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Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 16117

IMPLEMENTATION COMPLETION REPORT

BRAZIL

FEPASA RAILWAY REHABILITATION PROJECT

(Loan 2857-BR)

November 15, 1996

Infrastructure and Urban Development DivisionCountry Department ILatin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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BRAZIL


(Loan 2857-BR)

Currency Equivalents

US$1 = Cr$ 5.738 average of 1985 (Cruzeiro)= Cz$ 13.84 average of 1986 (Cruzado)= Cz$ 39.18 average of 1987 (Cruzado)= Cz$262.84 average of 1988 (Cruzado)= Cr$ 2.84 average of 1989 (New Cruzado= Cr$68.95 average of 1990 (New Cruzado)= Cr$408.78 average of 1991 (New Cruzado)= Cr$4,498.62 average of 1992 (New Cruzado)= CR$88.45 average of 1993 (Cruzero Real)= CR$0.93 average of 1994 (Cruzero Real)

Fiscal Year

January 1 to December 31

Weights and Measurements

Metric: British/US equivalent

1 meter (m) = 3.28 feet (ft)1 kilometer (km) = 0.62 mile (ml)1 kilogram (kg) = 2.20 lbs. (lb)1 metric ton (m ton) = 2,205 pounds1 liter (L) = 0.26US gallon (gal)

Vice President : Mr. Shahid Javed BurkiDirector : Mr. Gobind T. NankaniDivision Chief : Mr. Asif FaizTask Manager : Mr. Moazzam A. M6kan

FOR OFFICIAL USE ONLY

Abbreviations and Acronyms

BNDES Banco Nacional de Desenvolvimento Econ6mico e SocialNational Economic and Social Development Bank

CBTU Companhia Brasileira de Trens UrbanosBrazilian Urban Train Company

CPTM Companhia Paulista de Transporte MetropolitanosCTC Centralized Traffic ControlCVRD Companhia Vale do Rio Doce

Rio Doce Valley CompanyEBTU Empresa Brasileira de Transportes Urbanos

Brazilian Urban Transport EnterpriseEFVM Estrada de Ferro Vit6ria-Minas

Vitoria-Minas Railway CompanyEMBRATEL Empresa Brasileira de Telecomunica,oesFEPASA Ferrovia Paulista S.A.

Sao Paulo RailwayGEIPOT Empresa Brasileira de Planejamento de Transportes

National Transport Planning AgencyICR Implementation Completion ReportIERR Internal Economic Rate of ReturnINPC Indice Nacional de Pre,os ao Consumidor

National Consumer Price IndexMBR Minera,6es Brasileiras Reunidas

United Brazilian Mining CompanyMIS Management Information SystemMT Ministerio dos Transportes

Ministry of TransportP.N.D. Piano Nacional de Desestatiza9aoPORTOBRAS Empresa de Portos do Brasil S.A.

Brazilian Port EnterpriseRFFSA Rede Ferroviaria Federal, S.A.

Federal RailwaySAP Bank Special Action ProgramSEPLAN Secretaria de Planejamento

Federal Planning SecretariatSIGO Development and Implementation of Operational Management SystemsSR-2 Superintendencia Regional de Belo HorizonteSR-5 Superintendencia Regional de CuritibaSUNAMAM Superintendencia Nacional da Marinha Mercante

National Agency for Merchant MarineTKM Ton-Kilometers

Mhis document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed wiLhout World Bank authorization.

IMPLEMENTATION COMPLETION REPORTBRAZIL

FEDERAL RAILWAY - EXPORT CORRIDOR PROJECT

(LOAN 2857-BR)

CONTENTS

P R E F A C E ......................................................... i

EVALUATION SUMMARY .......................................................... iiIntroduction ......................................................... iiProject Objectives ......................................................... iiImplementation Experience and Results ......................................................... iiiSummary of Findings, Future Operations, and Key Lessons Learned .......... ........... iv

PART I: IMPLEMENTATION ASSESSMENT .............................. I.............................A. Project Objectives ........................................................... IB. Achievement of Objectives ........................................................... 2C. Major Factors Affecting the Project .......................................................... 5D. Project Sustainability .............. 6...........................................6E. Bank Performance .......................................................... 6F. Borrower's Performance ........................................................... 7G. Assessment of Outcome . ......................................................... 8H. Key Lessons Learned ........................................................... 9

PART II: STATISTICAL TABLES .......................................................... 12Table 1. Summary of Assessments .......................... ................................ 13Table 2. Related Bank Loans/Credits .......................................................... 14Table 3. Project Timetable .......................................................... 15Table 4. Loan Credit Disbursements ........................................... ............... 16Tables 5 & 6. Key Indicators for Project Operation and Implementation ......... ...... 17Table 7. Key Indicators for Financial Position ....................................................... 19Table 8A. Project Cost ............................ - 20Table 8B. Project Financing ............................ 21Table 9A. Economic Costs and Benefits ............................ 22Table 9B. FEPASA Financial Results ............................. 23Table 10. Status of Legal Covenants ............................. 24Table 11. Bank Resources: Staff Inputs ............................ 27Table 12. Bank Resources: Missions ............................ 28

APPENDICES ................................. 29A. Borrower's Contribution to the ICR ................................ Appendix AB. Map IBRD No. 28410 ................................. Appendix ]3


BRAZIL


(Loan 2857-BR)

Preface

1. This is the Implementation Completion Report (ICR) for the FEPASA RailwayRehabilitation Project in Brazil, for which Loan 2857-BR in the amount of US$100 millionequivalent was approved on June 25, 1987, and made effective on December 1, 1987.The Loan was closed on December 31, 1995. Final disbursement took place on May 31,1996, at which time a balance of US$16,068 was cancelled.

2. The ICR was prepared by the Infrastructure and Urban Development Division,Country Department I, of the Latin America and the Caribbean Region and was reviewedby Mr. Orville Grimes, Projects Adviser, LA1DR. Mr. Asif Faiz, Chief LAIIU,authorized release of the ICR.

3. Preparation of this ICR was begun during the Bank's supervision/completionmission in February 1995. It is based on project reports and material in the project files.The Borrower contributed to preparation of the ICR by providing facts, figures and viewsreflected in the report, and by commenting on the draft ICR. The Borrower's contributionis included as Appendix A to this ICR.

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BRAZIL

FEPASA RAILWAY REHABILITATION PROJECT(LOAN 2857-BR)

Evaluation Summary

The project was the sixth in a series of railway loans supported by the Bank inBrazil. The cost of the FEPASA Railway Rehabilitation Railway Project for the SaoPaulo Railway was estimated to be US$285 million, with a Bank loan of US$100 millionequivalent. Final project costs were US$227.2 million, with US$99,983,932 disbursedfrom the Bank loan.

Project Objectives

According to the Staff Appraisal Report (SAR) and the Loan Agreement (LA), theproject objectives were: (a) the financial rehabilitation and improved commercialperformance of FEPASA; and (b) increased transport efficiency in the main railwaycorridors leading to Sao Paulo and to the Port of Santos.

By achieving these objectives, the project was to contribute to more efficientresource use in the transport sector, particularly through further specialization of therailway in the services for which it has a comparative advantage over road transport. Theproject would also facilitate agricultural development and external trade through theprovision of more efficient transport services between the agricultural hinterland, theindustrial metropolitan region of Sao Paulo and the country's major port at Santos. TheBank's involvement in the project would help provide an appropriate mix of policy andinstitutional adjustments and investments necessary to gradually transform FEPASA into acommercially viable railway. Separation of the metropolitan services from FEPASAoperations was a related objective to help achieve viability.

To support the project's objectives, loan proceeds were to finance: (a) a policydevelopment and institutional component, which through the use of action plans, wouldaddress company-wide and sectional issues, and gradually turn FEPASA into acommercially viable railway, and (b) an investment component covering FEPASA'srehabilitation program and a technical assistance and training program to support theimplementation action plans.

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Implementation Experience and Results

The project aimed at an extensive coverage of FEPASA, reaching through itsinstitutional component the entire gamut of FEPASA operations, and through theinvestment component the most important corridors of the railway network. The internaleconomic rate of return on the investments (IERR) was 19.8% for the project (overall),compared to the estimate of 21% at appraisal.

Project implementation was delayed by two years and took eight years toimplement instead of six, mainly due to: (i) a marked deterioration in the macro-economicsituation leading to counterpart funding problems during the project period; and (ii)political factors leading to frequent changes in the administration resulting in counterpartfunding and management problems. An additional reason for the delay was the importantdecision in the last year of the project to conduct the FEPASA Restructuring study whichlaid the groundwork for the privatization of FEPASA. The first two of these elementscombined to slow down investments, restrain traffic increases and restrict freedom inincreasing tariffs. The result was that the financial improvement forecast did notmaterialize, although several cost reductions were made as a result of the implementationof the action plans and the investments and system improvements. Final project costswere US$227.2 million, compared with US$285 million at appraisal. The reduced size ofthe project resulted from agreement at mid-term (1990-1991) to modify the project scopeby reducing the level and pace of investments, due to the reduced availability ofcounterpart funds.

The deterioration of the Brazilian economy and the political and managementchanges significantly affected the achievement of the objectives of the project. Moreover,financial improvements were quite limited. On the other hand, important cost reductionswere made. The staff of FEPASA was reduced from 18,700 in 1987 to 11,500 in 1995.However most of this reduction occurred in the last year of the project. Intercitypassenger services were reduced. Separation of the metropolitan trains' accounts wasachieved during this project, and urban/metropolitan train services managed by the CBTUand FEPASA were transferred to the state-owned CPTM (Companhia Paulista deTransporte Metropolitana) which was formed to manage all urban transport in the SaoPaulo metropolitan area. FEPASA gained authorization to set tariffs (although itsimplementation was hindered by the macroeconomic stabilization programs). Traffic inthe corridors did not increase due to the downturn in the economy (paras 13 & 14).Although the investments in the corridors brought about substantial improvements in thesystem (paras. 11 and 12), the institutional component brought only limited improvements(para. 12-14) but nevertheless influenced the Government and FEPASA to initiate aserious effort to restructure and privatize the entity. A consultant's study to review thequestion of restructuring FEPASA (including privatisation and concessioning) was the lastaction taken in the project (para. 6).

