CIRCULATtNG CObuy TILE COPY Ift BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1414-BR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO COMPANHIA HIDRO ELETRICA DO SAO FRANCISCO (CHESF) WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE PAULO AFONSO IV HYDROELECTRIC POWER PROJECT May 22, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
CIRCULATtNG CObuy
TILE COPY Ift BE RETURNED TO REPORTS DESK
DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
Not For Public Use
Report No. P-1414-BR
REPORT AND RECOMMENDATION
OF THE
PRESIDENT
TO THE
EXECUTIVE DIRECTORS
ON A
PROPOSED LOAN
TO
COMPANHIA HIDRO ELETRICA DO SAO FRANCISCO (CHESF)
WITH THE GUARANTEE
OF THE
FEDERATIVE REPUBLIC OF BRAZIL
FOR THE
PAULO AFONSO IV HYDROELECTRIC POWER PROJECT
May 22, 1974
This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.
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CURRENCY EQUIVALENTS
(As of April 16, 1974)
Currency Unit = Cruzeiro (Cr$)
US$1 = Cr$6.515
Cr$l = US$o.153
Cr$l Million = US$153,492
INTERNATIONAL BANK FOR RECONSTRUCI'ION AND DEVELOPMENT
REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN
TO THE COMPANHIA HIDRO ELETRICA DO SAO FRANCISCO (CHESF)WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL
FOR THE PAULO AFONSO IV HYDROELECT'RIC POWER PROJECT
1. I submit the following report and recommendation on aproposed loan to Companhia Hidro Eletrica do Sao Francisco (CHESF)with the guarantee of the Federative Republic of Brazil for theequivalent of US$81.0 million to help fin,ance the Paulo Afonso IVhydroelectric power project. The loan would have a term of 20 years,including 14-1/2 years of grace, with interest at 7-1/4% per annum.In December 1973, the Board of the Inter-American Development Bank(IDB) approved a parallel loan of US$814.8 million including US$14.6million in financing charges towards this: project. The IDB loanwould have a term of 20 years, including 4-1/2 years of grace, withinterest at 8% per annum. In addition CHESF expects to obtainbilateral parallel financing totalling US$71,9 million from varioussupplier countries.
PART I - THE ECONOMY
2. An economic report, entitled I't he Economic and Social Develop-ment of Brazil" (R73-87), dated March 12, 1973, was distributed to theExecutive Directors on April 2, 1973. An. economic mission visited Brazilin the latter part of 1973 and its report is currently in preparation.Country data sheets are attached as Annex I.
3. The Brazilian economy has continued to grow at the very rapidpace which began in 1968. The increase in domestic product for 1973 isestimated to have been 10.5%. This was the third consecutive year ofgrowth exceeding 10% and the sixth in which it exceeded 9%. Over thissix-year period the per capita income of the country has increased 50%,its manufacturing output has doubled and its exports (in current dollars)have increased 3.5 times. Not only was overall growth in 1973 very rapidbut it was well distributed sectorially and regionally. Industrial pro-duction was up 14%, and this will be the fourth consecutive year ofacceleration of industrial growth. Economic growth for 1973 in theNortheast, where the weather was favorable for agriculture and where
inclustrial output is beginning to show the effects of previous invest-merits stimulated by fiscal incentives, was in the order of 13 to 15%.Finally, while world prices have been increasing rapidly, the Govern-mernt was able to manage its financial programs so that inflation didnot; accelerate during 1973. However, increased inflationary pressureshave been evident in the early part of 1974 as a result of decontrol of
some domestic prices and rapidly increasing import prices especiallyfor petroleum.
h. The development of Brazilian industry seems to be entering a
new phase, as excess capacity which had been playing a key role in expan-
sion of output has largely been utilized and most key industries are
operating between 90 and 95% of capacity. Rapid expansion of industrial
output has produced some bottlenecks in the supply of intermediate goods
and raw materials, especially steel and petrochemicals. This supply gap
is being filled by increased imports, which the Government has facilitatedby reducing, and in many cases suspending, import duties. The Governmenthas plans in an advanced state of preparation for expanding domestic pro-
duction of these critical intermediate goods. Over the short term, in-
creased import requirements will reflect both these bottlenecks and thehigher costs of imported petroleum.
5. The agricultural sector is also undergoing some important
structural modifications. The strong increase in international demandfor and prices of major products has led to substantial changes in
price-cost relationships among traditional crops and new export crops
like soybeans. Over the short term, these changes are making it diffi-cult for the Government to balance export demand against requirementsof the domestic market. In the case of beef, the Government has tem-porarily restricted exports in order to dampen the increases in domestic
prices which might endanger its targets for reduction of inflation. On
the other hand, exports of some agricultural products have increasedsharply and Brazil has become one of the world's leading exporters of
soybeans and sugar. While recent trends are causing temporary diffi-
culties in the management of the agriculture sector, they have generally
desirable longer term implications for the location and structure of
agricultural production. Pressure on presently cultivated land caused
by the expansion of soybean production is encouraging a marked accelera-
tion in the opening to commercial agriculture and livestock production
of large areas in the Center-West, and the agricultural frontier is
extending.
6. There are indications that the continued rapid expansion of
the Brazilian economy had a beneficial impact on employment and realwages during 1973. The data showing increased industrial employment
(8% in 1973) and real wages (2.3% in 1973) are clear. Less definite
but perhaps more important are reports of shortages of rural labor in
the South and rising wages for farm laborers harvesting coffee, cotton
and sugar crops. While technicians and skilled workers have been in
short supply in Brazil for some time, there are now persistent reports
of scarcity of unskcilled workers, especially in the construction indus-
try of Rio de Janeiro and Sao Paulo. While indications of increasing
absorption of labor and rising real wages encourage the belief that thelower income groups are enjoying an increase in their income in realterms, it cannot yet be said to what extent this will diminish theskewed pattern of income distribution in Brazil.
7. The rapid expansion of the Brazilian economy over 1968-72 de-pended increasingly on the utilization of foreign savings. The resourcegap, which was 0.9% of GNP in 1968, grew steadily to 3.4% in 1972 asincreases in domestic savings did not keep pace with the investment re-quirements of a 10% average rate of GDP growth, as the investment raterose from 17.4% of GDP in 1968 to 19.4% in 1972. During this periodthe growth of exports, while averaging 13% per year, was well below the20% growth of imports. However, this pattern of development was reversedin 1973 as domestic savings, stimulated 'by Government-induced savingsschemes and facilitated by increasing export prices, were estimated toincrease almost 23% and reach 19.8% of GDP. For the first time in manyyears this exceeded the growth of investment, so that the resource gapnarrowed from 3.4 to 3.2% of GDP. It should be pointed out that thismay not represent a trend toward narrowirng resource gaps and reducedexternal capital requirements but may, in part, reflect a lag betweenincreased incomes due to improved te'rms of trade and increases in con-sumption and imports.
8. The growth of the Brazilian economy continues to be fueled bythe outstanding performance of export agriculture and industry. Thedollar value of Brazil's exports increased by 45% in 1973, following a37% increase in 1972. The country has benefited from rising worldcommodity prices; nevertheless, it is es-timated that 64% of the increasein exports will be due to increased volume. Thus, despite an increasein imports of more than 30%, largely ref:Lecting expansion of wheat,steel, petroleum and chemical imports, the country enjoyed in 1973 apositive trade balance for the first time since 1970 and the currentaccount deficit was smaller, at around US$1,200 million, than in 1971or 1972. The first half of 1973 saw a continuation of the strong in-flow of foreign capital into Brazil, predominantly in the form of finan-cial credits, and, as in the past few years, this capital inflow exceededthe current account deficit, resulting in a substantial accumulation offoreign exchange reserves, which reached US$6.6 billion, the equivalentof about 11 months? imports, at the end of 1973. These reserves providea cushion of international liquidity expecially needed because of heavyshort- and medium-term debt service payments and would give the authori-ties adequate time to adjust their economic policy in case of adversebalance of payments developments. In mid-1972, concerned about both theterm structure of external debt and the inflationary effects of reserveaccumulation, the authorities began to alttempt to limit the inflow offinancial credits. The minimum maturity of financial credits was ex-tended to six, then eight, and ultimatelyr to ten years. These measuresproved partly successful and the net inflow in the first half of 1973,US$1.3 billion, was lower than that in the second half of 1972, US$1.8billion. The lengthening of minimum matuirities for financial creditsapparently induced some foreign firms to switch to direct investment,
which increased sharply. Tn September the Government took even sternermeasures to limit inflows of financial credits by imposing a 0% reservereqairement on cruzeiros generated by new financial credits while per-mitting existing credits to be renewed for a minimum maturity of tenyears. This measure virtually halted the inflow of new financial creditsduring the fourth quarter of 1973. However, in view of the higher importcosts due to increased oil prices and the uncertain condition of thewor.Ld capital market, the authorities repealed the L40% reserve require-ment in January 1971, while leaving the minimum term at ten years toassure an adequate flow of funds on acceptable terms.
