APPRAISAL OF BRAZIL. September 25, 1968

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Lo?AJ 56A&- 61& FILE COPY RESTRICTED Report No. TO-664a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF FIRST HIGHWAY CONSTRUCTION PROJECT BRAZIL September 25, 1968 Projects Department

2 Currency Equivalent Currency Unit New Cruzeiro (Symbol NCr) US$1 - NCr 3.65 US$1 million = NCr 3.65 million NCr 1 million US$273,973 Note: The currency equivalent at the time detailed engineering cost estimates were drawn up was US$1 = NCr 2.7, which has been used in this report unless otherwise stated. Weights and Meaurwes Equivalents 1 m 3.28 ft 1 km o.62 mi 1 km 2 0 o.386 sq mi 1 m ton 0.98 ton Fiscal Year = 1.1 U.S. sh ton January 1 - December 31 Abbreviations Used in the Report DER - State Highway Department 2DER - National Highway Department GEIPOT - Transport Policy Planning Group SUDENE - North East Brazil Development Agency

3 BRAZIL APPRAISAL OF FIRST HIGHWAY CONSTRUCTION PROJECT TABLE OF CONTENTS Page SUIRY i.r 1. INTRODUCTION 1 2. BACKGROrMm 3 A. General 3 B. Transportation in Brazil 3 C. Transport Coordination 5 3. THE HIGHiAY SECTOR 7 A. Highw ay Administration 7 B. Highway Engineering 8 C. Highway Construction 8 D. Highway Maintenance 9 E. Highway Financing and Planning 10 F. Characteristics and Groith or Road Traffic THE PROJECT 14 A. General Description 14 B. Design and Consulting Services 17 C. Cost Estimates and Financing 17 D. Execution of the Project 20 S. ECODIOMIC JUSTIFICATION 22 A. Introduction 22 B. The Project Roads 22 C. Benefits from the Project CONCLUSIONS AND RECO4IENDATIOIS 28 This report has been prepared by Messrs. Schaefer (Engineer), Parmeggiani (Engineer), Hughes (Economist) and Siret (Engineer/Economist), mrembers of the June-July, 1967 Bank Project Appraisal T4ission to Brazil, and updated by 14essrs. Schaefer and Hughes in M4ay, 1968.

4 Table of Contents (Continued) -2- TABLES 1. Freight Transport by Mode of Transport, Passenger-Kilometers, Percentage Shares, and Average Annual Growth Rates of Total and Selected Items, by Mode of Transport, l and Investment in Tran-port by Modes & Percentage Share of Modes in Total Investment, Highway Revenues and Expenditures, Classification of Highways, Lengths According to Type and Jurisdiction, December Highway Design Standards for New Roads. 7. Admissible Highway Design Standards for Improvement of Existing Roads. 8. Vehicle Registrations, By State, Vehicle Fleet, Projected Average Annual Growth of Rate by Class of Vehicle, Average Daily Traffic (ADT), Selected National Highways, Average Cperating Costs of Selected Vehicles on Flat Paved Roads. 13. List of Roads and Cost Estimates. 14. Average Daily Traffic, Project Highways, CHARTS I. National Highway Department II. Highway Department of Minas Gerais III. Highway Department of Parana IV. Highway Department of Rio Grande do Sul V. Highway Department of Santa Catarina ANNEX A. Consultants Engaged in the Brazil Transport Survey. B. Transport Survey, Phase I - Main Recommendations. C. Formulation of Transport Policy in Brazil. MAPS 1. General Highway Map 2. Minas Gerais 3. Parana 4. Santa Catarina 5. Rio Grande do Sul

5 BRAZIL APPRAISAL OF THE FIRST HIGHWAY CONSTRUCTION PROJECT SUMMARY i. The Bank has been closely associated with the comprehensive planning of Brazil's transport system over the past several years. The Bank's Economic Mission in 1964 concluded that Brazil's transportation system faced serious problems and that a major effort towards comprehensive transport planning was needed. The Government accepted these conclusions; it was agreed that a transport survey should be undertaken by foreign consultants and, because of the size of the country and the magnitude and complexity of the problems involved, that this survey should be carried out in stages. In 1965, the Bank made a grant to provide half the foreign exchange cost of Phase I of the Transport Survey, covering the entire railwiay system, three principal ports and the highway systems of four States. Phase II, a continuation of the highway studies in fourteen additional States, was commenced in 1967 with UNDP and USAID financing, with the Bank acting as executing agent. Phase I is virtually complete and Phase II will be largely completed by the end of ii. The Government of Brazil has asked the Bank for a loan to assist in financing a highway project which is based on recommendations resulting from the Phase I studies. The project consists of: (a) the construction, including paving, of three highways totalling 165 km; (b) the paving of four highways totalling 264 km; and (c) the detailed engineering and construction supervision for the proposed works. Six of the highwzays are important links which will go far to integrate regional economies through lower transport costs, while the seventh road is an urban improvement which will relieve congestion in the rapidly developing suburbs of Porto Alegre. The longest road, 99 Im in Minas Gerais, will greatly shorten the highway route between the underdeveloped northeast of Brazil with the highly developed southern towms. One road in the State of Parana will link the timber region of the west with the eastern consuming region while the other is an alternative coast route to the south. The Santa Catarina highway will join the economically developing west with the coast. In Rio Grande do SUl, the higlhways are essentially links between the city of Porto Alegre and the northeast, providing low cost transport routes mainly for agricultural produce.

6 - ii - iii. The total cost of the project, including contingencies, is estimated at US$65.5 million equivalent. The Bank loan of US$26.0 million equivalent would finance 40 percent of the construction cost, and the full foreign exchange cost (about 40 percent) of consultants, including the retroactive financing of their services from April 1, The balance will be provided by the Government. iv. The project will be the first highway construction project financed by the Bank in Brazil, though a highway maintenance project was financed in 1953 (US$3 million) covering the purchase of maintenance equipment. A railway project was financed in 1952 (US$12.5 million) covering the rehabilitation of the Central do Brasil facilities and the purchase of new rolling stock. v. Design standards adopted for the project roads are satisfactory. Detailed engineering has been completed by consultants who will assist the Government in analyzing bids and supervising construction. The cost estimates are considered reliable, and adequate contingencies have been included. vi. The project is technically and econamically sound. The economic rates of return for the different roads range from 13 percent to 40 percent, with the project as a whole giving a return of 21 percent. vii. Contracts for the project works will be let on the basis of international competitive bidding. viii. Execution of the project will be the responsibility of the National Highway Department for national highways and of the respective State Highway Departments for state highways. The National Highway Department will delegate authority to the State Highway Departments for the highways which belong to the national as well as to a state highway network. The loan will be to the Federal Government, and the National Highway Department, as executing agency, will administer a revolving fund for payments to contractors and consultants. ix. Based on the recommendations of the Transport Study, the Government has submitted a letter to the Bank stating its intention to take certain measures regarding transport policy. If these measures are followed through, they will result in substantially decreased railway deficits and a more rational organizational structure in the transportation agencies. The project provides a suitable basis for a Bank loan of US$26.0 million equivalent. An appropriate term would be 25 years, including a 4hk year period of grace.

7 BRAZIL APPRAISAL OF FIRST HIGHWAY CONJSTRUCTION PROJECT 1. INTRODUCTION 1.01 The Brazilian Government has requested a loan of US$26.0 million equivalent to help finance a) the construction, including paving, of three highways totalling 165 km, b) the paving of four highways totalling 264 km; and c) the detailed engineering and supervision of construction for the proposed works The Bank has been closely associa-ed over several years writh the comprehensive planning of Brazil's transport system. The Government of Brazil agreed with the conclusion of the 1964 Bank Economic Mission that the country's transportation system faced serious problems and that important improvements in planning, administration and operation of the various transport facilities were urgently needed. It was then agreed that a transport study should be undertaken by foreign consultants and because of the size of the country and the magnitude of the problems involved, that this survey should best be carried out in stages. In 1965, the Bank made a grant to provide half the foreign exchange costs of Phase I of the Transport Survey. This Phase included several highway feasibility studies, and master plans for: (a) (b) (c) (d) (e) construction, improvement and maintenance of some 8,000 km of roads in the three southern States of Parana, Santa Catarina and Rio Grande do Sul, and about 4,700 km in the State of Minas Gerais; reorganization of the State Highway Departments of Minas Gerais, Parana, Santa Catarina, and Rio Grande do Sul; improvement of facilities and administration in the three major ports of Rio de Janeiro, Santos and Recife; improvement of railway services and administration; and rehabilitation of coastal shipping. The highway feasibility studies were made for selected high priority roads in the four States for which highway master plans were carried out. Foreign consultants were employed to carry out Phase I (Annex A).

8 1.03 Phase II, a continuation of the Phase I studies, commenced in 1967 with Government, UNDP and USAID financing, with the Bank acting as executing agent. This Phase includes highway feasibility studies and master plans for highways in fourteen States in central and northeastern Brazil. One major study in this Phase is the proposed beltway for the city of Sao Paulo and an expressway from Sao Paulo to Santos. Again, foreign consultants have been engaged In addition, training Fellowships for overseas study are being provided. To coordinate and supervise the Survey, as well as to provide counterpart personnel and physical facilities, a Brazilian Government agency (GEIPOT) was formed in 1965, staffed largely by engineers and economists. For both Phases fourteen consulting firms were engaged from eight countries (Annex A). The total cost of Phase I studies was about US$8.0 million equivalent, of which US$1. 5 million was provided by Bank Technical Assistance, and the remainder (including US$1.5 million equivalent in foreign exchange) by the Government. Phase II studies are being financed by the Government (US$5.o million equivalent in local currency and US$1.4 million in foreign exchange), UNDP (US$1.4 million), and USAID US$1.0 million. Phase I is virtually completed and it is expected that Phase II will be largely completed by the end of The size of the Government's contribution is a significant indicator of the importance it attaches to developing the transportation system on a sound economic basis. Further details of the Survey are given in Annex B The proposed highway construction project, which is the direct outcome of the highways studies of Phase I, will be the first to be financed by the Bank in Brazil. A highway maintenance project was financed by Loan 75-BR (US$3 million) in 1953 covering the purchase of maintenance equipment for the State of Rio de Janeiro. Two railway projects of US$12.5 million each (Loans 65-BR and 92-BR) were financed in 1952 and 1953 respectively. The 1952 loan covered the rehabilitation of the E.F. Central do Brasil facilities and the purchase of new rolling stock; the 1953 loan covered purchase of suburban passenger cars for the same railway. All three loans have been fully disbursed This report has been prepared by Messrs. Schaefer, Parmeggiani, Hughes and Siret, members of the June-July, 1967 Bank Project Appraisal Mission, and up-dated by Messrs. Schaefer and Hughes in May 1968.

