

(c) enhance competition through regulatory reform, with a view to increase the railways' market share and reduce freight transport rates.

Achievement of these objectives would be measured and monitored during implementation through a set of key indicators (paras. 14, 23 and 24).

10. Project Description. The project, a specific investment operation, would consist of the following six components:

(a) Operations Restructuring and Concessioning Component (1% of total project cost), including the division of the railway into six regional operations, establishment of interchange traffic arrangements and trackage rights, preparation of bidding documents, negotiation of concession and lease contracts, transfer of rail assets to concessionaires, closure of RFFSA's operational divisions, and the organization and strengthening of RFFSA's technical supervision units;

(b) Staff Retrenchment Program (56% of total project cost), including appropriate incentive schemes for early retirement and voluntary separation, severance payments for the remaining redundant staff, retraining programs and outplacement assistance, aiming to reduce RFFSA staff by about 18,000 in order to increase staff productivity, while minimizing the social costs of retrenchment;

(c) Emergency Rehabilitation Program (41 % of total project cost), consisting of the emergency rehabilitation, repair and maintenance of locomotives, wagons and critical - 4 -

sections of track which are necessary to avoid further deterioration and traffic losses during the restructuring and concessioning process;

(d) Environmental Management Component (less than 1 % of total project cost), including environmental audits of railway facilities and strengthening of RFFSA's environmental management and safety unit; and

(e) Regulatory Reform Component (less than 1 % of total project cost), including the development, monitoring and evaluation of railway regulations, strengthening of the railway regulatory and supervisory agency (MT/DTF), and establishment of a dispute settlement commission (COFER);

(f) Financial Restructuring and Settlement Component (1.5% of total project cost), including establishment of a Settlement Division within RFFSA and contracting of a real estate manager to manage and sell non-rail assets in order to settle debts and labor liabilities.

11. The project would help finance RFFSA's staff retrenchment program (SRP), including severance payments, since they are critical to the success of the reform. RFFSA has identified the number of redundant staff by job categories on the basis of staffing plans for the six regional systems, consistent with redefined operational procedures and consolidated responsibilities, and analyzed redundant staff profiles against labor market characteristics in the various regions. The SRP was developed on the basis of these analyses, and the various parameters have been tested and optimized through a social and economic analysis. In addition to legally-required severance payments which, on average, are equivalent to 10 months of salary, the SRP would include: (a) incentives for voluntary separation ranging from 4 to 12 months of salary, depending on the period of employment; (b) involuntary separation grants for the remaining redundant staff equivalent to 80 percent of the incentives; (c) training and re-training programs based on regional employment opportunities; and (d) job searching and outplacement assistance. The proposed severance payments are not as generous as those offered under recent enterprise reforms in Brazil and Argentina; the results of a comparative analysis are available in the Project Files. However, they still reflect the importance of the Government's social concerns.

12. The SRP would be implemented in two phases. In the first phase, prior to concessioning, RFFSA would implement the incentive schemes for early retirement and voluntary separation, which would be offered only to certain categories of redundant staff and within pre-determined limits. Depending on the results of the voluntary schemes, RFFSA would then lay off the redundant staff selectively, taking into account employee performance, and pay an involuntary separation grant. In the second phase, after the auction, RFFSA would pay an involuntary separation grant of the same amount as in the first phase to remaining redundant staff who would not be hired by the concessionaire, up to a maximum number of staff specified in the concession bidding documents. Compensation packages for additional layoffs beyond the specified number would be the concessionaire's responsibility. RFFSA would be committed not to rehire SRP beneficiaries. About 4000 employees have already retired with early retirement incentives, and 2000 employees have terminated their contracts and been paid the voluntary separation incentives. - 5 -

13. Project Cost and Financing. The cost of the project is estimated at US$700 million equivalent. The project would be financed from the proposed Bank loan of US$350 million (50% of project cost) and from RFFSA and Federal Government counterpart funds (US$350 million or 50% of project cost). The Bank loan would be disbursed against: (a) severance payments at the rate of 50% of total payments (US$170 million); (b) retraining and outplacement of redundant employees, technical assistance and training of staff at the rate of 100% of total expenditures (US$20 million); (c) supply of goods at the rate of 100% of foreign or local (ex- factory cost) expenditures (US$20 million); and (d) supply and installation of goods, and civil works at the rate of 80% of total expenditures (US$140 million). RFFSA has already paid some early retirement incentives, and would fund 100% of specific locomotive and track repairs and the counterpart of project components partly financed by the Bank. The Government would guarantee all the necessary counterpart funds. To permit RFFSA to keep project implementation on the schedule agreed at appraisal in spite of the delays in loan negotiations, retroactive financing of expenditures incurred not earlier than twelve months before loan signing would be permitted up to US$70 million equivalent (or 20% of the loan amount). At the request of the Government, the Bank could appraise specific investments proposed by the concessionaires for partial risk and/or credit guarantees. A breakdown of project costs and the financing plan are shown in Schedule A. A summary of project benefits and costs is given in Schedule B. Amounts and methods of procurement and of disbursement are shown in Schedule C. A timetable of key project processing events and the status of Bank Group operations in Brazil are presented in Schedules D and E respectively. The Brazil-at-a-Glance table is included as Schedule F. A map is also attached. The Staff Appraisal Report, No. 15580-BR, dated May 29, 1996, is being distributed separately.

14. Project Implementation. The project would be implemented in accordance with an agreed Project Implementation Plan (PIP), based on an appropriate sequence of activities and on clearly defined responsibilities distributed between the Government and RFFSA. The Government would be responsible for implementing the concessioning component through the National Destatization Council and the National Bank for Social and Economic Development (BNDES) in accordance with the timetable included in the Project Implementation Plan (PIP); the Oeste concession has already been successfully auctioned to a consortium of investors from the United States. The Government would also implement the regulatory reform component, through the Ministry of Transport, and to this effect would strengthen MT's Department of Rail Transport (DTF) and establish the Federal Rail Transport Commission (COFER) by December 31, 1996. RFFSA would be responsible for implementing the operations restructuring, the staff retrenchment, the emergency rehabilitation, the environmental management, and the financial restructuring and settlement components in accordance with the time schedule and monitoring indicators and targets included in the PIP. RFFSA has completed staff retrenchment at headquarters and in the Oeste concession, and would complete the staff retrenchment program by the end of 1997. The emergency rehabilitation program, for which the bidding documents have been prepared, is scheduled for completion by the end of 1997. The environmental audits would be completed by the time of the respective auctions in accordance with the agreed targets included in the PIP. The Bank would: review ex-ante procurement documentation for all contracts above US$5.0 million and the first two contracts for supply and installation of goods and for civil works below US$5.0 million, all contracts for goods above US$350,000, and consultant and training contracts above US$100,000; and review ex-post other contracts on a -6- sample basis. The Bank would not disburse loan proceeds for severance payments unless the withdrawal application contains a certification by an independent auditor that the severance payments were made in accordance with the provisions of the agreed SRP. Implementation progress would be monitored against a set of implementation indicators and targets. Project impact would be monitored against a set of indicators of development objectives. Comprehensive reviews of the implementation of the project would be carried out in the month of June each year during project implementation, and when 50 percent of the loan amount allocated to separation grants has been disbursed. The Government and RFFSA would be committed to implementing all the proposed measures as necessary to ensure the efficient completion of the project and the attainment of its objectives.