Bank performance on the whole was satisfactory, especially during projectpreparation and supervision during the second half of the project period (paras. 17-20).

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Borrower performance started well with good project preparation in close collaborationwith the Bank, but was unsatisfactory during project implementation largely due to theadverse macro-economic situation and the frequent changes in the management of therailways (paras. 21-23), which resulted in non-compliance with the loan covenants and thecurtailment of project performance.

Summary of Findings, Future Operations and Key Lessons Learned

Clearly the political risks were underestimated at appraisal, as was also the deterioration ofthe macro-economic situation. This led to overoptimistic forecasts. Despite the realachievements of the project, described more fully below, the delays and difficultiesexperienced during implementation lead to a rating of the outcome as a whole as(marginally) unsatisfactory. Of the two principal objectives of the project, theachievement in one, the improvement of the corridors, was significantly attained. For theother, the financial rehabilitation and improvement of the commercial performance of therailway as a whole, this objective was not achieved. This was not only because of themacro-economic and political situation (BNDES withdrew its participation in thecounterpart funding at a critical time in the project), but also because the stateadministrators were reluctant to fundamentally restructure the railway entity. Inretrospect, and with the benefit of hindsight, it would appear that the project wasoveroptimistic in its forecast of expected improvements since it expected almost thecomplete financial rehabilitation of a railway system (with a long history of poor financialperformance) within the context of a single investment operation. However, one of theresults of the project under review was that it contributed to a serious effort at thereorganization, restructuring and privatization of FEPASA which was initiated with thestudy on the restructuring of FEPASA. Continued strengthening and restructuring of therailway system through the pursuit of the objectives of the project under review, andthrough the restructuring and privatization proposed by the study (para 6), would improvethe sustainability of this project. Overall, therefore, the project experience has beenworthwhile, since it provided useful lessons to help guide the design and implementationof railway reform of an important part of the rail system in Brazil.

Any Bank support for future operations of this kind should be based on a realisticassessment of the macro-economic and political risks. The main lessons for futureprojects are that:

(i) although there were major shortfalls in the implementation of the project,the experience was not altogether negative, and helped steer the railwayand the Government towards the current restructuring effort and theproposed concessioning of railway operations;

(ii) The FEPASA Rehabilitation Project enabled useful investments to be madewhich arrested the deterioration of the railway's infrastructure and rollingstock. Although the project was over-ambitious in its expectation of

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institutional and financial improvements under state-controlled operations,the system improvements, the staff reductions achieved and the newpartnership with the private sector (para. 12) set the basis for the broaderreform.

(iii) a major restructuring of the railway, including substantial participation ofthe private sector, now appears possible and essential to bring about thecreation of a commercially viable entity and to reduce governmentsubsidies;

(iv) the unreserved support and continued commitment of the Government is aprerequisite for the success of the restructuring effort;

(v) railway restructuring is a time-consuming and contentious process inwhich: (a) critical decisions in regard to the policy and its implementationare productive only if they emanate from a consensus within the country;and (b) real benefits are obtained by the utilization of the services ofauthoritative and impartial bodies (including consultants) and by entrustingthe planning and definition of policy choices to such entities; and

(vi) future Bank railway lending, if any, should be confined to the support ofderegulation, restructuring and privatization of the railway system.

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BRAZIL

FEPASA RAILWAY REHABILITATION PROJECT(LOAN 2857-BR)

PART I: IMPLEMENTATION ASSESSMENT

A. Project Objectives

1. The objectives of the project were: (a) to assist the Borrower in the carrying outof a program aimed at its financial rehabilitation and the improvement of its commercialperformance; and (b) to increase transport efficiency in the main railway corridors leadingto the Sao Paulo Metropolitan Region and to the Port of Santos.

2. The SAR reflected an expectation that by achieving these objectives, the projectwould contribute to a more efficient resource use of the transport sector through thecontinued and enhanced specialization of the railway in services for which it had acomparative advantage over road transport, and through a reduction in the public sectordeficit. In particular, it would help to ensure an adequate separation of the metropolitantrain operation and the resolution of the debt problem, streamline the railway's andgovernment's respective responsibilities, focus expenditures on urgent rehabilitation ratherthan on new construction and purchases, and adhere to appropriate operational andfinancial policies and targets to achieve the objectives.

3. The design of the FEPASA rehabilitation project was simple. It had a policy andinstitutional development action program, and an investment component to improve thecorridors.

4. The policy and institutional development component consisted of theimplementation of policies and actions for: (a) an organizational and financialrestructuring of FEPASA; (b) the rationalization and improved operation and financing ofFEPASA's non-viable services; (c) appropriate tariffs marketing and cost control; and (d)the development of operations and management systems and training of staff. Theinvestment component consisted of FEPASA's rehabilitation program, and of technicalassistance and training programs to support the implementation of the action programs.

5. A review of the objectives of the project after the completion of the project leadsto three principal observations. First, the investment objectives aimed to carry out specificinvestments to rehabilitate the railway facilities and equipment and as such were quiteenthusiastically owned, pursued and implemented by FEPASA (to the extent fundspermitted). Secondly, the policy and institutional improvements together with the actionplans were, as even a quick perusal of these plans reveals, rather voluminous and over-

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ambitious. These action plans were enthusiastically accepted, but reluctantly implemented,in great part due to the adverse macro-economic conditions. Thirdly, although the patternof institutional organizational and managerial improvement covered by the projectfollowed the pattern of most railway projects so far, no drastic restructuring orprivatization of essential railway functions was considered. This project was preparedbetween 1985 and 1987. By this time, the Bank had the accumulated experience of afairly large number of railway projects around the world and although a consensus wasappearing that something drastic needed to be done to restructure railways, theprivatization option had not quite emerged as the clearest solution. Privatization wasreally not considered as an option as part of this project. As such, nothing spectacularhappened in this area during the project, although the dialogue generated during theimplementation of the project, led, during its final stages, to the start of a study for therestructuring and privatization of FEPASA.

B. Achievement of Objectives

6. The investments were concentrated in the infrastructure, rollingstock andequipment related to the corridors leading to the Sao Paulo Metropolitan Region and tothe port of Santos. To the extent that these investments were executed, the corridorswere improved and the track, motive power and rolling stock was rehabilitated, and savedfrom further deterioration and decline. However, traffic failed to increase, and in fact,declined, largely due to the downturn in the Brazilian economy. An additional reason forthe fall in traffic was the lack of coordination between the port authority, RFFSA (whichowns the track in the vicinity of Santos) and FEPASA, a problem which was frequentlythe subject of attempts to improve the relationship, but was, somehow not effectivelyresolved. FEPASA's financial performance was poor during the project implementationperiod. Financial objectives set at the time of appraisal had to be revised to take intoaccount the reality of the slow progress. On the other hand, staff reductions at FEPASAfrom 18,700 in 1987 to 11,500 at the close of the project, aided by an effective staffincentive program, were far in excess of the modest figure of 1,000 forecast at appraisal.The separation of the metropolitan train operation and its merger with the CPTM was alsoa significant institutional achievement, and helped to clean up the operations of FEPASA.More than anything else, the implementation of this project marked the turning point in thecommitment of FEPASA and the Government to a process of restructuring andprivatization, and the very last act of the project was the start of the FEPASARestructuring Study which was financed from the Bank loan. The recommendations ofthis study have formed the basis for reorganizing the railway and for concessioning itsoperations.

7. Physical Components. The investments in the corridor comprised mainly: (a)infrastructure rehabilitation works including earthworks, and drainage systems for thetrack, (b) superstructure rehabilitation works including acquisition of rails, sleepers,fastenings, ballast in the Araguari-Santos corridor, the broad-gauge corridor and themeter-gauge corridor; (c) rehabilitation and improvement of yard facilities, construction

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and expansion of intermodal terminals and silos; (d) acquisition and utilization of trackmaintenance machinery, equipment and spare parts for the network; (e) workshopimprovements including overhaul of locomotives, acquisition of machinery and spareparts; and (f) Replacement of existing telephone lines by radio (VHF & UHF) and theinstallation of optic fibre on important lines.

8. The cost of the project at appraisal was estimated to be US$285 million includingthe investments and technical assistance. Of this amount, US$100 million was to befinanced from the Bank loan (35.1%), US$107.8 million from BNDES (37.8%), US$13.5million from cofinancier's (4.7%), and US$63.7 million from FEPASA's own resources(22.4%).

9. During project implementation, changes were made in the project scope whichwere caused by the worsening economic situation in the country which in turn resulted inreduced traffic as well as in the diminished availability of counterpart funds and lendingpolicy changes in BNDES which led to their withdrawal from funding the project. Thechanges, while maintaining the development objectives of the project, reduced the leveland pace of investments by redefining the project, and increased Bank participation from35.1% to 42.2% of the project cost. The total cost of the project was reduced fromUS$285 million to US$237.2 million. The expenditure on the telecommunications projectwas substantially reduced with the cooperation of the telecommunications company(EMBRATEL) in the installation of fibre-optic equipment.

10. The project which was started in late 1987 should have been completed inDecember 1993, but was actually finished in December 1995. The loan closing date wasextended twice, once in 1994 (to June 1995) due to delays in project execution and againin 1995 (from June 1995 to December 1995) to provide for the completion of theFEPASA restructuring study for the reorganization of the railway. When the project wasfinally closed in December 1995, it cost US$227.2 million compared with the Appraisalforecast of US$285 million, and the revised forecast (para 9) of 237.2 million.

11. The implementation of the project investments brought about the followingimprovements:

(a) improved condition of the track infrastructure in the corridors, resulting inincreased speeds and reduced accidents;

(b) more efficient yards, intermodal terminals and silo facilities (with privatesector participation), resulting in improved wagon handling and better grainstorage facilities;

(c) better communication facilities from the improved infrastructure andsuperstructure and installation of fibre-optic facilities on importantsections; and

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(d) improved stock of spare parts and machinery for the rehabilitation andmaintenance of the track, rolling stock, motive power and workshops.

