Document of The World Bank FOROFFICIAL USEONLY ReportNo.: 39218-BR PROJECTPAPER ON A PROPOSEDADDITIONAL FINANCING LOAN INTHEAMOUNT OFUS$95MILLION TO THE STATEOF SA0 PAULO (BRAZIL) WITH THE GUARANTEEOF THE FEDERATIVE REPUBLICOF BRAZIL FORA SA0 PAULO METRO (LINE4) PROJECT March3, 2008 SustainableDevelopmentDepartment Brazil Country ManagementUnit Latin America andCaribbean RegionalOffice This document has a restricteddistributionandmay be usedby recipientsonly inthe performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Real ($R) R$1.84-2.10= US$1 FISCALYEAR January 1-December 3 1 ABBREVIATIONS AND ACRONYMS CMSP SBo Paul0Metro Company (Companhia do Metro de SdoPaulo) COFIEX ExternalFinancing Commission(Comissdode Financiamento Esterno) CPTM S b Paul0MetropolitanTrain Company (Companhia Paulistade TrensMetropolitanos) CVA Consorcio Via Amarela GESP Government ofthe State of S b Paulo ICB InternationalCompetitive Bidding ICMS Circulation Tax on Goods and Services(Impost0de CirculacdosobreMercadorias eServices) IERR InternalEconomic Rateof Return METRO S b Paul0Metro Company (Companhia do Metropolitanode Sdo Paulo) NATM New Austrian Tunneling Method PCU ProjectCoordination Unit PMU ProjectManagementUnit PITU IntegratedUrban Transport Project(ProjetoIntegrado de Transporte Urbano) PMOC ProjectManagementOversightConsultant RTCC RegionalTransport Coordination Commission SEAIN State Secretariatfor ForeignAffairs S M A Secretariat for the Environment (Secretariado MeioAmbiente) SPM Silo PauloMunicipality SPMR S b Paul0MetropolitanRegion SSP State of Sgo Paulo STM Slo PauloMunicipal Secretariat for Transport (Secretaria de Transportesda Prefeitura do Municipio de Sdo Paulo) STMSP SBo Paulo Secretariat for Metropolitan Transport (Secretaria de TransportesMetropolitanos da Regido Metropolitana de SdoPaulo) TBM Tunnel Boring Machine Vice President: Pamela Cox Country ManagerDirector: John Briscoe Sector ManagedDirector: Jose Luis IrigoyenLaura Tuck Task Team Leader/Task Manager: Jorge Rebelo FOROFFICIAL USEONLY BRAZIL S A 0PAUL0METROLINE4 PROJECT ADDITIONAL FINANCING CONTENTS I INTRODUCTION . .................................................................................. 1 I1. BACKGROUND AND RATIONALE FORADDITIONAL FINANCING ............ PROJECTOBJECTIVE ............................................................................ 1 PROJECTMANAGEMENT ....................................................................... 1 1 RATIONALE AND REASONSFORREQUESTINGTHE ADDITIONAL FMANCING.......... 2 I11. PROPOSEDCHANGES ........................................................................... 2 IV. CONSISTENCYWITH CAS ..................................................................... 4 V . ECONOMIC ANALYSIS OF COST FINANCINGGAP .................................. 4 VI. EXPECTEDOUTCOMES ........................................................................ 5 VI1. BENEFITSAND RISKS ........................................................................ 5 VI11 FINANCIAL TERMS AND CONDITIONSFOR THE ADDITIONAL FINANCING ..........7 I X CONSTRUCTIONSAFETY AND THE JANUARY 12. 2007 ACCIDENT ............7 ANNEX 1: IMPACT OF CURRENCYDEVALUATION ............................................. 9 ANNEX 2: SOCIAL SAFEGUARDS ...................................................................... 18 ANNEX 3: PROCUREMENTTABLES .................................................................. 28 ANNEX 4: DOCUMENTSINTHE PROJECTFILE ................................................. 30 a restricteddistributionand may be usedby recipientsonly in the performanceoftheir official duties. Itscontentsmay not otherwisebe disclosedwithout World Bank authorization . 1 BRAZIL SA0PAUL0METROLINE4 PROJECT ADDITIONALFINANCING PROJECTPAPERDATASHEET Date: March 3,2008 Team Leader: Jorge Rebelo Country: FederativeRepublic of Brazil Sector DirectodManager: Laura Tuck Project Name: SBo Paulo Metro Line4 Country Director: John Briscoe Project ID:P105959 Environmental Category: A Borrower: State of SBo Paulo, Brazil Responsibleagency: Companhia do Metropolitan0 de SBo Paulo Revised estimated disbursements(Bank FY/US$M) FY 2008 2009 2010 lAnnua1 I 45 I 45 I 5 I I Cumulative I 45 90 95 Current closing date: June 30,2009 Rev,isedclosing date [ifapplicable]: Does the restructuredor scaled-upproject require any exceptions from Bankpolicies? oYes XNo Have these beenapprovedby Bankmanagement? oYes oNo I s approval for any policy exception sought from the Board? lo YesXNo Revisedproject development objectives/outcomes[Ifapplicable] N.A. Does the scaled-upor restructuredproject trigger any new safeguardpolicies? Ifso, click hereto indicate which one(s) N.A. For Additional Financing [XI []Credit []Grant Loan For Loans/Credits/Grants: Total Bank financing (US$M.): 95 Proposedterms: FSL F - Financing Plan (US$M.) Source Local I Foreign I Total 95 95 95 95 otal 95 95 190 ... 111 BRAZIL SA0PAUL0METRO LINE4 PROJECT ADDITIONALFINANCING I. INTRODUCTION 1. This Project Paper seeks the approval of the Executive Directors to provide an additional loan in an amount of US$95 million to the State of SBo Paulo, Brazil for the SBo Paulo Metro Line 4 project (ID PO51696, Ln.4646-Br). The proposed additional loan would help finance the costs associated with the devaluation of the US$in relation to the Brazilian Real which caused a financing gap. 2. Phase 1of the project was co-financed by the Japanese Bank for InternationalCooperation (JBIC) in the same amount as the Bank's financing (US$209m), by the State of SBo Paulo (US$332m) and by the private sector (US$183m) which was awarded a concession to operate the system for 30 years in exchange for the provision of rolling stock and systems. The same co-financing ratio for the Bank and JBIC would be maintained for this proposed additional financing. 11. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING 3. The Board approved the ongoing loan for the SBo Paulo Metro Line 4 project for US$209 million on January 22,2002 andthe project becameeffective on September 05,2002. 4. The mainobjective of the project is to improve the quality and long-term sustainability of urban transport in the SBo Paulo Metropolitan Region (SPMR) by interconnecting the existing subway, commuter rail and bus networks through the construction of Metro Line 4 under a "BOT" type scheme, partially financed by the private sector. A subsidiary objective is to improve the accessibility of the low- income population of the areas served by Line 4 to employment centers and health and education facilities. There have been no changes in the Project Development Objectives which will remain the same in the proposed additional financing. 5. The project includes two main contracts: (a) a turnkey contract for the provision of civil works and electrification for the 12.8 km of metro line which is financed by the Bank, JBIC and State; and (b) a concession to operate the system for 30 years, in exchange for the provision of the rolling stock and systems, financed mainly by the private sector and the State. The turnkey contract accounts for 80% of the total project cost and is made up of 3 lots. The contracts were signed in Reais in August 2003 when the exchange rate was R$2.993 per US$. As of March of 2007, the exchange rate has been below R$2.00. 6. The Project Development Objectives and Implementation Performance ratings are satisfactory and the project has performed very well. An initial 14 month delay in start up, caused by judicial litigation on one of the bids (Lot 3) and a prolonged process of expropriations due to a long strike of the property valuators, was overcome. The project has since continued to perform well in all areas including physical construction and institutional reform with about 50% of the civil works concluded and more than 60% of the institutional development completed. The project is also fully compliant with its legal covenants. There are no audits outstanding and the financial management of the project is satisfactory. 7. ProjectManagement: The SBo Paulo Metro is a very experienced organization with a dedicated department in charge of supervising the works of Line 4, staffed with 32 engineers and technicians. Metro 1 also has a Project Management Unit (PMU) which follows the project on a full time basis from the institutional, financial, fiduciary and safeguards standpoint. This unit issues a project management report to the Bank every three months. In addition, the P M U is supported by a Project Management Oversight Consultant (PMOC). As part o f its Terms o f Reference (TOR), this consultant must report its views to the State Secretary o f Metropolitan Transport (STMSP) and to the Bank and issues monthly reports. Finally, at the level o f the STMSP there is a Project Coordination Unit (PCU) which reports to the Secretary and to the Governor on strategic aspects o f the project. 