Document of

The World Bank

Report No. 16425-BR

STAFF APPRAISAL REPORT

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

May 20, 1997

Infrastructure and Urban Development DivisionCountry Department ILatin America and the Caribbean Regional Office

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CURRENCY EQUIVALENTS

Currency Unit = Real (R$)US$1 = R$1.0 65 (May 8, 1997)

This exchange rate has been used throughout the report unless otherwise indicated

WEIGHTS AND MEASURES

Metric System

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ABDER - Associacao Brasileira dos Departamentos Estaduais de Estradas de RodagemBrazilian Association of State Road Agencies

ADT (vpd) - Average Daily Traffic (number of vehicles per day)BNDES - Banco Nacional de Desenvolvimento Economico e Social

National Bank for Economic and Social DevelopmentCBR - California Bearing RatioCPMS - Computerized Project Management SystemCVRD - Companhia Vale do Rio DoceDER - Departamento Estadual de Estradas de Rodagem

State Road DepartmentDER-MG - Departamento de Estradas de Rodagem do Estado do Minas Gerais

Minas Gerais State Road DepartmentDNER - Departamento Nacional de Estradas de Rodagem

National Roads DepartmentEA - Environmental AssessmentEBM - Expenditure Budgeting ModelEM - Environmental ManualFPE - Fundo de Participacao dos Estados

State Participation FundGEIPOT - Empresa Brasileira de Planejamento dos Transportes

National Transport Planning AgencyGOB - Government of BrazilHDM-III - Highway Design and Maintenance Standards Model (version III)ICB - International Competitive BiddingICMS - Imposto sobre a Circulacao de Mercadorias e Servicios

Value Added TaxIDB - Inter-American Development BankIERR - Internal Economic Rate of ReturnIRI - International Roughness IndexMT - Ministerio dos Transportes

Ministry of TransportNCB - National Competitive BiddingNPV - Net Present ValueOM - Operational ManualPIP - Project Implementation PlanPMC - Project Management ConsultantPMU - Project Management UnitSIP - Subproject Implementation PlanSMU - Subproject Management UnitSNV - Sistema Nacional de Viacao

National Transport SystemTOR - Terms of ReferenceVOC - Vehicle Operating Cost

Vice President: Shahid Javed BurkiDirector: Gobind T. NankaniDivision Chief Asif FaizTask Manager: Jacques Cellier

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

STAFF APPRAISAL REPORT

Table of ContentsPage No

Loan and Project Summary .................................................. (i)

I. TRANSPORT SECTOR OVERVIEW .................................................. 1A. The Transport Sector in the Economy .......... 1........................................B. The Transport System .................................................. 1C. Sector Policy and Institutional Reform .................................................................. 3............... 3D. The Road Transport Industry ............... 4E. Bank Sector Experience and Strategy ............... 5

II. THE HIGHWAY SUBSECTOR ............. 6A. Subsector Overview ............... 6B. The Federal Highway Network ............... 7C'. The State Road Networks .............. 8D. Highway Subsector Financing ............... 9E. The Federal Highway Decentralization Program ........................................ 10F. The Highway Concession Program ......................................... 11G. Highway Budgets, Policies and Programs ........................................ 12H. Highway Planning and Management Capacities ........................................ 14I. Environmental Management ......................................... 15

III. THE PROJECT ......................................... 16A. Project Origin, Objectives and Rationale ........................................ 16B. Project Description ........................................ 17C. Project Cost and Financing ........................................ 20D. Environmental and Economic Assessments ........................................ 21E. Project Risks ........................................ 23

IV. PROJECT IMPLEMENTATION PLAN ........................................ 23A. Institutional Responsibilities ........................................ 23B. Organizational Arrangements ......................................... 24C. Project Implementation Action Plan . ................................................................... 26D. Procurement Arrangements .................................................. 28E. Disbursement, Accounting and Audit Arrangements .................. ............................... 29F. Monitoring and Supervision Plan ................................................. 29

V. AGREEMENTS REACHED AND RECOMMENDATION ................................................. 31

This report is based on the findings of an appraisal mission which visited Brazil during April 1996. The mission comprisedMessrs./Ms. Jacques Cellier (Task Manager, LAIIU), Gerard Liautaud (Sr. Highway Engineer, LAIIU), Elizabeth Wang(Financial Officer, CAPPF), Rodrigo Archondo-Callao (Highway Economist Consultant), Philippe Petit (Highway ConcessionConsultant) and Vitor Bellia (Environment Specialist). Messrs. William Dillinger (LAlPS) and William Paterson (EA31N),Peer Reviewers, provided technical advice. Ms. Joy Obialor and Ms. Mariagracia Schierloh provided administrative support.Messrs. Asif Faiz, Orville Grimes, and Gobind T. Nankani are respectively the managing Division Chief, Projects Adviser, andDepartment Director for the operation.

VI. ANNEXES

1. Bank Experience with Highway Projects in Brazil ............................................. 332. Federal Highway Maintenance Strategy and Program ................................ .... ..................... 393. Federal Highway Decentralization Program .............................................. 484. Federal Hi ghway Concession Program .............................................. 515. Environmental Management Plan .............................................. 586. Institutional Capacity Analysis and Technical Assistance .............................................. 627. Project Economic Analysis .............................................. 708. Project Implementation Plan:

Table 1. Project Monitoring Indicators and Targets .............................................. 912. Project Cost and Financing .............................................. 923. Allocation of Loan Proceeds .............................................. 934. Estimated Schedule of Disbursements .............................................. 93

Chart 1. Project Implementation Time Schedule .............................................. 949. Project Supervision and Monitoring Plan .............................................. 9610. Supporting Tables and Charts:

Table 1. Transportation Expenditures by Mode .............................................. 982. Evolution of National and Transportation Aggregates .............................................. 993. Brazil's Highway Networks ............................................ 1004. Brazil's Federal Highway Network ............................................ 1015. Brazil's State Highway Networks ............................................ 1026. Brazil's Road User Charges ............................................ 1037. DNER's Revenues and Expenditures ............................................ 104

Chart 1. National Roads Department Organization ............................................ 10511. Selected Documents and Data Available in the Project File ... ......................................... 106

Map: IBRD No. 27913: Brazil - Federal Highway Rehabilitation and Decentralization Project

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Loan and Project Summary

Borrower: Federative Republic of Brazil

Implementing Agency: National Roads Department (DNER)

Poverty: Not applicable

Amount: US$300 million equivalent

Terms: Repayment in 15 years, including five years of grace, at the Bank'sstandard LIBOR-based rate for single currency loans in US dollars

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

Onlending Terms: Not applicable

Financing Plan: See para. 3.11 and Table 2, Annex 8

Net Present Value: R$3.4 billion

Map: IBRD No. 27913: Brazil - Federal Highway Rehabilitation andDecentralization Project

Project Identification Number: BR-PA-6532

I

BRAZIL

FEDERAL HIGHWAY REHAIBILITATION AND DECENTRALIZATION PROJECT

I. TRANSPORT SECTOR OVERVIEW

A. The Transport Sector in the Economy

1.01 The transport sector accounts for a rather low RS$13 billion or 4.3 percent of Brazil's GNP. Roadtransport alone accounts for about 3.2 percent. But these figures exclude the very important segments ofown-account transport, services by truck owner-operators, and private automobile use, which are notaccounted for in GNP calculations. Total transportation expenditures amount to about US$90 billionequivalent and road transport accounts for 85% of that total (Table 1, Annex 10). The transport industryhas grown at rates which have systematically exceeded those of GDP. In the 1970s, when GDP increasedat an average 8.5 percent per year, the transport industry grew at over 11 percent per year; in the 1980sand early 1990s, when GDP grew at an average 2 percent per year, the transport industry grew at anaverage three percent per year (Table 2, Annex 10).

1.02 Public investments in transport, which used to account for about 40 percent of total public capitalformation in the 1960s and the early 1970s and reached 3.3 percent of GNP in 1975, have sharplydecreased to only one percent of GNP since 1981. Road expenditures in particular had to be curtaileddrastically, which resulted in the deterioration of large portions of the networks built in the 1950s and1960s. The unsatisfactory operational and financial performance of the railways also led to under-investment, insufficient maintenance, and to the deterioration of railway tracks, motive power and rollingstock. Because of the size of the transport industry, of its direct impact upon the productive sectors, theextensive involvement of the government and the fiscal implications, the performance of the transport sectoris critical to the success of the Government's economic stabilization and growth efforts.

B. The Transport System

1.03 Institutions. Through a Constitutional mandate, the Federation is required to operate interstateand international rail, water, air and (passenger) road transport, including port and airport services, eitherdirectly or through concessions or other forms of authorization. The state expanded its direct control overthe sector in the 1950s- 1970s. It took control of the many privately-owned railroads, merging them into thefederal (RFFSA) and the Sao Paulo state (FEPASA) railways, and it has retained majority shareholdercontrol, through Companhia Vale do Rio Doce (CVRD), of the two other, primarily ore-carrier railroads.The port facilities and operations, with some exceptions, have been incorporated into the former Portobrassystem. The state, through the Portobras system, Petrobras for oil-specialized operations and CVRD forminerals, and through concessions to private companies, has been controlling the country's entire portsystem. In addition, the state owns and operates a substantial portion of the merchant fleet (throughLloydbras, Petrobras and Docenave) and is present in inland shipping. The Federation also received amandate to regulate road freight transport through a law passed in 1984, but this industry has never beenregulated in practice and has generally remained efficient. By contrast, the State's direct control over therailroads has led to their poor operational and financial performance and to inadequate railroad regulations.

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1.04 Networks. The South and Southeast regions of Brazil have a dense system of highways andrailways. Substantial portions of the highway networks have deteriorated as a result of very heavy trafficand inadequate maintenance; they now require extensive rehabilitation. Many highways requirestrengthening and some also need to be widened. There is scope, however, for the railways to increase theirparticipation in the transport along the main north-south and export corridors, which could help postponesome highway capacity investments. The Center-West, frontier region, where an unprecedented expansionof agriculture has been taking place, has yet very sparse highway and feeder road networks, which need tobe gradually developed. The bulk of the region's exports is transported by truck at a very high cost.Efficient inter-modal services based on the railways which connect the southeastem part of the region toSao Paulo-Santos and to Belo Horizonte-Vitoria and the northem part of the region to Sao Luis, as well ason some of the rivers which flow from the region's periphery, could reduce these costs. The Northeastregion has a well-developed highway network, with substantially lower traffic levels, and an extensiverailway system which is under-utilized, except for the Carajas corridor. Coastal shipping has someimportance in both intra- and inter-regional trades. The North, with its sparse population and economicactivity, has traditionally relied upon river transport for both passenger and cargo movements in theAmazon basin; there is scope to increase the efficiency of this form of transport. Air transport has anincreasing role in moving passengers and high-value goods over the long-distances involved.

1.05 Operations. There has been an alarming decline in the performance of the transport system,overall, during the past two decades. The unstable macroeconomic environment and the efforts made tocontrol inflation through reducing public expenditures and containing the rates of the public companies, ledto the postponement of needed maintenance activities and capacity investments, to the rapid deterioration ofimportant portions of the transport system, including trunk highways, railway tracks, motive power androlling stock, and port facilities; and to traffic congestion in important corridors. The cost of road transporton deteriorated and/or congested highways increased despite technological advances in the truck and busmanufacturing industries. In addition to the poor state of assets and to the lack of integration among thevarious transport systems, particularly ports and railroads, Government regulation or direct intervention imthe management of public enterprises, particularly by imposing uniform tariff policies and public serviceobligations and reducing their ability to adapt to market and technological changes, led to the inefficientoperations, to poor service quality and to the chronic financial losses that charactenrze public companies.This situation, together with the unattractive compensation packages offered in the public service, has ledto the present state of institutional degradation of the sector's public entities.

1.06 Investments. Public investments in the transport sector, through the 1970s, went towardsexpanding the transport system into the interior of the country to permit settlement and support neweconomic activities, and towards increasing transport capacity on the eastern seaboard in line with thegrowth of demand. The largest share went to the construction of the primary highways network. After thefirst oil shock, federal priorities went to the railway and port infrastructure of the main corridors, insupport of the development of the steel industry and of mineral and grain exports. In the early 1980s,public investments in the sector were scaled down drastically; and priorities gradually shifted from newconstruction to maintenance and rehabilitation. However, the Government's austerity program and thecontainment of the tariffs of revenue-earning entities led to the postponement of needed maintenance andrehabilitation works and to the deterioration of large portions of essential transport infrastructure sector-wide. Investments in transport should therefore, in the short term, be focused on the rehabilitation andmaintenance of the facilities, and on selected improvements and capacity increases to the existing systems,which are essential to the recovery of economic growth. They should primarily support the country'sagricultural and industrial growth, and export expansion objectives, and contribute to improving theefficiency and performance of transport operators.

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C. Sector Policy and Institutional Reform

1.07 The management of the transport sector is undergoing significant changes. A number of reforms,which aim at reducing government expenditures in the sector, at deregulating and privatizing transportservices so as to allow market forces to be the primary determinant of the services provided, and atdecentralizing expenditure and financing responsibilities to lower levels of government, have been recentlyundertaken or are about to be implemented. The Concession Law, enacted in February 1995, establishesthe legal framework for private concessions of public services. A proposal for a new Transport Law,which would redefine the transport system under federal jurisdiction, is currently being considered by theCongress. The following paragraphs summarize the status of these reforms.

1.08 Highways. The Constitutional reform of 1988 decentralized fiscal revenues, transferring inparticular all road user charges to States and Municipalities, but kept unchanged the distribution ofresponsibilities among the three administrative levels. The reform has therefore further affected the abilityof the Federation to rehabilitate and maintain an extensive federal highway network, and to finance neededcapacity investments. The Government has decided to reduce the size of the road network under federaljurisdiction to those highways which are clearly of national interest, to transfer the operation andmaintenance of high-traffic highways as well as capacity investments to private concessionaires wherefeasible, and to transfer other highways to state jurisdictions. A highway concession program has beendeveloped and is being implemented, with four concessions already in operation. Agreements have beenreached with the state governments on the conditions of the transfers, including on the funds needed for therehabilitation of the transferred highways. A proposal for a new Transport Law, which would reclassifythe transport system under federal jurisdiction, is before the Congress. The Government's highwaydecentralization and concession programs are described in Chapter II; the proposed project (Chapter III)would assist the Government in implementing the programs.

1.09 Railways. The Government is currently restructuring the federal railways (RFFSA) into sixregional operations and concessioning these operations to private operators, with assistance from the Bankunder the Federal Railways Restructuring and Privatization Project (Loan No. 4046-BR). About 17,000redundant staff had their employment terminated and received separation benefits partly financed under theBank loan. Many are being retrained and will receive outplacement assistance. Five concessions have beensuccessfully auctioned and contracted, and the first ones already show substantial operationalimprovements. Similarly, the Government of the State of Sao Paulo decided to restructure and to privatizeFerrovia Paulista S.A., following a similar model. Finally, the Federal Government decided to privatizeCVRD, including the railways owned and operated by CVRD.

1.10 Ports. The Government closed the National Port Holding Company "Portobras" in 1990 and theCongress approved a law for a broad deregulation of the port system in February 1993. The Port Lawliberalizes port activities, enabling private terminals to operate for public use and private port operators tocompete with the port administrations. It also decentralizes normative and tariff setting responsibilities tonewly-created local Port Authority Councils, and establishes port labor management entities. Some ports,including Santos and Rio Grande, have made progress in implementing the reform. The Government hasrecently developed an action plan for the full implementation of the reform, including the privatization ofthe ports and terminals.

1.11 Multimodal Transport. The rapid evolution and expansion of intra- and inter-regional trade,fostered by regional trade bloc initiatives and by agricultural expansion and industrial development in theinterior of Brazil, will require important changes in the national and international transport systems.Freight carriers will be required to provide efficient and comprehensive logistical services to agricultural,

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industrial and commercial shippers, and for this purpose they will have to seek innovative multimodaltransport solutions which maximize productivity and quality of service. This in turn will require a muchbetter integration of the transport systems, particularly railroads and ports, which represent the majorbottlenecks in the present transport system. The restructuring and privatization of railroads and portterminals, if adequately completed, is expected to resolve the bulk of the intra- and intermodal bottlenecks.

D. The Road Transport Industry

1.12 Road Freight Transport Industry. The country's 15,000 commercial trucking firms togetherown about 25 percent of the truck fleet, and truck owner-operators operate another 25 percent of the fleet.Own-account trucking therefore represents the remaining half of the truck fleet. Trucking firms are highlyspecialized as to the type of market served and service provided, including routes and products. Largerfirms concentrate their services on denser routes, while smaller firms appear more frequently in less denseor more specialized links. Owner-operators generally operate older, medium-size trucks with conventionalopen bodies, on medium and long-distance hauls. Own-account trucking is most important in pick-up anddelivery services in the cities, and in the inter-city transport of cargoes which require specialized equipment.

1.13 The trucking industry overall is efficient. Truck rates reveal a competitive position in relation torail transport. The share of operational expenses to revenues varies from 50 percent to 70 percent, andtotal expenses are about 90 percent of revenues. There is no evidence of above-normal profits.Investments, however, have tended to decline in relation to GNP since the mid-1970s. Medium-size truckshave been substituted for smaller trucks and pick-ups in urban services, and for heavier trucks in inter-cityservices. The number of owner-operators has been decreasing gradually since the 1970s and their fleet israpidly aging.

1.14 The trucking industry is largely unregulated. The role of the Government has essentially been toprovide and maintain the road infrastructure. The Government influenced operations only indirectlythrough pricing and taxation of inputs, and license fees. In 1983 a law was passed authonrzing theGovernment to regulate the industry, and some important restrictions were introduced. But insufficientpolitical support and means of enforcing legislation have made the impact of these restrictions negligible.In 1990, the Government revoked all these restrictions.

1.15 Road Passenger Transport Industry. Passenger transportation in Brazil is considered to be apublic service. Entry into the sector is regulated by government through licenses or concessions. Federal,State, and municipal governments set rates, routes, frequencies, and safety and quality standards inpractically all market segments. There are a few publicly-owned and operated firms in some of the largestcities. Private enterprises, however, are predominant in number and hold the largest share of the market.The majority of these firms are small to medium in size, and controlled by one entrepreneur or by a familygroup. In the interstate segment and in dense inter-municipal connections, however, there are a few firmsproviding services in complex networks, operating fleets of more than a thousand buses. In the urbansegment, large firms are rare; they usually serve a strictly defined geographic zone, operating a fleet of upto two or three hundred buses from a single garage.

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E. Bank Sector Experience and Strategy

1.16 The Bank has made 31 loans in the transport sector since the early 1960s: 15 for highways andfeeder roads, six for railways, two for ports, and eight for urban transportation, in addition to financingrural roads under a number of agriculture projects. Until the mid-1970s, the projects concentrated on theexpansion of the trunk highway network and on the improvement of the railway and mass transit systems.In subsequent years, emphasis gradually shifted to the maintenance and rehabilitation of the interstate andtrunk highway network, to the planning and implementation on a decentralized basis of feeder roadsprograms, to the rehabilitation of important railway corridors, and to the improvement of public bustransport and traffic management in the major cities. More recently, the Bank has been supporting therehabilitation and decentralization of urban train systems with four loans, highway rehabilitation,maintenance and decentralization with one loan to the Federation and five loans to states, and therestructuring and privatization of the federal railways with a recently approved loan.

1.17 The Bank's involvement in the transport sector has been successful. The projects' physicalobjectives have generally been met although the more recent difficult economic conditions and relatedfunding problems have sometimes caused delays. Progress has been made on policy reforms andinstitutional strengthening though it has taken more time than expected, due to the size and complexity ofthe sector, the large number of government agencies and public enterprises involved, and the difficulty ofreaching the needed consensus for policy reforms. Under the recently-completed Highway Managementand Rehabilitation Project (Loan No. 3169-BR), the Federal Government, in consultation with the stategovernments, developed a broad reform and decentralization of the highway administration. The ongoingState Highway Management Projects have already achieved substantial progress in re-orienting theparticipating states' highway programs to ensure appropriate priority for maintenance, and in strengtheningthe planning and maintenance management capabilities of the DERs.

1.18 The assistance of the Bank to the transport sector of Brazil will remain in support of broadercountry objectives, particularly: (a) stabilization and consequent need to contain public expenditures,increase revenue mobilization and to improve resource utilization; (b) economic growth, ensuring efficientand reliable infrastructure services to targeted growth sectors of the economy; (c) redefinition of the role ofthe state, strengthening its regulatory functions, withdrawing from operations and promoting private sectorparticipation in infrastructure; (d) administrative decentralization; and (e) environmental management.

1.19 Emphasis will be upon the formulation and effective implementation of appropriate transportpolicy and institutional reforms including: (a) restructuring and privatization of railways and ports; (b) re-design of sector regulations, establishment of appropriate regulatory agencies, and effective implementationof regulatory reform, which, together with efficient pricing mechanisms and privatization measures, aim atrestoring the role of market forces in the sector; (c) institutional reform, including effective decentralizationof government responsibilities, seeking an appropriate balance between fiscal revenues and responsibilities,strengthening the normative and monitoring functions at the center, and the planning, management andenvironmental control capabilities of the decentralized entities; (d) privatization of operation andmaintenance services through concessions and management contracts; and (e) public investmentprogramming and private sector investment promotion based on appropriate economic, environmental andproject finance analyses, aiming in particular at facilitating intra- and inter-regional trade flows.

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II. THE HIGHWAY SUBSECTOR

A. Subsector Overview

2.01 Brazil's road network has a total length of about1.7 million km. The network is classified into three Table 2.1: Brazil's Road Networks (Thousand Kn.)

administrative levels: (a) a federal network, currently Jurisdiction Paved Unpaved Total

about 67,500 km, which is under federal jurisdiction Federal 52 15 67

(section B); (b) state networks, totaling about 200,000kmn, which are under the jurisdictions of the 26 states, State 85 114 199two federal territories and the Federal District (section Municipal 15 1,376 1,391

C); and (c) municipal networks extending over some 1.4 Total 152 1,505 1,657

million km, which fall under the jurisdictions of over4,000 Municipalities (Table 3, Annex 10).

2.02 The financing of the highway subsector underwent substantial changes over the last decade. Roadexpenditures used to be funded mainly through revenues from road user taxes, which were shared betweenthe three levels of government and earmarked for that purpose. In the 1980s, however, tax earmarking wasgradually discontinued. Also, the 1988 constitutional and fiscal reforms have transferred the bulk of roaduser tax revenues to the states and municipalities, but the distribution of road expenditure responsibilitiesremained unchanged (section D). The reform has affected the ability of the Federation to rehabilitate andmaintain an extensive federal highway network and to finance needed capacity investments. In order tocorrect the imbalance between revenue and expenditure responsibilities, the Government has decided to: (a)decentralize responsibilities for highways which are not clearly of national interest to state jurisdictions(section E); (b) transfer responsibilities for operation and maintenance of high-traffic highways and, wherefeasible, new capacity investments to private concessionaires who would recover costs through tolls(section F); and (c) implement appropriate policies and mechanisms to ensure adequate financing for publicroad expenditures (section D).

2.03 Highway administration responsibilities are shared between the National Roads Department(DNER), the 27 state road departments (DERs), and the 4,000 or so municipalities. DNER and many ofthe DERs developed into large organizations to administer the extensive construction programs of theprevious decades. There are still substantial needs for building new roads, in particular in the Center-WestRegion, and for capacity investments in the South and Southeast regions. However, since large portions ofthe networks are now reaching a critical age, highway maintenance has or should become the main activityof most agencies. Therefore, the agencies have to make important institutional adjustments, in particular todevelop appropriate road maintenance planning and management systems, to rely more systematically onthe more efficient private contractor industry rather than force account for their routine maintenanceactivities, to develop and supervise highway concessions, and to strengthen environmental management.DNER and some DERs have already undertaken such reforms under ongoing Bank-financed projects. Butthere are significant technological and institutional gaps among the various agencies (sections G & H).

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B. The Federal Highway Network

2.04 Brazil's federal highway network has a total ---

length of approximately 67,500 centerline km, of which Fig 2.1 Paving Works52,500 km (or 78%) are paved and about 15,000 km (or E 60,000

22%) are unpaved. It represents a total asset of nearly Xd 50.000

US$12 billion equivalent. It carries most of the country's f 40,000long distance traffic. Road users annually spend an s 30,000amount equivalent to almost twice its replacement value 20,000-for operating their vehicles on this network. About 90% X 10:-0

of the paved network consists of flexible structures with Egranular base-course overlaid either by asphaltic concrete 0 01960 1970 1980 1990 2000carpets or by double-surface dressings in the proportion Year

of 74% to 26%. Rigid or cement-concrete pavementsrepresent less than 1% of the paved network. Most paving works occurred between 1955 and 1985 at arate averaging 1500 km per year (Fig 2.1). Between 1985 and 1995, about 5000 km only were paved. Thenetwork is mostly unpaved in the northern and northeastern regions, particularly in the states of Para,Amazonia and Roraima. In the other regions, the federal network is fairly evenly distributed by surfacetype (Table 4, Annex 10).

2.05 Traffic volumes on the paved network cover a Fig 2.2 Traffic Distribution on the Federalwide range, from less than 1,000 vehicles up to 20,000 Network (1986)to 40,000 vehicles per day on the most heavily trafficked 16000dual carriageway sections (Fig 2.2). Average annual 14000 tdaily traffic volumes on two-lane rural highways 1000 generally range between 1,000 and 5,000 vehicles per 8000day, with the highest densities occurring in the southern 6000 sJstates. Over the last 10 years, the average traffic ' -

2000 volume has increased at about 3.0% per year; the mean o * . 3.-daily traffic rose steadily from about 1600 vehicles per o 6 g O o, 6 o : °°day in 1985 to about 2,100 vehicles per day currently. eOn the unpaved network, traffic volumes are Average Daily Traffic A

considerably lower and seldom exceed 1,000 vehiclesper day. About one third of the network (5,000 km), however, would be eligible for upgrading and pavingas it presently carries more than 250 vehicles per day. The typical traffic composition on the federalnetwork is 51% light vehicles and 49% commercial vehicles. Axle-load measurements carried out in 1994on a representative sample of the network indicate that at least 10% of the trucks are overloaded, withsingle axle weight exceeding the 10-ton maximum legal limit, typically ranging between 11 tons and 15tons. However, an economic analysis of overloading confirmed by world-wide experience shows thateconomic gains from overloading generally exceed economic maintenance costs (Annex 7, paras. 35-39).

2.06 For many years, particularly between 1975 and 1990, the maintenance condition of the pavednetwork remained poor as the funds made available to DNER only allowed to start addressing the severemaintenance backlog accumulated during the previous two decades. The proportion of the network in poorcondition remained persistently in the vicinity of 30% (Fig. 2.4). Between 1978 and 1996 some 27,000 kmhave been resurfaced or strengthened at a total present cost of about US$6.5 billion (Fig. 2.3). As aconsequence, the condition has improved and the proportion of the network length in poor condition (asmeasured by a roughness index, IRI, higher than five) fell to about 20% in 1992 and to about 11% in early1996 (Table 2.2 and Fig 2.4). The proportion of weak pavements with average deflection values higher

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than 0.5 mm to 0.6 mm (i.e., with modified structural number less than 4) was also in the order of 10% inearly 1996, as compared to about 50% between 1987 and 1990.

Table 2.2 Federal Network Condition (Paved) Fig 2.3 Length of Network Rehabilitated andResources Spent

Network Condition % Achievements (Cumul.) Km Rehab US$M SpentYear Good Fair Poor Km Rehab USSM Spent

1979 24 59 17 3,206 854 5007 ,0001984 30 42 28 7,703 2,321 40,000 7,0001986 39 36 25 12,931 3,029 Km 6,0001989 37 34 29 19,272 4,323 30,000 USM - 5,0001992 33 45 22 23,135 5,316 4,0001996 43 46 11 28,318 6,533 20,000 30001998 50 43 7 31,568 6,852 2,0001999 54 42 4 34,818 7,191 10,000 1,0002000 57 40 3 38,468 7,549 0 -1 ,

2001 58 40 2 42,118 7,907 0 Co N _I- w co o o 0 0CD C 0 0

Good ]RI <3, Fair 3<IRI<5, Poor IRI>5 N _ 0_Values in italic are projections Year

Fig 2.4 Evolution of Maintenance Condition Fig 2.5 Evolution of Deflection

100% EE-

80% - u~~~~~~~~~~ 0.9 V:

60% O 0.40 c 0 0.0g 40%/

u 0.620% o. I

0% - ; 0.4-----± , . -

1-COCOCOCoCoCoCoOC ~~~~~~~~1975 1990 1985 1990 1996 2000Co Co Co C Co Co Co Co 0 0_ _ _ _ _ _ _ _ N N Year

Year

C. The State Road Networks

2.07 The road networks which are under the jurisdictions of the states of the Federation have a totallength of approximately 200,000 km, of which 85,000 km (or 43%) are paved, and about 115,000 km (or57%) are gravel or earth roads. These networks include "transitory" roads (about 25,000 km of which14,000 km are paved), which were considered eligible to become federal (Table 5, Annex 10). The lengthof the state road networks is about only three times the length of the federal highway network in every state,with the exception of the northern region where the density of state roads is extremely low (0.3 km per 100sq. km) because of the environmental conditions and low population in Amazonia. Many highway sectionswhich are not of national but of regional or local interest have been built in the past by the FederalGovernment and have remained under federal jurisdiction. The decentralization component of the projectwould help the Government to transfer these federal highways to the states (paras. 3.05-3.06).

2.08 Traffic on the state roads is generally smaller than on federal highways. It varies widely acrossstates, reflecting sharp differences between levels of income and development. For example, on the pavednetwork, average daily traffic (ADT) ranges from 500 to 5,000 vehicles per day in the southeastern regionand from 50 to 500 vehicle per day in the northern region (Table 2.3 hereafter). On the unpaved network,

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the ADT is generally below 100 vehicles perday in the northern part of the country, but Table 2.3 Traffie volumes on the paved state network (1992-1994)

may reach or exceed 200 vehicles per day in Region Normal ranee of ADT Mean ADT value

the most developed southern states. As is the North & North East 50-500 200

case for the federal network, traffic. . . . ~~~~~~~Center West 200-1500 600

composition on state highways is generallyevenly shared between light and commercial South 400-2,500 1000

vehicles. Overloading above the maximum South East (Sao Paulo) 500-5000 2000

legal single axle load of 10 tons is alsofrequent.

2.09 With the exception of the most heavily trafficked roads in the southern states, where pavementstructure and geometry are often similar to the federal highway standards (relatively thick asphalt concretewearing courses), the structural capacity of the state roads has been designed in accordance with the lowtraffic volumes. Pavements are of the flexible type, consisting of naturally-occurring gravel base-coursecovered with surface designs or thin bituminous mixtures (3 to 4 cm of asphaltic concrete or sand-asphaltcarpets) with structural numbers generally below 4.

2.10 Comprehensive and accurate information on the maintenance condition for the entire state roadnetworks is not available. However, a survey carried out in 1995 has provided data from an array of 14states which covers the five regions of the country. Overall, the surface condition of the state networks issomewhat worse than the present condition of the federal network. About 18% of the length of the pavednetwork is now in critical or poor condition. In addition, nearly 50% is more than 10 years old, thusapproaching the end of its service life. Therefore, efficient rehabilitation and resurfacing programs are nowurgently required on the state networks, in order to prevent the proportion of roads in poor condition fromreaching the level observed on the federal network throughout the 1980's. The ongoing Bank-financedstate highway management projects are addressing this issue in six states.

D. Highway Subsector Financing

2.11 Road User Charges. The system of road user taxes underwent substantial changes with theconstitutional and fiscal reforms of 1988. The federal level lost its power to impose taxes on petroleum andalcohol products and on motor-vehicle ownership, retaining only a petroleum import tax (IIP). The statesgained from the inclusion of petroleum and alcohol products and of inter-state and inter-municipal transportservices in the base of the value added tax (ICMS) and the right to tax motor-vehicle ownership. Themunicipal level increased its participation in revenues from the ICMS (from 20% to 25%) and from themotor-vehicle ownership tax (IPVA, from 40% to 50%); and they gained authority to impose a tax on salesof gasoline and alcohol (IWC). A summary of current charges is shown in Table 6, Annex 10.

2.12 The ICMS imposed on petroleum and alcohol products has resulted in a net increase in taxrevenues and in an improved structure of road user taxes, as compared to the previous tax, which waslevied at a reduced rate on diesel oil and from which alcohol was exempted. But the distribution ofrevenues among the three administrative levels has been adversely affected, and is no longer consistent withthe distribution of responsibilities. States and municipalities now recover the total costs of operation,maintenance and rehabilitation of their road networks, as well as a substantial portion of their roadupgrading and construction expenditures (Table 6, Annex 10). Some state and municipal governments, inparticular in the south and the southeast regions, where road traffic is higher, recover more than their totalroad expenditures. On the other hand, the Federation has lost all fiscal revenues from road users, with the

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exception of the portion of the petroleum import tax revenues paid by road users. A policy for road cost-recovery was developed under the Highways Management and Rehabilitation Project (Loan no. 3169-BR).The Federal Government's decentralization and concession programs are aimed at correcting this imbalancebetween highway expenditures and revenues at the federal and state levels (see sections E & F).

2.13 The prices of motor-vehicle fuels at the pump, in the first quarter of 1997, were about US$0.79and US$0.44 equivalent per liter of gasoline (which includes up to 20% of ethanol) and of diesel-oilrespectively. These prices have been consistently maintained well above international prices, including thenecessary adjustments for taxes, distribution costs and retailers' margins.

2.14 Road expenditures used to be funded mainly through revenues from road user taxes, which wereshared between the three levels of government and earmarked for that purpose. In the early 1980s,however, tax earmarking was gradually discontinued with a view to restoring central control over publicexpenditures. The road agencies have consequently seen their resources erode drastically since generalbudget allocations did not make up for the loss of earmarked funds. Their total reliance upon the lesspredictable transfers from general revenue has badly affected their construction and maintenance programs.Federal and state road expenditures are now funded from general revenue. The project would assist DNERand DERs in: (a) concessioning high-traffic highways to ensure reliable funding from road users (para.3.07); and (b) preparing road programs based on sound technical and economic prionty criteria, and toensure adequate funding for their rehabilitation and maintenance programs (para. 3.09).

E. The Federal Highway Decentralization Program

2.15 In order to correct the imbalance between highway revenue and expenditure responsibilities at thefederal and state levels, the Federal Government has decided to reclassify the highway network, onlymaintaining under federal jurisdiction the main inter-regional and interstate highways of national interest,and transferring to state jurisdictions highways which are predominantly of local interest. The Governmenthas defined the highways of national interest to remain under federal jurisdictions as those which:(a) connect the states' capitals; (b) link with other major modes of transport to provide inter-regionalconnections; (d) promote international connections; and (d) ensure or fulfill national defense or safetypurposes. The federal and the state administrations have completed the negotiations regarding the proposedreclassification. The resulting highway network which would remain under federal jurisdiction wouldcomprise about 50,000 km, of which 40,000 km are paved and 10,000 km are unpaved highways,essentially located in Amazonia. The other highways, which would be transferred to 18 state jurisdictions,represent some 17,500 km, of which 12,500 km are paved and 5,000 km are unpaved (Annex 3, Table 1).Draft legislation (Sistema Nacional de Via,do) is being reviewed by the Congress in order to formalize theproposed reclassification and decentralization. The decentralization program is described in Annex 3.

2.16 Three states (Minas Gerais, Rio Grande do Sul, Parana) would assume over 50 percent of the totallength of the highways to be transferred (Table 1, Annex 3). The transfers would represent an increase ofabout 25 percent of current network responsibilities for Minas Gerais and Rio Grande do Sul, and 13percent for Parana. In order to alleviate the impact of such transfers on the states' finances, the stategovernments have prepared and undertaken plans to concession a significant portion of the highways to betransferred, together with highways which will remain under federal jurisdiction and state highways(Section F). The Federal Goverment has recently delegated these highways to the states in order to enablethem to invite bids for concessions. In the other states, the increases of the states' network responsibilitiesremain below 15 percent and/or represent a small length (Table 1, Annex 3).