9 2. BACKGROUND A. General 2.01 Brazil is somewhat larger than the continental United States,with an area of about 8.5 million km 2. It is divided administratively into 22 States with limited autonomy, a federal district and four territories administered directly by the Federal Government. The population (88 million in mid 1968) is the eighth largest in the w,orld and is growing at about three percent per annum The Gross Domestic Product for 1967 is estimated at NCr 47.2 billion, equivalent to about US$15 billion (US$ per capita). The annual real growth rate, after falling to 2.2 percent in , is recovering slowly, having been 3.7, 4.4 and 4.1 percent respectively in 1965, 1966 and 1967, and is expected to be at least 5.0 percent in The public sector generally has been a major source of inflationary pressure over the past decade. Operating subsidies to transport have been particularly important in this respect. The Government's objective is to reduce gradually the rate of inflation by, among other things, improving transport operations and by setting limits on permissable wiage increases. Government policies and general economic conditions are promising; the 1968 Economic Mission to Brazil expects an average annual growth rate in the Gross Domestic Product of about 5.5 percent during the next few years. B. Transportation in Brazil 2.04 Brazil's transport network has been influenced by geographical and historical factors. The easily accessible coastline of nearly 5,000 Ion together with 1,600 kn along the Amazon River has been instrumental in the development of population and economic centers. Settlement along or near water has also been influenced by the partially navigable Sao Francisco, Parana and Paraguay Rivers. Railways were developed primarily to penetrate the interior and to carry resources to the ports. For the most part, these lines are unconnected wsith each other and often have different gauges. Road transport, in terms of ton-km performed, has been more important than rail transport for many years and has almost doubled in importance over the last seven years (Table 1). This rapid growth has been both a consequence and a cause of difficulties in coastal shipping and railways. However, important parts of the highway system are deficient even for present needs. Aviation has been important for many years, providing transport to many otherwise inaccessible areas In Brazil there are 15 federal railway systems and 7 railway systems owned by the State of Sao Paulo. These total approximately 25,000 km and 6,500 km, respectively. Another system (E.F. Vitoria a Ilinas), of about 570

10 khm, is operated by a mining company that is partly owned by the Federal Government. In absolute terms, railway freight traffic has increased by h2 percent from 1961 to 1967, but in relative terms the railway share of total traffic decreased from about 18 to 15 percent in this period (Table 1). The largest absolute increase in freight hauled was in iron ore, accounting for about 46 percent of total railway traffic and 92 percent of the 1linas a Vitoria traffic. In recent years the federal and state railways have been suffering from intense road competition, even for bulky commodities such as sugar, livestock and timber; they are inefficient, with overextended light density lines and large staffs. The consultants for Phase I of the Transport Survey (Para. 1.02) made recommendations to increase efficiency but progress has been slowj (Para et seq.) Brazil's coastal shipping fleet consists of four passenger vessels, small tankers and 145 dry cargo vessels over 500 deadweight tons. The fleet is generally old, slow, expensive to operate and poorly utilized. A major renewal and expansion program is underway. Coastal shipping traffic has increased from 14 billion net ton/km in 1961 to 19 billion net ton/km in 1967 (Table 1). The increase is due to longer voyages rather than to greater tonnages Of Brazil's five major commercial airlines, four (VARIG, CRUZEIRO DO SUL, PARAENSE ANuD SADIA), are privately owned and operated, while the fifth, (VASP), is owned by the State of Sao Paulo. VARIG has the most extensive network,linking Brazil with other cities in South and North America as wiell as with Western Europe and Africa. The airlines contributed 0.2 percent of the total freight ton/kcm amounting to about 240 million ton/km in 1967 (Table 1) For passenger traffic in 1965, bus transport was the most important, accounting for 53 percent of the total passenger km. Automobile transport accounted for 31 percent and railways 14 percent (Table 2) Pipelines, all except one operated by the Government monopoly PETRO- BRAS, are becoming important in the movement of crude oil from the fields in Bahia and for oil and derivatives inland from the coast. Three short pipelines are located in the States of Bahia, Sergipe and Guanabara and a fourth links Rio with Belo Horizonte, a distance of 365 km, while another of 90 ka connects an inland refinery near Porto Alegre with its sea terminal in the State of Rio Grande do Sul. Another line of 120 km, owned by the federal railways, links the city of Sao Paulo with the port of Santos. The ton/km movement by pipeline is not knowqn Investment in transport has averaged about NCr 3.2 billion annually (1967 prices) from 1960 to 1966 (US$1.2 billion equivalent, Table 3). In the public sector transport investment is about one-third of total public investment, road construction alone accouting for about 22 percent.l/ Investment in highway construction rose significantly by about 25 percent betwseen 1960 and 1966, as did investment in fixed facilities for other forms of transport. 1/ Economic Growth of Brazil: Problems and Prospects, Vol. I. IBRD October 23, 1967, p. 45

11 Transport Coordination 2.11 Transport coordination, in the sense of a set of policies to encourage the movement of traffic by that mode of transport which, in the long run, can move it at the lowest economic costs, does not exist at present in Brazil. By and large, many past transport investments have been made without reference to priorities based on relative net contributions to national income and a number of investments have been made where the yield has been extremely low Current pricing policies do not ensure recovery of investment and operating costs of any mode of transport except pipelines. In rail and maritime transport not even current operating costs are recovered and large subsidies have been required. These are a major source of inflation as the federal subsidies accounted for about 43 percent of the federal cash budget deficit in In that year for &xarrple, the subsidies.were; federal railways NCr 474 million, ports NCr 34 million, shipping NCr 112 million, and air transport NCr 14 million, a total of NCr 634 million or US*i234 million equivalent. The largest share, US$lh0 million equivalent, was for the federal railways. Moreover the yield of road user charges is about 40 percent of the economic cost of highways Following the Bank's Economic Mission in 1964, the Government and the Bank realized the serious situation in the transport sector. In arranging for the subsequent Transport Survey (Para. 1.02), the Government signed a MIemorandum of Understanding, the main provisions of which committed the Government to pursue rational investment policies and aim for efficiency in the transport sector. The railwrays were to be reorganized into regional systems, uneconomic lines were to be abandoned, the construction of unremunerative new lines was to stop and some of the excessive staff was to be reduced. Hanagement was to be operated on sound business principles and rates were to be raised over time eventually to cover costs. Some specific measures were to be undertaken during the course of the study; 1,000 Ioms of uneconomic lines to be closed in 1965/1966, the excessive labor force to be reduced by 10,000 in the same period and rates increased by an amount which would exceed any cost increases by at least 20 percent. The Government actually achieved the target for the abandonment of uneconomic lines, the staff was reduced by 8,300 and the railway deficit declined in real terms by 24 percent. In respect of ports, the Government undertook that ports would be operated by local port authorities and on a commercial basis with Government's function being limited to coordination. The Port Master Plan to implement these objectives has been prepared by consultants. The Government also stated its intention to reorganize the National Highway Department and to pursue a policy of highway financing whereby the users would pay for their costs; these objectives are in the planning stage and are discussed further below in connection with the proposed project A further Memorandum of Understanding was agreed upon as a preliminary to Phase II of the Survey. About 1,000 km of uneconomic railway lines were to be abandoned in 1967 and staff reduced by another 10,000. Construction of new^s lines was to cease unless recommended in Phase I, and

12 - 6 - there were to be realistic increases in rates and fares. W,hile some progress has been achieved performance has fallen short of expectations; line abandonment was less than one-third of that agreed upon because the alternative highways have not been built, staff has been reduced by less than 3,000, and tariffs are still below costs for most goods and passenger traffic. The railway deficit, in real terms, was about the same in 1967 as it was in the previous year and although most construction of newj railway lines has ceased some is still taking place contrary to Phase I recommendations In the highway sector, the Government was to limit highway construction to roads indicated by the Phase I studies and those in other States agreed upon with the Bank. Again the limitation of construction has not been fully observed The Government is taking steps to remedy this situation. A "Strategic Program" of broad objectives for transport policy was approved by the Government in July 1967, which embodied most of the principles of the Memoranda of Understanding. This was re-stated in the President's 1968 Budget message, as a result of which a Plan of Action has been prepared including a 3-year transport investment plan for based principally on an analysis of benefits and costs. The Plan also sets out the objectives and measures by which it is intended to bring about improved transport coordination, including most of the measures agreed to in the Memoranda of Understanding and the recommendations of the Transport Survey Wfhen these measures are implemented, significant progress towards transport coordination will have been made. It should be recognized, however, that the transport problems to which these actions are addressed are widespread and deep-rooted. While the plans are well-conceived, it can be expected that progress wrill be difficult and, at best, slow. The importance of the problems and the Government's desire to work with the Bank in an ambitious program to bring about solutions, justify the Bank's continued efforts along these lines in the face of the mixed progress to date. Close cooperation between the Government and the Bank will be required. Prior to loan negotiations, the Government communicated to the Bank the major objectives of the Government's policies in highways, railways and ports and of the measures and time schedules proposed to achieve these objectives. The main elements of the Government's fu'ture t'ansport policy are'given in Annex C.

13 THE HIGHWAY SECTOR A. Highway Administration 3.01 Brazil has a total road network of about 825,000 km, of which 37,000 km are national, 99,000 km are state, and the balance municipal roads. The figure for municipal roads is doubtful since it is not based on actual inventories. The records of the National Highway Department show that 37 percent of the national highways, 16 percent of the state highways, and only an insignificant portion of the municipal roads are paved (Map 1 and Table 5) The national highways, which are mainly interstate roads and their connections, are administered by the National Highway Department (Departamento Nacional de Estradas de Rodagem - DNER) which has district offices in the states and federal territories (Chart I). State highways are administered by the State Highway Departments (Departamento de Estradas de Rodagem - DER in all states except Rio Grande do Sul where it is called DAER) The organization of DNER is shown on Chart I and of the DER's of the States of i4inas Gerais, Parana, Rio Grande do Sul and Santa Catarina, in which project works would be carried out, on Charts II, III, IV and V. There is wasteful duplication of services supplied by the National and State Highway Departments, especially in the more developed and more populated states wjhich have better organizations. The 1964 Bank mission recommended that the DNER should be reorganized by gradually restricting its activities to planning and supervision, leaving construction and maintenance to the DER's. In view of the size and complexity of Brazil the proposed change can be made only gradually. The present system should continue in the poorer states which do not have suitable highway departments, and by necessity will have to be continued in the outlying territories. The Government has agreed and taken the first steps towards reorganizing DNER. Under a USAID loan recently signed, experts of the US Bureau of Public Roads will assist DNER and make recommendations how best to change the present organizational structure within the period covered by the Government's Plan of Action regarding transport (Para. 2.16). The terms of reference for this study have been submitted to the Bank and found to be satisfactory. ENER has also retained the services of the Vargas Foundation to perform a management study of DNER, in cooperation with the advisors from the US Bureau of Public Roads. 3.o4 Concurrently with the reorganization of DNER, the reorganization and strengthening of the DERts will be undertaken. The objective of this program is to (1) increase the operational and administrative efficiency of the DER's, and (2) provide for the gradual transfer of all services relating to construction, maintenance and policing of highways within the states from the DNER to the DERIs. A reorganization study of the four DER's of Minas Gerais, Parana, Santa Catarina and Rio Grande do Sul was made during Phase I of the Transport Survey. The consultants who made the master plans and

14 - 8 - feasibility studies for the project roads have been in charge of the reorganization studies, Their recommendations should be carried out in phase with the reorganization of DNER during the period covered by the Plan of Action. Assurances were obtained during loan negotiations that the States of Minas Gerais, Parana, Santa Catarina, and Rio Grande do Sul will be required to implement the recommendations in consultation with the Bank Reorganization programs for highway departments of the fourteen states covered by Phase II of the Transport Survey have been included in the scope of the consulting services. B. Highlway Engineering 3.06 DNER and the DERst concerned have agreed to the general design standards shown in Tables 6 and 7 for the roads included in the project. These standards are in conformity with modern engineering practices and are a considerable improvement over the 1949 standards. The latter standards are now being revised and new improved standards will be adopted The shortages of staff in the DNER and in the DER 1 s concerned necessitated the use of consultants for the highway studies of the Transport Survey and the detailed engineering studies for the project roads. However, Government counterparts to the key personnel of the consultants were and continue to be assigned on a full-time basis for the purpose of training. This should improve the critical staff situation of the DNER and the DER's in the future if the Government provides working conditions sufficiently attractive to retain this personnel Regulations for maximum motor vehicle weights of 22,000 lb for single-axle and 35,000 lb for tandem-axle loads are similar to those in other countries. Excess loading, however, is frequent, endangering safety, increasing highway maintenance costs, and shortening the life of pavement structures. During loan negotiations a commitment was obtained that weight regulations will be enforced in the four states covered by the project. C. Highway Construction 3.09 The quality of construction is sometimes poor, due mainly to insufficient supervision, but also, in some cases, to hasty design. The local construction industry, however, is well advanced and there are about twenty construction firms with adequate experienced staff and equipment to handle large-scale highway works At present, only Brazilian contractors participate in bidding for construction work. Foreign contractors have in the past worked in Brazil, but the continuing inflation, coupled with poor contracting procedures and uncertainty of payments, have in recent years discouraged them from bidding.