8. In November 2006, the Government successfully awarded a 30-year concession for system operation. This was a landmark event, and the first PPP signed by any public sector agency in Brazil since the passage o f the new PPP legislation more than 2 years ago. 9. On January 12, 2007 a landslide occurred at the construction site o f the shaft o f the future Pinheiros Station o f Lot 2 o f Line 4. Seven people - passengers in vehicles and pedestrians on nearby streets - died in the accident. No tunnel workers were killed or hurt. Several homes and other structures were also affected. Six were demolished shortly after the accident and others were evacuated by Civil Defense authorities. The cause of the accident is currently under investigation. Because of the importance o f this accident, this Project Paper includes annexes on the social safeguards related to the accident. A description o f the accident and a review o f the construction safety methods with recommendations for their enhancement and better enforcement can be found in the project file. The State i s undertaking a full audit o f the accident which the World Bank is closely following. It is important to note that the additional financing was already requested before the accident and will not be used to pay for any accident-related costs as these are the responsibility of the contractor and its insurers. Rationale and reasonsfor requestingthe additional financing 10. According to OP/BP 13.20, the Bank may provide additional financing through additional loans in the context of ongoing, well-performing projects. The additional financing requested by the State is being requested solely to cover a portion o f the financing gap due to the devaluation o f the US$ in relation to the Brazilian currency. This devaluation and the usual effect of inflation affected the turnkey contract costs and their annual price readjustment clause, and the impact was exacerbated since inflation went up slowly and the exchange rate went down sharply. Annex 1 gives a detailed estimate o f the financial gap. 111. PROPOSED CHANGES 11. There are no changes in the original project design since this was a turnkey project. Metro has approved modifications in construction methods proposed by the Contractor in parts o f Lot 2 and by Metro in selected stations but these do not affect the alignment, the number o f stations and the project design. 12. The additional financing will cover the devaluation o f the US$ loan o f the Bank in relation to the original project costs that were calculated in Reais. The additional financing will also cover the cost o f extending the supervision services and project management oversight consultant. A similar additional financing loan is being processed between the State and JBIC to cover the additional costs associated with the JBIC contribution to the project. Table 1 show the Bank cost-sharing of the project in US$ will increase from 22.7% to 27%. In Reais the cost-sharing will be the same as the original one. 2 Local Foreign Total 13. As shown in Table 2, 97.4% o f the US$95M in additional financing will be used to cover the financing gap in works (turnkey contract) and 2.6% will be used to complement the financing gap in the project management oversight consultant contract and other supervision contracts. Table 2: AdditionalFinancingProjectCosts 1 %%zkI Component Category lndicative % of Bank-Financin costs Total (US%MJ (US$M) A: Infrastructure and Equipment Investment Turnkey 185 97.4 '92.5' 97.4- omponent Part B: Institutional and Policy Development Component Consulting 4.762 2.5 2.262 Services Front End Fee (0.25% of loan)* 0.238 0 0.238 Basic add. projectwith Contingencies Total 190 100 95 100 14. The proposed additional financing operation can be accommodated in the context o f the ongoing project, with the SBo Paulo Metro organization responsible for implementation as it has proven its ability to handle such contracts with good results. The proposed additional activities are expected to be completed within a maximum o f three years o f the current closing date o f the loan, which is consistent with the Bank's policy on additionalfinancing. Disbursement 15. The additional financing is expected to be disbursed withinthree years after the signing o f the contract, as shown in Table 3, while Table 4 indicates the amount o f additional financing allocated to each expenditure category. The present closing date o f June 30, 2009 will be extended to June 30, 2010. FM arrangements for the additionalloan remainthe same and continue to meet Bank requirements. 3 Table 3: EstimatedDisbursementsin US$M FY 2008 2009 2010 Annual 45 45 5 Cumulative 45 90 95 Table 4: Allocationof LoanProceeds Expenditure Category Amount in U S Financing Percentage million (YO) 1. Turnkey contract 92.5 100 2. ConsultingServices 2.262 100 3. Front-End fee 0.238 100 Total 95.0 16. Procurement:no new procurement activities will take place. The additional financing will be used to increase the allocations in the Turnkey Contract and Consultants expenditure categories. Annex 3 describes where the additional funds will be added to the original procurement categories. IV. CONSISTENCY WITH CAS 17. As indicated above, there are nochanges to the original project design which was described inthe appraisal o f the existing loan. The additional financing is only to cover the financing gap in phase 1which was approved by the Board in January 22, 2002. The project remains consistent with the Bank's Country Assistance Strategy Progress Report endorsed by the Bank's Board o f Directors on May 6, 2006. A new Country partnership Strategy (CPS), under preparation will continue to support the four pillars put forth in the original CAS: (a) equity, (b) sustainability, (c) competitiveness and (d) sound macro-economic management. In addition, the Bank has prepared a transport strategy for Brazil, in which urban transport figures as one o f the 4 thematic priorities. More specifically, the project supports: (a) reforms and financial viability o f public enterprises, including the concession o f state-owned urban transport agencies to the private sector; (b) improved efficiency o f infrastructure investments; (c) economic growth by improving efficiency in the metropolitan area; and (d) contribution to poverty alleviation by improving accessibility o f low-income segments o f the populationto jobs, educational and health facilities. V. ECONOMICANALYSIS OF FINANCING GAP 18. The investment costs were spread over a longer period of time than originally planned due to the initial project delays. Due to the delays in the conclusion o f the works, the first year benefits also start later. On that basis, a revised economic evaluation produced an EIRR o f 16% compared to 17.7% estimated at appraisal. A revised economic evaluation cash flow can be found in the project files. The fiscal impact o f the additional financing on the State finances is very small and was examined in detail by 4 the Brazilian Federal authorities when the State negotiated the Fiscal Adjustment Program (see Project Files) which took into account all the ongoing and future loans to the State. VI. EXPECTEDOUTCOMES 19. The expected outcomes o f the project are the same as the original ones. VII. BENEFITSAND RISKS 20. There are no changes inthe project beneficiarieswho are the residents o fthe Sgo Paulo Metropolitan Region, and particularly the low-income households (earning up to four minimumsalaries) - themajor users o f public transport. The Government o f the State of Silo Paulo will also benefit from the turnkey with concession to the private sector because it will not pay any operating subsidies and yet continue to expand its Metro system. This expansion also serves to diversify a substantial number o f commuters from road- based transport modes, thereby alleviating congestion and pollution. The reduction o f bus-kilometers and less congestion inthe area o f influence o f the line will have positive air quality impacts which are quantified inthe economic evaluation. 21. Project Risk factors: The main foreseen risks associated with this project have to do essentially with construction delays and/or accidents which could happen with these types o f complex civil works. Inthis case, construction delays could be caused either by soil conditions which might have been missed in the very detailed geological studies, or slower performance of the method o f construction selected. These risks are related with project cost and time overruns leading to delays in completing the project. The investigation and judicial inquiries o f the January 2007 construction accident may also cause additional delays. An updated risk table i s presented below: Original RiskMinimization. Current Risk RiskRating Measure Rating Project cost and time L Use o f well-known technology, available from M overruns. many sources. Detailed Project Engineering estimates at appraisal. Increase construction safety measures Construction Accidents NA Enforcement o f strict construction safety M measures not only inthe worksites but also in the areas above the shafts, particularly during the use o f the shield machine or the application of the NATM.Lessons learned from the Pinheiros station accident will be taken into account Delays in establishing and L "RTCC" was created through an agreement L sustaining the RTTC the State andthe Municipality o f Sgo has led to the integrated tariff called Resettlement delays M 11resettlement in the original loan has been L 5 Delays in the resolutionof M The insurer o f the Contractors consortium has Lto M cases o f claims by familiei now settled most o f the damages to those affected by the accident at affected. The representative o f the State Pinheiros Station (new) Secretary o fJustice and the Sgo Paulo Public Defender have participated inall the negotiations and ratified their outcomes. C V A has pledgedto pay compensation not covered by insurance. Some