15. Project Sustainability. The project was designed to ensure sustainable operation and maintenance of the federal railway system. Private concessions will help alleviate the burden on public sector finances and take advantage of effective private sector management. The proposed technical assistance and training program would contribute to sustainability by improving the competence and motivation of the staff of the residual public entities.

16. Lessons Learned from Previous Bank Involvement. Completed Bank-financed railway projects have generally achieved their physical objectives. Policy and institutional components, however, have often fallen short of their objectives of encouraging the public railways to operate on commercial principles. The experience with recently-completed railway projects in Brazil (Loans No. 2563-BR and 2857-BR) is consistent with these conclusions. Despite substantial implementation delays due to the unstable macroeconomic environment and to management weaknesses, track rehabilitation and capacity investments have substantially increased railway efficiency and modal share in major corridors. Although some progress was made in railway operations such as nominal tariff freedom, closure of uneconomic inter-city passenger services, separation of commuter trains, and staff reductions, continued Government intervention in the management of the public railways has led to chronic operational and financial problems. Preliminary experience with the recently-concessioned railways in Argentina shows that many of the problems faced by publicly-operated railways can be effectively addressed through concessioning of operations and maintenance by private operators within an appropriate regulatory framework. The design of the proposed project was based on these experiences.

17. Rationale for Bank Involvement. The Bank's country assistance strategy for Brazil, discussed by the Board of Executive Directors on June 29, 1995, identifies human capital formation and infrastructure development as the principal bottlenecks to Brazil's social and economic development. The emphasis is on structural reforms aimed at stabilization and resumption of broad-based growth, including the deregulation and privatization of infrastructure services, and on rebuilding and expanding a deteriorated and insufficient infrastructure in partnership with the private sector. The proposed project is fully supportive of this strategy and the Country Assistance Strategy Progress Report which will be discussed on the same day. By helping to deregulate and privatize the federal railway operations, the project, in addition to reducing the financial burden on public sector finances, would substantially increase the efficiency of rail and intermodal transport in the country's important corridors, and thereby contribute to economic stabilization, resumption of growth in agriculture and industry, and increased export competitiveness. -7 -

18. Agreed Actions. During loan negotiations, the Government and RFFSA confirmed in particular that: (a) RFFSA would restructure its operations and the Government would, through BNDES, auction the concessions and, if successful, through MT, transfer operations and maintenance responsibilities to concessionaires in accordance with the time schedule and monitoring indicators included in the PIP, and, by June 30, 1997, present a plan for the concessioning of the Nordeste operation to the Bank for conmments;(b) RFFSA would implement the staff retrenchment program in accordance with the terms and conditions, time schedule, and staff reduction, re-training and outplacement targets set forth in the PIP; (c) RFFSA would procure the goods and services for, and implement the emergency rehabilitation program, in accordance with the time schedule and targets set forth in the PIP; (d) RFFSA would carry out environmental audits of its facilities and the Government would specify responsibilities for environmental liabilities in concession contracts; (e) by December 31, 1996, the Government, through MT, would present to the Bank for comments a preliminary report on a review of the Concession Law and the Plano Real Law with respect to rail transport tariffs and, after taking into account the comments of the Bank, submit a final report to its relevant authorities, and would strengthen MT/DTF and establish COFER; and, prior to concessioning the Sudeste and the Nordeste operations, would develop appropriate mechanisms, criteria and guidelines to implement the captive shipper rate and line abandonment regulations, respectively; (f) by December 31, 1996, the Government would take a decision to settle RFFSA's debt with the social security agency INSS so as to enable RFFSA to sell its non-rail assets, and by June 30, 1997, it would present a plan for RFFSA's financial restructuring and debt settlement; and RFFSA would contract with a real estate management firm to sell its non-rail assets, and would keep its staff, sell non-rail assets, and pay its debts in accordance with the targets set forth in the PIP; and (g) RFFSA would contract a project management consultant and complete the installation of its computerized project management system not later than 90 days after the date of the project agreement. As conditions of loan effectiveness, RFFSA would: (a) establish the Settlement Division; and (b) restructure its Project Management Unit, with staff and functions satisfactory to the Bank.

19. Poverty Category. The project is not expected to confer direct poverty-reduction benefits, although the reduced transport costs should be reflected in the prices of basic commodities and therefore have indirect benefits for the poor.

20. Environmental Aspects. Brazil has adequate environmental legislation and regulations, and MT has developed specific Environmental Guidelines for the transport sector, including railways. Railway operators will be required, under concession contracts, to comply with the environmental regulations for all their operations and investments. DTF would delegate environmental supervision responsibilities to RFFSA, which would ensure the compliance of the operators with the regulations. The project would include environmental surveys of the potential pollution sites, and the respective responsibilities of RFFSA and the concessionaires for possible environmental liabilities would be specified in the concession contracts. The project is in the environmental category B, since the possible adverse environmental effects of locomotive, wagon and track repairs can be prevented or mitigated through appropriate measures. In particular, through appropriate clauses incorporated into contracts, all contractors will be obligated to comply with the environmental regulations, and payments to contractors will be subject to full compliance with such clauses. RFFSA would carry out appropriate supervision of the contracts, - 8 - includingenvironment-related clauses. In order to effectivelycarry out the abovetasks, RFFSA would strengthenits environmentalmanagement and safetyunit, and the project would include technical assistanceand training services for this purpose.

21. ProgramObjective Categories. Private Sector Development(PV) is the main thrust of the project, which will help concession the railway to private operators in order to improve efficiency and to reduce the burden on public finances. The project will also contribute to Environmentally Sustainable Development (EN) through reducing the costs of rail transport and indirectly relieving highway congestion in Brazil's major corridors.

22. Participatory Approach. In the course of project preparation, BNDES and RFFSA organized a number of public conferences and meetings to discuss the restructuring and privatization plan. Clients and potential concessionaireshave provided useful inputs to the design of the project, including concession contracts and investment priorities. The labor unions have opposed the plan. But many employees have expressed their appreciation for the efforts being made to provide redundant staff with retraining and outplacement assistance, and have provided useful feedback in designing these programs.

