Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 4660b-BR

STAFF APPRAISAL REPORT

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

November 11, 1983

Projects Department

Latin America and the Caribbean Regional Office

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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CURRENCY EQUIVALENTS 1,'

Currency unit = Brazilian Cruzeiro (Cr$)Cr,l.00 = 100 centavos

Cr$1.00 = US$0.002132

US$1.00 = Cr$469.15

MEASURES AND EOUIVALENTS

t (metric ton) = 1,000 kgs (2.205 lbs)kcal (kilocalorie) = 3,968 Btu (British thermal units)T.o.e. (ton oil equivalent) = 10.7 million kcal approx.kW (kilowatt) = 1,000 W (Watts)MW (Megawatt) = 1,000 kW

kWh (kilowatt hour) = 1,000 Wh (Watt hours)GWh (Gigawatt hour) = 1,000,000 kWhkV (kilovolt) = 1,000 V (Volts)kVA (kilovolt-ampere) = 1,000 VA (Volt-amperes)MVA (Megavolt-ampere) = 1,000 kVA

FISCAL YEAR

January 1 to December 31

1/ Estimated average exchange rate for 1983, used for basic data unlessotherwise indicated.

FOR OFFICIAL USE ONLY

GLOSSARY OF ACRONYMS

CAEEB = Companhia Auxiliar de Empresas Eletricas BrasileirasCEAL = Companhia Eletrica de AlagoasCEEE = Companhia Estadual de Energia EletricaCELESC = Centrais Eletricas de Santa CatarinaCELPA = Centrais Eletricas do Para S.A.CELPE Companhia de Eletricidade de PernambucoCEMAR = Centrais Eletricas do Maranhao S.A.CEMIG = Centrais Eletricas de Minas Gerais S.A.CEPEL = Centro de Pesquisa de EletricidadeCEPISA = Centrais Eletricas do Piaui S.A.CERON = Centrais Eletricas de Rondonia S.A.CESP = Companhia Energetica de Sao Paulo S.A.CHESF = Companhia Hidro Eletrica do Sao FranciscoCOELBA = Companhia de Eletricidade do Estado da BahiaCOELCE = Companhia de Eletricidade do CearaCOPEL = Companhia Paranaense de Energia EletricaCOSERN = Companhia de Servicos Eletricos do Rio Grande do NorteDENE = Department of Energy StudiesDNAEE = Departamento Nacional de Aguas e Energia EletricaEdF = Electricite de FranceEGTD = energia garantida por tempo determinado (interruptible

tariff)ELETROBRAS = Centrais Eletricas Brasileiras S.A.ELETROPAULO = Eletricidade de Sao Paulo S.A.ELETRONORTE = Centrais Eletricas do Norte do Brasil S.A.ELETROSUL = Centrais Eletricas do Sul do Brasil S.A.ENERSUL = Empresa de Energia Eletrica de Mato Grosso do Sul S.A.ESCELSA = Espirito Santo Centrais Eletricas S.A.FIJRNAS = Furnas Centrais Eletricas S.A.GCOI = Grupo Coordenador para Operacao InterligadaGI)P - Gross Domestic ProductGEER = Grupo Executivo de Eletrificacao RuralGGF = Global Guarantee FundGRF = Global Reversion FundHS = 'horo-sazonal' (time and seasonal) tariffICB = International Competitive BiddingI])B = Inter American Development BankINCRA = Instituto Nacional de Colonizacao e Reforma AgrariaINPC = National Consumer Price IndexITEE = Imposto Unico de Energia Eletrica (Sole Tax)L'IGHT = LIGHT-Servicos de Eletricidade S.A.MlE = Ministerio das Minas e EnergiaOPE = Orcamento Plurianual de EletricidadeORTN = Obrigacoes Reajustaveis do Tesouro Nacional (Treasury

notes)SEAP = Secretaria de Abastecimentos e PrecosSEPLAN = Secretaria de Planejamento da Presidencia da RepublicaSEST = Secretaria de Controle de Empresas Estatais

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.

I

BRAZIL

STAFF APPRAISAL REPORT

ELETROBRAS II POWER DISTRIBUTION PROJECT

TABLE OF CONTENTS

Page No.

1. INTRODUCTION ............................................... 1

2. THE ENERGY AND POWER SECTORS ............................... 3

The energy sector ..................................... 3Energy rescources ................................. 3

Energy demand and supply .......................... 3National energy policy ........................... 5

The power sector ...................................... 5

Policies and objectives .......................... 5

Organization ..................................... 6

Growth of demand and supply ...................... 6System expansion planning ........... i ............ 7Rural Electrification ............................ 7

Electricity revenues ............................. 8

Sector Finances .................................. 9

Bank participation in the power sector .... ....... 11

3. THE BORROWER ............................................... 12

Background ............................................ 12

Organization and management ........................... 13Financing Role ........................................ 14

Planning and budgeting ....................... 16

Policies and procedures ............................... 17

Training and Staff Relations .......................... 17

Accounting and Auditing ............................... 17

Appraisal and supervision capability .................. 18Finances .............................................. 18

Performance ...................................... 18

Forecast ......................................... 19

Performance indicators and reporting .................. 20

4. THE PROJECT ................................................ 22

Description ........................................... 22

Objectives ............................................ 22Characteristics ....................................... 22

This report is based on the findings of an appraisal mission which visitedBrazil during January-February 1983. The mission comprised Messrs. F. Ruberl

and J. M. Bakovic. It is also based on the findings of a post-appraisalmission which visited Brazil during July 1983. The post-appraisal mission

comprised Mr. J.M. Bakovic.

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TABLE OF CONTENTS (Continued)

Page No.

Selection of Beneficiaries ............................ 22Appraisal criteria ..................................... 23Costs ............. 23Implementation ......................................... 25Procurement ............. 25Disbursement ........................................ 26Environment ........................................... 26Social impact ....................... 26

Risks .................................................. 27Financial analysis ................. 27Economic analysis .. ............... 29

5. THE BENEFICIARIES ........................................... 31

6. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS .... ........... 33

ANNEXES

2 - 1 Ministry of Mines and Energy - Organization Chart.. 35

2 - 2/1 Power sector - Historical flow of funds ........... 36/2 - Proje!cted flow of funds ... ........ 37/3 - Average cost and revenue per kWh 38/4 - Historical cost of service 39/5 - Projected cost of service . 40/6 - Average monthly price per MWh 41

2 - 3/1 - Composition of sources of funds 42/2 - Distribution of revenues .43/3 - Assumptions used in financial pro-

jections .44

3 - 1 ELETROBRAS - Subsidiary and associated companies 46

3 - 2 - Organization Chart .47

3 - 3/1 - Historical income statements 48/2 - Historical flow of funds .49/3 - Historical balance sheets .50/4 - Historical financial indicators 51/5 - Foreign debt .52

3 - 4/1 - Projected income statements .54- /2 - Projected flow of funds .55- /3 - Projected balance sheet .56- /4 - Projected financial indicators 57

3 - 5/1 - Composition and distribution

of revenues .58/2 - Sources and applications of funds .. 59/3 - Financial monitoring indicators..... 60

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TABLE OF CONTENTS (Continued)Page No.

ANNEXES (Continued)

4 - 1 Project cost estimates ........................... 61

4 - 2 Program and project cost estimates .... ........... 62

4 - 3 Estimated Disbursement Schedule .... .............. 63

4 - 4 Investment and financing plans .................... 64

5 - 1 Beneficiaries' General Data ..... ................. 65

MAPM - 1 Location of Projects (Map No. 17091) .

I

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BRAZIL

ELETROBRAS II Power Distribution Project

Project Summary

Borrower: ELETROBRAS (Centrais Eletricas Brasileiras S.A.)

Guarantor: Federal Republic of Brazil

Amount: US$250.6 million equivalent.

Terms: Repayable in 15 years, including 3 years grace at the Bank'sstandard variable rate.

Project Objective and Description:

The project would provide expansion of power distribution systems inseven different areas of Brazil. ELETROBRAS would on-lend the proceeds of theloan to seven different beneficiaries for subprojects covering subtransmissionlines (up to 138 kV) substations, distribution lines and associated transformers,low-voltage distribution, common connections, general services and relatedauxiliary equipment.

Benefits and Risks:

The expansion of the seven beneficiaries' distribution systems willprovide for extensions, strengthening and improvements, with emphasis on providingelectricity in rural areas and to low-income consumers. System losses will bereduced, repressed demand will be satisfied, and about 2 million new consumerswill be connected, thereby improving the quality of life of about 8 millionpeople. There are no special risks involved.

-- US$ Million-----ECstimated Project Costs Local Foreign Total %Base Costs 396.6 230.8 627.4 79.8Physical Contingencies (10%) 39.6 23.1 62.7 8.0Price Contingencies 32.7 62.2 94.9 12.1

Total Project Costs: 468.9 316.1 785.0 99.9

Front-end fee in IBRD loan - 0.6 0.6 0.1Total financing required 468.9 316.7 785.6 100.0

Financing PlanIBRD loan - 250.6 250.6 31.9

Cofinancing 66.1 66.1 8.4Local development banks 132.0 - 132.0 16.8Beneficiaries 336.9 - 336.9 42.9

Total Financing 468.9 316.7 785.6 100.0

The project costs are about 24% of the investment programs of the beneficiaries.

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Rate of Return:

The rates of return of the beneficiaries' investment programs vary from

about 10 to 32%.

Disbursements:------ US$ Million ---------------

FY84 FY85 FY86 FY87 FY88 FY89

Annual: 5.6 60.0 100.0 60.0 20.0 5.0

Cumulative: 5.6 65.6 165.6 225.6 245.6 250.6

I. INTRODUCTION

1.01 The Bank has made nine loans to the Brazilian power sector since1976 of which six have been for power distribution projects (para. 2.24).Three of these were made to ELETROBRAS (the holding and finance company forthe Brazilian power sector) for on-lending to power utility companies. Theseloans financed sub-projects that were, in effect, portions of time-slices ofthe beneficiaries' general investment programs for power distribution, andall these sub-projects emphasized supply to rural and low-income consumers.

1.02 For the first two of these loans, (1300-BR and 1538-BR) the Bankidentified, helped prepare, appraised and supervised the respective sub-projects. But starting with the most recent loan (2138-BR, approved in May1982), ELETROBRAS has taken over the Bank's identification, preparation,appraisal and supervisory functions (para. 2.24). This means that the roleof the Bank now consists in assisting ELETROBRAS in maintaining the requiredcapabilities, and in ensuring that the high technical and financial qualitynormally expected in Bank financed projects is maintained.

1.03 There are various advantages in this new modus operandi, both forELETROBRAS and for the prospective beneficiaries, and, therefore, for thewhole of the Brazilian power sector. If the Bank were to continue withdirect appraisal and supervision of such sub-projects, staff limitationswould make it impossible to appraise and supervise the large number ofsub-projects currently envisaged: there were five subprojects in loan2138-BR, seven subprojects have been included in the loan now proposed an,'ELETROBRAS will identify further sub-projects for possible future loans,Thus the assumption of the Bank's appraisal and supervision functions byELETROBRAS provides a strong multiplying effect for the Bank's influence.

1.04 ELETROBRAS and prospective beneficiaries alike appreciate thebenefits of the application of Bank techniques to technical, organizationaland financial problems, and are anxious for a wider application of the Bank'sinfluence. Also, the greater involvement of ELETROBRAS in power distributionprojects will counter-balance the natural tendency (in resource allocationdecisions) to neglect the more pedestrian power distribution projects infavor of the more glamorous and sometimes grandiose generation andtransmission projects. Thus we are encouraging a healthier balance in thedevelopment of the power sector as a whole.

1.05 The Project now proposed for Bank financing consists of sevensubprojects. These are to be carried out by 7 beneficiaries, and representportions of time-slices of their current investment programs. Theseinvestment programs are designed to improve and expand the beneficiaries'distribution systems, with emphasis on providing electricity in rural areasand to low-income consumers. The programs provide for the use of consultantsas appropriate (para. 4.01), and the appraisal reports of ELETROBRAS containrecommendations for institutional improvements where needed (para. 4.02).

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1.06 The total project cost, including physical and financingcontingencies and front-end fee in IBRD loan, is about US$785.6 million.Non-borrowing sources will provide for about US$336.9 million, localborrowing for about US$132.0 million, and the proposed IBRD loan for US$250.6million. This leaves a gap of about US$66.1 million that should come fromforeign commercial banks by way of cofinancing (para. 4.22).

1.07 In line with the role of ELETROBRAS, this appraisal has focused onELETROBRAS' financial situation and its capability for assuming the functionspreviously carried out by the Bank. In general, the finances of ELETROBRAS,which reflect the sector finances, show a deteriorating trend which will bereversed during the project period. The project is technically,economically, financially, and institutionally well prepared. Most of thebeneficiaries will benefit from the institution-building influence of the project (paras. 4.01-4.07), and all subprojectscover areas where there will be a significant social impact.

1.08 As for ELETROBRAS' capability, the progress of the previous loan(2138-BR) and the completion of the appraisal reports are evidence of asatisfactory situation. It will, of course, be necessary to monitor projectimplementation as usual and to continue providing backup for preparation offurther projects and for supervision of those under implementation, but thereis no reason to expect that implementation would raise problems.

1.09 A proposal for another loan to ELETROBRAS is being considered bythe Bank simultaneously with this one. It is for Rural Electrificationprojects in the states of Minas Gerais and Parana, and it is the first of itskind for Brazil.

2. THE ENERGY AND POWER SECTORS

The Energy Sector

- Energy Resources

2.01 Brazil's energy resources comprise a vast hydropotential, as wellas oil shale, coal, nuclear fuels and biomass. Proven oil and gas reservesare limited. Of the indigenous energy resources only hydro and biomasscurrently play a significant role in the country's energy supply mix, thoughoil production has increased significantly in the last three years andcurrently covers about 24% of market requirements. The potential forhydroelectric development is estimated at about 213,000 MW of which about32,900 MW had been developed by the end of 1982 and about 10,000 MW ofadditional hydro capacity are scheduled to be commissioned by 1987.Presently the government is making important efforts to both increase oilproduction and substitute alcohol, coal and other energy sources for oil.The alcohol program, introduced in 1975, has already resulted in an averagealcohol content in automotive fuel of 19% (1980) and it is expected that by1985 it will have risen to 39%. Coal now represents about 4% of the energysupply and, by using it in coal-fired thermal power plants and in industry,the government expects that by 1987 it will provide 6% of the total energysupply. Brazil is also developing a nuclear generating capacity which shouldhave an important role in electricity generation beyond the year 2010, whenmost of the economic exploitable hydro resources would be already utilized.Efforts are also being conducted for a more intensive utilization of otherenergy resources, including burning wood and sugarcane bagasse forelectricity generation in isolated areas.

- Energy Demand and Supply

2.02 The table below illustrates the structure of Brazil's primaryenergy balance and final use of energy by sectors in 1981, and compares theseto the 1976 figures. As may be seen, even though oil production hasincreased 30% between 1976 and 1981, approximately one third of energyrequirements are still met through imports, thus reflecting the vulnerabilityof the economy to fluctuations in foreign oil supplies and prices. Never-theless, oil participation in the energy balance has decreased from 47% in1976 to 40% in 1981 mainly due to the increasing utilization of alcohol whoseshare in the country's energy supply grew from 7% in 1976 to 10% in 1981.

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BRAZIL - ENERGY BALANCES FOR 1976 AND 1981*

1976 1981_ TOE x 10 % TOE x 1O0 %

SUPPLY

TOTAL SUPPLY 109.5 100 138.1 100

Production 70.1 64 94.4 68

- Petroleum products 9.9 9 12.8 9- Coal 1.6 1 2.7 2- Hydroelectricity** 24.0 22 37.4 27- Firewood 27.2 25 27.6 20- Plants and animal fuels 7.2 7 13.5 10- Others 0.2 - 0.4 _

Imports 43.3 40 45.4 33

- Petroleum products 41.1 38 42.3 31- Coal 2.2 2 3.1 2

Exports -3.0 -3 -0.7 -

Stock Changes -0.9 -1 -1.0 -1

TRANSFORMATION LOSSES 8.4 - 13.2 -

NON-ENERGETIC USES 6.3 - 10.2 -

FINAL USES BY SECTOR

TOTAL FINAL USES 94.8 100 114.7 100

- Residential and commercial 25.1 26 28.9 25- Transport 22.5 24 24.5 21- Industry 36.7 39 46.0 40- Agriculture 5.0 5 6.6 6- Others 5.5 6 8.7 8

* Source: Balanco Energetico Nacional, Ministry of Mines and Energy (MME),1982.

** Converted at a rate of 1 GWh = 290 TOE.

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- National Energy Policy

2.03 National energy policy has the following main objectives:

(a) conservation and rational use of energy to encourage maximumefficiency in the utilization of energy resources;

(b) substitution of imported by domestic energy sources, especially"renewables", wherever technically and economically feasible, toreduce dependence on imported petroleum and coal;

(c) exploitation of existing domestic energy resources andintensification of search for new sources; and

(d) promotion of electricity usage through extension of distributioncoverage in urban and rural areas.