five claims may be difficult to settle quickly because a few families have engaged attorneys and have opted to litigate their claims. Demand Forecast L Several independent demand forecast studies L will be available. Proliferation o f Illegal M Assurances o f enforcement by State and L Transport (vans, topics) municipalities. Inclusiono f clauses in concession contract assuring enforcement and penalties in case Government fails to enforce the law. Modal and Fare L The establishment o f the RTCC and the new L Integration. inter-municipal bus contracts reflect this integration. Delay in approving Bus M This has beendone and is included inthe L Feeder Routes to rail contracts with the new bus operators. stations Repeated failure to M The PPP which concessions out the operation o f L concession out the the system in exchange for investment inrolling operations o f the system stock and systems by the private sector was signed on Nov. 2006. Failure to obtain private L The State has agreed to finance the gap and the L sector financing or higher PPP was signed. construction costs due to unexpected soil conditions Delays in the procurement L There is no procurement in the additional L process. financing. Timely availability o f M There are no counterpart funds from the State M counterpart funds. for the additional financing Limited Private Sector M The PPP has been signed L Interest in the "BOT type"/Concession Overall Risk Ratin: Modest Modest Risk rating-H (High Risk), 6 VIII. FINANCIAL TERMS AND CONDITIONSFORTHE ADDITIONAL FINANCING 22. The Project will be implemented as a Specific Investment Loan (SIL) to be disbursed over 2008-2010. The Borrower chose a Fixed Spread loan in US$ with a total maturity of 25 years and 5 years grace, with Automatic Rate Fixing by period with options for currency and interest rate conversion. The Borrower benefited from the n e w policy maturity extension approved by the Board on February 12, 2008. The mainreasons for the selection of this type of loan and options reflect the Borrower's intention to hedge against possible currency devaluation. IX. CONSTRUCTION SAFETY, SOCIAL SAFEGUARDS AND THE JANUARY 12, 2007 ACCIDENT AT PINHEIROSSTATION 23. Because o f the impact o f the January 12,2007 accident (see Project Files), the preparation o f this additional financing included a detailed analysis o f the application o f social safeguards related to the accident and an environmental monitoring progress report. A summary o f the findings and recommendations is presented in Annex 2. A review o f the construction safety methods and recommendations to enhance and enforce the safety measures which were put in place was prepared by the PMOC and is available in the project files. A review of the construction safety methods and recommendations to enhance and enforce the safety measures which were put in place is also available in the Project Files. 24. Right after the accident, the State ordered a full audit o f the accident and hired the Instituto de Pesquisas Tecnol6gicas (IPT) o f the University o f S?io Paulo to undertake the study. IPT is a very prestigious organization and has proposed to also have the results o f their audit validated by an international organization. The audit is not expected to be concluded until June 2008 because access to the site was delayed to allow the investigation to proceed and thereafter because o f the stabilization measures which were required to prevent further collapse o f the site. The Bank team visited the site on February 13, 2007 with a JBIC delegation and although the sides o f the shaft were stabilized, the area o f the tunnel collapse was, at that time, still not cleared nor safe for the experts to start the field based technical audit. In the meantime, the audit was concentrating on the project design documents and construction methods. Subsequently, the Bank project team has visited regularly the site to follow-up on the remediation measures and the compensation process. The area i s now stabilized and the audit continues. 25. In order to ensure to the public that all other work fronts were safe, the Ministerio Publico, the Metro and the Contractor (ConsQcio Via Amarela) signed on February 15, 2007, a term o f conduct by which the work activities on all work fronts were temporarily suspended until the IPT would conclude a safety inspection and clear the areas for continuation o f work activities. This agreement allowed a third party, other than Metro (the Employer) and C V A (the contractor) to ensure that the structures were safe and all preventive safety measures had been enforced to minimize the probability o f future accidents. After a rigorous inspection, IPT authorized the continuation o f the works in early May 2007 and recommended a number o f measures to improve construction safety. These measures have been promptly implemented by CVA. 26. The Safeguards Advisory Team requested that the Borrower submit a monthly report on the accident containing the following information: a) a census survey o f the displaced persons and valuation o f assets; b) a description o f compensation and other resettlement assistance provided to date and yet to be provided; c) a description o f initial and ongoing consultation processes with displaced people to define 7 acceptable alternatives; d) institutional responsibilities for the implementation o f the remedial resettlement action plan , including the period after available insurance resources are exhausted; e) a description o f existing procedures for grievance redress; f ) arrangements for ongoing monitoring (suggested to include monthly reports to the Bank until final resolution is has been reached with all affected individuals and households on settlement); and g) indication o f the timetable for the remaining assistance to be provided, as well as source o f budget. The Borrower has been submittingthese monthly reports starting June 22, 2007 with the above information and will continue to submit them periodically until the process is closed. The Borrower has also committed to an independent ex-post-evaluation o f livelihood restoration actions to be carried out by an entity with no affiliation with the project or the construction consortium. Furthermore, the Consortium has indicated the source o f contingency funding to carry out the remediation actions for those affected who elected to go to court because they did not reach an agreement on the amount o f compensation by November 2007. 27. As o f January 31, 2008, nearly all the families affected by the accident had been attended to by the Consorcio Via Amarela (CVA) with the financial cooperation o f the insurance company Unibanco - AIG. Nearly all families who owned homes and apartments that were not destroyed or damaged beyond repair by the accident have been able to returnto their homes. Others, primarily renters, have rentedapartments elsewhere in STio Paulo. All but 8 families (renters and owners) have reached financial settlements for their losses with Unibanco - AIG. Some five families have decided to litigate their claims, a decision that is likely to cause significant delays in settlement o f claims. Inthe immediate aftermath o f the accident, all the evacuated families were accommodated at five-star hotels at the expense o f CVA. Gradually, as settlements were reached and civil defense allowed families to return to their homes in the neighborhood, the number o f families temporarily housed in hotels declined to five as o f January 31, 2008. Negotiations for settlements included the claimants, CVA, Unibanco - AIG, Metro, the STio Paulo Public Defender and the State Justice Department (Secretaria de Justiqa) which ratified all decisions. Settlements included fair market value for lost assets, new appliances to replace those damaged during the power cuts, payments for pain and suffering (danos rnorais), lost profits for business owners as, payments for late rent payments as well as significant levels o f support for temporary housing, food, transportation, medications, and psychological counseling. While the monetary payments may not have fully compensated families for the psychological trauma and inconvenience they underwent, many families emerged from the crisis with increased assets. Several renter families were able to make down payments on new homes and some business persons invested in new or expanded businesses. 28. Regarding construction safety, the Project Management Oversight Consultant reviewed in detail all the construction safety procedures in place, and the efforts being made by the State, Metro and the Contractor to ensure the continuation o f the turnkey contract ina way that preventive safety measures will be further enhanced to minimize the occurrence and impact o f future accidents. 