23. Project Benefits. The project, by achieving more efficient, privately operated railway and intermodal transport services, is expected to result in a substantial increase in the federal railways' share of freight traffic, from 35 billion ton-km in 1995 to an estimated 53 billion ton- km in 2000, and in a 20 percent reduction in freight transport costs in Brazil's main corridors. It would thereby contribute to economic growth in agriculture, industry and exports. The estimated net present value (NPV) of the project, which was derived from transport cost savings on existing rail traffic and on traffic which, without the project, would be using trucks, is about US$2.6 billion equivalent, and its internal economic rate of return (IERR) is about 68% under base case assumptions. The emergency rehabilitation program is expected to increase locomotive availability, from 50 percent in 1995 to about 80 percent in 2000, and average productivity, from 52 million ton-km per locomotive and per year in 1995 to about 60 million ton-km in 2000. The IERR for the rehabilitation program, which was derived from estimates of the avoided costs of locomotive failures and train derailments, and the avoided incremental costs of transport of freight which, without the program, would be diverted to trucks, was estimated at 36 percent under base case assumptions.

24. The staff retrenchment program (SRP) is expected to result in substantial productivity gains for railway staff, from less than 1.0 million ton-km per employee in 1995 to over 1.7 million ton-km in 2000, and for redeployed staff. The design and economic analysis of the SRP were based on a detailed analysis of Brazil's regional labor markets. Benefits were estimated as the net increase in the marginal productivity of the redundant staff who are redeployed from RFFSA to other productive activities, and the marginal gain from the avoided labor-related costs. The IERR of the program is estimated at 40 percent under the most conservative estimates of re-employment and marginal productivity. The estimated IERRs of the program in the various concessions range from 19 percent in the Nordeste to over 50 percent in the Sudeste and at RFFSA's headquarters. The fiscal implications of the project are also expected to be very positive. RFFSA's operational deficit, about US$250 million equivalent as an average over the past seven years, should be gradually reduced and eliminated after the staff - 9 - retrenchment program and the concessioning process are completed. RFFSA's expected revenues from rail asset leases and from non-rail asset sales could be sufficient to service its restructured debt and to repay a portion of it over the project's implementationperiod.

25. Project Risks. The project would be subject to four types of risks. First, Brazil's first large-scale privatization of a public service could bring a number of unexpected implementation problems, including legal challenges, which could affect the proposed sequential concessioning process. Vested interests may attempt to stop, delay or re-direct the process, and Government bureaucracy may not cooperate fully. A future Government could even revoke the proposed railway concessions, rehire retrenched railway staff, and/or oppose the sale of non-rail assets. The commitment of the Government, the assignment of concessioning responsibilities to the National Destatization Council and to BNDES, the proposed labor separation incentive schemes, and the project implementation, monitoring and supervision plans mitigate such risks, which are taken into account in the conservative implementation time schedule. The successful auction of the Oeste concession provides additional assurances that the process is now firmly established. Second, some concessions which will be brought to auction might not find a buyer. Private investors have shown a strong interest in, and are preparing to bid for the the Centro-Leste, Sudeste and Sul concessions. The sole customer of the Tubarao line might have to take an interest in the concession and either operate it directly or under contract. Although the Government would be committed to present a plan for the Nordeste concession to the Bank for comments, there is a real risk that this concession would not find a buyer. In this event, the region's railway might have to be operated under a management contract, which would nevertheless represent an improvement over the current public operation.

26. Third, the emergency rehabilitation program could suffer from implementation delays, and/or the concessioning process could be accelerated, and some rehabilitation and maintenance works might not be needed or could be implemented by the concessionaires. The scope of the emergency rehabilitation program might therefore need adjustment during project implementation. Fourth, Brazil's institutions and private companies are not familiar with the proposed form of economic regulation and unexpected problems could lead to some form of restrictive regulations in such areas as pricing, competitive access or line abandonment. Enacting the new regulation for railways prior to concessioning, strengthening DTF and establishing the COFER, including the proposed training programs for MT/DTF and RFFSA staff and COFER members, are expected to help preserve competition and protect consumers' rights. Overall, the project carries real risks, but it also provides an exceptional opportunity to effectively reform Brazil's federal railways.

27. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it.

James D. Wolfensohn Washington, D.C. President May 29, 1996 Attachments - 10 -

Schedule A BRAZIL

FEDERAL RAILWAYS RESTRUCTURING AND PRIVATIZATION PROJECT

Estimated Costs and Financing Plan (US$ million equivalent)

Estimated Project Costs Local Foreign Total

Severance Payments 380.0 - 380.0 Retraining and Outplacement 10.0 5.0 15.0 Goods and Installation 50.0 155.0 205.0 Civil Works 38.0 17.0 55.0 Surveys and Studies 33.0 1.0 4.0 Technical Assistance and Training 4.0 2.0 6.0

Total Base Cost 485.0 180.0 665.0 Physical Contingencies 10.0 16.0 26.0 Price Contingencies 5.0 4.0 9.0

Total Project Cost 500.0 200.0 700.0 Financing Plan RFFSA/Government 300.0 50.0 350.0 Bank 200.0 150.0 350.0

Total 500.0 200.0 700.0 1/ including taxes and duties equivalent to US$105.0 million - 11 -

Schedule B

BRAZIL

FEDERAL RAILWAYS RESTRUCTURING AND PRIVATIZATION PROJECT

Project Benefits and Costs (US$ million, 1996)

Present Value of Flows Source of Difference Economic Financial Analysis Analysis Taxes Subsidies Other" Benefits Staff Productivity 763 1989 -1,226 Asset Produtivity 254 298 -44 Transport Cost Savings 2,4352' n.a. _ 2,435 Total Benefits 3,198 2,287 -44 1,209 Costs Staff Retrenchment 362 395 -33 Asset Rehabilitation 160 190 -30

Other Components 48 115 -7 603' Total Costs 570 700 -70 -60 Net Present Value 2,628 1,587 IERR 68% n.a. Overall risk: probability NPV <0 is negligible 1/ Nature ot benefits: increases of staft marginal productivity (economic) versus wage savings (tinancial); and overall transport cost savings (economic) not considered in financial analysis. 2/ Includes asset productivity benefits 3/ Locomotive maintenance expenditures financed by RFFSA not included in economic analysis Main Assumptions: discount rate: 12% growth in railway traffic (ton-km): 8% per year rail and truck marginal costs (SAR Annex 10, section D) marginal productivity value of RFFSA's retrenched employees (SAR Annex 8. section B) Nature of benefits: increases in labor productivity; increases in rail asset productivity; reductions in transport costs; reductions in highway traffic congestion and accident costs not quantified Alain beneficiaries: consunmersof products with long-haul shipments; shippers and rail concessionaires; railway employees. - 12 -