The Power Sector

- Policies and Objectives

2.04 The power sector has a major role to play in achieving the nationalenergy policy objectives listed above. Pricing is of key importance inconservation, and in this area progress has been made through marginal costtariff studies undertaken under loans 1300-BR and 1939-BR. Recent legisla-tion permits the implementation of the results of these studies, which isexpected to take several years. In August 1982 differentiated tariffs forpeak and off-peak demands, and for wet and dry periods, were offered, on anoptional basis, to high-voltage consumers. On average, current tariffs wouldhave to be increased by 40% - 50% to catch up with long-run marginal costs.This gap will progressively narrow with the implementation of the tariffagreement reached between the Bank and the Government (para.2.19 & 2.20).

2.05 The energy policies in the power sector give emphasis to the use ofindigenous primary energy resources (hydro power, coal, and uranium; see'para. 2.13). The scope for further substitution of oil in power generationis presently very limited in the main interconnected systems (in 1981 96% ofenergy generated was hydro) but oil-fired plant is still required for someisolated systems, specially in the North. Current expansion programs assumethat increase in demand up to the year 2000 will be met mainly by hydroplants and that coal and nuclear plants will mainly provide the requiredenergy reserve for dry hydrological conditions. The substitution policy atthe consumer level is based mainly on replacing the widely used liquidpetroleum gas (LPG) fueled appliances (mainly cookers and water heaters) withelectric appliances. This substitution is slow, due to the consumer'sreluctance to invest in new appliances, and expensive, given the largeinvestments required for expanding of distribution networks.

2.06 Present government plans also provide for the gradual substitutionof electricity for petroleum products in the transportation sector (railwaysand urban transport) and in industry ("Eletrotermia" program), takingadvantage of existing hydro capacity. Interruptible service at low rates iscurrently being offered in Sao Paulo, Rio de Janeiro and Minas Gerais, toinduce industry to increase its use of electricity. Autoproducers withoil-fired generating capacity are also being induced, through tariffs, toincrease their purchases of electricity generated from hydro sources.

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- Organization

2.07 The institutional develcpment of the Brazilian power sector overthe last 50 years has been characterized by progressive nationalization andgrowing centralization, resulting in the consolidation of a few large andhundreds of smal'l utilities into E. relatively compact structure of state andfederally-owned utilities. The power sector is under the jurisdiction of theMinistry of Mines and Energy (HME) (See Annex 2-1), created in 1960. Sincethen the drive has been towards increasing sector efficiency and coordinationwith the establishment of Centrais Eletricas Brasileiras (ELETROBRAS) in 1962(para. 3.01) and the strengthening of the Departamento Nacional de Aguas eEnergia Eletrica (DNAEE) as regulatory agency. The aim has been to combine,as far as possible, regionalization of operations with country-wideoptimization.

2.08 Though compliex and one of the largest in the world, the electricpower sector is well organized and past policies have generally been wellformulated and applied. Decree 60,824 of June 7, 1967 established thecurrent sector organization under which DNAEE performs regulatory functions,grants licenses for generating plants, assigns concessions, sets tariffs(after approval by the Ministry of Planning), and approves expansion plans.ELETROBRAS serves as a utility holding company, administers public funds foruse by its subsidiaries and by staLte-owned utilities and coordinates externalborrowings. ELETROBRAS also analyzes expansion plans for major generatingand transmission facilities and cc'ordinates and supervises the public powersystem (See Chapter 3).

2.09 Government guidelines contained in the 1967 decree mentioned abovepromote consolidation of public electricity services in the individual statesinto single state-owned utilities. This has resulted in the absorption bythe major state-owned companies of many municipal and privately ownedutilities. Despite this process of consolidation, the sector still comprises600 concessionaires, of which 25 are state companies and the rest smallmunicipal and private undertakings,

- Growth of Demand and Supply

2.10 During the 1977-1981 period electricity production by the publicsupply system rose from 100,000 GWh to 140,000 GWh, at an average annualgrowth rate of 8.7%. The 1981 national average production of electricity was1,011 kWh per capita. The industrial sector uses 57% of the electricity andthe residential sector 20%. Due to the high industrial and urbanconcentration in the states of Sac, Paulo and Rio de Jane:iro the geographicaldistribution of demand is uneven. Less than 60% of Brazilian households areelectrified but in the rural area about 19% of dwellings are electrified; therural electrification ratio goes from 40% in the state oi Rio de Janeiro toan insignificant 1% in Bahia.

2.11 Comprehensive projections of electricity requirements based ondetailed sectoral analysis, prepared by ELETROBRAS in 1982 showed that demandwas expected to grow 9.0% p.a. in 1983; about 11% p.a. in 1984-1988; and 7.3%p.a. in the period 1988-1996. Revised demand forecasts, which take intoaccount the increases in electricity consumption observed through mid-1983,show slower growth expectations (about 10% p.a. for 1984--1988), and ongoingrevisions that should be completed in early 1984, may reasonably be expectedto further lower the above figures, at least for the next two years.

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- System Expansion Planning

2.12 ELETROBRAS has the primary responsibility for the coordination ofplanning in the power sector and for the preparation of system generation andtransmission expansion plans. Distribution planning is the responsibility ofeach individual utility company. ELETROBRAS is subject to the supervision ofDNAEE in the preparation of its plans, and the plans themselves are subjectto the formal approval of the Ministry of Mines and Energy. However, inpractice, DNAEE tends to concentrate on tariff planning and on the sectorbudgeting exercise, which provides financial projections for the ensuingthree years. In the last two years the responsibility for approving theinvestment programs of public utilities has been exercised by SEST/SEPLAN(para. 3.12). Brazil's ongoing construction program of generating plants andtransmission lines is based on ELETROBRAS' earlier demand forecasts which arenow seen to have been too optimistic and to have assumed an availability offinancial resources to the sector which failed to materialize fully. Thisprogram resulted in commitments for large generating plants (Itaipu, Tucurui)and the corresponding large transmission systems which are now nearingcompletion but which leave a significant financial burden.

2.13 In 1982 ELETROBRAS prepared a generation and transmissiondevelopment plan to meet demand through the year 2000, in the so-called"Plano 2000". This plan, which provides a firm construction program for theperiod 1983-1990, a tentative construction program for the period 1991-1995as well as a reference program beyond 1995, is the result of a comprehensiveplanning process which includes evaluation of energy resources, inter andintra sectoral coordination, continuous methodological research and follow-upof program implementation. It focuses on the problems originated by the sizeand complexity of the Brazilian Power Sector in the context of the mostcritical problem confronting the Energy Sector: its heavy dependence on oilimports. Current planning, corresponding to a more mature stage ofELETROBRAS' planning, is well conceived and is being well implemented. Basedon the national energy policy, Plano 2000 taps only indigenous resources -hydro, uranium and coal - for expanding the generation system. The resultinggeneration expansion plan for the period 1983-1990 recommends installingabout 34,700 MW of generating power, of which 89% would by hydro, 2%coal-fired thermal and 9% nuclear. A comprehensive revision of the MasterPlan study is scheduled for 1986, but partial revisions have already beenneeded due to lower demand growth rates being observed in 1982 and 1983compared to previous expectations (para.2.11). Resulting from theserevisions, construction has been slowed down when economically feasible inthe major plants under construction. Despite this, excess installed capacityis expected until 1986-88.

- Rural Electrification

2.14 While there has been good progress in rural electrification in themore developed states, coverage for the whole country is still poor (about19%) as compared with the urban coverage (about 85%). At the national level,rural electrification is promoted by the Grupo Executivo de EletrificacaoRural (GEER), supervised by the Ministry of Agriculture and by ELETROBRAS'distribution department. However, there is no coordination between the

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activities of these two entities. This lack of a common national ruralelectrification program under a single agency has been a major obstacle toprogess in this neglected area of the sector, but in connection with a RuralElectrification project in Minas Gerais and Parana proposed for IBRDfinancing, the Federal Government has started preparation of measures forcoordinating Rural Electrification between all the agenci'es concerned. TheSAR on Rural Electrification gives further details on this matter.

- Electricity Revenues

2.15 The regulation of electricity rates in Brazil is the responsibilityof the Ministry of Mines and Energy which exercises its authority throughDNAEE. The Water Code of 1934, as amended, established the principle ofservice-at-cost plus an adequate return on capital. After 1971, powercompanies were allowed to earn, at DNAEE's discretion, a rate of returnbetween 10 and 12% on remunerable investment.1 / Since 1981 DNAEE'sresponsibility regarding sector tariffs has been reduced by effectivelytransferring the authority for tariff approval to SEAP/SEPLAN, which reviewsthese within a broader policy context.

2.16 Consumer bills contain the following charges (See Annexes 2-2/3 and2-3/2):

A. The tariff, which on a nationwide basis, provides about80% of revenues collected from consumers.

B. The sole tax (IUEE) on residential, commercial and smallindustrial2 / consumer bills, which provides about 12% of sectorrevenues. Forty percent goes to federal sector agencies, fiftypercent to state and federal district utilities, and ten percent tomunicipal utilities; and

C. The Compulsory Loan (8% of revenues), an obligatory investmentscheme under which industrial consumers using more than 2,000 kWhper month acquire ELETROBRAS bonds (20-year maturity yielding 6%annual interest and revalued through monetary adjustments).

2.17 A single tariff structure is applied to all interconnected systems,and slightly higher tariffs are applied in isolated thermal systems. Until1980, the Global Guarantee Fund (GSF), financed through a surcharge of up to2% on assets in operation, was used in the tariff equalization process tosupplement the earnings of eligiblea utilities. In recent years, the sectoras a whole has been obtaining rates of remuneration lower than the 10%allowed by law (para. 2.19) and in January 1981 the Brazilian governmentexpanded the role of GGF, from a tariff equalization instrument to a rate ofremuneration equalization instrument. Thus at present the annual guaranteequota is calculated based on the difference of remuneration in relation tothe average remuneration of the sector.

1/ Remunerable investment is equa:L to net revalued assets plus an allowancefor inventory and net working capital, plus (or minus) the differencebetween the prior years' ac:tuaL and allowable return, less contributionsand grants.

2/ Industries using less than 2,000 kWh per month.

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- Sector Finances 1/

2.18 Over the last ten years, sector investments increased considerablybecause of major electricity generation projects such as Itaipu, the nuclearprogram and Tucurui, while sector revenues did not keep pace with the rate ofgrowth of investment. As a result of a debt service that took increasingportions of the internally generated funds, sector finances show a fundingcomposition with increasing reliance on borrowings. Since the majorhydroelectric plants under construction and their transmission systems willbegin to be commissioned in the next two years (Itaipu in 1984 and Tucurui in1985) and because there will be an excess of installed capacity owing to aslowdown in market growth (para. 2.11), the pace of investment will drop inthe coming years, providing the sector with some financial breathing spacefor a reversal in past financial trends. Thus, from 1982 to 1986,consumer-based contributions are expected to increase from 3% to 35%, andborrowings are expected to be reduced from 87% to 57% of total financialrequirements (see Annex 2-3/1, 2-2/2). Notwithstanding the decreasingreliance on borrowings as a percentage of total sources, the sector will needabout US$11.4 billion of borrowings during the 1983-87 period, as shown inthe following table which summarizes Annex 2-2/2:

SECTOR'S PROJECTED FINANCING SOURCES (1983-87)(in mid-83 prices)

Cr.billion US$million %Net consumer-based contributions 3,046 6,493 33.3Equity contributions 727 1,550 8.0non-borrowing sources 3,773 8 042 41.3

Borrowings 5,355 11,414 58.7Total sources of funds 9,128 19,456 100.0

2.19 Under previous Bank loans, borrowers were required to maintaintheir revenues, including transfers from the GGF, at levels consistent withsound financial practice and in conformance with Brazilian legislation forthe sector (para. 2.15). However, in the 1978-1981 period most of the Bank'sborrowers or beneficiaries had a rate of remuneration which was below the 10%allowed by Brazilian law. Because of concern over the deterioration ofsector finances, a special agreement was reached with the BrazilianGovernment in September 1981 which provided the following:

(a) an annual rate of remuneration, for the electric power sector as awhole, of 10% of the current net value of remunerable investments(as defined by present Brazilian law), and the recovery of pastshortfalls in achieving such rate of remuneration since 1978,should be attained as soon as possible;

(b) the Brazilian Government would carry out a program of increases inthe level of total charges per kWh to the final consumer; suchincreases to be not less than 3% in real terms in 1982 and 5% ineach year thereafter, until such 10% rate of remuneration has beenachieved and shortfalls have been recovered;

(c) the above increases would be achieved through a series of quarterlytariff adjustments;

1/ See Annexes of group 2.

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(d) each of the Bank borrowers and beneficiaries would maintain everyyear a rate of remunerat:ion at least equal to that year's averagerate for the sector;

(e) the Government of Brazil would consult with the Bank and wouldprovide periodic reports on the execution of such program; and

(f) the Bank would not enforce the covenants in its loans relating torate of remuneration as long as the Brazilian government and itsagencies and power companies comply with the above provisions.

2.20 In 1982, the first and second quarterly tariff increases wereproperly carried out, on the dates and in the percentages established in theagreement. However, the third and[ fourth increases were delayed by twomonths and by seven weeks, respect:ively. These delays resulted in aboutUS$280 million of foregone revenues for the sector, and the average tariff inreal terms was about 12% lower in 1982 than in 1981. The Braziliangovernment made equity contributicins to the power sector to compensate forthe foregone revenues caused by the delays in tariff increases. To addressthese problems, in meetings held in Washington before negotiations, theBrazilian Government agreed to amend the September 1981 agreement in thefollowing manner:

(a) the Government undertakes to achieve the following annual rates ofremuneration for the sector as a whole: not less than 5% in 1984,6% in 1985, 7% in 1986, 9% in 1988 and 10% in 1989 and thereafter,and failure to achieve these targets would allow the Bank tosuspend disbursements on. all outstanding loans to the power sector;

(b) to achieve the agreed rates of remuneration, in 1984 and 1985tariffs would each year be increased by 5% in real terms, throughquarterly tariff increases of which the February and May increaseswould each provide half of the 5% real increase and the followingtwo increases would just adjust to inflation; and

(c) in January 1986, the Bank and the Government would meet todetermine what tariff actions and other measures would be requiredin 1986 and future years to achieve the agreed rates ofremuneration.

2.21 Financial projections for the sector show that the agreed tariffincreases for 1984 and 1985, complemented by cost reductions ensuing from theGovernment's policy to keep wage increases and industrial price increasesbelow inflation levels (as measured by the INPC), will allow achieving theagreed rates of remuneration, and will result in progressive recovery ofsector finances. However, a new factor in the operating costs of theBrazilian power sector will be the energy purchased from the ItaipuBinational entity, which is expected to start commercial generation ofelectricity in 1984. The Brazil-Paraguay agreement for the construction ofthe Itaipu plant established a tariff scheme based on the debt service. Asan increasing portion of Itaipu financing in recent years has been short-termfinancing, a tariff for the bulk sale of electricity based on the debt

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service would mean high tariffs at the beginning and low tariffs at the end.Because the present binational agreement will most likely be revised, iin thefinancial projections the cost of the Itaipu energy has been considered equal

to the bulk electricity price in the South-Southeast region (US$mills14.5/kWh in 1984), with an annual real increase equal to that applied tosector tariff levels. Even though this price is much lower than the pricecorresponding to an opportunity cost of capital of 11% (US$mills 35/kWh), itstill means that a growing percentage of sector revenues (1.2% in 1984 and8.2% in 1987) will go towards paying for Itaipu energy. During negotiations,the Government agreed that if Itaipu tariffs are increased above the forecastlevels, the Government will promptly take all measures required to offset theensuing cost increases and ensure that the agreed rates of remuneration areachieved (para.6.0 3(e).

- Bank Participation

2.22 Since 1949, the Bank has made 35 loans to the Brazilian powersector, amounting to about US$1.9 billion. Most have been for hydroelectricplants and associated transmission facilities in the Southeastern andSouthern regions. Bank participation has also contributed to sectororganization and planning and has facilitated foreign commercial financing tothe sector. Eight project performance audit reports on nine power plantsand five distribution projectsl/ have been distributed to the ExecutiveDirectors. These reports conclude that, despite construction delays and costoverruns in some cases, the projects were substantially successful.ELETROBRAS' performance in on-going projects is satisfactory.

