TO-6a

RESTRICTED

This report is restricted to use within the Bank.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TECHNICAL REPORT

on the

HIGHWAY PROJECT

of the

STATE OF RIO DE JANEIRO

BRAZIL

April 22, 1953

Technical Operations Department

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BRAZIL

STATE 0F RIO DE JATEIRO

HIGHWAY PROJECT (No. 10)

I. Purpose and Scope of this Report

An application for a loan of dS3 million has been received from theBrazilian Government through t.he JointCommission for the purchase by theHighway Department of the State of Rio de Janeiro of equipment mainly forhighway maintenance. This report covers an avpraisal of the proposalincluding its technical, financial, economic and organizational aspects,Recommrendations are included.

This appraisal is based on a report of the Joint Commission, onsupplementary studies made in the field by vr. G. A. Wilkins and hMr. Wi. T..Thornblad of the U.S, Bureau of Public Roads, acting as consultants for theBank, ad on investigations in the field by staff members of the Bank.

II. The Borrower

The Borrower would be the United States of Brazil.

III, Background

The State of Rio de Janeiro, which does not include the FederalDistrict has an area of 42,600 sq. kms. with a population of about 2.3million, the greatest population density of any State in the country.Settlement is characterized by a large number of mediun-sized cities widelydistri'outed throughout the State, a condition which has required the con-struction of a highway system adopted to carry a relatively heavy volume oftraffic.

The presenlt highway system consists of:

(a) 337 kms of paved roads in the Federal Highway system builtand maintained by the National Government;

(b) 3,538 kms of trunk and connecting roads, practically allgranular surfaced, built and maintained by the State Government;

(c) about 10,O00 kms of neighborhood and farm-to-market dirt andgravel roads, built by the State and counties.

The Bank's consul'tants report that the types of roads, their design and thematerials used are satisfactory with minor reservations concerning the slopesused in cuts and fills and the design of drainage ditches. Some of the olderroads are relatively narrow but are being gradually broug,ht to standard widths.

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All new constru'ntion and improvements are based on standard speeificSationsdrawn to confonr to U.S. practice.

The development of an extensive highway system has required theestablishment of a rather large orr anization for construction and maintenancework. The State Highway Department, formed for this purpose, has grown intoan experienced anld well organized agency, it is now responsible for the

execution of a five-yea priority program which involves extensive increasesin the mileage of both- paved and granrula?: surfaced roads.

IV. T SateHih ayDepartment

The State Highwray Department has been an autonomous agency, subor-dinate to the Secretary of Transportation and Public 'lYorks, since 1939. Itsautonormous position was further strengthened in 1946 by a National decreeproviding for State participlation in funds derived Lrom the national taxon ga3cline and oil. The Department has the direct responsibility for theadministration and execution of all matters pertaining t o State Highwaysincluding programming, engineering, construction and maintenance. It isalso responsible for coordination of the State Highwtray Program withNational and County Departments a-nd is requir'ed to provide assistance tothe latter in the form of engineering and construction services.

Policy control of the Highway Department is in the hands of a HighwayCouncil consisting of an independent President, representatives of theSecretaries of Agriculture and Finance, the Director of the Department andrepresentatives from the Federation of Engineers and the National Uni-versity.This council renders decisions on programs, budgets., credit operation<s andother policy matters.

The Highway Council is assisted by an Executive Council and a FiscalCouncil. The Executivre Council consists of the Director of the Departmentand the top members of. his staff and, in addition to advising on policymatters, is responsible for the contract negotiativns of the Department.The Fiscal Council is primarily responsible for auditing and conlrIrcol ofaecouints. Administratively,, the Department is organized in a conaventionalway, consisting of eigh.t divisions all responsible to the Director.,

The Department has eight- district repair shops for its on equipment,four iistrict shops to handle equipment owned by the counties arid one centralrepair shop. These facilities are well distributed but are not adequatefor present needs. A new central repair shop and five new district shopsare now under constr'ction. They are scheduled to be completed by the endof 1953,, These additional shops will make adequate repair facilities avail-able for the equipment which would be acquired under the proposed loan,

V, The Priority Road Program

A comprehensive h.ghway development plan w,xas forLeulated by the Stateduring the period 1939-1945. Th3s plan called for the construction. ofabout 5,000 km-. of State roads of which about 2,200 kms are to be first

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class highways. To date, about 3,500 kms of this sytem has been c-onstructed.Of these new roads about 1,000 kms already require improvement to meet in-

creased traffic demands. The plan is based on a series of main hM.ghwaysconnecting to important cities and ports and linking with Federal highways.The important features of this system are shown on the map at the end of the

report.