- I1 -

2.17 The Federal and the state governments have agreed, in order to minimize the impact of the transferson the states' expenditure responsibilities, that highways would be transferred in good condition or that theFederal Government would provide the resources necessary to rehabilitate those in poor condition. TheMinistry of Transport has negotiated highway decentralization agreements with the 18 participating statesin order to specify the highway sections to be transferred, and the respective responsibilities of the Federaland state governments for the execution and financing of the rehabilitation works and for operation andmaintenance until the above-mentioned legislation is passed by the Congress. Decentralization agreementshave already been signed with the states of Minas Gerais, Rio Grande do Sul, Parana and Bahia. DNERhas negotiated and would enter into delegation agreements with the DERs in the seven states of MinasGerais, Rio Grande do Sul, Parana, Bahia, Rio de Janeiro, Goias and Ceara, in order to delegate theexecution of the rehabilitation works within agreed technical and financial parameters. These seven stateswere selected on the basis of the size of the rehabilitation program in the state and the capacity of the DERto implement it. The proposed project would assist the federal and the state governments in effectivelyimplementing such agreements (paras. 3.05 and 3.06).

F. The Highway Concession Program

2.18 In February 1995, the Congress passed a revised Concession Law which allows the Government totransfer highways, as well as other public facilities and services, to private concessionaires. In September1996, the Congress passed another law (the Delegation Law) to authorize the Federal Government todelegate federal highways and other public infrastructure facilities to states and municipalities for theirsubsequent concessioning. On the basis of these laws, the Federal Government and some state governmentshave started developing and implementing highway concession programs, with a view to increasing roadcost recovery and to improving highway management. Private concessionaires would operate, rehabilitateand maintain the highways, and, in some cases, carry out and finance investments, and would recover thesecosts from road users through tolls. The governments or highway agencies remain responsible foridentifying candidate highways, defining initial works and maintenance standards, calling for bids andevaluating proposals from prequalified investors, as well as for supervising the concession contracts.

2.19 DNER has prepared a concession program which would consist of transferring high-traffic federalhighways totaling about 10,000 km to private operators over the next four years. However, a number ofstates, including Rio Grande do Sul, Parana, Santa Catarina and Minas Gerais have also prepared highwayconcessions programs which would include both federal and state highways. The Ministry of Transport, inline with the Government's decentralization objective and on the basis of the recent Delegation Law, hasdelegated federal highway sections totaling about 5,000 km to the first three states for concessioning.Negotiations are underway with the state of Minas Gerais for further delegations. DNER will beresponsible for concessioning the remaining highway sections included in the program, and for monitoringthe concessioning of the delegated highways (Annex 4).

2.20 DNER has completed a first phase of the program, which consisted of concessioning five highwaysections totaling about 850 km, including the Niteroi Bridge, the Dutra (Rio de Janeiro - Sao Paulo)highway, the Porto-Alegre-Entrada Guaiba highway, the Alem Paraiba-Teresopolis highway, and the Juizde Fora-Petropolis-Rio de Janeiro highway, which had already been tolled in the past. The totalinvestments required on these five sections are estimated at about US$1.4 billion equivalent over theconcession period (Annex 4). This first phase of the program suffered delays due to litigation byunsuccessful bidders and to the unavailability of long-term private debt finance in Brazil, but theconcessions are now in operation. Since concessionaires have been unable to secure private debt financing,except for a relatively small IFC "B" loan currently being finalized for the Dutra highway, the National

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Bank for Social and Economic Development (BNDES) had to provide most of the necessary debt financing.Also for this reason, the Government decided to dualize two important highways (Belo Horizonte - SaoPaulo and Sao Paulo - Curitiba - Florianopolis) with public funds and borrowings from the IDB, forsubsequent concessioning to private operators.

2.21 The experience developed under the first phase is being incorporated into the subsequent phases ofthe program, including with regard to the sharing of various risks. In particular, improved mechanismshave been developed and guarantees would be offered for toll adjustments with inflation, servicing offoreign debts, repatriation of dividends, and non-judicial resolution of disputes. DNER is also preparingfor a broader dissemination of the program, with a view to attracting interest from international investorsand financiers, and to increasing competition. The Government has also shown interest in the Bank'sguarantee program, and it was agreed that, at the request of the Government, the Bank would assess thefeasibility of partial risk guarantees on loans to concessionaires for specific highway concessions.

2.22 In order to implement the highway concession program and to supervise the highway concessions,DNER has recently established a Concession Department, headed by a Director who reports directly to theDirector-General (Chart 1, Annex 10). The department is responsible for all activities related to highwayconcessions, including planning, studies, development, procurement and supervision. The supervision ofthe concession contracts would be delegated to DNER's relevant districts. The proposed project wouldinclude technical assistance and staff training to help organize and strengthen the new ConcessionDepartment and establish adequate concession supervision capabilities in the relevant DNER districts inorder to implement the concession program efficiently (para. 3.08 and Annex 4).

G. Highway Budgets, Policies and Programs

2.23 With the elimination of the road fund and the fiscal reform, DNER's annual budgets decreasedsharply during the 1980s. Expressed in 1996 dollar value, its annual resources fell from about US$3.5billion in 1980 to about US$1.5 billion in 1990. Over the last five years, they ranged between US$850million and US$1.7 billion, averaging about US$1.2 billion (Table 7, Annex 10). Of this total annualallocation, about US$400 million are spent on wages and other current expenditures, and US$160 millionon debt service. During the 1980s, expenditures on new construction and capacity investments weredrastically reduced from US$720 million in 1980 to US$290 million in 1990, and to about US$150 millionin 1992-96, but have more recently increased to a level of about US$300 million per year, with the IDB-financed dualization works. During the 1980s, the average annual expenditure incurred for rehabilitationonly (in 1996 dollar value) was in the order US$350 million representing about 36% of total roadexpenditures, and was reduced to about US$315 million over the last six years still representing about 62%of total road expenditures. Resource allocation for routine maintenance averaged about US$300 millionper year between 1978 and 1985 representing 22% of total road expenditure and then fell to about US$100million over the last 10 years with a particularly bad period between 1989 and 1992 when they weredrastically reduced to record low values between US$30 and 80 million per year (1996 dollar value). Onaverage, over the years, routine maintenance has represented about 18% of total road expenditure.

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2.24 DNER analyzed alternative network rehabilitation Expenditures in New Const & Pavingand maintenance policies under budget constraints using theHDM-III and EBM models. The analysis indicates that " 600

annual rehabilitation budgets of less than US$200 million ' 500

would lead to the further deterioration of the current federal = 400-

network, bringing the proportion in poor condition to about 300 -

30% , thus validating the historical evidence mentioned in e5 200

para. 2.06 (Annexes 2 and 7). The optimum rehabilitation a-

and maintenance policies, assuming no decentralization or , 100

concessions, would require annual budgets of about 0 1 1

US$300-350 million for rehabilitation and periodic 1975 1980 1 9Yar 1990 1995 2000

maintenance and about US$100 million for routinemaintenance over the next four years (Annex 2). Suchpolicies would maximize economic benefits and keep the DNER Annual Resourcesproportion of pavements in poor condition to below 5%. 2 4,000

The optimum policies for enhancing the capacity and level m 3,500

of service of high-traffic highways would require about 3,000

US$500 million over the next five years, excluding the _ 2,500a~2,000

network intended for concessions. > 1500

1,000

2.25 In line with its current efforts to contain public z 500 -

expenditures, the Federal Government has decided to select .a policy which would limit annual budgets for 1975 1980 1985 1990 1995 2000

rehabilitation, maintenance and operational improvementsto about US$350 million. Compared to the optimum policywhich calls for total rehabilitation expenditures of about Expenditures in RehabilitationUS$1.6 billion over four years, the selected policy requires E

total rehabilitation expenditures of US$900 million over - 500

four to five years. The Net Present Value (NPV) of the O 400

selected program is still equal to 90% of the NPV of the Toptimum program. The selected strategy will effectively @ 300

preserve the federal highway network, including the 200

highways to be transferred to the states. It will reduce the 1

proportion of pavements in poor condition to less than 2% Inover the next five years. The selected policies are described 0 I- 1

1975 1980 1985 1990 1995 2000 2005in Annex 2, together with their expected impacts. Year

2.26 The DERs' annual budgets have also decreased Expenditures in Routine Maintenanceduring the 1980s, with the elimination of the road fund, toan aggregate amount of about US$1.0 billion in 1989. In E 300

the 1990s, after the fiscal reform which transferred road , 250 --

user charges to states and municipalities, they gradually O 200

increased to the level of about US$1.5 billion in 1995. 1Many state governments, especially in regions in which thehighway networks are less developed, have continued to 1give priority to new construction or paving projects, at the 5- -

expense of maintenance or rehabilitation of existing X o 0_highways. Portions of these networks are now entering into 1975 1980 1985 1990 1995 2000 2005

a process of rapid deterioration. However, a number of Year

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state governments are already giving more attention to the maintenance of the state highway networks, andare establishing effective maintenance planning and management systems under Bank-financed statehighway management projects.

H. Highway Planning and Management Capacities

2.27 DNER's organization still reflects its past objective of expanding the federal highway network. Itschronic funding problems have gradually weakened its capacity to plan and manage an extensive highwaynetwork effectively. As in most other Government agencies, the lack of clear goals and of managementautonomy, and continuity, as well as inadequate staff compensation, management and developmentpolicies, have resulted in low staff motivation and accountability, and in inadequate performance. Theproposed decentralization and concession programs are expected to reduce DNER's operationalresponsibilities, but DNER will continue to be responsible for the management of a substantial federalnetwork, and will need a capacity to develop and supervise of highway concessions. Under the HighwayManagement and Rehabilitation Project (Loan 3169-BR), the Ministry of Transport and DNER haveinitiated actions to reorganize the agency. The Concession Department was established. Also, DNER'sAdministrative Council was recently reformed, with representatives from the Ministries of Planning,Finance and Transport replacing DNER Department Directors, and with a clear mandate to reorganizeDNER in line with its reduced operational responsibilities resulting from decentralization, concessions, andmaintenance management contracts. The proposed project would provide technical assistance and stafftraining to help DNER prepare a strategic plan and carry out its reorganization and staff developmentprogram (para. 3.1 0).

2.28 DNER's Planning Division is responsible for expenditure planning and progranmming on the federalhighway network. With technical assistance and training of staff financed under the recently-completedHighway Management and Rehabilitation Project (Loan No. 3169-BR), the division reactivated DNER'spavement management system which was created in the early 1980s, updated the road network database,and developed efficient network maintenance and investment strategies and programs on the basis ofanalyses carried out with the Bank-developed Highway Design and Maintenance Standards (HDM-III)Model and the Expenditure Budgeting Model (EBM) (Annex 2). Also, a bridge management system wasdeveloped under the same project, and is being implemented in order to effectively monitor and plan for themaintenance of about 5,000 bridges on the federal network. With these new tools and trained staff, thePlanning Division is now capable of effectively carrying out its planning and programming responsibilities.However, a number of institutional weaknesses still need to be addressed to ensure the effectiveimplementation of the programs, in particular: (a) the lack of coordination among the various departments(Planning, Engineering, Operations, and Concessions); (b) the limited capacity of the EngineeringDepartment to contract and effectively supervise the detailed engineering studies and the preparation of thetender documents in order to ensure their consistency with the policies based on the HDM/EBM analyses ofthe Planning Division; and (c) the insufficient technical capacity of the Engineering Department to contractthe supervision works and to effectively exercise its quality control and technical audit functions. In orderto address these issues, DNER has recently established a Coordinating Committee, strengthened the studiesand supervision divisions of the Engineering Department, improved the forms of engineering andsupervision contracts, established a central audit group, and started to implement a computerized projectmanagement system. The proposed project will provide technical assistance and staff training to ensure theeffective implementation of the program (para. 3 .10).

2.29 DNER has a long tradition of contracting out capital works and maintenance operations to privatecontractors. Little work, if any, is now being carried out by force account. With the exception of the

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highways delegated to the DERs (about 8,000 km), the rest of the paved network (about 80% in length) iscurrently maintained through private contractors under input and unit price form of contracts (Annex 2,section H). This policy has enabled DNER to substantially improve the results of its maintenanceprograms as compared to previous force account operations. But the complexity of these contracts, whichinvolve many items of works in small quantities, and the insufficient capacity of DNER to effectivelysupervise such contracts and control the quantity and quality of the works on site, have led to numerouscontract modifications and price increases. In order to reduce this administrative burden and to improvethe efficiency of its routine maintenance operations, DNER management recently decided to experimentwith performance-based maintenance management contracts. DNER is now procuring such pilot contractsin each of the regions. On the basis of the results of the pilot contracts, DNER will prepare a plan togradually increase the use of such form of contract. The project will provide technical assistance andtraining of staff to monitor the pilot contracts, develop a performance-based maintenance managementprogram, and effectively implement and monitor such program (para. 3.10).

I. Environmental Management

2.30 Brazil has appropriate environmental protection legislation. In particular, any major civil worksproject is subject to an environmental impact assessment to measure its effects on the inhabitants and onthe natural environment in the project area. For investments likely to have negative impacts, funds shouldbe included to mitigate any adverse effects. Under the Highways Management and Rehabilitation Project(Loan 3169-BR), the Federal Government and DNER have prepared environmental standards andguidelines for the transport sector in general and for the highway subsector in particular; and they havestrengthened their capabilities for implementing and for monitoring compliance with these standards. Inparticular, DNER's environmental unit is staffed with one economist and three highway engineers, whohave received appropriate training. With technical assistance, the unit has developed a manual ofenvironmental norms and instructions (the Environmental Manual, EM) which, after approval by DNER'sAdministrative Council, has been put into effect. The unit has established a computerized environmentalmanagement system, and effectively supervised a number of environmental studies carried out byconsultants (Annex 5). It has also developed a methodology to assess environmental degradations alongexisting highways, and to incorporate the necessary corrective designs and solutions into highwayrehabilitation engineering and works contracts.

2.31 The environmental management performance of the DERs is still mixed. Many DERs do not haveyet appropriate environmental norms or guidelines nor a capacity to implement them. But the seven DERsparticipating in the project, which have benefited from Bank or IDB-financed projects, have alreadyestablished an institutional capacity to analyze the environmental impacts of their projects, take them intoaccount at the planning and design stages, and to effectively implement the necessary prevention ormitigatory measures. Under the project, they will be required to adopt DNER's EM or equivalent, and tostrengthen their environmental units and procedures as necessary to effectively supervise theimplementation of the EM. The terms of the contracts for highway engineering, road works and concessionswould specify the environmental responsibilities of the consultants, contractors, concessionaires and DNERor the DER, with appropriate references to the EM. The environmental units of DNER and the DERs, andthe Project Management Consultant would carry out appropriate supervision. In particular, the projectwould help implement the necessary surveys, designs and works under the rehabilitation subprojects torepair and prevent road-related environmental degradation (para. 3.15 and Annex 5).

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III. THE PROJECT

A. Project Objectives, Origin and Rationale

3.01 Project Origin. The project's concept originated from three main factors: (a) Brazil's broaddecentralization and privatization objectives which were formalized in the 1988 Constitution, and the recentregulation of public service concessions (Concession Law); (b) the Government's inability to adequatelyfund the maintenance of the highway network under federal jurisdiction and the consequent fundingdifficulties experienced under the recently-completed Highway Management and Rehabilitation Project(Loan No. 3169-BR); and (c) the experience gained with strengthening the maintenance capacity of statehighway agencies under several state highway management projects. Following the transfer of road usertax revenues from the federation to the states and municipalities, many states had to assume de factoresponsibilities, on a case by case basis, for essential works on federal highways which could not be fundedfrom the federal budget. But it became clear that in order to permit effective maintenance, managementand financing of the main highway network, the latter had to be reclassified, and highways had to betransferred to state jurisdictions so as to correct or to alleviate the existing imbalance between revenue andexpenditure responsibilities. State govermnents agreed to assume responsibilities for certain highways onthe condition that they would be transferred in good condition or with the funds necessary for theirrehabilitation. On this basis, the Federal Government presented a draft law to the Congress (SistemaNacional de Via,do, SNT) to reclassify the national transport system, including the highway network. Italso negotiated agreements with the state governments to transfer responsibilities and to implement andfinance the necessary rehabilitation works. At the same time, the Federal Government and some stategovernments developed programs to concession high-traffic highways.

3.02 Project Objectives. The project' s main objective is to improve and maintain the serviceability ofthe main highway network on a sustainable basis, with a view to reducing road transport costs. Specificobjectives are to:

(a) rehabilitate federal highways;

(b) decentralize highway responsibilities to state governments;

(c) increase the participation of the private sector in the management and financing of highwaysthrough concessions and maintenance management contracts; and

(d) strengthen the capabilities of DNER and the DERs to prepare, contract and monitor efficientnetwork rehabilitation and maintenance programs and highway concession projects.

Achievement of these objectives would be measured and monitored during implementation through a set ofkey indicators (para. 4.09 (d) and Annex 8, Table 1). It is expected that the federal and the transferredhighway networks would be in a satisfactory condition at project completion, and that only routine andpreventive maintenance would be necessary thereafter.

3.03 Rationale for Bank Involvement. The Bank's country assistance strategy for Brazil, discussed bythe Board of Executive Directors on June 29, 1995 with an update on June 20, 1996, identifies humancapital and infrastructure development as the principal bottleneck to Brazil's social and economicdevelopment. The emphasis is on structural reforms aimed at stabilization and resumption of broad-basedgrowth, including the deregulation and privatization of infrastructure services, efficient allocation of

- 17 -

resources in the public sector, and on rebuilding and expanding a deteriorated and insufficientinfrastructure in partnership with the private sector. The proposed project is fully supportive of thisassistance strategy. By helping decentralize highway responsibilities, concession high-traffic highways toprivate operators, and eliminate the maintenance backlog, the project will contribute to reducing thefinancial burden on public sector finances, and to achieving a better balance between revenues andexpenditures at the federal and state levels. By helping implement efficient highway rehabilitation,maintenance and operational improvement programs, the project will help reduce the cost of road transportand thereby contribute to economic stabilization, to the resumption of growth in agriculture, industry andtrade, and to increased export competitiveness.

B. Project Description

3.04 The project would consist of three main components:

(a) a highway decentralization component, including:

(i) technical assistance and training services to strengthen the capacity of DNER and the DERs toimplement:(1) decentralization agreements between MT/DNER and each participating state, which wouldspecify the highway responsibilities to be transferred to the state, the terms and conditions for suchtransfers, and the agreed actions to strengthen the DER capabilities to prepare and imnplementefficient road network maintenance strategies and programns; and(2) delegation agreements between DNER and each participating DER, which would specify therespective responsibilities for executing the rehabilitation and maintenance works, and the relatedwork programs and performance indicators and targets; and

(ii) state rehabilitation subprojects consisting of: (1) the rehabilitation works on the highways to betransferred to each state, as specified in the decentralization and delegation agreements, andprepared and executed in accordance with criteria, norms and methodologies specified in anOperational Manual (OM); and (2) the related engineering, economic and environmental studiesand supervision services;

(b) a highway concession development component, including:

(i) technical assistance and training services to strengthen the capacity of the newly-created DNERConcession Department and several DER concession units to prepare, promote, supervise andmonitor highway concessions, and to establish effective regulatory framework and arbitrationmechanisms; and

(ii) concession studies consisting of engineering studies, economic and environmental assessments, andproject finance services for specific highway concession projects;

(c) a federal highway component, including:

(i) technical assistance and training services to strengthen the capacity of DNER to: (1) contract themaintenance of an increasing portion of the non-concessioned network through performance-basedmanagement contracts; (2) prepare a strategic plan, including staffing and training programs, andimplement a reorganization in line with its reduced operational responsibilities resulting from

- 18 -

decentralization, concessions and maintenance management contracts; and (3) coordinate andmonitor the implementation of the entire project;

(ii) federal rehabilitation subprojects consisting of: (1) rehabilitation works, including resurfacing,operational and safety improvement, and environmental rehabilitation works on highways whichwill remain under federal jurisdiction and are not part of the concession program, prepared andexecuted in accordance with criteria, norms and methodologies specified in the OM; and (2) therelated engineering, economic and environmental studies and supervision services.

3.05 Highway Decentralization Component. The Government's plan is to transfer highway sectionstotaling about 17,500 km, of which 12,500 km are paved, to state jurisdictions over the next four years(Table 1, Annex 3). The main interstate highways and international connections (about 50,000 km, ofwhich 40,000 km are paved) would remain under federal jurisdiction. In order to transfer highwayresponsibilities to state jurisdictions, the Federal Government, through MT/DNER, would enter intodecentralization agreements with state governments, which would specify the highway sections to betransferred and the respective responsibilities of DNER and the state for the execution and funding of therehabilitation works and maintenance of these highway sections. Rehabilitation works would be designedand implemented in accordance with the catalogue of technical solutions, which was developed andoptimized with the HDM III and EBM models, and which would be included in the OM (Annex 2).Highway sections totaling about 4,000 km would need some rehabilitation works at an estimated total costof about US$225 million equivalent (Table 3.1 hereafter and Table 2, Annex 8). The rehabilitation worksand the transfer of highway responsibilities would be implemented in accordance with the time schedule andmonitoring indicators and targets included in the Project Implementation Plan (PIP) (Annex 8). Draftdecentralization agreements have been negotiated with all the participating states and four have alreadybeen signed. During loan negotiations, agreement was reached on: (a) the draft decentralization agreements;(b) the catalogue of technical solutions included in the OM; and (c) the rehabilitation and decentralizationtargets set forth in the PIP (Table 1, Annex 8). The signing of a decentralization agreement with the state,satisfactory to the Bank, would be a condition of disbursement under a state rehabilitation subproject.

3.06 DNER would delegate the execution of seven state rehabilitation subprojects (Minas Gerais, RioGrande do Sul, Parana, Rio de Janeiro, Goias, Bahia and Ceara) to the state DERs, which have adequateimplementation capabilities, and DNER would carry out supervision and monitoring. These seven statescombined would assume responsibility for highways totaling about 12,000 km (or 70% of the total lengthto be transferred) (Annex 3, Table 1); and they would rehabilitate sections totaling about 3,500 km (or88% of the total length to be rehabilitated). DNER would carry out the remaining works in those stateswhich have insufficient capabilities or very few highways to be transferred. The project would includetechnical assistance and training to help state DERs to develop efficient state highway expenditureprograms based on network surveys and HDM analyses, cost-effective maintenance programs, andhighway concession projects (Annex 6). Draft delegation agreements have been negotiated with the sevenabove-mentioned states. During loan negotiations, agreement was reached on: (a) the draft delegationagreements; (b) DNER to finalize and execute satisfactory delegation agreements with the sevenparticipating DERs in accordance with the targets set forth in the PIP, including three delegationagreements not later than three months after the effective date of the loan; and (c) the scope of the technicalassistance and training to the state DERs (Annex 6). The signing of a delegation agreement, satisfactory tothe Bank, would be a condition of disbursement under a delegated state rehabilitation subproject.

3.07 Highway Concession Development Component. This component would include consultant andtraining services to help: (a) DNER organize and strengthen its new Concession Department, including theDepartment's planning and development, project finance, promotion and marketing, bidding and bid

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evaluation, and concession supervision and monitoring functions; (b) some state DERs prepare and rnonitortheir concession programs; and (c) DNER carry out technico-economic and financial feasibility studies,environmental assessments, engineering designs, and promotion services for specific highway concessionprojects. The specific highway concession projects, which would involve the operation and maintenance ofexisting highways, and possibly rehabilitation and capacity investments (widening and dualization), or newconstruction, would be implemented by DNER and some state DERs separatelv from the proposed project.At the request of the Government, the Bank could assess the feasibility of extending partial risk and/orcredit guarantees to private lenders for highway concession projects which otherwise would not beattractive to private investors. In such cases, the Bank would appraise the technical. economic, financialand environmental aspects of the specific projects.

3.08 The Government's objective is to concession federal highways totaling about 10,000 km over thenext four years, including the already concessioned five sections (about 850 kni) (Table 1, Annex 4). Forthis purpose, the Government has already delegated such federal highway sections totaling about 5,000 kmto the states of Rio Grande do Sul, Parana and Santa Catarina for concessioning bv the respective stateDERs. Negotiations are underway with the state of Minas Gerais, which could also lead to such delegationagreement. The remaining highways would be concessioned directly by DNER. The rehabilitation worksneeded on the highways to be offered for concession, which are estimated to cost about US$600 millionequivalent under no budget constraint, have therefore not been included in DNER's public expenditureprogram nor in the project. In the event that some or all these highway concession projects would notmaterialize, DNER has developed and would implement a maintenance contingency plan on such highways.The resources necessary for the contingency plan would not exceed US$100 million over 1997-2000.Agreement was reached during loan negotiations on: (a) draft terms of reference for the concessiontechnical assistance and training; (b) the implementation time schedule, indicators and targets for theconcession development component (para. 4.09 (b) and Annex 4); and (c) Government guarantee of fundsfor the maintenance contingency plan.

3.09 Federal Highway Component. On the portion of the highway network which will remain underfederal jurisdiction and managed by DNER, i.e., which would not be transferred or concessioned (about40,000 km), the project would include: (a) rehabilitation or resurfacing works, including environimentalrehabilitation works, on highway sections of a total length of about 11.000 km over 1997-2001, at anestimated total base cost of about US$709 million equivalent; and (b) operational and safetv improvementworks (including third lane or shoulder widening, improvement of curves and intersections, andstrengthening or widening of bridges) at an estimated total cost of about US$100 million over 1997-2001(Table 3.1 hereafter and Table 2, Annex 8). Operational and safety improvement works, as well as theenvironmental rehabilitation works would be incorporated into the rehabilitation contracts. The 1997-1998rehabilitation or resurfacing program totals about 2,650 km and includes operational improvements onabout 250 km. The engineering designs and economic and environmental analyses for the 1997-1998program have been reviewed by the appraisal mission, and found satisfactory (Table 3, Annex 2). TheBank would annually review DNER's rehabilitation and maintenance program for the subsequent year,including: the federal and state rehabilitation subprojects, which would be prepared in accordance with thecriteria, standards and methodologies set forth in the OM, and with the indicators and targets set foith inthe PIP; and all other rehabilitation and maintenance projects, which would be prepared in accordance withthe catalogue of technical solutions included in the OM. During loan negotiations, agreement was reachedon: (a) the criteria, standards and methodologies, included in the OM, for the preparation and review ofDNER's annual rehabilitation and maintenance programs (para. 4.09 (c)); and (b) the implementation timeschedule, indicators and targets for the federal highway component (para. 4.09 (c) and Arnex 8).

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3.10 The technical assistance and training part of the federal highway component would help DNER to:(a) prepare and carry out a maintenance management plan, on the basis of the results of several pilotperformance-based maintenance management contracts, to increase the use of such form of maintenancemanagement contracts on the non-concessioned network (Annex 2, section H); (b) prepare a strategic planand carry out the necessary reorganization and staff development program to gradually downsize itsoperations in line with its reduced operational responsibilities resulting from decentralization, concessionsand rmaintenance management contracts, strengthen its strategic planning, management and supervisionunictions, and to re-design or improve the related work processes and methodologies; and (c) coordinate

and monitor the implementation of the project, through the assignment of a specialized Project ManagementConsultant (PMC) to assist DNER Project Management Unit (PMU) and DER Subproject ManagementUnits (SMU) in effectively coordinating the implementation of the project and subprojects (para. 4.06).Agiceement was reached during loan negotiations on the letter of invitation and terns of reference for the)Pj fC contract. A condition of loan effectiveness would be that DNER has contracted the PMC.

C. Project Cost and Financing

3. -1l The total cost of the project is estimated at Table 3.1: Estirmated Project Costs and Financing

JS$1.250 million equivalent, including US$250 million (US$ million)tOr rehabilitation of decentralized highways, US$1.5 Component Costs Local Foreien Total

'mllion for concession technical assistance and training,US$900 million for rehabilitation and operational Decentralization Works 135 90 225

iimoprovement of federal highways, US$84 million for Concession Tech. Assist. - 1 I

c ngineering, studies, and works supervision, US$3.5 Federal Highway Works 485 324 809

tiillion- for technical assistance, training of staff, and Engineering&Supervision 45 29 74

US'l 1 million for project management. The foreignc chiange cost component is estimated at about US$500 Tech. Assist. & Training 1 2 3

mnillionl or 40%, and the tax component at about Project Managernent 5 5 10

U.S$190 million, or 15%. The total project cost Total Base Cost 671 451 1122

includes physical contingencies of US$56 million or Physical Contingencies 35 21 56

5% of base cost, and price contingencies of US$72rill'ion (or about 6% of base cost plus physical Price Contingencies 44 28 72

contingencies), estimated on the basis of the Total Cost 750 500 1,250

disbursement schedule and a 2.3% average annual price Financing Plan

increase for both local and foreign expenditures Bank Loan No. 1 150 150 300

e. pressed in US dollars. Cost estimates for civil worksBank Loan No. 2 100 100 200

ate based on average per-kilometer costs supported byengineering estimates and recent contract prices. Cost IDB Loan No. 1 150 150 300

estimates for consultant services are based on IDB Loan No. 2 100 100 200

prevailing local and foreign specialist-month rates. The Federal Governnent 250 - 250

estimated costs of the individual project components Total Financing 750 500 1,250

are detailed in Table 2, Annex 8, and are summarizedin TI able 3.1 herewith.

3. 12 The project would be financed from two Bank loans of respectively US$300 million and US$200millioni equivalent (totaling 40% of the project cost), from two proposed loans from the IDB of respectivelyUS$300 million and US$200 million equivalent (totaling also 40% of the project cost), and from FederalGovetmrnent own resources for US$250 million (or 20% of the project cost). The second loan from theBank would be presented to the Board of Directors when an amount of at least US$225 million equivalent

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(or 75%) has been disbursed from the first Bank loan, on the condition that all the covenants of the firstloan agreement are substantially complied with, and the implementation and development impact targets setforth in the PIP are substantially met. The project financing plan is presented in Table 2, Annex 8, and issummarized in Table 3.1 above. Agreement was reached during loan negotiations on: (a) Borrowerguarantee of counterpart funds, including funding for the concession contingency maintenance plan; and (b)in order to permit the start up of urgent subprojects, retroactive financing in an amount of not more than10% of the loan amount for civil works, goods, and consultant and training expenditures incurred notearlier than January 1, 1997 or twelve months before the date of loan signing, whichever is later.

3.13 Highway rehabilitation, resurfacing, operational and safety improvement, and environmentalrehabilitation works, engineering, economic and environmental studies, works supervision, and technicalassistance, training and rmiscellaneous equipment for institutional development would be eligible fordisbursement under the loan. The loan would be disbursed at the rates of 80% of total expenditures foreligible civil works, engineering and other studies, and works supervision, and 100% for eligible technicalassistance and training services and miscellaneous equipment. Agreement was reached during loannegotiations on the above disbursement percentages.

D. Environmental and Economic Assessments

3.14 Environmental Effects. The project, which consists essentially of the rehabilitation anaresurfacing of existing paved highways, and of localized operational and safety improvements, could ha-v.possible adverse environmental effects which, however, can be prevented or mitigated by relatively simplemeasures. The project has therefore been rated "B" for environmental assessment purposes. The possibleadverse effects of the rehabilitation, resurfacing and most operational and safety improvement works arelimited to those resulting from quarrying, borrow pits, or the disposal of used pavement materials. Sormeoperational and safety improvement works, such as the construction of climbing lanes, widening ofshoulders and the improvement of curves and intersections, could have adverse impacts on the people livingclose to the highway, if they are located in high population density areas, or on slope erosion if they aielocated in mountainous terrain. In addition, since in the past many highways were built without adequateattention to the environment, the related environmental liabilities, which generally consist of uncontrollederosion, adversely affect highway structures or right-of-ways, sometimes adjacent properties.

3.15 Environmental Management Plan. In order to effectively prevent or mitigate such adverseimpacts, DNER has prepared and would implement an environmental management plan (Annex 5). Inparticular, DNER has established an environmental unit with adequately trained staff Through ResolutionNo. 126/96 of its Administrative Council, DNER has put into effect a manual of environmental norms andinstructions for road engineering and works (the Environmental Manual, EM), which was reviewed by theappraisal mission and found satisfactory. DNER has also initiated the preparation of a resettlement polic-framework which, after approval by the Bank, would be put into effect by the end of 1997. The sevenparticipating DERs would be required, through the delegation agreements, to adopt the EM and theresettlement framework for all project investments. The standard terms of reference (TOR) of theengineering studies for all project investments, which are included in the OM, as well as those for theconcession projects, which have been reviewed by the appraisal mission, include satisfactory requirementsfor environmental and resettlement screening, assessments and management, and the necessary referencesto the EM and to the resettlement framework. Also, the engineering consultants are required to identifyenvironmental liabilities along the highways under study, organize the related information in DNER's roaddatabase, design appropriate corrective measures and works, and incorporate such corrective measures andworks, together with the normal prevention measures, into the highway rehabilitation or concession

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contracts. The standard forms of contracts for works or concessions will also incorporate all necessaryenviromnental management requirements and references to the EM. Adequate supervision and control ofthe engineering studies and works will be carried out by DNER and the DERs' environmental units, and bythe project management consultant, in order to ensure effective implementation. It was agreed during loannegotiations that DNER would: (a) provide evidence by December 31, 1997 that it has adopted aresettlement policy framework acceptable to the Bank; and (b) present for comments the environmentalspecifications of the tender documents for the first three concessions.

3.16 Project Benefits. The project's main objective is to improve and maintain the serviceability ofthe main highway network with a view to reduce the cost of road transport. Road users, and producersand consumers of goods transported by road, would benefit from reduced vehicle operating costs andfrom travel time savings, as well as from fewer accidents and improved comfort. DNER, the Federaland the state governments, and ultimately taxpayers would benefit from the reduced recurrent costs ofmaintaining the highways which would be rehabilitated under the project, as well as from the avoidedhigher costs of future reconstruction. They would also benefit from the transfer of highway costs tousers under the concession program supported by the project. As a result, the state governmentswouild niot incur a significant increase of their expenditure responsibilities as a consequence ofdecentralization. The three components of the project are separable. The decentralization and thefederal components which, together, account for over 99 percent of project cost, have been evaluatedjointly as well as separately (Annex 7, sections E-G).

3.17 Economic Evaluation. The design of the project was optimized through the economicanalysis. The methodology consisted in comparing the Net Present Value (NPV) of alternative networkrehabilitation and maintenance strategies and associated programs, and selecting the strategies whichmnaximize the NPV under various budget constraints. The costs and benefits of each alternative werequantified with the help of the Bank's Highway Design and Maintenance Standards Model (HDM III).The optimum rehabilitation and maintenance strategy and associated program for the agreed budgetconstraint (US$225 million per year) was then selected using the Expenditure Budgeting Model. Theselected alternative would reduce the proportion of the federal highway network in poor condition from12 percent in 1997 to less than two percent in 2002, and would increase the proportion in goodcondition from about 40 percent to about 50 percent over the same period. The average vehicleoperating cost on the network would decline from US$0.42 to about US$0.395 equivalent per vehicle-knm. If the project is not undertaken, the proportion of the network in poor condition would increase toabout 30 percent and the proportion in good condition would decrease to less than 10 percent over thenext five years; the average vehicle operating cost would increase to about US$0.45 per vehicle-km;and the subsequent cost of rehabilitation and maintenance of the network after 2002 would be morethan twice the cost of the project, i.e. about US$600 million per year (Annex 7, section E).

3.18 The project has an estimated NPV of about US$3.4 billion equivalent at a 12 percent discountrate over ten years. Its internal economic rate of return (IERR) is estimated at a very high 106 percentin the base case. The decentralization component (20 percent of project cost) has an estimated NPV ofabout US$640 million and the federal highway component (79 percent of project cost) has an estimatedNPV of about US$2.8 billion equivalent. The sensitivity analyses show that if project costs were 20%higher than expected, the IERR would still be 88 percent, and if project benefits were 20% lower thanexpected, the IERR would be 84 percent. In the event that it would take six rather than four years tocomplete the project, the NPV would be reduced to US$3.1 billion equivalent and the IERR to 85percent. The project costs would have to be about four times higher, or the project benefits wouldhave to be four times lower than the appraisal estimates for the NPV to become negative; these arehighly unlikely scenarios (Annex 7, sections E and F).