9. The recent increases in world petroleum prices will havestrong direct and indirect consequences for the future growth of Brazil.During recent years Brazil has become increasingly dependent upon ex-ternal sources of petroleum, which now- supply three-fourths of its re-
auirements, and is now the heaviest importer of oil of all the lessdeveloped countries. The near-term direct impact of increased oil priceswil-' be strong, but should prove manageable. Latest tentative estimates
indicate it will add about US$1.5 billion to the oil import bill for 1974,an :lncrease of 50% over our earlier estimate. The Government is takingmeasures to lessen the long-term impact of oil price increases by raisingdomestic prices of petroleum products, carrying out an investment programwhich emphasizes hydroelectric power and rail transport, and beginningto clevelop alternative sources of energy (shale oil and atomic power).
10. Because Brazil has become increasingly integrated into theworld economy, its growth performance is now linked closely to the stateof the economies of the industrialized countries. Insofar as the energycrisis affects their economic well-being, it also affects Brazil's ex-
port; growth prospects and the potential for continued high levels ofcapital flows from the industrialized countries to Brazil. Despite theseuncertainties, Brazil's export prospects are generally favorable and itsforeign exchange reserves are ample so that high rates of growth can be
sustained, although some deceleration from the recent records can beexpe!cted. However, at acceptable rates of growth Brazil is certain to
continue to have a sizeable resource gap, and mobilization of largeflows of official external long-term capital should play an importantrole in financing the current account deficit if the debt service burdenis t.o remain manageable. It is estimated that the average ansnual inflowof cffi^ial medi, um- and long-term capital required for the years 197L4to 197) will be approximately US$1.9 billion, or almost twice the averageannual medium- and long-term official capital inflow for the years 1971to 1973. While the official loan capital needed to support Brazil'sgrowth targets is substantial, the direct import needs of most publicinvestment projects are relatively low, reflecting the ability of thedomestic capital goods industry to compete successfully under interna-tiornal competitive bidding and the low direct foreign exchange componentof many projects with strong social impact. Hence, an appreciable partof official external financing should be made available to cover domesticexpebnditures.
11. By the end of 1973, 13razil's total. external delt (public alndprivate) probably exceeded US$11.S billion, of which over US$7 biliollwas in the form of financial credi-ts. The ai'orementioned rucenLcasllr(extending the minimum term of financial credits and virtually eli- in1ningshort-term credits are having a J'avorable impact on debt strUcture. V)-tween March 1972 and March 1')73, the prcportion o' the debt due withitwo years f'ell from hO% to 3L,. NevertheLess, the de'bt servi.ce raliuI'or 1973, including all registered external debt, hut netting outl se';'0 payments received on Brazilian loans to other countries, is estima bed at.38%. It should be noted that this debt service rat:io inclhdes so'v;,
on all public and private debt; the ratio f'or public and pb LicLy s. L r;s -teed debt alone would be very mnuch lower. Nonetheless, tLhe act. renm
that Brazil's external debt is large and its deht service obll;at iornsare high. However, the very large f'oreign exchange rcser%-:e ,a over the past several years ensure that Brazil will have the liouidit.yto meet its debt service obligations in the short. term, while the coun-try's record of high caliber financial management provides grounds forconf'idence in the maintenance of' creditworthiness over the longer run.On the assumptions that exports increase by about 180 a year in nominalterms between 1973 and 1979 and that the average maturity of financiaLcredits does not f'all below six years, the debt service ratio i. e-pectedto decline substantially over the next several years and Brazil is cn-sidered creditworthy f'or continued Bank lending.
12. As a result of the trends in the Brazilian economy in rece-at.years and of' careful economic management, there has been a remar-:ablebroadening and deepening of the country's productive base and its in-frastructure as well as a strengthening of its external sector. How-ever, despite its recent growth and vast potential, Brazil is stfill acountry with a relatively low per capita income, about USVi4 6h (BankAtlas for 1971), a very unequal distribution of income and ex'ens:ivepoverty. The Brazilian Government believes that the poverty and dual:ismwhich af'flict the country can be ameliorated only if high rates o' eco-nomic growth are sustained, permitting absorption of the economicallymarginal population into the expanding modern sector. Within the conLe::tof rapid growth, the Government has committed itself to using the con-siderable savings it generates for programs which have a social orienta-tion and transfer resources from the more developed to the less developedregions of the country. These programs fall into two broad categories:regional development programs for the Northeast, Amazon and Center-Westdesigned to bring about a fuller utilization of the country's land andnatural resources, encourage expansion of the agricultural fron'ier andlpromote industrialization of less developed areas; and soc-ial develop)-ment programs in public health and nutrition, water and sewerage, lo-i-income housing, education and social welfare, inst:ituted to .roaden tle
distribution of and improve access to the benefits of economic growtih.
-..on cr. year, incrreas-in1r- to U.$)4 i iiL11i on, in jus$l I 1i; >f
oS$:j-;L3.7 r Llli,on in FY72, (1 US$1'7') milloi, r 1 l t . .
T.0 trtho n _ Y y they ..erp US$1 Bt ' ni i-on. ils l.:I s ;.ni
-o :ncrease durintr the ne.t few yerr:. Arinex 1i contains - 2nYP.r stc
.en- of BanIc loans as of MLarch 31, 17)l. .. nd not.es or the e . on
ongoinpC projects.
i)i. Bank lending to Brazil was very acti-.e iLn FY72, when sev;n
loans w,re approved totalli.ng US$ih7 milli o (includin.'~ three large
loans to the steel industry). In FY73, six loans amountinp to U1'$17.i
mill in, 'ere approved. A loan of US,L2t, milllion for the Itmibiara rdra-
electr r project has been the only loan to Brazil anproved thus far in
FY7-7 A loan of US$36 million for a water supply and sewea;e' pa -oJic-(tr
in the State of Minas Gerais is being presented to the ixrcit -ree IDircbors
at -the same time as the present loan. At an advancedi stage o! preparrlt 'on
are an education project in the Northeast and North, a railiTjay r ei.i 1-
tat-Lon program, a project to improve the port or Recife, and, a 1i''
highway construction program. We hope to present tho.se pro jcts to hti
Executive Directors in the next several, months. We are a:!.so wor!'inrr with
the Brazilians on the preparation o" an integrated rural dcv<elolienl.
project in the Northeast Statc: of Rio Grande do Norte, an :ir iciltural'
develonrnpent project in the lower Sao Francisco Valley, a se0tlcmen:ll.
project in the Amazon reg,ion, an agricultixral research pro-re.n. a .:-.1 ir
livestoc' development project. and - nutrition project. IJe hae also
been requested to part..cipate in the financing of the next pha.-.e o. thi
expansion of the flat steel induistry, and we are also consider-inof assi -
tance to small- and medium-sized industry.
15. Brazil's total medium- ard lonfg-term external dei:;t (excludin-
financial credits) outstanding and disb1ursed at the end oi 1 ,72 as
UJS$....C, bi'llio-n. lThe Ban heIld, at the ed o- -L-72, 12.2), of the mediur:-
d 4 ' n,, 'er ndebt cutst-andIng. and the Bank's share of the service on
this debt was about 6.j5/2i. If present trends continue as exuected, <hc
Banc's share in total mediumu- and long-term deht. outstandinc will. in-
crease to about 1)b 1970), while tnhe s(;re :in debt serv-ice ol i-
crease to about 10%.
IFC Operations
16. IFC has comrmitted more ifinanclial resources to Brazil <han -,o
any other country. Since 19;'7. IFC has made 22 cormitments to :r=IzA 1.
iotallmn,r~ nl$1112.1 million, oT which US$0d.8 million has been renaid
and US$1t-.6r million sold. Of tie ',.lance of US$73.7 million, U5Q113.()
million represent's loans and US$20.` mi]lion ecA ry. A summary of lFCt r
investments cr. tzo M,iarch 31, 1974, is given in Annex II.
-7-
Lending Strategy
17. In its lending to Brazil, the Rank has been supporting sever,1limportant objectives of' the Government's dcvelopment policy. One obj(&(-tive has been the identification and support o.' pro,jects desi,-n(Ad toincrease productivity and incomes in the lowest incomc se rment; oK Li&'population, to broaden the economic opportunit-i es open to tlioso frnup:-and to alleviate human inisery. Project pr-eparation ei f'ort .i in Lii ii-have been intensified, and we hope anm increasing number of' -oanIs wilththis objective will be coming forward to support B3r.;zil 's -dulcat ion,
nutrition, water supply and sewera-e and rural developmenL prot-r-ms.Experience shows that projects in these area.s are especially diand time-consuming to prepare, require close participaLion bvy Ian stthrough all stages of the project's life, and are usuaLlv rela't:iJ.ye'small in size. Other external developmernt lenders are also acti vel'Yseeking to help projects of this nature. For ti-jese reasons, only alimited number of projects in these areas will be available and suita0lefor Bank financing in the near f'uture. While the concentrated ef'fortsnow bei!ng made along these lines should Eventually result in many moreprojects of this nature, in the long run, for some time to come theywill constitute a relatively small share of total BanTk lending tn kraz>-.