The Highway Department to accelerate comple'tion of its develo-pment clan

has formulated a priority program to be executed over the five-year period1952-1957. As shown on the map, the highway- . involved in thiis program arelargely confined to the areas north and ea;3- of the Federcll District. The

program involves improvement.- and paving of 615 knms (384 miles) of main roadsand the construction of 481 kms (300 miles) of granular surfaced roads, mostof which will be paved in the future. At present, there are only 30 kmsof paved road in the State system.

In addition to the State prograin, the Federal Uovernment has an extensiveprogram of highway construction and improvement under way in tihe State whichconsists of twelve major projects. Also, the State has additional work underway which is outside the priority program involving about 100 kms of roads.The Highway Department, in cooneration with the counties w<ill assist in theconstruction of 23 projects involving 302 kms (200 miles) of secondary roads.

The program is well planned, is being carried out efficiently and whencompleted will greatly improve the transport facilities of the State.

vJ . Proposed Bank Participation

The total estimated cost of the priority program amounts to Cr.$ 749million ($37.5 million). A large part of the work has already been let toprivate contractors, the total value of contracts placed amount-ng to aboutCrz. $638 million ($32 million). The loan application under considerationinvolves financing of equipment items for use by the Highway Departmentprimarily in the execution of maintenance Qork and also for some new ccnstruc-tion not contracted to nrivate firms as follows:

Item Description Estimated C.I.F. Cost

1. Equipment for maintenance . .... ; 1,2890ooo2. Equipment for general improvement . . 170,000

3. Equipment for paving 4. . .. . . . 9h;0oGo4. Equ,ipment for earthmoving 296,0005. Spares ... . . .. . . . . . . .3 GOOO

Total .....

4-h -

VII. Financial Considerations

As has bieen mentioned above the proposed loan would cover the purchase

of highway equipment to a total of $3oOOO,OOO. The Highway Departmentexpects to be able to place orders and to draw dowa the loan during 1953.

Since almost all of the equipment is manufactured only in the U,S..,A it is

expected that practically all disbursements would be in U.S. dollars.

In order that the purpose of the loan shall be realized it isnecessary that the Department sha'1 have sufficient local currency resourcesto carry out its program, thus making full use durin nthe next four or five

yearS of the equipment being acquired. In addition to financing theconstruction and maintenance program, the Departmer;t may well have to find

the cruzeiro equivalent of the debt service on the IBRD loan to reimbursethe Federal Government to whom the loan would be made.

It becomBs necessary, therefore, to examine the amouLnts and sources of

the funds which the Highway Department will dispose of for carrying out its

program and for Providing debt service.

The main sources of revenue may be summarized as follows:

Federal

The Federal Government imposes import duties on all oil9 petroleum and

similar pro(dcts. From these furds quotas are allocated to the di.fferentStates. This has been one of the sources of revenue of the HighLway Depart-ment from 1946 onwards.

State

The Highway Department obtains income from three State sources.

(a) The Highway Improvement Tax, levied on motor vehicles,which was first imposed in 1952.

(b) The Ordinary Budget Allocation which consists of the routine

allocation from the overall revenues of the State.

(c) A Special Budget Allocation (Law 1479) which has been madeto provide funds for the priority program.

It may be noted that when the project was suibmitted by the JointCommission there was a deficit of funds for carrving ouit the priority program.;s4nce that time the necessary funds have been specifically allocated by Law No.

1479.

The amounts of revenue realized in the reoent years are summarized

below:

ORDINARY SOURCES OF FUNDS FOR RIO DE JANELRO STATE HIGHWMAY DEFT.

(in thousand Cr$s)

STilTE HIGHWAY DE-T'S HIGHIL'IY STATEtS QUOTA TOTAIL. ORDITN,"RY

ALLOCATION IN TNlPC.R EI OF NATIONAlL A.VAILABILITIES

YmER ST.TE BUDGET TAX HIGHWAY FUND OF HIGHW4,AY DF,.