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E. Project Risks

3.19 The main risks are: ineffective management of federal and state subprojects by DNER and theparticipating DERs; inadequate coordination and monitoring of state subprojects by DNER; insufficientcounterpart funds, in particular for maintenance; delays in the approval of the proposed SNV Law by theCongress; and lack of interest of private investors or financiers in the concession program. The experienceacquired with similar projects has been incorporated into the project's design in order to minimize theserisks. In particular, the project would provide for: adequate organizational arrangements and a projectmanagement plan, with clearly defined processes, responsibilities and accountability; simple methodologies,well suited to the agencies' technical capacities; a detailed project implementation plan, with suitableindicators and targets to monitor procurement, physical and financial execution of work programs, networkcondition, and agency development; well-focused technical assistance and training of DNER and DER staffin key technical and management areas; as well as comprehensive Operational and Environmental Manuals.

3.20 DNER's project management unit (PMU) has been staffed with experienced professionals and, as acondition of loan effectiveness, would be assisted by a specialized Project Management Consultant (PMC),with experience satisfactory to the Bank (para 4.09 (e)). The project implementation plan and thecomputerized project management system (CPMS) will be the basis for managing and monitoringimplementation. In order to ensure appropriate funding, the Bank would review DNER expenditure andfunding programs each year at the time of budget preparation against the agreed targets. The Bank willhave the right to exercise appropriate remedies, including suspension of disbursements or cancellation andreallocation of loan proceeds to well-performing subprojects, if DNER or a DER has defaulted on theobligations to achieve the agreed targets. In the event that the Congress does not approve the SNV Law,the decentralization agreements to be signed with all the state governments specify that the stategovernments assume all operation and maintenance responsibilities on the transferred highways for a periodof at least ten years. A contingency maintenance plan was prepared for highways included in theconcession program, in case some or all the proposed concessions would not enter into effect, and theGovernment would guarantee the necessary funds.

IV. PROJECT IMPLEMENTATION PLAN

A. Institutional Responsibilities

4.01 The Government of Brazil (GOB) and the National Roads Department (DNER) of the Ministry ofTransport, would be responsible for implementing the project in accordance with the ProjectImplementation Plan (PIP) and the Operational Manual (OM). The following sections of the PIP aresummarized hereafter: Institutional Responsibilities (section A); Organizational Arrangements (section B);Project Implementation Action Plan (section C); Procurement Arrangements (section D); Disbursement,Accounting and Audit Arrangements (section E); and Monitoring and Supervision Plan (section F), forwhich detailed guidelines are provided in the OM. The detailed implementation arrangements, timeschedule, indicators and targets are presented in Annex 8. The Loan Agreement between the FederativeRepublic of Brazil and the Bank and the Project Agreement between the Bank and DNER would specifythe above.

4.02 The Government of Brazil (GOB), through the Ministry of Transport (MT), would beresponsible for finalizing and executing the decentralization agreements with the participating states.

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DNER would be responsible for implementing the project in accordance with the ProjectImplementation Plan (PIP) and the Operational Manual (OM). With technical assistance from a ProjectManagement Consultant, DNER would in particular: (a) under the highway decentralizationcomponent: finalize and execute the delegation agreements with the seven participating DERs; prepareand implement, and assist participating DERs in preparing and implementing state rehabilitationsubprojects in accordance with the criteria, standards and methodologies specified in the OM, and withthe environmental norms and instructions set forth in the Environmental Manual (EM); and review andmonitor state subproject implementation, including engineering designs, economic and environmentalassessments, and procurement and disbursements; (b) under the highway concession developmentcomponent: organize and strengthen its recently-created Concession Department; establish and maintainappropriate arbitration mechanisms for federal highway concessions; and prepare, tender, superviseand monitor specific federal highway concession projects; and (c) under the federal highwaycomponent: prepare and implement federal rehabilitation subprojects, contract maintenance activities onthe non-concessioned highways, prepare a strategic plan and carry out the reorganization, andcoordinate the implementation of the entire project.

4.03 The seven participating DERs would be responsible for implementing their respective staterehabilitation subprojects in accordance with Subproject Implementation Plans (SIPs), and with the criteria,norms and methodologies specified in the OM, including the catalogue of technical solutions, the terms ofreference for subproject studies, and the environmental norms and instructions specified in the EM. Forthis purpose, DNER and the participating DERs would sign delegation agreements, which would specifytheir respective responsibilities in implementing the state rehabilitation subprojects. DNER, withassistance from the project management consultant, would review and monitor the implementation of thestate rehabilitation subprojects against the indicators and targets included in the SIPs. It would be acondition of disbursement under a delegated subproject that satisfactory decentralization and delegationagreements have become effective.

4.04 The Bank would approve ex-ante all delegation agreements, including SIPs, as well as all state andfederal rehabilitation subprojects for financing under the project on the basis of subproject applications inan agreed format. The Bank would review ex-ante procurement documentation for all contracts for worksabove US$5.0 million. The Bank would monitor project implementation against the indicators and targetsincluded in the PIP. A detailed mid-term project implementation review would be carried out when 75% ofthe loan amount is disbursed, prior to presenting the proposed second Bank loan to the Board of Directors.In addition to reviewing overall project performance, the mission would identify problem subprojects,which would be reformulated or terminated, and loan funds would be reallocated to well-performing statesor to DNER with the Bank's ex-ante approval (para. 4.19).

B. Organizational Arrangements

4.05 In order to coordinate the implementation of the project, the Director-General of DNER, throughPortaria No. 073/97 dated January 22, 1997, has established a Project Coordination Committee (PCC) anda Project Management Unit (PMU), with terms of reference (Regimento Interno) which the appraisalmission reviewed and found satisfactory. The PCC includes the Directors of the Departments involved inthe project, and is responsible for effective inter-departmental coordination. The PMU is headed by theChief, Planning Division (Assessoria de Planejamento), who reports directly to the Director-General. It isresponsible for the management of the overall project and for communications with the Bank, the IDB andFederal and state government agencies. The PMU includes four central units, responsible for therehabilitation, decentralization, concession and institutional development components, and for

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administration, and three regional units, to be established in Salvador, Belo Horizonte and Porto Alegre, tosupervise the subprojects in the Northeast, Southeast and South regions respectively (Annex 6). The aboveorganization arrangements incorporate the experience acquired in implementing the recently-completedHighways Management and Rehabilitation Project (Loan no. 3169-BR), which suffered from lack ofcoordination among the various departments involved, and from an insufficiently staffed PMU located at alower organizational level. Assurances were obtained during loan negotiations that DNER would maintainorganizational arrangements for project execution satisfactory to the Bank, including a project coordinationcommittee and a project management unit with terms of reference and staffing, and headed by a projectmanager with qualifications and experience satisfactory to the Bank.

4.06 DNER intends to contract a specialized Project Management Consultant (PMC) to assist the PMU,the permanent departments of DNER, and the participating DERs in effectively coordinating and carryingout the project and the delegated subprojects. The PMC would in particular assist: the Planning Division ofDNER and the participating DERs in monitoring the network and preparing efficient annual expenditureprograms; the Engineering Division in contracting, supervising and monitoring engineering designs toensure consistency with the agreed pavement management, operational and safety improvement, andenvironmental and resettlement management policies and standards; the Procurement Division in complyingwith agreed procurement timetables and targets; the DNER districts and participating DERs in supervisingthe works; the PMU and the state DERs in carrying out their project and subproject management functions.In order to facilitate project planning, scheduling, control and coordination among the departmentsinvolved, DNER, with assistance from the PMC, would complete the development of, and establish acomputerized project management system (CPMS). Agreement was reached during loan negotiations on:(a) the invitation letter and TOR for the Project Management Consultant; (b) the establishment of theCPMS not later than three months after the effective date of the loan; and, as a condition of loaneffectiveness, that DNER would: (c) contract the PMC on the basis of the agreed TOR.

4.07 DNER has recently established a Concession Department responsible for carrying out the highwayconcession program. The department is headed by a Director who reports directly to the Director-General(Annex 10, Chart 1). The department includes a Concession Development Division, responsible forplanning, studies, project finance and marketing, and a Concession Supervision Division, responsible forsupervision, monitoring and evaluation, and user relations. DNER's regional districts would establishconcession operations and supervision sections where appropriate (Annex 4). DNER would contract aintemational consulting firm with extensive international experience in highway concessions to helporganize and strengthen the Concession Department and to train its staff. Agreement was reached duringloan negotiations on: (a) the TOR for the concession technical assistance assignment; and (b) DNER tocontract the highway concession consultant by December 31, 1997.

4.08 The participating DERs, which have recently completed or are currently carrying out projectsfinanced by the Bank or the IDB, have adequate implementation capabilities. They have startedestablishing organizational arrangements to carry out their subprojects. Execution responsibilities would bedistributed according to the specific organization of each DER. Each participating DER has established aSubproject Management Unit (SMU), headed by a qualified and experienced Subproject Manager, whoreports directly to the DER Director-General. With these arrangements and with the assistance of thePMC, the participating DERs would have the capabilities to carry out the respective subprojects efficientlyunder the coordination and monitoring of the PMU. Assurances were obtained during loan negotiationsthat each participating DER would establish and/or maintain organizational arrangements for subprojectexecution satisfactory to the Bank including, as conditions of loan disbursement under a delegated staterehabilitation subproject: (a) a Subproject Management Unit (SMU), with adequate structure, functions

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and responsibilities; (b) a computerized management system interfaced with the DNER CPMS; and (c)adoption of the Operational and .Environmental Manuals.

C. Project Implementation Action Plan

4.09 The following actions, which are included in the Project Implementation Plan (PIP), wereconfirmed during loan negotiations:

(a) Highway Decentralization Component

(i) DNER, will prepare or cause participating DERs to prepare state rehabilitation subprojects inaccordance with criteria, standards and methodologies set forth in the OM, satisfactory to theBank, and will forward state subproject applications, including decentralization agreements and, ifapplicable, draft delegation agreements and SIPs, in the format set forth in the OM, for Bankapproval of subproject financing under the loan;

(ii) DNER, after Bank approval of state subproject financing, will carry out, or cause the participatingDER to carry out, the state subproject in accordance with the terms of the delegation agreementand the SIP, and will make all the necessary transfers of funds for this purpose;

(iii) the GOB, through MT, will enter into decentralization agreements with the participating states andDNER will enter into delegation agreements with the participating DERs, in accordance with thetimetable, indicators and targets set forth in Annex 8;

(iv) DNER will monitor state subproject implementation in accordance with procedures, criteria andmethodologies set forth in the OM and against the monitoring indicators and targets set forth in therespective SIPs;

(v) MT, through the decentralization agreements, will cause the DERs to: carry out surface andstructural condition, traffic, axle-weight, and accident surveys on their entire networks, includingthe transferred highways; organize these data in a computerized database; review their networkmaintenance, rehabilitation, and upgrading policies, strategies and programs on the basis of theresults of these surveys and in accordance with the procedures, criteria and methodologies set forthin the OM; and reflect the results of these surveys and analyses in the state road expenditureprograms; and

(vi) DNER, through the delegation agreements, will cause the participating DERs to implementDNER's Environmental Manual for all project investments and, for this purpose, incorporateappropriate environmental clauses, satisfactory to the Bank, in the road engineering, works andsupervision contracts;

(b) Highway Concession Development Component

(i) DNER will strengthen the capacity of its newly-created Concession Department and its relevantregional districts to carry out the highway concession program efficiently, and, for this purpose, byDecember 31, 1997, will contract a highway concession specialist firm on the basis of TORsatisfactory to the Bank;

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(ii) DNER wviII tender, or cause DERs to tender, concessions for federal highway sections inaccordance with the time schedule and targets set forth in Annex 8; and

(iii) the GOB will provide the funds necessary over 1998-2000 to implement the emergencymaintenance contingency program in the event that some or all the proposed concessions do notenter into effect.

(c) Federal Highway Component

(i) By July 31 each year during project implementation, DNER will present to the Bank itsrehabilitation and maintenance program for the following year, including the subprojects, whichshould be prepared in accordance with the criteria, standards and methodologies set forth in theOM and with the physical implementation and funding targets set forth in Table 1, Annex 8, andall other rehabilitation and maintenance projects, which should be prepared in accordance with thetechnical standards (catalogue of technical solutions) included in the OM;

(ii) the GOB will prepare its annual budget proposals on the basis of the DNER programs and of theminimum funding targets for rehabilitation and maintenance set forth in Table 1, Annex 8;

(iii) by December 31, 1997, DNER will present evidence that it has adopted a resettlement policyframework acceptable to the Bank, consistent with the terms of the Resettlement Letter, which shallapply to the preparation and implementation of any resettlement plan or activity which may berequired under the project;

(iv) by June 30, 1999, DNER will present to the Bank for comments, a plan, including a timetable, toincrease the application of the performance-based form of highway maintenance contracts to thenon-concessioned federal highway network, taking into account the results of the pilot contracts,and thereafter implement it, taking into account the comments of the Bank; and

(v) by December 31, 1998, DNER will present to the Bank for comments a strategic plan, includingreorganization, staffing and training programs and a timetable, in line with its reduced operationalresponsibilities resulting from decentralization, concessions and maintenance managementcontracts, and thereafter implement it, taking into account the comments of the Bank.

(d) Project Management

(i) As a condition of loan effectiveness, DNER will contract the project management consultant on thebasis of TORs satisfactory to the Bank and, not later than three months after the effective date ofthe loan, put into effect a computerized project management system, satisfactory to the Bank;

(ii) as conditions of disbursement under a delegated state rehabilitation subproject, DNER will causethe participating DER to: (a) establish an SMU with structure, functions and responsibilitiessatisfactory of the Bank; (b) put into effect a computerized project management system interfacedwith the DNER CPMS; and (c) adopt the OM and the EM; and

(iii) DNER will carry out the project in accordance with the PIP (Annex 8), including the monitoringindicators and targets (Table 1, Annex 8).

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D. Procurement Arrangements

4.10 Procurement arrangementsare sununarized in Table 4. 1. ~~~Table 4. 1- Procurement Method I/are summarized in Table 4.1.

(US$ million)

4.11 All civil works contracts ------------Procurement Method---------

estimated to cost US$5.0 million or Project Element ICB NCB Other n.b.f 2/ Total

more would be procured through Civil Works 300 270.4. 584 1,154

International Competltive Bldding(ICB) procedures, in accordance (240) (215) - - (455)

with Bank Guidelines and using Equipment - - l - 1

relevant standard bidding (l) - (1)

documents issued by the Bank. Any Consultants & Training 3/ - - 52 43 95modifications to such documentswhich may be necessary would -(44) - (44)

have to be agreed with the Bank. Total 300 270 53 627 1,250

Civil works contracts below (Bank financed) 5/ (240) (215) (45) - (500)

US$5.0 million, up to an aggregate of which: Loan no. 1: (140) (127) (33) (300)

amount of US$160 million underthe proposed first loan, would be Loan no.2: (100) (88) (12) (200)

I/ Figures in parentheses are the respective amounts financed by the Bankprocured through National 2/ Amounts not financed by the Bank; civil works and consultants financed by the IDB

Competitive Bidding (NCB) 3/ Services contracted in accordance with Bank Guidelines for Selection and Employment ofprocedures basedonstandard Consultants by World Bank Borrowers, January 1997

procedures, based on standard 4/ Of which US$160 million under Loan no. I and US$ 110 million under Loan no. 2

bidding documents which were 5/ Total Bank financing including proposed Loan no. I and tentative Loan no. 2

reviewed by the appraisal missionand found satisfactory, and which, after approval by the Bank, will be included in the OM. The value ofindividual civil works contracts is expected to vary between US$1.0 and US$10.0 million (total cost aboutUS$570 million). Miscellaneous road laboratory and office equipment and software would be purchasedby shopping on the basis of price quotations from at least three eligible suppliers, when they cannot bepackaged in contracts exceeding US$100,000, up to an aggregate amount of US$1.0 million. NCBprocedures would be used for contracts for goods exceeding US$100,000 and below US$350,000 in theevent that such contracts are required. Consultants for detailed engineering, construction supervision,technical assistance and training programs would be selected and engaged following Bank Guidelines forSelection and Employment of Consultants by Borrowers (January 1997), and the standard contract issuedby the Bank would be used for complex, time-based assignments.

4.12 DNER is the principal implementing agency, responsible for carrying out all the federal and somestate rehabilitation subprojects, and for reviewing and monitoring the delegated state rehabilitationsubprojects, including all procurement. DNER's organization for and experience with procurement werereviewed during appraisal and found to be satisfactory. All the seven executing DERs have implementedBank or IDB-financed projects and therefore have experience with Bank and/or IDB procurement.However, before sending a delegated state rehabilitation subproject to the Bank for review, the PMU,through the PMC, would make a detailed review of the executing DER's procurement organization andcapacity, and, if necessary, seek agreement on actions to strengthen such procurement capacity. The PMU,through the PMC, would provide technical assistance and training services as necessary. The Borrowers'procurement law (Law no. 8.666 of June 21, 1993), as amended, specifically authorizes executing agenciesto procure goods and services financed by multilateral institutions in accordance with the norms andprocedures of the financial institutions. All ICB contracts, the first two NCB contracts for civil worksprocured by DNER and each executing DER, all contracts for goods estimated at US$350,000 equivalent

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or more, the first two NCB contracts for goods, all contracts with consulting firms estimated atUS$100,000 equivalent or more, and all contracts with individual consultants estimated at US$50,000equivalent or more, would be subject to the Bank's prior review of all procurement documentation anddecisions. These prior-review arrangements would cover contracts totaling about 70% of the total cost ofBank-financed works, goods and services. The balance of contracts would be subject to selective ex-postreview by the Bank after contract award. Agreement was reached during loan negotiations on the aboveprocurement arrangements.

E. Disbursement, Accounting and Audit Arrangements

4.13 The Bank loan would be disbursed for: (a) civil works, at the rate of 80% of total expenditures; (b)equipment, at the rate of 100% of foreign expenditures, 100% of local expenditures (ex-factory cost), and80% of local expenditures for other items procured locally; (c) consultant services for studies at the rate of80% of total expenditures; and (d) consultant services for technical assistance and staff training at the rateof 100% of expenditures. The allocations of the proceeds of the loan are shown in Table 3, Annex 8.Based upon experience with similar projects and the relevant standard disbursement profile for highwayprojects, the implementation period for the project is estimated at six years. The project completion datewould therefore be June 30, 2002, and the Closing Date would be December 31, 2002. The estimated loandisbursement schedule is shown in Table 4, Annex 8.

4.14 In order to reduce the interval during which the Borrower would finance the Bank's share of projectcost with their own resources, the Borrower would establish a Special Account (SA) in US dollars in acommercial bank to cover the local and foreign currency expenditures of the project. The Bank woulddeposit up to US$30.0 million in the SA. The Bank would replenish the Special Account for the amount ofwithdrawals on account of eligible expenditures at the request of the Borrower. DNER has adequateaccounting control to enable disbursement to be made on the basis of Statements of Expenditures.Supporting documentation with respect to expenditures against contracts valued at up to US$5.0 millionequivalent for civil works, US$350,000 equivalent for goods, and US$100,000 equivalent for consultingfirm services, would be retained by DNER and/or the participating DERs, be available for inspectionduring project supervision missions, and be subject to auditing by the extemal auditors. Expenditures forcontracts above these limits and for all contracts with individual consultants would be documented. Duringloan negotiations, agreement was reached with the GOB on: (a) the above disbursement arrangements; and(b) contracting by DNER of independent auditors, acceptable to the Bank, to audit their accounts, includingthe project accounts, the Special Account and the Statements of Expenditures, and to fumish the auditors'reports to the Bank not later than six months after the end of each fiscal year.

F. Monitoring and Supervision Plan

4.15 DNER would establish an appropriate computerized project management system to monitor theimplementation of the project, so as to produce adequate information to report to DNER management andto the Bank. Participating DERs, as a condition of disbursement under delegated state rehabilitationsubprojects, would establish similar systems, interfaced with the DNER system, in accordance with thespecifications included in the OM, so as to produce consistent information on subproject implementationand to report to the PMU. During negotiations, agreement was reached that DNER would prepare andforward to the Bank quarterly progress reports, in accordance with the guidelines set forth in the OM,satisfactory to the Bank and the IDB, not later than one month after the end of each quarter.

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4.16 The PMU, assisted by the PMC, would coordinate and monitor the implementation of the project,and review the following documents prepared by DNER or the participating DERs: (a) financingapplication forms for subprojects included in the annual rehabilitation and maintenance programs andproposed for Bank or IDB financing; (b) annual procurement and execution time schedules;(c) procurement documentation for civil works and equipment; (d) terms of reference, invitation letters,shortlists and draft contracts for consultant services; and (e) DER quarterly subproject implementationprogress reports; and would forward them to the Bank as appropriate. PMU and PMC staff would carryout state subproject review missions, and would participate in the Bank's and the IDB's supervisionmissions to the states.

4.17 The Bank and the IDB would coordinate their supervision work programs, in order to avoidduplication of efforts. In particular, delegated state rehabilitation subprojects would be assigned to theinstitution which is already actively involved in the state's highway sector. The Bank would retain fullresponsibility for approving all the documents mentioned in the previous paragraph and the related actionsby DNER and the participating DERs in respect of the subprojects financed by the Bank. The Bank wouldsupervise and monitor the implementation of the project in accordance with the Monitoring and SupervisionPlan presented in Annex 9. The estimates of Bank supervision inputs into key activities, which are shownin the table of Annex 9, take into consideration the expected contributions of the PMU and the PMC, aswell as the above-mentioned coordination with the IDB.

4.18 The implementation of the project would be monitored against the time schedule and thedevelopment objective and implementation progress monitoring indicators and targets set forth in the PIPand in a Project Monitoring Letter (Annex 8, Chart 1 and Table 1). The development objective indicatorsare: (i) surface condition of the federal and transferred networks measured by the percentages of thenetwork length in poor condition (IRI above 5) and in good condition (IRI below 3); (ii) average vehicleoperating costs on the network calculated with the HDM III model as calibrated during the appraisalmission; (iii) highway transfers to states measured in km; (iv) federal highway concessions tenderedmeasured in thousand km; (v) maintenance management contracts measured by the percentage of the non-concessioned federal network length maintained by private contractors under performance-basedmanagement contracts; (vi) DNER design and supervision effectiveness measured by the average cost perkm of rehabilitation subprojects; (vii) DER planning and programming capacity measured by the numberof DERs with a pavement management system. The implementation progress indicators are: (viii) thenumbers of decentralization and delegation agreements signed; (ix) rehabilitation works procured andexecuted, on federal and transferred highways, measured in thousand km; (x) average costs per km of theoperational and safety improvement and environmental rehabilitation works; (xi) funding levels for routinemaintenance and for the project; and (xii) technical assistance and training measured by the total number ofman-months and trainee-weeks respectively.

4.19 A comprehensive Mid-Term review of the implementation of the project would be carried out when75 percent of the loan amount has been disbursed, prior to presenting the proposed second loan to theBoard of Executive Directors. The review will cover all the agreed actions, target dates, and developmentobjective and implementation progress indicators included in the PIP and the SIPs and the status ofcompliance with all covenants of the Loan and Project Agreements and the highway decentralization anddelegation agreements. Particular importance will be given to: (a) the Borrower's commitment to provideadequate funds for maintenance and rehabilitation, and counterpart funds for the project; and (b)MT/DNER performance under the agreed decentralization, concession, and federal highway components.The monitoring targets for the subsequent years would be revised if the additional financing from the Bankand/or the IDB would not be forthcoming. The Bank would have the right to exercise appropriate remediesif performance is not satisfactory.

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V. AGREEMENTS REACHED AND RECOMMENDATION

5.01 During negotiations, agreement was reached with the Government of Brazil on the following:

(a) MT/DNER to prepare and implement, or cause DERs to prepare and implement staterehabilitation subprojects, enter into decentralization and delegation agreements withparticipating states and participating DERs, and monitor implementation (paras. 3.05,3.06 & 4.09 (a));

(b) MT/DNER to cause the DERs to survey state networks, prepare expenditure programs inaccordance with criteria and methodologies set forth in the OM, and implementenvironmental manual (paras. 3.06 & 4.09 (a) (v) & (vi));

(c) DNER to strengthen its concession department, contract concession specialist firm, andcarry out concession studies and, if necessary, a contingency maintenance program (paras.3.07, 3.08, 4.07 & 4.09 (b));

(d) presentation of DNER's annual rehabilitation and maintenance programs and relatedpolicies, criteria and implementation targets (paras. 3.09, 4.09 (c));

(e) DNER to prepare and implement a maintenance management plan and a strategic plan(paras. 3.10, 4.09 (c));

(f) DNER to establish CPMS, to contract the PMC, and to cause the participating DERs toestablish subproject management units and systems (paras. 3.10 & 4.09 (d));

(g) Borrower's guarantee for counterpart funds, for concession contingency maintenance plan,and retroactive financing arrangements (paras. 3.08 & 3.12);

(h) DNER to present a resettlement policy framework and the environmental specifications ofthe concession tender documents (paras. 3.15 & 4.09 (c));

(i) DNER organizational arrangements for project execution (paras. 4.05 - 4.07);

(j) DER organizational arrangements for subproject execution (para. 4.08);

(k) Project Implementation Action Plan and related indicators and targets (para. 4.09 &Annex 8, Table 1);

(1) procurement arrangements (paras. 4.10 - 4.12);

(m) disbursement, account and auditing arrangements (paras. 4.13-4.14);

(n) monitoring and reporting arrangements (paras. 4.15-4.18); and

(o) mid-term review of project implementation (para. 4.19).

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5.02 The following is a condition of loan effectiveness:

(p) DNER to contract the project management consultant (para. 4.06);

5.03 The following are conditions of disbursements under state rehabilitation subprojects:

(q) a decentralization agreement with the participating state, satisfactory to the Bank, hasbecome effective (para. 3.05); and, in case of delegated subprojects,

(r) a delegation agreement with the participating DER, satisfactory to the Bank, has becomeeffective (para. 3.06);

(s) the participating DER has adopted the OM and the EM (para. 4.03); and

(t) the participating DER has established the SMU and the CPMS (para. 4.08).

5.04 Subject to the above, the project provides a suitable basis for a Bank loan of US$300 million. Theterms would be 15 years, including five years of grace, at the Bank's standard LIBOR-based interest ratefor single currency loans in US dollars.

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BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Bank Experience with Highway Projects in Brazil

A. Highway Project Summaries

1. The Bank approved twelve loans for highways and three loans for feeder roads in Brazilbetween 1968 and 1991. This section provides a summary for each project.

2. The First Highway Project (Loan 567-BR, US$26 million, October 1968) was instrumental insetting the framework for Bank involvement in the Brazilian transport sector. Together with this loan,the Bank reached agreement with the Government on a Plan of Action which included, among otherelements, the reorganization of DNER, the revision of road-user charges, the reduction of railwaydeficits and the improvement of port administration. The project included detailed engineering,construction, paving, and supervision of seven road sections totaling 429 km in four states. Theproject was successfully completed in September 1972, about a year later than expected. The delaywas mainly due to design changes and problems with earthworks. Despite cost overruns in somesections, total project costs were lower than anticipated. The audit reestimated rates of return for theroads were, except for one road, equal to or higher than the appraisal estimates; they ranged from 14%to 40% (PPAR No.626 dated Feb.12, 1976).

3. The Second Highway Project (Loan 676-BR, US$100 million, May 1970) includedconstruction and paving of 2,136 km of roads, detailed engineering of 2,369 km, and feasibility studiesof 3,256 km. The project provided technical assistance to strengthen the planning and supervisorycapabilities of DNER. Problems were encountered during construction, and delays occurred. As aresult, the project was not completed until August 1976, two years behind schedule. Final cost wasabout 6% above appraisal estimates. The audit rate of return for the project was higher than theappraisal estimate (36% as against 27%), mainly because of much higher-than-anticipated trafficgrowth. This was the first major road project carried out entirely by Brazilian firms under strictspecifications and quality controls agreed with the Bank. The experiences gained by the Brazilianconstruction industry and DNER during the execution of the project were considerable, asdemonstrated by the performance of follow-up projects (PPAR No. 644, dated June 21, 1977, PCRdated October 27, 1976).

4. The Third and Fourth Highway Projects (Loan 813-BR, US$89 million, April 1972, andLoan 854-BR, US$51 million, August 1972) included construction of 1,849 km, paving of 681 km ofroads, and related supervision. Civil works in both projects faced the same problems encounteredduring the Second Highway Project. Completion of both projects, initially scheduled for 1976, was atthe end of 1977. Underestimation of physical quantities and acceleration of inflation in 1973 and 1974caused substantial cost overruns. Reestimated rates of return, however, were considerably aboveappraisal estimates: 45% and 29% against 25% and 16% respectively. The PPAR noted thatinadequate detailed engineering for these two projects contributed to substantial quantity and costincreases. It also pointed out deficiencies in traffic forecasting (PCR dated May 30, 1978, PPAR No.2571 of June 8, 1979).

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5. The Fifth Highway Project (Loan 1075-BR, US$110 million, January 1975) set the basis forBank involvement in road maintenance, rehabilitation and strengthening. The project included: (a)construction and upgrading of 612 km of federal highways; (b) highway maintenance and rehabilitationprograms in the States of Minas Gerais and Rio Grande do Sul and technical assistance to DNER toimprove maintenance planning; (c) Phase I of a Weighing Station Program; (d) detailed engineering forroad construction, upgrading and rehabilitation; and (e) feasibility studies for three new highwaystotaling about 900 km. The project achieved its original objective in upgrading, and increasing thecapacity of, congested road links included in the project, although these works were completed withabout three years' delay and substantial cost overuns. The technical assistance achieved less thanexpected, partly because the systems developed by consultants were too complicated and did not takelocal conditions into account. Largely because of inadequate preparation, the weigh bridge programwas delayed and only partially completed, with significant cost overuns (PCR dated May 8, 1985).

6. The Secondary and Feeder Roads Project (Loan 1207-BR, US$55 million, March 1976) wasconceived as a line of credit extended to Brazil's National Economic Development Bank, BNDES, tofinance about 50 % of subloans extended by BNDES to state DERs or municipal road consortia to carryout secondary and feeder road programs in support of agricultural production. Subprojects wereprepared and evaluated in accordance with agreed and well-publicized criteria embodied in a manual.The loan helped finance 18 subprojects in 12 States comprising 5,400 km of roads and 110 separatebridges. The project was slow in starting because beneficiaries took more time than anticipated toestablish their working relationships with BNDES. Implementation has also been slowed by financialproblems, which were resolved through the Bank's Special Assistance Program, by providingsupplementary subloans under the Second Feeder Road Project. The project was completed in mid-1984, with a three-and-a-half year delay (PCR dated June 14, 1985, PPAR dated September 23, 1986).

7. The Sixth Highway Project (Loan 1557-BR, US$114 million, August 1978) continued tosupport rehabilitation and maintenance. The project included (a) rehabilitation of about 2,300 km ofpaved federal highways and detailed engineering for another 3,000 km of rehabilitation works; (b) ahighway maintenance and rehabilitation program in the State of Parana; (c) Phase II of the WeighingStation Program; and (d) consulting services to the Road Research Institute (IPR) to carry out researchon pavement overlay design and to GEIPOT to complete research on the Highway Design andMaintenance Model. Project implementation was delayed from the start, because of lack ofcounterpart funding, until mid-1983 when the Bank's Special Action Program, by increasingdisbursement percentages, helped the project to be completed in the second half of 1985. The weighbridge program remained incomplete. DNER's pavement research program, completed in late 1984,introduced a new standard for pavement overlay design. DER-Parana's maintenance operations weresuccessfully strengthened (PCR dated March 20, 1987, PPAR dated November 16, 1989).

8. The Second Feeder Roads Project (Loan 1730-BR, US$110 million, June 1979) was toprovide continuity to the program initiated by the First Project and implemented through BNDES. The19 subprojects in 13 states together consisted of the construction or improvement of 255 road linkstotaling about 4,900 km, and of the construction of 370 bridges. Lack of counterpart funds sloweddown implementation in 1982 and 1983. The Bank's Special Assistance Program helped resolve thefunding problems. Part of the loan was used to provide supplementary financing under the firstProject. The project was completed and the loan fully disbursed by the end of 1986, in line with theappraisal schedule. By requiring economic analyses and appropriate engineering standards, the firstand second projects helped state road administrations improve planning, engineering and managementof feeder roads programs country-wide. But maintenance capabilities remained weak in many states(PCR dated November 6, 1989, PPAR No. 9367 dated February 15, 1991).

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9. The Northwest Region Development Program, Highway Project (Loan 2062-BR, US$240million, November 1981), consisted of: (a) construction of the Campinas-Ariquemes section (about1,084 km) of the Northwest Highway, BR-364; (b) strengthening of Rondonia State HighwayDepartment (DER-RO); and (c) construction and improvement of about 1,000 km of roads in the Statesof Rondonia and Mato Grosso through BNDES' feeder roads program. The construction of theNorthwest Highway, after initial delays due to inadequate funding, accelerated in the second half of1983 with the Bank's Special Action Program, and was completed in late 1984, one year ahead ofschedule. The program for strengthening the State Highway Department of Rondonia made littleprogress due to delays in contracting the consultants and to subsequent suspension of disbursements fordelays under environmental components of the Northwest Region Development Program. The feederroad component was completed on schedule. In mid-1985, the Bank agreed to re-allocate about US$60million of loan savings for an emergency flood rehabilitation program in six Northeastern states, whichwas completed by mid-1987. The highway project upgraded the region's transport system but theNorthwest Development Program, of which the project was only one component, failed in its basicobjective of harmoniously developing the region. The improvement of the highway and feeder roadsand failures or delays in implementing the environmental and indigenous people protection programsunder the associated projects led to a destructive and disordely colonization process, with long-termdamage to the environment, encroachment onto Amerindian and natural reserves, and concentration ofmigrants in ill-equipped urban settlements (PCR dated April 15, 1991).

10. The Third Feeder Roads Project (Loan 2224-BR, US$154 million, December 1982)supported the continuation of the National Feeder Roads Program, administered by BNDES, includingstrengthening of project management. The project was to build or improve 8,000 km of roads at a costof about US$500 million over the period 1983-mid 1989, and to improve the maintenance capability ofsubborrowers through technical assistance for advisory services and training of staff . The project wasimplemented expeditiously, within the original timeframe. Physical results exceeded targets by morethan 20% (Almost 10,000 km of roads were built or improved, 70% in the low income states in theNorth, Northeast and Center-West regions. The three feeder roads projects helped develop statecapacities for preparing, evaluating and implementing feeder roads programs on the basis ofappropriate selection criteria and methodologies, and technical norms and standards. BNDESstrengthened its management of the program, but the fiscal reform and decentralization introduced withthe 1988 constitution led to the termination of the program (PCR dated June 11, 1993).

11. The Federal Highways Sector Project (Loan 2446-BR, US$210 million, June 1984) supportedDNER's 1984-1987 Investment Program, including highway rehabilitation, road safety, training ofDNER and state highway maintenance personnel, and technical assistance for a pavement managementsystem, an equipment management system, and highway research studies. Implementation wasexpeditious, despite DNER budget cuts on several occasions. Physical targets of highwayrehabilitation were exceeded by one-fifth. Procurement led to lower-than-expected bid prices butsubsequent contract modifications led to increased costs. The impact of road safety investments wasdifficult to judge because of the absence of monitoring. The training program for the DERs wassuccessful, but DNER gave priority to physical investments over technical assistance, which hadminimum results (PCR dated June 15, 1992).

12. The Sao Paulo State Highway Management Project (Loan 2830-BR, US$174 million, June1987) comprised: (a) rehabilitation and periodic maintenance works on about 5,100 km of statehighways; (b) equipment rehabilitation; (c) training of highway staff; and (d) technical assistance fortransport sector policy, planning and operations, pavement and bridge management systems, and roadresearch. The project started only in July 1988 due to administrative difficulties for loan signing. It

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made good progress until mid-1991, but remained virtually stalled until early 1995 due to the seriousfinancial difficulties of the state. Implementation resumed in 1995, after the state government clearedsignificant arrears owed to contractors and the Bank extended the closing date to December 1995. Thescope of the project was reduced, and about US$32 million was canceled from the loan. In spite of theimplementation difficulties, 4,000 km of roads were rehabilitated, reducing the portion of the networkin poor condition from about 40% to 6%, and the institutional component was substantially completedat closing (PCR dated October 25, 1996).