8 ANNEX 1 SHo PauloMetro Line 4 Project:AdditionalFinancing Impactof CurrencyDevaluation 1. This annex describes the impact o f the devaluation o f the US$ in relation to the Brazilian R$ (Real) on the overall turnkey contract financing. This i s the main contract financed by the loan and consists o f the civil works and electrification systems required to build Line 4 from the Luz station to the Vila Sonia yard (depot), a distance o f about 12.8 kms. 2. Phase Io f Si30 Paulo Metro Line 4 project was financed by loans from the Bank (US$209.OM), JBIC (US$209.OM), the Government o f the State o f Sao Paulo - GESP (US$332.9M) and the private sector (US$183 .OM).The latter would finance the rolling stock and systems under a concession contract. The centerpiece o f this project is the turnkey contract for civil works and electrification, fully financed by the Bank and JBIC loans and GESP. 3. The Bank provided a no objection to the turnkey contract on August 25, 2003, at which time the US$was worth R$2.993. The international biddingprocess was extremely competitive and the cost was about 10% lower than estimated. Table A 1 .1provides a breakdown o f contract financing by source: TableAl.1: StructureFinancing (see Client connection -WB Contracts # 1235117; 1235225; 1235226): Millions US$ R$ Y O IBRD 201.9 604.3 33 JBIC 187.0 559.7 31 GESP 218.8 655.0 36 TOTAL 607.7 1,819.0 100 4. After the effectiveness o f these contracts, two trends in the Brazilian economy occurred: the R$ started to appreciate in relation to the US$ and the inflation rate held steady with very small growth. In other words, the two variables evolved in opposite directions: while inflation grew the exchange rate decreased. This affected all o f the annual price readjustment formulas inthe turnkey contract and resulted in the need for the withdrawal applications submitted to the Bank and JBIC to use a much larger amount o f dollars to cover the costs o f the R$ than foreseen at the beginning o f the contract. This also led to the use o f significantly higher than initially expected GESP resources. 5. A simulation was prepared considering the 2007 GESP budget, the 2008 forecast and the actual values up to December, 2006 as well as the projections as o f January, 2007. The following assumptions were used: (i)theapplication ofthecontractualreadjustments inthemonthswherethey applyat 5.2% (annual) over the turnkey prices; (ii)US$exchangerateofR$2.133(January, 2007)forthesimulationperiod. 6. The results below show that the values disbursed by the Bank and JBIC in R$ end up being considerably lower than those originally expected. 9 Table A1.2: Shortfallprojectiondue to US$ Devaluation and pricereadjustment R$Millions Prices ofJudo3 FromJudo3 to&OS Y O IBRD 604.3 467.6 22 JBIC 559.7 412.6 19 GESP 655.0 1,290.7 59 TOTAL 1,s19.0 2,170.9 100 7. The difference is equivalent to R$351.9 millions and is the impact of the exchange rate devaluationand price readjustment. ExchangeRate Impact 8. Based on a financing schedule related to the actual construction schedule, Metro applies for monthly withdrawals from the Bank and JBIC loans. These withdrawals are converted from US$ in R$at the exchange rate of the withdrawal day; and are subsequently used to pay the expenses incurredwith the turnkey contract. R$ Average ExchangeRateUS%vs R$ 2,lO- 2,oo ~ l l l l l l l l / l l I / / I I I / I I I / I I I I I I I l / / l / I I I I I I I l 1 1 1 1 / / 1 1 1 l I l I I l 03R004)6/2004)9R00412/2004)3R00~6R00~9R00512iZ00~3iZ00Q6R00~9~00~ 2iZ00603R00iU6R00iU9f007l2~00iU3/200606f0089R0O812R008 month/yerar 10 9. The following table - Exchange Rate Impact, shows the estimate due just to the exchange rate devaluation, which totals US$115,OM, considering the disbursements up to December, 2006 and thus to be undertaken from January, 2007 to December, 2008 basedon the assumptionsdescribed above. Table A1.3: ExchangeRateImpact ~ ~S$millions Initial Fmal Difference IBRD 201.9 261.4 59.5 JBIC 187.0 242.5 55.5 TOTAL 388.9 503.9 115.0 11 Inflation Impact 10. The turnkey contracts have an annual price readjustment clause which is allowed by the national and Bank guidelines for projects with implementationperiods over one year. Reviewing the data for exchange rate evolution and inflation rate from December, 2001to June, 2003 shows that they both evolved inthe same direction. I Average Sectorial Index Rate Index 1,350 1,325 1,300 1,275 1,225 - 1,200 - r ' l 1,175 - 1,150 - 1,125 - 1,100- 1,075 1 11. When the project was appraised the share o f the Bank and JBIC in the turnkey project was roughly two thirds o f the overall cost. As of August, 2003 the inflation curve and the exchange rate curve evolved indifferent directions and this led to a higher than initially expected share o f costs for the GESP. The table below shows the loss due to the inflation impact insofar as the Bank and JBIC's participation inthe turnkey contract are concerned. Table A1.4: Inflation Rate Impact US$ millions Initial Final Difference IBRD 201.9 240.7 38.7 JBIC 187.0 223.3 36.3 TOTAL 388.9 463.9 75.0 12 Conclusion 12. Based on the above explanations, the total financial gap due to the exchange rate appreciation of the R$ vs. the US$ and the impact of inflation on the price readjustment US$190.0M of which the exchange rate portion is US$115.OM and the price readjustment portion i s US$75.OM. 13 Table A1.5: Demonstrativeof the ExchangeRate Impact (1) (2) (4) (5) (6) (7) Invoiced Financed ConversionA Quotation Conversion B Difference B-A monthlyear R$millions R$millions US$ millions R$ US$ millions US$millions 0312004 37.4 24.0 8.0 2.8890 8.3 .3 0412004 31.1 19.9 6.6 2.9254 6.8 .2 0512004 30.7 19.7 6.6 3.1623 6.2 -.4 0612004 5.2 3.3 1.1 3.1191 1.1 .o 0712004 2.6 1.7 0.6 3.0463 .6 .o 0812004 1.4 0.9 0.3 2.9727 .3 .o 0912004 1.7 1.1 0.4 2.9006 .4 .o lOl2004 4.4 2.8 0.9 2.8470 1.o .1 1112004 8.8 5.6 1.9 2.7419 2.0 .1 1212004 9.2 5.9 2.0 2.7075 2.2 .2 0112005 4.0 2.6 0.9 2.6559 1.o .1 0212005 6.5 4.2 1.4 2.6482 1.6 .2 0312005 11.6 7.4 2.5 2.7212 2.7 .2 0412005 5.4 3.5 1.2 2.7296 1.3 .1 0512005 1.0 0.6 0.2 2.5913 .2 .o 0612005 2.4 1.5 0.5 2.4493 .6 .1 0712005 17.9 11.5 3.8 2.5858 4.4 .6 0812005 5.1 3.3 1.1 2.4294 1.4 .3 0912005 19.0 12.2 4.1 2.2956 5.3 1.2 1Of2005 17.6 11.3 3.8 2.2740 5.0 1.2 1112005 31.5 20.2 6.7 2.2064 9.2 2.5 1212005 45.5 29.2 9.8 2.2816 12.8 3.0 0112006 20.8 13.3 4.4 2.2609 5.9 1.5 0212006 39.3 25.2 8.4 2.1758 11.6 3.2 0312006 33.2 21.3 7.1 2.1331 10.0 2.9 0412006 20.1 12.9 4.3 2.1821 5.9 1.6 05f2006 30.2 19.3 6.4 2.2590 8.5 2.1 0612006 34.7 22.2 7.4 2.2174 10.0 2.6 0712006 25.0 16.0 5.3 2.2111 7.2 1.9 0812006 44.2 28.3 9.5 2.1501 13.2 3.7 0912006 28.1 18.0 6.0 2.1703 8.3 2.3 lOl2006 23.0 14.7 4.9 2.1633 6.8 1.9 1112006 27.4 17.6 5.9 2.1782 8.1 2.2 1212006 36.4 23.3 7.8 2.1559 10.8 3.0 0112007 37.5 24.0 8.0 2.1487 11.2 3.2 0212007 9.0 5.8 1.9 2.1334 2.7 .8 0312007 17.5 11.2 3.7 2.1500 5.2 1.5 0412007 61.1 39.1 13.1 2.1670 18.0 4.9 05f2007 94.4 60.5 20.2 2.1840 27.7 7.5 0612007 100.4 64.3 21.5 2.2010 29.2 7.7 0712007 83.2 53.3 17.8 2.2180 24.0 6.2 0812007 94.8 60.7 20.3 2.2350 27.2 6.9 14 TableA1.5: Demonstrativeof the ExchangeRateImpact (continuation) (1) (2) (4) (5) (6) (7) Invoiced Financed Conversion A Quotation Conversion B Difference B-A monthlyear R$millions R$millions US$millions R$ US$millions US$millions 0912007 49.9 32.0 10.7 2.2520 14.2 3.5 1Of2007 73.0 46.8 15.6 2.2690 20.6 5.0 1112007 74.5 47.7 15.9 2.2860 20.9 5.0 1212007 56.3 36.1 12.1 2.3030 15.7 3.6 0112008 24.1 15.4 5.1 2.3200 6.6 1.5 0212008 22.7 14.5 4.8 2.3370 6.2 1.4 0312008 25.3 16.2 5.4 2.3540 6.9 1.5 04f2008 27.7 17.7 5.9 2.3710 7.5 1.6 05f2008 21.1 13.5 4.5 2.3880 5.7 1.2 0612008 21.3 13.6 4.5 2.4050 5.7 1.2 0712008 26.3 16.9 5.6 2.4220 7.0 1.4 0812008 28.1 18.0 6.0 2.4390 7.4 1.4 0912008 23.6 15.1 5.0 2.4560 6.1 1.1 lOf2008 16.0 10.3 3.4 2.4730 4.2 .8 1112008 86.1 55.2 18.4 2.4900 22.2 3.8 1212008 82.7 53.0 17.7 2.5070 21.1 3.4 1,819.0 1,165.4 388.9 503.9 115.0 I (1) Values invoiced untilFebruary, 2007 and forecast of invoicinguntilDecember, 2008 of lots 1,2 and 3 of contracts turnkey. (2) Corresponding parcel to the IBRDfJBICo f the payment o f the values invoiced until February, 2007 and foreseen untilDecember, 2008. 64.07% (3) Quotation o f the US$inR$inthe date o f attainment of the one "no objection" of contracts turnkey (August 25,2003). 2.993 (4) Values o f the column (2) converted by the quotation o f the column (3). (5) Quotationweighedmeanofthe monthofthe withdrawals. (6) Values of the column (2) converted by the quotation o f the column (5). (7) US$necessary to cover the original commitments inR$for the depreciation of the US$in relation to the R$. 