2.23 The most recent loans have been mainly for transmission anddistribution projects, as shown in the following table:

Loan No. Date Borrower Project Purpose2138-BR May 1982 ELETROBRAS Distribution expansions

(COSERN, COELCE, CELPE, CELPAand ENERSUL)

1939-BR January 1982 ELETROBRAS Electric Power SystemCoordination

1824-BR March 1980 CEEE Distribution expansion1721-BR May 1980 COPEL Distribution expansion1538-BR May 1978 ELETROBRAS Distribution expansion

(CEMIG, ESCELSA and CELESC)1343-BR January 1977 ELETROSUL Transmission expansion1300-BR May 1976 ELETROBRAS Distribution expansion

(COELCE, CELPE and COELIBA)1257-BR May 1976 COPEL Distribution expansion

2.24 The proposed loan would be the sixth loan to ELETROBRAS (after1300-BR, 1538-BR, 1939-BR, 2138-BR and the loan for the Rural Electrificationproject currently under consideration), and the second in which ELETROBRAShas the responsibility for appraisal of the sub-project and supervision ofthe beneficiaries.

i/ Sec M 75-646 of September 4, 1975; Sec M 77-532 of June 28, 1977;Sec M 789-34 of January 16, 1978; Sec M 79-82 of February 12, 1979;Sec M 79-756 of October 23, 1979; Sec M 79-757 of October 23, 1979;Sec M 79-905 of December 29, 1979; and Sec M 81-532 of June 22, 1981.

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3. THE BORROWERBackground

3.01 ELETROBRAS - Centrais E:Letricas Brasileiras S.A. - was created in1962 by Law No. 3890-A as a vehicle for consolidating existing public utilitiescentralizing management of the sector and encouraging orderly regional expansionand long-term growth. ELETROBRAS is a mixed economy corporation, operatingunder the jurisdiction of the Min-istry of Mines and Energy (MME) and theregulatory authority of DNAEE (para. 2.07). Under law, at least 51% of thecompany's voting stock must always be owned directly or indirectly by theGovernment of Brazil, and currently the Government holds 99.6% of total companyshares and 100% of voting (common) stock. In addition to common stock, companyequity includes Class A preferred shares owned by state, municipal and othershareholders and Class B shares of which non-governmental shareholders own 20%(Preferred shares are not convertible and have no voting rights, but havecertain prior rights in the distribution of capital and dividends.)

3.02 Commencing operations in 1962, ELETROBRAS gradually achieved itscurrent position in the electric power sector by absorbing existing federallyowned utilities and acquiring over time several foreign electric powercompanies operating in Brazil, including subsidiaries of the American andForeign Power Co., which had a strong presence in Brazil. Among the federalutilities transferred to ELETROBRAS were two regional generation andtransmission companies -- FURNAS Centrais Eletricas S.A. servicing theSoutheast and CHESF (Companhia Hidroeletrica de Sao Francisco) servicingthe Northeast. Later, two new regional subsidiaries were formed -- in 1968ELETROSUL (Centrais Eletricas do Sul do Brasil S.A.) responsible for theSouthern region and Mato Grosso do Sul, and in 1973 ELETRONORTE (CentraisEletricas do Norte do Brasil S.A.) responsible for the Northern region.

3.03 In addition to the four regional subsidiaries, ELETROBRAS also ownsESCELSA (Espirito Santo Centrais Eletricas), the power distributor for thestate of Espirito Santo in the Southeast. In January 1979, ELETROBRAS acquiredan 83% participation in LIGHT - Servicios de Eletricidade S.A. from BRASCANLtd. of Canada. LIGHT was Brazil's largest electricity distribution company atthat time, servicing the area of Rio de Janeiro and Sao Paulo. Since then ithas sold the Sao Paulo subsystem to ELETROPAULO, a mainly state-owned company.ELETROBRAS also holds the Brazilian Government's 50% interest in the ItaipuBinacional, the binational agency set up in April 1973 by the governments ofBrazil and Paraguay to build jointly the 12,600 MW Itaipu hydroelectricfacility on the Parana river.

3.04 ELETROBRAS' regional subsidiaries are responsible primarily forgeneration activities and high-voltage transmission systems (above 138 kV)covering several states. They act as bulk suppliers to state and municipalutility companies which generally have responsibility for sub-transmission(69-138 kV) and electricity distribution (up to 69 kV). Since 1967, Governmentpolicy has been to consolidate as far as possible local companies and servicesat the state level under the state utility companies. In line with thispolicy, any existing distribution activities under ELETROBRAS ownership aregradually being transferred to the state companies. In addition to itssubsidiaries, ELETROBRAS has a minority participation (usually below 15%)

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in most of the state and municipal companies of the electricity sector. A list

of the subsidiaries and associated companies and ELETROBRAS' equity share ineach is attached (see Annex 3-1).

Organization and Management

3.05 ELETROBRAS is governed by an Administrative Board of Directorscomprised of the President (appointed by the President of the Republic ofBrazil); five Directors who are elected at the General Shareholders meeting fora term of 3 years and who head up the various directorates of the company(Coordination, Operations and Systems, Economics and Finance, Planning andEngineering, and Corporate Management); four Counselors, elected for a term of3 years, who are associated with public power companies under federalconcession and have experience in technology, finance or business management;and two Counselors, again elected for a term of 3 years, one representingpublic bodies other than the Federal Government and another representingprivate shareholders. Both Directors and Counselors can be reelected.

3.06 The Administrative Board of Directors sets business policy for the

company and specifically is responsible for investment and financing of thepublic utilities, domestic and international borrowing and approving the annualbudget. It also calls the General Shareholders' Meetings and is, of course,answerable to its principal shareholder, the Federal Government. An ExecutiveBoard, comprised of the President and the five Directors, manages the day today activities of the company under guidelines set by the Board. It also hasresponsibility for making policy recommendations to the Board.

3.07 The five directorates of the company are its operating arms andreflect the various services ELETROBRAS provides -- funding and investment,planning, technical assistance, managerial assistance and regional and inter-national coordination (see chart at Annex 3-2).

(a) The Directorate of Economics and Finance has responsibilityfor obtaining funds through its Department of Resources; alsofor the financial analysis of projects and investments, andbudgeting for the sector through its Department of Investments.Preparation of medium- and long-term financial planning isalso conducted in this directorate through the Department ofFinancial Planning.

(b) The Directorate of Planning and Engineering is responsibleprimarily for the technical planning on a regional and nationalbasis, as well as analysis of projects and investments fromthe technical and economic points of view. During the budgetprocess, this directorate reviews from a technical standpoint,the annual budget, proposed projects and general expansionplans of subsidiary and associated companies. Its Departmentsof Market Studies and Energy Studies conduct the technicallong-term planning for system expansion. Another departmentwithin this directorate is assigned responsibilities forrural electrification.

(c) The Directorate of Corporate Management helps subsidiariesand other sector companies to strengthen administrative and controlsystems.

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(d) The Directorate of Systems Operation is in charge of coordi-nating inter-regional sysl:ems and also supervises the regionalcoordinating groups (GCOI's) set-up to plan and achieve themost economic operation of interconnected systems. And,finally,

(e) The Directorate of Coordination is responsible for (i) relationsbetween sector and industry, (ii) international relationsconcerning energy and power, and (iii) conducting and supportingstudies for the development of non-conventional sources of energy,and maintaining a technological research center, CEPEL (Centro dePesquisas de Energia Eletrica).

3.08 ELETROBRAS as the parent company of the regional generating and bulktransmission companies, and through its minority participation in state utilitycompanies, acts as a holding company for the sector, providing a variety ofservices. It provides financing for the sectcr, analyzes investment and expan-sion plans of sector companies, plays an important role in budgeting for thesector, undertakes technical and financial plannling, provides technical andmanagerial assistance to sector companies, coordinates regional and inter-national activities and supports research on technology and energy sources.

Financing Role

3.09 Because of its function as holding company and financial agencyfor the Brazilian power sector, ELETROBRAS plays a pivotal role in thedevelopment of the sector and becomes heavily dependent on sector basedresources for its finances. This dependence coupled with its pivotal roletends to make ELETROBRAS' financial conditions mirror the trends in thefinancial state of the sector.

3.10 ELETROBRAS raises funds from four sources -- statutory resources,government funds, internally generat:ed funds and borrowings.

(a) Statutory Resources

ELETROBRAS receives and distributes funds from three statutorysources--the Sole Tax, the Compulsory Loan and the GlobalReversion Fund (para. 2.16).

(b) Government Funds

There are two sources of funding from the Federal Government--itsreinvestment of dividends and special appropriations. In the past,government policy has been to reinvest 95% of dividends it receivedfrom ELETROBRAS by increasing its share capital in the company. Forspecific projects, ELETROBRAS also receives special appropriationsfrom the Federal Budget or in special legislation.

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(c) Internally Generated Funds

ELETROBRAS' internal sources of funds are dividends paid on itsinvestments in subsidiaries and associated companies and payments

of interest and repayments of principal on loans advanced tothose companies. ELETROBRAS determines dividend payments forits subsidiary companies after review of operating results andother financial data. ELETROBRAS frequently reinvests its

dividends in support of capital needs of sector companies;under several Bank loans, it is obliged to do this. In some

cases, it is also converting debt service and outstandingloans to equity. In lending from its general resources,ELETROBRAS requires a period of 10 years with a 3-year graceperiod and a rate a interest of 10% (plus a tax of 0.5%) plusmonetary correction. Borrowers guarantee their loans with theirstatutory IUEE quotas (sole tax). Domestic or external borrow-

ings specifically re-lent to utilities carry the conditionsof the respective financing.

(d) Borrowings

(i) ELETROBRAS raises both domestic and foreign currency loans,under its own name in local and international markets, thenpasses on the funds to subsidiaries or associated companies.In addition to the bulk of ELETROBRAS' borrowing being passed tothe sector, the larger and more experienced companies havesometimes taken loans in their own names, especially whenrelated to specific projects.

(ii) Annual borrowings targets for ELETROBRAS are established on ayearly basis and in accordance with the sector budget approvedby SEST. Approach to the banks for obtaining offers issubmitted to specific controls by the Central Bank, which hasthe responsibility for organizing a queue of borrowers. Thecompany has become increasingly sophisticated in its fundingprogram in recent years due to the creation of the Departmentof External Resources, later renamed Funding Department,within the economic and financial directorate. That departmentseeks to diversify ELETROBRAS group sources of funding in theinternational market, studying potential new markets, newtypes of operations, both in the financial and capitalmarkets, and developing contacts with banks operating inthese new markets or new banks operating in traditional markets(like the regional banks in the Euromarket). This departmentis also responsible for raising local funds from Banco doBrasil, BNH (Banco Nacional de Habitacao), BNDE (Banco Nacionaldo Desenvolvimento Economico), Caixa Economica Federal, andFINEP (Financiadora de Estudos e Projetos). It also analyzesconditions of FINAME (Agencia Especial de FinanciamentoIndustrial) loans for ELETROBRAS subsidiaries, and seeks waysto familiarize international markets with its lesser-knowncompanies.

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(iii) ELETROBRAS consolidates its activities in the internationalfinancial market through traditional operations handled by itssubsidiaries and new types of operations handled directly bythe company. Concerning capital markets, foreign bond issuesin new markets are sought when conditions are favorable. During1982, in spite of all problems in the International Market,ELETROBRAS Group borrowed US$1,610 million, through supplier'sand buyer's credits (US$610 million) and currency loans(US$1,000 million). The most significant operations were theUS$300 million syndicated loan led by Bank of America forELETROBRAS and the US$70 million Club Deal managed by UNIBANCO,which was the first deal for ELETROBRAS in the InternationalMarket led exclusively by a Brazilian Bank.

Planning and Budgeting

3.11 ELETROBRAS has long been at the center of sector planning, both inthe short-term through the budgeting process and associated planning offinancial requirements and in medivum and long-term technical and financialplanning. Up until 1980, both subsidiary and state companies submitted theirbudget estimates to ELETROBRAS for review by the company's technical andfinancial analysts, who then established project and other budgetarypriorities. Once this information was aggregated and financial requirementsidentified, ELETROBRAS' recommendations were submitted to the Ministry of Minesand Energy, and to the Ministry of Planning for review and final approval,which was generally forthcoming.

3.12 Since 1981, however, ELEIROBRAS' responsibility for the budgetaryprocess has been reduced with the centralizing of decision-making in SEST (anagency of the Ministry of Planning). Projected budgets of the stateutility companies for 1981, for example, have been submitted directly toSEST for review (although ELETROBRAS was asked to comment on them). Pro-cedures have been streamlined in 1982 with ELETROBRAS taking responsibility forthe budget submissions of its subsidaries and associated companies.Uncertainties regarding expected economic development in the country have madethe budgeting process in 1983 even more cumbersome than in the past.Investment ceilings for 1983 were approved only in July 1983 (para. 2.12).

3.13 Besides budgeting and related financial planning ELETROBRAS hasprimary responsibility for the coordination of medium and long-term planning inthe power sector and preparation of system expansion plans. Formulation ofplans for system expansion is the responsibility of the Directorate of Planningand Engineering which has a technical staff comprised of experienced engineersand economists. Complementary financial planning is conducted within theDirectorate of Economics and Finance. ELETROBRAS relies on the regionalsubsidiaries to conduct planning studies in their respective areas, and stateutility companies also undertake independent planning exercises. The size andcomplexity of the sector require this division of responsibility, butit creates problems in coordination of planning. Moreover, there is no cleardivision of responsibility between DNAEE and ELETROBRAS with respect to overallplanning.

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Policies and Procedures

3.14 ELETROBRAS is regulated by a legal framework within which it hasdeveloped financial policies. The resource allocation process gives highestpriority to large projects considered strategic by the Brazilian government,and to the generation and transmission projects of ELETROBRAS. Under Loan2138-BR, ELETROBRAS has provided the Bank with statements of its financialpolicies and has agreed to discuss them with the Bank before making any majorchange. During negotiations it was agreed with ELETROBRAS to maintain thisagreement under the proposed new loan (para.6.04(a). The financial monitoringindicators corresponding to this agreement are shown in Annex 3-5/3.

Training and Staff Relations

3.15 Many of ELETROBRAS' professional staff have had experience in utilityoperations in the Brazilian power sector and some have had training in foreignutilities both in Europe and in North America. In some cases, staff memberscame to ELETROBRAS from the private sector where they had specialized trainingas is the case of members of the external funding department that came fromcommercial banks. ELETROBRAS has a very comprehensive and updated trainingprogram for personnel of Brazilian power utilities that also benefits its ownstaff members. This training program has been extended to other South Americanpower companies, members of the Interregional Electric Commission (CIER).

3.16 ELETROBRAS' professional staff is competent and well trained. In thepast no major difficulties had been encountered in recruiting qualifiedpersonnel. At present time, however, some difficulties in recruiting andmaintaining staff exist because, in order to fight inflation, ceilings forsalaries of top management of government-run entities have been established andsalary increases have not kept up with inflation.

3.17 In its fight against inflation, the Federal Government has estab-lished a zero-growth rate in the number of personnel of ELETROBRAS. With theseconstraints, in salary levels and number of personnel, ELETROBRASwill be obliged to improve the productivity of its staff. Currently thesituation is satisfactory; during supervision, the organizational structure andstaffing should be kept under review to ensure that work continues to behandled adequately.

Accounting and Auditing

3.18 The accounting system of ELETROBRAS is satisfactory and well suitedto ELETROBRAS' needs. Internal control functions are vested in the InternalAuditing Department which reports to the President. Internal Audit carries anadequate program of financial audits and follow-up on past recommendations.ELETROBRAS employs as its external auditors the firm Boucinhas, Campos & ClaroS/C which is acceptable to the Bank (para. 3.29(a)). In addition, the FiscalCouncil, appointed by the Shareholders' meeting, carries out external controlduties in accordance with Brazilian legislation.

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Appraisal and Supervision Capability

3.19 Over the last five years, and in collaboration with numerouspreparation missions from the Bank, ELETROBRAS has developed an adequatecapability for appraisal and supervisory work. Special teams from theengineering, the financial analysis, and the management departments work withthe relevant staff of prospective beneficiaries in identifying and preparingsub-projects (which are portions of time-slices of overall investment programs)on the same principles that would have been followed by Bank staff in similaridentifications and preparations (para. 4.02). Following the Bank's advice,the Corporate Management Directorate now participates fully in the appraisaland supervision of IBRD financed projects regarding institutional aspects ofthe beneficiaries. This effort is having better than expected results since ithas become a vehicle for intra-sector transfer of know-how: staff fromdifferent utilities and with great experience in their particular fields arecoordinated by ELETROBRAS in making the institutional diagnosis of eachbeneficiary, and a plan of action for institutional improvement during projectexecution is prepared in collaboration with the staff of each beneficiary.Its capability enables ELETROBRAS to continue selecting priority investments inthe sector and to arrange for the respective financing on the basis of soundtechnical, economic, financial and institutional principles. A pipeline forfuture similar projects is already in preparation.

3.20 These ELETROBRAS teams have completed the appraisal reports for thesub-projects and investment programs of all beneficiaries, and they includerecommendations for the institutional improvements of the beneficiaries identi-fied by ELETROBRAS during appraisal.