The overall effect of the above system improvements was that FEPASA could reduce itsstaff effectively (para. 6), thus setting the stage for the restructuring of the railway.

12. Institutional Component. Coupled with the investment component, theinstitutional component aimed to implement a mix of policy and institutional adjustmentsto reorganize FEPASA, to rehabilitate the railway financially, and to gradually turnFEPASA into a commercially viable railway. Towards the achievement of this end, thefollowing notable changes occurred:

(a) assumption by the Government and capitalization of the pre-1987 debt asper the agreement dated March 28, 1987 between FEPASA and the State;

(b) study and definition of the treatment of FEPASA's federally guaranteeddebt as per the protocol dated February 28, 1987;

(c) FEPASA limited its future borrowings as a percentage of internallygenerated funds in accordance with Sec. 5.06 (a) of the Loan Agreement;

(d) FEPASA separated the accounts and operating and capital budgets for themetropolitan train operation from the accounts and budgets maintained forits freight and long distance passenger transportation businesses, enablingits transfer into CPTM;

(e) efforts were made to contain government normalization payments for thelong distance passenger and freight services as a percentage of operatingrevenues;

(f) introduction of modern computer based cost- accounting, officeinformation systems (OIS) and maintenance information systems(MIS) inpreparation for the restructuring of the railway; and

(g) introduction of a new client-oriented marketing and sales system, and theinvolvement of the private sector in a number of railway functions.

13. However, FEPASA's efforts at increasing its traffic were annulled by the adverseeconomic developments. The cost-accounting system was upgraded, and although a cost-related, market-based tariff structure was developed, it was implemented only towards theend of the project and inadequately due to the various economic stabilization plans. Areview of the financial performance of FEPASA during the project period (para. 14)reveals that financial progress remained consistently poor due to: (i) the deterioration ofthe macro-economic situation which reduced the availability of counter part funds,restrained traffic growth and inhibited tariff adjustments; (ii) political instability and

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government intervention in the affairs of the railway; and (iii) frequent changes inFEPASA's management. As a result, FEPASA continued to generate substantial annualoperating losses, which were exacerbated by the unstable macro-economic situation. TheGovernment decided in 1995 to precipitate action to initiate the privatization andrestructuring of FEPASA operations and towards this end, conducted the Study for therestructuring of FEPASA to concession FEPASA operations together with a gradualintegration with the adjoining RFFSA network. Thus, although the project achieved littlefinancial success, the restructuring of its operations spearheaded by the separation of themetropolitan operations, the very substantial staff reductions, and the various systemimprovements helped FEPASA become a more attractive candidate for theprivatization/concession option.

14. Financial Performance. The financial performance targets set during appraisalwere not met by FEPASA (see Tables 7 and 9B). In spite of the implementation of thecosting system and liberalization of the tariff structure, increases in tariffs dictated by thecosting system could not be implemented as the Government saw the tariff increases asinflationary. However, the main factor contributing to FEPASA's poor results was thegeneral downturn in the economy of the country, which reduced traffic volumes below theappraisal estimates. Delays in the implementation of the investment program, causedmainly by BNDES cancellation and shortage of counterpart funds also contributed to thegeneral deterioration of the system and reduced the availability of the motive power androlling stock (see Table 6). FEPASA responded to these challenges by cutting down costs(mainly personnel) and by postponing the maintenance and refurbishing of equipment.FEPASA also formed creative partnerships with the private sector in thetelecommunications field and in the development of intermodal facilities and grain-handling silos. The financial targets set at the time of appraisal were too optimistic anddid not foresee the economic downturn, or the problems relating to the availability ofcounterpart resources or for that matter the frequent changes in the management ofFEPASA. Recognizing the important changes in the business environment, the Bankrevised the financial targets, but by then a market deterioration had set in. It is clearhowever, that without the project, financial performance would have been far worse, asthe system changes (paras 11 &12) and the important cost reductions would not havetaken place. It is also this failure to turn the railway around within the scope of publicsector management that finally influenced the government to restructure FEPASA and tomove it steadily towards an increasing association with the private sector.

C. Major Factors Affecting the Project

15. Several factors affected the execution of the project. These were primarily: (i) amarked deterioration in the macro-economic situation during the project period resultingin the implementation of the governments' economic stabilization plans; (ii) politicalfactors leading to frequent changes in the administration and management of FEPASA (sixpresidents in eight years), and (iii) lack of proper coordination between FEPASA andRFFSA in the Sao Paulo region and the Port of Santos. These factors are, in many

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respects, interrelated. The worsening of the economic situation directly and adverselyaffected traffic volumes and prevented the attainment of the traffic targets forecast atappraisal. In addition, the financial stringency imposed by the economic down-turnslowed the rhythm of investments, led to the withdrawal of BNDES from project fundingand resulted in the renegotiation of several ongoing contracts. Tariff increases forecast atappraisal and supported by the costing studies were not implemented because thegovernment considered them inflationary. Politically motivated changes in theadministration and management of FEPASA occurred six times during the 7-8 year periodof execution of the project, adversely affecting decision-making processes at the highestlevels in railway administration. Finally, the succession of strikes in the Port of Santos andthe poor coordination between FEPASA and RFFSA in the area of access to the SaoPaulo region and Port of Santos led to detentions to trains and increases in the turn-around time of wagons, reducing wagon availability to carry freight. The combined effectof slower investments restraining capacity development, lower traffic, inadequate increasesin tariffs, and frequent changes in management leading to indecision and delays, resulted indeterioration of the financial situation of FEPASA despite the system improvements andcost reductions brought about by the project.

D. Project Sustainability

16. Continued substantial strengthening of the FEPASA administration through thepursuit of objectives initiated during this project and concessioning of operations to theprivate sector, as well as the government's current commitment to the restructuring of therailway sub-sector, augur well for the sustainability of this project. The sustainability isfurther enhanced by the increasing awareness of the need for allocation of adequatefinancing for railway investments to ensure proper maintenance of the infrastructure.However, although sustainability will be clearly enhanced by the privatization actionsfollowing the closing of the project, the overall sustainability is uncertain.

E. Bank Performance

17. Project Identification and Preparation. Satisfactory. This project wasidentified in 1985, appraised in 1986, approved by the Board in June 1987, and becameeffective in December 1987 (Table 3). From identification to appraisal, the project andproject issues were progressively defined through a set of three project briefs in therelatively short period from the first identification mission in February 1985 to appraisal inSeptember 1986.

18. Project Appraisal. Generally satisfactory. Project implementation fell short ofexpectations because the political risks and the macro-economic deterioration were under-estimated (although to what extent these could have been anticipated at appraisal isdebatable). The project design was simple although the expectations from the projectwere fairly high. Clearly there was a degree of mismatch between the investments and the

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financial and operational improvements anticipated, which was aggravated by the adverseeconomic and political developments.

19. Supervision. Satisfactory. A substantial degree of continuity in the essentialBank staff involved in the project preparation, appraisal and supervision made for goodcooperation, and a constructive dialogue between the Borrower and the Bank. Thisbrought about some changes in the Project in 1990 when only about 33% of the projecthad been implemented (against the appraisal target of 65%) and when it became apparentthat the project needed to be redefined and curtailed to take into account the reducedavailability of funds. In August 1991, a Bank mission took stock of the delays in theproject execution and carried out a detailed review to seek agreement with FEPASA on acorrective investment program, reducing some of the infrastructure works of lowerpriority as also the locomotive and telecommunications program and some of the yardrehabilitation works. An important feature of this review was the introduction of privatesector partnerships in areas such as telecommunications and rolling stock. The projectwas eventually completed in December 1995 at a cost of US$227.2 million against theappraisal estimate of US$285 million.

20. In the final stages of the project, the introduction of the Study for theRestructuring of FEPASA (see para. 13) laid the groundwork for the reorganization andgradual privatization of FEPASA.

F. Borrower Performance

21. Preparation and Appraisal. Satisfactory. Preparation for this project wasstarted during a Bank mission on June 1985 when FEPASA's Investment Plans, itsfinancial situation (including the debt services problem) and related issues such as the tariffstrategy, normalization payments, and separation of the Metropolitan services werediscussed in detail. A succession of project briefs leading to appraisal that followed werea result of a collaborative effort that reflected the concerns of FEPASA as well as theBank, and presented a mix of investments and actions directed to gradually achievingfinancial viability for FEPASA.

22. Implementation. Unsatisfactory. Marred by the economic downturn in thecountry and severely restricted by the Government's economic stabilization program,project implementation was grossly impaired. In addition, frequent political changes in themanagement and administration of FEPASA (six times during the project period)seriously affected decision-making. The slow speed of investments delayed therehabilitation of the infrastructure, motive power and rolling stock, making recoveryslower than forecast at appraisal. The lack of counterpart funds, the inadequacy of thenormalization payments, and the inability of the Borrower to raise tariffs were the directresults of the Government's economic stabilization program, and together prevented the

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financial recovery of FEPASA. The plans of action had been accepted by the Borrowerbut could not be fully implemented.

23. Compliance with Loan Covenants. Deficient. The status of implementation ofthe major legal covenants is given in Table 10. Non-compliance or partial compliance wasa problem throughout most of the implementation of the project. As a result, the financialcondition of FEPASA hardly improved even though important cost reductions were madeby staff reductions, and the restructuring study financed by the Bank Loan laid thegroundwork for the future plans to reorganize FEPASA.

G. Assessment of Outcome

24. Overall rating. Marginally satisfactory. Although a review of the projectindicates that the implementation was, for various reasons, unsatisfactory for much of theproject's duration, the final outcome of the project was satisfactory. There were twobasic objectives. The first pertained to the investments and improvements to the exportcorridors. This was clearly achieved, for despite the delays, the investments werecompleted and capacity improvements did take place although on a diminished scale. Theincrease in traffic was inhibited by the economic situation. As for the second majorobjective (institutional improvements), the Action Plans resulted in reductions in staff,closures of uneconomic lines, closure of passenger services, systems improvements andrationalization of workshops and rail yards. Separation of the metropolitan suburbanservices was achieved once and for all. However several of the important loan covenantswere not implemented (Table 10). In its final stages the project led to the realization thata major restructuring of the railway was needed to bring about improvement in therailway's finances, and the first definite step towards this end was taken by the start andcompletion of the study financed by the Bank loan. The re-evaluated internal economicrate of return on the investments (JERR) is estimated to be 19.8% for the project (table9A), as compared to 21% at appraisal.