19141 214.761 (1) 214.7611942 62.161 (1) 25a16l19143 32.o145 (1) 32.o157-9441 25.129 (1) '25.12919145 31.2214 (1) 31.22141946 22.339 11.9144 314.28319147 19.295 15.683 34.97819148 33.2148 23.166 56 .4114

19149 23.798 214.756 148.5541950 214.9140 31.7214 56.66141951 58.1469 36.1406 94.8751952 97.639 15.ooo (2) 46.000 (2) 158.639

(1) includes proceeds of credit operations in addition to budget

allocations for Hiiglaway Department.

(2) Pro-visional figures.

Estimates of future revenue have been prepared by, the Highway Depart-

ment and show oxpocted total amounts of:

ESTIMATES OF TCTAL FUTURE RVEMEFJS

Years Millions of Cruzeiros

1953 217.0195L4 258.01955 277.61956 2808,81957 259.819 58 250.61959 280.2

Details of the make-up of these amounts are giv,n in Appendix 1.

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Although the Federal Government would be responsible for debtservice on the proposed loan, it may be reasonably assumed that thecruzeiro equivalent would be made available by the State HighwayDepartment. In this connection it may be noted that the Federal Govern-ment, as the source of part of the Hfighway Departraent's revenues, mightbe able to retain funds out of the State's quota in the National HighwayFund. From a financial point of view the Federal Government may considerthis quota as its first line of security for debt service. AS will beseen from the following table, the quota amply covers the cruzeiro equivalentof the debt serviec, At thc crres6nt official rate of exchange,

(Millions of Cruzeiros)

IBRt Debt Service&tLmat2d Quota Debt Service covered about

1954 66.0 8.0 8.2 times1955 72.6 14h.2 5.1 times1956 79.8 13.7 5.8 times1957 87.8 13.1 6.7 times1958 96.6 12.6 7.7 times

1959 106.2 6.1 17.h times

A Budgetary Forecast showing the expected receipts and payments ofthe State Highway Department is given in Appendix 2.

Since all revenues are shown as being spent, debt service is shownas covered only once theoretically. But if the expected revenues werenot realized the Department could free funds for debt service by slowingdown its progrem, and since the cruzeiro equivalent at the presentexchange rate of the debt service amounts to only about 5% of total ex-pected revenue it appears in practice well covered.

It will be noted that the proposed loan is shown as being repaidover five years. The Joint Commission originally recommended a term ofeight years but at that time the Highway Department was faced with ashortage of funds which does not now apparently exist. The period offive years was used by the Highway Department in discussions of theproposed loan.

It must be borne in mind that during the lRfe of the loan thecruzeiro rate of exchange may depreciate. If, for instance, the proposedloan had to be repaid at the present free rate, about Cr$40 to US$1, debtservice on the loan would amount to about 10% of expected revenue.

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The conclusion to be drawn from the budgetary forecast is thatthe State Highway Department may expect to receive ample cruzeiro fundsto carry out its program and to cover debt service, except in the eventof a very substantial devaluation of the cruzeiro. in whe4I case theprogram might have to be materially curtailed in order to cover the debteorvice.

The road network of the State is integrated with railroads, FederalHighways and rural roads. Together, these serve a large, densely-populatedand important region, including the Paraiba Valley industrial complex (VoltaRedonda steel mill, metal working plants, chemical plants, food-processingindustries, paper mills). The rural areas within the State supply a greatpart of the food requirements to the urban centers. Much of the milk, meat,fresh vegetables and fruits of the region is truc'-hauled. In 1950, theFederal district alone receSLved 143,000 tons of foodstuffs by road transport.

Adequate maintenance of the State roads will pratect the transportationservices, which these roads render to the economy. Better maintenance willprovide cheaper, faster and more reliable road transport. It will save onwear and tear of trucks and on the consumption of fuel and oil and at thesame time prevent losses of perishable products and delays in deliveries.It helps to protect the State's investment in its network of 3500 lea ofhighways which is estimated to be equivalent to about US$100 million atpresent prices. The project also reduces unit cost of road maintenance byshifting from hand labor to mechanized methods.