15 The manufacture of construction equipment has developed considerably during the last decade, but heavy equipment, such as large scrapers, shovels, crawler tractors and large hauling equipment, still needs to be imported. Prices of locally manufactured equipment are high and, as a consequence, construction costs are generally higher than in other countries Yany aspects of bidding and contracting procedures in Brazil differ from international practice in respect of competitive bidding and unit price contracts. The DNER with the assistance of the consultants in charge of detailed engineering studies have prepared suitable documents which are in agreement with the Bank 1 s guidelines (Paras 4.33 and 4.34). D. Highway Maintenance 3.13 The quality of maintenance work on national and state highways varies widely, depending largely upon the importance of the road. In general, however, maintenance has been neglected until recently. The lack of proper organization and equipment, and of adequate funds, together with the uneconomic duplication of national and state maintenance divisions, have made it difficult to keep national and state roads at a suitable level of traffic serviceability. Maintenance costs are high, partly because of the use of old equipment, and partly because many of the existing roads were not des%gned and constructed to support presentday traffic, especially since weight regulations are not enforced. USAID has given considerable financial assistance to several States for the purchase of maintenance equipment. Loans amounting to US$20 million each were given to Sao Paulo, Minas Gerais and SUDENE (the Government development organization for the northeast), Parana received US$11.5 million and Rio Grande do Sul US$15.2 million. 3.lh Consultants for Phases I and I: of the Transport Survey have been entrusted with maintenance studies for the states concerned. The recommendations concerning Phase I are now available. These involve improvements in mairntenance methods and operations, procurement of equipment and materials required for maintenance, preparation of general maintenance programs, and organizational changes needed to implement these programs. Some of these recommendations have already been put into effect, such as the purchase of new equipment with USAID assistance; others are under consideration. During loan negotiations the Government agreed to implement the recommendations in order to arrive at a satisfactory level of maintenance on national and state highways in the four States in which project works would be carried out.

16 E. Highway Financing and Planning Revenue Sources 3.15 The main highway user charge is the federal tax on fuels and lubricants which is based on the price of imported crude oil. The greater part of the fuel tax is paid into the National Road Fund. The fund is then distributed to the DNER, the DER's and the municipalities on the basis of population, area, fuel consumption and the production of crude and refined oil. Deficits are made up from budgetary and other resources at various Government levels (Table 4). Besides highways, railways and airports, the Government oil monopoly (PETROBRAS) receives allocations from federal fuel taxes as shown below: Distribution of Federal Fuel Tax Receipts 1. National Road Fund Percent of Total 1.1. National Highway Department National Highwrays Reulacement of uneconomic railway lines by highways Airports States and Territories Construction of National Highways 2.4 (minimum) Airports Unallocated IMunicipalities (Road construction and maintenance) 5i.O PETROBRAS Federal Railways 6.0 TOTAL Several other special agencies receive or have received direct budgetary appropriations for highway construction, apart from the National Road Fund. For example, RODOBRAS, the agency responsible for the Brasilia- Belem Highway, received large sums in the p)ast (in 1967 this agency was merged with the National Highway Department). Regional agencies, such as SUDENE, the body responsible for the development of the northeast, together with similar agencies for the Amazon and Sao Francisco River basins, also channel funds through national and state highway dedartments for highway plurposes The States impose other taxes such as registration fees, inspection fees and road taxes on vehicle use. The total receipts from such state taxes, however, are small compared with state expenditures for highway purposes.

17 The Transport Survey showed that in the three southern States, and in Minas Gerais, the total of state vehicle taxes amounted to only 5 percent of highway expenditures in 1965, the balance being made up from tle National Road Fund and budgetary appropriations. The mwiicipalities also impose various vehicle use and ownership taxes. w Thile the receipts are generally earmarked for expenditure on city streets, there are some exceptions such as a social relief tax in Porto Alegre. The amounts raised by the municipalities from user taxes are generally low The report of the Coordination Consultants for Phase I of the Transport Survey concluded that users contributed about 40 percent of the economic cost of highways and that the incidence of the existing user charges on different types of vehicles was not linked to their relative use of highways. The Government is studying the possibility of reforming the road user charges. However, in view of the very heavy tax burden already borne by the private sector - federal, state and municipal taxes are about 30 percent of the GNP - significant increases in the overall level of fiscal charges will have to be coordinated with adjustments in the overall taxation and expenditure of the Government. The structure of the user charges, however, does need early reform. The transport policy letter includes a statement of the Government t s intention to reform the structure of road user charges, so that there would be a broad correspondence between the use of highways by particular classes of vehicles and the economic cost of highways (Annex C) In 1966 revenues received from users by federal and state governments totalled about NCr 850 million while total highway expenditure in that year was NCr 2,167 million. Users contributed, therefore, about 40 percent. (Expenditure on city streets or the receipts from municipal taxes are not compiled on a national basis. Their inclusion would not significantly change this order of magnitude). However, there is no economic reason why total user charges should cover annual highway expenditures. Highway Planning 3.21 Highway planning in Brazil centers on the 25-year program contained in Law 4592 of December 1964 which provides for the building of nearly 95,000 Im of roads. 'Within this program there is a "Preferential Plan," listing 25,000 km of priority roads. The DINMR cannot build outside the Priority Plan which is being implemented and forms the basis of all annual budgets. Other plans are armounced from tine to time, however. For example, in August 1967 a high priority program for construction of roads in the northeast, totalling 2,132 ka of paving, 962 km of earthworks, and 677 ki of betterment - all to be completed by was announced. In the past most highway plans were not based on economic analysis but this deficiency is being remedied as a result of the Transport Survey and by feasibility studies financed by USAID for high priority roads in the northeast The 25-year program is for national highways only, but state highways account for 54 percent of the total of paved highways in the country. The states thus have considerable autonomy in planning, since some of them provide over onehalf of highway expenditures from their own funds, the rest being automatically forthcoming from the National Road Fund. The DNER does, however, approve state expenditures from the National Road Fund, and is thus able to exercise some measure of control.

18 A new road plan has been prepared as part of a 3-year -lan ( ) for the transport sector (Para. 2.16). The plan is broadly based on the priorities established for national and state roads by Phase I studies of the Transport Survey, and the preliminary findings of the Phase II studies. F. Characteristics and Growth of Road Traffic 3.24 Data on the vehicle fleet are poor and the estimates given below are to be considered as the best aoproximations. The national total in 1965 was estimated to be about 1.3 million cars and pick-ups, 57,000 buses, and 436,000 trucks, and the total vehicle fleet has been growing by an average annual rate of nearly 8 -percent in recent years. For Brazil as a whole there was oae vehicle for every 47 persons in 1965 compared with one vehicle for every 18 persons in Argentina and one for 40 persons in Chile. The distribution among the states and territories was uneven; for example, Sao Paulo accounted for about 37 percent of the total and Guanabara for 10 percent (Table 8). Most of these vehicles were manufactured by the local automobile industry at high costs under the protection of high import duties reaching 150 percent. In fact, no significant vehicle imports of any kind have occurred in Brazil since About half the truck fleet is of 5-9 ton carrying capacity, gasoline-powered; heavr diesel trucks of over 15 tons carrying capacity account for only 7 percent of the truck fleet (Table 9) The total vehicle fleet is expected to grow from about 1.8 rillion vehicles in 1965 to about 2.8 million in 1971 (Table 10). The projected high growth rate for passenger cars (8.9 percent per annum) reflects the expected greater availability of cars, higher personal incomes and population growth. The highest growth rate is expected for inter-city buses, refclecting the same factors, together with the movement of passengers from uneconomic railway services that are to be suspended Knowledge of traffic characteristics has improved in the last two years as a result of the Transport Survey highway studies. The DNER and GEIPOT now make regular traffic counts, as do some of the states. The State of Sao Paulo for example, has over 800 regular counting stations. Origin-destination surveys are done although not on a systematic basis. The Government has agreed that data collection for highwray planning purposes will be undertaken systematically in the future The hub of Brazil's road transport network is the city of Sao Paulo, where several important interstate highways converge. Route BR-116 starts in the northeast in Ceara and continues south through Feira de Santana to Sao Paulo to the Uruguay border (Map 1). Its most heavily travelled sections are in the south. In 1966, for example, at Governador Valadares, the ADT was over 2,000 vehicles rising to 15,000 near Sao Paulo and remaining over 4,000 in the State of Rio Grande do Sul (Table 11). Freight traffic is heavy, trucks being as much as 80 percent of the traffic

19 flows in Minas Gerais. Other traffic data are given in Table 11 for all the main highways. The high proportion of tracks is evident, averaging 51 percent for the highway sections shown. Vehicle operating costs are given in Table 12. These tend to be somewhat higher than those experienced in the US, primarily because of the higher price of vehicles Entry to the interstate road transport industry requires DNER approval but is not difficult. Two-tlhirds of the ownership must be Brazilian. It is not necessary to prove public convenience and necessity for a proposed truck route, or to file information regarding tariffs, the commodities to be carried or financial standing. The granting of licenses is more or less automatic. Intrastate trucking operators are licensed by the DER's in the same way. Bus companies must apply to DNER or to DER's depending on whether the proposed services are inter or intrastate. Unlike truckers, however, applicants must prove public need and file tariffs and timetables for each route. There is, then, clear demarcation of interstate and intrastate road transport regulation which is, on the whole, not unduly restrictive.