25. Linkages between the restructuring operations on RFFSA and FEPASA areinevitable and desirable as they depend upon each other for freight as well as movement oftraffic. With the Brazilian government committed to the restructuring of the BrazilianRailway System, covering both RFFSA and FEPASA, the key to the future sustainabilityof this project is in the hands of the government of Brazil and the management of RFFSAand FEPASA. To the extent the railway organization can be effectively restructured toimprove its operation and finances, the sustainability of the project would be enhanced.The Bank has supported the restructuring of RFFSA through the Federal RailwaysRestructuring and Privatization Project (Loan 4046-BR) and financed the FEPASA.Restructuring study from Loan 2857-BR. FEPASA has come a long way since it wasformed in 1971 by the merger of five separate railroads owned by the State of Sao Paulo,but its financial and operational performance has been poor. For this reason, theGovernment's decision to restructure and privatize FEPASA operations is timely. TheFEPASA Restructuring Study has concluded, in confirmation of the Bank's findings that:

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a. the operational performance of the railway can be dramatically improved(reducing unit costs in the freight business to as much as one-third) withouta requirement for much capital investment, through rationalization of assetsand facilities, improved management processes and improved productivity;

b. with the separation of the Metropolitan Suburban Services, FEPASA is leftwith its long distance passenger service which is not financially viable.Continuation of this activity should depend only on the Govermmentproviding support to cover losses;

c. there is a good market for the freight railway. The railway is currentlycarrying only 50% of its assessed potential;

d. to realize its potential, FEPASA must be liberated from regulatoryrestrictions to pursue commercial practices (basically done through theMarch 1996 regulation).

e. extensive involvement of the private sector through concessions providesthe greatest opportunity for success; and

f. RFFSA is being concessioned at the present time. Integration of theFEPASA corridors with the adjacent RFFSA network provides the mosteffective and efficient solution for the Brazilian economy and the highestcommercial value for the private sector.

26. It is important that the concession agreements with private sector firms, whiledefining output-based service requirements for the operators (concessionaires), should bedetermined for the process of transition with the full realization that commercial risks tothe operator are high and that retums on investments may not be generated for someconsiderable time into the future.

27. Preliminary experience around the world with the concessioning of railwayservices shows that most of the problems can be effectively addressed through rigorouscost-cutting and through concession of operation and maintenance functions to the privatesector within an appropriate regulatory framework. These are the essentials of the futurerailway operation proposed for and currently being implemented in Brazil.

H. Key Lessons Learned

28. The lessons learned from this project discussed below underscore the linkagesbetween project success and project design, ownership, the railways' and theGovernments' role, local funding, capability constraints and the macro-economic climate.

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29. Project Design. The project design envisaged an institutional component togetherwith a set of action plans to implement and weave the two together. However, althoughthe investment part of the project was clear-cut and specific, the institutional and policypart, by its very nature, was less specific and had the defect that although it containeddetailed instructions for the various plans (tariffs, marketing, sales planning, controlsystems, training, etc.), it lacked a significant restructuring component for the railway. Bythe time this project was underway, Bank experience with railway projects was beginningto show that mere exhortations to cut costs, raise tariffs and improve efficiency do notbring about the required improvements unless deep-seated transformations are broughtabout in the organizational structure involving basic changes in the attitudes of managers.Also, it has been evident that, whereas changing the institution is a sine qua non ofprogress in the railways, this cannot be brought about without increasing significantly therole of the private sector in the management, as it is the private sector that brings aboutthe required change in the attitudes of the management. This project had the requiredinvestments and the Action Plans to operate the railways on a commercial basis, includingnormalization payments for public service obligations, but the lesson learned was thatgovernment intervention could not be contained due to public ownership. As a result, theinstitutional component of the project was not particularly effective. It was, in effect, thecontinued unsatisfactory financial performance of FEPASA which impelled thegovernment, towards the end of the project, to launch a study to devise plans for therestructuring the railway.

30. Project Ownership. The importance of project ownership by both theimplementing agency (FEPASA) and the Government cannot be over-emphasized. Forimportant projects involving significant cost-cutting operations, efficiency improvementsand important revenue increases, the success of the project is highly dependent upon thepresence and support of a champion. During project preparation, ownership wasstrengthened by having FEPASA and the government jointly prepare the project. Duringappraisal and negotiations the Government and FEPASA signed on all the Action Plans,but subsequent changes in the Government, followed by repeated reshuffies in theFEPASA management, prevented the managers from effectively 'bwning" and pursuingthe changes planned with regard to the institutional and policy improvements. Theinvestments, on the other hand, although delayed and somewhat curtailed due to shortageof counterpart funds, were effectively implemented, thus resulting in some improvementsin rail operations, achieved principally through staff reductions, and system improvements(paras 11 and 12).

31. As in most other railway projects financed by the Bank, the lessons learned are assignificant as the successes and failures in the implementation of the project. The mainlessons learned from this project are that:

(i) although there were major shortfalls in the implementation of the projectunder review, the experience was not altogether negative. The cost andsystem improvements that took place, together with the continuousdialogue with the Bank, steered FEPASA and the Government towards a

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serious study to restructure the railway. This study was financed from theBank loan and provides basic analyses and recommendations forrestructuring of the entity;

(ii) the FEPASA Rehabilitation Project enabled useful investments to be madeto arrest the deterioration of the railway infrastructure, rolling stock andequipment, but this project was over-ambitious in its expectations ofimprovements without the inclusion of any significant restructuring elementin the project;

(iii) a major restructuring and redesign of the railway, with the participation ofthe private sector, is a must to bring about the creation of a commerciallyviable entity and to reduce the public sector deficits that have plaguedrailway systems around the world;

(iv) the unreserved support and continued commitment of the governments is aprerequisite for the success of the restructuring effort;

(v) the critical decisions in regard to the policy and its implementation can beproductive only if they emanate from a consensus within the country;

(vi) railway restructuring, is a time-consuming and contentions process. Animportant element in many of the restructuring programs for railways hasbeen the use of the services of authoritative and impartial bodies (includingconsultants). Experience around the world clearly indicates that realbenefits have been gained by entrusting the planning and definition ofpolicy choices to such entities. In this respect, FEPASA is moving in theright direction; and

(vii) future Bank railway lending, if any, should be confined to the support ofderegulation, restructuring and privatization of the railway system.


BRAZIL


(Loan 2857-BR)

PART II: STATISTICAL TABLES

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Table 1: Summary of Assessments

NotA. Achievement of Objectives Substantial Partial Negligible applicable

Macro policies x

Sector policies xFinancial objectives xInstitutional development xPhysical objectives xPoverty reduction x

Gender issues xOther social objectives xEnvironmental objectives- x

Public sector management x

Private sector development x

B. Project Sustainability Likely Unlikely Uncertain

x

HighlyC. Bank Performance Satisfactory Satisfactory Deficient

Identification xPreparation assistance xAppraisal x

Supervision x

HighlyD. Borrower Performance Satisfactory Satisfactory Deficient

Preparation xImplementation xCovenant Compliance x

Highly HighlyE. Assessment of Outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactory

x

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Table 2: Related Bank Loans

Year of Amount Cancellation

Loan Title Approval (in US$ million) Status a/ (in US$ million)

L 0065-BR Railway Rehabilitation 1952 12.5 DL 0786-BR Railway 1971 46.0 DL 1074-BR Second Railway 1975 175.0 D 0.99L 1171-BR ThirdRailway 1975 75.0 D 0.07L 2563-BR Fed. Railway & Exp. Corridor 1985 200.0 D 5.6L 2857-BR Fepasa Railway Rehab 1987 100.0 DL 3457-BR Sao Paulo Metro Transport 1992 126.0 UL 3633-BR Rio Metro Transport 1993 102.0 UL 3915-BR Recife Metro Transport 1995 102.0 UL 3916-BR Belo Horizonte Metro Transport 1995 99.0 UL 4046-BR Federal Railway Restructuring 1996 350.0 U

TOTAL 1,387.5

a/ D: Disbursed; U: Under disbursement

Source: World Bank Statement of Loans

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Table 3: Project Timetable

Date Actual/Steps in Project Cycle Date Planned Date Revised Latest Estimate.