18. Institutional development and policy reform, designed interalia to help ensure that public savings are used economically arid that.an adequate volume of savings is available i'or applications in thesocial sector, have been a second major objective in Bank leriding toBrazil. They play a parti;cularly important role in our lending in thetransportation sector and, specifically, the railw ay rehablilitationprogram which is now being appraised. The strengthening oi developmentfinance institutions w ould be a major obljective if we move forwiard wit:-;the proposed program of lending for small- and medium-si ;ed industry.In agriculture, our 'Lending for livestock development has served tointroduce modern methods of ranch management, within the frameeworl. ox'a supervised credit program. In both industrial and agricul tural cr(eit.'our lending is linked to the application of progressively mnore realisticrates of interest. We also expect to l-end to support agricultural re-search in the Northeast and to strengthen the federal mechanism forcoordinating and supervising agricultural research.
19. A third objective in Bank lending to Brazil, especially inthe power, steel and highway sectors, is to help provide necessarylong-term external capital. In this regard, the Bank. seeks to playa complementary role to that of other lenders, supplementinfg theirresources in individual operations and f'inancing activities that titeyare unwilling to finance. Brazil has needed and will continue toneed a very large volume of medium- and long-term loan capital inr'lowsto sustain rapid grovrth and achieve its employment creation and reiondevelopment objectives.
20. A fourth lending objective for the Bank has been to hel-p easethe foreign exchange constraint on Brazilian developrnent b1y upportingprojects designed to increase Brazil's export capacity and, where economic,
t O S S' . -ute domestic n.rouuc. ion iFor irmnorts. Supo)ort ol a1
.teel i mlus t.ry. for :arinle i.; hel]pJnr rir:azol dievelop se 1-..;u ViiiLn a c Inmod i wh i ch eaul be produ oo cJti C i.J ently i rl ,ra,i I 1 !the cou!nbrv r s 5oun ti lul su7ply 0 ! i-' .l-O! or( c d Li:it., :Lr:te nJt ma r>-e L
21 The B'ank support o-' the lrazilian electric poi_er cecin :L,'i;
OL the Paulo Afonso IV project in particul.ar, re cflcts t c. in several ways. By giving continuing suipport to an electric t.aireginie that, assures a hizh degree of solvency in the power ,e r.C L
sub5stantial cash generation contributing to net.- investment. T arlr-.
is helning Brazil realize its enormous pok.er -inveStment nec .iw ithlou1undlue recourse to external canital. Our presence, maore-'e i wac.i.litates
Brazil's access to other sources of external carita.`, wit.i a dea.-.nigpartic-ipation by the 3an;. itself. Finally, by supportin- poc' cr develop-
merit in ',Aie 'Northeast, the Bank is helping to assre thre ade(Juate 1X>-
pli-es of electricity that are needed ,or thc development o" th.'e .ooure
region in the country.
PART III - TEl ELECTRIC POWER SECTOR
22.. The proposed loan to CHESF for the Paulo Afonso IV hydroelectric
power project would be the Bank's twenty-seventh for the development of
the powier sector in Brazil. The Bank made one previous loan to CHESF inl
19'50 to help finance CHFSF's Paulo Afonso I hydroelectric power projec.
(Loan 25-sR).
23. Brazil is fortunate to be endowed with one of the world's
largest hydroelectric potentials which make the country less dependent
on petroleum as a source of electric power than many other countries.
The estimated potential is 92,000 NW in the South, Southeast and North-
east regions where rivers have been surveyed and where most of Brazil's
population live, and about 60,000 MW in the remote parts of the country.
So far less than 10% of the total potential has been developed. In
19,72, of the total installed capacity of 13,500 MW, 11,000 MAW or 81%
was hydroelectric capacity and the remaining 2,500 MAW or 19',', -thermal
cao)acJt Brazil's first atomic thermal power plant is now under con-.4. ., ., 4 . .
The Power Sector
2h., The power sector is operated by a number of Federal- andState-owned companies, and one large private company (Light-Servicosde Eletricidade, S.A.). The sector is administered by the Ministryof Mines and Energy through its Department of Water and Electric EnerQr
(DNAEE; which performs regulatory functions, including granting licensesfor hycroelectric sites, assiMning concession areas, setting tariffs andapprov-ing expansion plans.
2.5. Centrais Eletricas Brasileiras, S.A. (ELETROBRAS) is theGovernment agency under the Ministry of MIines and Energy in chargeof planning, technical coordination, financing and administration orthe electric power sector. Through its four regional companies,ELETROSUL, FURNAS, CHESF and ELETRONORTE, it is also responsible forgenerating schemes affecting more than one state, high voltage (LIV)and extra-high voltage (EHV) transmission systems aimed at the inte-gration of state systems, and transmission systems related to hi-national power projects, in particular, the proposed Itaipu projecton the Parana River beetween Paraguay and Brazil. For plarnning pur-poses, the power sector is divided into Fi.ve regions: South, SouthaF(as'..Central-West, Northeast and North. 'The cDordinating i'unctions ofELETROBRAS have become important particularly in the South and Southe.lsregions which account f'or 90% of' the to'tal power consumptioni o.;' hccountry. At the time of the latest power generation loan t.o Brazi',for the Itumbiara hydroelectric pro;ject ('Loan 923-B3i), the Bank and theGovernment agreed on the need to coordinate the planning of electricpower generation and transmission in these regions, and the Governmentagreed to submit, through ELETROBRAkS, an updated study of the powrergeneration and transmission reouirements in the South and Southeastregions up to 1981. This study was submitted to the Bank in January1974, and is satisfactory. The Bank, however, has suggested thatadditional studies be made to take into account long-run trends forfuel prices. ELETROBRAS has also prepared a satisfactory power exfpan-sion program for the Northeast region.
26. The growth of the electric powe.r sector has been in line withthe high growth rate of the economy. Installed capacity increased f'rom5~,200 14H in 1960 to 11,200 MW in 1970 and 13,500 MW at the end of' 1.)72.During the past five years, electricity consumption in Braz-il grevJ atover 11% per year, and in 1973 amounted to ¼i7,000 GWh. The grow!th rat;.however, was much higher in the Northeast where consumption ;;as e:-pnndJi.nf'rom a lower base than in the more developed regions. Durin,, 1 ;'7..pow:er consumption in the Northeast with an annual per capi.ta COSUr1P-:-f- of 200 IcWh increased bDy 20;', while in the Southeast with a -,)r capln±aconsumption of 970 kWh it increased by l0;.
Northeast Development and CHESF
27. CHESF is virtually the sole supplier of electricity in tneNortheast region of Brazil. CHESF's concession area includes nineNortheastern states and is vast both in terms of area and population.Together, the nine states occupy 18% of the total area of Brazil orabout 1.5 million sq km (larger than the combined area of Portugal,Spain, France, Switzerland and Italy). The LO million inhabitants ofthese states are also the poorest in Brazil. In 1969, the per capitaincome of the region was only 48% of the national average. Until the1950's, government programs to aid the Northeast consisted mostly ofconstructing water works to temper the ravages of drought on agricul-tural production. After the 19E8 drought, the Northeast RegionalDevelopment Agency (SUDENE) was created and the emphasis of the Govern-ment program was shifted to more comprehensive regional developmentefforts.
- 10 -
28. Du2ing the l')6C s the thrust of the Uovernmernt's pro<ram t.a-on heary in-estment in ini'rastructure, mair'ly transport ancl poiJcr or d
on industrialization which was stimrulated throu-h an in-cniioli a\ LII-
centive scheme. The resulting economic girow-th in the Northleast, vanimpressi-ve by most standards. However, those livin,- in riLral arecs a'
the sussistence level did not bhenefit muaci f'rom the G)ovornnri!ti's C''l'Or.,
although their situation was alleviated to some degree )y inter- or
intra-re-gional migration. Until very recently, the industriali_ation
progran -as not able to ;enerate sufficient employment opportuniLv okeen nace with the rapid growth of the ur'an la'bor l'orce. Th}is, a prooloi' underemployed labor accumulated in the larg,e urban centers o' tve
Northeast, such as Salvador and Recif'e.
29. Recognizing the limit.-d absorptive capacity of la)or by
industry, the Government added two new dimensions to its policy; labormobilitv and agriculture. The new programs attempt to ease the agri-
cultural underemployment in the Northeast by removing workers from thisarea to new agricultural frontiers and by increasing the productivityof the remaining workers. The Bank is actively supporting the prepara-tion of a number of projects designed to further these objectives andthese may offer opportun-ities for Bank financial assistance.