Finances I/

Performance

3.21 ELETROBRAS, as the holding company and development bank for thesector, handles the funds from statutory sources, government funds, internallygenerated funds, and borrowings (see para. 3.10). During the 1973-1982 period,about60% of ELETROBRAS' revenues originated from loan interest charges, and theremaining revenues came mainly from shareholding profits. The decreasingremuneration on investment (see Annex 2-2/4) and the heavy interest expensesfaced by the operating Brazilian power companies have also affected negativelythe net income 2/ of ELETROBRAS' subsidiary and associated companies. Theclearly defined negative trend for revenues from shareholdings was broken in1978 and in 1979, basically because of new accounting methods approved by theBrazilian Government, 3/ it continued its decline in 1980 and recuperated in1981 and 1982 (Annexes 3-3/1 and 3-5/1). ELETROBRAS' general and

1/ See group 3 Annexes.2/ In this analysis, net income is utilized without taking into account the

monetary correction.3/ The new law allows the holding company to register as revenues the net

increases in equity derived from operations and not only the dividendpayments.

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administrative expenses were on average 8% of total revenues for the period,while interest on debt increasred from 12% of total revenues in 1973 to 38% in1982, which reduced net income from 83% of total revenues in 1973 to 55% in1982.

3.22 Because of a decreasing consumer-based contributions in face of arelatively heavy investment program, the composition of ELETROBRAS' funds forthe 1973-1982 period shows an increasing reliance on borrowings (from 4% oftotalling sources in 1973 to 25% in 1982, see Annexes 3-3/2 and 3-5/2). Theresult of the increasing borrowing meant also an increasing debt service burden(exacerbated by harder capital market terms) on ELETROBRAS' finances which, inturn, diminished substantially its net internal cash generation available forinvestment (from 40% of total resources in 1973 to 29% in 1982). ELETROBRAS'degree of financial autonomy has also been affected during this ten-year periodsince the capital service 1/ coverage ratio decreased from 4.5 times in 1973 to1.9 in 1982). The net internal cash generation has been reinforced by other

consumer-based contributions 2/ which help to make up for a positive butdecreasing total consumer-based contribution to expansion (from 93% in 1973 to67% in 1982).

3.23 As a result of decreasing net income and increasing borrowings, thedebt portion in the capital 3/ structure of ELETROBRAS has been growing (Annex3-3/3) and, therefore, the debt/equity ratio has been increasing during theperiod from 44/56 in 1973 to 53/47 in 1982. The current ratio4 / which wasgreater than 1.0 in 1973, became 0.7 in 1974 and remained lower than 1.0 until1982. Loans to subsidiaries and associated companies had an increasing sharein assets (from 50% in 1973 to 63% in 1982) while shareholdings had adecreasing share (from 36% in 1973 to 37% in 1982).

Forecast

3.24 Financial projections for the 1983-1987 period show that ELETROBRASwill reverse the trend of increasing participation of borrowings in itsfinancing plans (only 20% in 1987). To achieve this objective, and becausegovernment equity contributions are not likely to be forthcoming, ELETROBRASwill have to rely increasingly on consumer-based contributions (see Annexes3-4/2 and 3-5/2). According to Brazilian legislation, the 40% of the sole tax,allocated to the Federal Government and previously passed to ELETROBRAS asequity contributions, is fully retained by the Federal Government since 1982.Similarly, the compulsory loan is supposed to terminate at the end of 1983.However, ELETROBRAS' projections assume that the compulsory loan willcontinue. During negotiations the Brazilian Government agreed that thecompulsory loan scheme would be continued during project execution (para. 6.03(d).

1/ Capital service includes total debt service and net dividend payments.2/ Sole tax, compulsory loan and reversion quota.3/ Capital as the aggregate of debt and equity.4/ Current ratio: current assets/current liabilities.

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3.25 The income statement of ELETROBRAS projected for 1983-87 (see Annexes3-4/1 and 3-5/1) shows that heavy interest payments by operating companiescoupled with a low rate of remuneration, will make for low revenues fromELETROBRAS' shareholdings in these companies. Interest receipts from loanswill become the basic revenue for ELETROBRAS during the projection period. Onthe expense side of the projected income statement, interest on debt willabsorb decreasing portions of revenues through 1987 when they will become about41% of total revenues.

3.26 ELETROBRAS' sources of funds shows an increasing reliance onconsumer-based contributions especially in the last portion of the projectionperiod, and a corresponding reduction of borrowings. The following table givesa summary of ELETROBRAS' projected funding mix, as shown in greater detail inAnnex 3-4/2 and graphically in Annex 3-5/2:

ELETROBRAS' PROJECTED FINANCING SOURCES (1983-87)(in mid-83 prices)

- Cr$billion US$million %Net consumer-based contributions 3,173 6,763 64.1Equity contributions 94 200 1.9Non-borrowing sources 3,267 6,963 66.0

Borrowings 1,684 3,589 34.0Total sources of funds 4,951 10,552 100.0

The effect of the composition of funding sources on the accumulated values ofthe balance sheet show that ELETROBRAS' loans remain a significant part in itsasset composition (about 63% of total assets) and its capital stock investmentsremain less so (about 37% of total assets). The share of debt in the capitalstructure of ELETROBRAS has been growing in the past and is expected to remainalmost constant in the projection period (about 65/35).

3.27 Because loans have a greater role in asset composition, and interestreceipts in total revenues, ELETROBRAS is more of a bank and less of a holdingcompany for the power sector. There exists a strong interrelation betweenthese two roles of ELETROBRAS: an increase in the interest rate it charges toits borrowers means a decrease in the dividends it gets from its subsidiary orassociated companies, which are also its borrowers. Although the financialtrends of the past will be difficult to reverse, ELETROBRAS has pointed outthat the projections show their intention to reverse these trends. Under loan2138-BR ELETROBRAS has agreed to use as limits, during the project executionperiod, certain specific ratios relating to spread, new borrowings for debtservicing, indebtedness, and capital servicel/. During negotiations,ELETROBRAS agreed to include the same ratios for the proposed new loan (para.6.04(b).

Performance Indicators and Reporting

3.28 During the appraisal mission some basic financial indicators wereagreed with ELETROBRAS to be considered for supervision purposes as goals to beattained in the projected period. These are shown in Annex 3-4/4.

1/ See Annex 3-5/3.

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3.29 During negotiations ELETROBRAS has agreed:

(a) to provide financial statements audited by independentaccountants acceptable to the Bank together with a report onthe audit, not later than four months after the end of eachfiscal year (para. 6.04(c); and

(b) to prepare such other reports as the Bank may reasonablyrequest, including project completion reports (para. 6.04(d).

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4. THE PROJECT

Description

4.01 The Project consists of seven sub-projects, each of which consists ofportions of the investment programs cf the seven utility companies selected byELETROBRAS as beneficiaries under the proposed loan. These 1983-88 investmentprograms provide for the purchase and installation of sub-transmission lines(up to a voltage of 138 kV, but mainly at 69 and 34.5 kV), substations andassociated transformers, distribution, lines and transformers (primary feeders),low voltage distribution lines (secondary circuits), consumer connections,general service equipment, and related auxiliary equipment needed for theappropriate expansion 1/ of the capacity of the respective beneficiaries'systems; in addition for 2 of them, rehabilitation of generating plant willalso be required. These programs include the use of consultants where needed.

Objectives

4.02 The main objectives of the sub-projects are to meet more efficientlythe needs of the market by expanding and modernizing distribution networks, inline with national energy policy (para 2.03). This should remedyunsatisfactory system conditions arising from inadequate planning and from thelack of sufficient investment by the beneficiaries in the past. Otherimportant objectives are the strengthening of the beneficiaries' organizationand the improvement of their technical and financial capability. The proposedproject would also consolidate ELETROBRAS' capability for appraising andsupervising projects in accordance with standard Bank methods and procedures.This has already been achieved in part, as demonstrated by the completedappraisals.

Characteristics

4.03 The investment programs were developed originally by thebeneficiaries; however, there has been considerable input by ELETROBRAS in thecourse of identification, preparation, and appraisal that follow closely Bankprocedures and practices in regard to such matters. The result of all this isthat the programs, as now put forward and appraised, are carefully planned, andrepresent optimum solutions in technical and economic terms, based onconservative market assumptions.

Selection of Beneficiaries

4.04 The selection of the various beneficiaries has been made byELETROBRAS on the basis of need and willingness to cooperate in sub-projectpreparation on the lines necessary for a Bank type appraisal by ELETROBRAS.The needs are of different origins, arising in part from geographical locationin the less-developed regions of the country, and in part from organizationaland structural inadequacies which ELETROBRAS desires to address with theassistance of the Bank's lending techniques. Further potential beneficiariesfor possible future loans are being identified.

1/ Expansion includes extensions, strengthening and improvements.

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Appraisal Criteria

4.05 In appraising the beneficiaries and their respective programs,ELETROBRAS applied criteria and used methods similar to those that would havebeen used by the Bank in appraising similar programs and sub-projects (para.5.10). ELETROBRAS has developed an instruction manual that providesorientation for the prospective beneficiaries in project preparation andprovision of information needed for appraisal. Also, ELETROBRAS follows upwith repeated preparation missions and has adopted the project brief approachused by the Bank for initial identification of costs and issues, etc. Beforeaccepting the market assumptions and forecasts made by the beneficiaries,ELETROBRAS reviewed the market studies, and where needed, caused them to berevised. ELETROBRAS has a department that specializes in market studies, andexperts from this department were brought in to make the necessary revisions.The resulting market assumptions are sober and conservative, and are consistentwith the currently known Federal and State Government plans for the developmentof the various areas concerned. We can, therefore, say that the marketforecasts are reasonable and realistic.

4.06 On the technical side, ELETROBRAS has used the study of alternativesto determine the least-cost solution for the development and/or rehabilitationof the systems concerned. This work is being carried out under the directionof engineers with great experience in distribution design and planning, withthe assistance of various specialists from other parts of the ELETROBRASorganization. The ELETROBRAS technical team ensures that the technicalproposals constitute adequate and least cost solutions in line with appropriatestandards for security of supply in the regions concerned. ELETROBRAS has alsodeveloped a financial analysis manual that follows the general Bank guidelinesfor this purpose and has defined a group of significant financial indicatorsthat are included in the appraisal reports.

4.07 The ELETROBRAS appraisals also deal with institutional (i.e. opera-tional and managerial) problems of the beneficiaries, and contain appropriaterecommendations regarding technical and financial planning, data collection andprocessing, billing and collection, training, structural adjustments, and so on(para. 5.03). These recommendations will be reflected in the on-lending loanagreements with the beneficiaries.

Costs

4.08 Cost estimates for the programs and subprojects used in theELETROBRAS appraisals are based on the estimates prepared by the beneficiaries,revised and up-dated by ELETROBRAS on the basis of actual recent experience inprocurement for Loan 1538-BR provided by CAEEB (the procurement consultants andagents) from their records, and cross-checked by ELETROBRAS with their ownindustrial department. Cost estimates have been based on December 1982prices, and adjusted for the February 83 maxi-devaluation. Engineering andadministration costs are included at about 10% of total base costs, and taxesand duties on goods and services are also included at about 10% of total basecosts, considering that Bank financed goods and services will be exempt fromtaxes and duties. Physical contingencies have been assumed at 10%. Pricecontingencies for the foreign costs are based on 8% for 1983, 7.5% for 1984,

- 24 -

7.0% for 1985, and 6.0% for 1986 arnd thereafter. Price contingencies for thelocal costs were estimated assuming that the exchange rate for the Cruzeirowould be depreciated according to domestic inflation in 1983 and 1984; and thatafter 1984, it would be depreciatedL according to the differential betweendomestic inflation and international inflation. The costs, includingcontingencies of the 1984-87 Bank financed sub-projects are shown in Annex 4-1and summarized as follows (in US$ millions):

LOCAL FOREIGN TOTAL

CERON 43.7 28.9 72.6MANAUS (excl. Balbina) 44451 28.2 69.6CEMAR 59.6 40.3 99.9CEPISA 34.7 23.7 58.4CEAL 41.0 28.4 69.4LIGHT 108.8 74.8 183.6ELETROPAULO 139.7 91.8 231.5

468.9 316.1 785.0

59.7% 40.3% 100%

US$316.1 million represents the equivalent of 100% of the estimated foreigncomponent of the seven sub-projects, and includes the cost of inspection atthe factory, assumed at about 3/4% of total foreign costs..

4.09 The relation between the subprojects and the investment programs ofthe beneficiaries are detailed in Annex 4-2 which shows basic costs thatinclude physical contingencies but exclude price contingencies. Thiscomparison may be summarized as follows (in US$ millions):

Subprojects as %Investment of Investment

Subprojects Programs Programs

CERON 62.5 103.5 60MANAUS (excl. Balbina) 61.5 126.0 49CEMAR 86.9 151.8 57CEPISA 51.1 102.5 50CEAL 61.4 123.3 50LIGHT 161.9 858.1 19ELETROPAULO 204.5 1,358.3 15

689.8 2,823.5 24

4.10 Project briefs have been completed for all beneficiaries and allappraisals are ready for Bank review. Each project brief includes an adequatedefinition of the project, cost estimates, implementation schedules, and astatement of the main issues facing the beneficiary and ELETROBRAS'srecommendation for dealing with these issues.

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Implementation

4.11 Most beneficiaries have capability for carrying out engineering andconstruction supervision with their existing staff; they would be assisted,where appropriate and recommended by ELETROBRAS, by Brazilian consultants; therelated costs have been included in the estimates at about 5% of the base costsof the substations and other installations concerned. 1/ Larger works would bebuilt under local contracts, and smaller works would be carried out by thebeneficiaries' own staff, as is normal utility practice.

4.12 The construction programs have been reviewed by ELETROBRAS andrevised to ensure realistic timing. The appraisal reports prepared byELETROBRAS contain construction schedules that will provide a basis formonitoring progress during the sub-project construction period.

Procurement

4.13 Equipment and materials financed under the loan would be procured inaccordance with Bank guidelines, through international competitive bidding,except minor quantities (each item not exceeding US$50,000 equivalent, and allitems totalling not more than 5% of each sub-loan) where special reasons (suchas high degree of technical sophistication, or standardization, orcompatibility with existing equipment, or urgency of delivery) justify limitedinternational tendering (LIT). Within the same limitations, direct purchasesmay be made for the rehabilitation of thermal generating plant if the originalmanufacturer is the only source of supply. Possible Brazilian suppliers ofitems included in the sub-projects are reasonably competitive; as in previouspower loans, Brazilian suppliers whose bids contain components manufactured inBrazil equal to at least 50% of the value of the bid would be given a margin ofpreference of 15% or the applicable import duties, whichever is lower.

4.14 The total foreign costs of the project are estimated at aboutUS$316.1 million equivalent. About US$250 million equivalent for equipment andmaterials to be financed from the proposed loan will be acquired through ICB inaccordance with Bank Guidelines (except as already noted above); and, on thebasis of past experience, Brazilian suppliers would be awarded up to two-thirdsof the value of the contracts. Equipment, materials and services not financedunder the proposed loan would be procured locally under the beneficiaries'normal procedures which are satisfactory. An analysis of the contracts thus tobe established showed that a limited number would, in effect, amount toreserved procurement owing to the nature of the contracts involved. Thisreserved procurement is not expected to have any adverse effect on projectcosts or execution, as the number of Brazilian suppliers is large and theirprices are generally competitive. The foreign content of these reservedprocurement contracts was estimated at US$28 million; these foreign costs willnot be financed from the Bank loan.

4.15 For the smaller beneficiaries, the procurement would be handled byCAEEB who over more than 20 years have been procurement agents forbeneficiaries under previous Bank loans. The costs of CAEEB's services havebeen included in the estimates at about 2% of the cost of the equipment andmaterials concerned, 1/ but actual charges will use a time basis, as practicedin the current project (Loan 2138-BR). As the Borrower wishes to minimize themis-procurement risk for his beneficiaries, a $200,000 threshold for prior

1/ Equivalent to about $6,000 per man month.

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review of bid award decisions by the Bank has been agreed. This is the same aspreviously agreed for Loan 2138-BR, and should cover about 80% of theprocurement dollars with a prior review.

Disbursement

4.16 Preparations for procurement of goods and services are well advancedso that bid invitations may be issued without delay once the loan has beenapproved. ELETROBRAS expects that disbursements will build up quickly afterthe first year and would be completed in about 4-1/2 years after Loanapproval. This is a reasonable target, but it would be prudent to allow foran additional 6 months of disbursements, i.e. a total of 5 years after loanapproval. Compared with the disbursement profile of previous similar projectsin Brazil, 5 years would achieve about 80.0% disbursement; however, in view ofthe advanced state of preparation and the nature of the project (no large civilworks are involved) and since this :is the 2nd ELETROBRAS distribution project,a 100% disbursement in that time is considered a realistic estimate. Theprojected disbursement schedule is Shown in Annex 4-3. Disbursements would befully documented, and would be made for 100% of foreign expenditures forimported equipment and materials, or the ex-factory cost of locallymanufactured equipment and materials. To give an additional margin of sixmonths, the closing date would be June 30, 1988.

4.17 To reduce the impact of the time between billing and collection dueto continued devaluation of the Cruzeiro, a Special Account for US$22 millionwill be opened with the Central Bank for payments to Brazilian suppliers.Withdrawals from this account will b3e made after exchange rate prevailing onthe date of the expenditures. The Central Bank will send the correspondingstatements of Expenditures to the Bank which would then replenish the SpecialAccount.