Schedule C BRAZIL

FEDERAL RAILWAYS RESTRUCTURING AND PRIVATIZATIONPROJECT

Procurementand Disbursement

A. ProcurementArrangements (US$ million)

------Procurement Method------

Project Element ICB NCB Other n.b.f 2' Total Separation Grants 340 40 380 (170) (170) Supply and Installation 100 35 70 205 of Goods (80) (26) (106) Goods 20 20 (20) (20) Civil Works - 45 30 75 (34) (34) Consultants & Training 20 2' 20 (20) (20) Total 120 80 360 140 700 (Bank-financed) (100) (60) (190) (350) 1/ Figures in parentheses are the respective amounts financed by the Bank loan. 2/ Severance pay component, locomotive and track repairs and maintenanceexpenditures not financedby the Bank. 3/ Services contracted in accordance with Bank Guidelines for Use of Consultants. - 13 -

Schedule C B. DisbursementArrangements

Loan Category Amount Disbursement Rates ($ million) 1. Separation Grants 170.0 50% of total expenditures 2. Supply and Installation of Goods 95.0 80% of total expenditures 3. Goods 20.0 100% of foreign expenditures; 100% of local ex-factory cost 4. Civil Works 25.0 80% of total expenditures 5. Consultants & Training 100% of total expenditures (a) retraining and outplacement 15.0 (b) technical assistance and training 5.0 6. Unallocated 20.0 Total 350.0

Estimated Disbursements 4' Bank Fiscal Year 1996 1997 1998 1999 2000 2001 ------($rmillion) ------

Annual - 150 100 60 30 10

Cumulative - 150 250 310 340 350 4/ FY97 amount includes initial deposit ot less than US$40.0 million into the Special Account. - 14 -

Schedule D

BRAZIL

FEDERAL RAILWAYS RESTRUCTURING AND PRIVATIZATION PROJECT

Timetable of Key Project Processing Events

(a) Time taken to prepare: 9 months

(b) Prepared by: RFFSA and BNDES with the assistance of the Bank.

(c) First Bank mission: June 1995

(d) Appraisal mission departure: February 1996

(e) Negotiations: May 1996

(f) Planned Date of Effectiveness: August 1996

(g) List of Relevant ICRs and PPARs: Loan No. 2563-BR Federal Railway-Export Corridor Project ICR dated March 1, 1996 - 15 - ScheduleE Status of Bank Group Operations in Brazil IBRD Loans and IDA Credits in the Operations Portfolio

Difference betweenexpected Project Loan Fiscal and acbtal ID No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursementsa

NumrberofClosedl.oans 171

Active Loans

BR-PA-35717 L39170 1995 STATE OF RURAL POV (BAHIA) 1050 101.5 1.83 BR-PA-38882 L39150 1995 FED REPUBLIC OF BRAZIL RECIFE M TSP 102 0 102 11.68 BR-PA-38884 L39180 1995 STATE OF CEARA RURAL POV - CEARA 700 70 3 BR-PA-38885 L39190 1995 STATE OF RURAL POV -SERGIPE 360 34 5 0.33 BR-PA-6360 L29500 1988 FED REPUBLIC OF BRAZIL IRR SUB-SECTOR 1950 26 14.29 4029 BR-PA-6364 L33750 1991 STATE OF SAO PAULO INNOV BASIC ED 245.0 192.57 17534 BR-PA-6367 L26810 1986 FEDREPUBLICOFBRAZIL SALVADORMETRODEVT 550 1839 6.41 24.8 BR-PA-6368 L34420 1992 FED REPUBLIC OF BRAZIL WATER SECTOR MODERNI 2500 201 151.28 BR-PA-6369 L27620 1987 FED REPUBLIC OF BRAZIL NRDP PIAUI 780 25 1 33 26.33 BR-PA-6370 L30130 1989 FED REPUBLICOF BRAZIL NE IRRI JAIBA 71 0 25 64 21 97 BR-PA-6378 L35470 1993 STATE OF STATE HWY MGMT 50 0 23.61 8.08 BR-PA-6378 L35480 1993 STATE OF STATE HWY NIGMT 38 0 32.57 -5 43 BR-PA-6379 L34570 1992 FED REPUBLIC OF BRAZIL METRO TRANSP SPAULO 1260 51.41 5008 BR-PA-6392 L28640 1987 FED REPUBLIC OF BRAZIL LVSTK DISEASE CNTL 51 0 10 1094 20.94 BR-PA-6403 L31350 1990 FEDREPUBLICOFBRAZIL NEBASICHLTHSRVII 2670 50 9231 138.03 BR-PA-6407 L31020 1989 SABESP WATER SCTR SAO PAULO 2800 94 94 BR-PA-6414 L30430 1989 COMGAS,SAOPAULO NTRLGASDIST 940 3202 32.02 BR-PA-6422 L28950 1988 STATE OF MINASGERAIS MINAS GERS FRSTRY 485 8 27 10.7 BR-PA-6426 L28610 1987 FED REPUBLIC OF BRAZIL NRDP 55.0 27.22 2722 BR-PA-6427 L36040 1993 FED REPUBLIC OF BRAZIL NE BASIC EDUC 11 212.0 159.24 84.82 BR-PA-6431 L28100 1987 FED REPUBLIC OF BRAZIL SKILLS FORMATION 745 589 122 5968 BR-PA-6432 L27180 1986 FED REPUBLIC OF BRAZIL NRDP 920 20 885 28.85 BR-PA-6433 L28620 19B7FED REPUBLIC OF BRAZIL NRDP MARANHAO 840 46.37 46.37 BR-PA-6436 L37890 1995 STATE OF CEARA CEARLAURDV/WATERCO 1400 1296 2027 BR-PA-6437 L29830 1988 CEF W&S/PROSANEAR G0 83 83 BR-PA-6438 L29310 1988 FED REPUBLIC OF BRAZIL NE ENDEMIC DIS CTL 109.0 27 4.47 31 47 BR-PA-6439 L30720 1989 FED REPUBLIC OF BRAZIL AMAZON BASIN MALARIA 990 26.1 0.73 2683 BR-PA-6440 L28310 1987 FED REPUBLIC OF BRAZIL 2ND SP IND POLILUTN 50.0 24 7.02 942 BR-PA-6442 L28831 1990 ELETROBRAS ITAPARICA 1000 10.92 -8908 BR-PA-6444 L31690 1990 FED REPUBLIC OF BRAZIL HWY MGMT AND REHAB 310 0 40 22 83 62.83 BR-PA-6445 L28600 1987 FEDREPUBLICOFBRAZIL NRDPPARAIBA 600 17.06 17.06 BR-PA-6446 L31730 1990 FED REPUBLIC OF BRAZIL NAT ENVIRONMT 1170 5933 5933 BR-PA-6448 L30180 1989 STATEOFPARANA LNDMGMTI-PARANA 630 716 523 BR-PA-6452 L36630 1994 FED REPUBLIC OF BRAZIL NE BASIC EDUC III 206.6 161.56 51 48 BR-PA-6453 L31700 1990 FED REPUBLICOF BRAZIL NE IRRIG I 210.0 69 112.08 18108 BR-PA-6454 L34440 1992 FED REPUBLICOF BRAZIL RONDONLANTRL RES M 167 0 81.09 47 76 BR-PA-6467 L31300 1990 FEDREPUBLICOFBRAZIL AGRESEARCHIII 470 5 2.84 784 BR-PA-6473 L31600 1990 STATEOFSANTACATARINA LNDMGMTII-S CATAR 330 1426 1083 BR-PA-6483 L32690 1991 FEDREPUBLICOFBRAZIL SCIENCERESEARCH&TRN 1500 10 3643 46.43 BR-PA-6492 L33760 19Q1PETROBRAS HYDROCARBNTRNSP/PRO 2600 14479 14479 BR-PA-6495 L34800 1992 BNDES NATL IND POLLUTN 50.0 38.24 3824 BR-PA-6505 L34920 1992 FED REPUBLICOF BRAZIL MATO GROSSO NAT RES 205.0 143.76 10576 BR-PA-6512 L39240 1996 CVRD ENV/CONS(CVRD) 50.0 47.79 -I 21 BR-PA-6522 L37670 1994 STATE OF ESPIRITO SANTO ESP.SANTO WATER 154.0 14261 5501 BR-PA-6524 L36390 1994 STATE OF MINAS GERAIS MINAS MGNCDEVELOPMT 150 0 138 04 63.04 BR-PA-6540 L35540 1993 STATE OF MINASGERAIS WTR QJPLN(MINASGERA 1450 12885 116.02 BR-PA-6541 L35030 1993 FED REPUBLIC OF BRAZIL WXTRQ,PLN(SP/PARANA) 90 83 738 BR-PA-6541 L35040 1993 STATE OF SAO PAULO WTR Q/PLN(SP/PARANA) 1190 9578 8291 - 16 - Schedule E Status of Bank Group Operations in Brazil IBRD Loans and IDA Credits in the Operations Portfolio