15 Table A1.6: Demonstrativeof the Impact of the Sectorial Indexes (1) (2) (4) (5) (6) (7) Invoiced Financed OriginalA Index ReadjustedB DifferenceB-A monthlyear R$millions R$millions US$ millions US$ millions US$ millions 0312004 37.4 24.0 8.0 1.000 8.0 .o 0412004 31.1 19.9 6.6 1.000 6.6 .o 0512004 30.7 19.7 6.6 1.000 6.6 .o 0612004 5.2 3.3 1.1 1.000 1.1 .o 0712004 2.6 1.7 .6 1.020 .6 .o 0812004 1.4 .9 .3 1.020 .3 .o 0912004 1.7 1.1 .4 1.020 .4 .o lOl2004 4.4 2.8 .9 1.020 .9 .o 1112004 8.8 5.6 1.9 1.020 1.9 .o 1212004 9.2 5.9 2.0 1.020 2.0 .o 0112005 4.0 2.6 .9 1.020 .9 .o 0212005 6.5 4.2 1.4 1.020 1.4 .o 0312005 11.6 7.4 2.5 1.020 2.6 .1 0412005 5.4 3.5 1.2 1.020 1.2 .o 0512005 1.0 .6 .2 1.020 .2 .o 0612005 2.4 1.5 .5 1.020 .5 .o 0712005 17.9 11.5 3.8 1.130 4.3 .5 0812005 5.1 3.3 1.1 1.130 1.2 .1 0912005 19.0 12.2 4.1 1.130 4.6 .5 lOl2005 17.6 11.3 3.8 1.130 4.3 .5 1112005 31.5 20.2 6.7 1.130 7.6 .9 1212005 45.5 29.2 9.8 1.130 11.1 1.3 0112006 20.8 13.3 4.4 1.130 5.0 .6 0212006 39.3 25.2 8.4 1.130 9.5 1.1 0312006 33.2 21.3 7.1 1.130 8.0 .9 0412006 20.1 12.9 4.3 1.130 4.9 .6 0.512006 30.2 19.3 6.4 1.130 7.2 .8 0612006 34.7 22.2 7.4 1.130 8.4 1.0 0712006 25.0 16.0 5.3 1.180 6.3 1.0 0812006 44.2 28.3 9.5 1.180 11.2 1.7 0912006 28.1 18.0 6.0 1.180 7.1 1.1 1012006 23.0 14.7 4.9 1.180 5.8 .9 1112006 27.4 17.6 5.9 1.180 7.0 1.1 1212006 36.4 23.3 7.8 1.180 9.2 1.4 0112007 37.5 24.0 8.0 1.180 9.4 1.4 0212007 9.0 5.8 1.9 1.180 2.2 .3 03/2007 17.5 11.2 3.7 1.180 4.4 .7 0412007 61.1 39.1 13.1 1.180 15.5 2.4 0512007 94.4 60.5 20.2 1.180 23.8 3.6 0612007 100.4 64.3 21.5 1.180 25.4 3.9 0712007 83.2 53.3 17.8 1.241 22.1 4.3 0812007 94.8 60.7 20.3 1.241 25.2 4.9 16 TableA1.6: Demonstrativeof the Impactof the Sectorial Indexes(continuation) Invoiced Financed Original A Index Readjusted B Difference B-A montwyear R$millions R$ millions US$ millions US$ millions US$millions 0912007 49.9 32.0 10.7 1.241 13.3 2.6 lOl2007 73.0 46.8 15.6 1.241 19.4 3.8 1112007 74.5 47.7 15.9 1.241 19.7 3.8 1212007 56.3 36.1 12.1 1.241 15.0 2.9 0112008 24.1 15.4 5.1 1.241 6.3 1.2 0212008 22.7 14.5 4.8 1.241 6.0 1.2 0312008 25.3 16.2 5.4 1.241 6.7 1.3 0412008 27.7 17.7 5.9 1.241 7.3 1.4 0512008 21.1 13.5 4.5 1.241 5.6 1.1 0612008 21.3 13.6 4.5 1.241 5.6 1.1 0712008 26.3 16.9 5.6 1.306 7.3 1.7 0812008 28.1 18.0 6.0 1.306 7.8 1.8 0912008 23.6 15.1 5.0 1.306 6.5 1.5 1012008 16.0 10.3 3.4 1.306 4.4 1.0 1112008 86.1 55.2 18.4 1.306 24.0 5.6 1212008 82.7 53.0 17.7 1.306 23.1 5.4 1,8 19.0 1,165.4 388.9 463.9 75.0 (1) Values invoiced untilFebruary, 2007 and forecast of invoicing untilDecember, 2008 o f lots 1,2 and 3 o f contracts turnkey. (2) Correspondingparcelto the IBRDIJBIC of the payment o f the values invoiced until February, 2007 and foreseen untilDecember, 2008. 64.07% (3) Quotation o f the US$inR$m the date o f attainment o f the one "no objection" of contracts turnkey (August 25,2003). 2.993 (4) Values o f the column (2) converted by the quotation o f the column (3). (5) Average mdex ot readptment ot price apphed mthe date contractual base. For the future periods (2007-2008), the average mdex of readjustment had beenprojected inthe same base. 5.2% (6) Values o f the column (4) readjustedby the indexes o f the column (5). (7) US$ necessary to cover the original commitments inR$ for the readjustment o f prices for the contractual indexes. 17 ANNEX 2 Ssio Paulo Metro Line 4 Project:AdditionalFinancing Social Safeguards Background 1. Construction o f the Line 4 project (also known as the Yellow Line) is divided into two phases, the first o f which is a 12.8-km line from the Luz Railway Station in downtown Sgo Paulo and Vila SGnia, a mixed residential and commercial district in the southwest quadrant o f Sgo Paulo. Phase Iis scheduled for completion in 2009 and is the object o f World Bank financing. The Borrower is seeking additional financing for Phase I,primarily due to unexpected exchange-rate fluctuations. 2. The project was classified under environmental Category A and triggered OP 4.01 (Environmental Assessment) and OP4.12 (Involuntary Resettlement). An environmental impact assessment (EIA), Environmental Management Plan (EMP) and Resettlement Action Plan (RAP were prepared for the project) and were appraised along with the project. Executive summaries o f the EM, EMP and RAP were submitted to the Bank's INFOSHOP and the full text o f these documents were circulated, in Portuguese, inthe project area prior to appraisal. Social Issues IndigenousPeopleand Cultural Property 3. N o indigenous people or Cultural Property are affected by the project. Resettlement Concluded 4. Line 4 was designed and planned from the early 1990s. An official expropriation decree was issued in 2001 by executive decree, ratified by the courts. Metro designed the project to minimize displacement, using underground tunneling technology over most o f the length o f the line. Vacant lots, parking lots and gasoline stations were expropriated to excavate shafts for stations and ventilation shafts causing minimum disruption o f residents and traffic. All o f the anticipated resettlement for Phase Ihas been completed. See below for a summary and a discussion under the heading, "Pinheiros Station Accident ." 5. Nearly all the resettlement occurred in Vila Sbnia, the western terminal o f Phase Io f Line 4 where the tracks raise the surface to accommodate a train parking area and maintenance shops. All o f the occupants o f expropriated properties could be described as middle-class, aware o ftheir rightsand able to defend their interests. Nearly all held formal legal title to their homes and businesses and these titles were duly registered. No squatments or other informal settlements were affected by the project. During the early 1990s, social workers from Metro visited the occupants o f properties and discussed their options. All o f the displaced occupants preferred compensation as the solution. Property values were assessed by independent real-estate experts and compensation was set at market replacement value. In most cases, the process o f negotiation over the value o f compensation to be paid had already begun. Unfortunately, project financing was delayed by nearly 14 years duringwhich time many o f the occupants lost confidence inthe process. Most were persuaded to hire lawyers who encouraged their clients to take their compensation cases to court, in expectation o f higher settlements than had been offered. 6. Between June and December 2005, 198 residential properties and some 67 businesses were expropriated under the expropriation decree. The decree allows the State to take possession o f the properties after Metro and the property owner reached a voluntary agreement o f the compensation. If such agreement could not be reached by the parties, the courts adjudicated the value o f the compensation 18 and issued an authorization for Metro to occupy the property after Metro had deposited an amount equivalent to the value o f the property based on a preliminary assessment. The court process caused additional delays during which court-appointed independent professional property assessors to evaluate the properties. According to Metro, in most cases, this process did not lead to substantially larger settlements than had been offered previously. The process created a problem for many owners because, in cases o f contested compensation, payment was not made in full but rather in two stages. The first payment was set at 80% o f the preliminary value set by the assessors. The remaining 20% is payable after a final assessment ratified by a judge. The owners also had to pay lawyers' fees, generally a percentage o fthe settlement. 7. As a result, many owners entered the market for replacement business sites and housingwith less than the full compensation amount in hand, obliging some to purchase properties o f lower value than the ones they had previously occupied. This process, exacerbated by the long delay in beginning the project and further delays arising out o f the judicial process, caused negative feelings among the displaced business owners and families. However, there is no concrete evidence that any resettled occupant experienced a decline in standard o f living caused by the resettlement. Those who preferred to remain in the area found replacement properties in the vicinity and business people were able to rebuild their businesses. Occupants were offered access to a line o f credit to finance their purchase o f new properties, but very few availed themselves of this service. Complaints centered on the size o f the compensation received and lack o f continuous communication with Metro. Given the long delay between the first expropriation decree and the actual removal o f families and litigation, such complaints are not surprising. 8. N o further displacement caused by the construction design is anticipated in Phase I.In general, the resettlement process was conducted in compliance with Bank policy but not optimally, primarily because o f the long delays and the decision o f the property owners to seekjudicial redress. 9. For Phase 11, Bank missions have recommended strengthening Metro's capacity to communicate effectively and continuously with affected people, primarily by maintaining personal contact with displaced families. Metro will also seek to avoid delays and will strive to reach voluntary agreements regarding compensation in order to avoid the problems that plagued the Phase I,particularly the interventiono f the courts. Pinheiros Station Accident 10. On January 12, 2007 a partial tunnel collapse and landslide occurred at the shaft for the future Pinheiros Station o f Line 4. Seven people - five passengers in a van and two pedestrians on nearby streets - died in the accident. No'underground tunnel workers were killed or hurt. Several homes and other structures were affected. Six were demolished shortly after the accident and others were evacuated by Civil Defense authorities. The cause o fthe accident is currently under investigation. Response to Accident 11. The consortium together with the Municipal Fire Brigade and the Civil Defense authorities took immediate action to secure the site and to begin operations to locate the missingvictims and later to shore up and secure the collapsed area and to remove debris from the tunnel. After the accident, the Consortium reinforced the excavated structure with concrete, and installed anchors to prevent further landslides. Drainage systems were installed to avoid further undermining o f the retaining walls. These measures allowed rescue and clean up work to continue. Some 103 buildings in all were affected by the accident and their residents were evacuated to hotels in the same vicinity. 