Environment

4.18 The beneficiaries intend to route most of their lines overhead andto locate their substations so as to minimize their visual impact in a mannerconsistent with economic and financial considerations. Environmental impactwill therefore be negligible.

Social Impact

4.19 The investment programs of beneficiaries are designed to expand andimprove their distribution systems, with emphasis on providing electricity inrural areas and to low-income consumers. The total impact of these extensionsis not yet fully known, but it is probable that they will result in connectionsto about 2.0 million consumers (about 7% of all existing consumers in Brazil).This will be monitored by ELETROBRAS by means of the usual key indicatorsincluded in their appraisal and progress reports.

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Risks

4.20 There are no special risks involved in the sub-projects where theworks will follow normal practices and procedures that have been tested andfound practicable. Weaknesses in the beneficiaries' organizations will becounterbalanced by consultants, and by the influence of ELETROBRAS who willmonitor closely the beneficiaries' performance. ELETROBRAS has adequatearrangements for obtaining required counterpart funding, primarily from stategovernments and federal agencies. The sub-projects represent generally lessthan 50% of the respective investment programs (see Annex 4-2) and constitutepriorities for the beneficiaries. In addition, the federal government hasprovided assurances that the beneficiaries' sub-projects will be supported byadequate counterpart funding (para. 6.03(a).

Financial Analysis

4.21 The financial analysis of the beneficiaries' projected financialstatements for 1983-1988 has been carried out by ELETROBRAS on the same basisas that normally adopted by the Bank for power utilities. The standardfinancial indicators used in Bank appraisals have been included so as to allowadequate monitoring during supervision. In line with the September 2, 1981,agreement between the Bank and the Brazilian Government (para. 2.19 & 2.20),the annual rates of remuneration for each beneficiary are assumed to be thesame as for the expected sector averages 1/, attained not only through tariffsbut also through the utilization of GGF resources. The funds thus generatedwill be sufficient for the envisaged investment programs of each beneficiary2/.

4.22 The project costs for the seven beneficiaries are estimatedto come to about US$860.5 million equivalent, including physical and pricecontingencies, and front-end fee for IBRD loan. The table below shows thecosts of the individual sub-projects and the corresponding financing plan:

1/ The September 2, 1981 agreement established that power utilities that arebeneficiaries of World Bank loans will maintain a rate of remuneration atleast at the average level for the sector, and for the sector it has beenassumed that the growth in the market will be the same as the growth inremunerable investment so that the average rate of remuneration wouldgrow at the same rate as the tariff increases.

2/ Annex 4-4 includes Investment and Financing plans of all beneficiaries.

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------US$ Million-------ESTIMATED PROJECT COSTS 1/ Local Foreign Total _

CERON 35.7 21.1 56.8 7.2ELETRONORTE (Manaus) 35.4 20.5 55.9 7.1CEMAR 49.6 29.6 79.2 10.1CEPISA 29.1 17.4 46.5 5.9CEAL 35.2 20.7 55.9 7.1LIGHT 92.6 54.6 147.2 18.7ELETROPAULO 119.0 66.9 185.9 23.7

Base Costs 396.6 230.8 627.4 79.8Physical Contingencies (1I%) 39.6 23.1 62.7 8.0Price Contingencies 32.7 62.2 94.9 12.1

Total Project Costs: 468.9 316.1 785.0 99.9

Front-end fee in IBRD loan. - 0.6 0.6 0.1Total financing required 468.9 316.7 785.6 100.0

FINANCING PLAN

IBRD loan - 250.6 250.6 31.9Cofinancing - 66.1 66.1 8.4Local development banks2/ 132.0 - 132.0 16.8Beneficiaries 336.9 - 336.9 42.9

Total Financing 468.9 316.7 785.6 100.0

4.23 A total of about US$66.2 million will be needed from foreigncommercial banks, and ELETROBRAS will assist the beneficiaries in obtaining therelevant cofinancing loans. Funds are expected to be needed in 1986 so thatadequate time would be available for making the necessary arrangements.

4.24 To ensure completion and adequate funding of the beneficiaries'sub-projects, during loan negotiations it was agreed that the loan andguarantee agreements contain the following conditions:

(a) The Federal Government will not interfere with timely execution ofthe beneficiaries' sub-projects (para. 6.03(b).

1/ Figures in local currency have been omitted because the continued steadydevaluation of the local currency makes such figures meaningless, andbecause they would detract from a clear presentation.

2/ The sector has traditionally received financing from BNDE, FINEP, FINAME,BNH, and other development finance entities.

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(b) Before approving them, ELETROBRAS will discuss with the Bank anymodifications in the beneficiaries' investment programs that aregreater than 15% of the cost in real terms in any one year (para.6.04(e).

(c) ELETROBRAS will undertake to inform the Bank annually offunding requirements for satisfactory completion of the bene-ficiaries' investment programs (para. 6.04(f).

(d) ELETROBRAS will assist in obtaining the necessary cofinancing orcounterpart funds to ensure satisfactory completion of thebeneficiaries' subprojects (para. 6.04(f).

Economic Analysis

4.25 ELETROBRAS has developed a long-range generation and transmissioninvestment program which optimizes project costs on a country-wide basis(para.2.13). Within the context of this program, each utility has theresponsibility for developing its own distribution program, which is the caseof the beneficiaries of the proposed loan. All program alternatives--utilizing different voltage levels--have been selected through the method ofleast-cost solution, with a discount rate of 11%, taken to be the opportunitycost of capital in Brazil.

4.26 The economic analysis of the beneficiaries' investment programs hasalso been carried out on the same basis as that normally adopted by the Bank inappraising power projects. Since most costs and benefits of the sub-projectscannot be segregated from those of the investment programs, the economic rateof return was calculated for the programs as a whole. Because the economicbenefits of the programs cannot be properly quantified for this type ofproject, the incremental revenues have been used as a proxy for economicbenefits (since tariffs are centrally controlled, they probably understate theconsumers willingness to pay). Revenues, which include the sole tax, werecalculated taking as a starting point the tariff levels for December 1982, andadding the real increases of 5% in 1983 and in subsequent years, as establishedin the September 2, 1981 agreement between the Bank and the Braziliangovernment, when the sector achieves the 10% rate of remuneration and completerecuperation of past shortfalls in remuneration (see paras. 2.19 & 2.20).

4.27 The calculation of rates is based on conservative assumptions.Furthermore, the social impact of the Project is difficult to measure. Lessconservative assumptions, and inclusion of social benefits, would show higherinternal rates of return. Sensitivity analyses are also carried out in theappraisals, as is normal Bank practice.

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4.28 The appraisals of the beneficiaries' investment programs show thefollowing economic rates of return:

EconomicBeneficiary Rate of Return(%)

CERON 11.0MANAUS 13.0CEMAR 14.6CEPISA 9.8CEAL 24.5LIGHT 28.3ELETROPAULO 31.7

The significant difference between t'he economic rates of return of the twomajor distribution companies (LIGHT and ELETROPAULO) and those of the smallerones arises from the effects of the tariff equalization scheme currentlyapplied to electricity consumers in Brazil (para.2.17), and reflects thedifferent characteristics of the beneficiaries (see Annex 5.1).

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5. THE BENEFICIARIES

5.01 There are wide variations in the general characteristics of theprospective beneficiaries, as may be seen from the information provided inAnnex 5-1. The only common features are that they are all joint stockcorporations, and that they distribute electricity within their concessionareas from sub-transmission systems at 138 kV and lower voltage levels,mainly 69 and 34.5 kV. The location of the beneficiaries is shown inMap No. 17091, and general data are given in Annex 5-1.

5.02 The organizational structures vary from case to case, but generallythere is a Board of Directors headed by a President who acts as the ChiefExecutive Officer. The Board is appointed by the shareholders, and normallyits composition reflects the interests of majority and minority shareholdersin reasonable proportions.

5.03 In the appraisal reports prepared by ELETROBRAS the beneficiaryorganizations are described and subject to critical analysis. Recommendationsare made for improving structures, and for obtaining support from consultantswhere needed. The ELETROBRAS appraisal team is bringing in specialists fromother departments of ELETROBRAS and from other utilities to come to theassistance of the beneficiaries, and the interaction between ELETROBRAS and thebeneficiaries shows improvements in organizational, operational, technical andfinancial aspects (para. 4.07) even during the appraisal stage.

5.04 ELETROPAULO is by far the largest of beneficiaries, in terms ofenergy sold (32,652 GWh) and consumers served (3.6 million). Its concessioncovers the city of Sao Paulo and adjacent areas, known as "perifericos." Thesub-project is located in these outlying areas, where it will provideelectricity mainly for rural and low-income consumers; about 550,000 newconsumers are expected to be connected as a result of this subproject. Thisbeneficiary is a state-owned company.

5.05 The next largest beneficiary is LIGHT, the distribution companyfor the city of Rio de Janeiro, with sales of 13,941 GWh and 2.0 millionconsumers. It is a wholly-owned subsidiary of ELETROBRAS. Its sub-project isdesigned to provide and improve electricity supply mainly in the "favela"districts of Rio, in areas where currently there is no supply at all, or onlysub-standard supply distributed by "pirate" type small entrepreneurs atexorbitant rates; about 450,000 new consumers are expected to be connected asthe result of this subproject.

5.06 As for the remaining beneficiaries, it will be seen from Annex 5-1that they are all much smaller than the first two mentioned above. Except forManaus, temporarily owned by ELETRONORTE (a wholly-owned subsidiary ofELETROBRAS) they are companies supplying electricity throughout their respect-ive states, which are the principal owners, with ELETROBRAS having a minorityshare-holding. Sales range from 724 GWh for CEAL (Alagoas) to 131 GWh forCERON (Rondonia), and consumers vary from 214,945 for CEAL to 38,016 for CERON.

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5.07 All these smaller beneficiaries operate in the less-developed areasof Brazil (see Map 17091), where the expansion of existing distribution systemsis essential to the development of the areas concerned. Rondonia is astate currently growing at the rate of about 25% per annum, and expansion ofelectricity supply is one of the Government's highest priorities. Thisexplains why for this beneficiary, the sub-project to be financed constitutesmore than 50% of the total investment program.

5.08 The distribution system covering the city and surrounding areas of

Manaus is temporarily owned and administered by ELETRONORTE, since the state-owned company, CELETRAMAZONAS, did not have the resources, financial and other-wise, to take over this company which formerly was privately owned. ELETRONORTEis responsible for generation and transmission in the Amazonas state and

adjacent territories, and is temporarily operating the Manaus system, which hasits own thermal generating plant. A hydroelectric project (Balbina) iscurrently under construction, but its costs etc. have been excluded from thoseof the Manaus distribution system since it is completely separate from it, andall other generating plants owned or being built by ELETRONORTE have also beenexcluded.

5.09 Except for a small loan to LIGHT ($20 million) in 1973, none of thebeneficiaries have previously been beneficiaries of Bank loans, but theyhave all responded eagerly to the p;roposal presented to them by ELETROBRAS toparticipate in this project. Technical and institutional improvements arealready showing, and ELETROBRAS is applying the experience gained during thepreparation of the previous loan (2138-BR, approved in May 1982) to theirhandling of the beneficiaries. The manuals and methodologies developed duringthat first project have made it possible for ELETROBRAS to identify, prepare,and appraise 7 sub-projects in the short time of 12 months, without a dilutionof the high quality expected from work conducted according to Bank standards.

5.10 The ELETROBRAS project briefs and appraisal reports give all detailsfor the beneficiaries, providing all, the information (technical, economic,financial, and institutional) which would normally be given in a Bank-styleappraisal. This is an indication that ELETROBRAS has successfully absorbed theBank's normal appraisal techniques and managed to get them accepted by thesenew beneficiaries.

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6. SUMMARY OF AGREEMENTS AND RECOMMENDATIONS

During negotiations, agreement was reached on the following matters:

6.01 As conditions for effectiveness:

(a) the Brazilian Government will have enacted the February 1, 1984tariff increase according to the September 2, 1981 agreement, asamended (paras.2.19 & 2.20); and

(b) ELETROBRAS will provide the Bank with the respective onlendingagreements for at least three beneficiaries.

6.02 As condition for disbursement for each project category, ELETROBRASwill provide the respective onlending agreement for each beneficiary.

6.03 The Brazilian Government will:

(a) ensure that adequate counterpart funding will be available to thebeneficiaries for the timely execution of the appraised subprojects(para.4.29);

(b) permit completion of the appraised subprojects (para.4.24(a);

(c) provide the beneficiaries with tariff levels that are sufficient toattain the 10% rate of remuneration, according to Brazilianlegislation and in line with the September 2, 1981 agreement, asamended, (para.4.21).

(d) provide for the continuation of the compulsory loan after 1983(para.3.24); and

(e) if Itaipu tariffs are higher than the bulk tariffs of theSouth-Southeast region, undertake all measures required, in termssatisfactory to the Bank, to insure that the agreed sector rates ofremuneration are achieved (para.2.21).

6.04 ELETROBRAS will:

(a) during the life of loan, discuss with the Bank before making anymajor modifications in its policies and procedures for funding andinvestment (para.3.14);

(b) during the project execution period, use as limits for its financesspecific ratios relating to spread, new borrowings for debtservicing, indebtedness, and capital service (para.3.27);

(c) provide financial statements audited by independent accountantsacceptable to the Bank together with a report of the audit, not laterthan four months after the end of each fiscal year (para.3.29(a));

(d) prepare such other reports as the Bank may reasonably request,including project completion reports (para.3.29(b));

- 34 -

(e) before approving them, discuss with the Bank any modifications in thebeneficiaries' investment, programs that are greater than 15% of thecost in real terms in any one year (para.4.24(b));

(f) undertake to inform the Bank annually regarding funding requirementsfor satisfactory completion of the beneficiaries' investment programs(paras.4.24(c);

(g) assist in obtaining all the necessary cofinancing or counterpartfunds to ensure satisfactory completion of the beneficiariessubprojects (para.4.24(d);

(h) include in the onlending agreements the standard covenants ofBank-financied power projects (such as reporting, access to works andbeneficiaries, connections for low-income consumers, reinvestment ofdividends, commitment of counterpart funding from State Governments,accounting records, independent audits, indebtedness and debt servicecoverage ratio, etc.) and. the specific recommendations included ineach of its own relevant appraisal reports; and

(i) onlend the proceeds of the loan to the beneficiaries on the sameterms and conditions plus a charge of 1% on the outstanding balance,with the foreign exchange risk being borne by the beneficiaries.

Recommendation

6.05 Given the above agreements, the project constitutes a suitable basisfor a Bank loan of US$250.6 million equivalent to ELETROBRAS to be repaid overa period of 15 years including three years of grace.

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BRAZIL

ELETROBRAS II PCWER DISTRIIBUTTON PROJECT

PCWER SECRI

HISITICAL FLOW OF FUND6 a/

(in millions of current Cr$)

Year endlng Dec. 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

SOLRCES 9,580 14,112 24,913 38,011 59,795 9 164,736 310,201 731,640 1,373,783

Net internal cash generation 1,858 2,441 4,644 6,179 5,119 4,544 5,936 (37,979) (48,707) (278,343)

Gross internal cash generation 3,997 5,481 9,609 12,381 20,593 28,988 63,888 107,213 259,357 477,478

Capital Service 2,139 3,040 4,965 6,202 15,474 24,444 57,952 145,192 308,064 764,821Anrrtization payments 949 1,278 2,391 2,885 5,565 9,897 21,799 57,556 105,295 237,941Interest payments 714 1,126 1,797 3,074 5,566 12,337 .33,254 85,489 199,578 519,746Dividend Davments (net) 476 636 7 243 4,343 2,210 2,899 2,147 3,191 7,134

Other consuner-based contributions 3,485 4,667 6,561 10,708 15,518 23,603 33,540 64,720 182,892 314,745Sole tax 1,208 1,613 2,135 3,097 4,863 6,811 9,302 17,653 41,842 63,509Compulsory loan 1,074 1,400 2,021 3,274 4,366 7,362 11,165 21,479 45,121 88,845Reversion 1,203 1,654 2,405 4,337 6,289 9,430 13,073 25,588 95,929 162,391

Equity contributions 1,327 2,148 4,282 4,239 7,082 8,195 10,743 20,798 69,374 140,415Federal government 258 709 1,402 1,480 2,281 3,162 4,554 6,650 41,505 62,562State governments 1,204 1,241 1,465 1,304 3,861 3,149 1,568 5,537 12,134 35,214Mfnicipalities and others (135) 198 1,415 1,455 940 1,844 4,621 8,611 15,735 42,639

Borrowings 2,910 4,856 9,426 16,885 32,076 58,937 114,544 262,662 528,081 1,1%,966Local 740 1,666 3,737 9,440 11,019 21,601 52,539 102,226 167,696 434,920Foreign 2,170 3,190 5,689 7,445 21,057 37,336 62,005 160,436 360,385 762,046

APPLIGN'TlON5 9,580 14,112 24,913 38,011 59,795 95,279 164,763 310,201 731,640 1,373,783

Investments 8,847 12,973 20,962 33,026 52,652 82,516 126,515 236,322 526,545 1,092,897

Increase in working capital 733 1,139 3,951 4,986 7,143 12,763 38,248 73,879 205,095 280,886

a/ Source: "Fontes e Usos de Recursos do Setor de Fnergia Eletrica", ELEIRDBRASSee Annex 2-3/1 for graphic presentation.