13. The Highway Management and Rehabilitation Project (Loan 3169-BR, US$310 million,February 1990, closed December 31, 1996) helped redefine the federal highway network, restructurethe national highway department, rehabilitate and maintain highways in major transport corridors,improve sector policy formulation and strategic planning, and develop and improve compliance withenvironmental standards in the transport sector. Project starting was delayed by modificationsrequested by the incoming government and approved by the Board. Implementation was affected byGovernment stabilization efforts and consequent insufficient counterpart fund transfers. Butimplementation improved after the Bank increased disbursement percentages and canceled US$40million from the loan in early 1995. The appraisal targets for the works were met or exceeded. Thepolicy and institutional component, which had been affected by the numerous changes of sectoradministration, was also succesfully completed (draft PCR dated May 15, 1997).

14. The State Highway Management Project (Loans 3547-BR and 3548-BR, US$88 million,December 1992) is helping rehabilitate and maintain the state highway networks in the states of SantaCatarina and Alagoas, and to strengthen the state highway agencies' (DERs) planning, contractmaintenance and environmental management capabilities. Both the physical and institutionalcomponents of the Santa Catarina subproject have progressed satisfactorily in spite of the recentfinancial difficulties of the state. But progress under the Alagoas subproject has been unsatisfactory.Because of the financial difficulties of the State and insufficient counterpart funding in 1994-95, anumber of rehabilitation contracts had to be terminated. The subproject was restructured in early1996, increasing disbursement percentages and cancelling US$18 million from the loan. The reformsintroduced by the state government in 1996 have enabled the works to be re-tendered and re-initiated inaccordance with the available counterpart funds. The institutional component, which initially madeslow progress due to the numerous changes of administration, is now progressing satisfactorily.

15. The State Highway Management II Project (Loans 3713-BR, 3714-BR & 3715-BR, US$220million, March 1994) is assisting the states of Piaui, Tocantins and Maranhao to develop andimplement efficient road expenditure programs, with adequate priority to maintenance, and tostrengthen the planning, contract maintenance and environmental management capabilities of the states'highway agencies. Project startup has been satisfactory in the three states. The monetary reformintroduced with the Plano Real in mid-1995, however, has substantially affected the financial capacitiesof the states, particularly Piaui and, to a lesser extent, Maranhao. Implementation targets at the end of1995 were substantially met in Tocantins. But the two subprojects in Piaui and Maranhao wererestructured in November 1995 in line with the states' financial capacities, reducing the upgrading andpaving targets while keeping maintenance and rehabilitation targets, canceling US$18 million fromeach loan, and increasing disbursement percentages. With this project restructuring and the reformmeasures introduced by the state governments, the performance of the two subprojects substantiallyimproved in 1996 and is now satisfactory.

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B. Lessons Learned

15. The following important lessons learned from the experience with the above projects have beenincorporated into the design and preparation of the proposed project.

16. Counterpart Funding, Budgets. The counterpart funding problems have been recurrent andhave adversely affected the implementation of the physical investment components of most projects.Government efforts to contain public expenditures in order to achieve important economic stabilizationobjectives have been the main reasons. Despite the recent measures taken by the Government to givethe highest priority to Bank-financed projects, insufficient and unreliable counterpart transfers from theTreasury have continued to affect project implementation. In addition, the budgetary process, whichenables the Congress to change individual allocations for specific road sections, often results ininconsistent budgets and inefficient execution of contracts. In order to substantially reduce the impactof such unreliable counterpart transfers on the execution of individual contracts and on projectimplementation, disbursements could be made in quasi-tranches against eligible expenditures aftercompliance with agreed physical and institutional implementation monitoring targets.

17. Project Implementation Plan and Monitoring Indicators. With the exception of the recentlyapproved state highway management projects, the projects did not include detailed implementationplans, appropriate indicators and targets, and computerized project management and monitoringsystems to effectively monitor project implementation, progress in fulfilling the developmentobjectives, and the performance of the implementing agency. As a consequence, project managers andBank supervision missions were unable to identify implementation delays and issues early enough toseek timely remedial measures. The lack of detailed implementation plans, monitorable indicators andadequate and timely project information was a major factor in the substantial delays encountered insubproject/ investment engineering and procurement of contracts.

18. Expenditure Planning and Progranmning, Network Management. The investments financedunder the highway and the feeder road projects have been justified in economic terms, and technicalsolutions have been optimized at the level of each individual investment. But technical solutions andpriorities have not been optimized and justified from a network management perspective, taking intoaccount existing resource constraints. This shortcoming has led to substantial over-dimensioning ofindividual investments, to the postponment of other essential expenditures, in particular maintenance,and, as a consequence, to the deterioration of the overall network condition. It is therefore essential toassess and compare alternative expenditure policies and strategies in order to optimize highwayexpenditure programs and individual project investments on the basis of appropriate technical andeconomic criteria and budget constraints. Experience was gained with the recent state highway projectsin carrying out regular network condition surveys, in establishing a network database, and inoptimizing expenditure strategies and programs using the Highway Design & Maintenance Standards(HDM) Model.

19. Maintenance by Contract. Experience with earlier highway and feeder roads projects inBrazil and worldwide has shown that highway maintenance, when carried out by force account, isgenerally ineffective. In addition to the difficulties in ensuring the necessary and timely transfers ofresources from the Treasury, government road agencies have demonstrated their inability to effectivelymanage the numerous activities, the personnel and the equipment required for highway maintenance.Since the early 1980s, DNER has contracted out the (routine) maintenance of the federal highwaynetwork, except for highways in Amazonia; the experience has been successful in ensuring theeffective delivery of routine maintenance services at reasonable costs. The forms of contracts,

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however, still require heavy supervision from DNER. New forms of (performance) contracts, whichwould pay contractors on the basis of the level of service maintained rather than of the quantities ofwork performed, could be more effective and should be tested. Also, the state highway agencies, mostof which still maintain their networks by force account, should now initiate contract maintenanceprograms.

20. Design and Implementation of Institutional Components. Borrowers and executing agencieshave generally given higher priority to physical investments than to the institutional components,which often fell short of achieving their objectives. The frequent changes in sector administrations andmanagement personnel have been an important factor. But the scope and timetable of the agreedinstitutional components have often been over-optimistic, and have underestimated the difficulties ofthe reforms. In order to be effective, the institutional components of projects need to be focused onaddressing a few essential issues. Their design and timetables should be realistic, and based on adetailed analysis of the capacities of the organizations to implement them. If possible, disbursementsfor the physical components should be linked to progress made under the institutional components.

21. Environmental Management. The experience with the Northwest Region DevelopmentProgram showed that highway and feeder roads investments can lead to significant long-termenvironmental damage by enabling destructive and disorderly colonization and economic activities, ifthe necessary measures to prevent or mitigate the potential adverse impacts are not promptlyimplemented. Also, road works can have more direct adverse environrnental effects, such as increasedsoil erosion. The ongoing Highway Management and Rehabilitation Project has been successful indeveloping and disseminating Environmental Guidelines for the transport sector and for the highwaysubsector, and in training federal transport sector staff. The recent State Highway Projects areeffectively helping participating state governments to establish appropriate road environmentalmanagement capabilities. These efforts should be continued and expanded countrywide.

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BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Federal Highway Maintenance Strategy and Program

A. Introduction

1. Too often in the past, subprojects of road rehabilitation for the federal highways were designed andimplemented without due consideration to the overall needs of the network and to DNER budgetconstraints. Even though the rehabilitation works carried out during the past fifteen years were supportedby economic analysis confirming that intemal rates of return of at least 12% were obtained, their prioritywas not always demonstrated and the technical solutions selected did not necessarily correspond tostandards yielding the maximum net present value to the community, and even less so in the context of aglobal analysis encompassing the entire highway network, under resource constraints. Generally, theadoption of over-designed subprojects, sometimes associated with premature execution, absorbs a greatdeal of available funds, leaving little resources for the rest of the network. The result, in the long term, is adramatic increase in the proportion of roads in poor condition, and thus in transport costs.

2. In order to formulate the most appropriate policy, i.e., a suitable set of technical standards for themaintenance of the federal highway network and to design a cost-effective program of implementationwhich assigns priorities and cost thresholds to the execution of rehabilitation works, an economic analysisusing the HDM/EBM models was performed. This analysis included the entire federal network to remainunder federal jurisdiction and the portion to be devolved to the states and a realistic level of budgetconstraints over the next five years. The main objective was to derive from the analysis the best strategyconsistent with attainable budget levels. The strategy would comprise: (a) a catalogue of technicalsolutions adapted to road conditions and traffic, to be applied throughout the project, associating with eachsolution with an average (maximum) unit cost, and (b) a phasing of execution of the program which wouldbe in line with the priorities as defined by the economic models. During the implementation of the project,a reasonable degree of consistency would be sought between the standards and unit costs based uponengineering studies, and the technical solutions derived from the HDMtEBM network evaluation.

B. Network Analysis

3. Comprehensive network monitoring and analyses have been carried out twice in the past by DNER:in 1986 and in 1992. In order to build the decentralization project upon more reliable and updatedinformation, an extensive program of road measurements was carried out between June 1995 and March1996, with the assistance of DNER regional districts supplemented by six consulting firms. Practically, theentire length of the paved federal highways, i.e., about 51,000 km, was divided among the five regions andthoroughly surveyed.

4. The surveys included:

(i) the assessment, on a continuous basis, of the geometric and structural characteristics of the roads,as well as the surface defects observed on the pavements, i.e., proportion of cracking or raveling

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and areas of potholes, assigning to each km a rating or note of between I and 5 (5 being excellent,and 1 very poor);

(ii) the measurement, also on a continuous basis, of the international roughness index (IRI) of eachhomogeneous section of the network, using calibrated response-type equipment;

(iii) deflection measurements within 1,500 one-km-long segments of the network, selected as beingrepresentative of the condition of homogeneous links;

(iv) traffic counts at about 250 sites located so as to supplement the information collected from othermajor locations where DNER systematically carries out traffic volume censuses.

5. All the information obtained from the surveys was compiled into a computerized data bankdesigned to enable statistical evaluations to be made, and to calculate the weighted average values of theparameters characterizing each cell of a matrix comprising groups of homogeneous links, in terms oftraffic, roughness, and structural capacity. Table 3 of this annex indicates how the federal network wasclassified as a function of traffic volume, surface condition, and deflection.

C. Alternative Maintenance Strategies

6. Annex 7, on the project's economic analysis, presents the detailed methodology used for thedefinition of the various maintenance options taken into account in the economic evaluation. Broadlyspeaking, the following alternatives were selected as being representative:

(i) for roads in good condition (IRI<3), patching and simple resurfacing using surface treatments orslurry seals, and also a thin asphalt concrete overlay whenever traffic volume is high and pavementstrength low;

(ii) for roads in fair condition (3 < IRI <4.5), asphalt concrete overlays with thickness varying from 3to 8 cm were analyzed and compared to surface recycling techniques; and

(iii) for roads in poor condition (IRI> 4.5), policies included medium to thick asphalt concrete overlays(from 5 to 12 cm), or deep recycling followed by a new wearing course, as well as a complete baseand wearing course reconstruction.

7. The economic benefits of postponing works execution were also analyzed though the adoption ofcondition thresholds triggering execution (area of cracking, or roughness level), or simply by setting theyear of execution as year 1, year 3, year 5 or year 7. Altogether, twelve maintenance policies were tested,namely:

- 41 - Annex 2

Table 1: Proposed Rehabilitation Techniques

PatchingSingle surface treatment, or Slurry sealDouble surface dressingAsphalt Concrete Overlay, 3 cm thickAsphalt Concrete Overlay, 4 cm thickAsphalt Concrete Overlay, 5 cm thickAsphalt Concrete Overlay, 6 cm thickAsphalt Concrete Overlay, 7 cm thickAsphalt Concrete Overlay, 8 cm thickAsphalt Concrete Overlay, 10 cm thickAsphalt Concrete Overlay, 12 cm thickRecycling of upper 5 cm of pavement followed by a full-width A.C.overlay of 4 to 12 cm thick (when ADT>5,000)Reconstruction of base, including 5 to 10 cm A.C. wearing courseReconstruction of base with double-surface dressing wearing course

D. Budget Constraint Levels and Phasing of the Economic Analysis

8. During the last ten years, resources for the maintenance and rehabilitation of the federal highwaynetwork remained consistently in the order of US$100 million and US$350 million respectively, for a totalnetwork of about 50,000 km. Accordingly, and consistent with past experience and future expectations,optimum strategies were defined for a wide and realistic range of budget constraint scenarios likely to occurwithin the next five years. This time, however, a reduced network was considered comprising a total lengthof about 38,000 km of which 29,000 km are to remain under federal jurisdiction, and the remaining 9,000km are to be transferred to the States. About 2,500 km which are already under contract and 11,300 kmpertaining to the concession program were excluded from the analysis. The economic analysis was carriedout in two phases. In the first phase, the entire 38,000 km long network was analyzed using variousconstraint scenarios for rehabilitation, i.e., US$200, 225, 250, 275, and 300 million per year, over the nextfour to five years. Resources for routine maintenance were kept unconstrained, representing betweenUS$80 and 85 million per year (i.e., US$2,100/km/year). This preliminary analysis helped determine theoptimum global budget level for that network, considering DNER financial constraint. But, in order toarrive at a feasible program and an acceptable budget sharing ratio between DNER and state-transferrednetworks, it proved necessary to incorporate the results of the discussions held with the States. Thenegotiations had indeed indicated that decentralization would be successful only if it involved, before thedevolution, the rehabilitation of about 4,000 km of roads. Thus, the second phase of the analysis aimed atdetermining the amount of resources that would need to be applied to the network to be transferred in orderto achieve a rehabilitation program involving about 4,000 km of roads. Various pairs of budget constraintratios (DNER/state-transferred networks) - all within the previously determined optimum global budget -were tested until a satisfactory solution was obtained.

E. Strategy Formulation

9. Catalog of Structures for Pavement Rehabilitation. The first phase of the economic evaluationusing the HDM/EBM models with various budget constraint scenarios indicated that the best strategy to be

- 42 - Annex 2

applied for the 38,567 km-long network, considering its current maintenance condition and traffic,corresponds to US$225 million annually over the next 4 to 5 years (excluding routine maintenance andcapacity enhancement on the paved network, as well as the maintenance of the unpaved portion of thenetwork). The second phase of the economic evaluation indicated that the US$225 million should be bestshared in the proportion of US$175 million for the 29,335 km long network to remain under federaljurisdiction, and US$50 million for the 9,232 km long network to be devolved to the states. Implementingthis scenario would reduce the proportion of roads in poor condition from the current 10% to 2% in theyear 2001, and keep that proportion relatively constant during the subsequent ten to fifteen years, providedthat subsequent annual resource allocations are maintained to a minimum level of about US$175 million.The selected strategies for each network can best be represented by the catalog of structures shown inTables 3 and 4 hereafter. The catalogs give the optimum technical solutions to be applied as a function oftraffic level, pavement surface roughness and pavement structural condition (deflection). They also definethe maximum average unit cost per km for each solution as well as the most suitable year (between 1 and7) in which the execution of the works should take place. As was stated earlier, care will be taken duringproject implementation to ensure that the technical solutions proposed from detailed rehabilitation studiesdo not depart significantly from the standards and costs recommended by the network evaluation study,since this would greatly modify the financial evaluation and economic returns of the program (section G).

10. Capacity increase. In addition to defining the most satisfactory structural designs for theresurfacing and strengthening of existing pavements, the HDM Model yielded the following guidelines forcapacity enhancement:

(i) the construction of a third lane to upgrade a two-lane bi-directional road is economically justifiedwhenever: (a) the traffic level lies in the range of 5,000 to 7,500 vehicles per day, (b) theproportion of heavy commercial vehicles exceeds 30%, and (c) the unit cost of the upgrading is lessthan about US$200,000 per km; and

(ii) the upgrading of a two-lane road to a dual carriageway is economically feasible whenever: (a) thetraffic volume in both directions exceed about 8,000 vehicles per day, and (b) the unit cost ofconstruction of the second carriageway remains below US$300,000 to US$350,000 per km. Formuch higher unit cost of dualization, traffic thresholds would be substantially higher than 10,000vehicles per day.

Moreover, climbing lanes are justified whenever: (a) the gradient is more than 3%, (b) the volume ofcommercial vehicles exceed 300 per day, and (c) the length of the climbing lane is more than about 300 m.

11. Maintenance policy for unpaved roads.The strategy for maintaining the 15,000 km of federal Table 2: Frequency of Grading and Regraveling forunpaved roads was based on studies carried out in Unpaved RoadsBrazil, using also the HDM model and representative No. of Time interval between

unit costs for routine maintenance, including balding Average daily traffic grading/year regraveling (years)

and regraveling. The following optimum frequencies <25 2 7

of grading and regraveling are recommended as a 25-50 4 650-100 8 5

function of average daily traffic. Furthermore, 100-200 1 2 4

whenever traffic volumes exceed about 300 vehicles >200 24 3

per day, consideration should be given to upgradingand paving in order to reduce maintenance andvehicle operating costs.

- 43 - Annex 2

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 3: Catalog of Rehabilitation Solutions for Federal Network

Traffic IRI < 2.5 2.5 IRI < 3 3 <IRI <3.5 3.5< IRI 4.5 IRI '4.5

ADT D<OASmm, D'0.45rmrn 1D<0.45 mm D >0.45mm DcO.45nDn 0.45mm ID<0.45mm D 0.4Smm 0<045m- 0>0.45mm

Pavements with Asphalt Concrete Waring Course

0 1200 RM RM RM RM RM RM 3cm RM = m

1200-1800 RM RM RM RM Icm 3cm 3cm 3cm cm Gem

1B00-2300 RM RM RM RM ~~~ ~~3cm 3cm 3cm 3cm acm acm1800-2300 RM RM RM RM U3 m 3cm 4cm rnt

2300-3100 RM RM RM RM 3cm 3cm 3cm cm *cm 4cm

3100-4800 RM RM RM RM 4cm cm 5cm cm Scm Scm

480010000 RM R M R M R M cmemcmcmcm Ccc

> 10000 RM RM RM RM 5cm 5cm Scm acm Scm Scm

Pavements with Surface Dressing Wearing Course

01200 RM RM RM RM RM RM RM RM RM Rcr OST

1200-1800 RM RM RM RM RM RM RM RM Scm m

1800-3100 RM RM RM RM 4cm 5cm 5cm cm cm

Table 4: Catalog of Rehabilitation Solutions for Transferred Networks

Traffic RI < 2.5 2.5 <IRI <3 3 <tRI <3.5 35 IRI <4.5 IRI > 45

ADT D < 0.45 mmn D>045mm 1<0.45mm D>0.45mm 1D<0.45mm D00.45mm ID<0.45mm D>0.45mm ID.045mm D-045mm

Pavements with Asphalt Concrete Wearing Course

<1200 RM RM RM 3 RM RM U3 RM3cUrmnc 5cm

1200-1800 RM RM RM -- 3-M -3 3- a' -t1200-1BOO RM RMRMS3cm 3cm 3cm 3cm 3cm 'cm acm

1800-2300 RM RM RM 3cm 3cm 3cm 3cm 3cm cm cm

2300-3100 RM RM 3cm 3cm 3cm 3cm 3cm 3cm 4cm 5cm

3100-4800 RM RM scm 3 cm 4cm <cm Scm acm acm

Pavements with Surtface Dressing Wearing Course

01200 RM RM RM -S DST DST RM RM RM RM

1200-1800 RM RM RM RM RM RM m RM cm

1800-3100 RM RM 3cm 3cm 4cm cm 5cm 5cm acm 5cm

Ltumnd RM Roubne Maintenance

Asphalt Concrete Overlay 3 cm Thck

C". Recycing 5 Cm and place 4 cm A C Overlay

R c DST Reconsctrucon vmth Double Surface Treatment Wearing Course

tST Resuacing vdtt Sngle Sualace Treatnent

t D"T RescLwacing vAth Dotmie Surface Treatement

- 44 - Annex 2

F. Multi-year Rehabilitation Program

12. Based on the analyses performed, Table 5 shows for the selected strategy (US$225,000 per year)the scope of the five-year program of road investments for the 38,567 km long highway system analyzedboth in terms of physical targets and total financial needs. The table spells out, year by year, the varioustechnical standards to be applied, their respective unit costs, and the lengths of the network over which theywill be implemented. As can be seen, the overall program is estimated to cost approximately US$1.2billion and involves rehabilitation and/or resurfacing works over a cumulated length of 14,150 km, i.e.,37% of the total network. About 3,800 km of rehabilitation pertain to the network to be transferred and10,350 km belong to the network that will remain under federal jurisdiction. More specifically, theprogram will comprise the execution of about:

766 km of surface-dressing works, at a cost of about US$ 10 million;13,195 km of asphalt concrete overlays, at a cost of US$883 million;188 km of reconstruction, at a cost of US$21 million; and1,350 km of operational improvement, at a cost of US$120 million;

Excluding capacity enhancement, the total amount of investments in rehabilitation works would be US$914million, i.e., US$225 million annually, and US$65,000/km. Regarding the network intended for concessionby DNER itself (about 4,000 km), contingency funds will be provided for, in case the concession programtakes longer to implement than expected. The assessment of the amount to be set aside was based on ananalysis of the condition of that network. The estimated value for the contingency fund is about US$100million, representing the execution of a 3 cm thick asphalt concrete carpet on the portion of that networkwhich is in critical condition (about 1,000 km with IRI > 4). This work will help improve riding qualityand waterproofness.

G. First-Year Rehabilitation Program

13. The first-year program, which is expected to start in late 1997, early 1998, was prepared on thebasis of the HDM economic evaluation. It represents the highest priority road sections which needrehabilitation or resurfacing. The total length of this program is approximately 3,155 km. The programwould comprise between 40 and 60 homogeneous road segments covering most of the states butpredominantly the states of Bahia, Goias, Mato Grosso, Minas Gerais, Parana, Rio de Janeiro, Rio Grandedo Sul, and Santa Catarina. About 76% in length are highways that will remain under federal jurisdiction;the other 24% would be transferred to the states.

14. Detailed engineering studies are presently available for nearly 50% of the first-year program andthe information was used to prepare rehabilitation designs that are consistent with the recommendations ofthe Catalog of technical solutions and to carry out the economic evaluation. More detailed investigationsare under way for the remaining 1,500 km, and by June 1997 final designs will be available for the entirelength of the priority program.

15. The 50% sample analyzed thus far, show that the majority of the road segments involved in thefirst-year program were built some 25 years ago and strengthened or resurfaced about 15 years later, i.e.,

between 1985 and 1988. The pavements mostly consist of flexible structures with asphalt concretesurfacing and granular base-course. They presently carry average daily traffic ranging generally between2,000 and 5,000 vehicles. Usually cracked over more than 20% of their length, their current roughness

- 45 - Annex 2

values average almost 7 IRI, reflecting their poor condition. As shown in Table 5, rehabilitation techniquesgenerally involve the placing of an asphalt concrete overlay having average thickness of between 4 and 8cm, which will increase the pavement structural number to an acceptable figure of more than 4. The needfor further strengthening or resurfacing is only expected to occur after the next 10 to 15 years of service.

16. Table 5 summarizes the main characteristics of the road sections forming part of the first-vearprogram, along with the subproject economic evaluation carried out using the HDM model. For a totallength of 1,512 km analyzed, the investment cost amounts to approximately US$108 million (giving anaverage unit cost per km of US$71,000). These investments yield intemal economic rates of return (IERR)generally ranging between 50% and 250% (averaging 175%) with a total Net Present Value (NPV) ofUS$1.5 billion. Sensitivity analyses showed that a 20% increase in rehabilitation costs or a 20% reductionin benefits only marginally affect the IERR and NPV, usually by less than 20%. Rehabilitation costs wouldhave to multiplied by a factor of 24 or benefits would have to divided by a factor of 21 in order to reducethe NPV to zero.

17. The implementation schedule for the first-year federal highway program is shown in Annex 9Bidding process is expected to start before July 1997, and works scheduled to begin around October-November 1997 are expected to be completed 18 months latcr, i.e., towards the end of 1998.

H. Routine Maintenance Strategy and Program

18. Historical background. Prior to 1970, the Evolution of Maintenance Execution Modalitiesroutine maintenance of the federal highway system wascarried out directly by DNER using its own personnel and 100%equipment. However, because of the large maintenancebacklog accumulated over 20 years, as higher priority Ocwas given to paving and new construction, labor 3 60% gatshortages and insufficient maintenance equipment in the z 40%field residencies made it impossible for DNER to cont'inue 20%) routine maintenance exclusively by force-account. 0%- _ + _+ _ _ _ +:_Beginning in 1971, in addition to reorganizing and 1965 1975 1980 1985 1990 1995structuring a limited core of force-account unit, DNER Year

shifted its policy to maintenance by contract, and, whereappropriate, to delegation of these activities throughagreements with State Highway Departments, or exceptionally with the Army. These efforts weresupported by the Bank from 1975 onwards. In 1990, the distribution between the three types ofmaintenance were as follows: contract maintenance 60%, delegated maintenance 25%, and force-accountmaintenance 15% of the total length of the federal network.

19. Current maintenance policy. To a large extent, the 25 year experience with maintenance bycontract has been successful, and to-day 80% of the federal system (excluding 13,000 km of earth roads),i.e., about 44,000 km, are being maintained through individual three-years contracts with privatecontractors. The maintenance of the remaining 20% portion of the network is delegated to DERs (about8,000 km), while the Army maintains some 2,000 km, mainly unpaved roads in the northem part of thecountry. There are currently 250 on-going contracts with the private sector, each contract covering about200 km of roads. The activities involved normally comprise drainage, clearing of right-of-ways, shoulderrepairs, pavement patching and occasionally limited overlay and resurfacing works. By and large,

-46 - Annex 2

individual contracts amount to approximately US$2 million over a three-year period, representing anaverage cost per km and per year ranging from US$2,500 to US$5,000. The programs are prepared anddesigned by the district residencies, through visual surveys of the road condition and estimates of thequantities of works. The districts are also responsible for the supervision and monitoring of the activitieson site, with some support from DNER head-office personnel.

20. Such admeasurement-type contracts, however, are becoming more and more difficult to manage,not only in the preparation stage, but also during execution. Items to be quantified and measured forpayments sometimes reach 200 to 300 in number, and DNER lacks personnel to supervise efficiently thequantity and quality of the works performed by the contractors on site. Therefore, there is a growingtendency to measure and monitor on a sample basis with all the shortcomings and uncertainties that such asystem entails. The situation is further compounded by the deficiencies in resource allocations: not onlymaintenance budgets tend to be insufficient, but activities are difficult to plan and program since resourcesare released by the Treasury on an unpredictable basis.

21. Proposed future maintenance modalities. The need was therefore felt to go one step further inorder to improve the system and to ensure better service to road users. Solutions had to be sought to theproblem of cumbersome measurements and supervision procedures by DNER, while attending the necessityto bestow more responsibility and initiative to the contractors. To that effect, DNER has envisaged thepossibility of adopting performance-type contracts which are already being implemented with success inArgentina, enabling to reduce considerably the work-force needed for preparation and supervision, whileallowing the contractors to be more creative and more directly involved in the design and quality control ofthe maintenance program. One system concerns essentially routine maintenance and applies to roads ingood to regular condition. The other system, which integrates both rehabilitation and routine maintenance,applies to small networks in regular to bad condition, necessitating some prior strengthening or resurfacingworks before routine maintenance can be effectively carried out. The first system would normally beawarded for a period of 5 to 10 years. The contracts would define - not the type and quantities of works tobe executed and paid on a unit price basis - but rather a level of service to be obtained, as reflected forexample by the riding quality of the pavement, the presence and efficiency of drainage and safety features,or the friendliness of the road immediate environment. Payments would be made on a km/month basis,following regular inspections carried out to identify any deficiencies which, unless corrected within a giventime period, would give rise to penalties, that would be deducted from the payments to be made to thecontractors. The integrated rehabilitation/maintenance system comprises initially a rehabilitationcomponent which is paid once executed on a lump-sum basis, provided the final specified results arecomplied with. The rehabilitated network would then be maintained according to the km/month system.

22. Pilot Maintenance Program. As part of the proposed project, pilot schemes for performance-based contract, comprising the above systems, will be carried out and are intended to be expanded to theentire network, when proven successful. The first pilot scheme, the routine maintenance system, will beimplemented in each of the five regions of the country, and will involve a total network of about 2,000 km,comprising individual sub-networks with length varying between 100 and 200 km each. These sub-networks are currently being identified and surveyed by the district engineers and a technical assistance wascontracted to prepare bidding documents (including technical specifications), help evaluate proposals andtrain DNER personnel in the monitoring of the program. It is expected that tendering would take place inthe third quarter of 1997, and works would start in late 1997. The second pilot scheme, the integratedrehabilitation and maintenance system, will be developed and implemented once the first one is in operation,and is therefore scheduled to begin in 1998.

- 47 - Annex 2

Table 5: First Year Rehabilitation Program

Sample Sub-Projects

Road Section From To Ext Surf. Traffc Deslen Total Cost Switchine FactorKm Km Km Thick IRI ADT Rehab USSM NPV IERR Base Cost Bene.

mm Solutlons* BR-101/BA Entr. BA-093/400 (Entre 65.6 131.4 65.8 60 8.0 3,730 05 7,980 80.4 122.8 14 14

Rios)/Entr. BA-515(TeodSarnp.)

BR-10IBA Entr. BA-515 (Teodoro 131.4 207.5 76.1 75 8.0 3,326 04 9,051 69.1 90.5 11 10Sampaio)/Entr. BA-492(Gov. Mang&)

BR-101/SC Penha-Canal Marui 266.3 315.7 44.3 50 2.0 12,003 AS 2,033 100.3 140.7 100 10BR-285/RS Entr. BR-158 (p/Cruz 416.0 432.0 16.0 -50 3.5 4,800 04 1,188 15.2 85 17 17

AltayEntr. RS-155 (p/lsui)BR-285/RS Entr. RS-155 (p/Isui)/Entr. 456.8 463.7 6.9 50 3.4 4,800 04 512 6.5 92.6 18 20

RS-342(B)BR-2851RS Entr. RS-342(B)/RS-536(A) 463.7 498.9 35.2 50 2.9 4,175 04 2,027 20.8 58.7 11 10BR-070/MT Entr. BR 524.7 605.7 81.0 20 2.4 2,983 A6 5,329 44.0 51.6 15 14

163(B)/364(ByEntr. MT-160/370

BR-070/MT Entr. BR- 605.7 661.7 56.0 20 3.0 2,983 A6 3,153 33.2 81.8 23 25163(B)/364(ByJacobina

BR-010/MT. JacobinalEntr. BR- 661.7 731.9 70.2 20 2.3 2,983 04 3,627 32.7 54.3 12 11. 174(AYMT-343

BR-1011BA Entr. BA-233/Entr. BA- 35.5 65.6 30.1 40 3.4 3,266 R5 1,081 11.8 85.7 13 13I 093/400

BR-364/RO Div. MTlRO/Entr. RO-391 0.0 51.4 51.4 40 4.9 1,066 04 3,683 3.7 22.3 2 2BR-364/RO Entr. RO-391/Marco Rondon 51.4 110.0 58.6 25 4.6 1,066 04 4,234 2.3 18.4 2 2BR-1631MT Nova Muturn/Entr. BR-242 625.3 711.8 86.5 25 4.0 2,271 R5 9,366 46.9 55.4 7 7BR-2851RS Entr. RS-176/Entr. BR- 638.1 673.1 35.0 40 3.6 4,004 06 2,499 24.5 76.4 12 13

287(AY472BR-259/ES Entr. BR-101/Ac. Cotalina 0.0 51.0 51.0 20 5.0 3,237 08 3,126 71.5 223.7 52 50BR-101/BA Entr. BR-420/Entr. BA- 287.9 365.4 77.5 40 5.8 3,678 03 3,637 75.3 163.0 24 25

250(A)BR-101/BA Entr. BA-492/Entr. BA-420 207.5 287.9 80.4 40 5.9 3,678 05 2,803 80.5 304.1 50 50BR-364/GO Entr. BR-060(A)/Entr. GO- 192.7 259.3 66.6 20 7.2 2,041 05 2,351 47.2 210.2 30 33

050BR-174/MT Entr. MT-388(B)/Entr. MT- 163.9 221.9 58.0 20 11.5 2,983 07 4,743 61.7 222.0 IS 17

246(A)/473BR-174/MT Entr. MT-246(AY473/Rio 221.9 286.5 64.6 20 11.5 2,983 07 4,395 102.3 389.9 32 33

SarareBR-174/MT RioSarare/CorregoDourado 286.5 358.8 72.3 20 11.5 2,983 07 5,600 124.5 388.8 33 33BR-174/MT Entr. BR-070(B)/Entr. MT- 0.0 46.2 46.2 20 9.0 2,983 07 3,434 89.7 372.9 38 33

173(A)BR-174/MT Entr. MT-173(A)/Porto 46.2 101.9 55.7 20 11.5 2,983 07 4,006 88.3 370.5 30 33

EspindiaoBR-174/MT Port EspiridiaolEntr. MT- 101.9 163.9 62.0 20 11.5 2,983 07 5,304 92.5 298.3 24 25

248BR-174/MT Corrego Dourado/Entr. MT- 358.8 435.6 76.8 20 11.5 2,983 07 6,162 115.3 318.2 26 25

364(A)BR-174/MT Entr. BR-364(ARio l2de 435.6 490.9 55.3 20 11.5 2,983 05 4,127 74.7 245.7 22 20

OutubroBR-174/MT Padronal Div. MTIRO 490.9 523.9 33.0 20 11.5 2,983 04 2,396 39.0 194.6 18 17

1,512.5 32 6.7 3,442 107,847 1,553.9 175.5 24 21(Total) (Avg) (Avg) (Avg) (Total) (Total) (Avg) (Avg) (Avg)

Note:03, 04, 05, 06, 07,08 = Asphalt concrete overlay 3, 4, 5,6,7, 8 cm thickness, over 7.2 m wideAS, A6 = Asphalt concrete overlay 5,6 cm thickness, laid full-width 10.2 m.R5 = Reconstruction with 5 cn Asphalt Concrete wearing course

- 48 - Annex 3

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Federal Highway Decentralization Program

1. The 1988 Constitutional reform decentralized fiscal revenues and transferred all road usercharges to States and Municipalities without changing in parallel the distribution of responsibilitiesamong the three administrative levels. The federation was therefore left with a disproportionate shareof functional and financial responsibility, which became more and more difficult to assume as DNER'sannual budgets dramatically decreased from about US$3 billion to a current figure of about US$1billion. The average annual expenditure of US$250 to US$300 million incurred over the last fiveyears for rehabilitation and maintenance is substantially below the level of resource allocations requiredto properly maintain, strengthen and upgrade the 69,000 km forming the federal network. On theother hand, most state governments would now accept to assume responsibility of part of the federalnetwork providing they receive either the funds needed for necessary rehabilitation works, if any, orthe roads in good condition. In order to correct the imbalance between highway revenues andexpenditure responsibilities at the federal and state levels, it became obvious that the solution was toreduce the size of the network under federal jurisdiction, devolving to the States all roads which arenot of national interest, while embarking simultaneously on a concession program which involves theparticipation of the private sector.

2. To that effect, and over the last five years, the Ministry of Transport has been activelyworking at redefining the configuration of the road network that should remain under federaljurisdiction. The criteria used to define the highways of national interest which would become the newfederal system were five-fold : (i) they connect the states' capitals and thus contribute to nationalintegration; (ii) they provide connections to other major modes of transport; (iii) they establish inter-regional links; (iv) they ensure and fulfill national defense and safety purposes; and (v) they promoteinternational connections with neighboring countries. Based on these criteria, a new national highwaysystem was drafted in early 1995, which included a preliminary definition of the highways that wouldremain federal and those which could be devolved to the states.

3. Following the preliminary definition of the proposed new national highway system, theMinistry of Transport initiated in June 1995 intense negotiations with the state administrations and bySeptember 1995 arrived at a consensus regarding the proposed reclassification. It was confirmedduring the negotiations that only highways in good condition, through rehabilitation when necessary,would be transferred to the states. Draft legislation that would formalize the proposed reclassificationwas then prepared and sent to the Congress on October 31, 1995. The configuration of the new federalsystem sent for approval to Congress comprised approximately:

highways linking the states' capitals (17,200 km);highways providing connections to other major modes of transport (4,100 km);highways establishing inter-regional connections (13,800 km);highways ensuring national defense purposes (1,000 km); andhighways promoting international connections (6,300 km).