19 12. Shortly after the accident, the contractor, Cons6rcio Via Amarela (CVA), mobilized a team of social workers and psychologists. They were given three maintasks: (a) to provide moral and logistical support to the families of the fatal victims of the accident, (b) to provide assistance to the families who were evacuated the vicinity of the accident, and (c) to provide psychologicalsupport and counseling to CVA staff members. Since the initial period, their role has evolved into providing logistic and psychologicalsupport to the families who remainintemporary housingwhile they await decisions on the habitabilityoftheir homes or the validity oftheir claims. 13. With regard to the families of the fatal victims, the team identified their close relatives shortly after the accident and provided transport (including intercity transport) of relatives and friends of the victims. The team set up a 24-hour vigil with the victims' relatives who remained at the site of the accident until the bodies of their loved ones had been located and removed. The team provided moral support, food, personal needs, communications, etc. Thereafter the team assisted with funeral arrangements, grief counseling and other support to the victims. Of the seven fatal victims' families, five have agreed on financial compensation for their loss including payments for pain and suffering (dunos moruis). Agreements were made with the victims' families and their legal representatives, with the participation of Metro, CVA, the Unibanco-AIG Insurance Company, and the Sgo Paulo State Public Defender. Evacuationsfrom the Accident Area 14. One hundred three housing and business units in the vicinity of the accident were evacuated by civil defense authorities pending verification of the structural integrity of the buildings. Most of the structures are residential(47), some mixed-use buildings (13), and six businesses. Six buildings close to the site were demolished shortly after the accident because they were in danger of collapse and at least twelve more are slated for demolition because they werejudged to be structurallyunsound following the accident. Seventeenare still under analysis as of August 1, 2007. Thirty additionalstructures (including single-family and multipledwellings) were evacuatedpendinginspections. Some 48 residentialbuildings in the area have beendeclared safe and are reoccupiedfollowing necessary repairs. 15. Part of the area adjacent to the site, bounded by the Rua Capri, Rua Gilbert0 Sabino and the Rua Conselheiro Pereira Pinto, has been condemned by the Municipal Government of Sgo Paulo (PMSP) for the constructionof an intermodaltransfer station for buses, Metro Line 4 and CPTM trains. Ideally, the evacuated homes and businesses in this area would be expropriated prior to being reoccupied so as to avoidhavingto removethese families twice. However, there is no firm timetablefor the expropriation of these properties and construction of the station. The suggestion has been advanced to have the consortium finance the resettlement of these families and be reimbursed later by the PMSP for its expenses. However, this arrangement does not appearto be likely becauseof uncertaintyon bothsides. 16. Inthe area surroundingthe Pinheiros Station, some 70 families (23 1 people) were evacuated and taken to hotels in the Pinheirosarea with all expenses paid by CVA. Two families outside the accident zone were relocated by court order, even though they do not appear to be in a danger zone. Most of the evacuees are working people or lower-middle-class including public sector workers, housewives, schoolchildren, and some retiredpersons, or small business persons. About half are renters, and half are property owners; some of the latter derive part of their income from rental payments. Some operated small businessesinthe area. 20 Assistance Provided to Evacuees 17. C V A promptly housed the relocated families in hotels in the Pinheiros area, using six first-class hotels. The families were provided with hospitality, meals, room service, taxi service, school bus service, prescription medications, boarding facilities for pets and entertainment programs for children, exercise programs for adults, and - as necessary - individual and group counseling, psychotherapy and medical referrals. These services have now been greatly reduced because nearly all the families have been relocated. Only five families were staying in hotels, at CVA's expense, as o f September 21, 2007. The services provided to the families have been generous and complete. The social team recognizes the need to set limits and to avoid creating excessive dependency, signs o f which are already appearing. The team also recognizes the importance o f returning families to their normal lives as soon as possible. In addition to the five families still residing in hotels as o f September 21, 2007 there were three additional families livingwith relatives. 18. C V A has worked to assist families to return to their homes as soon as they are cleared for occupancy. As o f August 1, 2007, C V A has found it is easier to reach agreements with renters than with owners because renters have the option o f not returningto their current neighborhood and therefore need not await clearance by Civil Defense. The negotiations included the affected family, their legal representative, if any, Unibanco-AIG Insurance, the SBo Paulo State Public Defender's Office (Defensoria Publica), Metro, and the State Attorney's Office (Procurador). 19. Most o f the affected families have now returned to their neighborhood or moved elsewhere. A supervision mission on September 21, 2007 met with several affected families (both renters and owners) who had returned to the neighborhood. While there are still some psychological residues o f the traumatic evacuation, the families interviewedseem to be well established. Some were able to use their insurance settlements to establish or expand small businesses. 20. The social teams o f CVA and Metro have set up a routine o f visiting affected families on a fortnightly basis to evaluate their progress and provide assistance. These visits have provided needed comfort to families who underwent a great deal o f stress following the accident. CVA has continued to provide services such as paying for prescription drugs and for medical visits even for families who received settlements. This level o f follow-up service is unprecedentedand will provide an excellent basis for the ex-post evaluation. Metro has agreed to contract an independent evaluation o f the resettlement to be carried approximately one year after the bulk o fthe settlements were reached. 21. According to the Public Defender's office, all parties agree that negotiated settlements without litigation is preferable because o f the likelihood o f long delays in the judicial process. Nevertheless, five families have decided to bring civil cases to recover damages, having been convinced that they could obtain a more favorable settlement in the courts. Unfortunately, these cases could drag on for years. In most o f the cases that went to mediation, agreements were made for cash settlements that include compensation for material losses, pain and suffering(dams rnorais), moving expenses, penalties for late rent payments, and a 12-month rent supplement. Small business owners received compensation for lost profits caused by downtime and relocation. Payments already made for hotel; room and board, taxis, medical expenses, etc. are not deducted from compensation. The exact amounts o f payments, by agreement, are kept secret by mutual agreement. 22. The insurance policy written by AIG-Unibanco has a maximum payout value which had not been reached as of January 31, 2008. Projections based on settlements reached to date suggest that the overall maximum will not be reached. There are only 13 settlements outstanding o f which five are in litigation. The policy had a limit o f R$4,000,000 for pain and suffering (dams morais) which has already been exceeded by R$800,000. C V A has assumed this cost and will pay any additional amounts for pain and 21 sufferingthat may be awardedunder this category. CVA has assured Metro and the Bank that it will be responsiblefor any settlements exceedingthe insuredvalue. DamageAssessment 23. Multiple studies by independent consultants or agencies, with oversight by the Institute for Technological Research (IPT) of the University of Sgo Paulo were commissioned. Because of the sensitivity of the matter and the fact that the exact cause or causes of the accident are as yet unknown, elaborate procedures have been set to assure the habitability of homes in the area. The final decision regarding reoccupation or demolition will be taken by the Civil Defense Authorities based on these studies. Evaluation 24. CVA, together with Metro, the Public Defender, and the State of Sgo Paulo have worked well together to assist the relocated families. In general, the measures taken are compliant with the Bank's Policy on Involuntary Resettlement; with the obvious exception that an ex ante plan and community outreach were not done due to the unexpected nature of the accident. The extensive assistance spbntaneously provided to the evacuees can be understand by the fact that CVA and its insurer, Unibanco-AIG,have a vested interest in avoidingconflictwith affected people becauseof their financial liability and also their corporate image. It is also in the Bank's interest