- 37 -

ANNEX 2-2/2BRAZIL

ELETIRDBRAS II - POWER DISTRIBUTION PROEC=

ER SECIOR

PROJECIED FLOW OF FUNDS(in billions of mid-1983 Cr$)

TotalYear Ehiing Dec. 31 1983 1984 1985 1986 1987 83-87

SOURCES 1,717 1,722 1,801 1,884 2,004 9,128

Net internal cash generation (624) (430) (461) (423) (46) (1,984)

Gross internal cash generation 754 1,065 1,277 1,768 2,261 7,125Remnueration 389 671 819 1,100 1,404 4,383Depreciation and annrtization 365 394 457 545 615 2,376Itaipu's capital service to ELETROBRAS - - 1 123 242 366

Capital Service 1,378 1,495 1,738 2,191 2,307 9 109Amortization payments 459 536 738 1,184 1,337 4,254Interest payments 905 929 959 958 904 4,655Dividend payments b/ 14 30 41 49 66 200

Other conrsœer-based contributions 779 888 1,024 1,087 1,252 5,030Sole tax a/ 154 208 236 271 315 1,184COxmulsory loan 195 214 249 295 350 1,303Reversion 430 466 539 521 587 2,543

Equity contributions 198 125 131 138 135 727Federal QCvernment 94 - - - - 94State governments 24 39 44 45 52 204YMuicipalities and other 80 86 87 93 83 429

Borrowings 1,364 1,139 1,107 1,082 663 5,355Existing: local 216 119 91 69 44 539

foreign 119 295 294 189 83 980Future 1,029 725 722 824 536 3,836

APPLICATIOC 1,717 1,722 1,801 1,884 2,004 9,128

Investments 1,612 1,617 1,696 1,779 1,899 8,603Utilities 1,329 1,463 1,588 1,699 1,857 7,936Loans to Itaipu 283 154 108 80 42 667

Increase in wDrking capital 105 105 105 105 105 525

a/ Portion reinvested in the sector (60% of total).b/ Net payments, after reinvestment.

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

POWER SECTOR

AVERAGE COST AND REVENUE PER KWH a/(in current prices)

Year ending Dec. 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982tCr Z ¢Cr l Z Cr % ¢Cr Z 4Cr Z ¢Cr % ¢Cr % ¢Cr 4Cr B ZCr Z

Personnel 3.1 14 3.8 14 5.3 14 7.3 15 10.2 16 14.6 16 24.2 19 42.2 19 104.6 20 203.4 20Materials and services 2.1 9 2.6 10 3.1 8 3.8 8 5.7 9 7.6 9 12.1 9 19.4 9 51.1 10 93.5 9Fuel 0.5 2 0.7 3 0.7 2 1.1 2 0.9 1 1.9 2 2.6 2 11.0 5 22.4 4 29.7 4Other 0.1 1 0.2 - 0.3 1 0.5 1 1.1 2 0.2 - 0.6 - 0.5 - - - - -

Operating expenses 5.8 26 7.3 27 9.4 25 12.7 26 17.9 28 24.3 27 39.5 30 73.1 33 178.1 34 326.6 33

Depreciation b/ 1.9 8 721 A 3I 1 4.5 9 6 . 1 12.2 14 17.7 14 37.7 1/ 67.0 13 142.0 14Operating co-sts 777 TjT 1-3, =T -- f T77 -If T4Z- 38T -6 -T 371 7 T~TU -37 ~TOT 74T - 7

Remuneration 7.7 33 9.0 33 14.1 37 15.1 32 21.0 33 26.7 30 37.1 29 43.6 20 132.0 25 251.6 25Concessionaires revenues T1T5 -7 7.4 36 27 77 1 8 .4 4' 7T 3 T W 7 6 3 .2 7 TS32 7M 77FT1 77 T T 77

Reversion 2.0 9 2.4 9 3.2 8 4.8 10 6.4 10 7.7 9 10.4 8 21.1 10 70.5 13 110.0 11Electricity bill T7.4 71 M 77 7-C ' 7 77 3T°. - a8T 7? 9U TU7 rT 175.5 -U B7U 85 830.2

Social security tax 0.3 1 0.2 1 0.3 1 0.3 1 0.1 - - - - - - - - - - -Sole tax 3.1 14 3.5 13 4.3 11 5.8 12 6.9 11 10.4 12 14.1 11 23.9 11 36.3 7 90.8 9Compulsory loan 2.1 9 2.5 9 3.2 8 4.6 10 5.4 8 8.1 8 11.0 8 20.2 9 39.1 8 83.2 8

Total charge to consumers 22.9 T0 2.0 100 38.2 100 47.8 100 89.4 100 129.8 100 219.6 100 523.0 100 1,004.2 100

Transfer to other sectors c/ 0.4 1 0.9 2 1.2 3 1.0 2 2.8 3 4.7 4 7.1 3 1 6 7 d 3 3 3 6 .3 d/ 4Sector revenues 7T 98 46.6 13. 86.6 T 12. 212. 97 506.3 -7 gzT2g b .

a/ See Annex 2-3/2 for graphic presentation.b/ Includes amortization.c/ Not available.d/ Estimate.

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

POWER SECTOR

HISTORICAL COST OF SERVICE AND REMUNERATION(in millions of current Cr$)

a/

Year ending December 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 -

Remunerable investment (net) 38,768.3 49,428.5 73,113.8 95,012.7 152,095.5 279,859.8 484,511.6 1,003,687.8 1,920,209 4,205,453

Gross remunerable investment 43,539.1 56,440.3 85,942.4 113,269.8 182,340.2 340,209.3 572,412.7 1,134,459.2 2,183,442 4,744,509Utility plant in service 39,296.9 51,099.7 81,072.1 109,504.7 177,178.9 334,091.9 561,049.9 1,115,775.4 2,165,186 4,704,840Working capital 4,242.2 5,340.6 4,870.3 3,765.1 9,161.3 6,117.4 11,362.8 18,683.8 18,256 39,669

Deductions (accumulated) 4,770.8 7,011.8 12,828.6 18,257.1 30,244.7 60,349.5 87,901.1 130,771.4 263,233 539,056

Depreciation 4,786.0 6,757.5 10,640.0 14,612.6 22,504.0 44,675.0 78,033.1 146,584.0 304,620 683,301Amortization - - - - - - 84.8 6,745.2 26,284 58,958

Contributions and grants 1,486.2 2,084.8 2,984.1 4,215.4 8,259.2 19,977.7 25,013.7 45,131.6 88,788 151,266Excess (deficiency) in remuneration (1,501.4) (1,830.5) (795.5) (570.9) (518.5) (4,303.2) (15,230.5) (67,689.4) (156,459) (354,469)

Revenues 11,567.0 15,376.1 24,115.9 34,482.5 52,207.9 80,895.4 131,186.4 246,121.3 631,191 1,229,871Electricity billing 8,791.8 11,899.6 19,179.6 26,788.2 42,208.0 64,148.6 105,772.5 ,669.2 516,693 1,016,718Social security tax 158.3 107.1 172.6 241.1 50.0 - - - - -

Sole Tax 1,543.4 1,969.3 2,742.3 4,179.5 5,584.0 9,384.3 14,248.9 26,800.7 69,377 111,158 1Compulsory loan 1,073.5 1,400.1 2,021.4 3,273.7 4,365.9 7,362.5 11,165.0 22,651.4 45,121 101,995 w

Cost of service 8,791.8 11,899.6 19,179.6 26,788.2 42,208.0 64,148.6 105,772.5 196,669.2 516,693 1,016,718 1

Operating 2 927.6 4,1721 5 946.2 9 174.4 14 596.0 21 990.2 39 898.9 81,872.6 205,635 399,985Personnel 1 3. 2, 1 3:351.4 5:232.5 8:319.1 13:192.4 24:431.6 4/, 280.2 120 737 249,102

Material and other 1,042.3 1,502.1 1,927.9 2,761.7 4,605.8 6,875.1 12,202.3 21,748.6 58,986 114,524Fuel 274.9 377.0 465.7 805.0 768.4 1,728.5 2,640.9 12,302.6 25,912 36,359

Other 27.1 105.8 201.2 375.2 902.7 194.2 624.1 541.2 - -

Depreciation and amortization 959.1 1,224.1 2,330.0 3,270.3 5,302.3 11,026.7 17,859.6 42,232.1 77,289 173,883

Reversion 1,034.9 1,367.0 2,006.9 3,466.8 5,216.6 6,930.4 10,490.1 23,664.7 81,348 134,698

Remuneration (annual) 3,870.2 5 136.4 8,896.5 10 876.7 17 093.1 24,201.3 37,523.9 48 899.8 152,421 308,152Legal 4,36 376" 7,81T. 10:652.1 17040.77 8451.2 1001368.8 192, 020 420,545

Excess (deficiency) (495.6) (329.1) 1,035.0 224.6 52.4 (3,784.7) (10,927.3) (51,469.0) (39,599) (112,393)

Rate of remuneration (%) 10.0 10.4 12.2 11.4 11.2 8.6 7.7 4.9 7.9 7.3 3

Energy Sales (GWh) 50,544.0 57,039.0 63,112.0 72,071.0 81,245.0 90,541.0 101,088.0 112,115.0 115,431 122,477Increase (%) 14.8 12.9 10.7 14.1 12.8 11.5 11.6 11.0 3.0 6.1

a/ Preliminary

BRAZIL

ELETROBRAS II - POWER DISTRIBUTION PROJECT

POWER SECTOR

PROJECTED COST OF SERVICE AND REMUNERATION(in billions of mid-1983 Cr$)

Year Ending Dec. 31 1983 1984 1985 1986 1987

Remunerable investment (net) 10,261 11,218 13,137 15,721 17,550

Gross remunerable investment 11,278 12,166 14,007 16,590 18,598Utility plant in service 11,230 12,118 13,959 16,542 18,550Working capital 48 48 48 48 48

Deductions (accumulated) 1,017 948 870 869 1,048Depreciation 1,866 2,208 2,584 3,015 3,505Amortization 45 45 45 45 45Contributions and grants 434 474 515 555 595Excess (deficiency) in remuneration (1,328) (1,779) (2,274) (2,746) (3,097)

Revenues 2,545 2,968 3,457 4,100 4,862 4Electricity billing 2,093 2,407 2,814 3,354 3,987Sole tax 257 347 394 451 525Compulsory loan 195 214 249 295 350

Cost of service 2,093 2,407 2,814 3,354 3,987Operating expenses 892 827 835 893 955Electricity purchased -- 35 150 281 412Fuel tax 17 14 14 14 14Depreciatlon and amortization 365 394 457 545 615Reversion 430 466 539 521 587

Remuneration 389 671 819 1,100 1,404Legal 1,026 1,122 1,314 1,572 1,755Excess (deficiency) (637) (451) (495) (472) (351)

Rate of remuneration (M) 3.8 6.0 6.2 7.0 8.0

Energy sales (GWh) 127,807 141,141 156,566 174,191 191,816 4Increase M 7.6 10.4 10.9 11.3 10.1 >X

Average revenue (Cr$/MWh) 19.91 21.03 22.08 23.54 25.35 !Increase (M) 5.0 5.6 5.0 6.6 7.7 L'

BRAZILPOWER SECTOR

AVERAGE MONTHLY PRICE PER MWH

480

see ~ ~ ~ ~ ~NIs

Y'RS2146

0~

JFMAM~JdASONDJFMAMJJASONDJFMAMJASONDJFMAMJ.JASONDJFMAMJ~JASOND~JFMAM,JJASOND

1977 1976 1979 196e lost 1Q82YEARS

BRAZILELETROBRAS II POWER DISTRIBUTION PROJECT

POWER SECTORCOMPOSITION OF SOURCES OF FUNDS

HISTORICAL - PROJECTED -E100-

90-

80-

70BORRODWINGS

60 CONTRIBUTIOS

zwsoS

wa-

40-

30CONTRIBUTIONS

20-

10 -NET INTERNAL

1973 1975 1977 1979 1981 1983 1985 1987YEARS

1/ See Annexes 2-2/1 and 2-2/2 for definitions.

- 43 -

ANNEX 2-3/2

BRAZILELETROBRAS II POWER DISTRIBUTION PROJECT

POWER SECTORDISTRIBUTION OF REVENUES

SOCIA SEC.TAXHISTORICAL - -- PROJECTED --soCJ:AL SEC . TA X

w SOLE 'A~~~~~~~ELCTIIT8

| l l ~~~OPERATING XPENSES

H __=______ =___

H- \_\__\_\___, __ \_

< -9

C-,

1973 1975 1977 1979 1981 1983 1985 1987

YEARS

1/ See Annexes 2-2/4 and 2-2/5.

- 44 -

ANNEX 2-3/3Page 1 of 2

BRAZIL

ELETROBRAS I]: POWER DISTRIBUTION PROJECT

SECTOR

ASSUMPTIONS USED IN FINANCIAL PROJECTIONS

1. Energy sales growth (%):

1983 1984 1985 1986 1987

7.6 10.4 10.9 11.3 10.1

2. Growth of average revenue per kWh (%):

1983 1984 1985 1986 1987

5.0 5.6 5.0 6.6 7.7

3. Electricity purchased from Itaipu (average cost equal to the averagebulk price of electricity in the South-Southeast region):

1984 1985 1986 1987

Electricity (GWh) 5,230 20,936 37,948 52,052Average price (US$/MWh) 14.52 15.61 16.09 17.19Electricity purchased (US$106) 75.9 326.8 610.6 894.8

(Cr$109) 35.6 153.4 286.5 419.9

4. Compulsory loan will continue after 1983.

5. Equity contributions from the Federal government limited to the amountapproved for 1983: Cr$94 billion.

6. Reversion tax, 4% p.a. during 1983-85, and 3% p.a. during 1986-87.

7. Reinvestment of dividends, 9.5% of the dividend payments ot the Federalgovernment.

8. Borrowing conditions:

Grace period: 3 yearsRepayment period: 5 yearsInterest and other charges: 12% p.a.

- 45 -

ANNEX 2-3/3Page 2 of 2

9. Lending conditions (from ELETROBRAS to the utilities, with sectorgenerated resources):

Grace period: 2 years for distribution5 years for generation

Repayment period: 10 yearsInterest and other charges: 10% p.a.

- 46 -

ANNEX 3-1

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

ELETROBRAS

SUBSIDIARY AND ASSOCIATED CONPANIES

as of December 31, 1981

COMPANIES %

CONTROLED COMPANIES

FURNAS 98.96CHESF 96.91ELETRO SUL 99.14ELETRONORTE 96.34ESCELSA 90.55LIGHT 82.48

ASSOCIATED COMPANIES

CERON 0.27ELETROACRE 7.27CELETRAMAZON 0.39CER 1.26CELPA 6.69CEA 0.20CEMAR 9.09CEPISA 6.16COELCE 12.35COSERN 3.76SAELPA 5.58CELPE 2.80CEAL 7.90ENERGIPE 5.60COELBA 15.76

*COBER 6.28CEMIG 16.69ERMIG 20.00CERJ 33.15CESP 11.45CPFL 22.58CAEEB 3.49COPEL 13.11CELESC 9.83CEEE 12.83CEB 5.85CELG 15.82CEMAT 7.96ENER SUL 10.34EEB 0.15CELB 3.31

SOURCE: DECO/DVCO

R esou rces r

Investmet - a rm

m 0 n ~ 0

A nO

:I] m~~~~~

| Accounting > _ m m

I q C-Finane |

| Technical Standards r r

0~~~~~~~0~~~~~~~

| Industrial Reain |-

> <~~~~~~~~~~~~~~~~~~~,

>~~~~~

-4 0~~~~~~~~~~~~-

| Market Studies Lr

o~~~C)~~~~~~~~~.

| Genea >LWr

Utility Management 7,2> < 0

Energy Studies |E m _

I ~ ~~~~~~~ ~~~~ I >mo0Electrical Svtm>1

Eneurgy Elecrications1

| Tariff |- D

> ~~~ O

_ o m q _ 1m m Utility Management _ > m < o~~~~~~~>

SuP ervision ~ ~ M _ >

UnomtiioMnag >o ElcrclI

Energ Oerations _

| eeomuiationstema r-

orand ectrical r

Eegy Distrabtion Serie1

TelecommunicationSu SyvstemL

andn Cordnatrol fGO

o~~~~~~~~~

rE~~~~~~~~ m omte fCodnto

S, creitaribut ~rSp,iion Comte

an_oriatoifGO

Comi-ee Cornai

of the Nlwtheaa

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

ELETROBRAS

HISTORICAL INCOME STATEMENT-/

(in millions of current Cr$)

Year ending Dec. 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Revenues 1,774 2,308 4,697 6,296 10,068 20,346b/ 46,780 65,837 222,641 49.7,032

From shareholdings 666 759 1,238 1,253 2,316 7,041- 20,021 10,112 87,677 216,876

From loans 1,056 1,463 3,214 4,245 6,830 12,877 24,890 54,331 131,049 280,156

Other 52 86 245 798 922 428 1,869 1,394 3,915 -

Expenses 91 134 416 631 974 1,826 3,606 8,247 17,772 33,296

Administrative and

general 88 124 222 392 631 1,329 2,898 6,606 13,450 29,572

Depreciation 3 9 12 16 27 37 51 71 116 221

Taxes -- 1 182 223 316 460 657 1,570 4,206 3,503

Income before interest 1,683 2,174 4,281 5,665 9,094 18,520 43,174 57,590 204,869 463,736

Interest on debt 209 289 606 1,325 2,687 4,919 16,289 34,488 85.95 188,290 1

Domestic currency 158 222 , 385 806 1,455 3,476 9,255 16,942 36,462 54,587

Foreign currency 51 67 221 519 1,232 1,443 7,034 17,546 49,495 133,703

Income before monetary

adjustment 1,474 1,885 3,675 4,340 6,407 13,601 26,885 23,102 118,912 275,446

Monetary adjustment 524 27,285 -/ 10,753 13,188 (25,666)

Net income 14,125 54,170 33,855 132,100 249,780

a/ See Annex 3-6/1 for graphic presentation.

h/ Includes Cr$7.001 million of shares revaluation.

c/ Includes Cr$2 3,8 33 million for extraordinary profit made in the acquisition of LIGHT - Servicos de Eletricidade S.A.,

between the book value of equity and the actual price paid.