20 4. THE PROJECT A. General Description 4.01 The proposed project was chosen on the basis of feasibility studies carried out for selected high priority roads during Phase I of the Transport Survey. All of these roads are included in the resulting master plans. The project consists of: (i) The construction, including paving, of three highways totalling 165 kin, one of which is in IYinas Gerais and two in Rio Grande do Sul (Maps 2 and 5, Table 13); (ii) (iii) The paving of a total of 264 km of four highways, two of which are in Parana, one in Santa Catarina and one in Rio Grande do Sul (Maps 3,4 and 5, Table 13); and The detailed engineering and construction supervision for the above highways. Highways to be Constructed (Table 13)* Ipatinga-Governador Valadares: MG-4 or BR-381 (State of Minas Gerais) 4.02 The construction of the 99 km stretch of State Highway MG-4 (National Highway BR-381) would complete the connection from National Highway BR-262 at Monlevade to National Highway BR-116 at Governador Valadares, thus providing the shortest paved connection between the northeast and the industrial centers of Belo Horizonte and Sao Paulo. The route traverses the heart of the Rio Doce valley, mainly rolling terrain,and its future extension towards the east will eventually connect Belo Horizonte and the steel-producing area between Nova Era and Ipatinga with the Port of Vitoria and the beaches in the State of Espirito Santo (Map 2). The design calls for Class I standards and asphalt concrete surfacing. The construction cost is high because crushed rock for the base course will have to be brought in from widely scattered quarries with an average hauling distance of 20 km. Tabai-Canoas: RS-13 or BR-386 (State of Rio Grande do Sul) 4.03 Highway BR-386, known as the "Xennedy Highway," connects the productive northwestern area of Rio Grande do Sul with the capital Porto Alegre (Map 5). The major portion of the road is being completed with financial assistance from USAID and is nearly completed up to the village *Note: National highways are designated with BR-, State highways in Iinas Gerais with MG-, in Parana with PR-, in Rio Grande do Sul with RS-, and in Santa Catarina with SC-. National highways may also have a state designation.

21 of Tabai. However, traf ic from Porto Alegre bound for the Kennedy Highway must still use the roundabout route following Highway BR-116 via Sao Leopoldo and then Highway RS-3 to Montenegro and Tabai, a distance of about 95 km The proposed construction of the 54 km stretch between Tabai and Canoas will complete the Kennedy Highway by connecting it with Highway BR-116 at Canoas and shorten the distance between Porto Alegre and Tabai by about 34 km. The route traverses rolling terrain which does not present major location difficulties, but difficult soil conditions may cause embankment construction problems. The work comprises grading and drainage works, and construction of pavement structure and bridges. The design calls for Class I standards and asphalt concrete surfacing. Sao Leopoldo-Novo Hambuargo: BR-116 (State of Rio Grande do Sul) 4.05 The existing 12 km, paved 2-lane highway between these two cities (Map 5) is one of the most highly travelled routes in Brazil (Average ADT = 6,500). It is proposed to increase the capacity by improving the existing highway and by constructing two additional lanes The work proposed on the existing road is improvement of grade and alignment in rolling terrain, repaving, and widening or construction of drainage structures and bridges. The construction of the two additional lanes includes grading, drainage works, paving and the constraction of several bridges. The design calls for Class I standards and asphalt concrete paving. Highways to be Paved (Table 13) Sao Mateus do Sul-Uniao da Vitoria: PR-5 or BR-476 (State of Parana) 4.07 Highway BR-476 is a high priority road for the south of Parana (Map 3). It is paved between Curitiba and Sao NvIateus do Sul. Earthwork for the 85 km stretch beyond the latter point to Uniao da Vitoria has recently been finished by the State and the grade is ready for paving. The road for the most part traverses rolling country and has been built in accordance with Class I design standards. It is proposed to provide this section with an asphalt concrete paving. Section of BR-468 from km 40 to km 83 (State of Parana) 4.08 This 43 km section is part of the high priority road between the state capitals Curitiba (State of Parana) and Florianopolis (State of Santa Catarina). The 290 km road is designated BR-468 from Curitiba to the town of Joinville in the State of Santa Catarina, and BR-101 from there to Florianopolis (Maps 3 and 4). It has been designed in accordance with Class I design standards. Construction was started about six years ago and pavement of about 170 km is finished. Earthiwork is nearly finished and pavement contracts are under way for the remaining 120 kim, with the exception of the section between km 40 and Im 83 in the State of Parana (Map 3).

22 Earthwork in the Im 40 - km 83 section is being completed.the amount of earthlwtorlc is considerable, since the road crosses very mountainous terrain. Grade construction is expected to be firnshed by November 1968 at th latest,and it is now proposed to pave this section and surface it with asphalt concrete. Rio do Sul - Junction with BR-116: SC-23 or BR-470 (State of Santa Catarina) 4.10 Highway BR-470 is a high priority road for the State of Santa Catarina since it links the western part of the State with the populated coastal area and the sea (Map 4). 96 kn of the 140 km section between Itajai, on the coast, and Rio do Sul are paved. Pavement is under 1ray.or the a?emainder of this section The 91 km section of Highway BR-470 between Rio do Sul and the junction with BR-116 has been constructed in accordance with Class II design standards, and the grade is ready for paving. It is now proposed to pave this section and surface it wfith asphalt concrete. Cai-Farroupilha: RS-4 (State of Rio Grande do Sul) 4.12 This 45 km section may- in the future be an alternate route for Highway BR-116 between Caxias do Sul and Vila Scharlau (Map 5)e The road, which in part crosses very mountainous terrain, has been designed to Class I standards Grade construction of 41 km has been finished and the remaining 4 km (which are between Sao Vendelino and Farroupilha) will be finished by November It is now proposed to pave the entire 45 km section and surface it with asphalt concrete. 4.J1 Following is a summary of the highway construction and paving program included in the project. Cost Estimate June 1967 Type of Work Excluding Construction contingencies Road Number & Paving Paving US$ Equivalent State National State Road Section Km Km Million 1. Mijnas Ipatinga-Governador Gerais HL-3Ql ig-4 Valadares Parana BR-476 PR-5 Sao Mateus do Sul Uniao da Vitoria 3. Parana 3R Km 4o - Km Santa Rio do Sul-Junction Catarina BR-470 SC-23 BR Rio Grande do Sul BR-386 RS-13 Tabai-Canoas Rio Grande do Sul - RS-4 Cai-Farroupilha Rio Grande Sao Leopoldodo Sal BR Novo Uamburgo TOTALS Z

23 B. Design and Consulting Services 4.15 Feasibility studies for the highways proposed for construction and/or paving have been carried out as Dart of the Bank-financed Phase I of the Transport Survey (Para. 4.01). In order to ensure continuity of responsibility, the Government in 1965 decided to employ, for detailed engineering studies and later for supervision of construction, the same consultants who made the feasibility studies. Detailed engineering is now completed During the feasibility and detailed engineering studies, the consultants have thoroughly reviewed existing surveys, soil studies, geometric and structural designs, and administrative and technical specifications. Design of pavement structures was based on the legal 10 m ton single axle load, and is satisfactory The cost of constructing pavement structures is generally higher in the three southern States than in Minas Gerais where suitable materials are more readily available. This is especially true with regard to base courses which in the southern States, due to the lack of natural gravel and sand deposits, will have to be either of the crushed rock or the macadam type of construction Employment of the same consultants for supervision of consteilctl.on is necessary since experience has sloim that local supervision tends to be lax. In addition, it is highly desirable to establish continuity of responsibility by making the consultants responsible for seeing that the workmanship meets the requirements of their own detailed engineering plans and specifications. On the other hand, to avoid excessive supervision costs and duplication of personnel, the consultants ai.ll provide only a limited number of key personnel who xrill closely cooperate with the highway officials in charge of the works, and will avail themselves of the supporting services (personnel and equipment) of the respective highway departments. This supervision arrangement aras agreed during loan negotiations. C. Cost Estimates and Financing 4.19 The total cost of the project is estimated at US$65.5 million equivalent, including contingency allowances. A surmmary of the project cost follows:

24 Costs in US$ Equivalent (Millions) Total Foreign Exchange Component Component 1. Construction and/or pa-ving of 429 km of highways (23%) Quantity Contingencies 10% Sub-Total 51.5 (23%) Price Contingencies 10% Total Item (23%) 2. Detailed Engineering (40%) 3. Construction Supervision (40%) Contingencies 10% Total Item 3 _7 17 (40%) Total Project (25%) 4.20 The estimate of construction and paving costs is considered adequate. It is based on June, 1967 estimates, converted at the then current exchange rate of US$1.00 = NCr 2.7 (Table 13). Quantities used for this estimate were taken from the detailed engineering studies, and unit prices from contracts recently awiarded to domestic contractors for similar works and checled by independent estimates of the consulting engineers A 10 percent contingency allowance has been added to the construction cost for quantity increases. This is considered sufficient in view of the accuracy of the quantity estimates in the detailed engineering studies The 10 percent price contingencies are to cover the probably changes in the cost estimates which were prepared in mid-1967; prices of imported equipment and materials are expec-ted to increase and, furthermore, exchange rate adjustments may lag behind price increases, as they have in the past The foreign exchange cost of detailed engineering corresponds to amounts already disbursed for the services of foreign consultants. The foreign exchange component of construction supervision costs is based on estimates which wiere discussed with the consul-tants The foreign exchange component for construction has been estimated for each highway on the basis of contract awards to 1) local firms or 2) foreign firms. The range is from 15 percent o2 the total construction cost if only local contractors, using primarily local equipment, were employed to 45 percent if all worlc was carried out by foreign contractors. In spite o the lack of interest showm in recent years by foreign contractors to bid in Brazil, it could be reasonably expected that the improved

25 bidding and contracting procedures, introduced for the project, will make it easier for foreign contractors to participate. Assuming that one-fourth of the construction would go to foreign contractors and threefourthb to local contractors, the foreign exchange component would be about e3 percent. The total foreign exchange component of the project, including consulting services, then becomes 25 percent With regard to the Bank's contribution to the project cost, the following participation is proposed: a) 40 percent of construction costs; and b) the foreign exchange cost of consultants. Since the project has been prepared in close cooperation with the Government the loan would provide retroactive financing, limited to expenditures after April 1, One of the major problems in establishing a disbursement procedure for foreign currencies for this project is the relationship between changes in the exchange rate and the domestic price level in view of the record of price inflation and currency devaluation. Disbursement of Bank funds should be associated with the project until the completion of the works. It is conceivable that in the case of disbursements based on a fixed percentage of Cruzeiro costs converted to dollars at the prevailing exchange rate, a substantial lag in the exchange rate behind changes in domestic costs could result in the exhaustion of loan funds before the completion of the project. Disbursements will be made on the basis of unit costs, expressed in dollars at the exchange rate applicable at the date of bid opening. Disbursements will be made v"' Cruzeiros and the Government will from time to time request the Bank to reimburse the agreed percentage of expenditures, arrived at by the conversion of physical units of work into dollars at the appropriate dollar unit prices The composition of the proposed Bank loan would be as follows: 40 percent of total estimated construction cost of US$59.9 million Foreign exchange cost of consultants for detailed engineering studies and construction supervision, with retroactive financing from April 1, Total proposed loan US$23.9 million 2.1 million US$26.0 million 4.28 Construction is expected to commence during the second quarter of 1969 and be completed towards the end of 1971; on this basis the tentative annual breakdown between estimated Government expenditures and those covered by the Bank loan is as follows:

26 Total Expenditures Government Expenditures Bank Participation US$ Equivalent Million US$ Equivalent Million US$ Equivalent Million 1966/67 0.9* L5.5 22~ _26.0 *Detailed engineering, retroactive financing for which is included in the Bank participation for The loan would be to the Federal Government. The DNER will be the executing agency and will administer a revolving fund for payments to contractors and consultants. The Federal Government will finance the cost of construction and consulting services on national and state highways included in the project and withhold from subsequent Road Fund allocations to the particular states such amounts as are expended on the state highways. The revolving fund will be replenished with the Bank's reimbursement from payments made and with the Federal Governmentts contribution coming from DNER's share of the National Road Fund. During loan negotiations assurances were obtained that the amount of the revolving fund will alw;ays be kept at a level sufficient to cover 3 months of project cost, in accordance with work schedules. An initial revolving fund of NCr 18 million in a blocked account at a suitable Brazilian bank, has been agreed with the Brazilian authorities; its establishment will be a condition of effectiveness of the loan. D. Execution of the Project 4.30 Execution of the project will be the responsibility of the DWER. Of the seven highways included in the project, one is a state highway, two are national highways and the remainder belong both to the national and state networks. The DNER will be responsible for the works relating to the two exclusively national highways. The works on the other five highways will be under the respective state highway departments. Table 13 shows the highway department responsible for each highway The Government and the respective States will conclude agreements, acceptable to the Bank, for the construction of the highways by the respective States. These agreements will include the standard provisions of project agreements, and their satisfactory conclusion will be a condition for the effectiveness of the loan.