- 49 - Annex 3

4. Altogether, the proposed reclassification contemplates the devolution of about 17,500 km to thestates, of which 12,500 km are paved. The new federal system which would incorporate also someroads previously under state jurisdictions, would consist of about 50,000 km, of which 40,000 km arepaved and 10,000 km, essentially in the Northern region, are unpaved (Table 1). The total length ofthe federal network would therefore be reduced by about 26%. If one also considers the concessionprogram, which aims to transfer about 10,000 km to private operators, DNER's network responsibilitywould be reduced by a total of about 40%.

Table 1. Proposed Federal anid Transferred Networks (km)

Federal Network State Networks Transferto remain federal to be transferred to be as % of

STATE Paved Unpaved Total Paved Unpaved Total Rehab. Paved Unipaved Total StateNet.

NORTHRONDONIA 1195 380 1575 0 140 140 0 163 4126 4289 3ACRE 298 862 1160 0 0 0 0 23 316 339 0AMAZONAS 861 1307 2168 0 260 260 0 650 596 1246 20RORAIMA 222 817 1039 0 213 213 0 59 1618 1677 13PARA 640 2881 3521 0 281 281 0 2666 4202 6868 4AMAPA 193 483 676 0 194 194 0 40 439 479 41TOCANTINS 791 473 1264 0 407 407 0 878 6307 7185 6

NORTH-EASTMARANHAO 1945 535 2480 426 305 731 26 1932 3100 5032 15PIAUI 2009 71 2080 64 331 395 23 1457 4721 6178 6CEARA 1543 0 1543 454 206 660 177 3837 3370 7207 9R. G. NORTE 952 0 952 348 185 532 88 2345 1189 3534 15PARAiBA 919 2 921 303 0 303 83 1731 2615 4346 7PERNAMBUCO 1907 72 1979 570 35 605 285 2678 2064 4742 13ALAGOAS 683 0 683 43 49 91 9 1515 734 2249 4SERGIPE 313 0 313 6 0 6 12 1524 1143 2667 0BAHIA 3358 388 3746 929 441 1370 298 7275 7481 14756 9

SOUTI1-EASTMINAS GERAIS 4971 117 5088 4311 555 4866 1571 8645 11492 20137 24ESPIRITO 755 7 762 12 0 12 11 2337 2446 4783 0SANTOR. DE JANEIRO 1322 21 1343 260 0 260 253 2420 2400 4820 5SAOPAULO 1107 0 1107 35 0 35 22 16551 2093 18644 0

SOUTIIPARANA 1727 117 1844 1481 87 1568 243 9608 2190 11798 13S. CATARINA 1737 130 1867 382 13 395 2 2995 2779 5774 7R. G. DOSUL 2773 223 2996 2383 133 2516 496 4120 4994 9114 28

CENTER-WESTMATO GROSSO 2733 272 3005 27 664 691 0 1757 17548 19305 4M. GROSSO SUL 2825 403 3227 87 81 168 45 1674 9995 11669 1GOIAS 231:8 485 2853 357 334 691 139 5765 14077 19842 3D. FEDERAL 165 0 165 0 0 0 0 573 726 1299 0

TOTAL 40311 10045 50356 12476 4912 17388 3783 85010 114761 199771 9

5. The four states Minas Gerais, Rio Grande do Sul, Parana, and Bahia would receive about10,320 km, accounting for 60% of the total transfer. Individually, they would be transfered between1,500 km and 4.800 km, representing between 13% and 28% of the total state networks under their

- 50 - Annex 3

responsibility. In order to alleviate the impact of such transfers, the four states have prepared andundertaken plans to concession a significant portion of the highways to be transferred, together withstate highways and sections which will remain under federal jurisdiction. The Federal Government hasrecently delegated many of these highways to the states in order to enable them to invite bids forconcessions (Annex 4, section C). Of the remaining states, a group of about half would receivebetween 300 and 600 km each, the other half receiving less than 200 km.

6. The Transport Commission of Congress prepared an alternative proposal which consists ofdistributing the federal network into two distinct networks: a "Rinter" network (Rede Interestadual eInternacional de Estradas de Rodagem) which corresponds to the main inter-state, inter-regional andinternational networks, and a "Complementary" system. The former would constitute the new federalhighway system to remain under federal jurisdiction, part of which may be either delegated to statesadministrations or concessioned to the private sector. The total length of Rinter network, includinghighways to be tendered out for concessions, is about 43,100 km of which 33,300 km are paved. Theproposed federal network would include inter-state highways (30,300 km), inter-regional connections(5,300 km), and international links (7,500 km). The complementary network, totaling about 26,200km (of which 18,000 km are paved) would still be administered by M.T./DNER, preferably throughdelegations to States, Municipalities or the Federal district, until the final transfer occurs by agreementbetween the Federal and the State Governments. Delegation to States or Municipalities would givethem also the right to either concession the highways or to directly recover tolls, the proceeds of whichwould be used to maintain these highways and possibly adjacent feeder roads. The proposal has beenapproved by the relevant commissions of the Congress and is expected to be presented to the Chamberof Deputies and the Senate for final votes in the near future.

7. Pending approval by the Congress of the new federal highway system, and in accordance withthe spirit of the draft legislation, a transitional step is being taken to initiate and speed up thedecentralization process. It entails the signing of decentralization agreements or protocols of intentionbetween the Ministry of Transport and the State Governments, aimed at defining the highway segmentsto be transferred and the respective responsibilities of DNER and the states for the execution andfunding of the rehabilitation works and future maintenance of these highway segments. Four highwaydecentralization agreements have been signed with the states of Parana, Rio Grande do Sul. MinasGerais and Bahia. The agreements specify that responsibilities for the selected highway sectionswould be transferred when the SNV Law is approved, or, for those sections which requirerehabilitation, after the completion of the works. In the event the SNV Law is not approved, the stateis committed to assume operation and maintenance responsibility for a period of at least ten years. TheMinistry of Transport has also delegated federal highway sections to the states of Parana, Rio Grandedo Sul, and Santa Catarina for their concessioning by the states (Annex 4).

8 The Federal and the state govermnents have agreed, in order to minimize the impact of the transferson the states' expenditure responsibilities, that highways would be transferred in good condition or that theFederal Government would provide the resources necessary to rehabilitate those in poor condition. TheMinistry of Transport has negotiated and would enter into highway decentralization agreements with allparticipating states in order to specify the respective responsibilities of the Federal and state governmentsfor the execution and financing of such rehabilitation works. DNER has negotiated and would enter intodelegation agreements with seven states (Minas Gerais, Rio Grande do Sul, Parana, Rio de Janeiro, Goias,Bahia and Ceara) to delegate the execution of the rehabilitation works within agreed technical and financialparameters. These seven states were selected on the basis of the size of the rehabilitation program in thestate and the capacity of the DER to implement it. The proposed project would assist the federal and thestate governments in effectively implementing such agreements.

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BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Federal Highway Concession Program

A. Introduction

1. In 1994, the Federal Government and DNER initiated the preparation of a highway concessionprogram. The objectives were to transfer the management and financing of existing federal highwaysto private investors. A special concession unit was created within DNER to: (i) develop a consistentprogram; (ii) analyse priority projects; and (ii) prepare tender documents and invite and evaluate bids;In February 1995, the Congress passed a Concession Law, which specifies the procedures and criteriafor transferring public facilities and services, including highways, to private concessionaires. In thecourse of 1995, DNER implemented the first phase of the program, which consisted of four highwaysections and the Rio-Niteroi bridge, which had already been tolled in the past (Table 1). All of themrequired substantial initial rehabilitation works. The Rio - Sao Paulo, Dutra highway also requiredadditional capacity investments. All the five concessions, which total about 850 km in length, havebeen contracted and are presently in operation (section B). On the basis of the experience with the firstphase, DNER initiated the preparation of the second phase of the concession program, which wouldinvolve some 10,000 km of existing federal highways (sections C and D).

2. In September 1996, however, the Congress passed another law (the Delegation Law), whichauthorizes the Federal Government to delegate federal highways and other public infrastructurefacilities to states and municipalities for their subsequent concessioning. On the basis of this law,some state governments, including Rio Grande do Sul, Parana, Santa Catarina and Minas Gerais, havestarted developing and implementing highway concession programs, which combine both federal andstate highways. The Ministry of Transport, in line with the Government's decentralization objective,and on the basis of the recent Delegation Law, has delegated federal highway sections totaling about4,500 km to the first three states for concessioning. Negotiations are still underway with the state ofMinas Gerais for further delegations. DNER will be responsible for concessioning the remaininghighways sections included in the program, and for monitoring the concessioning of the delegatedhighways (section E). Other states, including Sao Paulo and Rio de Janeiro, have prepared orundertaken concession programs which essentially involve state highways.

3. The DNER and the state programs have the same objectives: increasing road cost recoverythrough tolls, and improving highway management through the private sector. Private concessionaireswould operate, rehabilitate and maintain the highways, and, in some cases, carry out and financeinvestments, and would recover these costs from road users through tolls. The governments orhighway agencies remain responsible for identifying candidate highways, defining initial works andmaintenance standards, calling for bids and evaluating proposals from prequalified investors, as well asfor supervising the concession contracts. But the bidding procedures and bid evaluation criteria varyfrom state to state. As an example, DNER has awarded the concessions to the pre-qualified bidderswho offered the lowest toll rates. Other criteria used are the highest price for the concession (state ofSao Paulo) or the longest section of highway maintained (state of Rio Grande do Sul), both for a tollrate set by the state.

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B. Experience with the First Phase of the DNER Program

4. DNER has completed the first phase of the program, which consisted of concessioning fivehighway sections totaling about 850 km, including the Niteroi Bridge, the Dutra - Rio de Janeiro - SaoPaulo highway, the Osorio - Porto Alegre highway, the Alem Paraiba-Teresopolis highway, and theJuiz de Fora-Petropolis-Rio de Janeiro highway, which were already tolled in the past. The totalinivestments required on these five sections are estimated at about US$1.3 billion equivalent over theconcession period (Table 1).

Table 1 - Federal Highway Concession Program, First Phase

Concession Length Concession Investment Concession(km) period Estimate Stage

(years) US$ Millions)

Rio-Niteroi Bridge 13.2 20 59 Signed 06/95

Osorio-Porto 112.3 20 48 SuspendedAlegre Highway

Rio de Janeiro- 179.7 25 323 Signed 10/95Petr6polis-Juiz de Fora

Rio de Janeiro- 144.4 25 133 Signed 11/95Teres6polis-Alem Paraiba

Rio de Janeiro-Sao Paulo- 406.8 25 770 Signed 10/95Dutra Highway

5. This first phase of the program suffered delays due to litigation by unsuccessful bidders and tothe unavailability of long-term private debt finance in Brazil. Four concessions are now in operation.T'he Osorio - Porto Alegre concession has been suspended due to the financial difficulties of thewinning bidder. Although the success of a highway concession can only be assessed several yearsafter its opening to traffic, the following lessons have been learned from this first experience:

(a) the financial analyses performed did not take into account the lack of long-term private financein Brazil, and the bidders were not requested to provide a thorough justification for theirfinancial proposals;

(b) since concessionaires have been unable to secure private debt financing, except for small loansguaranteed by the sponsors and for a relatively small IFC B loan currently being finalized forthe Dutra highway, the National Bank for Social and Economic Development (BNDES) had toprovide most of the necessary debt financing;

(c) since the above sources of funds are limited, future concessions will have to be financed on alimited recourse basis, and therefore to attract long term debt domestically and/orinternationally which, in certain cases, will require appropriate guarantees and effectivepromotion;

(d) the concessionaires selected are essentially civil works contractors, with the risk that they maynot be willing to operate the toll road during the entire concession period, after the main workshave been completed;

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(e) the concession contracts include detailed specifications for the works and services to beprovided by the concessionaire, which would require efficient control mechanisms; but DNERhas not yet organized its newly-created Concession Department to effectively supervise thetechnical, financial, and operational aspects of the concessions.

6. As a result of the above difficulties to secure private financing for toll roads, the Governmentdecided to dualize two important highways (Belo Horizonte - Sao Paulo, 450 km, and Sao Paulo -Curitiba - Florianopolis, 250 km) with public funds and borrowings from the IDB, for subsequentconcessioning to private operators.

C. Proposed Federal Highway Concession Program

7. The experience developed under the first phase is being incorporated into the preparation of thesubsequent phases of the program; in particular with regard to the selection of the highway sections forconcessioning, and to the sharing of the various risks between the Government and the concessionaires.

8. A consulting firm has been appointed to analyze the entire federal highway network and toidentify the highways which could be concessioned on the basis of sound technical, economic andfinancial criteria. The necessary rehabilitation and maintenance works and capacity investments wereestimated on the basis of the results of the network condition and traffic surveys. The economicevaluation was conducted using the Bank's HDM III model. The financial analysis led to preliminaryestimates of the financial rates of return on the sponsors' equity contributions for each of the proposedconcessions. These analyses were used to prepare a priority list of highway sections, totaling about12,000 km, for which concessioning was found to be feasible.

9. In line with the Federal Government's decentralization objective, and on the basis of therecently-approved Delegation Law, the Ministry of Transport decided to delegate the responsibility forconcessioning federal highways to those state governments which have adequate capabilities. It isexpected that, by combining federal highway sections with state highway sections, the stategovernments could offer more efficient and attractive concession packages. Such delegationagreements have already been signed with the states of Parana, Rio Grande do Sul and Santa Catarina.The total length of the sections delegated to the three states is about 5,000 km. Negotiations are stillunderway with the state of Minas Gerais, which could lead to the delegation of a number of sectionstotalling up to 3,000 km.

(a) Santa Catarina State Concession Program

10. The state of Santa Catarina has prepared a highway concession program, which consists ofconcessioning five networks totalling about 1,470 km, of which about 520 km are federal highwaysand 950 km are state highways. The Ministry of Transport has delegated to the state two highwaysections totalling about 520 km (Table 2).

Table 2. Federal Highway Sections Delegated to the State of Santa Catarina

Hi2hwav No. Section Len2th

BR-280 Porto S. Fco. do Sul - Mafra 164.3BR-470 Div. RS/SC - Navegantes 355.3Total 519.6

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(a) Parana State Concession Program

11. The state of Parana has prepared a highway concession program, which consists ofconcessioning a network of about 2,030 km, of which about 1,680 km are federal highways and 350kmn are state highways. The Ministry of Transport has delegated to the state 14 highway sectionstotalling about 1,786 km (Table 3).

Table 3. Federal Highway Sections Delegated to the State of Parana

Highway No. Section Length

BR-369 Ent. BR-153 (Divisa SP/PR) - Acceso Oeste a Cambe 169.8BR-369 Acceso Oeste a Cambd - Entr. BR-376(B) (Jandaia do Sul) 61.0BR-369 Entr. BR-158(A)/272(B)/487(A) (Campo Mourao) 277/467 (Cascavel) 171.6BR-376 Divisa PR/SP/MT - Acceso pl Paranavai 102.8BR-376 Acceso p/ Paranavai - Entr. BR-369(A)/466(A) (Jandaia do Sul) 114.6BR-376 Entr. BR-369/466 (Apucarana) - Entr. BR-277/BR-468 (Sao Luiz/Puruna) 320.4BR-158 Entr. BR-317/465(B) - Entr. BR-272/369(A)/487(A) (Campo Mourao) 15.9BR-373 Entr. BR-487(A)/BR-151 (Ponta Grossa) - Entr. BR-376(A) 7.8BR-373 Entr. BR-277(A)/PR-452 (Rel6gio) - Entr. BR-376(b) (Caetano) 101.5BR-277 Fronteira Brasil/Paragaui (Ponte da Amizade) - Entr. BR-369/467 (Cascavel) 145.8BR-277 Entr. BR-369/467 (Cascavel) - Entr. BR.-466 (p/Guarapuava) 241.3BR-277 Entr. BR-466/PR-364 (Guararapuava) - Entr. BR-376/PR-428 (S. Luiz Purana) 203.5BR-277 Entr. BR-376/PR-428 (Sao Luiz Purana) - Final Trecho Municipal (Curitiba) 46.3BR-277 Entr. BR-1 16/476 Curitiba) - Ponte s/Rio Emboguacu (Praranagua) 84.2Total 1,786.5

(b) Rio Grande do Sul State Concession Program

12. The state of Rio Grande do Sul has prepared a highway concession program, which consists ofconcessioning nine separate networks around nine regional centers. The studies have been completedand the bidding process is at the pre-qualification stage. The concessions would be awarded to the pre-qualified bidders who offer to take the longest networks for a pre-established toll rate. It is expectedthat the aggregated length of the nine networks will exceed 3,000 km. The Ministry of Transport hasdelegated to the state 11 highway sections totalling about 2,771 km (Table 4).

Table 4. Federal Highway Sections Delegated to the State of Rio Grande do Sul

Hiehwav No. Section Length

BR- 116 Pelotas - Jaguarao 640.6BR-153 Entr. BR 290 - Bage 135.9BR-158 Santa Maria - Julio de Castilho 157.7BR-285 Vacaria -Lagoa Vermelha 67.0BR-285 Passo Fundo - Pananbi 128.5BR-287 Santa Maria - Sao Vicente 86.3BR-290 Eldorado do Sul - Uruguaiana 613.3BR-293 Pelotas - Bage 161.1BR-386 Carazinho - Lageado - Soledade Tabai 375.0BR-392 Rio Grande do Sul - Santa Maria 349.6BR-471 Santa Cruz - Entr. BR-290 58.9Total 2,771.0

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(d) DNER Concession Program

13. The federal highway sections which are not, or will not be, delegated to state goverments,would be concessioned directly by DNER. On the basis of the pre-feasibility study, 16 sectionstotalling about 3,900 km could possibly be concessioned (Table 5). Detailed studies, however, stillneed to be carried out in order to confirm the feasibility of the proposed concessions. DNER is in theprocess of contracting such studies for a first group of nine highway sections totalling about 2,150 km,which would constitute the second phase. The terms of reference for the studies, including theengineering, traffic, economic, financial, and environmental analyses, have been reviewed and foundsatisfactory by the appraisal mission. The project would include consultant services to carry out thesestudies. It is expected that the studies of the first phase would be completed by the end of 1997 andthose of the second phase by the end of 1998. The bidding process would take place in 1998 and 1999respectively.

Table 5. Federal Hi hwa s to be Concessioned b DNER

Financial

Hi2hway No. Section Length Investments/ Raet oNPV (UJS$M) Return-

A. First Phase (completed , see Table 1) 850 1.400 n.a.B. Second Phase

BR-116/PR/SC Curitiba - Div. SC/RS 406 50 14BR-101/RN Div. PB/RN - Natal 89 28 31BR-101/PE Div. PE/PB - Div. PE/AL 213 58 30BR-101/PB Div. PE/PB - Div PB/RN 129 40 29BR-101/RJ Div. ES/RJ - Pte. Pres. Costa e Silva 322 55 26BR-393/RJ Div. MG/RJ (Alem Paraiba) - Entr. BR-116 192 28 25BR-101/AL Div. PE/AL -Div. AL/SE 251 34 13BR-101/SE Div. AL/SE - Div. SE/BA 206 31 12BR-153/SP Div. MG/SP - Div. SP/PR 348 45 26

Subtotal 2,156 369

C. Third Phase

BR-324/116/BA F. de Santana - Div. BA/MG 646 111 27BR-163/MT Entr. BR-070 (V. Grande) - Jangada 86 11 26BR-267/MS Entr. BR-267 (N. Alvorada) - Div. MS/SP 249 30 24BR-163/MT Div. MT/MS - Cuiaba 323 27 22BR-163/MS Campo Grande - Dourados 220 25 20BR-153/PR Div. SP/PR - Entr. NR-272(A) (Japira) 105 14 18BR-232/PE Recife - Caruaru 129 18 12Subtotal 1,758 236

Total 4,764 2,005

Preliminary estimates based on pre-feasibility analysis

14. On the highway sections which require essentially rehabilitation and maintenance works, theprogram of works can generally be phased so that they can be substantially financed through tollrevenues. In these cases, debt financing requirements are minimal; therefore, in spite of the lack oflong-term debt financing in Brazil, it is expected that these concessions will attract interest on the partof investors and contractors.

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15. On the highway sections which require substantial initial investments, such as a completereconstruction of the pavement, additional lanes or dualization, the concession documents will bedesigned with a view to facilitate private financing. In particular, the methodologies for trafficanalyses and forecasts, and the computer model for financial analyses, will be refined. Improvedmechanisms would be developed and some form of guarantees would be offered for toll adjustmentswith inflation, servicing of foreign debts, repatriation of dividends, and non-judicial resolution ofdisputes. DNER is also preparing for broader communication and marketing efforts to disseminate theprogram, with a view to attracting interest from international investors and financiers, and toincreasing competition.

16. The Government has shown interest in the Bank's guarantee program, and it was agreed that,at the request of the Government, the Bank would assess the feasibility of partial risk guarantees onloans to concessionaires for specific highway concessions which, because of the risks involved, wouldnot be attractive without such Bank guarantees. One or two pilot projects will be selected on the basisof the results of the feasibility studies, and the Bank would make a separate evaluation of these projectsfor possible guarantee operations.

D. Technical Assistance and Training

17. In order to implement the highway concession program and to supervise the highwayconcessions, DNER has recently established a Concession Department, headed by a Director whoreports directly to the Director-General (Chart 1, Annex 10). The department is responsible for allactivities related to highway concessions, including planning, studies, development, procurement andsupervision. The supervision of the concession contracts would be delegated to DNER's relevantdistricts. The DERs of Santa Catarina, Parana and Rio Grande do Sul, have established concessionunits with similar responsibilities. The proposed project would include technical assistance from aninternational specialist firm and staff training to help DNER organize and strengthen the newConcession Department and establish adequate concession supervision capabilities in the relevantDNER districts in order to implement the concession program efficiently. Technical assistance andtraining services would also be offered to the DERs which are preparing and/or implementingconcession programs which include delegated highways.

18. The scope of the technical assistance would be to:

(a) advise on the traffic studies, financial analyses, and appropriate financial structures toensure the attractiveness of the concession projects to private sponsors and financialinstitutions, including the development of an adequate computerized financial modelwhich would be used to evaluate bidders' proposals;

(b) help prepare appropriate concession documents and the related bidding documents toensure an efficient distribution of the risks between the Government, the sponsors andthe financial institutions;

(c) prepare a marketing plan, including documentation to disseminate the program andspecific projects, identify potential sponsors and financiers, and organize appropriateseries of meetings and road shows;

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(d) assist in the evaluation of bids, particularly in the feasibility of the proposed financialstructures, and in award decisions;

(e) recommend appropriate communications policies vis-a-vis road users, and helporganize public meetings and hearings;

(f) organize the units responsible for the supervision, monitoring and evaluation of theconcession contracts, prepare relevant manuals, and train supervision, monitoring andevaluation staff;

(g) recommend effective dispute resolution mechanisms;

(h) review the environmental analyses of specific concession projects, and advise onappropriate distribution of environmental responsibilities; and

(i) prepare and help coordinate a training program for DNER and DER concession staff,particularly in the areas of: financial analyses and project finance; procurement andlegal issues; environmental management and supervision; communications and publicrelations; supervision and auditing; monitoring and evaluation.

19. Estimates of specialist-month and budget requirements for the technical assistance and trainingcomponents are shown in the project cost and financing table (Annex 8, Table 2).

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BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Environmental Management Plan

A. Environmental Management Capacities

1. DNER has established an Environmental Unit in its Engineering Department as a condition ofthe recently-completed Highway Management and Rehabilitation Project (Loan No. 3169-BR). Theunit is responsible for developing appropriate environmental norms and instructions and forsupervising their implementation. The unit is now comprised of one economist and three engineers,who have received appropriate training and are now fully operational.

2. The unit, with technical assistance financed under the above-mentioned project or othersources, has carried out the following agreed tasks:

(a) preparation of a manual of Environmental Norms and Instructions: Corpo NormativoAmbientalpara Enpreendimentos Rodoviarios (para. 4);

(b) preparation of a computerized Environmental Management System, which consists of adatabase of environment-related information;

(c) environmental assessments for major improvement projects, including the Sao Paulo -Florian6polis highway, the BR-174 Manaus-Boa Vista highway, and the BR 040/MG BeloHorizonte-Sete Lagoas highway;

(d) preparation of a Pilot Plan for the Rehabilitation of Environmental Degradations resultingfrom road works in the State of Rio de Janeiro, and related Manual of Instructions to addressthe most frequent degradations;

(e) ex-post evaluation of the Engineering Design of BR 101/ RJ/SP highway between Rio deJaneiro and Ubatuba, identifying the environmental management deficiencies at the planning,design, and constrution stages;

(f) evaluation of land use in right-of-ways and in their vicinity, identification of related problemssuch as fires, urban crossings, invasions, etc., and recommendation of solutions, includingresettlement of population; and

(g) environmental audits of specific engineering designs and construction works.

3. More recently, the unit had initiated the following additional tasks:

(a) ex-post environmental impact assessment of the BR 163/MT/PA Cuiaba-Santarem highway,aiming at verifying the changes, especially migrations and economic activities that occurredin the area of influence after the construction of the road sections in the 1960s and 1970s. Theresults of this work and of the above-mentioned BR 101 Rio de Janeiro - Ubatuba study will

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help develop a detailed methodology for incorporating environmental impact assessments inthe economic evaluation of future highway improvement projects; and

(b) specific environmental studies and supervision of the implementation of the environmentalmeasures on many highway sections such as BR 226/CE, Jaguaribe-Senador Pompeu, and BR-050/MG (near Uberlandia).

4. DNER's manual of Environmental Norms and Instructions (Corpo Normativo Ambiental paraEnpreendimentos Rodoviarios), which was prepared by the Environmental Unit, and approved byDNER Administrative Council through Resolution No. 126/96, is now in effect. The Manual includesEnvironmental Guidelines (Escopo Basico) for road projects and ten specific EnvironmentalInstructions (ISAs), which are now incorporated into all bidding documents and contracts for roadengineering and works. These instructions cover all the phases of the highway projects, andparticularly:

(a) preliminary environmental impact assessments at the planning stage;

(b) analyses of alternative aligmnents;

(c) environmental impact assessments (EIAs);

(d) environmental impact reports (RIMAs);

(e) preparation of the Environmental Management Plan;

(f) environmental impacts at the design stage: identification, prevention and mitigation;

(g) environmental impacts at the construction stage: identification, prevention and mitigation;

(h) environmental impacts at the operation stage;

(i) environmental rehabilitation projects; and

(j) environmental supervision of road works.

5. The manual was prepared with technical assistance under the recently-completed HighwayManagement and Rehabilitation Project. The Bank supervision team closely supervised the preparationof the manual; the appraisal mission reviewed the document and found it adequate to ensure aneffective environmental management and supervision of highway projects, including the proposedproject. The Bank team also supervised the other tasks carried out by the environmental unit under therecent project, and found that the unit has now the capacity to effectively implement itsresponsibilities. However, considering the size of the proposed project, the project managementconsultant would provide technical assistance to the project management team and to the environmentalunit in carrying out the environmental management plan (section B).

6. The environmental management performance of the DERs is still mixed. Many DERs do nothave yet appropriate environmental norms or guidelines nor a capacity to implement them. But theseven DERs participating in the project, which have benefited from Bank or IDB-financed projects,have already established an institutional capacity to analyze the environmental impacts of their projects,

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take them into account at the planning and design stages, and effectively implement the necessaryprevention or mitigatory measures. Under the project, they will be required to adopt DNER's manualof environmental norms and instructions or equivalent, and to strengthen their environmental units andprocedures as necessary to effectively supervise the implementation of such norms and instructions.The terms of the contracts for highway engineering, road works and concessions would specify theenvironmental responsibilities of the consultants, contractors, concessionaires and DNER or the DER,with approporiate references to the manual of environmental norms and instructions. Theenvironmental units of DNER and the DERs, and the Project Management Consultant would carry outappropriate supervision. In particular, the project would help implement the necessary surveys,designs and works under the rehabilitation subprojects to repair and prevent road-related environmentaldegradation (section B).

B. Enviromnental Management Plan

7. The project works consists essentially of the rehabilitation and resurfacing of existing pavedhighways, and of localized operational and safety improvements and environmental rehabilitationworks. The rehabilitation and resurfacing works are related to the existing platform of the highway,mostly to the pavement. The operational and safety improvement works will consist of widening lanesand shoulders (in particular climbing lanes), strengthening or widening of bridges, improvement ofcurves and intersections, and vertical and horizontal signalization. The environmental rehabilitationworks will consist mainly of correcting drainage systems to avoid uncontrolled erosions, and inrehabilitating already degraded areas. Because of the budget constraints, however, only those worksnecessary to avoid the further degradation of the highway platform will be implemented.

8. The possible adverse effects of the maintenance and rehabilitation components are limited tothose resulting from quarrying, borrow pits, or the disposal of used pavement materials. Theoperational and safety improvements, especially those planned in sensitive, either high populationdensity areas or mountainous terrain, could have adverse impacts, respectively on the people livingclose to the highway or on slope erosion. Also, in the past, many highways were built withoutadequate attention to the environment. The resulting environmental liabilities, which generally consistof uncontrolled erosions, adversely affect the highway structure or right-of-way, and sometimesadjacent properties.

9. In order to effectively prevent or mitigate such adverse impacts, DNER has prepared andwould implement an environmental management plan. DNER has put into effect the above-mentionedmanual of environmental norms and instructions for road engineering and works. The sevenparticipating DERs will be required, through the delegation agreements, to adopt the DNER manual ofenvironmental norms and instructions or equivalent for all the investments under the project.

10. At the planning and design stage, the engineering consultants have been required, and will berequired in the future, to follow the relevant Environmental Instructions. In particular, the agreed,standard terms of reference for subproject field surveys and studies, which are included in theOperational Manual, and the relevant Environmental Instructions incorporate appropriate screeningcriteria and requirements to effectively prevent, correct or mitigate such adverse impacts. Adequatesupervision and control will be carried out by DNER and the DERs' environmental units, and by theproject management consultant. Summaries of these studies, including environmental analyses, in anagreed format will be reviewed by the Bank prior to authorizing the financing of specific investmentsunder the loan.

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11. The terms of reference for subproject designs specifically require the subproject engineeeringconsultants to survey all existing degradations in the right-of-way and adjacent areas resulting frompast road works. The environmental data collected by the consultants, including existing and potentialdegradations, will be incorporated into DNER environmental database, and be used in the preparationof future plans and programs. The consultants are also required to incorporate the design of thesubproject the necessary corrective works to rehabilitate such degraded areas and to prevent futuredegradations. However, considering the budget constraints, the environmental rehabilitation workswill be limited to those which are essential to prevent further degradations which, in the long term,could affect the structure of the highway. On the basis of the studies of the first-year program, whichhave been completed, reviewed by the appraisal mission, and found satisfactory, the cost ofenvironmental rehabilitation works was estimated, as an average, at about 5 percent of the totalsubproject cost.

12. The highway concession projects being prepared by DNER are also subject to theenvironmental management plan. The terms of reference for the engineering consultants who areresponsible for preparing the preliminary designs of the works and the bidding documents for theconcessions, include specific requirements for field surveys to identify existing and potentialenvironmental degradations, and for designing appropriate corrective and prevention measures orworks. The bidding documents and the concession contracts will include the relevant EnvironmentalInstructions of DNER, and will specify the respective responsiblities for implementing the specificcorrective and prevention works included in the concession.

13. At the construction stage, appropriate norms and specifications will be incorporated in thebidding documents and contracts for civil works, including the relevant Environmental Instructions andthe detailed specifications for the environmental prevention measures or works. Payments tocontractors will be subject to compliance with the Environmental Instructions. The agreed standardterms of reference for the supervision consultants, which are included in the Operational Manual,specify the environmental supervision requirements. DNER and the DERs environmental units,assisted by the project management consultant, will exercise adequate control through field inspectionsin order to ensure that the environmental clauses of the contracts for works and supervision arecomplied with.

14. Technical assistance and staff training services will be provided to DNER and to theparticipating DERs in order to effectively implement and supervise the above-mentioned environmentalrequirements (Annex 6).

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BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Institutional Capacity Analysis and Technical Assistance

A. Assessment of DNER's Institutional Capacity

1. DNER's institutional capacity analyses were initiated as far back as 1988 , prompted by two majorfactors: first, the constitutional reform which decentralized fiscal revenues, drastically curtailing DNERbudgetary resources and forcing the agency to revise and reduce the scope of its road activities; second, thepolicy shift in emphasis away from new works and expansion of the federal highway network to the morerelevant activities of maintenance and rehabilitation of the existing assets. DNER appointed a Consultingfirm to make a comprehensive analysis of its institutional capacity gaps, and to recommend institutionalreform and strengthening measures required in the new context of maintaining the existing network to anadequate level of service under more constrained financial resources. On the basis of these analyses, theConsultant identified the major institutional weaknesses of the institution and recommended a plan forreform and institutional strengthening in order to achieve the newly defined role and objectives of DNER.Taking into account the results and recommendations of the Consultant's assessment, a number of positivereforms were implemented such as the contracting of all maintenance activities to the private sector, thetransfer of the police function on the federal highways and related staff to the Ministry of Justice, thereduction of staff through early retirement, and the merging of the former Maintenance and ConstructionDepartments into one Department of Highway Engineering. Despite these positive actions, DNER'scurrent organization still reflects its past objectives and requires further reforms.

2. The enactment in February 1995 of the concession law, and the Government's decisions toconcession the highway sections that are susceptible to attract private management and financing, and todevolve to the states the responsibilities for a substantial portion (nearly 30%) of the federal network that isnot of national interest, will have two effects: (i) to reduce the scope of DNER's direct operation andmaintenance responsibilities on the federal network by almost 40%, as well as the Federal Government'sexpenditure responsibilities; and (ii) to increase DNER's responsibilities for regulating, supervising andmonitoring the concession and decentralization programs. On this basis, DNER started to redesign itsadministrative and organizational structure with technical assistance financed under the recently-completedFederal Highway Rehabilitation Project (Loan 3169-BR). In redefining DNER's mission and objectives,the consultant helped diagnose its current institutional deficiencies and recommended measures tostrengthen the specific functions and processes needed to effectively implement the proposed FederalHighway Rehabilitation and Decentralization project.

3. The institutional capacity gaps, and thus the needs for capacity building, were identified as follows:

(i) lack of coordination between DNER and the various ministries involved in the definition, fundingand implementation of highway transport policies and programs; this issue was addressed by therecent reform of DNER's Administrative Council, which now includes representatives of theMinistries of Planning, Finance and Transport;

- 63 - Annex 6

(ii) insufficient network monitoring and work programming and budgeting capacity; DNER still needsto organize systematic surveys of surface and structural condition, traffic and accidents, and tostrengthen its network database and its planning, programming, costing and budgeting processes toprepare coherent annual and pluriannual investment and maintenance programs and budgetproposals;

(iii) deficient contract supervision and quality control often resulting in substantial delays and costoverruns: hence the need to strengthen its capacity to inspect, audit and monitor the works, and toreevaluate its methodologies and forms of contracts, including shifting from traditional line-item orquantity and unit price contracts to more efficient performance or results-based contracts;

(iv) insufficient technical capacity and resources to prepare highway concession projects attractive tothe private sector; hence the recent creation of the Concession Department and the concessiontechnical assistance and training component of the project;

(v) insufficient technical capacity to adequately supervise and monitor the concession contracts or thenew forms of maintenance management contracts; and the consequent need to strengthen theregional districts' concession supervision and monitoring capacity to ensure that the qualitystandards of the contracts are complied with;

(vi) insufficient capacity to supervise the preparation of final engineering designs and to ensure thatconsultant recommendations are consistent with the technical solutions derived from economicanalyses incorporating budget constraints, and with other agreed policies and standards foroperational and safety improvements and environmental rehabilitation works;

(vii) deficiencies in the preparation and carrying out of experimental and applied research programs;DNER needs to seek innovative and cost-effective technologies responding to pressing issues andproblems encountered at design, construction, or maintenance stages;

(viii) lack of management stability within the technical and operational departments due to high turnoverarising from changes in government: hence the need to separate the politically appointed layers ofmanagement, most susceptible to changes, from what should be a more permanent core of technicalstaff.

4. In order to remedy the above deficiencies and to strengthen DNER's capacity to implement theproposed project and to achieve its objectives, DNER has established a Project Management Unit, headedby a Project Manager who reports directly to the Director General, and a Project Coordinating Committee,including the Directors of all the departments involved. The project includes a technical assistancecomponent, which consists of the assignment of: (a) a specialized Project Management Consultant (PMC)to assist the PMU and the departments concerned in the coordination, supervision and monitoring of theproject; and (b) a specialized Highway Concession Consultant to assist the Concession Department inpreparing and monitoring the concession program.