BRAZIL

EIETROBRAS II POWER DISTRMIBIOcN FECr

EILETRORAS

HISIDRICAL FILIA OF FtlS a/(in millliorn of current Cr$)

Year ending Dec. 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

SOURCES 4,074 6,426 10,577 17,977 30,413 48,246 74,526 129,580 298,249 666,452

Net internal cash generation 1,613 2,333 4,710 5,715 8,242 12,730 8,698 16,350 54,439 194,595

Gross internal cash generation 2,070 2,976 5,537 7,539 11,244 18,585 26,764 59,051 143,280 416,492Income before interest 1,683 2,174 4,281 5,665 9,094 18,520 43,174 57,590 204,869 466,707Norr-cash expenses (473) 38 (104) (300) (991) (3,8D4) (22,158) (8,971) (76,714) (109,766)Amortization receipts 860 764 1,152 1,574 3,141 3,869 5,748 10,432 15,125 59,551

Capital Service 457 643 827 1,824 3,002 5,855 18,066 42,701 88,841 221,897Amortization payments 259 356 312 831 894 1,633 4,463 14,534 23,990 64,093Interest payments 197 285 510 986 1,860 4,213 11,883 27,408 63,984 157,012Dividend payments (net) 1 2 5 7 248 9 1,720 759 867 792

Other consumer-based contributions 2,166 3,596 4,310 7,791 12,490 18,638 26,394 50,701 147,695 251,236Sole tax 502 678 848 1,062 1,464 1,846 2,156 3,634 6,645 -CXxuAhLSDry loan 1,074 1,400 2,021 3,294 4,366 7,362 11,165 21,479 45,121 88,845Reversion 590 1,518 1,441 3,435 6,660 9,430 13,073 25,588 95,929 162,391

Equity contributions 134 289 398 171 634 665 1,697 6,564 38,300 55,175

Borrowing 161 208 1,159 4,300 9,047 16,213 37,737 55,965 57,815 165,446

APPLICATIONS 4,074 6,426 10,577 17,977 30,413. 48,246 74,526 129,580 298,249 666,452

Investments 3,661 6,348 10,635 15,957 29,692 44,921 73,321 131,887 293,186 648,292Capital stock 612 1,139 1,534 3,193 4,317 5,936 8,671 4,773 11,663 131,192Loais 2,897 5,156 8,943 12,702 25,076 38,290 63,169 12D,467 280,669 515,584Other 152 53 158 62 299 695 1,481 6,647 854 1,516

Increase in oring capital 413 78 (58) 2,020 721 3,325 1,205 (2,307) 5,063 18,160

a/Source: TFontes e Us0s de Recurso do Setor de Energia Eletrica, E;LET)BRAS.

See Anxn 3-5/2 for graphic presentation.

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

ELETROBRAS

HISTORICAL BALANCE SHEET -

,Year ending Dec. 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982- in millions of current CrS - - - in billions of current Cr5 - - - - - -_

ASSETS 19,251 27,378 41,710 67.016 112.1 2468 508.6 902.9 2,158.2 4,922.8

Current assets 2,151 2,199 2,216 4,983 10.9 18.2 22.0 52.0 411.8 215.4Cash and deposits 738 672 290 1,433 1.5 5.6 6.1 3.4 5.4 11.6

Loans 1,273 1,526 1,902 3,528 8.5 12.5 15.0 47.9 95.6 164.7

Other 140 1 24 22 0.9 0.1 0.9 0.7 10.8 39.1

Loans 9,730 14,601 25,315 38,800 69.1 136.5 284.9 512.0 1,275.5 2,879.9

Capital stock investments 7,050 9,986 13,824 22,777 31.6 91.4 200.8 337.7 768.7 1,818.5

Subsidiaries 4,541 6,502 8,413 14,428 20.7 57.1 139.8 217.5 508.8 1,379.5Associated companies 1,835 2,299 4,087 5.158 7.4 21.7 34.6 41.6 115.4 167.0

Itaipu 4 376 461 626 0.8 1.1 3.6 19.0 6.4 12.6

Other 670 809 863 2,565 2.7 11.5 22.8 59.6 138.4 259.4

Net fixed asbeLs 172 333 0n4 0 7 n.s 1.2 2.2 4-1 ;

Gross fixed assets 159 187 309 374 0.5 0.9 1.3 1.8 3.6 7.0Accumulated depreciation (8) (15) (26) (41) (0.1) (0.2) (0.4) (0.6) (1.4) (2.9) o

I ~~~~~~~~~~~~~~C:Other assets 269 420 72 123 0.1 _ = -- __ 4.9

EQUITY AND LIABILITIES 19,351 27,378 41,710 67,016 112.1 246.8 508.6 902.9 2,158.2 4.922.8

Current liabilities 1,079 1,750 2,067 3,295 8.0 14.2 32.5 78.7 134.9 218.5Debt 194 248 311 402 3.2 7.5 16.8 63.6 104.7 146.5

Capital stock subscriptions 21 494 95 350 0.7 0.3 -- -- -- -Other 864 1,008 1,661 2,543 4.1 6.5 15.7 15.1 30.2 72.1

Long-term debt 6,253 9,485 15,067 28,309 51.1 110.7 248.6 435.1 1,074.7 2,480.3Domestic currency 4,982 7,813 12,927 25,102 40.3 81.7 158.9 269.7 707.4 1,555.7

Foreign currency 1,271 1,672 2,140 3,207 10.8 29.0 89.7 165.4 367.3 924.6

Other liabilities 1,093 1,098 302 294 0.4 -- = -- 30.9

Equity 10,926 15,045 24,274 35,118 52.5 121.8 227.5 389.1 948.6 2.193.1 XShare capital 8,817 10,980 14,600 2Z.000 27.5 35.8 48.8 71.7 160.0 360.0Reserves and retained earnings 2,109 4,065 9,674 13,118 25.0 86.0 178.7 317.4 788.6 1,833.1

i See Annex 3-6/3 for fraplic presentation.

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

ELETROBRAS

HISTORICAL FINANCIAL INDICATORS-a/

Year ending Dec. 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

Debt/Equity (%) 44/56 45/56 42/58 48/52 53/47 51/49 55/45 57/43 55/45 53/47

Income before monetary adjustment/Equity (%) 13.5 12.5 15.1 12.4 12.2 11.2 11.8 5.9 12.5 12.6

Revenues from shareholdings/Capital stock investments (%) 10.4 8.3 9.6 6.2 8.0 7.7 10.0 3.0 11.4 11.9

Revenues from loans/Loans (%) 9.6 9.1 11.8 10.0 8.8 8.6 8.3 9.7 10.3 9.7

Interest on debt/Debt (%) 3.2 3.0 3.9 4.6 4.9 4.2 6.1 6.9 8.0 7.6

Spread (%) 6.4 6.1 7.9 5.4 3.9 4.4 2.2 2.8 2.3 2.1

Gross internal cash generation/Capital service (times) 4-5 4.6 6.7 4.1 3.7 3.2 1.5 1.4 1.6 1.9

Gross internal cash generation +Compulsory loan + Reversion/Capital service (times) 8.2 9.2 10.9 7.8 7.4 6.0 3.1 2.5 3.2 3.0

Income before interst/Intereston Debt (times) 8.1 7.5 7.1 4.3 3.4 3.8 2.7 1.7 2.4 2.5

Foreign currency debt/Long-termdebt (%) 20.3 17.6 14.2 11.3 21.1 26.2 36.1 38.0 36.7 37.3

a/ Calculated with year-end figures.

- 52 -

ANNEX 3-3/5

Page i of 2BRAZIL

BLETBOBRLS II POWER DISTRIBUTION PROJECT

ELZTROBRAS

FOREIGN DEBT

AMORTI- Balance Outstanding ae ofDATE O GRACE ZATION D ceabor 31, 1982

LENDER SIGNATURE CURRENCY AlOIDN3T INTZREST PERIOD PERIOD Origitnl103 ( ,p.a.) (Months) (Mon'ths) C4rre cy Cruxeijoe 1/

AID - 512L-085 10/29/71 US$ 2,394 6.0 66 180 1,500 367

AID - 512L-053 12/01/65 US$ 12,036 3.5 108 198 5,846 1,431

AID - 512L-070 10/23/67 US$ 702 6.0 72 180 350 86

IDB - 122 OC/BR 10/01/65 USM 16,400 6.0 48 132 - -

IDB - 339 SF/BR 12/18/72 USS 34,.L34 4.0 84 168 31,166 7,631

IDB - 235 OC/BR 12/18/72 US$ 16,169 8.0 84 168 14,763 3,615

IDB - 184 OC/BR 12/17/69 US$ 11,962 8.0 48 192 7,332 1,795

IDB - 184 OC/BR 12/17/69 DM 26,907 8.0 48 192 16,851 1,676

IDB - 2 XD-BR 12/18/72 £ 1,650 3.0 54 252 1,246 492

IDB - 203 SF/BR 03/12/69 US$ 24,819 3.25 48 192 11,130 2,725

IDB - 14 CD/BR 03/12/69 CAN$ 8,5i66 3.0 84 276 6,015 1,199

IBRD - 1300-BR 08/27/76 US$ 50,000 8.85 42 198 45,054 11,032

IBRD - 1939-BR 01/14/81 US$ 54,000 9.25 43 144 3,203 784

IBRD - 2138-BR 05/12/82 US$ 182,700 11.6 43 128 2,700 661

IBRD - 1538-BR 05/08/78 US$ 130,000 7.45 42 144 72,164 17,670

EXIMBANY - 2636 09/22/69 US$ 7,166 6.0 36 144 866 212

EXIMBANK - 3820 A 05/19/76 USS 9,180 8.0 80 54 8,482 2,077

EXIMBANK - 5968 05/19/76 USS 28,200 8.5 88 48 28,200 6,905

EXIMBANK - 5968 A 05/19/76 USS 701 8.25 6 54 - _

EXIMBANK - 3820 07/24/72 US$ 38,685 8.5 108 72 29,014 7,104

KFW 06/22/71 DM 9,300 3.0 66 240 6,284 625

CHASE MANHATTAN BANK-3820 07/24/72 USS 38,671 LIBOR+3/4 36 72 -- -

CHASE MANHATTAN BANK 07/24/72 USS 8,773 - 33 48 - -

CHASE MANHATTAN BANK 11/19/81 US$ 32,0DO LIBOR+21/8 48 48 32,000 7,835

US$ 17,000 PRIME(NY)+2 48 48 17,000 4,163

DM 80,748 LIBOR+21/8 48 48 80,748 8,029

MANUFACTURERS H.T.-3820 A 05/19/76 USS 9,130 LIBOR+17

/8 28 54 -- -

MANUFACTUEJRS H.T.-BH-3820 A 05/19/76 USS 2,040 LIBOR+13

/4 14 54 - -

MANUFACTURERS HANOVER LTD. 04/24/78 USS 250,000 LIBOR+17

/8 48 78 211,538 51,797

MORGAN G.T.-N.Y.- 5968 05/19/76 USS 14,100 LIBOR+13

/4 22 30 -- -

MORGAN G. TRUST - 5968 A 05/19/76 US$ 3.50 LIBOR+13

/4 6 54 - _

MORGAN G.T.-LONDON - 5968 05/19/76 US 8,000 LIBOR+13

/4 10 54 - --- 5968 A

MORGAN G. TRUST CO. 07/28/80 USS 400,000 LIBOR+13

/8 48 48 400,000 97,944

- 53 -ANNEX 3-3/5

Page Z of 2

AMORTI- Balance Outstanding as ofDATE OF GRACE ZATION December 31, 1982

LENDER SIGNATURE CURRENCY AMOUNT INTEREST PERIOD PERIOD Original103 (1 p.a.) (Months) (Months) Currency Cruzeiros I/

103

io06-

PRIVATE EXP.F.CORP-5968 05/19/76 US$ 21,150 9.25 52 36 6,681 1,636

PRIVATE ZXP.FUNDING-5968 A 05/19/76 US$ 525 9.25 6 54 - -

BANK OF AMERICA N. TRUST 09/12/77 US$ 250,000 LIBOR+17/16 84 66 250,000 61,215

BANK OF AMERICA NATIONAL 12/22/77 US$ 54,000 LIBOR+2 36 54 24,000 5,877

BANK OF AMERICA 08/15/79 US$ 100,000 LIBOR+3/4 72 72 100,000 24,486

BANK OF AMERICA 06/04/81 US$ 148,567 PRIME(NY)+2 48 48 148,567 36,378

US$ 151,433 LIBOR+21/8 48 48 151,433 37,080

BANK OF AMERICA N.T.&S.A. 06/21/82 *US$ 152,575 LIBOR+21/8 48 48 152,575 37,359

US$ 147,425 PRIMZ+17/8 48 48 147,425 36,098

DEUTSCHE BANK 10/26/78 US$ 250,000 LIBOR+11/4 66 60 250,000 61,215

DRESDNER BANK A.G. 03/22/78 DM 150,000 6.75 97 - 150,000 14,915

DRESDNER BANK A.G. 08/17/77 DX 150,000 7.0 58 15 134,514 13,375

DRESDNER BANK 02/08/79 EN 100,000 7.0 96 - 100,000 9,943

THE BANK OF TOKYO 03/28/78 Y 10,000,000 7.8 84 72 10,000,000 9,959

THE BANK OF TOKYO LTD.* 09/25/78 Y 5,000,000 7.3 72 78 5,000,000 4,980

THE BANK OF TOKYO 08/23/79 Y 10,000,000 8.5 120 66 10,000,000 9,959

KUWAIT INTERN. INVEST. CO. 10/09/78 KD 10,000 8.25 144 -- 8,400 7,125

UNION BANK OF SWITZERLAND 08/17/79 SW.Fr. 80,000 4.5 96 30 80,000 9,322

DG. BANK 04/23/79 US$ 400,000 LIBOR+0.96 72 78 400,000 97,944

THE LONg TERM CREDIT BANK 06/19/79 Y 10,000,000 7.7 120 66 10,000,000 9,959OF JAPAN

THE NOMURA SECURITIES CO.LTD. 08/21/79 Y 10,000,000 8.3 72 60 10,000,000 9,959

NATIONAL BANK OF CANADA 11/24/80 US$ 20,000 LIBOR+11/2 48 48 20,000 4,897

N.V.BANK VOOR 04/28/81 DFL 50,000 127/8 72 48 50,000 4,540NEDERLANDSCHE C.

ROYAL BANK OF CANADA 07/24/81 CAN$ 50,000 PRIME(CANS)+2 48 48 50,000 9,964

UNIAO DE BANCOS 03/19/82 US$ 27,000 LIBOR+21/8 48 48 27,000 6,611

BRASILEIROS - N.Y.