30. Despite the shift in government policies, manufacturing industryis likely to remain the leadin; sector for regional growth. The indus-trialization program broadened the economic base and exposed the regionto a modernization process. Local entrepreneurship was stimulated 'oymanagerial experience which was brought by southern firms into their sub-sidiaries in the Northeast. During 1967-72, the net domestic product ofthe Northeast grew at 6.4% per year compared with 9.9% per year for thenation as a whole. The relatively slow growth of the region was duemainly to the slow growth of the agricultural sector whose net domesticproduct grew at only 0.1% per year compared to 5.6% per year for thenation. On the other hand, industrial growth at 11.7% per year was almostup to the very high national average of 12.5% per year. In 1973, the re-
gional product of the Northeast, grew by an estimated 13% compared to 10.5%for the country as a whole. Concurrently, unemployment and underemploymentin the Northeast have been diminishing, indicating the prospects for higherproductivity and income for the Northeast.
31. The increased power supply by CHESF would be a vital element4n -he Government's continued effort to develop the Northeast and todecrease the regional income disparity between the Northeast and the
rest of the country, in particular, the Southeast and the South. Between
1964 and 1972, power sales by CHESF increased at an average rate of' lL%
per yea.r from 1,600 Gwh to h,500 GWh. Between 1?73 and 1982, it is pro-
jected to increase at an average annual rate of 13.79 per year from5,400 G,0Jh to 17,200 GWh.
32. In 1972, CHEOF sold') 3' o!' its sower to 13 state-owned distr; 0,-tioni comnanies and the remainiri g 7 (l- di oe ! ly to large industrial conswner s.Industrial consumers account-,ed !or I < o0 total consumpti-on lollowied biy
residential conFsinmers wil 1 Ni:;. commercial users with L,;; anrd other cateŽ'or i (Žs
- 11 -
with 19%. The demand pattern is closely related to the population whichis very unevenly distributed; the area near the coast, the Eastern Sector,which occupies about half of the Northeast, uses about )7, or the totalenergy consumed in the region, while the Western Sector uscs only al)out3%. The proportion of the population in the Northeast serviced witihelectric power is still very low. In IW70, 18.7% o.f.' the populat.ion hadaccess to electricity and by 1)80 this is expected to increase to 28.7P.The Government and the Bank are holding discussions on possible Bankparticipation in financing power distribution projects -in the Northeast,with particular emphasis on lower income families. The increased powergeneration of' CHESF would supply any additional demand created d an i:-tensified power distribution program f'or residential consiumers.
PART IV - THE PROJECT
33. The Sao Francisco River has a total length of 2,660 km. Startingfrom the highlands near Belo Horizonte in MIinas Gerais State, it flowsnorthward for 1,750 km and then turns eastward to flow into the AtlanticOcean. Rainfall varies from 1,600 mm per -year at the head of' the river to400 mm per year in Sobradinho. For most of the 1,000 km that it flowsthrough the State of Bahia, the Sao Francisco River is the main water chan-nel in the great drought polygon of Brazil.
3h. The current project is another step in developing the hydroelec-tric potential of the Sao Francisco River at the Paulo Afonso Falls totallinrabout 6,500 MW. In 1950, the Bank helped CHESF finance the first generatingstation at Paulo Afonso. Subsequently, the Inter-American Development Bank(IDB) assisted CHESF with loans to Paulo Afonso II and III, as well as aplant at Moxoto, upstream from Paulo Afonso, the latter being constructedunder CHESF's fourth expansion plan.
35. CHESF's fifth expansion plan, of which the Paulo Afonso IV projectis a part, is designed to meet the expected power demand in the Northeastuntil 1982. ELETROBRAS made a formal request for f'inancing this plan to theIDB in July 1972. Because the financing needs exceeded what IDB was pre-pared to lend, IDB, and subsequently the Government of Brazil, invited IBRDparticipation. The Government sought the assistance of the two banks f'orthe purchase of equipment and not for civil works for which adequate localresources are available. A joint IBRD/IDB appraisal mission visited Brazilin August 1973. Negotiations with CHESF and the Government were held be-tween April 29 and May 7, 19Th. Annex III contains a description of tneloan and the project. The Appraisal Report (396a-BR) is being circulatedseparately to the Executive Directors.
Project Description
36. The project consists of the main elements of the fifth expansionprogram, namely, the Sobradinho Dam and Reservoir; the Paulo Afonso IV under-ground hydroelectric power station; transmission facilities; associated sub-stations; project related equipment, such as inspection vehicles; and trainingfor the construction, operation and maintenance of an EHV transmission system.
- 12 -
37. The Sobradinho Dam, under construction since June 1)73, will
be located on the Sao Francisco River about 470 km upstream t'rom f'aulo
Afonso. It wil create a reservoir with a gross capacity ol' 36.2 billion
(36.2 x 109) m and will inundate an area of' about l, 150 sq kin. i tls
usable storage capacity of 29.4 billion m3 will be used to increase the
minimium river flow from 1,150 m3/sec to 2,060 m-'/sec and to raise thit
firm annual energy generation by about 8,300 GWh at the generating plants
currently in operation and underway, and about 27,000 GWh at aLl generating
plants installed and to be installed downstream.
38. The Paulo Afonso IV plant wiill be located about 2 km downstream
f'rom the existing Paulo Afonso plants. A portion of the river flow will
be diverted to it from the existing Paulo Afonso and Moxoto plants by a
bypass canal and forebay.
39.. The transmission system required by Paulo Afonso IV is provided
for partly in the fourth expansion program now underway and partly in the
proposed project. The fourth expansion program includes two 500 kV trans-
mission circuits between Paulo Afonso and Salvador and one 500 kV circuit
between Paulo Afonso and Recife. These lines, initially operating at
230 kV, plus nine 230 kV circuits to the Fortaleza, Recife and Salvador
areas, provide the transmission capacity to deliver the power generated
at existing Paulo Afonso and Moxoto plants to the main load centers of'
the Northeast (see map, IBRD 10807, attached).
The Borrower
0o. The borrower would be CHESF, an autonomous Government company^<
established in 1948 and a subsidiary of ELETROBRAS. CHESF is responsicle
for the generation and transmission of electric power in nine states o'
Northeast Brazil. Only 3% of the industries in the Northeast provide
their own power. CHESF's power system, with 11,000 krm of transmission
lines, is independent of the systems o_ the more highly developed South-
east and South regions, although future connection with the Southeast
region at Vitoria in Espirito Santo is under consideration. CHESF's
presently installed capacity, mostly at Paulo Afonso I-TII stations,
is 1,300 MW with another 976 IMW under construction.
Li. The company's headquarters are located in Rio de Janeiro, and
operating offices are maintained in Paulo Af'onso, Salvador and Recife.
Since CHE.'SF uses its ouw forces for an important part of' its construction
wvork and has a vast concession area, the total of about 14,000 em-
ployees appears reasonable. CIMSF's management is good. Its external
audi-;ors are satisfactory.
42. CIESF has a well-conceived training program budgeted in 1 ;7:
at US$_71,000 equivalent. It covers all areas: technical, legal,
accounting, L'inance, saL'ety and general administrative duties as wvel)
as suoervFi.on at all levels.
- 13 -
l>3. CHESF has operated its generating system satisfactorily; itsoperating performance has not been so good, however, in the transmissionsystem. Unusually high transmission losses, about 13% in 1972, have iconexperienced on the 230 kV lines, due to delays in expanding the system.stemming from ELETROBRAS' decision to adopt A00 kV for neT I1IIV Linos in-stead ot' the original WOO kV. Energy losses are expected to ,go down toabout 1L,4 once the 500 kV double circuits between Paulo Alfonso and Salv:ildorand between Paulo Afonso and Recife are installed.
Engineering and Construction
)lU. The Sobradinho Dam and Reservoir were first studied by theGovernment's Superintendencia do Vale do Sao Francisco (SUVALE). FinaLengineering design was done by the firm Hidroservice of Sao Paulo, withthe assistance of various organizations and consultants. The construc-tion contract was awarded to a Brazilian firm, SERVIX, after domesticcompetitive bidding, and construction started in June 1)73. The fillingof the reservoir is expected to start in January 1977. The bedrock isof' excellent cuality so that 1ith adequate construction methods andmanagement, the Sobradinho Dam should be constructed on schedule andwithin current cost estimates.
4L5. The Paulo Afonso IV power station, bypass canal and foreb0aywere designed by SOFRELEC of France with the participation of CHESF.The consultants recommended an underground powerhouse, and CHESF,which built the underground powerhouses for existing Paulo Afonsonlants, decided to construct the new power station bLy force account.Preliminary work started in mid-1973 and excavation for the bypasscanal and the underground powerhouse started in early 17L. Theinstallation of the four 375 KW generating units will start in 1)70,and the units are expected to be comm!issioned between 1)78 and 1)-32.