to reduce the time people are without access to their homes as much as possible. Fortunately,all stakeholders involved agree on this need. Environmental Issues 25. On March20,2007, a Bankteam visitedthe Metroto reviewthe environmental managementplan of Metro Line 4. the Bank team met with a number of representatives of Metro to discuss the environmental aspects duringproject implementationand adequacyof mitigationmeasures and proposed supervision arrangements that are currently in place. A number of documentswere also reviewed as part of this assessmentprocess: 1 EnvironmentalReviewReport February 2007 1 IndependentTechnical Assessment ofTSP Monitoringby CETESB February 2007 1 RecentMonthlyEnvironmentalReportsby Consortium November andJanuary 2007 1 RecentReviewsby MetroofMonthly EnvironmentalReports November to February 2007 1 EnvironmentalAssessment Summaryof S i 0 PauloLine 4 MetroProject July 2001 1 EnvironmentalImpactAssessment Reportof Line4 Metro August 1994 OverallProject Impacts 26. This project will have a positive environmental impact since it will promote more efficient and cleaner transport systems in Sgo Paulo and interconnect existing subway, commuter rail, and bus networks. The Metro Line 4 is being implemented in a highly urbanized and densely populated area. 22 Environmental Impact Assessment and Preliminary Environmental Reports were prepared to receive the environmental license for construction o f Metro Line 4. An integrated Environmental Management Plan was prepared by the Consortium. The Environmental Assessment and Management Plan were adequate in identifying and addressing environmental impacts. The main challenges have been to deal with contaminated soil at construction sites (mainly from gasoline stations whose tanks had leaked into the ground) that were encountered along the path o f the metro, and nuisance due to construction noise. An adequate management and supervision system is in place, but enforcement mechanisms should be strengthened and made more transparent. Organizational Framework 27. To implement the environmental management system, an organizational structure was established with clear responsibilities, procedures and required resources to monitor environmental and social impacts o f the project and ensure that mitigation measures are adequately implemented during construction phase. The consortium has prepared monthly progress reports on the environmental and social aspects o f the project. These reports have been improving in quality over time and have an adequate format, although some o f the graphs and data presentation could be improved. An environmental officer within Metro reviews these reports and provides detailed comments, so there is an extensive database o f information available. Besides this supervision by Metro, the PMOC (Project Management Oversight Consultant) provides overall oversight on project implementation and CETESB provides specific support to Metro and the consortium in monitoring air quality around selected sites. The State Secretary o f Environment receives regular summary reports and is responsible for licensing selected activities and overall project implementation. Some activities (e.g. vegetation removal and replacement, disposal o f spoil at sites that will have future development) require separate licenses and different environmental agencies get involved inthe process and provide additional supervision. Air Quality 28. This is the first Metro project in Sgo Paulo that includes an air quality monitoring program. Since Metro had little experience with air quality monitoring, it signed an agreement with CETESB, the State Environmental Management Agency, to help set up and supervise the program. The monitoring program focuses on total suspended particulate matter (TSP) as a result o f dust emissions from the construction sites. Other pollutants are not being measured as background levels in the city are high and it would be expensive and complex to sort out the impacts o f other pollutants emanating from the project. The monitoring program started with a single Hi-Vol meter that was transported between two sites (Fradique Coutinho and Vila Sonia), but currently has two fixed Hi-Vol stations at two sites with the highest potential for dust emission (Vila Sonia and Fradique Coutinho) to enable comparisons between both sites. 29. A dust suppression program designed to aggressively reduce dust and air pollution during construction has been implemented, measures include the cleaning truck wheels prior to leaving the construction site, coveringtruck loads, wetting down demolition areas and transport routes at construction site, enclosing activities such as the opening o f cement bags and overall cleanliness o f the construction site. Some problems have been found during inspections by Metro with damaged screens that cover truck loads and improper cleaning of construction sites and wheels; but overall the program has been successful and continuous supervision by Metro has ensured that specific problems are detected and non-compliance i s detected. Only 3% of the TSP sampled in Fradique Coutinho and 9% o f the samples at Vila Sonia can be considered as inadequate according to CETESB air quality standards (24-hour concentrations above 240pg/m3). 23 30. Metro has also implemented a program to reduce emissions from diesel vehicles. The Ringlemanntechnique has been used to identify gross-polluters and a preventive maintenance program i s inplace to reduce emissions from trucks. Noise and vibration 3 1. One o f the main nuisances o f this project is the noise impacts during construction. Although construction is taking place in highly urbanized and typically "noisy" areas, the main complaints from surrounding population have been the noise levels from generators, pumps and other equipment and from underground blasting. Since construction goes on 24 hours a day, the main concerns are the noise impacts duringnighttime 32. Metro has a noise monitoring program but it may not be fully effective. Overall, the data show little increase in noise levels above background levels from the construction sites. In some cases a reduction o f noise levels around construction sites is observed, which may be a consequence o f rerouted traffic around the construction sites or simply due to the high background noise levels measured prior to construction. The Smin sample provides a "snapshot" o f noise levels each month at a particular site that can be influenced by several factors. This may or may not be representative o f actual noise levels at the site and makes comparisons difficult or even irrelevant. 33. The consortium has been required by local authorities to implement several measures to reduce and alleviate noise impacts during construction. Among others, the following measures have been introduced to reduce noise levels around the construction site: use o f silent generators, installation o f noise suppression equipment at ventilation outlets, truck back-up warning horns are turned off at night, inspection o f vehicle exhaust systems, concrete mixing i s done off-site, construction o f enclosures to load and unload trucks, training o f workers and improved planning o f activities to avoid nighttime noise impacts. 34. While the measures implemented seem to be adequate and effective, the actual monitoring program o f noise levels is not effective in identifying problems or enforcing sanctions. The Bank has made recommendations regarding sampling frequency and appropriate times for sampling background noise levels. 35. A project-wide vibration monitoring program has also been implemented to minimize vibration and respond to community complaints, especially during blasting. The Metro also has an ongoing outreach program to discuss mitigation options with the public, including sensitive uses - such as hospitals - that could be particularly affected by various project disturbances. The plan includes temporary displacement o f most sensitive population. Soil Contamination 36. Prior to construction, an investigation is undertaken to identify locations along the alignment o f Metro Line 4 that might have contaminated soil. Samples are taken from these sites. The most common form o f soil contamination i s fuel and oil leakage from gas stations. Gas stations are often the preferred locations to create access to underground stations, since complex resettlement and demolition o f buildings are avoided. Almost always, these sites require special care and proper soil clean up to avoid future impacts. In the case o f displacement o f gas stations, clean up is easier since the cost o f disposing o f contaminated soil can be deducted from the compensation for the displaced station. The problem is more complex when no displacement i s involved and legal action must be taken against owners responsible for the soil contamination. To avoid delays, Metro often pays clean-up costs up front, but there is no guarantee that it will recover these costs. Soil clean up and removal is done under the supervision o f 24 CETESB. The process has significantly slowed the construction process since it involves another contractor, ECOTEST, that is responsible for the removal, clean up and disposal o f contaminated soil. SolidWaste 37. Solid waste is segregated at each construction site and collected and transported by Translix, a private company. Hazardous materials are collected in sealed containers and stored in secure places before being transported for final treatment and disposal. Health and safety procedures are employed to minimize exposure to workers and the public. Specific regulations exist for handling, stockpiling, loading, transporting and disposing contaminated materials. The procedures taken by the consortium seem adequate to reduce risks and inspection has not found major issues. Liquid Effluents 38. All effluents from the construction site are collected and treated. The consortium has installed treatment plants at the main construction sites with high effluent volumes. Three times a day the effluents are monitored for sediments and pH levels to ensure quality prior to discharge. The consortium prepares reports that are submitted to the Metro. These reports are not always submitted in time, but no major irregularities have been found. 