27 Contracts for the project works will be let on the basis of international competitive bidding and in accordance with the Bank's established bidding procedures. The consultants have assisted the Government in the preparation of prequalification, bidding and contracting documents. They will also assist the Government in the analysis of bids and be responsible for the supervision of construction. The Government is proceeding with the prequalification of interested firms. The results of the prequalification as well as proposed contract awards will be submitted to the Bank for approval and this was agreed during loan negotiations Appropriate price escalation formulas prepared by the consultants and the Government have been made legally effective. Bidding and contracting documents have been approved by the Bank. The legal adoption of these documents,for the national and state highways included in the project, will be a condition of effectiveness of the loan An existing law and a decree, not yet declared effective, would permit duty free import of equipment for the project, if no similar equipment is produced domestically. If such equipment is produced domestically, duty free import of equipment would be permitted if the price of the domestic product is more than 15 percent above the c.i.f. price of the imported equipment. The declaring effective of the decree will be a condition for the effectiveness of the proposed loan Brazilian legislation facilitates acquisition of lands needed for highway purposes. Construction or relocation of roads is often started before right-of-way is secured. However, to avoid difficulties and unnecessary delays later on, the Government has confirmed that the acquisition of right-of-way for project roads will be given immediate attention Any surplus funds remaining in the loan account on completion of the project should be cancelled.

28 A. Introduction ECONOMIC JUSTIFICATION 5.01 The size of Brazil, its economic potential, and the need to integrate its different regions require the continuing improvement of the existing transport facilities and increases in its capacity. Highway transport, in view of its pre-eminent role in the transport sector, will require a particularly large volume of investment. Highway master plans and project feasibility studies are being prepared in almost all the States. In four (Minas Gerais, Rio Grande do Sul, Parana and Santa Catarina) they are already completed. The project includes road construction and/or paving in all of these States in wihich accelerated highway programs have been set up to offset the present backlog in the transport sector. Meanwhile, expenditures in the rest of the country will be kept low pending the completion of the Transport Survey Phase II studies. In this respect the proposed Bank loan will constitute a najor step towiards the fulfillment of the immediate highway program objectives. The forecasts on which the economic justification was based were made by the consultants responsible for feasibility studies (Annex A). B. The Project Roads i/ In the State of 1{inas Gerais (il[ap 2) 5.02 Ilinas Gerais extends over 587,000 kmi 2, or almost 7 percent of the total area of the country. Its present population is close to 11.5 million or 13 percent of the total Brazilian population and is currently growing at an average annual rate of 2.2 percent. The main activities in the State are related to tle exploitation of iron ore (18.5 million tons in 1965) and it produces about half of the country's steel. These activities are principally located within the 11 Zona Metallurgical' which is centered on Belo Horizonte, the State capital. Agriculture, however, is important particularly in the"triangulo 1 1, or western part of the State. Crops include rice (1.3 million tons, 1965), corn (2.2 million tons), beans (0,3 million tons), coffee (0.4 million tons) and sugar cane (2.0 million tons). Cattle and pig raising is also important, PMinas Gerais having about 19 percent of the total livestock of the country. Due to the richness of soil and subsoil, agriculture and mining offer particularly good prospects for the further economic development of 2Iinas Gerais State Route MG-4 (99 km) This road will connect the eastern part of the State of Minas Gerais and the northeastern states of Brazil. Its local influence area spreads over 6,000 km 2 and encompasses a population of close to 250o,00. It includes Governador Valadares, the major settlement in the zone with a population of over 100,000. The route will connect important agricultural areas with the Zona Metallurgica and, thereby, facilitate the supply of food and agricultural products to this rapidly developing zone. Though the FIG-4 is in poor condition, traffic reaches about 310 vehicles per day / Project roads are discussed by States and not by type of work as in Chapter 4.

29 at present, of which nearly 45 percent are heavy vehicles (Table 14)1/ Future traffic will consist of local traffic and traffic diverted from BR-116 since the project road between Governador Valadares to Belo Horizonte is about 20 percent shorter than the present route. Annual traffic growth rates over the period are expected to be about 9 percent for goods, 10 percent and 8 percent for bus and private car traffic respectively. Traffic projection for both freight and passenger vehicles have been assumed to level off at 7 percent from 1981 onwards. Part of the "Iinas a Vitoria" railway system parallels the road; this ispredominately an iron ore line, with heavy trains of up to 100 iron ore hopper cars, and it is planned to phase out all other traffic wthen MG-4 is opened. No road-rail coordination problem is involved. In the State of Parana (Map 3) 5.04 The State of Parana covers an area of about 200,000 km 2, or 2.4 percent of the total area of Brazil. Its present population is close to 7 million, or nearly 8 percent of the country's total population. Timber production and processing, which accounts for just over 12 percent of Brazil's total production, forms the bulk of the industrial activity. Agricultural production includes sugar (3.2 million tons in 1965), coffee (1.8 million tons), rice (0.6 million tons in 1965), potatoes (0.3 million tons), beans (0.6 million tons), maize (2.2 million tons) and manioc (2.1 million tons). In addition, about 6 percent of the country's cattle is raised in Parana Route PR-5 (85 kmi This project road runs from Uniao da Vitoria along the southern border of the state to Sao Mateus do Sul; it links the rapidly developing area of southwestern Parana to Curitiba and Sao Paulo. The local area of inrluence covers 3,500 km 2 with a population of roughly 100,000 including about 45,000 settled in Uniao da Vitoria and its ixmmediate surrounding area. The proposed highway will principally accommodate long distance traffic and particularly timber traffic wihich is expected to amount to 70 percent of all eastbound tonnage. Traffic on the route -as disrupted in 1966 and diverted to parallel routes, mainly because of detours to facilitate grade construction. Counts taken prior to the interruption of traffic showed an ADT of 490 vehicles, about 75 percent being heavy vehicles. of which about 25 percent were long distance trucks. Based on the expected growth of the regional economyy, the future traffic growth over the period is estimated to be 9 percent and 6 percent per annum respectively for local and long distance freight traffic, with 10 percent per annum being forecast for passenger traffic. From 1981, growth has been conservatively estimated to be 7 percent per annum Route BR-468 (43 km) This road is one of the highest priority routes in the I4Iaster Plan for the three southern states, forming an alternative coastal route between Curitiba and Porto Alegre, thereby relieving the mountainous BR-116 alternative. Traffic on the present gravel road is already heavy, 589 vehicles per day in 1966, 60 percent being trucks (Table 14). It is estimated that car traffic will continue to grow at an / Traffic volumes shown in Table 14 relate to volumes at traffic counting points and are not averages over the whole sections.

30 average annual rate of 7 percent per year throughout the life of the road, though bus and long distance truck traffic will probably grow at 5 percent and 6 percent per year respectively. These are conservative estimates and should the plan for a freeway from Porto Alegre to the coast materialize, truck growth may be higher. On the other hand, a railway connection between Sao Paulo and Porto Alegre is being constructed (The Tronco Sul). This will not be directly competitive,but if completed will probably attract agricultural traffic from BR-116 which would otherwise be diverted to BR-468. Consequently no growth in this traffic has been forecast. There is also a small amount of coastal shipping competition but it is expected that the road improvement will make this relatively unattractive for some commodities which are now being carried by ship. In the State of Santa Catarina (Xap 4) 5.07 Santa Catarina is the smallest of the three southern states, with 96,000 km 2 and a population of about 2 million, engaged for the most part in agricultural production, which accounts for over half of the regional income of the state. The most important agricultural products, relative to total Brazilian production are pine (40 percent) and tobacco (32 percent). Manioc, maize, grapes and livestock are also important. WXood processing is the largest industry, employing over 30 percent of the industrial population, while textile manufacturing employs 23 percent Route SC-23 (91 km) This road will form a link of the future main west-east artery of the state, connecting the harbor of Itajai and the growing industrial town of Blumenau with the whole of western Santa Catarina and its important timber growing areas. The present connections for traffic from and to the wvest of the important BR-116 are extremely poor and costly and there is no through railwiay. Long distance through trucks are expected to be the main users of the road, the main traffic being timber to the port and petroleum products and building materials in the opposite direction. Even though grade construction is only just completed, traffic is heavy with a count of 596 vehicles per day, 66 percent being trucks (Table 14). The road has three distinct economic sections. The most easterly section, 16 km starting at Rio do Sul and serving the largest settlements, has the heaviest traffic, more than half of -which are passenger cars. Traffic growth is expected to be 4.5 percent annually during the life of the road. The 16 km section west of Trombudo do Sul serves small farming settlements and traffic growth is expected to be slow, at 2.8 percent during the road's lifetime. The western section of 58 km is essentially a through route with no local traffic in the mountainous terrain. Because timber production will not increase signi-f,icantly, traffic growtth in this section is expected to rise by only 1.4 percent per year to 1980 and 1.2 percent thereafter. In the State of Rio Grande do Sul (map 5) 5.9 mthe State of Rio Grande do Sul has a total land area of 267,000 km 2, covering about 3.1 percent of Brazil. Its population amounts to roughly 6.5 million, or 7.5 percent of Brazil's population and is currently growing