46. The transmission lines and substations have been designed 'oyPower Techrnology Inc. (PTI) of the US with the participation of' CHESF.The transmission lines will be built by contractors and the subs Lationsby CHESF by force account. The construction of the 500 kV lines f'romPaulo Afonso to the Recife II stubstation will start in mid-1)75, forcompletion by end-1977. The construction of the 230 kV lines and sub-stations will start in the beginning of 1975 for completion by end-1)7Y.
Cost Estimates and Financing Plan
47. The total cost of the project, as estimated in January l97L, e::-cluding interest during construction, is US$692.6 million equivalent Withestimated foreign exchange component of US$29)h.2 million equivalent. Theestimated cost of the Sobradinho Dam is based on the actual contract 'orcivil works in which price con-ingencies have been incorporated, and T.'hici;
provides an escalation formula to cover other cost increases as indicatedthe official Brazilian indexes; plus 10% for physical contingencies; thecost of land and relocation of the population from the flooded area reilectsCHESF's estimate plus 15% for physical contingencies. The cost estimate
of the Paulo Afonso IV power station, transmission l'acilities atnd misccl-laneous components include physical contingencies oL' 1i'' f'or civil] worlusand 10% for equipment. In addition, they contain price contingencies at,the rate of 7% per annwa for civil works of' Paulo Afonlso IV and pricecontingencies for equipment at an averagre annual rate of 8.7:. SinceSobradinho will benef'it all downstream hydroelectric schemes, its costsshould be allocated among them. The total cost of the Pallo Afonso IVpower station and related transmission facilities, including aboout L40,of the cost of Sobradinho, amounts to US$562.6 million equivalent orabout US$375 per kW of installed capacity. This unit cost is reasonallef'or a plant of' this type.
L48. CIESF plans to obtain a total of' US$223.1 million equivalentfrom the Bank, IDB and bilateral financing sources. The remainder oi'the project cost will derive from CHESF's internal cash generation andloans from ELETROBRAS. The proposed Bank loan of US$81 million equi-valent would finance transmission line equipment, some of the equipment.for the 230 kV substations, miscellaneous enuipment and training. TheIDB would finance some equipment for the Paulo Afonso IV station, t.ieequipment for the 500 kV substations, part of the equipment for the230 kV substations and US$lL.6 million equivalent in interest durin-construction. Each Bank would t'inance the f'oreign cost component o'the engineering for that part of the transmission system it is financing.Neither bank would finance civil wor'.s, whose cost will be met frominternal Brazilian resources.
The major items of equipment, namely, the turbines, generatorsand large transformers, which are not made competitively in Brazil havebeen selec'ed by CHESF for bilateral parallel financing. Of the estimatcdUS$82.3 million cost of this equipment, CHESF plans to finance US$1O.J.million in down payments from its own resources, and has arranged to ob)-tain financing on reasonable terms from supplying countries for the re-maining US$71.9 million. For this equipmernt, CHESF will conduct competitivebidding among the suppliers in countries that agree to provide parallelfinancing. In addition to making contacts with i'oreign embassies, CIESFof'ficials visited Canada, Japan and the US in November 1)71 and Austria.France, Germany, Italy, Sweden, Switzerland and the UK in February 'L i)(!to request bilateral parallel financing. So far, twelve countries havesent letters of intent to CHESF agreeing to make such financin- availab'e.
50. The Bank loan would be made to CIESF at 7-l/)i` interest .'or20 years, including a L-l/2 year grace period. The IDB loan will bemade at 8% interest for 20 years, including a 1-l/2 year grace period.The potential sources of bilateral parallel financing have so -ar indi-cated interest rates between 7-1/)4% and 7-1/2% with terms of 15 years,including appropriate grace periods.
51. The IDB's Board approved the US$841.8 million loan (theirlargest ever) in December 173. The signing and effectiveness of' thatloan are contingent, respectively, on approval and effectiveness of' theproposed Bank loan. The effectiveness of' the Bank loan would ie con-tingent on the effectiveness of the IDB loan (see Section 3.01(a) of thedraft Loan Agreement).
Project Justification
52. After examining several hydro alLernatives on the Sao FranciscoRiver, ELETROBRAS and CHESF, wiith the assistance of' consultant;s, deter-mined that the most attractive alternative consists oi' building- theSobradinho Reservoir to fully regulate the Sao Francisco River and toinstall at Paulo Afonso a fourth powerhouse (Paulo Afonso IV) with acapacity of 1,500 MW. This alternative, the Paulo Ai'onso hydroelectricproject, was compared with:
a) conventional thermal alternatives consistzing of oil-'iredsteam generating units to supply the system base load re-quirements combined with gas turbines and the existinghydroelectric stations: and
b) a nuclear alternative where the above-mentioned oil-lfiredunits were replaced by pressurized light-water nuclearreactors.
By comparing the present worth of the cost differential between the PauloAfonso IV and the thermal (oil or niiclear) alternatives, it was conc.lu-ledthat the proposed project provides the required power supp.Ly for theNortheast region at the minimurm cost.
53. The rate of return on this project calculated on the basis oicharges paid by consumers cariff plus sole tax)will be 23. 3A).
Financial Aspects
5l;. In the nine-year period 197l-82, CHESF plans to spend aboutUS$1.7 billion on the construction of new generating and transmiss;ionfacilities, and its total fixed assets are expected to grow- at anaverage annual rate of 1L4.8% . CHESF?s financing plan :f'or this periodassumes an lp return on remunerable investments (defined in Annex II,Page 3 of' the Appraisal Report), Government grants and equity contri-butions of about US$23)t. 6 million, and almcist total reinvestment ofearnings. CHESF's financing requirements would be provided about 22.-'..by net internal cash generation, 23.Lb% by existing and proposed foreignborrowiings and 5t.14% by existing and proposed borrowings from ELETROBIRLA.SS.CHESF's financing plan as detailed above :'s reasonable, particularlywith the support of the Federal Government; through ELETROBRAS. In theevent that CHESF did not have sufficient funds to assure the timely com-pletion of the project, the Government would be committed to provide thlem,either directly or through ELETROBRAS (see Section 2.0.3 of the draftGuarantee Agreement).
55. CESF's financial outlook is satisfactor,y. CIESF's financialstrength comes not only from adequate tariff legislation (see paragraph 2.06of the Appraisal Report), but also f rom ELETROBRAS' willingness to convertsome of its loans into eouity and/or contribute fresh enuity as needed tocarry out CHISF's expawsion program and meet its financial oboligattions.
- 16 -
The Government would be committed, in the event C11ESF' did nmA oLte
sufficient funds to meet its f'inancial. oblligations, Lo provide tiin.m
either directly or through ELETROBRAS (see Section 2.03 of' tile draiL
Guarantee Agreement). CHESF would not incur new debt it by sach in-
currence total debt were to exceed 66-2/3% of CHESE's total l'ixedassets less depreciation; it would also not incur new debt with anoriginal term of less than 10 years, if by doing so the total out-standing principal of such debt were to exceed % of' its total 1 ixedassets (see Section 5.07 of the draf't Loan Agreement).
56. In its projections, CHESF has used an average annual depre-ciation rate of about 2%. Compared to t-ie rate used by similar lar_epower companies in Brazil, this rate is lowq and theref'ore CHESF hasagreR,d to make a study of its depreciation practices and to discusswith the Bank the results of such study within nine months of thesigning of the Loan Agreement (see Section 5.08 of' the drai't LoanAgreement).
Disbursement and Procurement
57. Disbursements from the Bank loan would be made against appro-
priate documentation for the CIF cost of imported goods or the ex-factorycost of locally manufactured goods and for the foreign exchange cost oatraining abroad. No disbursement would be made for expenditures madeprior to the signing of the Loan Agreement. The schedule of' disburse-ment is given in Annex III.
58. Procurement of the equipment to be financed by tuie Bank wouldfollow the Bank's Guidelines; the manufacturers whose bids contain com-
ponents manufactured in Brazil equal to at least 50% of the value of thebid being given a 15% margin of preference. Since Brazilian firms are
likely to win some of the bids, the Bank will be f'inancing some localexpenditures, estimated to be about US$20 million equivalent or aboutone quarter of the loan.
Environmental Aspects
59. The creation of the Sobradinho Reservoir will have two majorimpacts on the environment: Upstream of the dam, it will flood an area
of about L,150 sq km; and downstream, it will alter the natural flow o.
the river. In the Sobradinho Reservoir area, the land to be flooded is
of small agricultural value, but has about 11,000 families or 70,000
inhabitants, most of whom live by subsistence agriculture. An agreement,
signed in October 1973 by the Instituto Nacional de Colonizacao e Refor-maAgraria (INCRA), CHESF and ELETROBRAS, places upon INCRA and CHESF re-sponsibility for relocating the people displaced by the reservoir. CHESF
will resettle about 3,000 families who live in or near four municipaldistrict seats (Remanso, Sento Se, Pilao Arcado and Casa Nova) with fundsprovided by ELETROBRAS and the Government. CHESF has already purchased
- 17 -
land and prepared plans for the new municipal district seats. About2,000 families are expected to leave the area or to be given theopportunity to work on ongoing and future construction work by CHESF.