US$ 43,000 PRIME+17

/8 48 48 43,000 10,529

AMFORP/BEPCO 11/12/64 USS 141,930 6.0 & 6.5 0 535 81,076 19,852

1/ Exchange rates used:

1 USS ' 244.86 CrS1 DM - 99.431 Cr$1 £ - 395.20 Cr$1 CANS 199.27 Cr$1 Y 0.99593 Cr$1 KD * 848.268 Cr$1 SWFr - 116.52 Cr$1 DFL * 90.801 Cr$

BRAZIL

ELETROBRAS II - POWER DISTRIBUTION PROJECT

ELETROBRAS

PROJECTED INCOME STATEMENTS(in billions of mid-1983 Cr$)

Year Ending Dec. 31 1983 1984 1985 1986 1987 TOTAL 83-87

REVENUtES 4116 749 412 1 1fr5 3')42

From Shareholdings 33 174 196 300 378 1,081Utilities 33 174 194 298 376 1,075Itaipu - - 2 2 2 6

From Loans 378 461 553 642 727 2,761Contracted 192 217 226 224 226 1,085To be contracted 26 34 85 146 222 513Itaipu 160 210 242 272 279 1,163

Interest on Debt 330 364 411 444 453 2,002Contracted 231 207 191 163 121 913To be contracted 19 55 94 131 155 454Compulsory loan 31 37 44 52 62 226 XGlobal Reversion Fund 49 65 82 98 115 409 y

Net Income 81 271 338 498 652 1,840

ELETROBRAS II - POWER DISTRIBUTION PROJECT

ELETROBRAS

PROJECTED FLOW OF FUNDS

(in billions of mid-1983 Cr$)

Year Ending Dec. 31 1983 1984 1985 1986 1987 TOTAL 83-87

SOURCES 969 862 999 925 1,196 4,951

Net Internal Cash Generation (91) (131) (127) (184) 112 (421)

Gross Internal Cash Generation 330 308 459 582 939 2,618Dividend receipts 30 5 42 47 66 190Interest receipts 189 128 179 291 428 1,215Amortization receipts 111 175 238 244 445 1,213

Capital Service 421 439 586 766 827 3,039

Dividend payments 2 5 6 6 7 26Interest payments 281 299 329 346 338 1,593Amortization payments 138 135 251 414 482 1,420

Other consumer-based contributions 615 645 745 741 848 3,594

Compulsory loan 186 215 251 297 344 1,293Reversion 429 430 494 444 504 2,301

Equity Contributions 94 - - - - 94

Borrowings 351 348 381 368 236 1,684

APPLICATIONS 969 862 999 925 1,196 4,951

Investments 911 803 940 865 1,137 4,656

Capital stock 126 34 59 73 138 430Loans 785 769 881 792 999 4,226

Increase in working capital 58 59 59 60 59 295

BRAZIL

ELETROBRAS II - POWER DISTRIBUTION PROJECT

ELETROBRAS

PROJECTED BALANCE SHEETS

(in billions of mid-1983 Cr$)

Year Ending Dec. 31 1983 1984 1985 1986 1987

ASSETS 7,989 9,178 10,467 11,750 13,112

Current assets 88 147 207 266 325

Loans 4,898 5,645 6,517 7,364 8,206Contracted 2,982 2,799 2,738 2,705 2,639

To be contracted 412 997 1,647 2,474

Itaipu 2,070 2,434 2,782 3,012 3,093

Capital stock investments 3,003 3,386 3,743 4,120 4,581

Contracted 1,893 2,013 2,156 2,382 2,649

To be contracted 1,091 1,354 1,569 1,718 1,913 a

Itaipu 19 19 18 20 19

EQUITY AND LIABILITIES 7,989 9,178 10,467 11,750 13,112

Debt 5,120 6,043 6,999 7,790 8,507

Compulsory loan 1,100 1,308 1,552 1,839 2,173

Global Reversion Fund 1,711 2,206 2,781 3,321 3,940

Extra-sector, contracted 1,997 1,922 1,711 1,394 1,049

Extra-sector, to be contracted 312 607 955 1,236 1,345

Equity 2,869 3,135 3,468 3,960 4,605

Capital stock, contracted 1,061 1,061 1,061 1,061 1,061

Capital stock to be contracted 125 227 337 456 586

Capital reserves 247 247 247 247 247

Earnings reserve 1,124 1,273 1,459 1,734 2,114Retained earnings 205 211 238 325 448Dividends payable 107 116 126 137 149

BRAZIL

ELETROBRAS II - POWER DISTRIBUTION PROJECT

ELETROBRAS

PROJECTED FINANCIAL INDICATORS a/

Year Ending Dec. 31 1983 1984 1985 1986 1987

Debt/Equity (%) 64/36 66/34 67/33 66/34 65/35

Net income/Equity (%) 2.8 8.6 9.7 16.5 14.2

Revenue from shareholdings/Capitalstock investments (%) 1.1 5.1 5.2 7.3 8.3

Revenues from loans/Loans (%) 7.7 8.2 8.5 8.7 8.9

Interest on debt/Debt (%) 6.4 6.0 5.9 5.7 5.3

Spread (%) 1.3 2.2 2.6 3.0 3.6

Gross internal cash generation/Capital service (times) 0.8 0.7 0.8 0.8 1.1

Gross internal cash generation +Compulsory loan + Reversion/Capital service (times) 2.2 2.2 2.1 1.7 2.2

Income before interest/Intereston debt (times) 1.2 1.7 1.8 2.1 2.4

a/ Calculated with year-end figures.

- 58 -

ANNEX 3-5/1

BRAZILELETROBRAS II POWER DISTRIBUTION PROJECT

ELETROBRASCOMPOSITION AND DISTRIBUTION OF REVENUES

HISTORICAL - - PROJECTED-

m LiM

H O Smw!~~~~~~~~~~~~(0 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~ -0 .

190

19572 19S74 1 976 1Q978 1 980 1 982 1 984 1 988

YEARS

1/ See Annexes 3-3/1 and 3-4/'1.

- 59 -

ANNEX 3-5/2

BRAZILELETROBRAS II POWER DISTRIBUTION PROJECT

ELETROBRASSOURCES AND APPLICATIONS OF FUNDS

HISTORICAL .--- PROJECTED

EQUITYItoCONTRIBUTIONS _ f

30

H~~~~~~~~~~~~~~~

,CAPI~THER STOCINVSUMER-BSED / /g / l/ -40 I- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~9

0~~~~~ OASLLI

1 97 3 1975 1977 1979 1981 1983 1985 1987YEARS

1/ See Annexes 3-3/2 and 3-4/2.

- 60 -

ANNEX 3-5/3

BRAZIL

ELETROBRAS II POWER DISTRIBUTION PROJECT

ELETROBRAS

FINANCIAL MONITORING INDICATORS

ELETROBRAS, in aiming to reduce the participation of borrowings inits funding composition of its investment program, will use the followingratios as limits during the project execution period:

1. With respect to any new borrowings to be relent to Sectorutilities, the relending terms and conditions will be the same asas the borrowing terms, except that they will include an additionalrelending charge of at least one percentage point on theoutstanding balance.

2. With respect to all debt, the interest rate on total loans(calculated as the interest earned during the year divided by thetotal loans at the end of the year) will be at least tw percentagepoints higher than the interest rate on debt (calculated as theinterest paid or accrued during the year divided by the outstandingdebt at the end of the year).

3. For ELETROBRAS and its subsidiaries, new borrowings not forrelending or for direct investment, as a percentage of total debtservice on indebtedness denominated in foreign currencies, will notexceed 100% in 1983, 88% in 1984, 80% in 1985, 70% in 1986, and 60%in 1987.

4. The share of debt, excluding the reversion funds and the compulsoryloan, as a percentage of total equity and liabilities will be lessthan 35% in any year. For this purpose, the reversion funds willmean the net balance in the account used to control funds, underthis name and under the responsibility of ELETROBRAS, generatedaccording to Law No. 5,655 of May 20, 1971, as amended. Thecompulsory loan will mean the net balance of the account used tocontrol funds, under this name and under the responsibility ofELETROBRAS, generated according to Law 6,180 of December 11, 1974,as amended.

5. The capital service coverage ratio will be maintained every year ata level greater than 1.5. This ratio will be calculated as theaggregate of interest, amortization, and dividend, reversion,compulsory loan and sole tax, receipts net of operational andgeneral and administrative expenses, divided by the aggregate ofinterest, amortization and dividend payments (receipts and paymentsto be considered as net of reinvestment).

- 61 -

ANNEX 4-1

B R A 7. I L

E117TT,S II PR14I3 D ISThRTM7TTI PfRrx=

PM Csr S s (1)

(in USS millions! (2)

1984 1985 1986 1987 TOTAL

CERON - Local 5,2 3,6 14,2 20,7 43,7

- Foreign 2,9 10,9 9,7 5,4 28.9

- Total 8,1 14,5 23,9 26,1 72,6

ELETRONORlTE(MANAUS) - Local 11,7 11,3 9,8 8,6 41,4

- Foreign 3,1 *10,2 9,1 s,e 28.2

- Total. 14,8 21,5 18,9 14,4 69,6

Ca4AR - Local 9,3 12,1 16,9 21,3 59,6

- Foreign 4,0 15,3 13,7 7,3 40,_3

- Total 13,3 27,4 30,6 28,6 99,9

CEPISA - Local 7,1 6,7 10,6 10,3 34,7

- Foreign 2,3 9,0 -8,2 4,2 23,7

- Total 9,4 15,7 18,8 14,5 58,4

-CLAL - Local 11,2 10,9 127,4 6,5 41,0

- Foreign 2,9 10,8 9,6 5,1 28,4

-. Total 14,1 21,7 22,0 11,6 69,4

LIGHT - Local 25,8 31,4 27,6 24,0 1C8,8

- Foreign 7,5 28,4 25,4 13,5 '74 R

- Total 33,3 59,8 53,0 37,5 183,6

ELETROPAULO - Local 43,5 29,4 36,8 30,0 139,7

- Foreign 8,3 33,5 31-,S 18,1 91,8

- Total 51,8 62,9 68,7 48-,1 231,5

T 0 T A L - Local 113,8 105,4 '28,3 121,4 468,9

- Foreign 31,0 118,1 107,6 59,4 316,1

- Total 144,8 223,5 235,9 180,8 785,0

(1) Including physical and price contingencies

(2) Based on December'82 prices, adjusted for t.h.e February'33 maxi-devaluation,

using Cr$ 328,47 = US$ 1.

-" 62 -

ANNEX 4-2

BRAZILELETROBRAS II POWER DISTRIBUTION PROJECT

PROGRAM AND PROJECT COSTS I/(in US$ millions) 2/

1983 1984 1985 1986 1987 1988 TOTAL %

3/CERON - PCI 5.3 13.8 21.8 20.9 27.1 14.6 103.5 -100%

- POF - 7.5 12.3 20.7 22.0 - 62.5 - 60%

MANAUS - PGI 28.3 22.7 26.9 24.0 14.5 9.6 126.0 -100%(excl. - POF - 14.2 19.1 16.2 12.0 - 61.5 - 49%Balbina)

CEMAR - PGI 11.1 17.4 28.3 32.8 34.1 28.1 151.8 -100%- POF - 12.5 24.0 26.4 24.0 - 86.9 - 57%

CEPISA - PGI 8.9 10.1 18.3 20.1 20.6 24.5 102.5 -100%- POF - 9.0 13.7 16.2 12.2 - 51.1 - 50%

CEAL - PGI 17.7 18.5 21.9 22.9 22.3 20.0 123.3 -100%- POF - 13.5 19.2 19.0 9.7 - 61.4 - 50%

LIGHT - PGI 78.9 98.0 123.6 151.6 182.6 223.4 858.1 -100%- POF - 31.9 53.1 45.4 31.5 - 161.9 - 19%

ELETROPAULO - PGI 130.9 194.6 212.4 241.2 270.3 308.9 1358.3 -100%- POF - 50.1 55.2 59.0 40.2 - 204.5 - 15%

TOTAL - PGI 281.1 375.1 453.2 513.5 571.1 629.1 2823.5 -100%- POF - 138.7 196.6 202.9 151.6 - 689.8 - 24%

1/ Base costs including physical but excluding price contingencies.2 Based on December'82 prices, adjusted for the February '83 maxi-devaluation,

using CR$ 328.47 - US$1.3/ PGI = Investment Program

POF = Subproject to be financed from IBRD loan.

11/10/83

- 63 -

ANNEX 4-3

BRAZIL

ELETROBRAS II. POWER DISTRIBUTION PROJECT

ESTIMATED DISBURSEMENT SCHEDULE(in US$millions)

IBRD During Cumulative atFiscal Semester Ending Semester Semester EndYear

1984 June 84 5.6 5.6

1985 December 84 20 25.61985 June 85 40 65.6

1986 December 85 55 120.61986 June 86 45 165.6

1987 December 86 35 200.61987 June 87 25 225.6

1988 December 87 15 240.61988 June 88 5 245.6

1989 December 88 5 250.6

B R A Z I L

ELETROBRAS II POWER DISTRIBUTITON PROJECT

BENEFICIARIES' INVESTMENT AND FINANCIIG PLANS

(December 1982 Prices) (1)

C EAl CEPISA C E M A R ELETI TE L I G H T C E RON ELEIWPAUIO

uSS 10i % US$ 106 % USS 106 % USs lo % 106 % Us$ 106 % USS 106 %

INVESlTPLIW i 123,1 100,0 101,4 100,0 15i,6 100,0 5.718,1 100,0 740,8 100,0 100,6 100,0 1.215,3 100,0

Projects in Progress 17,7 14,4 8,9 8,8 11,2 7,3 2.663.5 46,6 2.76,2 37,3 - -- -

Proposed IBRD Project 61,4 49,9 51,1 50,4 86,8 56,5 61,5 1,1 161,8 21,8 62,5 62,1 204,5 16,8

Other Projects 44,2 35,9 42,6 ,42,0 53,8 35,0 2.584,3 45,2 428,9 57,9 41,0 40,8 1.153,8 94,9

kIrking Capital (0,2) (0,2) (1,2) (1,2) 1,8 1,2 408,8 7,1 (126,1) (17,0) (2,9) (2,9) (143,0) (11,7)

Net Internal Cash Generation 17,1 3,9 1,7 1,6. 1,2 0,8 (536,2) (9,4) 234,0 31,6 6,3 6,4 (24,6) (2,1)

Gross internal cashgeneraoion61,9 50,3 55,1 54,3 92j7 60,3 2.612,6 45,7 1.736,8 234,5 37,5 37,3 1.534,9 126,3

Net debt service 31,2 25,3 29,3 28,9 43,6 28,4 3.148,8 55,1 1.299,4 175,4 21,3 21,1 1.479,7 121,6

Other obligations (a) 13,6 11,1 24,1 23,8 47,9 31,1 - - 203,4 27,5 9,9 9,8 79,8 6,6

SaCmuR Ert cor ims 47,6 38,7 852,3 51,6 82,4 53,6 1.1142 4 2

0p9 270,9 36,6 21,9 21,6 38,3 31,5

NdN,SDrIOR Qurry C(rIBTaION$ 5,0 4,0 8 84 Q,3 18,2 1,8 - - 19,0 18,9 47,1 3,9

__RRKX___ 53,4 43,4 39,0 38,5 51,8 33,7 5.112,1 89,4 235,9 31,8 53,4 53,1 809,8 66,7

Existing FIETROERA.S Loans 1,6 1,3 0,6 0,6 0,7 0,5 4,9 0,1 - - 0,6 0,6 - -

Other Existing loans 11,9 9,7 1,3 1,3 0,8 0,5 431,0 7,5 1,7 0,2 - - 239,2 19,7

Proposed IBRD Lan (b) 22,8 10,5 19,0 18,7 32,3 21,0 22,6 0,4 60,0 8,1 23,2 23,1 73,6 6,1

Unid'nIified Saurces 17,1 13,9 18,1 17,9 18,0 11,7 4.653,6 81,4 174,2 23,5 .29,6 29,4 497,0 40,9

(1) Exchange rate: 1 USS Cr$ 328,47

(a) Includes net non-operating resources6 *6(b) Includes co-financing for LIGhT (10 US$ 25,7) and ELETrROPALO (10 US$ 27,6 ), without price contingercies.

-P

BRAZIL

ELETROBRAS II. POWER DISTRIBUTION PROJECT

BENEFICIARIES' GENERAL DATAAs of December 1982

Description CERON ELETRONORTE CEMAR CEPISA CEAL LIGHT ELETROPAULO(Manaus)

Energy Sold ...GWh 130.6 668.5 625.9 397.7 724.3 13,941 32,651.9

Maximum Demand ... MW 37.4 149.1 158.6 108.0 183.4 2,727.8 6,165.2

No. of Residential Consumers 30,654 105,400 220,849 137,141 189,3t0 1,840,310 3,255,800

Total No. of Consumers 38,016 118,567 263,519 161,978 214,945 2,027,957 3,637,000Ln

No. of Employees 583 1,196 1,781 1,402 1,476 14,820 19,104

Concession Area .*.Km2 243,044 14,333 324,616 250,934 27,731 12,159 21,612

kWh per Residential Consumers 1,768 2,150 919 1,068 1,014 2,039 2,250

kWh per total all Consumers 3,435 5,646 2,375 2,455 3,369 6,874 8,978

Consumers/Employee 65 99 148 115 145 137 190

Consumers/Households 19.9 34.8 22 29 38.6 55.1 43.7

U8/

8/5/83

IBRD-17091

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