Identification 28-Feb-85

Preparation I 12-Jun-85

Preparation II 11-Nov-85

Preparation III 3-Mar-86Appraisal 18-Aug-86 8-Aug-86 1-Sep-86

Negotiations 1-Feb-87 25-Feb-87 20-Apr-87

Board Approval 1-Apr-87 25-Jun-87

Loan Signature 27-Jul-87

Loan Effectiveness 1-Dec-87

Project Completion 31-Dec-93 31-Dec-95

Loan Closing 30-Jun-94 30-Jun-95 31 -Dec-95

31 -Dec-95

Source: Project Files

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Table 4: Loan Disbursements: Cumulative Estimated and Actual(in millions of US$)

~~~~~~~~~~. ........... . ......000''"''"'"1''"'*'""'W""' 'S" 'lgSS ZS'SS'S 0-IBRDFb#aIY~~~~....... 198 199 19 91 19 93194 1995196'

Appraisal Estimates a/ 9.00 24.00 48.00 73.00 90.00 97.00 100.00

Actual Disbursements bl 5.00 13.84 21.98 48.03 69.58 84.64 91.91 96.04 99.55

Actual as % of Estimated 56% 58% 46% 66% 77/o 87% 92% 99% 100%

Date of Final Disbursement 5/31/96

a/ The original closing date of June 30, 1994 was postponed twice to complete ongoing works and studies.bl An amount of US$16,068 was cancelled.

Source: World Bank MIS and Project Files

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Table 5: Key Indicators for Project Implementation

,Key mplemeitation indicatorsin, $AR/Predt'. Repo 1 987 1988 1989 1999 191 1 1993 1994. 1995 199

1. Infrastructure Works _ _

;e w &# 8 &&& 3 gf&~S# SB #B

2. Superstructure Works - - - - -

3. Materials

4. Equipment _

5. Telecommunications_ _

6. Locomotives and Wagons = _ _

7. Yards and Terminals

8. Technical Assistance I II

mm Estimated; - Actual

* The telecommunications program was not implemented because of shortage of funds (BNDES), although somestudies were conducted in 1995 to determine the future course of action.

Source: Project Files; FEPASA ICR

Table 6: Key Indicators for Project Operation

Ky o-perat c tin .t0987 1988 199 - 190 1991299tijlitjl: 00t000 .0 ........ ... i00000.X0Xi00000-X :E.00.0:.0tA020000100E I-i iittgii0;t00000000X 0000000

1. Freight Traffic (billion ton-km) 8.0 7.2 8.8 7.1 9.8 7.1 10.1 6.5 10.4 6.3 10.7 6.5 11.0 7.0 7.7 6.5 7.4 6.1

2. Locomotive Availability (%) 70.0 63.7 73.0 63.1 76.0 63.8 78.0 62.6 79.0 59.5 80.0 61.5 80.0 61.8 66.2 61.4 68.8 61.0

3. Locomotive Utilization (%) 67.0 58.8 69.0 59.7 70.0 58.7 72.0 54.7 73.0 54.9 74.0 53.5 76.0 54.8 60.7 51.3 55.7 48.3

4. Locomotive Productivity(%) 64.0 72.3 68.0 72.0 76.0 75.4 84.0 73.2 86.0 71.4 88.0 73.7 88.0 73.7 42.3 73.3 11.2 35.8

5. Availability of Wagons(%) 91.0 91.2 91.0 91.9 92.0 90.7 92.0 89.0 93.0 86.5 93.0 81.1 94.0 83.4 89.7 84.1 84.1 84.0

6. Wagon Turnaround (days) 9.0 8.3 8.3 10.7 7.5 10.7 6.8 11.9 6.7 10.7 6.7 9.4 6.7 9.5 8.8 9.8 10.0 11.2

7. Avg. Load per Wagon (tons) 45.0 45.5 45.0 49.3 45.0 49.3 46.0 50.2 46.0 50.2 46.0 50.2 47.0 49.2 47.9 49.6 48.5 49.0

8. Max. NumberofStaff('000) 20.0 18.7 20.0 18.6 20.0 18.0 19.7 18.6 19.5 17.7 19.2 17.9 19.0 17.0 14.9 17.0 9.5 11.9

E = Estimated; A = Actual

The estimates after 1993 (outside the project period appraisal) were detemiined at the start of the year after reviewing current figures and progress.


Table 7: Key Indicators for Financial Position

1989~~ ~ ~ 19....Key ope.rsting indiefftos,in .1988 ;18.._ 0 .:91" l92; 1993 .,1:994, 1995SAR/PresWents'Ieport E A E A - E A .E: .A .E -A E A :.A A

1. Working Rafio 0.84 0.95 0.77 0.87 0.75 0.82 0.73 1.08 0.71 1.01 0.69 1.01 0.97 0.98

2. Working Ratio (freight) 0.84 0.93 0.75 0.77 0.70 0.78 0.67 1.11 0.64 1.01 0.61 1.05 1.07 1.13

3. Working Ratio (passengers) 0.85 1.02 0.91 1.36 1.00 1.14 1.12 1.11 1.29 1.00 1.55 1.01 0.83 0.73

4. Working Ratio (Metropolitan) 0.82 0.94 0.86 1.23 0.90 0.71 0.95 0.90 1.00 0.80 1.00 0.82 0.77 0.75

5. Max. Normalization(%ofrevenue) 12.48 11.88 10.06 7.62 8.33 13.87 6.61 17.61 4.94 18.28 3.32 18.34 19.31 22.58

6. Max. Borrowings (% of int. gen. funds) 340.00 322.00 80.00 13.00 45.00 39.00 40.00 0.00 40.00 0.00 40.00 0.00 0.00 0.00 0

7. Accounts Receivable (days) 60 54 60 25 60 17.22 60 18.32 60 15.4 60 17.8 12.8 16.6

E = Estimated; A = Actual


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Table 8A: Project Costs

g 0000X ylEd iX i00004000040 Ap14praisal EstimWatte(SSM) culySMLoual Foreign LOCAl Freg

J( ;0 $ 0 ;;Item i :0f Costs 0 l C:stst Ttial Csts C osts Tcal

1. Civil Works 34.7 19.6 54.3 39.0 26.6 65.6

2. MaterialsandEquipment 74.4 111.9 186.3 75.3 77.8 153.1

3. Technical Assistance 7.0 2.7 9.7 6.1 2.4 8.5

4. Training 1.5 0.8 2.3 0.0 0.0 0.05

5. Contingencies 15.4 17.0 32.4 0.0 0.0 0.0

Total 133.0 152.0 285.0 120.4 106.8 227.2

Source: Project Files and FEPASA ICR

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Table 8B: Project Financing

Appraisal Estite (USSM) ActuaS( ) -- _ '' 'Loc .. Foreipg LOca Foreg

Source Costs TCosts To Costs Costs Total

World Bank 100.0 100.0 100.0 100.0

BNDES 69.3 38.5 107.8 31.1 31.1

Cofinanciers 13.5 13.5 5.7 5.7

FEPASA 63.7 63.7 89.3 1.1 90.4

Total 133.0 152.0 285.0 120.4 106.8 227.2

Source: Project Files and FEPASA ICR

- 22 -

Table 9 A: Cost and Benefit Analysis

USS Millions

Year Investment Rail Traffic Transport Cost Transfer Cost Net________ ________ wlProject wio Project w/Project w/o Project w/Project w/o Project Benefits

1987 18.8 8.83 8.33 238.7 238.7 26.22 26.22 (18.80)1988 23.8 7.18 7.18 242.4 242.4 28.47 28.47 (23.80)1989 30.8 7.24 7.24 286.0 286.0 37.05 37.05 (30.80)1990 19.7 6.49 6.49 352.5 352.5 45.90 45.90 (19.70)1991 50.7 6.45 5.75 295.1 362.23 15.74 46.15 45.841992 33.8 6.63 5.09 302.3 318.68 16.31 39.59 5.861993 19.0 7.11 5.09 303.2 298.31 23.55 36.04 (11.40)1994 11.2 6.58 5.09 326.1 346.52 33.72 40.91 16.41995 22.5 6.13 5.09 337.3 384.89 40.90 44.26 28.451996 7 6.32 5.09 337.3 372.86 40.90 42.00 29.661997 6.32 5.09 337.3 372.86 40.90 42.00 36.661998 6.32 509 337.3 372.86 40.90 42.00 36.661999 6.32 5.09 337.3 372.86 40.90 42.00 36.662000 6.32 5.09 337.3 372.86 40.90 42.00 36.662001 6.32 5.09 337.3 372.86 40.90 42.00 36.662002 6.32 5.09 337.3 372.86 40.90 42.00 36.662003 6.32 5.09 337.3 372.86 40.90 42.00 36.662004 6.32 5.09 337.3 372.86 40.90 42.00 36.662005 6.32 5.09 337.3 372.86 40.90 42.00 36.662006 6.32 5.09 337.3 372.86 40.90 42.00 36.662007 6.32 5.09 337.3 372.86 40.90 42.00 36.662008 6.32 5.09 337.3 372.86 40.90 42.00 36.662009 6.32 5.09 337.3 372.86 40.90 42.00 36.662010 6.32 5.09 337.3 372.86 40.90 42.00 36.66

Total 237.3 NPV 110% US$58.28 millionE.I.R.R. 19.78%

Notes on the Economic Analysis

The ground for the present economic evaluation was laid out by the interim appraisal performed by theBank in 1990 which suggested that the 'without' case assumed in the appraisal of the project neededto be substantially revised because of the deteriorating economic situation and capital constraints facedby FEPASA. For the purposes of calculating economic rate of return on the completion of the project,it is deemed impractical to compare the "without" case in the SAR with that at the termination of theproject. Had this been done, the EIRR would have been about 6.5 percent.

Instead, a different 'without' case was projected starting form the conditions that existed during theappraisal and modified taking into account the deterioration in the general economic condition. The new.without' case assumed:

a) The production levels in the without case would be appreciably below (23 percent) those assumedduring appraisal;

b) In the first four years of the project, the transport volume without the project would be similar to thoseidentified in the SAR followed by a drop in the next two years which will be accompanied by risingtransport costs on the same scale as the actual increase

c) The costs of transfer to road transport were kept same in relation to the transport costs identified inthe SAR for the alternative without the project up to 1990. Starting in 1991, road freight rate is appliedto the transport estimated and not effected by rail.

These criteria provide reasonable basis for comparing the effects of the project in relation to what wouldbe expected without it. The resulting EIRR is 19.78 percent and NPV of US$58.28 million at 10 percent.

Table 9B: Financial Results

RFFSA - Income and Expenditure Statement (USS million)

Key operating indicator in 1985 1989 1990 1991 1992 1993 1994 1995SAR/Presidents Report E A E A E A E A E A E A E A E A

OPERATING REVENUESFreight 170.8 167.7 188.8 238.2 196.0 246.1 203.5 166.4 211.3 179.7 219.3 183.4 197.2 198,517Passengers 3.6 10.2 3.8 15.6 3.9 13.0 4.1 11.1 4.3 10.7 4.6 9.6 10.2 8.4Suburban 3.5 8.1 3.6 8.8 3.8 18.5 4.0 21.5 4.2 23.6 4.4 28.1 37.9 53.5Others 5.8 27.4 5.8 13.0 5.8 17.8 5.8 11.0 5.8 4.1 5.8 6.2 5.9 6.0Subtotal Operahng Revenues 183.7 213.4 20Z0 275.6 209.5 295.4 217.4 210.0 225.6 218.1 234.1 277.2 251.2 266.5

CONTRIBUTION FORTRACK 0.0 0.0 0.0 21.0 0.0 64.9 0.0 4.7 0.0 16.9 0.0 3.1 11.4 2.3

NORMALIZATION PAYMENTSReceived 50.0 43.1 44.9 34.0 39.5 68.8 34.2 59.0 29.1 63.7 25.0 65.6 72.2 77.2To be received 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Normalezatn Paymenws 50.0 43.1 44.9 34.0 39.5 6&8 34.2 59.0 29.1 63.7 25.0 65.6 72.2 77.2Total Operating Revenues 233.7 256.5 246.9 330.6 249.0 429.1 251.6 273.7 254.7 298.7 259.1 295.9 334.8 345.9

EXPENDITURESPayroll 130.6 142.9 129.1 173.2 127.5 201.0 125.8 164.9 124.7 179.2 122.7 191.9 195.9 215.4Fuel 18.0 10.7 14.3 11.5 13.3 14.7 13.9 11.8 14.5 16.7 15.4 17.5 18.7 20.2Electricity 5.0 8.0 6.9 11.3 7.6 11.5 7.9 9.5 8.3 10.3 8.7 9.5 12.4 11.9Spareparits 12.2 13.1 12.7 11.0 12.7 18.0 13.1 13.8 13.5 14.1 13.9 9.7 12.4 16.1Others incl. contracts 30.8 67.7 28.1 79.0 25.7 107.3 22.7 95.1 20.0 82.0 17.3 69.2 86.3 73.7Total Optiing Expendtures 196.6 242.4 191.1 286.0 186.5 352.5 183.4 295.1 181.0 302.3 178 297.8 325.8 337.3