60. INCRA plans to use two different approaches. The first con-sists of including about 3,000 of the more highly skilled and adaptablefamilies, who choose to migrate, in colonization schemes which it isorganizing elsewhere in the region. The second consists of resettlingthe remaining 3,000 families, poorer and less educated than the firstgroup, on the shores of the new reservoir. Although the poor qualityof the land around the reservoir and the periodic receding of the shoresby up to several kilometers will make farming difficult, many of thepeople have indicated their wish to resettle on the shores of the reser-voir. CHESF and INCRA will ensure that the living conditions of thesefamilies would be no harsher than they are now, and will assist in furtherrelocation if and when the families so desire.
61. The relocation task described above is complex; it will requiredetailed planning if the reservoir area is to be evacuated on time andthe affected population is to receive proper attention. The project costincludes US$31 million towards compensation and relocation of inhabitantsin the reservoir area. The Brazilian Government and CHESF agreed to com-plete appropriate resettlement plans for review and comment by the Bankwithin nine months after the signing of the Loan Agreement (see Sections3.06 of the draft Loan Agreement and 3.03 of the draft Guarantee Agree-ment).
62. A consultant retained by CHESF studied the ecological impactof the creation of the Sobradinho Reservoir. In the light of his recom-mendations, the Brazilian Government and CHESF would forward to the Bankfor comment within nine months of the signing of the loan plans for:
a) minimizing the possible spread of plague, schistosomiasisand malaria in the area of the reservoir;
b) minimizing undesirable effects of the decaying vegetationon the biochemical properties of the reservoir; and
c) promoting fish conservation and production in the reservoir.
(See Sections3.07 of the draft Loan Agreement and 3.03 of the draftGuarantee Agreement.)
63. The Sao Francisco River downstream of Sobradinho may be dividedinto two segments:
a) the Middle Sao Francisco which flows over a dist;ance ofabout 560 km from Sobradinho to Pao de Acucar; and
b) the Lower Sao Francisco which flows over a distance ofabout 220 km from Pao de Acucar to the mouth.
- 18 -
The effects of doubling the minimum river flow on the Middle Sao Francisco
have not yet been established, but are not likely to be serious. CHESF
would, with the agreement of the Brazilian Government, complete for review
and comment by the Bank, within 15 months of the signing of the Loan Agree-
ment, a study which would establish these effects; and within 9 months
thereafter, a plan for reasonably compensating the people (see Sections
3.0 8 (a) of the draft Loan Agreement and 3.03 of the draft Guarantee Agree-
ment).
64. The Lower Sao Francisco comprises a portion of hilly terrain
which is only sparsely populated and another portion near the mouth of
the river with floodplains which sustains a fairly dense population umder
a system of relatively few large landholdings cultivated by sharecroppers
and laborers. About 15,000 ha of floodplains are under rice cultivation.
Each year, water is trapped on these lowlands (known as varzeas) and as
it recedes, rice is planted. Of the 15,700 ha of rice land that are at
present flooded and uncovered in four out of every five years, 3,100 ha
would be permanently covered by low water after the Sobradinho Dam is
built, while 5,900 ha would not be flooded at all. Ihus, 9,000 ha of
land now sustaining about 9,000 families would be lost to rice cultiva-
tion in the absence of corrective measures.
65. A polder project already under construction by SUVALE will
protect 1,800 ha of this land from loss. For the remaining 7,200 ha,
an emergency project, comprising dikes and pumping stations, has been
prepared by SUVALE assisted by consultants and staff from the FAO/Bank
Cooperative Program. These works will be the first stage of a wider
program for intensive development of the floodplains, and would enable
present conditions of flooding and uncovering to be maintained (with a
higher degree of certainty). The emergency project would adecuately
cope with the effects of the Sobradinho Dam in this area. The wider
area development program to follow the emergency project would be
designed to increase agricultural production in the area, especiLlly
by small farmers. Both the emergency project and the wider area de-
velopment program may be submitted to the Bank for financing.
66. The Brazilian Government agreed:
a) to complete for review and comment by the Bank, within
nine months of the signing of the Guarantee Agreement,
the engineering study and cost estimates of' the Lower
Sao Francisco emergency project; and
b) to prepare for review and comment by the Bank, within
15 months after the signing of the Guarantee Agreement,
a comprehensive development program for the Lower Sao
Francisco (see Sections 3.04 and 3.05 of the draft
Guarantee Agreement).
67. With the above measures, the Government and CHESF will have
taken all reasonable steps to prevent undue damage to the environment
from the construction of the project.
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PART V - LEGAL INSTRUMENTS ANiD AUTHORITY
68. The draft Loan Agreement between the Companhia Hidro Eletricado Sao Francisco and the Bank, the draft Guarantee Agreement between theFederative Republic of Brazil and the Bank, and the Report of the Com-mittee provided for in Article III, Section 4(iii) of the Articles ofAgreement and the text of a draft resolution approving the proposed loanare being distributed to the Executive Directors separately. In additionto the features of the draft Loan and Guarantee Agreements which arereferred to in paragraphs 51, 54, 55, 56, 61, 62, 63 and 66 of this re-port, the following event of suspension and default has been included,namely, that a change in the Brazilian legislation has been made, which,in the judgment of the Bank, will affect the carrying on of CHESF'sbusiness or the maintenance of the tariffs that CHESF needs for its opera-tions. This clause has become standard in power loans to Brazil (seeSections 8.02 and 8.03 of the draft Loan Agreement).
69. I am satisfied that the proposed loan would comply with theArticles of Agreement of the Bank.
PART VI - RECOMMENDATION
70. I recommend that the Executive Directors approve the proposedloan.
Robert S. McNamaraPresident
Attachments
May 22, 197T
ANNEX I%-,,=1of 4
COUNTRY DATA - Z1IL
Area Population Density 2er75L2,000 km' miilion (mid-1970) 1 per km
2
33.5 per km f arabLe land
Socibl Indicators
ReTe-repce romD8rqtonaBraz Ll Re7 n Co.oa eria
19O 1970 1*90 1970 1970
GNP per Capita USS (Atlas basis) *- 120 670 1,760 120
Population Deisity per sq. km. 8.4 11.2 26.0 178.0 74.0Urban Populat:.on as Percent of Total 45.1 55.9 59.5 53.0 22.8Family Planning: No. of Acceptors Cumulative (thousand) .. 250
Income DistributionPercent of K,netary Income Received by Lowest 20% 3.5 3.2 3.7 .. 7.0Percent of K,netary Income Received by Highest 5% 27.7 34.9 28.5 *- 38.L
health and NutritionPopulation pnr Physician 2,170 2,120aJ 1,820 553 24,032Population par Nursing Person .. 2,890 .. 2,530Population per Hospital Bed 275 280 498 99 1,867
Per Capita C.lorie Supply as % of Requirements 98 .0W 102.0 108.2 118.0 90.0Per Cnpita Protein Supply, Total (grams per day) 5/ 60.cW 63.0 66.3 88.o 59.0
Of Which, .lnimal and Pulse (37.6)1/ (40.6) 28.2 42.4 13.8Death Rate 1-h Years 6J .. .. 8.9 1.1
EducationAdjustedl/ P'rimary School Enrollment Ratio 73.4 96.3 105.0 108.0 36.0Adjusted2/ Secondary School Enrollment Ratio 7.4 18.6 20.0 511.0 3.0Years of Schooling Provided, First and Second Level lL.0 11.0 12 13 14.0Vocational Enrollmant as % of Secondary School Enrollmnt 24.0 .. 13.0 25.1 9.Adult Literacy Rate % 60.6 68.o 67.3d/ 90.7
HousininAverage No. of Persons Per Room (Urban) 2. .. 6.9 1 128Percent of Orcupied Unite Without Piped Water 58.2J 45.OL 67.79/ 28.hQ/Access to Electricity (as % of Total Population) .. .. 11.1 .. 7.5Percent of Rural Population Connected to Electricity .. ..
RadioRepeivers per 1,000 Population .. .. 276.0 218 23.0Passenger Cars per 1,000 Population 7.0 22.0 21.3 169.8 1.2Electric Power Consumption (LWh p.e.) 262 40h 525.0 2,121 19.0Newsprint Consumption p.c., kg. per Day .. 2.4 3.1 5.3 0.1
Notes Comparative figures refer either to the latest period or latest year. Latest period refers in principle ;o theten years 1960-70, the latest year in principle to 1970. Only significantly different periods or years arefootnoted separately.
1 Average number of daughters per woman of reproductive age._/ Ratio of under 15 and 65 and over age brackets to those in labor force bracket of ages 15 through 611.
F/ FAC reference standards represent physiological requirements for norsal activity and health, taking account ofenvironmental temperaturs, body weighta and distribution by age and sax of the national population.