31 at a rate of about 2 percent per annum. Agriculture is the main economic activity, generating about 40 percent of the total regional income and employing more than 50 percent of the active population. Income derived from agriculture has been growing at a rate slightly over h percent annually during the period. Maize (5.0 million tons in 1965) is used chiefly for animal feeding, while wheat (0.4 million tons), rice (1.3 million tons), beans (0.2 million tons) are grown for human consumption. In addition about 12 percent of Brazil's cattle is raised in the state. Industry represents a relatively small sector (17 percent of regional income), with about 60 percent of its production being based on agricultural raw materials Route RS-13 (54 km) This project road is the continuation of the "Kennedy Highway" towards Porto Alegre. It will mainly accommodate long distance traffic between the northwestern part of the state and the Porto Alegre area. The traffic, largely diverted from other routes, is expected to reach 1,700 vehicles per day by 1971, with about 45 percent being heavy trucks. Future rates ol growth, based on an analysis of the regional economy, have been estimated to be 6 percent and 9 percent per annum for long distance and local goods traffic respectively, and 10 percent for passenger traffic. On the basis of these forecasts, the capacity of the highway will be reached in 1981, hence no traffic increase has been assumed in subsequent years for the purpose of economic analysis Route RS-4 (45 kaa) This road has two distinct sections, from Cai to Sao VendeiLno, 2 htm and then to Farroupilha, 21 km. Traffic on the first section is already heavy, and reachad 1,329 vehicles per day on the old earth road before construction started, nearly 70 percent being trucks (Table 14). On the first 24 km section traffic is expected to grow by an average annual rate of 7 percent to 1980 when the capacity of the road will be reached. On the second section, traffic is expected to grow by 7 percent per year to 1980, falling to 6.5 percent thereafter. The assumption regarding this section are very conservative as no long distance through traffic has been included in the calculation of benefits. Should a by-pass of the town of Caxias do Sul be constructed in the future, a great deal of truck traffic would use RS-4 in preference to the mountainous alternative, BR-116,but this will not affect the econonic justification of the 12 km of BR-116 between Sao Leopoldo and Novo Hiamburgo (Para 5.12) Route BR-116 (12 kim) This is an urban route from Sao Leopoldo to Novo Hamburgo, a satellite city of Porto Alegre. The Porto Alegre-Novo Hamburgo corridor is of paramount importance to the state. It includes a population of over one million that is currently growing at rates ranging from 3.5 percent to 9.0 percent per annum according to locality. About 40 percent of the state population engaged in industry lives in the corridor. This 2-lane highway is now carrying heavy traffic of about 6,500 vehicles per day, about 30 percent of which is trucks. As a result, the capacity of the existing facility is reached several hours every day and the ensuing delays to users lead to important losses to the economy. Construction of two additional lanes, as proposed in the project, will relieve the present congestion. Passenger and goods traffic is expected to increase at annual rates of 13 percent and 7 percent per annum respectively until Capacity of the new facility will be reached in 1981 and no subsequent growth of traffic was considered thereafter.

32 C. Benefits from the Project 5.13 On most of the project roads, benefits will materialize through lower vehicle operating costs on paved roads as compared with those on gravel roads. In addition, reconstruction wiill often include the shortening of routes either for n-rmal or diverted traffic and thereby lead to further road user benefits. Benefits from reductions of vehicle operating costs have been estimated by the consultants, during the preparation of the master plans, for the various vehicles commonly used in Brazil. They are based on an analysis of trucking companies' records and test drives of the various kinds of vehicles over the different types of roads and are conservative estimates. On route BR-116, an urban road, benefits will be derived from the reduction of congestion. These were estimated by attributing a value to time-savings, based upon driver's wages for commercial vehicles and wages for passengers on business trips, the numbers of which were found from origin-destination surveys. There are other benefits from paving, for example, reduced spoilage of bananas result in benefits from using the asphalted BR-468 instead of the existing gravel road while losses of hogs and cattle will be very much reduced on all roads. These benefits have been included where appropriate. Finally, while the costs of maintaining well constructod bituminous paved roads vary little with the level of traffic, the costs of maintaining the existing gravel roads would substantially increase with the continued growth of traffic if the roads were not improved. The federal and state governments will therefore derive large benefits by avoiding high maintenance expenditures The very active ccmpetition within the transport industry makes it likely that a large part of savings in truck operating costs will be passed on to the productive sector in the form of lower freight rates. Greater consumption and/or reinvestment will therefore be made possible The estimated benefits, discounted over the 20 year economic lifetime of roads, show rates of return on the investments ranging between 13 and 40 percent, as follows: 1. Minas Gerais State Rates of Return 2. Parana State MG-4 Ipatinga-Governador Valadares 14% PR-5 Sao Mateus do Sul-Uniao da Vitoria Section 1 13%) Section 2 13% Section 3 16% Total 14% BR-468 Km 40 - Km 83 40%

33 Santa Catarina Rates of Return BR-470 Rio do Sul - BR-116 Section 1 20% Section 2 23% Section 3 18% Total 20% 4. Rio Grande do Sul RS-13 Tabai-Canoas 21% RS-4 Cai-Farroupilha Section 1 43% Section 2 15% Total 34% BR-116 Novo Hamburgo-Sao Leopoldo 31% 21% 5. Totial Project Both the individual and the overall rates of return are acceptable. The project is, therefore, economically justified Additional, but not readily quantifiable, benefits will also result from the project roads. These are, for example, increased transit speeds leading to faster turnover of capital; a lowiering of inventory costs; and the development of tourism. 14oreover, easier communication and exchange between the different regions of this exceptionally large country will facilitate the broader objectives of unity and economic integration.

34 CONCLUSIONS AND REC0IMMDATIONS 6.01 The project, which is the outcome of studies financed under Phase I of the Transport Survey, is technically and economically sound. The cost estimate, as expressed in US currency, is considered realistic, and the project as a whole gives an average rate of return of 21 percent on the investment The same consultants who made the feasibility studies have been in charge of detailed engineering which is now complete. They will also be employed for the supervision of construction The Bank's contribution to the project would be 40 percent of the construction cost (foreign exchange component is about 23 percent), and the full foreign exchange cost (about 40 percent of total cost) for consulting services. Disbursements in respect of construction will be made on the basis of unit costs expressed in US dollars. 6.o4 Before loan negotiations the Government communicated to the Bank the main objectives of the Government's three-year plan of action for the transportation sector (Annex C). This was accepted by the Bank as a suitable basis for proceeding with the negotiations During loan negotiations, agreement was reached with the Government on: (a) the reorganization of the WNER, and of the DERts of Minas Gerais, Parana, Rio Grande do Sul and Santa Catarina (Paras 3.03 and 3.04); (b) the enforcement of weight regulations (Para 3.08); (c) the implementation of consultants' recommendations concerning highway maintenance (Para 3.14); (d) the construction supervision arrangements (Para 4.18); (e) (f) the maintenance of the revolving fund at a level sufficient to cover 3 months of construction work (Para 4.29); and the acquisition of right-of-way for project roads (Para 4.35) During loan negotiations it was agreed that the effectiveness of the loan will be contingent upon the Government:

35 (a) (b) (c) (d) establishing an initial revolvring fund of NCr 18 million, in a blocked account at a suitable Brazilian bank (Para 4.29); concluding an agreement with the respective States for the construction of the highways included in the project (Para 4.31); legalizing the revised bidding and contracting procedvures (Para 4.33); and making effective the law regarding imnportaticn of construction equipment (Para 4.34) The project provides a suitable basis for a Bank loan off US$26.0 million equivalent. An appropriate term would be 25 years, including a h½ year period of grace. September 25, 1968

36 TABLE 1 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Freight Transport by Mode of Transport, (billions of net ton-km) Railways Coastal Air Year Total Total Federal State CVRD Shipping? HIZDwavs Transport/ o Percentage Shares Air Year Total Railways Coastal Shipping E H hw2s Transport / lj "Minas a Vitoriat" railway, subsidiary of CVRD mining company. / Excluding river traffic for which no statistics are available. 2/ Includes international services. Domestic figures not available separately. Source: GEIPOT.

37 BRAZIL TABLE 2 FIRST HIGHWAY OONSTRUCTION PROUECT Passenger-Kilometers, Percentage Shares, and Average Annual Growth Rates of Total and Selected Items, by Mbde of Transport and Average Annual Growth Rate Passenger-Kilometers (billions) Percent Shares (percent) Mode of Transport & Item Highways Medium and long distance bus traffic n.a. Automobile medima and n.a. n.a long distance traffic n.a. n.a. n.a Subtotal n.a. n.a. n.a Local bus traffic n.a. n.a. n.a Automobile local traffic n.a. n.a. n.a Subtotal n.a. n.a. n.a Total n.a. n.a. n.a Railways Interior traffic Commuter traffic Total Coastal Shipping Airwaysa) Total n.a. - not available a) Includes international travel since figures for domestic travel are not available separately. Source: Brazil Transpcrt Survey, Draft Volume II.

38 TABLE 3 BRAZIL FIRST HIGHWJAY CONSTRUCTION PROJECT Investment in Transport by Ilodes & Percentage Share of.ilodes in Total Investment, (Constant NCr June 1967, Millions) Railways Equipment NA New Lines NA Total Highwaysl/ Trucks & Buses 1, , , , , Automobiles Construction , , ,135.8 Total 2, , , , , , ,949.5 Maritime Ships Ports Total Air Aircraft Airports Total Pipelines Total Investment 3, , , , , , ,634.0 Percentage Shares Railways Highways Maritime Air Pipelines / Does not include investment in urban roads or in highway construction equipment. Source: Brazil Transport Survey, Draft Volume II.

39 TABLE 4 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Highway Revenues and Expenditures, (Constant June 1967 NCr (million) 1966 US1;/ equiv. million Expenditure b/ National Highway Dept. (DNER)- Construction Maintenance & Acministration krodoras FLoan Amortization Total States and Federal Districts Construction Maintenance & Administration Loan Amortization Total , , Municipalitie,3/ Total Expenditure 1, , , , , , Revenue a/ National Highway Dept. (DNER)- Revenues from: National Road Fund (FRN) National Budget SUDENE USAID Inter-American Development Bank RODOBRAS Other Total States and Federal Districts Revenues from: / National Road Fund (FRN) Exterpal loans Other' Total , , Municipalities National Road Fund (FRN) Other Total Total Revenues , , , , , ,108.8 Notes: Sources: 1/ Actual expenditures in 1966 converted to US$ by 1966 rate of exchange, Cr 2,200 - TS$1. 2/ Brasilia-Belem Highway. 3/ Separate figures for construction and maintenance not available. / Budgets and earmarked taxes, no breakdown available. a/ Sistema Rodoviario Brasileiro, DNER-DP ( ), National Department of Highways. b/ GEIPOT / Plano Decenal - EPEA, Ministry of Planning.