Dince

Project Loan Fiscal end asul ID No. Year Borrower Purpose IBRD IDA Cancelions Undisbuned diabenmmta

BR-PA-6541 L35050 1993 STATE OF PARANA WTRQ/PLN(SP/PAPlANA) 117.0 94.74 82.12 BR-PA-6543 L37330 1994 STATE OF MINAS GERAIS M. GERAIS BASIC EDUC 150.0 122.44 16.77 BR-PA-6546 L36590 1994 FED REPUBLIC OF BRAZIL AIDSCONTROL 160.0 70.03 -7.17 BR-PA-6547 L36330 1993 FED REPUBLIC OF BRAZIL METRO TRYANSP.RIO 128.5 88.86 63.04 BR-PA-6555 L37130 1994 STATE OF PIAUI STEHWYMGTII 54.0 Is 32.17 16.1 BR-PA-6555 L37140 1994 STATE OF TOCANTINS STE HWY MGT II 87.0 56.82 -30.18 BR-PA-6555 L37150 1994 STATEOFMARANHAO STE HWYMGTII 79.0 18 54.17 -6.83 BR-PA-6558 L37660 1994 STATE OF PARANA PARANA BASIC EDUC 96.0 88.33 19.66 BR-PA-6564 L39160 1995 FED REPUBLIC OF BRAZIL BELO H M.TSP 99.0 99 12

TOTAL 6733.1 0 431.79 3602.14 2326.76

Active Loans Closed Loans Total Total disbursed (IBRD and IDA) 2699.17 13244.87 15944.04 Of which repaid 594.87 10284.21 10879.08 Total now held by IBRD and IDA 5706.44 3057.71 8764.15 Amount sold 0 45.83 45.83 Ofwhich repaid 0 45.83 45.83 Totalundisbursed 3602.14 97.04 3699.18

a. Intendeddisbursements to date minusactual disbursements to dateas projectedat appraisal. Note: Disbursement data are updated at the end of the first week of the month. - 17 - Schedule E

BRAZIL

Statement of FC Investments As o3131/96 r,us$ millions)