B. Project Management Unit

5. In order to ensure adequate management of the project, a Project Coordinating Committee (PCC)was established in January 1997, through a resolution of DNER's General Director. Also, a Project

- 64 - Annex 6

Management Unit (PMU) was created. The PCC includes the Directors of the Departments involved in theproject and is responsible for effective inter-departmental coordination. The PMU is headed by the Chief ofthe Planning Division (Assessoria de Planejamento), who is directly subordinated to the Director-General.The mission assigned to the PMU is three-fold: (i) to plan and manage the implementation of the project,distributing the various tasks involved in its execution between the Unit itself and the Departments existingwithin the formal structure of DNER, (ii) to prepare the annual work programs to be financed under theproject, monitor their implementation and report on progress made to the Director-General, and (iii)establish and maintain, on behalf of DNER, all relationships with the Bank and IDB as well as with otherGovernmental Departments and States authorities involved in the Project.

6. The Project Management Unit has its headquarters in Brasilia and its relation with the DNER'sorganizational structure is illustrated in Chart 1. The PMU comprises the following seven sub-units, all ofwhich will be headed by DNER staff (Chart 2):

* an Administrative Sub-unit* a Rehabilitation Sub-unit

a Decentralization Sub-unit* a Concession and Institutional Development Sub-unit

and three Regional Sub-units for the North-East, South-East, and South with headquartersin Salvador, Belo-Horizonte, and Porto-Alegre respectively.

7. The Administrative Sub-unit, with the participation of all relevant DNER's operationaldepartments, is responsible for the elaboration and implementation of the computerized information systemsthat will enable to control, monitor and report on the physical, financial and administrative progress of allworks and services executed and financed under the project, all in accordance with DNER's procedures andBank's requirements. The Rehabilitation Sub-unit, with the participation of the Directors of theDepartments involved in the project (including regional districts), is responsible for the preparation of thedetailed implementation schedule, including the necessary annual budget resources allocations, for allworks to be executed on the highways to remain federal, and for the monitoring of their physical andfinancial execution, including progress reports writing. The Sub-unit is also in charge of updating theOperational Manual as may be necessary. The Decentralization Sub-unit, also in consultation with theother operational DNER's Departments and the highway authorities of participating States, is responsiblefor the preparation of the detailed implementation schedule, including the necessary budget resourcesallocations, for all the works to be carried out on the highways to be transferred and for the monitoring oftheir physical and financial execution, including the preparation of corresponding progress reports. Thesub-unit will also contribute to any update to be made of the Operational Manual. The Concession andInstitutional Development Sub-unit , in consultation with the Concession Department, the ResearchInstitute (IPR) is responsible for the preparation of the detailed implementation schedule of the concessionand institutional development components, including the related annual budgetary resources allocations,and for monitoring the physical and financial progress of execution, including compliance with establishedperformance indicators and targets. The Regional Sub-units task is to represent and complement the actionof the central unit in Brasilia, in providing more immediate assistance to subprojects activities performedeither by DNER's regional districts under the rehabilitation component or by States DERs under thedecentralization component.

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Chart 1. The Project Management Unit within DNER Organizational Structure

GENERALDIRECTORATE

CABINET ~~~~~~~~~LEGALDEPARTMENT

TECHNICAL PLANNINGADVISORY ADVISORY

DEPARTMENT DEPARTMENT

ADMINISTRATIVE 8. ROAD TRAFFI ENGINEE*JN C~ ION TECHNOLOGICALINANCIAL OPERATIONJ EATErDPRMN DEVELOPET(R

DEPARTMENT DEPARMENT DDEPATMEN DEPARTMENT DEPARTMENT

. ~~~~~~~~~~I .. I-. ''.'ici;;""| Reglonal | | Reglonal Regional Regionalt DisricS 1 Dlstlict 2 DisrIcts 20 Districts 21 1.

Chart 2. Organizational Structure of the Project Management Unit

DNER GENERALDIRECTOR

I

PMU COORDINATINGCOMMITrEE

PMU EXECUMVEMANAGER

Sub-Units

DECENTRALIZATIONI &CONCESSIONSREHABILITATION ALIZTON & INSTITUTIONAL ADMINISTRATION

(STATES) DEVLOPMENT

NORTH EASTREGIONAL UMT SOUTH EAST SOUTH

(Maranhao, Piaui, Ceara, Rio REGIONAL UNIT REGIONAL UNITGrande do Nort., Parauba, (Mines Gerals, EspirHto Santo, Rio (Parana, Santa Catarina, Rio

Pernambucoq Alagoas, Sergife, de Janelro, Sao Paulo) Grande do Sul)l3aNe)

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C. Project Management Technical Assistance

8. In order to fill short-term gaps in DNER's current capacity to implement the project, technicalassistance shall be provided throughout the project implementation period to the PMU and through it to thevarious departments involved in the execution and monitoring of the project. The Terms of Reference forthis technical assistance describes as follows the scope of the services and the tasks to be performed by theConsultant. In the initial stage of project implementation, the Consultant will assist the PMU in Brasilia in:

(i) the preparation of a detailed Project Implementation Plan, in consultation with the variousdepartments concerned;

(ii) the identification of tasks to be carried out for work supervision and monitoring;

(iii) the preparation of a model of work plan to be used by the States participating to thedecentralization program;

(iv) the development of an appropriate set of procedures for obtaining environmental licenses for theworks;

(v) the development of specific software, manuals and procedures for the planning and programmingof works, both in physical and financial terms;

(vi) the definition of suitable performance indicators and reliable targets monitoring plans and datacollection methodologies for works, and institutional development, including specific environmentaland safety indicators;

(vii) the development of a computerized project management system, including a review of DNERexisting administrative procedures and recommendations for their improvement;

(viii) the design of a system for processing systematic requests of funds;

(ix) the preparation of systems and models for the transmission of all technical, legal, and fiscaldocumentation required by the financing agencies or other governmental departments; and

(x) the preparation of agreements or protocols to be signed with participating states and the review oftheir work program.

During project implementation, the services required from the Consultant shall comprise:

(i) the preparation of all information as required by the loan agreements or by the financing agenciesfor the purpose of their supervision of the project;

(ii) the periodic review and update of the detailed Project Implementation Plan

(iii) the preparation of all documentation related to bidding, proposal evaluation, contract award andstatement of expenditures in support of request for disbursement, as may be required by the Banksor other government agencies; and

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(iv) the preparation of periodic progress reports, including disbursement projections and status ofcompliance with the specified targets.

9. The Consultant shall also provide assistance to the Administrative Sub-unit in the monitoring ofpayments made and status of disbursement , and the Rehabilitation, Decentralization and Concession Unitsin the preparation of their annual program and budgets and in the monitoring of such programs both inphysical and financial terms, assessing also whether they achieved the standards of performance and qualityas well as the targets specified in the loan agreement. Vis A vis the Regional Subunit, the Consultant willprovide assistance similar to that given to the Central Unit reinforcing the control of that unit on site inorder to ensure that the rehabilitation and decentralization components are progressing satisfactorily. Tothat effect, it is expected that the Consultant will assign and maintain adequate representation in the threeRegional Subunits. In the final stage of project implementation, the Consultant is expected to assist theCoordinating Unit in the collection of all data enabling to assess the final status of execution of the projectin financial economic, technical and administrative terms. Furthermore, the Consultant will prepare theProject Implementation Completion Report including a plan for the subsequent maintenance of the FederalNetwork on a sustainable basis. The length of the Technical Assistance Contract is estimated at 54 monthsand the total cost at U$13 million representing approximately 1,000 specialist-months.

D. Institutional Capacity Analysis of the State Road Departments

10. The success of the decentralization program implies that the State Roads Departments (DERs), towhich highways are to be transferred, have the capacity not only to prepare, contract, and monitor theexecution of the rehabilitation works to be carried out on the roads which will become under theirresponsibility, but also to ensure that in the future adequate maintenance strategies are implemented in acoherent and cost-effective manner, both on the state network and the federally-devolved highways.

11. During project preparation, a survey was carried out to diagnose the capabilities of the DERs toeffectively take charge of the rehabilitation activities to be performed under this project and also to fulfill,at a later stage, the prime functions of network maintenance management. The results of the survey wouldserve as a foundation to design the objectives and tasks of the technical assistance required to bridge theinstitutional capacity gaps identified.

12. The survey showed that most DERs suffer to varying degrees, from common deficiencies, such asexcess of personnel, little planning capacity, and lack of comprehensive pluriannual investments andmaintenance programs based on objective and updated network and traffic surveys with priorities clearlyestablished and supported by sound economic evaluations. Also, very few DERs have yet sufficientexpertise in environmental impact assessments and little knowledge on how to develop and monitor acoherent concession program, while few have yet developed the system of routine maintenance by contract.Although some of the states where the devolution of federal highways is expected to be the most important,

for example Minas Gerais, Parana, Rio Grande do Sul, and Santa Catarina have already set up structuresand road management systems, these will need to be upgraded in order for them to be able to performefficiently the task of maintaining adequately the road system assets.

13. The four areas where upgrading is necessary and for which technical assistance is most needed arethe following:

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(i) Development of annual and multi-year road investment and maintenance programs based onupdated network and traffic surveys, and supported by HDM/EBM economic evaluations;

(ii) Design and implementation of more cost-effective maintenance execution programs, giving higherpriority to maintenance by contract, while keeping force-account involvement within reasonablelimits;

(iii) Identification, preparation, negotiation and supervision of the state's road concession program; and

(iv) Development and implementation of a comprehensive training program on environmental impactassessment of roadwork.

14. The project would finance the technical assistance needed to strengthen the capacity of the DERsfor performing these functions. To that effect, the following draft Terms of Reference were prepared toapply to the procurement of competent consulting firms.

E. Technical Assistance to State Road Departments

15. The main objectives of the technical assistance are to:

(i) carry out comprehensive network and traffic surveys (or update previous surveys) and train DERspersonnel not only in modem surveying techniques but also in using the latest version of the HDMmodel for data analysis, thus enhancing the capacity of the DERs in establishing more adequateplanning and implementation structures; assisting ultimately in the preparation of the state's annualand pluriannual road investment programs;

(ii) assist the DERs in the design and implementation of more cost-effective maintenance policiesbased upon an increased participation of the private sector and preferably promoting performance-type contracts, while helping in the restructuring and right-sizing of an in-house force-account unit;

(iii) strengthen the capacity of DERs for identifying, preparing, negotiating and supervising the state'shighway concession program; and

(iv) strengthen the capacity of DERs to perform environmental impact assessments of road projects,including the development of appropriate environmental norms and the building up of theconditions enabling to enforce the environmental regulations.

7. The following tasks would be performed by the technical assistance:

(i) review existing methods and/or develop more appropriate methodologies for traffic and networkinventories, including surface defects, roughness, structural capacity assessment, and evolvecomputer processing programs enabling the results of the surveys to be presented in a suitable andattractive form (GIs system), while allowing them to be readily input in the subsequent economicevaluations;

(ii) carry out the above-mentioned traffic and network condition surveys, training the personnel in theprocess;

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(iii) on the basis of the above, assist in the preparation of the state's annual and pluriannual roadprogram, considering budget constraint, and using the HDM/EBM model (including, possibly, themore recent HDM 4 version);

(iv) review the DERs policy on maintenance, analyze existing structures including personnel andequipment capacity and performance; develop a new strategy for improving and right-sizing theorganization, seeking to expand the execution of routine maintenance by contract; and developprocedures for the design, procurement and supervision of maintenance contracts with the privatesector, seeking to introduce and promote performance or result-based systems, in lieu of thetraditional quantity-based contracts;

(v) review all existing studies and data, if any, regarding the road concession program of the state todetermine whether they are sufficient, and/or otherwise assist in the selection and prioritization ofspecific road segments for concessioning, including economic, financial, and legal analysis; andhelp in the preparation of the road concession tender documents, and provide guidance for thesupervision and monitoring of on-going concession projects; and

(vi) evaluate the current capacity of each participating DER to conduct environmental impactassessments and elaborate on that basis a training program to improve that capacity and to enablethe DER's staff to effectively implement the environmental norms and guidelines.

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BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Project Economic Analysis

A. Introduction

1. In order to prepare the multiyear (1997-2001) road maintenance program and define adequatebudgetary needs as well as priorities for resource allocations, the Planning Division of DNER carried outan economic evaluation of the entire federal paved highway network, using the latest version of the BanksHighway Design and Maintenance Standard Model (HDM-III and HDM Manager) associated with theHighway Sector Expenditure Budgeting Model (EBM-HS).

2. The HDM III is designed to make comparative cost estimates and economic evaluations of differentconstruction and maintenance options, including different staging strategies, either for a given road sectionor an entire network. The model simulates total life cycle conditions and costs and provides economicdecision criteria for multiple road design and maintenance alternatives. The primary cost set for the life-cycle analysis includes the costs of road construction and maintenance and vehicle operating costs to whichtravel time costs can be added as a special option. The concept can be simply outlined as follows:determining costs, adding the set of costs over time and comparing the total cost streams for variousmaintenance and construction alternatives. The basic data requirements are the road or network description,construction options, maintenance standards and unit costs, vehicle characteristics and unit costs, trafficvolumes and projections, exogenous benefits and costs, analysis period and discount rates. The essentialreferences for understanding and running the model are contained in "The Highway Design andMaintenance Standards Model. Model description and User's Manual" by Thawat Watanatada et alpublished for the World Bank by the John Hopkins University Press in December 1987.

3. The HDM Manager is a user-friendly shell environment developed over the last three years by theWorld Bank for specific customized applications of HDM. For the economic evaluation of the federalhighway network, the latest version (version 3) dated December 1994 was used in association with the fullHDM III software package. HDM Manager is designed to evaluate a set of road agency strategies,including congestion analysis, applied to paved and unpaved roads. It stores the input data efficiently andcreates all the input files required by HDM. It then transfers, from within the shell, the data to HDM IIIwhich in turn computes the road deterioration, the costs streams and the economic indicators used tocompare the set of strategies analyzed. Finally HDM Manager collects and presents the results in apractical way. However, unlike the main HDM program, HDM Manager does not enable to divide linksinto sections and subsections, and execute only one link at a time using five alternative maintenancestrategies and up to seven vehicle types. For the calculation of vehicle operating costs, it uses thefundamental equations derived from the Brazil experiments. Before running the HDM Model, HDMManager requires the user to define: (i) the discount rate, analysis period, initial year and currency, (ii) theroad characteristics, (iii) the vehicle fleet; and (iv) the maintenance or construction strategies to beevaluated with their respective unit costs.

4. The EBM-HS Model is an analytical tool for optimizing multiyear programs of expenditures undermultiple budgetary constraints. Particularly useful when used in conjunction with the HDM program,

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EBM-HS reads the project data generated by HDM III (as previously stored in an ASCII text file) andfinds the optimal maintenance policy (i.e., the policy that maximizes the net benefits) under budgetaryconstraints. It is capable of handling up to 100 projects (i.e., maintenance, upgrading, construction,widening, etc...) with 16 mutually exclusive altematives. The annual values of economic costs andbenefits, including the annual amounts of capital and recurrent resources needed, are calculated for eachproject alternative. The EBM-HS program then examines the resources consumed and the Net PresentValue (NPV) of the net benefits of each project alternative, and selects the group of altematives thatmaximizes the total NPV for all projects within the pre-defined budget constraints.

B. Methodology of Economic Evaluation

5. The economic evaluation follows a step-by-step procedure:

(i) survey the road network, according to agreed Terms of Reference in order to collect the minimumand yet necessary amount of information on traffic, pavement condition and environmentalparameters;

(ii) compile the survey data into a road data-base that enables to sort and statistically analyze them inthe most efficient manner;

(iii) identify and estimate the unit costs of the current and most effective maintenance and rehabilitation(or upgrading) techniques compatible with the current experience and material resources;

(iv) determine DNER's most probable budget constraint scenarios for the next five years on the basisof past experience;

(v) on the basis of the information obtained from the inventory, design a matrix which woulddesegregate the road network into homogeneous groups of roads or links suitable for evaluation,and formulate maintenance policies alternatives for each one of these groups (or cells of thematrix); and finally;

(vi) calibrate the HDM III model in order to adapt, as necessary, the road deterioration submodel and toreflect modem vehicle technology in so far as it affects vehicle operating costs;

(vii) run the HDM Manager and EBM models to arrive at the optimum set of maintenance strategiesconsistent with budget constraints, and the listing of priorities with corresponding expenditures forthe 1997-2001 period.

C. Basic Parameters and Assumptions used in the Analysis

6. The basic parameters and assumptions used to run the HDM and EBM models are:

(i) Network conditions and characteristics, including traffic volumes, composition and growth;

(ii) Vehicle characteristics and operating unit costs; and

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(iii) Typical construction, overlay and maintenance techniques with their respective unit costs. Networkconditions and characteristics are summarized in Table 6 and Table 7. Values used for the costparameters are given below. In addition, the following assumptions were made: Discount rate =12%; Analysis Period = 20 years; Traffic Growth = 3 % per year; Year 1 of implementation =1997; Generated Traffic = 0; Nature of benefits = reduced vehicle operating costs, time savings ofroad users, and reduction in maintenance costs.

(a) Network Survey

7. Prior to starting the network survey, and in order to standardize data collection methodologies,Terms of Reference were prepared both for the District engineers and for the consultants contracted toassist in the inventory. The procedures used for collecting information were designed to be consistent withthe minimum requirements of the economic model to be used (HDM Manager), and also to achieve speed atreasonable cost. The survey was carried out by region, each of the five regions comprised between 9,000and 11,000 k1m, covering altogether approximately 52,000 km. It comprised the following tasks:

(i) a definition (identification name, length, age of construction...) of individual homogeneoussegments forming the federal network, based on archives available within DNER;

(ii) the quantification of the geometrical, structural and environmental parameters characterizing eachhomogeneous segment, i.e., width of pavement and shoulders, pavement surface type, rainfall,altitude and topography; such information being obtained from DNER's files or from the districtengineers;

(iii) visual assessment, on a continuous basis, of surface defects enabling the extent (%) of potholes andcracking to be determined for each homogeneous link, followed by a rating which reflects theoverall serviceability index of that link (a rating of 5 meaning excellent condition, a rating of 1meaning poor condition); such assessment being made by the district engineers;

(iv) characterization of the pavement structure for each homogeneous link, including the definition ofthe thickness and geotechnical nature of the materials forming that structure, as well as subgradeCBR values; this information being obtained either from existing files or from a few pits dug in thepavements;

(v) continuous roughness measurements using calibrated response-type equipment (Mays meter, Bumpintegrator, or equivalent); the measurements covering the totality of the paved network;

(vi) deflection, cracking, potholes and rut depth measurements on some 1,500 one-km-long test sectionsselected to represent the whole network, thus enabling each uniform segment to be associated withrepresentative values of deflection and rut depth; and

(vii) and finally three-day traffic counts at specific locations in order to capture traffic characteristics oneach uniform section of the network; the counts involving the assessment of both the volumes andthe distribution of vehicles by class; (annual traffic growth projection figures being obtained frompast records and/or predicted growth of other economic indicators).

8. The visual surveys and general traffic information provided by the districts were carried outbetween June and December 1995, while the roughness and deflection measurements as well as additional

-73- Annex 7

traffic counts were carried out by consultants between January and May 1996. A rate of survey ofapproximately 10,000 km per month was achieved.

9. Following the collection of data, all the information was compiled into a computerized data bankdesigned to enable easy processing and consistency across regions. The worksheets uniformly containedabout 30 columns representing the road and traffic conditions parameters required by HDM Manager, andas many rows as individual road segments within the network. By and large, the average length of eachindividual section varied from 10 km to 50 krn. Once the information were entered in the data bank, theywere analyzed, checked for consistency, sorted out and rearranged in larger homogeneous groups of roadshaving similar surface, structural, traffic and environmental characteristics.

(b) Vehicle Characteristics and Operating Costs

10. Data for estimating vehicle operating costs were collected at federal level and the values used in theanalyses are summarized below. Costs are given in economic terms, financial costs being about 1.7 timeseconomic costs, overall.

Thble 1: Vehicle Characteristics and Operating Costs

Car Pick-up Bus Light truck Med. Truck Heavy Truck ArticulatedBasic Characteristics

Gross Vehicle Weight (t) 1.2 1.8 10.900 6.0 12.0 27.0 40.0ESA Factor/Veh 0.0 0.010 0.50 0.10 2 6.7 12.0NO. of Axles 2 2 2 2 2 3 5No. of Tires 4 4 6 4 6 10 18No. of Passengers 2 1 40 0 0 0 0

Vehicle Utilization DataService life (yr.) 12 10 10 10 12 12 12Hrs driven/year 400 700 1600 1000 1150 1150 1300Km driven/year 30000 50000 100000 70000 80000 80000 90000Annual Interest rate (%) 12 12 12 12 12 12 12

Economic Unit CostsNew Veh. cost (US$) 14000 26000 70000 35000 55000 70000 100000New Tire cost (US$) 50 70 300 150 250 300 400Maint. lab. cost (US$/hr) 10 10 10 10 10 10 10Crew cost (US$/hr) 0 0 6 6 360 6 6Pass. time cost (US$/hr) 2 2 0.5 0 0 0 0Cargo cost (US$/hr) 0 0 0 0 0 0

Gas price (US$/liter) 0.50 0.50 0.3 0.3 0.3 0.3 0.3Diesel price (US$/liter) 0.3 2.4 2.4 2.4 2.4 2.4Lubric. price (US$/liter) 2.4 2.4

11. On the basis of the above vehicle characteristics and after calibration of the HDM model (paras. 17to 19), the following equations were derived, giving as a function of roughness and for average geometricaland terrain conditions, the vehicle operating cost per km traveled for each category of vehicle and also for atypical composition of the vehicle fleet of the federal network:

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Table 2: Equations summarizing Vehicle Operating Costs

Category of vehicle VOC/veh-km. in US$

Cars 0. 14 exp 0. 035*IRIPick-up 0.216 exp 0.037*IRIBus 0.45 exp 0.039*IR1Light truck 0.341 exp 0.055*IRIMedium truck 0.416 exp 0.0631IRIHeavy truck 0.64 exp 0.045*IRIArticulated truck 0.93 exp 0.045*1RI

Typical vehicle fleet 0.35 exp 0.048*IRI

(c) Unit Costs of Maintenance and Rehabilitation Techniques

12. Suitable unit costs derived Table 3: Unit Costs of Maintenance and Rehabilitationfrom recent bid proposals wereapplied to the full range of Techniquesmaintenance, rehabilitation Maintenance and Rehabilitation Operations Financial Unit Costs (in US$/Wn)

techniques and upgradingoperations envisaged by the Single surface treatment and/or Slurry seal 7,200

rouaios nvsay tie Double surface treatment 14,500analysis. They comprise routme Asphalt concrete overlay, 3 cm thick 45,000maintenwace, patching, resurfacing Asphalt concrete overlay, 4 cm thick 64,200(slurry seals, single or double Asphalt concrete overlay, 5 cm thick 72,200 - 107,500 (full width)surface dressings), asphalt concrete Asphalt concrete overlay, 6 cm thick 80,200 - 121,000

overlays (with prior recycling of Asphalt concrete overlay, 7 cm thick 90,410Asphalt concrete overlay, 8 cm thick 96,300 - 148,200top 5 cm of existing pavements Asphalt concrete overlay, 10 cm thick 123,200 - 175,500

where necessary), and total Asphalt concrete overlay, 12cm thick 141,500-202,733reconstruction, as well as all other Recycling of upper 5 cm +4 cm A.C overlay 77,500

sidework costs normally included in Recycling of upper 5 cm +5 cm A.C overlay 85,500 - 120,000

rehabilitation projects (mobilization Recycling of upper 5 cm +6 cm A.C overlay 93,500 - 134,000costs, drainage, shoulders repairs Recycling of upper 5 cm + 7 cm A.C overlay 106,000

Recycling of upper 5 cm +8 cm AC overlay 110,000 - 161,500or reconstructlon, signalization. ..). Recycling of upper 5 cm + 10 cm A.C overlay 143,000 - 189,000

In addition, the unit costs of Recycling of upper5 cm + 12 cm AC overlay 216,500upgrading operations such as the Reconstruction with double surface treatment 112,000

provision of a third-lane or another Reconstruction with 5 cm A.C wearing course 146,700tolecraeaso Reconstruction with 8 cm A.C wearing course 191,000two-lane carrlageway were also Reconstruction with 1O cm A.C wearing course 219,500

determined. The following table Routine maintenance 2000

summarizes the techniques intended Patching per sq. m 10

for use and their financial unit costs Upgrading to three lanes 200,000

(economic costs are about 80% Upgrading to dual carriageway 1,600,000

financial costs). Also, and formore general use, the following equations give the unit cost per km of rehabilitation techniques (overlays)and reconstruction as a function of the thickness of the asphalt concrete overlay or new wearing course (t iscm, with a range of applicability from 2 to 12 cm):

-75- Annex 7

Table 4: Equation Summarizing Unit Costs of Rehabilitation Works

Rehabilitation technique Unit Cost per km. in US$

7.2 m wide A.C overlay 10264*t + 18,56212.2 m wide A.C overlay (including shoulders) * 13625*t +39,2337.2 m wide A.C overlay following top 5 cm recycling 10595*t + 31,97412.2 m wide A.C overlay following 5 cm recycling * 13750*t + 51,500Reconstruction 14377*t + 75,619

Note: Full width overlays only apply to roads with traffic ADT>5,000

(d) Budget Constraints

13. Over the last ten years, resource allocations made available to DNER for the rehabilitation of the50,000 km paved network varied between US$130 million and US$400 million, averaging about US$300million per year. Accordingly, and for a reduced network of about 40,000 km (excluding roads to beconcessioned), the following scenarios of annual budget constraints for investments in rehabilitation, overthe next six years, were used in the analysis, namely: US$ 200, 225, 250, 275, and 300 million.

As from year 7, an unconstrained budget resources was selected in order to determine the actualannual allocations needed as a result of implementing the above scenario during the first six years of theperiod of analysis. Moreover, resource allocations for routine maintenance were left unconstrained duringthe twenty- year- period of analysis, representing approximately US$ 2,000/km/year.

(e) Design of Analytical Matrices

14. Prior to conducting the economic evaluation, two matrices were designed in order to desegregatethe road network according to surface type (see Table 8). One matrix, the larger one, comprised allpavements with asphalt concrete wearing course. The second matrix concemed pavements with surfacetreatments. The results of the surveys indicated that for all practical purposes, there was no need to includerigid concrete pavements as they represent a negligible portion of the network (about 150 km i.e., 0.3%)and cannot be properly analyzed by the current HDM model.

15. Each matrix contained a number of cells designed according to the following parameters:

(i) maintenance condition of the network, including 5 rating categories: excellent, good, fair, criticaland poor as a function of roughness, the thresholds used being IRI < 2.5 for excellent condition,2.5 < IRI < 3 for good condition, 3 <IRI< 3.5 for fair condition, 3.5 < IRI <4.5 for criticalcondition, and IRI > 4.5 for poor condition;

(ii) structural strength, including strong pavements with deflection less than 0.45 mm (or modifiedstructural number above 5), and weak pavements having mean deflection higher than 0.45 mm (ormodified structural number below 5);

- 76 - Annex 7

(iii) traffic level, discriminating 7 classes between very low, low, medium-low, medium, medium-high,high, and very high, these levels being respectively < 1,200, 1,200-1,800, 1,800-2,300, 2,33-3,100,3,100-4,800, 4800-10,000 and > 10,000 vehicles/day ; the matrix for surface-dressed roadsincluding only the very low to medium-low traffic classes.

16. The desegregation gave rise to the identification of homogeneous groups of roads or links, suitablefor evaluation. By definition, each group, of a given total or accumulated length, normally falls within onecell of the matrices as having similar characteristics, and is to be subjected to a specific set of maintenancepolicy alternatives, as described in para. 21 and 22. Asphalt concrete roads comprised 70 filled cells andsurfaced- dressed roads had 30 filled cells. Each cell had an identification code which reflected the above-described characteristics.

(f) Calibration of the HDM Model

17. VOC submodel. The vehicle operating cost submodel was calibrated by updating vehicle costsand characteristics and by adjusting the maintenance parts equations of the HDM III model to reflectmodern vehicle technology. The recent HDM-4 international study indicated that the maintenance partsequations of HDM-III over-estimates parts consumption for modem vehicles and depicted an inconsistencyin the parts consumption rate (sensitivity of parts consumption to roughness) for passenger cars that ratebeing significantly higher than for other vehicles, probably due to the types of vehicles used in the HDM-IIIstudy. Therefore, following the guidelines of the HDM-4 study, and in addition to discarding variation incosts for roughness level lower than 3 IRI, the maintenance parts consumption for 'hew technology"vehicles was taken as 75 per cent of the "old technology" vehicles and the parts consumption rate forpassenger cars was adjusted to be the same as for trucks. Thus, in the table of optional parameters for thevehicle fleet data contained in HDM Manager, the default values of 32.49, 1.49, 8.61, and 13.94 used forthe constant coefficient CPO in the exponential relationship between spare parts consumption and roughness(which applied respectively to light vehicles, light trucks, heavy trucks and articulated trucks) werereplaced by 24.37, 1.128, 6.46, and 10.46. Similarly, for cars and utilities the roughness coefficient CPq inthe exponential relationship between spare part consumption and roughness was reduced from 13.7 to avalue of 9. The net impact of these changes is a 59% reduction in roughness effect for light vehicles andabout 42-43% for trucks. Other calibration adjustments made referred essentially to the energy-efficiencyfactor and the hourly utilization ratios. The energy-efficiency factor which affects directly the prediction offuel consumption was adjusted by replacing the default value of 1 (which applied to vehicles employedduring the Brazil studies) by 0.8 in order to incorporate modern and more fuel-efficient vehicles makes andmodels; the hourly utilization ratios which affect the prediction of depreciation and interest were adjustedby replacing the default values of 0.60, 0.80, 0.75, 0.85 respectively used for cars, utilities, buses, andtrucks, by 0.20, 0.30, 0.40, and 0.50. Finally, vehicle and maintenance labor costs were updated alongwith service life and hours driven per year (see Table 1). These adjustments generally resulted in VOCvalues and benefits of a lesser magnitude than calculated with the original model (about 25% less).

18. Road deterioration submodel. The road deterioration submodel was calibrated by introducingequivalent standard axle factors for heavy vehicles that duly take into account the overloading observed orexpected to occur on the network. Also, for the assessment of pavement residual strength and theprediction of roughness and other surface defects evolution, deflection values effectively measured on thenetwork were given precedence over structural numbers estimated from 'theoretical" material strengthcoefficients. Considering the low deflection values measured (generally between 0.3 and 0.6 mm), thisapproach resulted in modified structural numbers greater than what would have been otherwise calculated,and consequently to somewhat slower deterioration pattems. Finally, the applicability of the roughness

-77- Annex 7

progression model was evaluated by comparing the values of roughness observed on the 1,500 test sectionsto the values calculated by HDM-3. Although, and as would be expected, some dispersion occurred due tothe large number of sample included in the statistical analysis, it was found that the HDM-3 model gives asatisfactory prediction of roughness, with a I to I ratio between observed and predicted values.

19. Maintenance costs submodel. Investments and maintenance unit costs were also updated, takinginto account the most recent figures obtained from bidding and incorporating all additional costs related toshoulders repairs and upgrading, drainage rehabilitation, and pavement markings (estimated to be about 20to 30% of total costs). These unit costs, however, do not include additional costs resulting from otheroperational improvements such as climbing lanes, exceptional safety devices, and special environmrentalimprovements as such expenditures are separately provided for in the project cost estimate.

D. Evaluation of Multiyear Program

20. The economic evaluation covered altogether 38,566 km of roads, of which 29,335 km are toremain under DNER jurisdiction and 9,231 km are to be devolved to the states. A total of 13,190 km ofroads, consisting of the highways already under concession (about 850 km), others to be concessioned butcurrently under rehabilitation or upgrading contracts including the Sao Paulo-Belo Horizonte and Curitiba-Florianopolis highways (about 1,500 km), the 4,000 km of roads recently delegated to the states of Paranaand Rio Grande do Sul for inclusion in their concession program, the up-coming DNER own concessionprogram (about 4,200 km) as well as about 2,600 km of other roads currently under rehabilitationcontracts, were excluded from the analysis. Regarding the DNER own concession program, a specialcontingency allocation of about US$100 million over 5 years representing 3 cm asphalt concrete overlayover the critical portion of that network, would be provided to keep them serviceable until concession isawarded.

21 Phasing of the economic evaluation. The economic evaluation was carried out in 2 separatephases. In the first phase, the whole 38,566 km long network was analyzed using various budget constraintscenarios ranging from US$200 to 300 million per year, in order to determine the strategies correspondingto the resource level alternative that would be compatible with DNER annual financial constraints over thenext 4 to 5 years. In a second phase, and having determined the optimal budget level alternative, theobjective was to incorporate in the analysis the results of the discussions held with the various statesgovernments on the scope and content of the decentralization program. Negotiations had indeed indicatedthat devolution of highways to the states would be feasible and acceptable only if the total length ofnetwork to be rehabilitated prior to transfer, was in the order of 4,000 km. Consequently, the secondexercise aimed at determining - within the limit of the overall budget available - the budget sharing ratio(between the network to remain federal and the network to be transferred) that would enable to rehabilitateon the network to be devolved, about 4,000 km of roads in critical or poor condition. To that effect, severalpairs of budget constraint ratios were tested until a mutually satisfactory solution was obtained.

22. Steps in the analyses. In both phases of the evaluation, the economic analysis comprised fivesuccessive steps: (i) the formulation of maintenance policy alternatives for each cell of the matrices (ii) theHDM Manager runs at the link group (or cell) level, enabling to compare the returns to be expected fromeach maintenance strategy altemative, (iii) the EBM runs which optimize, at network level, the set ofstrategies analyzed by HDM Manager, taking into account the various budget constraints scenarios, (iv) theselection of the set of strategies and priorities which are consistent with the predicted budget constraint

- 78 - Annex 7

level, and (v) a sensitivity analysis for the selected strategy, to assess the impact of cost increases or benefitdecreases upon the economic returns.

23. Formulation of Maintenance Alternatives. Strategies can be either scheduled in time orresponsive to a certain threshold of surface condition. For paved roads in good condition which do not needperiodic maintenance actions in the near future, the first intervention was scheduled to take place in years 5(i.e., in 2001), 7, 9, and 11, with future overlay action (5 cm asphalt concrete overlay), triggered at aroughness level of 4 IRI. For paved roads in fair to poor condition, periodic maintenance actions can beexpected to be needed immediately or in the near future. The strategies were therefore scheduled to occurimmediately (year 1 of the project, i.e., in 1997), and also allowed to be postponed to the third, fifth, orseventh year of the project in order to test the effect of postponement on the economic returns. Futureoverlay interventions (5 cm A.C ) were also triggered to occur at a roughness level of 4 IRI.

24. In the analysis, the base strategy (alternative 1) included routine maintenance with 100% patchingof potholes and reconstruction when roughness reaches a very high level, i.e., 11 IRI. The other fourmaintenance options to which each cell or group of homogeneous roads were subjected were generally thefollowing, depending on traffic level and the condition of the pavement:

(i) for asphalt concrete pavements in good condition, routine maintenance was applied during the firstfour years, followed by a 5 cm thick asphalt concrete overlay scheduled to be placed in year 5, or7, or 9, or 11. Future policies included another 5 cm of A.C carpet whenever roughness reaches 4IRI. For surface-dressed pavements, and following the first four years of routine maintenance,slurry seals or surface treatments were used for low traffic levels, with an option of a 5 cm A.Coverlay for medium -low traffic and weak pavements; these operations being scheduled to occur inyear 5, or 7, or 9, or I1, with future actions identical to that selected for asphalt concretepavements;

(ii) for asphalt concrete pavements in fair or critical condition, thin to medium asphalt concreteoverlays, ranging in thickness from 3 cm to 8 cm were scheduled to take place in years 1, 3, 5, and7; for surface-dressed pavements also in fair or critical condition, surface treatments for lowtraffic levels or 5 cm thick asphalt concrete overlays for low to medium-low traffic levels werescheduled in years 1, 3, 5, and 7. Future maintenance policy again included the placing of 5 cmA.C carpet whenever roughness reaches 4 IRI;

(iii) for asphalt concrete pavements in poor condition, thick asphalt concrete overlays ranging from 5cm to 12 cm in thickness were scheduled to occur in years 1, 3, 5 and 7; overlays were generallyplaced after the recycling of the upper 5 cm of the existing pavement. For surface dressedpavements, only reconstruction solutions using double-surface dressings for very low traffic or 5 to8 cm thick asphalt concrete wearing course for low and medium traffic respectively, were analyzedand scheduled to occur in years 1, 3, 5, and 7 of the analysis period. Likewise, future actionsincluded a 5 cm thick overlay to be placed when roughness reaches 4 IRI.