Secondly, better maintenance cannot be completely separated fromimprovement of these roads. They were built some years ago and withoutgood maintenance would deteriorate rapidly under an increasing trafficdensity. Between Rio and Niteroi it already reaches 3000 vehicles per day,and is over 1000 per day on at least 500 len of other State highways.Experience in Brazil has shown that it is uneconomaical to maintain unpavedhighways carrying heavy truck traffic when the density exceeds 150 vehiclesper day, a condition which has been reached on about 2500 km of State roads.The paving and improvement of 615 km in the program includes some of themost urgent projects in a continuing program of highwyay improvement.

Finally, the road maintenance project is an integral part of theState's priority program of road construction. By and large, this is awell-conceived effort to expand the highway network in an area with goodprospects for the development of agriculture, forestry, mining, industryand trade. Its execution will greatly benefit the economy of the Stateand increase the traffic density on the existing roads. The greater

emphasis now being given by the Highway Department to the maintenanceof the existing and new highways and roads is fully justified from aneconomic point of view. Without An adequate amount of equipment of thetype which it proposes to acquire by means of a Bank loan, it wouldnever be able to carry out this program of improved maintenance.

IX. Recommendgd Bais, for Loan

The road program of the State of Rio de Janeiro is well planned

and seems justified on the basis of inereaspd traffic density on thepresent system and the transportation needs for further development ofthe areas north and east of the Federal District. Bank participationin this program through the financing of equipment urgently needed formaintenance and minor construction projects appears Justified. The StateHighway Department is well organized, is cmpetent and capable of usingand maintaining modern highway equipment to carry out its present program.

The project could be the basis for a loan equivalent to US$3 million.In the light of the normal life of the equipment being financed, the pro-posed term of about five years seems appropriate.

Forecast of Receiptsg of Rio de JaneiroteDte Hi elartmnt

(Expressed in Milli!ons of Cruzeiros)

Quota in State Highway Stt Bupet AllocationsNational Improvemenit Special Law

Hihya,y E Tax - Ordinar= No. 1479 TotA

1953 60.0 16.0 55.0 86.0 217.0

1954 66.0 17.0 30.0 145.0 258.0

1955 72.6 18.0 30.0 157.0 277.6

1956 79.8 19.0 30.0 152.0 280.8

1957 87.8 20.0 30.0 122.0 259.8

1958 96.6 22.0 70.0 62.0 250.6

1959 106.2 24.0 140.0 10.0 280.2

569.0 136.0 385.0 734.0 1,824.0

* The quota in the National Highway Fund is based on duties levied on

petroleum products imported into Brazil and, following past experience,

shovs a growth at a compounded rate of 10% per annum. Should Brazil t s

balance of payments position in the future be such that this rate of

growth in imports cannot be maintained, the estimates of revenue

fr,om this source (assuming an unchangad' rate of tax) mly be soidewhat

optimist ic.

b LAppendix 2

Rio de Janairo State Highwa i)enart ent,Buegetar Forecast

(Expressed in Millions of Cruzeiros)

1953 1295 1 195;7 , 9 1959

ReceimtoProceeds IBRD-loan 60.0Cruzeiro funds (See App. 1) 217.0 258.0 277.6 230.8 259.8 250.6 280.2

277.0 258.0 277.6 230.8 259.8 250.6 280.2

PaymXentsNew Construction and Inprove-ments:-

under Law no. U/+79 86.0 145.0 157.0 152.0 122.0 62.0 10.0other works 41.0 23.0 20.6 18.8 17.8 58.6 130.2

Maintenance Vork 90.0 82.0 85.8 96.3 106.9 117.4 133.9IBRD Debt Service:-

interest, etc. - 2.0 2.2 1.7 1.1 0.6 0.1c,apital 6.0 12.0 12-,0 12.0 12.0 60o

Purchase of Highway Equipment 60,0

277.0 258.0 277.6 280.8 259,8 230,,6 280,2

H..,.. ...-.. 11.

STATE OF RIO DE JANEIROHIGHWAY MAP

Including The Works Schedule Established . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .For 1952/ 1957

Sto_ ROADS TO BE .o D. . -O

. .................... .0. ..20 3 0 4 0 5 0