Crigi,n, Gor-s commn,nenis

Fiscal IFC IFC field by Held bv Ljndisb. Year Obibgor Type of Business Loan Equity icipants Totals IFC arncip. articip. 1957 a/ Siemens do Brasil Cia. de Electricidade Manufacturing 2 00 2 00 1958 at D L R. Plasticos do Brasil, S.A Motor Vehiclesand Components(including 0 45 0 45 1958 ar Olinkraft, S A Celulose e Papel Timber,Pulp and Paper 1 20 1 23 1958 at Willys Overlanddo Brasil, S.A. Industrnae Comercio Motor Vehicles and Components(including 2 45 24; 1959 at Champion Papel e Celulose, S A Timber, Pulp and Paper 0Q3 3 18 4 01 1959 at CompanhiaMineira de Cimento Portand, S A Cement and ConstructionMaterials I 20 1 20 1966 at Acos Villares, S A Mining and Extractionof Metalsand Other 0 3 10 0 90 0 91) 4 90 1966 Papel e Celulose Catannense, S A Timber, Pulp and Paper 0 74 3 13 2 26 6 13 1967 at Ultrafertil, S.A Industria e Comerciode Fertilizantes Fertilizersand AgriculturalChemicals 7 99 3 00 0 26 11 25 1968 a/ Acos Villares, S A Mining and Extraction of Metals and Other 0 o 06 0 06 1969 Papel e Celulose Catarinense, S.A Timber,Pulp and Paper 0 69 0 37 1 06 1969 at Petroqu1mica Uniao S.A. Chemicalsand Petrochemicals 3 88 25 2 46 8 39 1970 at Poliolefinas, S A Industrie e Comercio Chemicalsand Petrochemicals 4 86 2 14 1 38 838 1971 at Oxiteno. S A Industna c Comercio Oil Refining 4 60 1 44 n04 1971 at Rio Grande -Compahnia de Celulose do Sul (Riocell) Timber,Pulp and Paper 4 90 4 9(1 1972 at Acos Villares, S A Mining and Extraction of Metals and Other 0 2 00 0 48 2 48 4 96 1972 a/ CIM1NAS- Cimento Nacional de Minas, S.A Cement and Construction Materials 4 38 3 20 24 76 32 34 1973 a/ Capital Market DevelopmentFund (FUMCAP) Financial Services 5 00( 50o3 1973 at CompanhiaSiderurgica daGuanabara (COSIGUA) Mining and Extractionof Metals and Other0 2 O 200 soo 9 00 1973 Empresa de Desenvolvimentode Recursos Mineris (CO Mining and Extractionof Metalsand Other 0 13 00 3 80 11 60 30 40 1974 at Companhia Siderurgicada Guanabara(COSIGUA) Mining and Extractionof Metalsand Other 0 10 00 5 50 59 97 75 17 1974 at Fabrica de Tecidos Tatuape SA Textiles 7 75 23 25 31 00 1974 at Industrias Villares S.A Manufacturing 3 °0 3 00 610 1975 at CapuavaCarbones Industriais, Ltda Oil Refining 2 48 1 08 3 70 7 26 1975 Oxiteno Nordeste S Alndustria E Comercio Chemicalsand Petrochemicals 10 00 100 1976 at Santista Industria Tetil doNordeste, SA Textiles 645 1(00 745 1976 at Tecanor S.A Textil Catarnense doNordeste and Hering Textiles o (30 ( 00 1977 a/ FMB S A Produtos Metalurgicos Motor Vehiclesand Components(including 20 00 20 on 1977 at Mineracao Rio do Norte S A Mining and Extraction of Metals and Other 0 15 00 15 00 1978 at Cimetal SiderurgiaS.A Mining and Extractionof Metals and Other 0 8 38 3 00 1 1 8 1978 Empresa de Desenvolvimentode Recursos Minerais (CO Minig and Extractionof Metals and Other 0 5 00 3 94 54 00 62 94 3 94 1979 at Capuava Carbones lndustrnais,Ltda Oil Refining 0 11 0 II 1979 at Volvo do Brasil Motores e Veiculos S A Motor Vehicles and Components(including 10 00 4 10 50 00 64 10 1980 Dende do Para S/A-DENPASA-Agricultura,Ind&stria e Food and Agribusiness 3 73 1 00 4 73 1 48 ( 04 1980 at Destilana Cianorte S.A Chemicals and Petrochemicals 0 25 0 25 1980 a/ Hierng do Nordeste S A -MALRAS Textiles 200 2 00 1980 Polisul Petroqu1mica S A Chemicalsand Petrochemicals 15 00 5 00 28 00 48 00 5 00 1980 PPH - Companhia Industrial de Poltopropileno Chemicalsand Petrochemicals IS 00 2 00 17 00 1 64 1980 at Tecanor S A. Textil Catarinensedo Nordeste and Hering Textiles 10 20 10 20 1980 at Villares Industrias de Base S A - VIBASA Mining and Extraction of Metals and Other 0 5 0on 5 00 1981 Brasilpar Com,rcio e ParLicipatoesS A Financial Services 1 50 1 50 004 1981 CompanhiaBrasileira de Agropecuaria- COBRAPE Food and Agribusiness 5( 3 00 8 50 1 05 1981 at CompanhiaSiderurgica da Guanabara (COSIGUA) Mining and Extractionof Metals and Other 0 373 373 1981 a/ CIM1NAS- Cimento Nacional de Minas, S A Cement and Construction Materials 30 00 3 50 110 00 I 43 50 1981 a/ SotaveAmazoniaQu;micaeMineral S.A Fenilizers andAgricultural Chemicals 16 00 4 00 200)n) 1982 at Banco de InvestimentoPlanibanc S A. Financial Services 1000o 0 45 20 0n 30 45 1982 Cimento Caue S A Cement and Construction Materials 20 00 5 00 20 00 45 00 3 26 1982 at Petroqu1mica Triunfo S A Chemicals and Petrochemicals 15 00 400 31 00 50(,0 1983 at Atlas Ffigorifico S.A Food and Agribusiness 1000 3 O- 13 0i0 1983 a/ Cimento Portland Mato Grosso Cement and ConstructionMaterials 35 00 3519(1 1983 a/ Companhia Dende do Amapa -CODEPA Food and Agribusiness 6 10 6 10 1983 at Companhia Riograndensede Participacoes FinancialServices (101 () I 1983 a/ Companhia Sidenargicada Guanabara(COSIGLUA) Mining and Extractionof Metalsand Other 0 0 64 0 64 1983 Empresa de Desenvolvimentode Recursos Minerais (CO Mining and Extractionof Metalsand Other 0 0 40 0 40 0 40 1983 PISA -Papel de ImprensaS.A Timber,Pulp and Paper 30 00 3 50 2000 s3 50 2 50 1983 a/ SotaveAmazonia Qu1mica e Mineral S A. Fertilizers and AgriculturalChemicals 6 00 2 00 13 00 21MiCj 1983 SOCOCO S/A - Agroindhstriasda Asnazonia Food and Agribusiness 3 00 2 S0 5s5 2 50 1983 a/ Volvo do Brasil Motores e Veiculos S.A Motor Vehiclesand Components (including 1 17 1 17 1984 a/ CompanhiaAlcoolqu 1mica Nacional - Alcoolqu1mica Chemicals and Petrochemicals 20 00 4 on 24 (8) 1984 a/ Companhia Siderurgicada Guanabara(COSIGUA) Mining and Extractionof Metals and Other 0 0 40 0 40 1985 a/ Companhia Siderurgicada Guanabara(COSIGUA) Mining and Extractionof Metals and Other O 3 7n.I ) 1985 PISA - Papel de ImprensaS A Timber, Pulp and Paper I 41. 11 67 13 07 1 40 1985 Qulmica da Bahia IndLstriae Com,rcio S A Chemicals and Petrochemicals 3 49 1 S0 29 0 49 1986 a/ Nitroclor Produtos Qu1micos S A Chemicals and Petrochemicals 3 0C S 70 8 70 1987 Amapa Florestal e Celulose S A - AMCEL Timber, Pulp and Paper 14 00 14 1919 2 80 1987 Cimento Cauc S A Cement and Constructionlvlaterials 1987 a/ CfMINAS - CimentoNacional de Minas, S A Cement and ConstructionMaterials 10 00 20 00 30 00 1987 Polisul Petroqu,mica S A Chemicalsand Petrochemicals I 0n IM0 I 00 1987 S-o Paulo AlpargatasS A Textiles 30 00 3000 6 40 1 60 1987 a/ Volvo do Brasil Motoresc Veiculos S A Motor Vehicles and Components (including I 68 1 68 - 18 - Schedule E

BRAZIL

Statement of IFC Investments An of 3i31:96 (USS milions)

_~ rosnod GrossCommilsreses

FIora IFC IFC Held by Held by disb. incl Year Obligor Typeofllusinss Loan Eqgih rici,enpis Totals IFC rncipxaeIoriiip-tI