EMERGENCY PROGRAM EXPENDITURESSpare parts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.8 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3.6 0.3 0.0 LWTotel Emergency Program Expenditures 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.4 0.3 0.0Depreciation 57.8 60.3 121.5 54.8 125.0 40.1 128.3 56.9 130.2 52.5 130.5 56 431.5 567.1Provision f vacat. rewards 0.0 0.0 0.0 52.7 0.0 24.5 0.0 34.4 0.0 34.9 0.0 52.6 72.2 55.7Staff seconded to other org 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.3 6.3 1.0Dismissal Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 29.2Total Operating Expenditures 264.4 302.7 312.6 393.5 311.5 417.1 311.7 386.4 311.2 389.7 308.5 418 836.2 991.3WORKING INCOME 37.1 14.1 55.8 44.6 62.5 76.6 68.2 -21.4 71.7 -3.6 81.1 -1.9 9.0 8.6OPERATING INCOME -20.7 -46.2 -65.7 -62.9 -62.5 12.0 -60.1 -112.7 -56.5 -56.1 -49.4 -57.8 -422.6 -558.5Non-Operating Income 32.90 2.00 32.90 8.13 32.90 12.60 32.90 38.57 32.90 5.61 32.88 -9.11 77.94 -3.31Interest 157.70 0.00 118.10 613.72 90.18 576.40 70.70 1,281.29 48.72 389.80 37.64 271.24 75.47 23.54Otherfinancial expenditures 0.00 389.20 0.00 388.53 0.00 81.30 0.00 63.61 0.00 530.93 0.00 582.9 510.63 180.38Other financial revenues 0.00 0.00 0.00 10.92 0.00 4.50 0.00 8.77 0.00 6.66 0.00 15.85 47.40 60.21NET ANNUAL DEFICIT -145.48 -433.40 -150.90 -1046.10 -119.78 -628.57 -97.90 -1410.26 -72.32 -964.56 -54.16 -905.25 -883.32 -705.53WORKING RATIOWith Est. Cont. (excl. Emerg. Prog.) 84.1 9,4.5 77.4 86.5 74.9 82.1 72.9 107.8 71.1 101.2 68.7 100.6 97.3 97.5Without Est. Cont. (excl. Emerg. Prog) 107.0 113.6 94.6 103.8 89.0 119.3 84.4 140.5 80.2 138.6 76.0 131.1 129.7 126.6OPERATING RATIOWith Est. Contr. (excl. Emerg. Prog) 108.8 118.0 126.6 103.1 125.1 91., 123.9 128.6 122.2 118.8 119.1 119.5 226.2 261.5Without Est. Contr. (excl. Emerg. Prog) 138.5 141.8 154.8 123.7 148.7 132.9 143.4 167.6 137.9 162.7 131.8 155.7 301.5 339.4

NORMALIZATION (as % of operating rev. 21.4 16.8 18.2 11.0 15.9 18.9 13.6 21.9 11.4 22.6; 9.6 22.4 22.3 22.5NORMALIZATION (FreighttPassenger) 12.5 11.9 10.1 7.6 8.3 13.9 6.6 17.6 4.9 18.3 3.3 18.3 19.3 22.6as % of operating revenue

E = Estimate; A= ActualThe estimates after 1993 (outside initial project period) were determined at the start of the year after reviewing current figures and progressSource: Project Files; FEPASA ICR

-24 -

Table 10: Status of Legal Covenants

]Dotuct Setr )ccito f: C:,venant .........

SA 2.03 The State to assume and capitalize state-guaranteed, pre-1987 Yesdebt as per agreement between the State and FEPASA datedMarch 28, 1987.

GA 2.04 The Federal and the State Governments to study and define the Yestreatment of FEPASA's federally guaranteed debt no later thanNovember 30, 1987 as per Protocol dated February 28, 1987.

LA 5.06(a) FEPASA to limit its future borrowings as a percentage of Yesinternally generated funds to pre-determined targets.

LA Sch. 5.1 FEPASA to maintain separate accounts, operations and capital Yesbudgets for the metropolitan train operation, refrain fromtransferring funds to this operation from its other revenues andcomplete the separation of balance sheets by end of 1987.

LA 5.04 FEPASA to reduce and/or rationalize its commercially non-viable In generalpassenger and freight services to achieve the determined working not compliedratio targets for the respective long-distance passenger withmetropolitan train, freight and total businesses.

LA 5.02-5.05 FEPASA to contain Government normalization pavements for the Yeslong-distance passenger and freight services, as a percentage ofcorresponding operating revenues, below the detrmined targets.

LA Sch. 5.2(a) By September 30 of each year, forward to the Bank for review Yesand comments, the normalization arrangements for the forth-coming budget year.

LA Sch. 5.2(b) The State Government and FEPASA to prepare a multi-year plan Yesfor the railway's long-distance passenger services not later thanDecember 31, 1987.

LA Sch. 5.2(c) FEPASA to prepare a corporate plan not later than June 30, 1988. Yes

LA Sch. 5.2(d)-(e) FEPASA to analyze the feasibility of its new investment in Yesaccordance with technical and economic criteria satisfactory to theBank, and by November 10 of each year, discuss its multi-yearinvestment program and financing plan with the Bank.

- 25 -


bDumcnt - Seoon -Description of Covenant Compliance

LA 5.02(c); 5.05(c) Adjust freight tariffs, rates and passenger fares to achieve the In generaldetermined working ratios targets fof the respective freight, long- not complieddistance passenger, metropolitan train and total businesses. with

LA Sch. 5.3(b) Develop a cost-related, market-based tariff structure not later Yes but notthan December 31, 1988 and implement it thereafter. adequately

implemented

LA Sch. 5.3(b) Develop a sales planning and control system not later than YesJuly31, 1988.

LA Sch. 5.3(c) Upgrade its cost accounting system not later than December 31, Yes1988

LA Sch. 5.3(d) Finalize joint-venture arrangements for the construction and Yesoperation of grain terminals not later than July 31, 1988.

LA Sch. 5.4(a) FEPASA to undertake no later than December 1, 1987, and Yescomplete not later than June 30, 1989, the consolidation of theorganization of operations and maintenance, and the developmentand implementation of an Organisation Information System (OIS)and a locomotive and wagon maintenance system (MIS)

LA Sch. 5.4(b) FEPASA to undertake not later than December 1, 1987 and Yescomplete not later than June 30, 1988, the development andimplementation of a track maintenance MIS.

LA Sch. 5.5 FEPASA to undertake not later than December 1, 1987 and Yescomplete not later than December 31, 1990 the development andimplementation of a personnel management and training program.

LA 4.01(c) Operational performance targets. In generalnot complied

withLA 5.02-5.05 Annual reviews of FEPASA's operations and financial performance,

investment program, and financing plan. Yes

LA 5.08 FEPASA to take all necessary tariff and/or cost savings actions In generalto recover, by the end of 1993, all costs, including depreciation and not compliedinterest, from operating revenues. with

-26 -


LA 5.01-5.06, Financial performance targets. In general

5.08 revised not complied

with

SA: Shareholder AgreementGA: Guarantee AgreementLA: Loan AgreementSch: Schedule Note: Several of the action programs referred to in this table were based

on studies. In addition towards the en d of the project the study onrestructuring and privatisation of FEPASA was conducted (refer paras 13

Source: World Bank MIS and 20 of Part I Implementation Assessment), and forms the basis for therestructuring of FEPASA now in progress.

-27 -

Table 11: Bank Resources: Staff Inputs

-.-Stage of . . .Planned* RevisedA. Actual:project cye . Weeks US$ Weeks US$ Weeks USS$-

Through appraisal 53.8 99.8

Appraisal-Board 55.9 97.9

Board-effectiveness 14.0 27.6

Supervision 46.0 153.5 39.8 124.3 126.5 299.6

Completion 1.7 4.0 1.7 4.0 7.8 18.2

TOTAL 47.7 157.5 41.5 128.3 258.0 543.1

* Original and revised plan data available for FY94-96 only.

Source: World Bank COS (Cost Accounting System)

- 28 -

Table 12: Bank Resources: Missions

N& 4Df~~~~ 0 ig Pefouace z,atn bStage ofProject ...No..of Daysin Specalizatio T m p)em Devt.. Typ of

Cycle Date Staff Field Repreeentd A/ Status mat l :Probliems cI. Through AppraisalIdentification 28-Feb-85 4 18 FNA, PE, RE, TE

Preparation 14-Jun-85 5 5 FNA, RE, TE, C

Preparation 12-Nov-85 4 11 FNA, TE, C

Preparation 3-Mar-86 6 14 FNA, RE, TE, C

Preappraisal 19-May-86 4 7 FNA, RE, TE, C

Appraisal 1 -Sep-86 3 20 FNA, RE, TE

Pre-Negotiations 12-Jan-87 3 7 L, LO, TE

II. Supervision26-Jun-87 1 21 TE

5-Oct-87 4 14 FNA, RE, TE, C 1 1

I 1-Apr-88 3 7 FNA, RE, TE 1 I20-Feb-89 2 3 RE, TE 2 1 F,M

4-Sqp89* 1 2 RE M, P

5-Feb-90 1 5 RE 2 1 T

29-Apr-91 2 2 RE, TE 3 2 M

2-Sep-91 1 5 TP 3 2 F, M, P

16-Nov-92 2 3 RE, TP 2 2 F

17-May-93 2 2 RE, TP 2 2 F

9-Feb-94 2 3 RE, TP 2 2 M

16-Jan-95 2 5 FNA, RE S U M29-Jan-96* 1 5 RE

Completion

Total Bank Resources: Staff DaysIdentification 4 18

Preparation 15 30

Preappraisal 4 7

Appraisal 3 20

Pre-Negotiations 3 7

Supervision 24 77

Total 53 159

a/ C- Consultant, FNA-Financial Analyst; L-Lawyer; LO-Loan Officer, PE-Port Engineer; RE-Railway Engineer;

TE-Transport Economist; TP-Transport Plannerb/ Performance ratings between October 1987 and October 1993 were based on overall performance (first column) and

development objectives (second column). Form 590 was revised in 1994 to reflect the implementation status

and developmental impact (S=Satisfactory; U-Unsatisfactory).

c/ F-Financial; M-Managerial; P-Procurement; T-Technical

* No Form 590 produced (limited supervision mission)

Source: Project Files

- 29 -

FEPASA Appendix AFerrovia Paulista S.A.

BORROWERS' CONTRIBUTION TO THE 1CR

LOAN AGREEMENT No. 2857-BR

PREFACE

This is the final report on the Rehabilitation and Modernization Plan for theFerrovia Paulista S.A. lSao Paulo Railway] in Brazil, for which a loan of US$100million equivalent was approved on May 7, 1987.

The loan was closed on December 31, 1995, representing a two-yearextension compared with the initially scheduled closing date of December 31,1993. The last disbursement was made on April 30, 1996, at which time therewas a balance of approximately US$15,000 remaining.(*)

(*) Some invoices are still outstanding in connection with "Special Accounts"surplus.

l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

- 30 -

FEPASA

Summary EvaluationFEPASA Rehabilitation and Modernization Plan (PRMF)

Loan Agreement No. 2857-BRBrazil

INTRODUCTION

The World Bank's association with FEPASA goes back to 1975, the year inwhich the Bank's Third Railway Project in Brazil (Loan No. 1171-BR, of October1975, of US$75 million equivalent) was launched, the main objectives of whichwere to: (a) rehabilitate and, where necessary, expand the system; (b) improveFEPASA's operating and financial performance; (c) upgrade the suburbanpassenger services in the S3o Paulo area; and (d) strengthen the coordination ofurban transport in the Sao Paulo area. This project was completed in October1983, after being redefined in 1977.