40 TABLE 5 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Classification of Highways Lengths According to Type and Jurisdiction, December 1966 NATIONAL HIGRWAYS 9ATE UmieAYs MUNICIFAL HIGHWAYS State or Territory Total Km Km Km Total Unpaved Paved Total Unpaved Paved Total I Unpaved Paved Rondonia 1, _ _ Acre _ Amazonas 1, (a) Roraima (formerly Rio Branco) Para 5, ,655 1, ,321 2, Amapa Maranhao 23,947 1,427 1,397 (a) ,625 21,625 _ Piaui 21,475 1,399 1, ,120 1, ,956 18,956 - Ceara 45,229 1,800 1, ,878 1, ,551 41, Rio Grando Norte 9, ,455 2, ,177 6,177 - Paraiba 23, (a) 235 2,401 2, ,856 19,856 - Pernasmbuco 16,878 1,881 1, ,997 1, ,000 13,000 - Alagoas 11, ,273 2, ,400 8,400 - Fernando de Noronha Sergipe 3, o 1,224 1, ,022 2,022 - Bahia 63,263 3,308 2, ,055 4,843 1,212 53,900 53, Minas Gerais 1142,707 5,244 1,530 3,714 13,504 12,118 1, , , Espirito Santo 14, ,225 3, ,034 11, Rio de Janeiro 16,523 1, ,0o0l 4,320 3,052 1,268 11,000 11,000 - Guanabara 1, , _ Sao Paulo 136,479 2, ,349 13,954 5,287 8, , ,000 - Parana 82,795 2,286 1,084 1,202 7,113 6, ,396 73,396 - Santa Catarina 31, ,443 5, ,044 25,044 - Rio Grande do Sul 108,447 2,682 1, ,765 9, ,000 96,000 - Mato Orosso 27,594 3,694 3, ,388 5, ,512 18, Goias 34,939 3,311 2, ,628 11, ,000 20,000 - Federal District, Brazilia TOTAL 824,742 36,987 23,184 13,803 99,392 83,083 16, , , Note: (a) Pavement deteriorated Soure.: National Highway Department

41 TABLE 6 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT HIGHWAY DESIGN ST.NDARDS FOR NEW RCtDS Class of Highway 0 I II III Design Speed, flat km/h rolling mountainous Minimum Horizontal flat Radius, m rolling mountainous Maximum Grade, % flat rolling mountainous Sight Distance for flat Stopping, m rolling mountainous Sight Distance for flat Passing, m rolling mountainous Pavement Width, m flat rolling to to mountainous oo Shoulder Width, m flat rolling 3.00 to to to mountainous very mountainous Right-of-Way, m flat _ rolling mountainous Source: GEIPOT

42 T&BLE 7 BR&ZIL FIRST HIGHWAY CONSTRUCTION PROJECT A.34ISSIBLI HI3MWAY DESIGN STANDARDS FOR I&PROVEMENT OF EXISTING ROADS Class of Highway 0 I II III Design Speed, flat kmh rolling mountainous Minimum Horizontal flat Radius, m rolling mountainous Maximum Grade, % flat rolling mountainous 5 6.o 7 8 Sight Distance for flat Stopping, m rolling mountainous Sight Distance for flat Passing, m rolling mountainous Pavement Width, m flat oo rolling to to mountainous oo 6.oo Shoulder Width, m flat rolling mountainous very mountainous Right-of Xay, m flat _ rolling mountainous

43 TABLE BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Vehicle Registrations, By State, 1965 State Cars Buses Trucks Total % Distributi Ceara 32, ,68&E 44, Pernambuco 29,792 1,536 9,417 40, Bahia 34J475 1,963 12,120 48, Minas Gerais 118,391 4,210 44, , Rio de Janeiro 57,244 5,462 26,378 89, Sao Paulo 487,875 14, , , Parana 81,572 1,832 50, , Santa Catarina 30, ,701 49, Rio Grande do Sul 171,862 4,933 32, , Guanabara 148,96h 14,371 2h, , Other states and territories 107,728 6!600 51, , National Total 1, !436, , Source: Brazil Transport Survey, Phase I, (source book) Transport and the Growth of the Economy, Draft Volume II.

44 TABLE 9 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Vehicle Fleet, 1965 (000) Cars Pickups Total 1,301.0 Buses: Gasoline 28.5 Diesel 28.4 Total 56.9 Trucks: 2-h tons gasoline tons gasoline tons diesel tons gasoline tons diesel tons diesel tons and over diesel (tractors/semi-trailers) 6.5 Total Source: Brazil Transport Survey, Draft Volume TI.

45 TABLE 10 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Projected Average Annual Growth of Rate By Class of Vehicle, No. of Vehicles No. of Vehicles Growth Rate Class of Vehicle ('000) ('000) % Cars , Pickups o 5.8 Buses (Intercity) Buses (City) o 9.7 Trucks 436.o Total 1, ,771.1 Av.6.3 Source: Brazil Transport Survey, Draft Volume II.

46 TABLE 11 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Average Daily Traffic, (ADT) Se.ected National Highways, 1966 ADT / Highway-BR State No. Trucks % 040 i.finas Gerais 1, Minas Gerais 1, Goias 1, Santa Catarina 1, Ceara 1, Bahia 1, Kinas Gerais 1, Rio de Janeiro 5, Sao Paulo 15, Rio Grande do Sul 10, I"iinas Gerais 4, Rio de Janeiro 10, Goias 1, Ceara 1, Paraiba 1, Minas Gerais 1, Parana 3, Bahia 4, /464 Rio de Janeiro 3, Minas Gerais 1, o 381 Minas Gerais 3, Guanabara 15, Rio Grande do Sul 1, / ADT at selected counting stations. Source: Anuario Estatistico de Transito nas Rodovias Federais, DNER, 1966, National Department of Highways.

47 TABLE 12 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Average Operating Costs of Selected Vehicles on Flat Paved Roads (NCr, June 1967, per km, net of taxes) Truck Load Capacity Load Capacity Passenger Car 6 ton, gasoline 15 ton, diesel Bus Volkswagen Fuel o.o Lubrication ) Tires Maintenance O Wages O.096 _ Depreciation and interest o.o Total US equivalent per km Source: Brazil Transport Survey, Phase II. Guideline 014.

48 BRAZIL TABLE 13 FIRST HIGHWAY CONSTRUCTION PROJECT List of Roads and Cost Estimates Estimates June 1967 Type of Work Total Cost Construction Exclusive Conting. Road Number Responsible and Paving Paving NCr. US$ Equiv. State National State Agency Road Section Km Km Million Million 1. Minas Gerais BR-381 MG-4 DER/MG Ipatinga-Governador Valadares Parana BR-476 PR-5 DER/PR Sao Mateus do Sul-Uniao davitoria Parana BR DNER Km 40 - Km h. Santa Catarina BR-470 SC-23 DER/SC Rio do Sul - Junction BR Rio Grande do Sul BR-386 RS-13 DAER/RS Tabai - Canoas Rio Grande do Sul - RS-4 DAER/RS Cai-Farroupilha Rio Grande do Sul BR DNER Sao Leopoldo - Novo Hamburgo h9.5 Totals 429 Note: As stated in paragraph 4.24, the foreign exchange component assuming one-quarter foreign and three-quarters local contractors is about 24 percent. The corresponding foreign exchange cost component of construction (excluding contingencies) is therefore $11.9 million.

49 TABLE 14 BRAZIL FIRST HIGHWAY CONSTRUCTION PROJECT Average Daily Traffic i/ Project Highways, 1966 Highway and No. of Percentage of Counting Station Vehicles Cars Buses Trucks Other MG-4 Ipatinga MG-4 Governador Valadores BR-468 Km PR-5 Sao Mateus do Sul PR-5 Uniao da Vitoria RS-4 Cai 1,3992/ BR-116 Vila Scharlau 10, (Sao Leopoldo) BR-470/ Trombudo Central 5963' / Traffic volumes shawn in this table relate to volumes at traffic counting points and not averages over the whole sections. 2/ January-May / May Source: DNER

50 BRAZIL: FIRST HIGHWAY CONSTRUCTION AND ENGINEERING PROJECT ORGANIZATION CHART OF THE NATIONAL HIGHWAY DEPARTMENT (DNER) LEGAL OFFICE DIRECTOR GENERAL TECHNICAL ADVISORS DEPARTMENT OF TECHNICAL ADMI STRATION DEPARTMENT ADMINISTRATION APPRAISAL DESIGN MAINTENANCE DIVISION COMMITTEE DIVISION DIVISION FINANCIAL TRAFFIC RESEARCH PAVING DIVISION DIVISION DIVISION DIVISION INFORMATION PLANNING COORDINATION CONSTRUCTION DIVISION DIVISION DIVISION DIVISION DISTRICT OFFICES SUPPLY EQUIPMENT COMPETITIVE (ONE IN DVSODISONBIDDING EACH STATE) ~~~~~~~~~~~~~~~~COMMITTEE Jonuary (R)IBRD-3644

51 BRAZIL: FIRST HIGHWAY CONSTRUCTION AND ENGINEERING PROJECT ORGANIZATION CHART OF THE STATE HIGHWAY DEPARTMENT OF MINAS GERAIS (DER-MG) EXECUTIVE COUNCIL HIGHWAY COUNCIL - - TRAFFIC COUNCIL r AUDITING COMMITTEE _ DIRECTOR GENERAL GENERAL l MTECHNICAL SECRETARIAT ADVISORS 1_ I 111 LEGAL DESIGN CONSTRUCT10ON EQUIPMENT AND FINANCIAL DIVISION DIVISION DIVISION EDIVISION DIVISION PLANNING AND RESEARCH MAINTENANCE ADMINISTRATIVE TRANSPORT CDIVISION DIVISION DIVISION DIVISION DIVISION 0 I Jonuary, 1968 (RI IBRD-3645

52 BRAZIL: FIRST HIGHWAY CONSTRUCTION AND ENGINEERING PROJECT ORGANIZATION CHART OF THE STATE HIGHWAY DEPARTMENT OF PARANA' (DER-PA) HIGHWAY COUNCIL C RADMINISTRATIVE TAF CONTROL BUREAU P H ECHNICAL DIRECTOR h IETOR GENERAL W DIITRATIVE DIRECTOR h I A < X H....v< H \ m I 0M,I DESIGN CONSTRUCTION LEGAL MOCMETAO ADMINISTRATIVE SUPPLY DIVISION DIVISION DIVISION D IVSINC DIVISION DIVISION CONSERVATINDCP PAVING DOCUMENTATION TAFC METHODS AND PLANNING l RESEARCH EQUIPMENT ~~~~~~~SOCIAL PERSONNEL BUIDMINGSRTO DIVISION DIVISION ASSISTANCE SERVICE SERVICE l AND l COMPUTATIONS 9HIGHWAY DISTRICTS-COORDINATION I l I~~~~~~~~~~~~~~~~~~~~~~~ Jonuary, 1968 (R) IBRD F

53 BRAZIL: FIRST HIGHWAY CONSTRUCTION AND ENGINEERING PROJECT ORGANIZATION CHART OF THE STATE HIGHWAY DEPARTMENT OF RIO GRANDE DO SUL (DAER-RG) ~HIGHWAY COUNCIL EXECUTIVE COUNCIL AUDITING COMMITTEE 1' ~~~IRECTOR GENERA RFI ONI ADMINISTRATIVE OFFICE r RECRUITING SERVICE l COMMUNICATIONS AND AND MEDICAL ASSISTANCE C C FILING SECTION r PERSONNEL SECTION S A GENERAL RECORDS SURVEY AND l l SMAINTENANCE CONSTRUCTION MEUIPMENT SUPPLY ACCOUNTNG DESIGN AND IMPROVEMENTS DIVISION DIVISION DIVISION DIRECTORATE SPECIAL TRAFFIC ASSISTANCE TO LEGAL SERVICES DIRECTORATE MU NICIPALITIES DEPARTMENT January, 1968 (R) AE3D 3647