1988 Bmco Bozano.Siuonsen S.A Financial Serices 00 I 20 l00 1.00 0 67 1988 Banco-lIa S.A Financial Seices 31100 3.001 1.67 0 75 1988 a] BrasilalSA. p.a a IndisLsa e o Comrcin, Textiles 0 10 0.10 1988 a Cebrae Cospahia B-asileira de Cnsial NMmn faclang 4Q011 5.00 45.O10 1988 Durlex S A. Timber, Plp nd Paper 73 37 042 1 05 1988 a Equily Fund of Srazi Finncial Se,ices 21 20 21 20 1988 a/ Fab-ica de Tecidos Tatinpe S A. Textiles 8 80 8 80 1988 e FabmcaCainca de CaralisadoresS A. Chemicals d Petrochemicals 20 30 21.50 1988 Mineracoes Basileiras ReunidasS A Mining and EWtracionof Melals and Other Oret 20 Oil 20100 4 28 19S8 Perdkq.nS A. Com-rc o e lodf,sla Food and Agfibusiness 23 0i 2 86 22 86 10.011 19S8 v Pe,teqn;mica Triunfo SA. Chemicals andPetrochemnals 1011 0 11 19S8 PISA - Papel de [,sprensa S A. Timber, Pulp and Paper 220o 22 00 5.O 198B PPHF- Compudialndstal de Poliopropileno Chemicals ndPerochemcals 16.00 1600 373 160 1988 S S A. Mo.ndI Satiista ndistntasGerais Textiles 4 01 4.00 1988 a Sanlisla todiseir- Teldil de SeegipeS A. Textles 3 20 1 30 4.50 1988 a Toalia S A boditsr-iaTexil Textiles 1.90 I 90 1988 Ioibanco - Unian de (Lmcs 13-raninrosS.A FinancialSemces 301DO 30 01 1 40 0 67 1989 COPENFI- Pelrnqn,mics do Nordeste S.A Chemicals d Pel-ochem-als 1I 10 5(10 s001 18.18 1989 Eloma S.A. odiEsMae Com-rci Mniog d ExtractonoF Mets d ither Ors 150/i 15.00 12.00 1989 Papel e CelloseCainene. S A. Timber. Pnlp nd Pper 15011 15.0O 3 16 1989 Polireno Linear.baddria e Com.r io S A emicals,ad Pe-hoce ,ticaln IN50 6050 2500 1237 1990 Bal1iaSul Cell-se, S A Timber, Pulp ad Paper 401.00 15.110 60 00 115 01) 40 00 1991 (labia Sul Celulose S.A Timber, PFlp and Paper 6 00 60 5 97 1391 a Compana, VidariaSanta.Marina ManuFciOring 310 1O.00 2500) 1991 LagepolEbgenbaia de Polimeras Mu,nFaclring 3 51 3.50 2 19 1991 Kipa S A. Celulose e Papel Tomber,Pulp nd Pper 20. Ol 500 25.00 16.43 1994 ChapecoCDmpanhida odndsial de Ahimemos Food and Agribhuiness U30 0.110 100( 1994 Dende do P.a S/A-DENPASA-Agticnlbm, Indlsina a Comjcin de 01 Fond aid Agibusiness 1 50 0 12 0 62 0 37 0.07 1994 O-ea lotelia e T.itm S A. Ilodsand Todsn- 1671 7 50 2425 1675 1994 GP Capital Paters. 1.P FinancialServces 20 Oni 20 00 19 51 9 I-7 1994 S A odistniae ComicinCapecg Food and Agnabsiness Oil 90 500 (IS 1994 Sadbi Conc,rdia S.A Indfitria e Com.rcio Food ad Agfibusiness 4001 40 00 38.00 2 00 1995 Caobnhy M C. bids,d ial Lido Food and Agrihusiness,0 Oil 30 00 3( 00 1995 Cerfmica Potobello S.A. Cemen4and Co MnactionMalerialt 17.00 (10 22 01 22 00 3.00

1995 Compaidi Cee 1 ao Brahl-a Foodand Agihbsineo 33110 123.00 158 Ol 35.00 12300 1995 Compatda Peroq-amica C acai - CPC) Chmicals ad Petrochemicals 12.86 1286 12.86 1995 CRP-Caderi Capltal de Rin oS A FinancialSen-ces 2 00 20 2 00 I 25 1995 Encalendo SWlS A T-mber, PIp aid PFper ' 50 1995 Glebo Cabo S A ,,nsoiucture 35 O1 101C1 0 89 00 12511 45 D0 1995 H-nng Texatle Textiles 7 50 1995 Lalas de Alam;nie S A sanafactnring 21.10 50n 26 0I 21 .00 5 0O1 1995 Pe Pignenlos S A M,sing ad Exracto of Etetals old Other Ores 90) or/ 9 01 35 (o 74 00 39.00 35 00 11.1H 1995 Sadia Conctrdia S.A. lIdStr-a e Com..ci Food and Agibhsiness 62 iOn 62 00 62.00 1996 Ccval Alimenios S.A Fond and Agihns,mess 49 00 130lOnI I'S 00 45 00 1996 Chapec- Companhie Indusial de Alimentes Food and Agihbs-ness 22 Ifl 3 'I 5 00 3(1(1 24 72 5 00 1996 Lojas AmeocanasS A Indstuial andCom-mer Servce, 33.00 20 00 93 00 33 00 2Q00 53.00 1996 Ox,enir NordesteS A bidiut,, 1FComercio Chemicals and Pelenchemicals 30 1) 30n01 0.0 31)00 1996 Perdg.o S A. Comrioeddtria Foodand Agiboninesb 35110 15(10 5nO0 35.00 1996 RhadIac, Ind-suas Qnimi,as Ltda. ChemIcalsad Peutrchemicals,' ,1 1, 300 611On) 31)00 30 Oln 60 00

Total gtoss cmitrent, b; I S61 47 25 10 12612'4 395213'

Leo leminats -cancellalions.repa5ment &.sales R3585 82 96 824.18 1 43 69

Total cononimeosloDw held C! 725 62 174 211 31'.S6 1277 08 899 82 377 86 201 38

PendingCenminoenie

Bacell Senicos e idomtria LimlIada Timber, Pulp ad Paper 7 75 0 70 MALLORY 8 00 I OIl 12.00 Pol.eno Linear ndiouia Ccanrcio S A. Chemicalsand PeIrrchemical 1 9 n 1 Ca RHODIA-STER 11.95 (1.95 S A ICC 700 700 TIGRE 20 00 510 35500 60 10 Unibanc- - Unine de B(ancesBrastleos S.A FtnUncialSerices 25SC00 25 )00

Tolal pending comontmnts i' 17 65 30.01, 124 65

Totalco1mc-mens eIdd nd pendingco-rnunts 80262 191.85 -107 86 140233

Tolal nndisb-csed conninoents 134 03 12 I 59.25 201 38

a In-s-sents which has been fiully cancelled, te-minated.neitten off sold redeemedor repaid

b (iross co- ml consist-e-Ls of approvd andsi3erd proJc/

ci Held c-naiuneots consist of dsurseand -ndisnbused invesam- - 19- Schedule F Brazil at a glance

Latin Upper- POVERTY gkndSOCIAL Ameflca middle- _ __ Brazil &Carib. Income Developmentdiamond, Populationmid-1994 (millions) 159.0 471 472 Life t GNPper capita1954 (LUSS) 3.370 3.310 4,720 L expectancy GNP 1994(bblmons US$) 535.9 1,558 2,230 | Averageannual growth, 1990944 Population (%) 1.7 1.8 1 GNP \ Laoor force(96) 2.2 2.4 2.2 per - Mostrecent estimate (latest yearavailable since 1969) capita . e Poverty:headcount index (% of population) 17 Urbanpopulation (% of tOtlapopuilitlon) 78 71 71 Life eNopeotatyat birth (years) 66 68 69 Infant mortality (per 1,000 lie births) 58 42 37 Child malnutrition (96of childrenunder 5) 18 ... I Accessto safewater Accessto sale water(%6 of population) 96 80 86 IllIteracy(96 ofpopu/aiaon ae 15+) 19 15 15 -Braz Grossprimary enrollment (% of school-agepopulation) 111 110 107 Male - Upper-middle-income group Femaie,-.....