PROJECT OBJECTIVE

In 1987 FEPASA, in pursuance of the Sao Paulo State Government'stransport policy, signed Loan Agreement No. 6531-BR, subsequently No. 2857-BR,in an amount of US$100 million, with the World Bank, with the guarantee of theFederal and State Governments concerning counterpart funding of US$107.8million from the BNDES, US$63.7 million from FEPASA itself, through the SaoPaulo State Treasury, plus US$13.5 million in supplier credit, making a total ofUS$285 million equivalent, for the provision of services and execution ofrehabilitation works for the following corridors: (a) Araguari-Santos; (b) Broad-Gauge Corridor; and (c) Metric-Gauge Corridor, including implementation ofbusiness programs.

The priority objectives of the project investments were: (a) financialrehabilitation and improvement of the commercial performance of FEPASA, and (b)greater transport efficiency in the mail rail corridors serving Sao Paulo and the portof Santos. Upon achievement of these objectives, rail transport would beperforming its function more efficiently by reducing transport costs for producersthrough better participation in model distribution. As a result, it would both induceand facilitate agricultural development and foreign trade.

Among the key factors that made it possible to achieve the project'sobjectives, special mention must be made of the vital part played by the S3o Paulo

- 31 -

State Government in making the counterpart funds available, especially after theBNDES dropped out of the project.

The PRMF's performance can be evaluated as being fundamental forFEPASA. The permanent way infra and superstructure was rehabilitated in linesections commercially essential for the railway; practically 50% of the fleet ofmost heavily used locomotives have undergone general rehabilitation and the fleetof hopper and bulk cars has been modernized and its capacity increased, and theyards with heaviest traffic have been expanded and the institutional programshave proven beneficial, particularly the market/tariff and cost-control programs.

EXPERIENCE GAINED FROM IMPLEMENTATION AND RESULTS

The project was designed and carried out within the context of statemanagement, i.e. without any study of policies aimed at privatization of FEPASA.

In this context, the institutional development action programs would be thebases for enabling and sustaining accomplishment of the objectives and goals setin the project.

Basically, these programs were carried out toward the end of the projectand, combined with external factors that will be discussed further on, they did notmake it possible to fully achieve the goals set, especially the "commercial" andoperating targets. However, with the execution of the various componentprograms of the project and the present government's firm resolve to press aheadwith privatization, the financial goals should be not only achieved but alsosustained, in addition to preparing the way for better results in the future.

Implementation of the project, scheduled for 1987/93, was started in May1987 with closing initially scheduled for December 31, 1993; this latter date wassubsequently twice extended, to 1994 and 1995 respectively, the first time due todelay in execution of the project and the second time in order to include the studyof privatization of FEPASA in the institutional programs.

The following external factors complicated execution of the project:

(a) the withdrawal of the BNDES from the project in 1 988 when it had only putin 25% of the financing to which it was committed, so that currentcontracts and also the counterpart funding had to be renegotiated;

(b) implementation in Brazil of anti-inflation policies at the end of the CruzadoPlan (1986/88) and in the Verao Plan (1989), the Collor Plan (1990) and theReal Plan (1994), which caused revision and even complete halting ofcontracts because the contract amounts had to be renegotiated;

- 32 -

(c) in order to cope with the problem referred to in (a), the Sao Paulo StateGovernment needed to review the flow of counterpart disbursementsscheduled at the start of the project, which entailed extending the periodsset for programs already underway or deferring the signing of newcontracts;

(d) the elimination of the project telecommunications masterplan, as a result of(a) and (c) above, which brought the PRMF down from the US$285 millionset at appraisal to US$237.4 million;

(e) successive administrative and organizational changes in FEPASA, forgovernmental (policy) reasons.

Regarding achievement of the "operational performance targets" it is alsoimportant to note that problems external to the project arose which prevented fullaccomplishment of those targets:

(a) the stoppage of the electrification contract in 1990, which beside affectingoperations in that the planned additional eighty 2,500-hp locomotives didnot become available also prevented the decommissioning of some 46electric locomotives that had been in use for over half a century and hadtherefore reached a stage of very low reliability and productivity;

(b) successive strikes in the port of Santos connected with operating difficultiesin RFFSA (SR4) and CODESP, chiefly on account of the bad condition of theRFFSA infrastructure on the lowlying land on the way into Santos(permanent way and signalling).

As regards the "commercial targets", in addition to the operationaldifficulties it must also be borne in mind that the lack of a transport policy inBrazil, and especially in the State of Sao Paulo (where competition from trucking isfiercer because of the excellent quality of the roads), puts the railway at a totaldisadvantage vis-a-vis road transport, thus making achievement of the projectobjectives all the harder.

BANK PERFORMANCE

The World Bank's partnership with FEPASA goes back many years and hasproduced good results in the development of rail transport policy. As far as theloan agreement under-review is concerned the outcome has been highly positivesince as a result of this agreement FEPASA has been able to handle freight trafficon its export corridors better and, notwithstanding its financial problems, has alsobeen able to maintain its source of resources.

- 33 -

In general, our assessment of the World Bank's performance over theduration of the project is that is has been highly satisfactory. On the majority ofoccasions the Bank responded favorably to FEPASA's requests, which relatedmainly to modifications or adjustments to the scale of the project necessary formeeting the goals set at appraisal, while also promoting whenever needfulapproaches to the governmental authorities with a view to ensuring the continuityof the project.

BORROWER PERFORMANCE

The main problem that occurred with the PRMF was the BNDES' withdrawalfrom the project. Thanks to the effective support provided by the Sao Paulo StateGovernment the counterpart commitments were covered, though admittedly withinthe context of a disbursement schedule feasible for the Finance Secretariat, whichentailed a two-year delay and also deletion from the project of thetelecommunications masterplan.

Also with respect to the Sao Paulo State Government it is important to notethat throughout the entire project the payments specified in the appraisal foraccounting normalization for the long-distance passenger and metropolitanservices were effected as required.

Finally, regarding the telecommunications plan, FEPASA sought analternative and signed a contract with EMBRATEL, the Braziliantelecommunications corporation, during the project period for a transmissionsystem using optical cables. In addition, to take care of the tractive power needsFEPASA procured seven 3,000-hp locomotives from the Quintella company for usein its commercial service.

We accordingly consider the performance of FEPASA and of the Sao PauloState Government in the execution of the project to have been satisfactory.

EVALUATION OF THE PROJECT OUTCOME

The project for the rehabilitation and modernization of FEPASA was of vitalimportance for the following reasons:

(a) it improved the railway's operating performance, concerning which wewould emphasize the increased locomotive utilization efficiency, the markedreduction in the number of traffic accidents, and the prospect of higheroperating productivity through movement centralization;

- 34 -

(b) it enabled development of a tariff policy based on market and costs, thusmaking it possible to maintain a reasonable level of economic and financialresults at a time when the prevailing economic conditions were extremelyadverse for rail transport;

(c) it made it possible to computerize FEPASA, which besides enabling fasterdecisionmaking, also made it possible to reduce the number of personnelrequired, thereby lowering the cost of FEPASA's main expenditure centerand improving productivity;

(d) it enabled FEPASA to prepare for privatization;

(e) by means of the remodeling of the permanent way superstructure it made itpossible for train speed to be increased;

(f) it made it possible to maintain the traction equipment level necessary formeeting the revised operational targets, which without the projects wouldhave resulted in significant reductions in volumes hauled, which could alsohave brought FEPASA's continued existence as an economically viableenterprise into question.

In general, we can state that the PRMF project was of vital importance forFEPASA not only because of the results achieved but chiefly because of thedifficulties FEPASA and the Sao Paulo State Government would have encounteredif the project had not been implemented.