- 79 - Annex 7

E. Results of Economic Evaluation

25. First Phase Study. The HDM study carried out for Fig 1. Evolution of Program NPV withthe whole network of 38,566 km highlighted the magnitude Budget Constraintof the economic issue: 9.65

(i) road users spend about US$ 16 to 17 billion 0 9.55 5 ' "'""''"'

annually to operate their vehicles on the paved ' .5 .........federal network, i.e., an amount equivalent to nearly . ....... ......twice the capital asset value of the infrastructure; X 9

9.3

(ii) the costs born by road users for vehicle operation 99.251

and depreciation outweigh by far the costs incurred 200 225 250 275 300

by the government: road users spend between 40 Annual Budget Constraint (1197-2001)

and 100 times more, depending on whether budgets Fig 2. Evolution of Future Resourceare constrained or not; needs

(iii) the economic return accruing to society from N .," ...............

maintaining the network is considerable. The 1 .....Project Net Present Value (NPV) is about US$3.4 c ............

billion under the selected budget constraint. The * .". ,,. ,,. ,*,

Intemal Economic Rate of Return (IERR) is about < 1'60 "

104%. The discounted benefit/cost ratio is about 2; 2 200 225 250 275 300

so Annual Budget Constraint (1997-2001)

(iv) the average road user saves about two dollars invehicle operating costs for every extra dollar Fig 3. Variation of % Network with IlR >4 ininvested by the government in rehabilitation works Function of Budget Constraint (2001)

10

on the network. A 9 E 87 . ... fi .- .............................

(v) If the project was not undertaken, then by 2002: c6 ' '"' "'''''"''""

<3) would decrease from a current 43% to l 27 N -- ''z ''' ooo2zen'n

critical to poor condition (IRI >4) would20 25 20 27 30

increase from a current 15% to about 55%;BugtCnratUSMYrthus reverting to the bad situation that Fig4. Evolution of Maintenanceprevailed throughout the last decade (with aproportion of poor to very poor condition, 900% :1 . .,...... ... I......

70

* road user costs would increase by about 5 %, W 50o%% | ||.i".. .|with unit average vehicle operating costs t 40% : - 4|

rising from an actual 42 cents per km to x 30°%% f sm<2 - oo 2 n*4'

nearly 44 cents in year 2002. Road users tO% .fi...|i"||s,..2'4g§..gs

would collectively and annually spend about 1979 1984 19386, 1989 1992 1996 2001

US$300 to 350 million more than if the Year

project was implemented;

- 80 - Annex 7

the annual resources needed, as of year 2002, to rehabilitate the network would be in theorder of US$630 million during a five-year period (compared to a current US$320 millionunder a no-budget constraint scenario).

26. The results of the economic evaluations aresummarized in Figures 1 to 3, which show for each of the (Ion >5)five budget scenarios: (a) the NPV of implementing the 30 .. ...... ..project according to the optimum strategies recommended by 2S ... ....I.........the Expenditure Budget Model; (b) the amount of annual .20........resources needed as from year 2002; and (c) the proportion of 0 ....... .. :roads in critical to poor condition (IRI > 4) at the end of the .. ..project. For comparison purposes, Figures 4 to 7 show the Xevolution of the maintenance condition of the network, of * ... s - .vehicle operating costs and total transport costs on the paved 197 1 1 200 2010network over the period 1975-2000 (as derived from the 1970 1980 1990 2000 2010relationship between these parameters and roughness). Year

27. On the basis of these results, the fourth-best scenario Fig 6. Evolution of Unit VOC onwas selected for the following reasons: Paved Network

m 0.425 -

(i) the level of financial resources expected to be 0 0.42 - .. .......available to DNER in the next 4 to 5 years, for the 0.415 .E .rehabilitation of the highway system (excluding o

* 0.41 - . .. .. . .routine maintenance, operational and safety .improvements, and contingency funds for the .05 .........highways to be concessioned) is estimated at about > OA- : ........_ .........US$225 million per year; 1970 1980 1990 2000 2010

Year

(ii) the rehabilitation activities implied by this scenario(about 14,150 km of civil works over the next 4 to 5 Fig 7. Evolution of Total Transportyears) are compatible with the institutional capacityof DNER and the participating DERs which will 4> 16.7- :::: ..........................prepare, procure, and supervise the works; .16 6.m

01 16.5 *:*:K::::::.. . .......

(iii) 'the second phase study", and within the limit of that 0 164. .:X:<: .scenario, shows that a fair distribution of > 16.3 . .... .expenditures between DNER and state-transferred 0 16.2- X.

networks enables to arrive a mutually acceptable 16.1 : ; : :.tj:: t :i

solution (para 30 to 33); and, 1970 1980 1990 2000 2010Year

(iv) selecting more expensive strategies or scenarioswould result in a very marginal improvement both in the level of service provided (averageroughness, percentage of network in poor condition) and in the additional benefits or Net PresentValue accrued to society (less than 2%).

28. The project benefit and cost flows given in Table 9 of this Annex shows that implementingscenario 4 would yield a Net Present Value of about US$ 3.4 billion over a period of about ten years,considering only the investments made during the project implementation period (i.e., US$900 million). If

- 81 - Annex 7

the strategy recommended by this scenario was applied during the full twenty years period of analysis, withannual investments of about US$180 million, as from year 2002, then the Net Present Value of thatprogram would be in the order of US$9.4 billion, with a rate of return of 104%.

29. The results of the HDM economic evaluation were finally translated into a catalog of technicalsolutions to be applied to each cell of the matrices, as a function of pavement condition and traffic, (Annex2) and also into the project Cost and Financing Table 1 (Annex 8). They both correspond to a budgetconstraint of US$225 million per year for rehabilitation works over 14,150 km of roads.

30. Second-Phase Study. The first phase of the economic evaluation indicated that the mostappropriate budget constraint level to be considered corresponded to annual resources of US$225 millionduring the next 4 to 5 years. Applied to the whole network, and irrespective of the results of negotiationswith the states, such resources would enable to rehabilitate about 3,000 km of the network to be transferredto the states, without attending - because of financial constraints - sections of roads which already showobvious signs of fatigue and distress. Discussions held on that basis with the state govermnents confirmedthe concern the states have in receiving segments of highways in critical condition without properrehabilitation, and it became obvious that the decentralization process would only be successful if therehabilitation program for the state-transferred network comprised about 4,000 km of roads. This causedDNER to carry out a follow-up study aimed at determining the budget sharing ratio and correspondingstrategies (within the overall constraint of US$225 million per year) that would be mutually acceptable.

31. The second-phase study consisted in applying separately to the two networks (remaining federaland to be transferred) - each one being properly characterized by its own matrix of traffic and pavementcondition - various levels of budget constraints and determining - within the global US$225 million limitannually - the most adequate distribution of resources that would satisfy state's requirements, whileenabling DNER to improve the condition of its own network. To that effect, about 10 pairs of budgetsharing ratios were analyzed and submitted to new HDM/EBM evaluations ( ratios ranging from 195/30 to155/70 million of dollars, for DNER and State-transferred networks respectively).

32. The results of these evaluations are illustrated in Figures 8 to 15. For each network and for thevarious budget constraint scenarios, are indicated the evolution of NPV (both for a 20-year program andfor the project alone), the total length of roads that can be rehabilitated during the project, the amount ofannual resources needed in the future, and the resulting roughness condition of the networks, Anexamination of these trends led to the conclusion that the most satisfactory solution was to implement thestrategies corresponding to a budget sharing ratio of US$ 175/50 million per year. As can be seen inFigures 11 and 15 such strategies will allow an overall reduction in the proportion of roads in critical orpoor condition (IRI>4) from a current figure of 18% to less than 5% in year 2002. The strategies involvealtogether the rehabilitation of some 14,200 km of roads, i.e., about 37% of the whole network (3,800 kmpertaining to the network to be transferred). For the federal system the reduction of the proportion of roadsin critical to poor condition would be from 15% to 5% and for the network to be devolved from 23% toabout 8%.

33. Finally, the design solutions for various traffic classes and road conditions, along with the optimalyear of intervention and average unit costs, were represented in the form of Catalogs of structures whichare strictly applicable to the budget constraint scenario taken into account (US$175 million for the federalnetwork, and US$50 million for the state-transferred network). The technical solutions proposed shouldnormally provide a satisfactory level of service over a period of 10 to 15 years, whereupon a new overlaywill be required. The catalogs are shown in Annex 2 'Maintenance Strategy"

- 82 - Annex 7

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Graphic Illustration of Second Phase Study

Fig 8. Effect of Budget Constraint on NPV Fig 9. Needed Resources as of 2002 as a(Federal Network) function of Budget Constraint

Program Project7.75 3124

o 7.7 Program 2.9 140o 17.66 2. 3

D 7.6. 2.- i

7.5 -2.513

z 745 - Federal : 27.4 2_3 '_ _ __12_ _ _ _, _ _ _

O, - _ o ~- 5 , E S E 8 150 160 170 ISO ISo 200

Annual Resource Constraint US$M Budget ConstraInt (1997-2001) USSM

Fig 10. Length that can be Rehabilitated In fu Fig 11. % Network with IRI > 4 as a function ofBudget Constraint Constraint

12000 20 p f

n 1105W raAc15z

S esoo s 0

150 16o 170 190 190 200 150 1so 170 180 190 200

Budget Constralnt USSM Annual Resource Constraint US$M

Fig 12. Evolution of NPV with Budget Constraint Fig 13. USSM needed as of 2002 as a function oNetwork) Constraint

Program ProJert

19 P roiect.........1 So 0

1.75.- 0o 4

0.7 01> 7 w rga 40

Z 1.65 Tramnher 0 2 3 Trander

30 35 40 455055 60 65 70 30 40 50 60 70

Annual Resource Constralnt USSM Budget Constraint (1997-2001) USSM

Fig 14. Km of Rehabilitation as a function of Fig.15: % Network with IRI > 4 as a function ofConstraint Constraint

6000

30 40 60 60 70 30 40 50 60 70

Budget Constri nt USSM Budget Con traint (107.2001) USSM

- 83 - Annex 7

F. Sensitivity and Risk Analysis

34. Effect of higher costs: A 20% increase in rehabilitation costs or a 20% decrease in vehicleoperation benefits (resulting from either lower traffic volumes or higher VOC) would only marginally affectthe Internal Economic Rate of Return and the Net Present Value: IERR would still be in the order of 88%and NPV would decline by 26%. The NPV would only reach zero if the capital costs would be multipliedby a factor of about 4, or traffic would be divided by a factor of similar magnitude, which is very unlikely.

35. Effect of delays in execution. In the event that the project would be implemented over a six-yearperiod instead of four to five years, the Net Present Value would decline from US$3.4 billion to 3.2 billion(i.e., a 4% reduction), the annual resources needed in the future would rise from US$176 million to 206million (i.e., a 17% increase), and the average roughness at the end of the implementation period wouldincrease by 25%, from 3.2 to about 4 (i.e., a 3% increase in VOC/veh-km from US$0.41 to 0.424).

36. Effect of overloading. The effect of overloading was investigated using also the HDM model. Forthe economic evaluation, conservative equivalent standard axle (ESA) loads were selected for the heavy andarticulated trucks to reflect the likelihood of overloading on the network. Values of 6.7 and 12 standard 18kips axle load factors were adopted respectively. In parallel, another analysis was carried out to determinethe impact of overloading by assuming another scenario in which no overloading occurs, meaning that fullcompliance with the Brazilian law on vehicle weights and axle loads was met. Accordingly, ESA factors of1.8 and 3.4 were adopted for the heavy and articulated trucks, respectively. In addition, the effect ofoverloading was analyzed under a no-budget constraint and a US$225 million per year budget constraintscenarios.

Fig 16. Evolution of Costs and Benefits as37. The results of the analyses can be summarized a function of Overloading under

as follows: Budget Constraint0 9000 - .....................

(i) under budget constraint, the presence of ' 8000 .... :...

overloading requires an increase of 1 to 2 cm of 7000asphalt concrete overlay over almost 30% of the . .6000 - : .

5000.. . . . . . . . . . . . .network to be rehabilitated; 4000

e 3000... .

(ii) as a result, the government needs to invest 13% O 2000

more over a 20-year period. Total investments 0 0 1 2 3

amount to US$4.5 billion instead of US$3.9 None Severe Very

billion, with unit rehabilitation costs of Overloading Scenario

US$5,750/km/yr instead of US$5 ,085/krn/yr;Fig 17. Evolution of Costs and Benefits as

a function of Overloading under(iii) also, overloading does not allow a substantial No-Budget Constraint

portion of the network (about 15%) which is incritical or very poor condition, to be X 10 :.

strengthened quickly; 8; 6000 I:eBe ts..6000 ...:....

(iv) under a no-budget constraint scenario, the m 4000

impact is less severe, though still substantial: X 202000 .... .

investment needs are increased by nearly 10%, . 0 1 2 3

while additional overlay thickness is necessary None Severe VerySevereover 20% of the network to be strengthened. Overloading Scenario

- 84 - Annex 7

Also, because of the unconstrained resources, allsections in critical or poor condition can be Fig 18. BenefitlCos Ratio as a functionrepaired within the next 4 to 5 years; of Overloading

2 .2 . . . . . . . . . . . . . . . . . . . .

(v) these results only apply to the network in 2 ............o....tquestion and particularly with regards to its ...........structural strength (mean modified structural a"number of 5.5, as derived from deflection tests). X 1.6 wfnbantHad the network been less strong, a greater ...-.... .additional investment cost would be expected. 1 23

None Severe Very Severe38. The impact on the national economy is very Overloading Scenanodifferent; the benefits accrued to society are much largerunder the overloading scenario. Over a 20-year period program of sustained investment, Net PresentValues are increased by 20% to 25% whether there is a budget constraint or not. Also, whatever thebudget-constraint scenario, Benefit/Cost ratios are higher when overloading occurs; with and withoutoverloading B/C ratios are 1.7 compared to 1.5 under budget-constraint, and 1.94 compared to 1.6 underno-budget constraint. Overloading, to the extent taken into account in the analysis, results in vehicleoperating costs 25% to 53% lower than in the case of no-overloading. These conclusions are consistentwith previous studies that show that total transport costs decrease dramatically when legal maximum singleaxle loads are raised from 8 - 10 tons up to 13 - 15 tons.

Table 5: Effect of Overloading on Cost and Benefits

Overloading Scenario

ESA Factor Budget Constraint Total Investment Cost to Society Net Benefits accrued BenefiUtCostAppreciation Heavy truck Artic. truck for Road Agency over next 20 vrs/USSM over next 20 vrs/USSM Ratios

None 1.8 3.4 Yes 3982 6109 1.53

None No 4201 6573 1.57

Severe 6.7 12 Yes 4500 7609 1.69

Severe No 4571 8886 1.94

Very severe 10 16 Yes 4500 8044 1.79

Very severe No 4573 9927 2.17

G. Fiscal Impact Analysis

39. The Federal Government will benefit from the reduced recurrent costs of maintaining the highwaysrehabilitated under the project and from the avoided much higher costs of future reconstruction, as well asfrom the transfer of highways responsibilities to state governments and/or to private concessionaires whowould recover costs through tolls. Under the conservative assumption that, without the project, DNERwould not carry out substantial rehabilitation work in the next five years, the fiscal impact of the project isnot significant over 1997-2001, but it becomes very positive thereafter, when heavy reconstruction wouldbe needed if the project was not implemented. The state governments will receive additional periodic androutine maintenance expenditure responsibilities through the decentralization component. Theseresponsibilities, however, will be minimized by the rehabilitation and resurfacing works to be carried outunder the project. They will be reduced through the concession program, which will transfer rehabilitationand maintenance expenditures, and capacity investments on federal and state highways, to road users.Overall, the impact of the project on the states' finances is not significant (Table 9.b hereinafter).

-85- Annex 7

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 6: Brazil Federal Network Condition and Characteristics (1996)

Network Length per Surface Tvye 60000

Surface type Length (km) % 50000.~40000

Paved 52000 78% '300Unpaved 15000 22%

10000 E - :

Total 67000 100% 0 -Paved Unpaved

Surface type

Distribution of base and wearina courses on Paved roadsMaterial Base Wearing course 4000

Km % Km % |Granular 48000 92% 0 30000

Soil cement 4000 8% 0 EBitumen macadam 0% 0 0% * 20000

Soil lime 0% 0 o1000 * < -E

Asphalt concrete 38150 73% oESurface treatment 13700 26% Asphalt Surface Cement

Cement concrete 150 0% Concrot r realrnent Concret

Total 52000 52000 type o ing course

Evolution of Paved network over the last 30 years 60000

%increaseE 40000Year Length per year Kmfyear E

1960 8000 20000 -

1970 15000 8.7 700 - -1980 40000 16.7 2500 0 1980 1990 1996

1990 50000 2.5 1000 Year

1996 52000 0.7 333

Aae of Paved network 25000

Year of % within 20000

construction Age (yrs) Length (km) range E.X15000

1990-95 0-5 2000 4% s.1985-90 5-10 7000 13% .

10-15 3000 6% soo

1975-80 15-20 15000 29% 0 1 :1960-75 20-30 25000 48% 04- 5-10 10-15 15-20 20-40

Total 52000 100% Age, years

Paved network structural strength 30000

Structural Numbe Length (km) % E 20000

2-3 0 0% ~[I3-4 2600 5% 0110000

4-5 20800 40% ol5-6 26000 50% 0

6-7 2600 5% ~~~~~~~~ ~~~~~~~~~~~~2-3 3- 5- -s 6-7 7-86-7 2600 5% | Structural number7-8 0 0%Total 52000 100%

- 86 - Annex 7

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 7: Brazil Federal Network Condition and Traffic (1996)

Deflection distribution on paved networkDeflection (m Length (km) % 3.0000 .

0-0.3 364 1% 250002 20000

0.3-0.4 9984 19%

0.4-0.5 27092 52% s 15000OC10000

0.5-0.6 11960 23% 5000

0.6-0.8 2548 5% 0 - I L. rn0.8-1.0 52 0% U 'A

Total 52000 100% Defection mm

Roughness distribution on the network20000

IRI Km %0-2 5345 10% E15000 .. .. ..

2-3 18065 35%

3-4 16150 31% ,

-j4-5 6873 13% 50005-6 2227 4%6-7 1113 2% o>7 2227 4% 0-2 2-3 3-4 4-5 5-6 6-7 >7

Roughness, IRI

Total 52000 100%

20000

Maintenance condition of the network

Surface cond Km %1002

Excellent 7174 14%

Good 13752 26% s jl

Fair 17201 33% w 5000Poor 9430 18%

Very poor 4443 9% Excellent Good Fair Poor VeryTotal 52000 100% PoorMaintenance Condition

Daily Traffic distribution on the network

ADT Km % 15000

<1000 9573 18%

1000-2000 14593 28%

2000-3000 11059 21%co 0

3000-4000 5020 10% 4)

4000-5000 3991 8% o5000-10000 6117 12% ° o . ° °

>10000 1647 3% v0% Average Daily Traffic

Total 52000 100%

Vehicle fleet distribution on the network% Cars % Pick-up % Bus % Small trucks % Medium trucks % Heavy trucks % Articulated trucks

Paved 30 19 5 7.4 7.3 19 12.3

- 87 - Annex 7

BRAZILFEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Economic EvaluationTable 8: Matrices of Networks Condition and Traffic

Internatlonal Roughness Index IRI mlkm<2.5 2.5clRI<3 3<IRI 3.5 3.5 lRI<4.5 IRI>4.5

Surface Traffic Deflection mmType Class ADT c OA5 >0A5 < OAS > OA5 c OAS >:0.45 < OA5 > 0.45 < OA5 > OA5

CodeA B C D E F G H I J Total %

Lenath km

Network to remain Federal

Asphalt I < 1200 58 581 156 405 149 785 81 903 23 336 3477 18%Concrete 2 1200-1800 466 592 434 673 334 324 379 461 36 187 3886 20%

3 1800-2300 795 407 628 345 452 291 437 446 81 87 3969 20%4 2300-3100 564 309 317 346 303 235 422 313 139 171 3119 16%5 3100-4800 696 178 755 74 436 63 421 159 204 114 3100 16%6 4800-10000 377 18 302 111 315 29 150 135 187 82 1706 9%7 > 10000 109 6 47 5 31 19 27 t1 36 37 328 2%

Sub-total km 3065 2091 2639 1959 2020 1746 1917 2428 706 1014 19585 100%% 26% 23% 19% 22% 9%

Surface 1 < 1200 148 130 223 292 472 624 584 775 201 188 3637 36%Dressing 2 1200-1800 267 379 411 354 405 374 550 671 204 780 4395 43%

3 1800-2300 98 288 52 242 205 163 86 326 358 258 2076 21%Sub-total km 513 797 686 888 1082 1161 1220 1772 763 1226 10108 100%

% 13% 16% 22% 30% 20%Total km 3578 2888 3325 2847 3102 2907 3137 4200 1469 2240 29693 63%

% 22% 21% 20% 25% 12%

Network to be transferred

Asphalt 1 < 1200 59 136 98 128 6 117 58 45 56 203 906 23%Concrete 2 1200-1800 132 190 109 28 71 46 44 86 13 134 853 21%

3 1800-2300 110 270 104 41 36 20 68 83 95 155 982 24%4 2300-3100 225 148 24 66 22 35 71 69 235 131 1026 26%5 3100-4800 21 6 61 30 20 20 29 11 36 9 243 6%

Sub-total km 547 750 396 293 155 238 270 294 435 632 4010 100%% 32% 17% 10% 14% 27%

Surface 1 < 1200 204 53 360 168 475 123 270 227 93 232 2205 42%Dressing 2 1200-1800 253 254 159 341 145 186 25 543 32 317 2255 43%

3 1800-2300 59 137 44 100 54 41 30 99 15 183 762 15%Sub-total km 516 444 563 609 674 350 325 869 140 732 5222 100%

% 18% 22% 20% 23% 17%

Total km 1063 1194 959 902 829 588 595 1163 575 1364 9232 20%% 23% 20% 15% 19% 21%

Network to be concessioned

Asphalt 1 < 1200 29 132 3 62 1 31 14 32 0 6 310 4%Concrete 2 1200-1800 180 140 13 2 6 0 0 8 1 17 367 5%

3 1800-2300 193 51 66 16 15 25 134 2 32 25 559 7%4 2300-3100 387 98 42 94 48 113 74 145 30 155 1186 15%5 3100-4800 573 268 289 134 330 93 490 156 75 112 2520 31%6 4800-10000 456 194 329 110 350 46 368 77 481 168 2579 32%7 > 10000 52 10 75 7 56 3 110 40 110 78 541 7%

Sub-total km 1870 893 817 425 806 311 1190 460 729 561 8062 100%% 34% 15% 14% 20% 16%

Surface 2 1200-1800 0 0 0 1 0 0 0 19 0 35 55 59%Dressing 3 1800-2300 0 2 0 0 0 3 4 7 5 18 39 41%

Sub-total km 0 2 0 1 0 3 4 26 5 53 94 100%% r.2% 1% 3% 32% 62%

Total km 1870 896 817 426 806 314 1194 486 734 614 8156 17%% 34% 15% 14% 21% 17%

Global

Length km 6511 4977 5101 4175 4737 3809 4926 5849 2778 4218 47081 100%% 24% 20% 18% 23% 15%

Nota: Were excluded from the analysis about 4,150 km currently under rehabilitation contracts, and 850 km already under concession contracts.

- 88 - Annex 7

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Fig 9. Surface Condition and Traffic Volumes on the Networks

Traffic on the Network to remain Roughness on the Network to Surface Type on the Network toKm Federal Km remain Federal remain Federal

3500 f 70003000 0000

2500 251-Ill ~~~~~~~~~~~50002000 : :1500 N B

000 Ii 25-3~~~~~~~~~~00

!2oF 0 Do<Cv -e>> nY <q ,,° <2., ~~~~~~~~~~2As3 3-3.5 3.54.5 s

0 o ~~~~~~ ~~~~~~~~~2.5 ~ 5 4.5 4JOT Claases Roughness IRI

Traffic on the network to be Roughness on the Network to be Surface Type on Network to beTransferred Transferred Transferred

KmKm 25001200

20001000 II%2000+ 1;1 1' u 15 200 0 8 ,-'1 .. 1 .0'

000 liii II~~~~~~~~~~00410 i 1000 - -!2LI D

~ s 8 <° s s ° 8 ; . Fs 2 253 3-3.5 3.54.5ADT Classes Roughness RI

Traffic on the Network to be Roughness on the Network to be Surface Type on Network to beConcessioned Concessioned Concessioned

KmKm300

3600020

2500~~~~~~~~~~~~~~20

2000

5o0

500 nIl~~~~~~~~~~~~~0

-2.5 2.5-3 3-3.5 3.54.5 S4.5ADT Classes ~~~~~~~Roughness RI

- 89 - Annex 7

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Costs and Benefits Flows for the Project

Table 9: Economic Analysis

Total Totai Economic Economic Economic Economic Total EcantacFlnancial Financial Financia Economic Economic Ndt Net Economic Not Total Net Economic Net

CapItal Recurrent Cost Costs Benoils Benofts Cost Bendits Benefts Benefms Economic Bonerts BSn1I4.3 BandtsYew USSM USS USSM USSM ussM ussm +20% USSM .20% uSSId Cost *4.3 usSm USsM ussm

1 -225 -95.00 -320.00 -256.00 -100 00 -356 -307 -407.20 -80 -336 -1100.8 -1200.8 -23.255814 -279.26

2 -225 -80.00 -305.00 -244.00 602 00 358 -293 309 481.60 237 6 -1049 2 -447.2 140.00 -104.00

3 -225 -83.00 -308.00 -246.40 297.40 51 -296 1.72 237.92 -8.48 -1059.52 -762.12 69.16 -177.24

4 -225 -80.00 -305.00 -244.00 923.00 679 -293 630 738.40 494 4 -1049.2 -126.2 214.65 -29.35

5 0 97.00 -97.00 -77.60 856.60 779 -93 763 685.28 60768 -33368 522.92 199.21 121.61

6 0 -80.00 -80.00 -64.00 94800 884 -77 871 758.40 6944 -275.2 672.80 220.47 158.47

7 0 -81.00 -81.00 -64.80 1.055.80 991 -78 978 844.84 779.84 -278.64 777.16 245.53 180.73

8 0 -79.00 -79.00 -63.20 1,159 20 1096 -76 1,083 927.36 864.16 -27176 887.44 269.58 206.38

9 0 -87.00 -87.00 -69.60 1,271.60 1202 -84 1,188 1,017.28 94768 -299.28 972.32 295.72 226.12

10 0 -78.00 -78.00 -82.40 1,364.40 1302 -75 1,290 1,091.52 1029.12 -268.32 1,096.1 317.30 254.90

NPV (765.41) (536.62) -1302.03 (1,041.62) 4,478.69 3,437 3,229 (1,249.95) 2,541.36 (3,582.95) (0 25) (4,65.05) (0.06)

IERR 106% 88% 84% 12% 12%

Table 9b: Fiscal Impact AnalysisFederal Govenrnent _Stt_ e Govenorpnts 1/

_ _tl Prctest Wthout Proled _ _ MWth Prject_

eaI r Rehab MaiM. Debt Svc Concessions 21 total Rehab Maoit. Tota Net moad RRdhab Mairt. Concession 21 Total Net hrsc

1997 12 95 107 112 112 5 0

1998 45 74 2 121 112 112 -9 0

1999 62 74 15 -40 111 112 112 1 0

2000 65 66 35 -60 106 112 112 6 0

2001 66 80 80 -80 146 112 112 -34 30 20 -40 10 -10

2002 135 65 100 -90 210 630 112 742 532 30 20 -40 10 -10

2003 135 65 120 -90 230 630 112 742 512 30 20 -40 10 -10

2004 135 65 150 -90 260 630 112 742 482 30 20 -40 10 -10

2005 135 65 145 -90 255 630 112 742 487 30 20 -40 10 -10

2006 135 65 140 -90 250 630 112 742 492 30 20 -40 10 -10

1/ For transferred highways only2/ Rehabilitation and maintenance expenditures under concessions

(capacity investments not included)

- 90 - Annex 7

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Economic Evaluation

Table 10: Summary Tables of Significant Parameters

Effects of Budaet Constraints on NPV and Condition of Network (38.567 km)

Budget Internal Annual No. of km thatConstr./yr, NPV of NPV of Economic Resources % length with Average can be

USSM,1997- Program, Project, Rate of needed 2002- IRI>4, in year Roughness at rehabilitated in2001 USSbillion US$billion Return % 2016, US$M 2002 end of project IRI 1997-2001200 9.256 3.267 107 186 10 331 11609225 9.415 3.436 104 176 6 3.21 14149250 9,509 3.640 99 167 3 3.12 15810275 9.56 4.100 95 162 1 3.01 17242300 9.609 4.100 92 163 0 2.92 19644

Effects of Budget Allocation Level on NPV. Future Financial Needs. Rehab. Program, and Condition of NetworkNetwork to remain Federal 2S,335 km

20 years 10 yearsanalysis analysis Internal Annual Average

period NPV of period NPV of Economic resources Roughness at No. of km that beAllocation, program, project, Rate of needed 2002- %length with IRI end of project, rehabilitated km

US$MIyr USSbillion US$billion Return, % 2016, USSM >4 in year 2000 IRI in 1997-2001150 7.518 2.506 111 142 15.1 3.33 8620155 7.549 2.565 111 142 14.4 3.3 9160160 7594 2.627 110 140 13.1 3.27 9570165 7.593 2.632 106 139 12.6 3.22 9702170 7.619 2.706 105 137 11.2 3.19 10135175 7.659 2.796 104 135 10.5 : 3.18 10368180 7.66 2.765 103 133 9.3 3.15 10725185 7 693 2.84 102 134 8.6 3.13 10948190 7.706 2.869 101 130 7.2 3.07 11380195 7.725 2.891 100 129 6.5 3.05 11576200 7.732 2.916 98 129 6.3 3.01 11992

Network to be Transferred, 8232 km

Internal No. of km thatNPV of NPV of Economic Average IRI at can be

Allocation, program, project, Rate of USSM needed % length with IRI end of project, rehabilitated InUS$M/yr US$billion USSbillion Return % 2002-2016 >4 in year 2000 IRI 1997-2001

30 1.69 06861 132 48 21.1 3 59 220535 1.683 0583 110 47 17.6 353 266240 1 721 0.608 108 45 15.5 3.42 310045 1.74 0.626 103 43 17.9 3.4 3491

50 1.75 0.64 97 4 1 54 3.33 3781:55 1.772 0.698 95 39 15.1 3.24 426160 1.802 0.771 92 37 11.1 3.12 515065 1 813 0.751 89 36 6.6 3.05 567370 1 828 0.786 87 37 5.4 2.96 6423

Evolution of Roughness over the next ten years. under Budget Constraint

% network with IRI > 4(Smooth curve)

Fed. with State with Overall withYear USSMI25 US$50 US$2251996 15.3 28.4 181997 13.5 18.4 14.71998 11.8 14.6 131999 10 13 10.72000 8.3 10.8 92001 6.5 9.2 7.12002 4.8 7.6 5.52003 3.2 6.5 42004 1.5 4.3 2.22005 0.5 3.2 12006 0 2.7 0.6

- 91 - Annex 8

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Project Implementation Plan

Table 1. Project Monitoring Indicators and Targets

Obiectves, Components Indicators 1997 1998 1999 2000 2001 2002

A. Development Objectives

1. Improve Condition of Highway NetworkFederal Network in Poor Condition % length with iRi> 5(1) 12 10 7 4 2 1

Good Condtion % length with IRI c 3 34 40 44 46 49 52

Transferred Net. in Poor Condition % length with IRI > 5 20 17 12 7 4 2

Good Condition % length with IRI < 3 36 36 41 42 44 45

2. Reduce Road Transport CostsVehicle Operating Costs average HDMVOC (UScentlveh-km) (2) 42 0 41.5 41 0 40.5 40.0 39.5

3. Decentralize Highway ResponsibilitiesHighway Transfers to States thousand km transferred (cumulated) - 50 8.0 12.0 15.0 17.5

4. Increase Private Sector Management and FinancingFederal Highway Concessions thousand km tendered (cumulated) (3) 0.8 2.0 4.0 6.0 80 10.0

Maintenance Managt. Contracts percent of federal paved network length (4) - 5 5 20 50 75

5. Strengthen Highway Agencies' Maintenance CapabilitiesDNER Design & Supervision max. average rehab. cost ($OOOkm) 90 90 85 80 75 75

DER Planning & Programming nb.ofDERs with PMS (5) 5 8 10 12 14 15

B. Implementation Performance

1. Decentralization ComponentDecentralization Agreements nb.of states (cumulated) 5 '0 15 18 18 1BDelegation Agreements nb of states (cumulated) 3 7 7 7 7 7

State Subprolect Preparation km contracted works (cumulated) 100 1250 2650 3800 3800 3800Implementation km executed works (cumulated) - 500 1500 2650 3800 3800

2. Concession Development ComponentTechnical Assistance nb of man-months (cumulated) 15 60 90 120 120 120

Training of Staff nb. of trainee-weeks (cumulated) 25 100 150 200 200 200

Studies km of studies completed (3) 2000 4D00 6000 8000 10000 10000

3. Federal Highway ComponentFederal Subproject Preparation km contracted works (cumulated) 2000 5000 7500 10000 10000 10000

Implementation km executed works (cumulated) 250 2000 5000 7500 10000 10000

Operational & Safety lmprovts. maximum average cost (USS$000km) 53 5.3 5.3 5.3 53 5.3

Environmental Rehabilitation maximum average cost (US$OOOJkm) 4 7 4 7 4.7 4.7 4.7 4.7Routine Maintenance Paved Net DNER budget (US$million) 110 89 82 75 68 63

4. Project FundingCounterpart Funds treasury transfers (US$m. cumul.) 5 44 120 185 250 250

Bank IBRD disbursements US$m. cumul) 20 92 250 375 500 500Co-financing IDB disbursements (US$m cumul.) - 92 250 375 500 500

1) IRI. Irdemational Roughness Index

2) HDM VOC: HOM Vehicle Operasog Cost

3) Of which 5000 km are under the respons4biity of the Stle Govermnens

4) Except concessions

5) PMS: Pavement Management System

v g ° w X n n X " g o D C D 3 C 0 U- - - - - - - - - - - - - - - - - - -C 05 .3 4 M- W f w H t OXM-~~ g -s 5 2 3>£ D~ 7= =7 jZ XZ gg g 4g ° . . . . . . .

O 8 D 0 e = X _ < < z: S = 4 ^ 3 3 3 3 3 3 3 3 3~~~ 3 3 3 . . . . . .

000 r! 3 o J o 0 0 W o -. -o 044,4 O4Om o -<oomml, m W -7 t-- -~ ~ ~ ~ ~~~ k 0 :~~j:~~-j ~:~;J ~~~sss 5 :~~db0K

.-. . . .. w. .............. . 55 oo 5 . .- ....

CD

* S N oo i<l N O 0- 0 o- o r o oo, ~oow Qoo o gM 0MQ oW-0 to- s 4D1)

00000) 08~N 0-.... .8... .)0 0( 00).C.00) .)00 (4 0 00.00 0 ) .0 0 .0

a ~~~~~o05 (.0 (OMOOM ~~~~~N .00.4 00 .. M M C 0 . 0 00 . . 0(.4 .- 0. .0) .C

N 0 Q~ o S00 OCC) O r S°O O OO-1 OOMMoOo O OM ) 00 C Q0Q0W0N0-0O)OMMCOO 0

. . .. . . .M M -0-0 440 . M0)

N 44)(0O tA L C MQ0 W) 000WM(WOO 00O0(0 @@o l -4 N 0 O04 M0) OOO OON -Q - 0.0 :a 2

. . . . .(4I .