KEYEC.ONOMI fRATlOS and LONG-TERM TRENDS 1975 1985 1994 1996 Economicratios'

GOPfbisulons US$) 121,8 222.9 554.6 677.0 | Gross domestic irvestmentlGOP 26.8 19.2 20.8 21.9 Openness of economy Exportsof goodsand non-factor services/GDP 7.5 12.2 8.1 6.8 Grossdomestic savingslGDP 22.9 24.4 22.4 21.1 Grossnational savingslGDP 21.4 19.0 20.6 19.4 I

Currentaccount batance/GDP -5.8 0.2 -0.2 -2.6 Savings .-- - Investment InterestpaymentsIGDP 1.7 3.3 0.9 Totaldebt/GDP 22.4 47.2 27.2 24-01 Total debtservicelexports 43.5 39.1 31.8 33.1 Present value of debt/GDP .. .. 25.4 Present value of diebtVexports .. .. 278.2 .. Indebtedness 1975-84 19854S 1994 1995 1996-04 (averageannual growth) -Brazil GDP 3.0 1.5 5.8 42 5.3 Upper-middle-incomegroup GNPper rapita 0.2 -0.1 2.2 2.4 3.8 Exports of goods anS nfs 10.4 6.2 7.7 -0.4 6.2

STRUCTUREof the ECONOMY 1975 1985 1994 1995 (% OfGDP) Agricullure 12.1 11.5 12.7 12.8 wthratesofoutputandinvestment Industry 40.2 45.3 38.7 38.4 Manufacturing 30.3 33.7 25.2 24.8 Services 47.7 43.1 48.7 48.8 .5 9 9 94 s .10 Private consumption 66.5 65.8 61.1 62.1 General government consumption 10.6 9.9 16.5 16.8 G Imports of goods and non-factor services 11.5 7.1 6 5 76 -GD - GDP

1975-84 1985-95 1994 1995 r (averageannual growth) Agriculture 4.2 2.3 7 6 5.9 Industry 3.0 -0.5 7.1 2.0 .Gwth ratesofexportsand.mports%i Manufacturing 2.6 -0.9 5.5 1.6 30 Services 2.9 3.0 4 4 5 7 20

Private consumption 4.3 1.9 7.2 7.9 1 rI9 90 94 95 Generalgovernment consumption 0.8 2.3 -1.0 2.4 .20 Grossdomestic investment -3.2 0.2 8.5 9.2 Imports of goods and non-factor services -3.7 9.0 15.4 37.3

Gross national product 2.5 1.7 3.9 3.8 - spers - Imports

Note: 1995 data are preliminary estimates. The diamonds show four keyindicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - 20 - Schedule F

Brazil

PRICESand GOVERNMENTFINANCE 1975 1985 1994 1995 Inflation(%) Domesticprices (% change) 3000 Consumer prices 29.1 226.9 2,668.6 66.0 2000 Implicit GDP deflator 33.9 231.7 2,284.0 67.4 1000 Govemmentfinance (% of GDP) 90 Of 92 93 94 9S Current revenue .. .. 30.7 30.5 Current budget balance .. .. 7.4 4.3 -GDPdef 6 CPI Overall surplus/deficil .. .. 4.4 1.8

TRADE

(mifflionsUS$) 1975 1985 1994 1995 Export and import levels(mill. USS$ Total exports(fob) .. 25,638 43,563 46,506 soooo Coffee .. 2,607 1,942 2,850 Otherfood .. 2,545 1,851 2,100 40,000 Manufactures .. 13,356 26,844 27,081 30.0. Total imports(cii). 13,153 33,133 49,663 2000

Fuel Foodand energy ... 6,176.. 4,7404,695 7,5005,103 10000 Capital goods .. 2,480 11,906 18,200 o

Exportprice index (1987=100) .. 97 116 121 Sr "O of D2 93 SW 9S Import price index (1987=100) .. 79 139 148 oExports olmports Terms of trade (1987=100) .. 123 84 82

BALANCE of PAYMENTS 1975 1985 1994 1995 (millionsUS$) Exports of goods and non-factor services 9,418 27,713 44,966 47,846 Imports of goods and non-factor services 14,323 16,928 36,187 53,516 2 Resource balance -4,905 10,785 8,779 -5,670 n Nel factor income -2,106 -11,213 -12,580 -15,246 C r account bala ct GOPratto (%l Net current transfers 0 0 2,597 3,513 91 92 93 94 9 Current account balance, -1 before official transfers -7,011 -428 -1,203 -17,404 -2 Financing items (net) 5,946 1,842 8,203 30,450 Changes in net reserves 1,065 -1,414 -7,000 -13,046 Memo: Reserves including gold (mill. US$) 4,166 11,618 39,463 53,704 Conversion rate (locaVIUSS) 3.OOE-12 2.26E-09 0.6 0.9

EXTERNALDEBT and RESOURCEFLOWS 1975 1985 1993 1994 (millionsUS$) I Total debt outstanding and disbursed 27,329 105,187 145,438 151,104 IBRD 1,045 5,274 6,575 6,311 IDA 0 0 0 0 Totaldebtservice 4,319 11,471 11,111 16,114 IBRD 98 796 1,857 1,883 IDA 0 0 0 0 G A CD Composition of net resource flows 317056 20304 Official grants 9 34 59 69 20304 Official creditors 1,059 935 -1,009 -2,116 | Private creditors 4,213 149 9,286 3,717 89636 Foreign direct investment 1,302 1,348 1,292 3,072 Portfolio equity 0 0 5,500 5,082 World Bank program Commitments 538 1,525 636 1,024 A -IBRD E - Bilateral Disbursements 249 765 471 640 B - IDA D - other multilateral F - Prbate Principal repayments 26 405 1,279 1,346 C- IMF G - Short-term Net flows 224 359 -808 -706 Interest payments 72 391 579 536 Net transfers 152 -32 -1,387 -1,242

International Economics Department 3/8196 MAP SECTION

BRE273922

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IMAGING

Report No: P- 6907 BR Type: MOP