54 BRAZIL: FIRST HIGHWAY CONSTRUCTION AND ENGINEERING PROJECT ORGANIZATION CHART OF THE STATE HIGHWAY DEPARTMENT OF SANTA CATARINA (DER-SC) HIGHWAY COUNCIL } E EXECUTIVE COUNCIL AUDITING COMMITTEE DIRECTOR GENERAL TRAFFIC COMMISSION LEA TEHICL2 DISTRCT ADMINISTRATIVE l DIVISIONDIVISION DIVISION TESTING OF PAEETTAFCCOMMUNICATIONS MATERIALS CNTRUCTION DEINSTATISTICS ACCOUNTING PURCHASING AND) FILING AND ROAD SIGNS MAINTENANCE..SISTNC AND ASURDESIGN EQUIPMENT TO COUNTIES TREASURY PERSONNEL IMPROVEMENTS AND DESI 0 Jun~e 1968 IBRR-3902,

55 AINEX A Page 1 BRAZIL COWSULTA:rTS ERIGAGED IIT THE TRA2ISPORT SURVEY Consultants and Nationality Duties PHASE I 1) Coverdale & Colpitts (USA) Co-ordinating consultants and railway studies. 2) INGEROUTE (France) Highway master plan and organization study, and feasibility studies in the State of Minas Gerais. 3) KAM.PSAX (Denmark) Highway master plans and organization studies, and feasibility studies in the States of Parana, Santa Catarina,and Rio Grande do Sul. 4) NEDECO (Netherlands) Study of the Ports of Rio de Janeiro, Recife and Santos, and of coastal shipping. PHASE II 1) KAMSLX (Denmark) Co-ordinating consultants. 2) Parsons, Brinkerhoff, ) Highway master plans and feasi- Quade & Douglas (USA) ) bility studies in the States ) of Sao Paulo, Mato Grosso and Edwards & Kelcey (USA) ) Goias. ASPLAN (Brazil) Highway organization studies in ) the States of Mato Grosso and MONTOR-MONTREAL (Brazil) ) Goias. 3) NORCONSULT (Norway) ) Highway master plans and orga- ) nization studies in the States Servicos de Planejamento ) of Rio de Janeiro and Espirito (Brazil) ) Santo.

56 AIEh.;: A Page 2 Consultants and Nationality Duties 4) Xaver Dorsch (Germany) Highway master plans and organization studies, and feasibility studies in the States of Bahia and Sergipe. 5) Louis Berger (USA) High-way master plans and organization studies in the States of Alagoas, Pernambuco, Paraiba, and Rio Grande do Norte. 6) Sauti (Italy) Highway master plans and organization studies,and feasibility studies in the States of Maranhao, Piaui, and Ceara.

57 ANNEX B Page 1 TRANSPORT SURVEY, PHASE I, 1iLAIN RECOliE 1ATIONS Transport Coordination 1. The consultants made general recommendations which, if adopted, would go far to ensure) the movement of traffic by that mode of transport which incurred the least cost to the economy. It was recommended that investments be made according to economic criteria, that there be free user choice of mode of transport, that government policies should not unduly favor or discriminate between modes and that users pay their full costs. Railways 2. An extensive analysis of the federal and state railways was made and a litany of problems catalogued. The principal recommendation was that all the railways should be merged into one system, controlled by a Board with a ManagJiig Director directly responsible to the Minister of Transport. A manpower study to reduce staff to reasonable levels was recommended, and several lines were recommended for abandonment. Where the armed forces insisted on the retention of uneconomic lines, the resulting deficit should be handled in such a way as not to be a burden to the railways. Various improvements in equipment, signalling and operations were recommended, as well as the institution of cost-oriented tariffs. It was envisaged that implementation of the recommendations would require the engagement of a highly qualified team of consultants. Ports 3. The ports of Rio de Janeiro, Santos and Recife were studied in detail with a view to providing guidelines for the improvement of administration and to prepare master plans for investment. The situation in the ports was unsatisfactory in almost every respect, the principal cause being overcentralization. It was proposed that the National Port Organization be responsible only for rational planning and coordination and that individual ports should be transformed into largelyindependent port authorities. For the port of Rio de Janeiro, the Survey recommended extensive rehabilitation and expansion of facilities, including new wheat and dry bulk terminals, and new general cargo berths. In Santos new facilities, including a container berth, were recommended to handle increasing traffic. In Recife, replacement of almost all equipment was recommended as well as the rebuilding of sheds. Coastal Shipping 4. The consultants were asked to identify major shortcomings and to recommend any new investment in ships that may be required. A major finding was that the present fleet was much too large for the available cargo and extensive scrapping was recommended. Fixed sailing schedules

58 ANNEX B Page 2 were suggested, as were the consolidation of shipping companies and the decrease in the role of the regulatory body, the Merchant Marine Commission. If the recommendations are adopted, greater efficiency and reduced costs could be expected, resulting in a reduction in subsidies. Highways 5. The highway studies covered Parana, Santa Catarina, Rio Grande do Sul and Minas Gerais, including the review of design standards, economic studies, master plans for construction, the preparation of financial programss maintenance equipment needs, organization of highway departments and feasibility studies. Some of the feasibility studies are the basis of the present proposed loan. Recommended construction and maintenance expenditures from 1969 to 1976 for the states were: Recommended Expenditures in US$ Millions Rio Grande do Sul Santa Catarina Parana Minas Gerais Priority roads h34.0 Improvements 63.6 h (incl. in above) Maintenance, including equipment A major recommendation was that user charges be revised so that each category of vehicle paid its share of the economic cost of the highways. Calculations were made of the amounts appropriate for each type of vehicle. It was also recommended that the National Highway Department, where feasible, hand over its project design, construction, and maintenance functions to State Highway Departments,and be restricted to an agency for planning, programming and financing highways and establishing standards. Other recommendations were that a pavement reinforcement program be undertaken, traffic studies improved, geometric design standards reviewed and construction inspection intensified. Transport Investment Program 7. The recommended transport investments for the period are as follows: US$ Million Equivalent Highway construction Railways (priority program) Ports 208 Coastal shipping 30 3,128 2,080 (3 southern states and Minas Gerais) 810 (all federal and state systems) It may be expected that the Bank will participate in some of these as projects become ready for appraisal.

59 FORIUtTIATION OF TRANSPORT POLICY IN BRAZIL ANNEX C Page 1 Background (a) First L!nmcrandum of Understanding. The Bank luission to.razil (11H-146a) noted several shortcomings in trahsport policy ahdc planning which had resulted in mistaken or ill-timed investments and large cash deficits, particularly for railways and ports. In turn these were the most important sources of inflation, subsidies to the transport sector reaching 58 percent of the federal budget deficit in that year. The Government agreed with the mission's conclusion that urgent steps were required to cope with the serious problems. 2. In October, 1965 the Government requested technical assistance from the Bank to undertake a transport survey which would study the problems and make recommendations. The resulting Survey included a study of all railways, the ports of Santos, Rio de Janeiro and Recife, coastal shipping, and the highways in the States of Parana, Rio Grande do Sul, Santa Catarina and llinas Gerais. The Bank and the Government agreed upon a Memorandum of Understanding which conmnitted the Government to implement the recommendations of the Survey to the largest possible extent, in respect both to policy and to investments. 3. (b) Program of Action. The Survey is virtually complete and has resulted in Master -ians for all sectors. The main recommendations of the Survey are given in Annex B. A second phase of the Survey was commenced in 1967 to complete highway master plans for fourteen additional states with USAID and UNDP assistance, the Bank being executing agent. This phase is expected to be completed by the end of The Government furnished the Bank with a further Hemorandum of Understanding in January, 1967 in which the Government restated its intention to support the principles and policies set out in the 1965 Memorandum. The Government further agreed that it would undertake, by the end of February 1967, an additional program of action, acceptable to the Bank, for highways and transport coordination (including railways, ports and coastal shipping). The Government and the Bank were to agree on measures of implementation. 4. (c) 10-Year Plan In March, 1967 the Government produced a 10-Year Plan for Economic and Social Development which, in the transport sector, broadly followed the first phase consultants' recammendations. Before the Plan could be implemented, however, the new Government of President Costa e Silva took office and the Plan was suspended. 5. (d) Strtegic Program The new President, in his Budget Message to the National Congress in July of 1967, announced that a Strategic Program for Development would be presented shortly and a new Three-Year Plan ( ) would be fonmulated within the guidelines of the Program. The Strategic Program was published and approved by the President on July 14, 1967.

60 ANNEX C Page 2 6. The Program set out the basic objectives and policy guidelines adopted by the Government. In the traisport sector these included statements that: (a) investment was to be based mainly on economic criteria; (b) economic costs were to be reflected in prices paid by users for all forms of transport; (c) ocean shipping was to be expanded, as was coastal shipping which was also to be put on a scheduled basis; (d) ports were to be modernized and reorganized; (e) railways were to be consolidated into one system; and (f) the National Highway Department was to be reorganized. These guidelines are in accordance with the Memoranda of Understanding with the exception of the expansion of ocean shipping. 7. (e) Three Year Plan The Plan for the transport sector allows for Federal Government capital expenditures as follows: US$ Equivalent (Million) Roads 1,646.0 Shipping and navigable waterways Railways Ports Air Transport 48.5 Protection of coastal navigation 10.8 Administration 1.2 $2,268.4 Expenditures for other levels of Government are excluded, as are private projects and certain projects for which foreign financing is expected. The Plan is essentially a list of projects which are authorized by law to be proceeded with. This does not mean that all the projects will be undertaken, but even so, many of them could not be construed to be economically justified and therefore are not within the spirit of the Memoranda of Understanding or the Strategic Program. 8. (f) Letter of Intent. The 1967 Bank Mission to Brazil (WH-173a) was concerned with the continung large subsidies to the transport sector and the consequent inflationary pressure, in spite of the progress made to improve efficienqr and the elimination of uneconomic services. The proposed loan is seen as a means of following up the Memoranda of Understanding by requiring specific further actions, as lending conditions, related to the improvement of efficiency in the transport sector and to the consequent reduction of deficits.

61 ANNEX C Page 3 9. As a result of extended discussions a letter of intent, outlining the necessary measures, has been presented to the Bank which states the intention to undertake the following important measures: (a) Recommendations for the consolidation of the railway system are to be drawn up by a special commission to merge the railways into a single organization directly reponsible to the Iviinister of Transport; (b) A manpower survey by the railways aimed at reducing staff by 11,000 over the next 3 years; (c) The introduction of cost accounting as a basis for railway tariff reform; (d) A program of abandonment --P uneconomic railway stations and lines to be concluded by the end of 1972; (e) The termination of new line construction as recammended in the Transport Survey, except for those socially and strategically required; (f) The reorganization of the National Highway Department in accordance with a program to be formulated early in 1969; (g) The formulation of proposals for the reform of the structure of road user charges; (h) The basing of highway construction priorities on the recommendations of the Transport Survey; Ci) The decentralization of port administration and the representation of State and Municipal government in port authorities; (j) The introduction of commercial accounting in the ports of Rio de Janeiro, Santos and Recife by mid-1969; and (k) The use of cost accounting in the ports as a basis for assessing port charges. The Government understands that this statement of intentions and the program proposed are of importance to the Bank and that progress towards implementation will be an important factor in the consideration of future loans in the transport sector. Future Lending in the Sector 10. If progress is made by the Brazilian Government regarding the above matters, the Bank might contemplate further lending in the transport field. The Survey, Phase II, includes feasibility'studies for highways which could be appraised shortly and others which will be ready early in Highway projects are being identified for appraisal while lending might later be possible in the port and railway sectors, depending largely on financial performance in the future.