Although the transfer of the metropolitan passenger services to CPTM(Companhia Paulista de Transportes Metropolitanos, a company controlled by theSAo Paulo State Government) was effected in February 1996, i.e. after completionof the project, we should nevertheless note that the planning and the actions forseparation of this activity from FEPASA were done within the scope of the project.

SUMMARY OF BENEFITS, FUTURE OPERATIONS AND MAIN LESSONS LEARNEDWITH THE PROJECT

1. We understand that the main difficulty with a project of this scale, whichcan generally be expected to extend over eight years, is the unpredictabilityof government policy actions. This renders the feasibility studies uncertain,to the extent that the various programs making up the project are affectedby those actions. However, the skill and motivation of the technical staff ofboth the enterprises concerned and the government departments involvedare such that the projects are usually satisfactorily completed.

- 35 -

2. The continuing economic instability of the country throughout the executionof the project was also a major factor in the failure to fully meet the targetsset at appraisal.

3. The interface with the Bank technical staff was very important, due to theproject supervisors' wide-ranging knowledge of developments throughoutthe world, and this interaction contributed greatly not only to the executionof the project but also to the management, i.e. nonpolitico-administrative,actions taken. We would rate these contributions as having been of greatvalue for the case of the PRMF.

For future projects we would point to the following lessons learned:

1. From the technical standpoint, the various subprojects making up theproject should be presented with minimum basic project details and clearlydefined physical and economic quantities.

2. Each program forming the project should have no more than one source ofcounterpart funding, besides the IBRD resources.

3. The participants in projects should be jointly committed. We would suggestto the Bank that it set up an "insurance" designed to cover the counterpartfunds due from sources-that withdraw from the project before it iscompleted.

4. At the organizational level, for projects of this size the borrower should havea unit that is independent of its formal structure with a view to ensuring aswifter response on actions to be carried out, so as to keep within the timeand cost limits set in the appraisal.

5. There should be a centralizing agency in the government for the variousIBRD-funded projects, so that these projects can be kept unaffected, to theextent possible, by the administrative changes that occur with suchfrequency in the state enterprises.

6. Finally, in the post-privatization phase lending should be continued to theprivate concession-holder, in order to meet new investments needs.

s/Jean Carlos PejoGeneral Coordinator, PRMF

- 36 -

Approveds/Renato Casali PavanPresident of FEPASA

i

I

I

- 37 -

FEPASA Sao Paulo, June 21, 1996Ferrovia Paulista S.A.

SPG.092/96

Mr. Moazzam A. MekanFinancial AnalystInfrastructure and Urban Development Operations DivisionCountry Department ILatin America and The Caribbean Regional OfficeThe World BankWashington, D.C.

Subject: Loan Agreement No. 2857-BR

In accordance with your request sent by fax dated June 1 2, 1 996, we are sendingyou herewith, on an informal basis, the cost-benefit data on the project togetherwith a final economic evaluation of the FEPASA Rehabilitation Project, forverification and acceptance by the World Bank, as an integral part of thecompletion report.

Sincerely,

s/Fernando A. Ramos GoncalvesSuperintendent, Business Management

- 38 -

FINAL ECONOMIC EVALUATION OF THE SAO PAULORAILWAY REHABILITATION AND MODERNIZATION PLAN (PRMF)

Introduction

For the purposes-of the PRMF project completion report an economicevaluation has to be made of the project based on the results obtained during itsimplementation.

The criterion for determining the benefit was the transport cost saving onthe traffic volume in the situation with and without the project taking into accounta loss of traffic to road transport, as described in the Staff Appraisal Report (SAR)of 1987.

Points concerning the context in which the project was carried out

1. As already noted in the Reappraisal of the project prepared by RobinCarruthers for the World Bank in 1990, a number of adverse factorsimpacted the project in its initial phase, including:

(a) pronounced economic instability during the period 1986-90, whichgreatly increased project costs (point 2 of report);

(b) rapid deterioration of the permanent way, owing to the time whichelapsed between the determining of the emergency needs and actionto take care of them (point 3 of report);

(c) the need to change the scope of the project as a result of theresource constraints imposed by the higher costs and action in criticalsituations which could not wait for the scheduled measures in theproject (points 2, 3 and 5);

(d) the appreciable reduction in traffic demand due to the prevailingeconomic situation in the country (point 5).

2. Of the factors listed above, those referred to in (a), (b) and (d) persisted upto 1995, while in addition the BNDES (National Bank for Economic andSocial Development) only actually provided US$31.2 million of theUS$107.8 million it was originally committed to contribute, which meantthat the Sao Paulo State Government had to make up the difference tocomplete the project after its reappraisal in 1 991.

- 39 -

These circumstances, together with the reduction in scope already referredto, had the effect of extending the time needed for implementation of the project.

3. The funding allocated for permanent way and rolling stock maintenance wasnot sufficient to keep up the maintenance of the other premises andequipment not covered by project funds, as of 1 987.

Given these circumstances the economic evaluation of the project becomesa rather complex undertaking owing to the significant changes in the assumptionsunderlying its implementation; as a result, the direct evaluation, i.e. comparison ofthe actual transport cost data with those estimated with or without the project inorder to determine the benefit from it, produces an inconclusive rate of return witha net present value 6.5% above the investment made.

Alternative evaluation approach

An alternative for obtaining a conclusive evaluation of the project using theappraisal parameters is to adopt the approach that the evaluation of the conditionswithout the project can be revised, bearing in mind that:

* FEPASA would not maintain the production levels without the projectdescribed in the SAR, but would post an appreciable drop to a level about23% lower than that achieved in 1995;

* the transport volumes without the project would be similar to those of thefirst four years, as would the transport costs;

* as of the fourth year without the project, there would be a drop in the nexttwo years equivalent to that which actually occurred in 1 989 and 1990,followed by a rise in transport costs on the same scale as the actualincrease, given the economic conditions prevailing in 1990, the impact ofwhich was felt as of 1991;

* the costs of transfer to road transport would remain the same in relation tothe transport costs identified in the SAR for the alternative without theproject.

For the situation with the project, the transfer cost was considered to beidentical with that without the project up to 1990, then as of 1991 the roadfreight rate is applied to the transport estimated and not effected by rail.

These criteria provide reasonable basis for comparing the effects of theproject in relation to what could be expected without it, as in the annexed table,which indicated an IRR of 19.78% and a NPV of US$58.28 million.

- 40 -

Other exercises to provide a numerical demonstration of the positiveimpacts of the project in terms of rate of return are inconclusive.

FEPASA Rehabilitation and Modernization Plan

Evaluation based on modified Without Project dataTraffic Without Project = Actual Traffic up to 1990 followed by a drop in 91 and 92 to the 89/90 volumeTransport Cost Without Project = Actual Unit Cost applied to traffic volume without the project at the samerates of increase as the actual costs (Base = 1 989)The transfer costs are the percentage of transport cost obtained from the original SAR data (situation withoutproject)

Data With ProjectRail traffic and Transport Cost = actual figures up to 1 995Road Transfer: up to 1990 equal to situation Without Project, as of 1991 = t(Estimated - t Actual) x RoadFreight

Year Inve Rail Traffic Transport Cost Transfer Cost Net Benefitstment (US$ millions)

w/Project wout/Project w/Project wout/Project w/Project wout/Project1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000t I

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010 IIIII

TOTAL 237.30 NPV58.28

I ~~~IRR 19.78%

I,'

IBRD 28A10

cc.J Ad2~2ouot .- B R A Z I L

GOi B R A Z I L g AS < '°° SAO PAULO STATE RAILROADSB R AZI ,

Ubo.*d.o DOUBLE TRACK SINGLE TRACK SINGLE TRACKELECTRIFIED ELECTRIFIED NON-ELECTRIFIED

FEPASA:

C k _9<F-p _. / \ | | | Metn GuogeSl (100m)A Ar.o ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Brood Guoge (1 .60m.)

4405025024 AXecDc t | | @ | | ' * * Duel GuJge (1.00,D1 60m.)

RFFSA

Metric Guage (10.m)

MATO. BroOd Guoge (1.60m.)

GROSSO z Rivers

DO SUL State Bound=war - - S Boundaries

Tm~~~~~~ Ull S'. &, R.&

fX Aiino°stece < > t < g, ~~~~~MINAS GERAIS

24 . Ie~~~~~~~~~ 24

no.~~~~~~~~~~~~X.~S A".

P A R A N A S G ,' '-

0 20 40 60 eo 8loo 120 140 1600/-;:ancd / l m2

0~ ~ ~ ~~-d. 20 4G0e-loao ,\ R;/ aJ

MILES ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~D

MILES rb /< . _ fri c / X ~~~~~~~~ATLANTIC OCEAN

r"fs m .~~~2. rrl hMaCDmld Gh ed.Emos

.. d.n-,on, .~~~~~~~~~~~~~~~~~~~~.. 50~~~~.,C

x~~~~~~? xe* dIA+. r 607 5-2

22 0 20 42 ~ 4N

02 ~~~~32- 52' [so,S

NCvEmIER 1996

IMAGING

Report No: 16117Type; ICR

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