W/ Protein stAndards (requirements) for all countries as established by USDA Economic Research Service provide fora minimum allowance of 60 grams of total protein per day, ant 20 grams of animal and pulse protein, of which 2.0grams should be animal protein. Thees standards are sosauhat lower then those of 75 gram of total protein and23 grAms of animal protein as an average for the world, proposed by E'AO in the Third World Food Survey.
/ Some studies have suggested that crude death rates of children ages 2 through 4 may be used an a firstapproximation index of malnutrition.
W Percentage enrolled of corresponding population of school age as defined for each country.
8/ 1968; b/ 1963-651 g/ date for nine out of 12 statem; d/ 1960; 2J 1961; / urban; e/ urban and rural 1960.
Country Programs Department IILatin Amsrica and Caribbean
Regional Offioe March 1974
AWE1ET I
SELECTED ECONOMIC DEVELOPMENT DATA
Average Actual , Estimated Projections Growth Rates As 7. of GDY
1/ General price index -- weighted average of wholesale price index (60 percent), the cost of living index (30 percent) and the cost of construction index (10 percent).
2/ Data before 1969 is not available.
3/ Including financial investment.
.tarch 19'4
AE I
MAW 2O iA_IT8. 4TMMf ASS1STAlfl fJD MiT RiCT10-
( 1Ao .ia dIlln-. of 0.S. doltao. at accral p7tta)
A-rog. AtIalAetual jqg2tMCl _ rolactad 13l*Et Cro80 Ita t
1973 Capital Market Development Fund - FUMCAP Capital Market Development 5.00 - 5.00
1973 Eanpresa de Desenvolvimento de Recursos Nickel Mining andMinerais - CODEMIN, S.A. Refining 26.00 4.40 30.40
1974 Industrias Villares, S.A. Elevators and IndustrialEquipment 6.oo - 6.oo
Total Gross Commitments 117.23 24.88 142.11
Less Cancellations, Terminations, Repayments and Sales 64.20 4.17 68.37
Total Commitments Now Held by IFC 53.03 20.71 73.74
Total Undisbursed 23.97 39 27 95
ANNEX IIPage 4 of 9
C. 1IO, JECTS IlI EXECUTION 1/
(As of IMarch 31, 197L)
Ihere are now 31 effective Bank loans under disbursement:
Loan No.
403/474 Estreito Hydroelectric Project: US$57 and US$39 millionloans of February 26, 1965 and December 19, 1966; Closing
Date: June 30, 1974. The nroject was completed in December
1973. Bquipment costs were substantially below estimates,
so that disbursements proceeded more slowly than forecast.
Lhe originlal closing date was April 1, 1971.
404l; Xavantes Hydroelectric Project: US$25 million loan of
February 27, 1965; Closing Date: December 31, 1974. The
project was completed in early 1971 (after a delay of about
18 months) except for the installation of equipment for an
associated transmission line. Ordering and the proposed
delivery of this equipment have been delayed, and the loan
is now expected to be fully disbursed by December 31, 1974,
five years after the initial closing date. The original
closing date was December 31, 1969, postponed to December 31,
1971, February 29, 1972, and further postponed to December 31,
1973.
442 Jaguara Hydroelectric Project: US$49 million loan of March 15,
1966; Closing- Date: December 31, 1971. All the generators were
commissioned during 1971 and the project has been completed.
Disbursements will extend Up to the end of 1974 primarily because
equipment originally defective necessitated a postponement of the
last payments to suppliers. The original closing date was
April 30, 1971, postponed to April 30, 1973.
L&477 Power Distribution Project: US$41 million loan of December 19,
1966; Closing Date: December 31, 1973. This power distribution
project had a slow start but after administrative reorganization
in 1070 it gained momentum. Procurement for the project has been
ccnmleted. Most of the overhead distribution system has been
completed, as has construction work on transmission lines, sub-
stations and underground distribution systems. The loan is almost
fully disbursed. The original closing date was December 31, 1970,
postponed to December 31, 1973.
j/ These notes are designed to inform the Executive Directors regarding the
progress of projects in execution, and in particular to report any prob-
lems which are being encountered, and the action being taken to remedy
them. They should be read in this sense, and with the understanding that
they do not purport to present a balanced evaluation of strengths and
weakness in project execution.
ANNEX TIPage 5 of 9
Loan No.
516 Livestock Project:_ US$4O million loan of September 23, 1967;Closing Date: December 31,, 1974. After initial delays due tomarketing and organizationa'l difficulties, the livestock creditprogram has been proceeding at a satisfactory rate. Some prob-lems arose in early 1972 on the calculation of interest onindexed principal amounts during the grace period but these have
now been settled. Although loan funds have now been completelycommitted, US$2.9 million remains to be disbursed. The originalClosing Date was December 31, 1973.
565 Porto Colombia Hydroelectric Project; US$22.3 million loan ofOctober 23, 1968; Closing Date: Mlarch 31, 1975. Changes in theproject layout and design have increased substantially the localcost, which will be covered by ELETROBRAS, without, however,significantly affecting the economLic justification for the project.Construction work is on schedule and the last unit was placed inservice in early 1974.
566 Volta Grande Hydroelectric Project: US$26.6 million loan ofOctober 23, 1960; Closing Date: January 31, 1975. The projectwas delayed six months by spillway foundation difficulties.This problem and price escalation greater than estimated in-creased powerhouse construction cost by 72%, but, as the originalcost was very low, the resulting cost per kW of generating capacityis still attractive. No financialL difficulty is expected for thecompany as a result of the overruns. The project is now two-thirds completed and the first generating unit is expected to hciin operation in April 1974.
567 First Highway Construction Project: US$26 million loan ofOctober 23, 1965; Closing Date: March 31, 1973. The construic-tion works under this project are completed, as are disbursementson all original project items. Overall quality of work wassatisfactory. The closing date for the loan was postponed fromDecember 31, 1972, the original date, to March 31, 1973. TheGovernment proposed several related additions to the project whichwould utilize the unexpended loan balance of about US$3.2 million.The Bank requested further information on the additions, and therevised proposals are now under consideration in the Bank. If theproposals are accepted by the Bank the Closing Date will be
postponed.
656 Industry: US$25 million loan of February 16, 1970 to Banco doNordeste do Brasil (BNB); Closing Date: June 30, 1975. The ]!oarnhas been fully committed. The Terminal Date for submission ofsubprojects, originally June 30, 1972 and postponed to June 3(0,1973, was postponed a second time to June 30, 1974 to give BNB anopportunity to submit subprojects in an advanced stage of prepara-tion. Slow utilization of the loan was due mainly to BNB'sunusually burdensome security conditions on subloans and its
ANNEX IIPage 6 of Y
Loan No.
emphasis on larger-scale projects, for which financing from otherthan WTorld Bank fumds has been available.
676 Second Highway Construction Project: US$100 million loan ofMay 25, 1970; Closing Date: July 31, 1974. Construction worksare underway and the overall quality of construction and super-vision is satisfactory. There have, however, been substantialcost increases on some contracts, so that the total constructioncost of the project is now estimated to be above the appraisalestimate, excluding contingencies, but still within the appraisalestimate including contingencies. The execution of some contractshas been seriously delayed by inclement weather conditions andproject changes, and it is expected that the Closing Date for theloan will have to be postponed until June 30, 1975. Disbursementsunder the loan are behind the appraisal schedule, due to a latestart of the project, but have improved during the last year.
677 Marimbondo Hydroelectric Project: US$70 million loan of May 25,1970; Closing Date: May 31, 1977. Construction work is proceedingon schedule. The cost of increased excavation and concrete worh-resulting from poor rock foundation is expected to be mostlyr off-set by a reduction in earth fill work. A US$26 million overrun,caused by equipment prices higher than estimated and additionaltransmission facilities, was covered by a loan from a commercialbank, but did not significantly affect the economic justificationfor the project.
728 Salto Osorio Hydroelectric Project: US'70 million loan of April 5,1971; Closing Date: May 31, 1977. The construction of the SaltoOsorio hydroelectric plant is progressing satisfactorily and nocost overrun is foreseen at this time. The construction of thetransmission system -- delayed to allow a reexamination ofELETROSUL's market in light of revised demand projections in theSouth of Brazil, possible new power sales in the Southeast regionand the addition of heretofore unscheduled generating capacity --is now about to proceed as originally defined.
755 Education Project: US$8.4 million loan of June 21, 1971; ClosingDate: December 31, 1975. Progress on the construction and equip-ment of the project schools is now proceeding satisfactorily.Construction of six schools has been initiated, bids for construc-tion of another five are underway, and design work for the remainingfive has been started. Although the project implementation isbehind the original schedulZ due to initial delays, disbursementsunder the loan are expected to be completed by the Closing Date.