M M C OWMN N NOOOW NQ°O°ONW. 0 .4 O MWO . O . O O O O O . . . .

WW ^ O NEO Qo W W N O MO C O)

(O O)0 0.00 _o NQ° Ni O CQ O M CC MW00 )0 0 o5. o ,o{ D^° |

o o ~~~~~ 0 0 M N N W 0 - ( 4 O O C O 0 D M _ ) 0 0 C 0 ) 0 0 0 0 ) Q 0 0 0 0 0 0 0 ) 0 W ) N 0O C - O 0 ) - 0) , NOOOOOOW' Nt '|

S S s z S Iw g X~~~~o N

O & b ° P O ZNo b ^ g * X~~~~~~~~WI

- 93 - Annex 8

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 3 - Allocation of Loan Proceeds

AmountLoan Category ($ million) Disbursement Rates

1. Civil Works 80% of total expenditures(a) on transferred highways 57.0(b) on federal highways 200.0

2. Goods 1.0 100% of foreign expenditures,100% of local expenditures

(ex-factory cost), and80% of other local expenditures

3. Studies 14.0 80% of total expenditures4. Technical Assistance & Training 12.0 100% of total expenditures5. Unallocated 16.0

Total 300.0

Table 4 - Estimated Schedule of Disbursements

Bank Fiscal Year Disbursement Cumulative DisbursementsOuarter ending in Quarter (US$m.) (US$m.) % of totalFY 1998September 30, 1997 1/ 5.0 5.0 2December 31, 1997 5.0 10.0 3March 31, 1998 10.0 20.0 6June 30, 1998 20.0 40.0 13FY 1999September 30, 1998 25.0 65.0 22December 31, 1998 25.0 90.0 30March 31, 1999 30.0 120.0 40June 30, 1999 30.0 150.0 50FY 2000September 30, 1999 30.0 180.0 60December 31, 1999 30.0 210.0 70March 31, 2000 30.0 240.0 80June 30, 2000 30.0 270.0 90FY 2001September 30, 2000 20.0 290.0 97December 31, 2000 20.0 300.0 100FY2002December 31, 2002 2/ - 300.0 100

Sources: DNER and Bank Mission, 1997

1/ includes initial deposits less than US$30.0 million into Special Account2/ Loan Closing Date

-94 - Annex 8FEDERAL HGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Chart 1. Project Implementation Time Schedule

1997 1 1998 1999 2000- 2001ID Task Name Dur Start Finish 0102| Q40Q34 Q2|Q30Q4011Q20Q3lQ4 01Q Q2|03|Q4 01|Q2103|041 LOAN PROCESSING 702d 5123t97 211100 *

2 Board Review and Approval of Loan 15d 5/23/97 6/12/97 :

3 BACEN/Senate Review and Approva 30d 6/13197 7/24/97 .

4 Loan Signing Od 8/1/97 8/1/97

6 Legal Opinions 44d 811197 10t1/97

6 Loan Effectiveness Od 10/1/97 10/97

7 Project Launch Workshop Sd 10/1/97 10/7/97

8 Mid-Term Review Sd 3/2/99 3/8/99

9 Preparation & Negotiaton of Loan 2 30d 10/20/99 11/3099

10 Board Review and Approval of Loan 15d 12/10/99 12/30/99

11 Effectiveness of Loan 2 Od 2/1/00 2/1/00

12 ORGANIZATIONAL ARRANGEMENTS 153c 411t97 10t30197

13 Complete staffing of PMU 47d 6/12/97 8/15/97

14 Contract Technical Assistance 85d 5/5/97 8/29197

15 Finalize Standard Bidding Document 64d 5/5/97 7/31/97

16 Revise Operational Manual 85d 5/5/97 8/29197

17 Establish CPMS 153d 411/97 10130/97

18 DECENTRALIZATION COMPONENT 197d 4/11/97 12131197 _

19 Sign Decentralization Agreements 197d 4/1/97 12/31/97

20 Sign Delegation Agreements 107d 5/5/97 9/30/97

21 Establish SMUs & cpms 173d 15/597 12/31/97

22 Group 1 State Rehab. Subprojects 587d 612/97 8131/99

23 procure studies 152d 612/97 12/30/97 .

24 supervise studies 152d 10/1/97 4/30/98 i

25 procure works & superision 173d 2/V9d 9/30/98 .

26 supervise works 305d 7/1/98 8131t99

27 Group 2 State Rehab. Subprojects 586d 112/98 3/31/00

28 procure studies 128d 1/2/98 630/98

29 supervise studies 153d 4/1/98 10/30/98

30 procure works & supervision 173d 8/3/98 3/31/99

31 supervise works 325d 1/4/99 3/31100

32 CONCESSION DEVELOPMENT COMPON 521d 1/1/97 12/30/98 .i,

33 sign delegation agreeements 129d 1/1 t97 6/30t97

34 procure technical assistance 85d 5/5/97 8/29/97

35 finalize financial model 89d 7/1/`97 10/31/97

36 revise regulatory framework 89d 7/1/97 10/31/97

37 organize & train superision unds 348d 9/1197 12/30/98

38 Group I Concession Projects 521d 11V297 12/31/98

39 procure studies 128d 1/2/97 6/30/97

40 supervise studies & tender docs 1968 4/1/97 12/30/97

41 promote concession projects |151d 9/1197 3/30/98 .

42 tender concessions & evaluate bids | 261d 1/1/98 1231/98 .

43 Group 2 State Rehab. Subprojects 521d 112t98 11231/99 .

44 procure studies 128d 1/2/98 6/30/98

45 supervise studies & tender docs 153d 4/1/98 10/30/98 .

46 promote concession projects 173d 8/3/98 3/31/99 M

Source: DNER and Bank Mission, 1997

- 95 - Annex 8FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Chart 1. Project Implementation Time Schedule

1997 1998 1 999 2000 2001ID TaskName Dur Start Finish QI Q2Q3I4Q11Q2Q3Q4Q1 02Q3Q4Q1 Q2Q3Q4Q1 Q2Q3Q4

47 tender concessions & evaluate bids 260d 1/4/99 12/31/99

48 FEDERAL HIGHWAY COMPONENT 955d 515197 12t29100

49 Procure Maintenance Management 85d 515/97 8/29/97

50 Prepare Maintenance Management 305d 9/1197 10/30/98

51 Procure Maintenance Management 261 d 1/1/99 12/31/99

52 Procure Management Consultant 87d 612197 9/30/97

63 Prepare DNER Strategic Plan 265d 1011197 10/6/98

54 Reorganiza DNER & Train Staff 521d 1/1/99 12/29/00

55 1997-98 Federal Highway Rehab. Progra 521d 1/2197 12131198

56 Procure Subproject Studies 42d 1/2197 2/28/97

57 Supervise Subproject Studies 90d 2125/97 6/30/97

58 Procure Subproject Works & Supervi 150d 5/2/97 11/27/97

59 Supervise Subproject Works 31 7d 10/15/97 12/31/98

60 1999 Federal Highway Rehab. Program 521d 111`98 12130199

61 Carry out Network Surveys 64d 1/1/98 3/31/98

62 Prepare & Evaluate Program 45d 4/1/98 6/2/98

63 Bank Review & Approval of Program 10d 6/3/98 6/16/98 .

64 Prepare Detailed Engineenng Desig 60d 6/17/98 9/8/98

65 Bank Reviews & Approves Applicatio Sd 9/9/98 9/15/98

66 Procure Works & Supervision 77d 9/16/98 12/31/98

67 Supervise Works 260d 1/1/99 1230/99

68 2000 Federal Highway Rehab. Program 521d 1111/99 12129100I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

69 Carry out Network Surveys 63d 1/1/99 3130199

70 Prepare & Evaluate Program 45d 411199 6/2/99

71 Bank Review & Approval of Program 1Od 6/3/99 6/18699 .

72 Prepare Detailed Engineering Desig 60d 6/17/99 9/8/99

73 Bank Review & Approval Application 5d 9/9/99 9/15/99

74 Procure Works & Supervision 77d 9/16/99 12/31/99

75 Supervise Works 260d 1/3/00 12/29100

76 2001 Federal Highway Rehab. Program 521d 113100 12131101

77 Carry out Network Surveys 63d 1/3100 3/29/00

78 Prepare & Evaluate SRP 45d 4/3/00 6/2/00

79 Bank Reviews & Approves SRP 1Od 6/5/00 6/16/00

80 Prepare Detailed Engineering Desig 60d 6/19/00 9/8/00

81 Bank Review & Approval Application Sd 9/11/00 9/15/00

82 Procure Works & Supervision 77d 9/18/00 1/2/01

83 Supervise Works 259d 1/3/01 12/31/01

Source: DNER and Bank Mission, 1997

- 96 - Annex 9

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Project Supervision and Monitoring Plan

1. The National Road Department (DNER) would, as part of the action plan to strengthen projectmanagement and program monitoring, establish an appropriate computerized system to monitor theimplementation of the project, including producing adequate informnation to report to DNER management,the Government, and to the Bank, in accordance with the specifications included in the OM. DNER wouldforward quarterly progress reports to the Bank, not later than one month after the end of the quarter.

2. The Bank would, as part of its project supervision responsibilities, review and comment on thefollowing documents: (a) DNER annual rehabilitation programs and budgets; (b) state rehabilitationsubproject applications and related documentation (delegation agreements, subproject implementationplans); (c) specific investment applications, including the results of the engineering, economic andenvironmental analyses; (d) annual procurement and execution programs; (e) procurement documentationfor all ICB and the first two NCB contracts for civil works procuured by DNER and by each participatingDER; (f) terms of reference, invitation letters, short-lists and draft contract for consultant services; and (g)the quarterly progress reports. The Bank would approve all subprojects for financing under the loan on thebasis of subproject applications, and all investments on the basis of specific investment applications,prepared in the agreed format included in the OM.

3. The Bank would monitor project implementation against the PIP, including the sets of actions andtimetable, procurement, physical and financial execution targets, and development impact (Annex 8,Table 1). A mid-term, detailed review of the implementation of the project would be carried out by the endof 1999 or when 50% of the loan amount is disbursed, whichever is earlier. The review would cover all theagreed actions, targets dates, and execution targets included in the PIP and the status of compliance with allcovenants of the Loan Agreement. Particular importance will be given to: (a) the federal governments'commitment to provide adequate funds for maintenance and rehabilitation, including counterpart funds forthe project; and (b) DNER's performance under the agreed institutional development component. The Bankwill have the right to exercise appropriate remedies, including suspension of disbursements and terminationof the loan, if the state government and/or DNER have defaulted under the funding condition and/orDNER's performance is not satisfactory.

4. The Bank will supervise and monitor the implementation of the project in accordance with the Planpresented on the next page. The estimates of Bank supervision inputs into key activities, which are shownin the table of this annex.

- 97 - Annex 9

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Bank Supervision Input into Key Activities

Approx. Dates Key Activities Expected Skill Requirements

09/97 Project Launch Workshop Highway Engineerreview status of effectiveness, contracting of Transport Economisttechnical assistance and Procurement Officer1997-98 works programs and budgets.

01/98 Supervision Mission: review progress on Highway Engineerconcession, maintenance & environmental Transport Economistprograms, procurement of 1998 works. Environment Specialist

06/98 Supervision Mission: review progress under Highway Engineerdecentralization, and proposed 1999 work Transport Economistprogram and budget proposal. Organization Specialist

12/98 Supervision Mission: review execution of Highway Engineer1998 works and procurement of 1999 works, Transport EconomistDNER's organization plan. Organization Specialist

06/99 Supervision Mission: review proposed 2000 Highway Engineerprogram and budget proposal, and progress Transport Economistunder concession and contract maintenanceprograms.

12/99 Mid-Term Review: review progress under Highway EngineerTA, decentralization, concessions, Transport Economistreorganization, training, engineering, and Organization Specialistcivil works programs, compliance withcovenants and monitoring indicators, andprepare presentation of second loan.

2000 Two Supervision Missions Highway EngineerTransport Econ./Organiz. Spec.

2001 Two Supervision Missions Highway EngineerTransport Econ./Organiz. Spec.

2002 Loan Closing Highway Engineer(Implementation Completion Report) Transport Economist

Total Staff Input 150 staff-weeks

- 98 - Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 1 - Transportation Expenditures by Mode"'

PASSENGER US$m CARGO US$m.

AIR 3360 AIR 998

- Domestic 1231 - Domestic 301

regular 1160 regular 267

regional 71 regional 14

- Intemational 2129 - Intemational 696

AIRPORTS 182 RAIL 1659

- RFFSA 999

RAIL 605 - FEPASA 374

- Interurban 3 - EFVM 286

-Suburban 350

-Metro 252 ROAD 35245

- Truck 35245

ROAD 43267 urban 13917

- Bus 6177 intermunicipal 11120

urban 3257 interstate+intl 10208

intermunicipal 2115

interstate+intl 804 PORTS (Portobras) 590

- Auto 37090

WATER 5479

-inland 141

-coastwise 533

- intemational 1905

TOTAL 47414 TOTAL 43970

" 1994 EstimateGDP in 1994 reached US$ 430 billion, in US$ of June 1994Sources: Anuario Estatistico dos Transp. - GEIPOT - 1992/93

Perfil das Empresas Estatais - SEST/SEPLAN 1985Empresas de Transporte Rodoviario - FIBGE 1990/92Estudo sobre o Transporte Rodoviario de Cargo - GEIPOT 1995

- 99 - Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 2 - Evolution of National and Transportation Aggregates

GROSS PRODUCT

GDP DIESEL TKM PASS.KMYEAR INDEX AGRIC. INDUSTRY SERVICES TRANS CONSUMPTION (GEIPOT) (GEIPOT)

1970 100 100 100 100 100 100 100 100

1971 111 110 112 111 115 110 109 113

1972 125 115 128 125 124 128 115 129

1973 142 115 149 145 148 149 133 147

1974 164 116 162 160 170 165 159 167

1975 162 124 170 168 187 184 174 190

1976 178 127 190 187 211 212 189 217

1977 187 142 185 197 224 227 208 253

1978 196 138 209 209 243 248 225 289

1979 210 145 223 225 287 270 247 328

1980 229 159 243 245 297 290 208 374

1981 219 171 222 240 282 281 209 389

1982 220 170 222 245 287 287 287 405

1983 212 189 209 243 281 283 268 421

1984 224 175 223 253 293 292 296 438

1985 241 193 241 269 312 304 327 456

1986 260 177 270 291 347 342 355 476

1987 269 204 272 301 353 382 379 493

1988 268 205 265 308 379 375 403 510

1989 278 211 273 320 393 385 411 533

1990 287 203 201 317 376 378 423 552

1991 289 209 245 323 388 395 448 573

1992 267 220 237 323 397 405 427 589

1993 278 218 253 334 413

1994 294 235 270 348 430

GROWTHRATE

8.63 4.73 9.30 9.39 11.11 11.29 1040 14.0970-80 1 54 2.52 0.29 281 2.80 2.68 4.53 3.9680-90 2.45 3.75 1.92 2.29 3.28 3 58 0 55 3.3390-94

LAST YEAR (I10E9 (I10E9ABSOLUTE (1990 (I000 M3) TKM) PASS EM)VALUE US$rm) 68334 178241 273813 20548 26410 566078 684089

519910

Sources: Anuano Estatistico dos Transportes -GEIPOTAnuario Estatistico do CNDAnuario Estatistico do Brasil -IBGE

- 100 - Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 3 - Brazil's Highway Networks

Federal StateLength of Network, Irn km

Paved Unpaved Totl Paved Un;aved TotalNorth Rondonia RO 1234 i93 1727 163 4126 4259

Acre AC 292 862 1154 23 316 339Amazonas AM 196 2232 2428 442 481 923Roraima RR 350 900 1250 59 1618 1677Amapa AP 162 677 839 40 438 478Para PA 640 3162 3802 2459 3766 6225Tocantins TO 787 856 1643 771 6057 6828

North East Maranhao MA 2374 840 3214 1920 2879 4799Piaui Pi 2111 288 2399 1064 4121 5185Ceara CE 2040 184 2224 3317 3194 6511Rio Gde Norte RN 1302 185 1487 2233 1616 3849Paraiba PB 1216 2 1218 1491 2473 3964Pernanbuco PE 2480 107 2587 2631 2052 4683Alagoas AL 722 49 771 1494 734 2228Sergipe SE 319 0 319 1524 1143 2667Bahia BA 4335 784 5119 6069 5614 11683

South East Minas Gerais MG 9307 668 9975 6629 9635 16264Espirdu Santo ES 771 4 775 2044 2353 4397RF de Janeiro RJ 1581 21 1602 1994 2216 4210Sao Paulo SP 1146 0 1146 12338 1294 13632

South Parana PR 3212 204 3416 8323 1811 10134Santa Catanna SC 2077 172 2249 2387 2454 4841Rio Gde Sul RS 5158 348 5506 3419 3693 7112

Center West MatoGrossoSul MS 3043 372 3415 1606 9485 11091Mata Grosso MT 2728 936 3664 1601 16828 18429Goias GO 2647 819 3466 4465 12043 16508Distrito Federal DF 167 0 167 424 718 1142Total 52397 15165 67562 70930 103158 174088

Surface condIion of paved network

Federal StateCondition km % km %

Good 20604 44% 39525 50%

Fair 21119 45% 25296 32%

Poor 4999 11% 14230 18%Total 46722 100% 79051 100%

Structural Strength and Age of the paved networksFederal State

Strength SNC km % Age Years km %

Weak 2.5-3 0 0% Very young 0-5 18182 23%

Fair 3-4 2600 5% Young 5-10 19763 25%

Strong 4-5 20800 40% Old 10-15 22925 29%

Very strong 5-6 28600 55% Very old 15-20 18181 23%

Total 52000 100% 79051 100%

Traffic Volumes on the paved networks

Federal State

ADT Range km % South North

0-500 0 0% 14 73500-1000 9532 20% 24 25

1000-2000 14624 31% 27 2

2000-5000 17569 38% 20 0>5000 5000 11% 15 0

Total 46725 100%

- 101 - Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 4 - Brazil's Federal Highway Networks

Surface Type and Condition, and Traffic Volumes

Distribution by State and Surface Type of Federal Road Network10000 ... ....

OW Pa'"ved: 52 M km. 7% U' .pavd

E 7000 Paved

* 6000 lToWUnpaved: 15165 km, 22%

z 5000 -

s 40 . -

1000

0

3 :, : ,.,,'~1 I , ,, .: .. .. . :,1 IL -:,: -C ,- to. .. -: .. .) -:. .

0 .U ' O. .. - ,-, ' ' L .J 3 0. . M M a

North North East South East South Center West

State

Surface ConditionPaved Network Strength of Paved Network Traic Volumes

30000~~~~~~520025000 23S%

20000 - 20000 0000 4 315000

15000 1 S 81 - X X £ ---2- 0000

} sowl LELt x. I 1 ,;N I~~~~-l

20000~~~~~~~~~~~~~50

0~~~~~~~~~~~~~~~~~~~~~~~~~~00

Coo Fair Poor 0 , , , + ,5102 S

25 W ak 3. ¢FaiX 5 StrdE00- 0- 0- 001000100 200 500

Maintnance Condition 0 0 0

Modified Structural Number

ADT Range

- 102 - Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 5 - Brazil's State Highway Networks

Surface Type and Condition, and Traffic Volumes

Length of Road Networks per State, by Surface Types20000

E Unpaved

' Total Poved:70930 km. 41% .... .. ........

14000

,§ 12000 i Total Unpaved: 103158 km. 5:%

'oooo .... f. .'" .. -,. '--'-.'t. . ~ ~~~~~~~ ~~~~~~~...... - . . . . 0.. - . .'.....

I mo 1*F|- .s.t .vl.| t... *. |.. .. _ .... ....

0i l*j1 U iii lii 41 1beSurtace Condition of the Ag tPvdNtokTraffc Volume on Paved

Paved Network Ag fPve ewr Roads

y f.fE j iD... i.ESED.i.-itE:fE... ' E, g :,: ,-,:- ig.::: ,.E: ,- , ......... O oi: -t'......-.::.-............

10000 j g 5000 4000 . .. °..-.lQlili20

Geed F^ir0Poor010015 20 2eho 5000

0 ~ ~ ~ 0U

God ai Poor I101 UIC 0L 15W mU 20n,5-a00

M t Nce Condition * since Constructon ADT Ra We

Surac nnne Condition ofteAeo ae etokTafcVlm n Pve

- 103 - Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 6 - Brazil's Road User Charges

TAX or CHARGE TAX BASE RATES REVENUES") BENEFICIARIES

(US$ million) FEDERATION STATES MUNICIPIOS

1. Vehicle Ownership All motor- 2-3%(2) 2,240 - 50% 50%Tax (IPVA) vehicles

2. Petroleum Import Petroleumn 18% 810 100% - -Tax (IPI) imports

3 Value Added Tax * Interstate/ 17% 740 - 75% 25%(ICMS) Intermunicipal

transportservices

alcohol, 17%(3) 4,930 - 75% 25%diesel,gasoline

4. Sales Tax gasoline and 3% 385 - - 100%(IVVC) alcoholMunicipal tax on (diesel-oilalcohol and gasoline exempted)sales

5. Tolls vehicles on (2) 140 60% 40% -

specifichighways

- Total Annual 9,245 895 5,430 2,920Revenues (US$million)

- Annual Network 5,160 660 1,975 2,525Operation,Maintenance andRehabilitation Costs

Revenue/ 1.8 1.4 2.7 1.2Expenditure Ratios

Sources: GEIPOT and Mission Estimates[I] Estimate of Revenues (1995 data)[2] Rates vary with type of vehicles and states.[3] Some states have increased this rate to 25%.

- 104 - Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Table 7. DNER Revenues and Expenditures, 1992-2001

- Executed ProjectedComponents 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Total

Current Revenues 283.6 370.5 486.7 7041 655.4 680.2 801.6 777.3 842.9 8647 3966.71 Treasury Transfers -Personnel 1937 218.3 336.7 505.2 469.6 522.5 536.1 550.1 564.4 579.0 2752.12. -Maintenance 44.5 77.5 743 119.9 119.9 81.8 83.7 85.9 88.1 90.4 429.73. -Other 36.7 684 63.2 69.2 46.2 88.1 173.5 132.8 1817 186.4 742.5subtotal Treasury 274 9 364.2 474.2 694.3 635.7 672.2 793.3 768.8 834.2 855.8 3924.34. Concessions 6.3 4.2 105 8.9 16,5 8.0 8.3 8.5 8.7 8.9 42.45. Others 2.4 2.1 2.0 0.9 3.2 0.0 0.0 0.0 0.0 0.0 0.0Subtotal 283.6 370.5 486.7 704.1 655.4 680.2 801.6 777.3 842.9 964.7 3966.7

Capital Revenues 568.7 708.2 580.6 666.0 1094.8 1273.6 1388.2 1149.2 963.7 1219.3 5994.06. Treasury Transfers- IBRD projects 52.9 122.8 140.2 30.5 12.7 5.9 18.7 18.7 18.7 50.0 112.07. -IDB projects 00 0.4 81 3.0 62.3 143.0 213.9 124.3 56.4 50.0 587.6B. -Other projects 456.5 508 0 314.6 556.0 890.8 467.0 4587 592.9 680.4 698.0 2897.0subtotal Treasury 509.4 631.2 462.9 589.5 965.8 615.9 691.3 735.9 755.5 798.0 3596.69. Borrowings -Project IBRD( 591 76.8 117.7 63.4 25.0 12.1 92.5 112.4 85.0 200.0 502.010 -Project lDB (2) 0.0 0.0 0.0 1 7 100.2 330.4 452.8 239.4 102.4 200.0 1325.011 - Other 0.2 02 0.0 11.4 3.8 315.2 151.6 61.5 20.8 21.3 570.4subtotal Borrowings 59.3 77.0 117.7 76.5 129.0 657.7 696.9 413.3 208.2 421.3 2397.412. Other 0.0Subtotal 568.7 7082 580.6 666.0 1094.8 1273.6 1388.2 1149.2 963.7 1219.3 5994.0

Total Revenues 852.3 1078.7 1067.3 1370.1 1750.2 1953.8 2189.8 1926.5 1806.6 2084.0 9960.7

Current Expenditures

13. Personnel 194.5 219.2 336.7 505.2 469.6 522.5 5361 550.1 564.4 579.0 2752.114. Administration 524 82.9 86.8 129.7 139.6 89.6 92.0 94.4 96.8 99.3 472.115. Debt Service 36.7 68.4 63.2 69.2 46.2 68.1 173.5 132.8 181.7 186.4 742.516. Maintenance 52.2 79.0 61.4 1387 108.8 111.6 114.5 117.5 120.6 123.7 587.9Subtotal 335.8 449.5 548.1 842.8 764.2 791.8 916.1 894.8 963.5 988.4 4554.6

Capital Expenditures 568.7 708.2 580.6 666.0 1094.8 1273.6 1388.2 1149.2 963.7 1219.3 5994.017. Debt Anortization 90.5 122.2 92.3 75.0 91.0 66.4 580 184.9 261.8 268.6 839.718. Rehabilitation Projects (IBRD/IDB) 54.9 64.0 89.2 62.5 23.6 22.2 184.9 2249 170.0 400.0 1002.019. Other Rehabilitation works 234.4 251.6 192.6 131.8 2233 229.1 235.0 241.1 247.4 100.0 1052.620. Dualization of BR-050 (SP-BH) 0.0 00 0.0 2.8 139.1 156.1 317.1 103.1 0.0 0.0 576.3

21. Dualization of BR-116 (SP-FL) 00 0.0 0.0 32.7 24.5 305.6 234.9 125.9 51.4 0.0 717.822. Other Investments 136.7 191.4 145.1 222.5 484.5 382.6 243.8 151.8 112.5 327.0 12177Subtotal 516.5 629.2 519.2 527.3 986.0 1162.0 1273.7 1031.7 843.1 1095.6 5406.1

Total Expenditures 852.3 1078.7 1067.3 1370.1 1750.2 1953.8 2189.8 1926.5 1806.6 2084.0 9960.7

Source: ONER and Bank mission, 1997

(t1) IncIdes the Federal Hgh-ay Rehabilitation and Decentrliation Proe.t nd US$ 2.0 nilio f1rom IBRO Lean No. 136-BR.

(2) Includes the duaaizAhon ot BR-381 the dauzatio of BR-11t and a rdure IOB Loan of US$ 500.0 nolion fr the Federal Highay Rehabiitation and Denedrafization Projer.

(3t Expert ftr bo.rffamgs and debt sebtsse the ProjetLon was caluabted on the average ot the exeeded s years wAth the addtion of an eirnated inflation rate of 2.6% ofthe U.S. dfter.

- 105- Annex 10

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Chart 1 - National Roads Department Organization

DRRETORa GERAL

OIRETORUA EXECUTrV COSEH ADIS I;

D IOI SA EESORA I

AUTITORIA~ ~ ~ ~~~~~~~~~~~~~~~I ASESRaD

I PROCURADORIG ERAL

IDIRETOR!A DE I I DIRETORIA DE ID-rOL IDEEOR E I 14MENGENHARIA I n OPERACOES DESENVOLVIMENT ADMIN. E FIN. N E

,ESfL6UD6f ;'ENG.E ; PESOLJISASE ; [FEANCAS ; C6SNCE%iA82,MOJETOS ;SEGURANCA ; DESEWVDwMENfD; RODOVIARIA

Ee6NSfRUCO '; ;'e6fR6Lf '; C-At AeUA6 ; fWVCPS ;,iPE9S. ; l :OPERACIONAL TECNOLOGICA , GERAIS FISCALZACAOI

:iiEH6IiMfEi; ;Tk"SPORTH APOIC ; A.MAfERIALE ERESTAURACOES: :RODOVIARIOS 'TECNOLOGICO : .. PATRNONID

---------- & - - - - -

IDISTRITO RODOVIARIOSFEDERAIS

Source ONER, 1997

- 106 - Annex 11

BRAZIL

FEDERAL HIGHWAY REHABILITATION AND DECENTRALIZATION PROJECT

Selected Documents and Data Available in the Project File

1. Sistema Nacional de Viacao-SNV-Projeto de Lei "Ministerio dos Transportes, Brasilia, Out. 19952. Avaliaqao Economica HDM/EBM 25/10/95: Rede Estadualizavel, Divisao de Planejamento,

DNER3. Avaliaqao Economica HDM/EBM 04/11/96: Rede Remanescente, Divisao de Planejamento,

DNER4. Programa de Habilita,ao da Malha Rodoviaria Federal, PREMARFE, Assessoria Tecnica, DNER,

19965. Commissao de Viardo e Transportes - Projeto de Lei No. 1.176, de 1995, Camara dos Deputados6. Audiencia Puiblica Previa ao Inicio das Obras, Coordenaedo Executiva Central do Projeto de

Restaura,co e Descentralizacao de Rodovias Federais, DNER, Brasilia, 3 de abril de 19977. Orgamento de 1997, Unidade: 39.201 - DNER8. Instru,ces de Prote,ao Ambiental daas Faixas de Dominio e Lindeiras das Rodovias Federais,

DNER, 19969. Manual Rodoviario de Conserva,ao, Monitoramento e Controle Ambientais, DNER, 199610. Manual para Ordenamento do Uso do Sol nas Faixas de Dominio e Lindeiras das Rodovias

Federais, DNER, 199611. Corpo Normativo Ambiental para Empreendimentos Rodoviarios12. Proposta de Emenda a Constituicao No. 81 -B de 1995, Ca.mara dos Deputados13. Protocolo de Inteng6es para Transferencia de Patrim6nio e Execu,co de Obras de Restraura,cao em

Rodovias Federais, Estado do Parana, 2 de abril de 199714. Protocolo de Inten,ces para Transferencia de Patrimonio e Execu,cao de Obras de Restraura9ao em

Rodovias Federals, Estado da Bahia, 2 de abril de 199715. Protocolo de Inten,ces para Transferencia de Patrimonio e Execusao de Obras de Restrauracao em

Rodovias Federals, Estado de Minas Gerais, 199716. Protocolo de Inten,ces para Transferencia de Patrimonio e Execu,co de Obras de Restraura,ao em

Rodovias Federals, Estado do Rio Grande do Sul, 199717. Ata da Reuniao - Reuniao de Revisao dos Termos do Protocolo de Inten,ces e do Convenio de

Delega,ao no Ambito do Programa de Reabilitac,o e Descentralizagao de Rodovias Federais,Estado do Rio de Janeiro, 30 de maio de 1996

18. Ata da Reuniao - Reuniao de Revisao dos Termos do Protocolo de Intenc,es e do Convenmo deDelegacao no Ambito do Programa de Reabilitacao e Descentralizacao de Rodovias Federais,Estado de Golas 26 de malo de 1996

19. Ata da Reuniao - Reuniao de Revisao dos Termos do Protocolo de Inteng6es e do Convenio deDelega,ao no Ambito do Programa de Reabilita,ao e Descentralizacao de Rodovias Federais,Estado do Rio Grande do Sul, 3 de maio de 1996

20. Ata da Reuniao - Reuniao de Revisao dos Termos do Protocolo de Intenc6es e do Convenio deDelegaqao no Ambito do Programa de Reabilita,co e Descentraliza,co de Rodovias Federais,Estado da Bahia, 30 de abril de 1996

- 107 - Annex 11

21. Ata da Reuniao - Reuniao de Revisao dos Termos do Protocolo de Inten,ces e do Convemno deDelega,cao no Ambito do Programa de Reabilitagao e Descentraliza,co de Rodovias Federais,Estado de Minas Gerais, 22 de abril de 1996

22. Ata da Reuniao - Reuniao de Revisao dos Termos do Protocolo de Inten,ces e do Convenio deDelega,cao no Ambito do Programa de Reabilita,ao e Descentraliza,co de Rodovias Federais,Estado do Parana, 24 de abril de 1996

23. Nota 15/95, Projeto de Reestruturac,o do DNER 1995, Assessoria Tecnica, 19 de dezembro de1995

24. Informa,ces para o BID e BIRD, DNER, Brasilia, abril de 199725. Relatorio das Atividades da Diretoria de Concess6es Rodoviarias no Exercicio de 1996, DNER26. Edital No. 0030/97-00, Sele,co de Empresa de Consultora para Elabora,co de Programa de

Exploragao de Rodovia com Projeto BAsico, DNER, janeiro de 199727. Carta Convite para Sele,ao de Empresa de Consultoria para os Servicos de Assistencia Tecnica no

Desenvolvimento de Alternativas de Financiamento para o Programa de Concessoes de RodoviasFederais e o Treinamento de Servidores no Gerenciamento de Concessoes, DNER, Brasilia, marcode 1997

IRED 27913

7 0' VVENEZUELA o ,2 FR. B R A Z I L- ~~~~~(UIAM~ UA A0 250 500 750 1000 KILOMErERS

COLOMBIA ~ (SUINAME~GUIANA _____________ FEDERAL HIGHWAYREHABILITATION AND

r''}.v)' ~. ROR IMA , ' APA DECENTRALIZATION

~ 0 YotnoATLANTIC OCEAN

_ r M-/ l, \61 1-1M,OrC UA PROJECT

N / '.4,! \ \< ,,: BelnmH - HT HIGHWAYS TO BE TRANSFERRED

Meo,0 - HIGHWAYS TO BE CONCESSIONED

'_-2~'->1 - \S M=ncus C ; P/rntins ° S'nto ,m J !\e nSiie -i = HIGHWAYS TO REMAIN FEDERAL

A M A Z 0 N A N 6P A HIGHWAY R OUTE NUMBERS

a" ProcodIOnGANDE IVER

/ Teree.ne ~~~~~~~~~~' DO~0 NORTE2 / ,/ /j_, ,JRANHA . CeV ARA 07 DO NORTE o SELECTED CITIES AND TOWNS

a' " B,tteto Naeo~~~~~~~~~~~~~~~~~~~~~~~~~~~~ a" A STATE CAPITALS~~~~~~~~~~~~~~~~~~~~~~( SAT

Hon,o,to 0O ePe P AfBA A NATIONAL CAPITAL

M~~Bne P ,t / ~P IA UII ---- STATE BOUNDARIES

AC RE N VMBUJCO --- INTERNATIONAL BOUNDARIES

(' I t__ O AS

*~~~~~~~~~~~~~ '-a E Bnonol Ko -C = - S-P=t S'gur= _- Ni__

1 8 0 L I.- VPorto Noc.ogBI. --

M T 0 \ T O T IN S I-, -- S GIPEO Th.|p, , 3 - 4p-d - by th

O C E A N Sonty RFlorion6polis 0 C E A N t > ATBAN TIC~~~~~~~~~~~~~~~~~~

H A M D,i~ U,t-1Th-W-Id3-

P ~ ~ E R U Th.NAgsZubro| CA

G T0arro do Q u5 S 0l-D- . . -tly, -y hWoodor he WolPd Bo-E Gnoop, -ny jodqnten

J.q.ii _4~~~~~~~~~~~~~~~~~o helgl -t,hay tenttoy.

t } >{/7ORio Grond- *;;!-_ 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~nyedosmetorocepnneo

b6 Iif&i. \i7rr 60 tJURUGuAy n*Vit6^od oV EL'A

Go~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~A I 997~

BO0LI V IA -jt..' .ndo / ee.O SURINAME GIN

b. ~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~COLOMBIA (RNHGIN

(~~I~~benho 00 ESP~~~iRITO

1 ~~ ~~~~~~~~~~~~~~~~~~D L -d TOTUOi) t

20- ~ ~ ~ ~~~~~N/B.l. OA,,< (

___ ~ ~ ~ - - a Pn..idePmntP. AuO 0I DE JANEIRO PE20-LT S

PARt'..AGUA -, a- i o e.e

CHILE j P .... 6 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~BOLIVIA ~

P ,PACIFIC/ ATLANTIC OCEAN~~~~~~~t. ~' K ARAO6UAY

0 C E A N K 2 / - lea ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~XI.J ~ ~ ~ ~ ATL NTIA

.2 ~~~~~~~~~~~~~~~~~Sont R.,p•"\, ARGE 1~oNTlINA 'ATLANTIC

00 0 AN~~~~~~~~~~~~~~~~~~~ lEdo ~~~~~~~~~~~~URUGUAY OCEAN

A R G E N T BornN A oGoo t0A.e

50-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0

mAY 1997

IMAGING

Report No.: 16425 BRType: SAR