756 Santos Port Project: US$45 million loan of June 21, 1971; ClosingDate: June'30, 1979. Because of other investments in the Port ofSantos and an increase in the cost estimate of the Bank-financedproject there, the execution of the Bank--financed project has beendelayed and its scope has been reviewed. The Bank and the Borrower
ANNEX IIPage 7 of f
Loan No.
have now agreed to postpone construction of part of the containerterminal, exclude from the pro,ject the corn storage silo, simplify
the rail access to the left bank of the project, and reallocatethe remaining loan amount to a larger dredger and more extensiveconsultantsI services and training. The Closing Date of the Loarnhas been postponed from September 30, 1976 to June 30, 1079, inaccordance with the new schedule for completion of the project.With the assistance of management consultants, satisfact,ory pro-gress has been made in improving port operations in Santos.However, a satisfactory plan for the reorganization of the NationialDepartment of Ports and Navigable Waterways has not yet beencompleted, but is expected to be ready by mid-I Y4.
757 Sgo Paulo Water Supply Project: US$22 million loan of June 'l1971; Closing Date: June 30, 19'75. The project suffered initial
delays caused by the State of Sao Paulo not furnishing the re-quired counterpart funds. The required funds are now included inthe state budget. The Government has consolidated all the waterand sewerage companies in the state into a single company. A new
agreement must therefore be negotiated with the new company. The
new company has been tardy in providing the Bank the necessaryinformation to conduct negotiations.
758 Sao Paulo Pollution Control Project: US$15 million loan of'June 21, 1971; Closing Date: June 30, 1975. The original projectdesign included the pumping of untreated sewage into an areareservoir representing a major source of water and serving as an
important recreational facility for the Sao Paulo area. Earlierstudies had shown that the reservoir could absorb the organicpollution without damage for some time. Area residents, however,objected to this solution and subsequent technical review questioned
the initial judgment that no ecological harm would be caused. As
a result, the original d3sign has been modified to exclude the
discharge of raw sewage and include a treatment facility. Riddingprocedures are in progress for other portions of the project. In
light of the lower costs associated with the above solution, the
loan amount has been reduced to US$12 million. The Government has
consolidated all the water and sewerage companies in the stateinto a single company. A new agreement must therefore be negotiatedwith the new company. The new company has been tardy in providing
the Bank the necessary information to conduct negotiations.
786 Railway Project - MBR: US$46 million loan of August 25, 1971;
Closing Date: September 30, 1975. A delay of about six monthsoccurred in awarding the contracts for constructing the newrailway link for the MBR iron ore mine due to engineering prob-lems encountered and inadequate project management by the Federal
Railways. Work on site has proceeded rapidly during 1973 andmuch of the lost time was regained. New ore traffic commencedon July 1, 1973.
At!1 EX TIPage 8 of 2
Loan 'o.
'787 Mf'? Iron Ore Project: US$50 million loan of August ŽW, 1')71;
Closing Date: December 31, 1976. The estimated cost of the
project has increased due to major design changes for tlie port,
terminal and several investment additions to the project.
Target completion dates at the mine and terminal were met sond
the first ship left port on November 2(6, 1 w't3, With 1 ,
tons of Aguas Claras Ore.
797 CSN Steel Expansion Project: US$64.5 million loan of F'ehru1ar\V ,
1972; Closing Date: July 1, 1975. The Project is proceem nv
according to schedule.
&12 USIMINAS Steel Exoansion Project: US'63 million loan of April 1l
1972; Closing Date: June 1, 1976. The oroject is proceedinc
according to schedule.
813 Third Highway Construction Project: US$89 million loan of
April 11, 1972; Closing Date: June 30, 1976. Construction works
are nearly two-thirds completed, but are slightly behind schedule;
the estimated total contract cost is slightly above the appraisal
estimate. The feasibility studies and detailed engineering
financed under the loan were started later than planned, but are
now almost completed at a cost substantially below the appraisal
estimate. Disbursements are lagging behind the appraisal fore-
cast, but have improved during the last half year and are now
expected to be completed by the original Closing Date of the
loan (June 30, 1976).
828 COSIPA Steel Expansion Project: uS$64.5 million loan of
June 14, 1972;. Closing Date: January 15, 1977. The projest
is proceeding according to schedule.
829 Sao Simao Hydroelectric Project: US$60 million loan of June 11¼,
1972; Closing Date: September 30, 1979. The contract for th-
civil works was awarded to an Italian-Brazilian consortium in
May 1973, and the project is proceeding according to schedule.
853 Alto Turi Land Settlement Project: US$6.7 million loan of
July 24, 1972; Closing Date: December 1, 1978. COLONE has
prepared revised farm development plans whose credit component,
to be financed by public financial institutions, will be sig-
nificantly higher than originally estimated, although still low
in comparison to other settlement projects. Physical infra-
structure is likely to be completed in 1974, and it is
anticipated that the project will be completed in 1978 as
envisaged.
854 Fourth Highway Construction Project: US$51 million loan of
August 14, 1972; Closing Date: December 31, 1976. Construction
works are 37% completed and behind schedule; the estimated total
contract cost is slightly below the appraisal estimate.
ANNEX ITPagre ' of'
Loan No.
857 Grain Storage Project: US$30 million loan of September 27,
1972; Closing Date: December 31, 1979. After some initial
difficulties with the appraisal of subpro,jects, the project is
now well underway. During the first year of operation, 90
subprojects (totaling US$11 million) were approved and another
94 (totaling US$15 million) are in the pipeline.
868 Interim Second Livestock Project: US$25 million loan of
December 19, 1972; Closing Date: June 30, 1977. The projectis proceeding according to schedule and will be fully committed
by the end of 1974.
887 Power Distribution Project: US$20 million loan of April 1(b,
1973; Closing Date: June 30, 1976. The project is proceeding
according to schedule.
923 Itumbiara Hydroelectric Project: US$125 million loan ofAugust 1, 1973; Closing Date: December 31, 1962. Invitations
to tender have been issued and the project is proceeding
according to schedule.
924 Agro-Industries CrEdit Project: US$54 million loan of August 1,
1973: Closing Date: December 31, 1978. The loan became
effective on March 11, 1974. The demand for credit is strongand the participating banks are! expected to commit project funds
by October 1975.
ANNEX IIIPage 1 of 2
BRdAiZIL - PAULO AFONSO IV HYDROELECTRIC POWER PROJECT
Loan and Project Summa:r
-3orrower: Companhia Hidro Eletrica do Sao Francisco (CHESF).
Guiarantor: Federative Republic of Brazil.
Amount: US$81 million equivalent.
'I'erms: Payable in 20 years, including 4-1/2 years of graceand 7-1/4% interest per annum.
Pro,jectDescription: The project consists of the Sobradinho regulating dam,
the 1,50C MW Paulo Afonso IV hydroelectric power plant,h70 km downstream from Sobradinho, 2,740 km of asso-ciated transmission lines and 22 substations with anaggregate capacity of 5,100 MVA to meet increases inthe power demand of the Northeast region of Brazil,project related equipment such as inspection vehicles,and training for the const;ruction, operation andmaintenance of the extra high voltage transmissionsystem.
Estimated Cost: (In US$ million equivalent)
Local Costs Foreign Costs
Bank BankCategory Financed Cither Financed Other Total
SobradinhoDa.n -- 175.0 __ 2.3 217.3
Paulo Afonso IVStation -- 122.0 -- 113.3 235.3
TransmissionSystem 19.3 81.3 56.9 76.9 23L.4
Training andOther -- 0.8 .8 -- 5.6
TOTAL PROJECT 19.3 379.1 61.7 232.5 692.6= =~ _=
ANNEX IIIPage 2 of 2
t .ancin~:; 1' an: CHESF plans to obtain US$223.1 million equivalent outof the total project cost of US$692.6 million equiva-lent from the Bank, IDB and bilateral financing sources.The remainder of the project cost will derive from in-ternal cas-i generation and loans from EIETROBRAS. Theproposed foreign currency financing which applies tomaterials, equipment and foreign engineering and train-ing is shown below:
(In US$ million equivalent)
Category IBRD IDB Parallel Total
Paulo Afonso TV -- 18.8 62.3 81.1
Transmission Lines 5LJ.5 -- -- 54.5
Substations 21.7 51.4 9.6 82.7
Training and Other L.8 -- --. 8
TOTAL PROJECT 81.0 70.2 71.9 223.1_ _ =~ ==m
Financing Charges 1L..6
TOTAL TDB 84.8
timc,- at.ed
DiE>ursements: (In US$ million equivalent)
Fiscal Year Annually Cumulative
1975 17.0 17.0
1976 25.5 42.5
1977 21.0 63.5
1978 17.5 81.0
ProcurementArrangements: Equipment and materials to be financed by the recommended
Bank loan would be procured on the basis of internationalcompetitive bidding under the Bank procurement guidelines;tile manufacturers whose bids contain components manufac-tured in Brazil equal to at least 50% of the value of thehid being given a lj% margin of preference.
'i f of' Retturn: 23%
At) .ri ;a1 YPport; : RepoIrt, No. 396a-BR or May 1',, 19'2L.