39. Maintenance and cleanliness o f drainage and the truck-wheel cleaning system i s problematic in some construction sites. By comparing between the different construction sites and showing the "best practices," Metro has been successful in addressing some specific problems. Vegetation removal 40. During project preparation, careful assessment and registration was done o f all trees that are affected and should be removed along the alignment and construction sites o f the Metro Line 4. State and municipal regulations specify procedures for compensation and maintenance of vegetation. A major problem for Metro has been finding adequate space for tree planting and that, by law, it is requiredto care for these trees for two years. For trees planted and maintained around Metro stations this would not be a major issue, but maintenance o f trees off-site might be problematic. Agreement must be reached regarding donation of trees to public parks and spaces, while appropriate government agencies take care o f maintenance. Spoils Removal and Disposal 41. The sites for the disposal o f soil were identified by the consortium and presented to the environmental authorities for approval. Currently, seven sites are used for disposal o f excess excavation material from Metro Line 4. Two of these sites will undergo future development and went through a process o f environmental licensing. These sites are more carefully monitored by the State Environmental Agencies and regular reports are submitted on spoils volume deposited by truck load and source. However, all disposal sites have monitoring plans on disposal volumes. Contaminated soil is being separately treated and disposed. 42. Specific routes for the transport o f spoils from excavation to disposal sites have been planned before-hand and compliance monitored, Each truck's load and its source is also registered and monitored. Metro regularly follows trucks to ensure they comply with agreed routes and disposal. To date, no major irregularities were found. As mentioned before, during inspections problems were found with damaged screens that cover truck loads and the cleaning o fwheels. 25 CulturalProperty: Archeology Findingsand Historic Building 43. Current legislation in Brazil is adequate in addressing potential impacts o f project on historic buildings. Following the Brazilian norm, a database o f historic buildings, protected by either federal, state or local laws, was prepared. Based on a 300m radius around each o f these historic buildings, the potential impact o f above-surface structures o f the Metro Line 4 project was identified. The final design o f these structures requires a special license from one or more government agencies to avoid or minimize any esthetic impacts. 44. An independent archeologist was hiredto carry out an assessment o fthe project area and identify the potential of having a historic settlement based on available information and data. The project area was cleared and procedures are in place for chance-finds o f artifacts or other archeologically interesting objects. The measures taken by Metro and requiredby law are adequate to mitigate potential impacts. EnvironmentalImpact of the Accident 45. The environmental impacts o f the January 12, 2007 accident described above were minor. Some minor impacts occurred due to fuel and oil losses o f the vehicles involved in the accident, but the impacts were not quantified. Other impacts were due to traffic detours and interruptions along Marginal Pinheiros, a major traffic artery, redirection o f public transport away from Rua Capri, removal o f some compromised trees and to enable proper access o f rescue squads. Some services were interrupted due to the accident, among others: gas, electric energy, water, sanitation and drainage. 46. The debris and spoils as a result o f the accident were transported following the usual routes to regular disposal sites. A total volume o f 26,9 thousand m3 o f spoils were removed after the accident and transported to the Lagoa de Carapicuiba landfills. Construction debris (772m3) were disposed o f at different sites and reusable materials (352 m3)were brought to the central construction site o f Jaguare e Villa Lobos Park. Overall Recommendations 47. The project has been successful in preventing and mitigating the direct environmental and social impacts o f the project. The procedures and supervision given to the project are adequate, but some aspects can be improved and are summarized below: Recommendations 48. The following recommendations have been accepted and are being carried out by Metro: Social aspects: 1 Metro will take measures to avoid, if possible, the double resettlement o f the evacuees who occupied areas affected by the Municipal decree. ; 1 Keep careful records including the forwarding addresses o f people who move away from the neighborhood; 1 Improve the flow o f information among the various stakeholders including the general public so as to prevent rumors and present a true picture o fthe situation. 1 Metro should prepare a plan for providing adequate assistance to the families evacuated from the accident site. Such plan should be consistent with the Bank's policy on involuntary resettlement and should include eligibility criteria for compensation and guidelines for benefits to be provided. 26 This plan shouldbe submittedto the Bank for reviewprior to negotiations and implementationof this plan in atimely fashion should be agreedto underthe amendment. Metro will provide monthly reports to the Bank on the status of the evacuees from the accident site 'until all the evacuees havebeensuccessfully resettled or returnedto their originalhomes. In addition, Metro will conduct an ex post evaluation of the situation of the resettled families approximately one year after the date ofthe accident. EnvironmentalAspects: 49. Regardingthe environmental aspects of the project, Metropreparedan addendum to the existing EnvironmentalManagementPlan, which incorporates and strengthensthe followingaspects: . Data quality control'for effluent monitoring: Metro is hiring an independent laboratory to implement quality control measures to ensure the accuracy and precision of water quality monitoringundertakenby the Consortium.A preliminaryplanto maintainquality inall aspectsof the environmental program, including:proper documentationof all procedures, data management and analysis, and frequent independent quality controlof collecteddata was preparedand will be . refinedonce the laboratory has beenhired. Improved noise management plan: Metro and Consortium Via Amarela evaluated the noise management programand presenteda new sampling planthat will includemore sampling times, more sampling points and more detailed description of activities during sampling. In parallel, Metrowill monitordaytime and nighttimenoise levels at the work sites and comparethe readings with samples taken by the Consortium. The Consortium also agreed to present environmental . progressreports, the VibrationReportswith allowablelevelsbasedon Seismographic Reports. Environmental data presentation. Starting with the EnvironmentalReport of August 2007, all environmental data presented in the reports will be compared to actual environmental quality standard and norms, or overall (realistic) benchmarks to allow for qualitative control by Metro and environmental agenciesandmore clearly identifynon-compliance. Non-compliance: Metro agreed to strengthen the enforcement systems and ensure that the consortium and other companies involved in project implementationare required to address shortcomings raised during inspection. The EnvironmentalReports will also include a special section summarizingnon-compliances in a visual way to increasepressure on the Consortium. 50. As requestedby the Bank, Metro and the Consortium ViaAmarela provideddetailed information regardingthe solidwaste generated and disposedat the Jaguare site. The quantity(tons) and composition of the waste were reportedand all environmental licenseswere found to be incompliance. 5 1. Finally, regarding blasting, the Consortium agreedto schedule blasts at times when they will be less disruptive. There shouldbe a curfew on late-nightblastingunlessthere i s a demonstratedoperational need to do blastingat that time. In any case, the consortium and Metro will continue to provide public information, for each construction site, regarding when blasting will take place and over how long a period. This would allowpeopleto adjust moreeasily to the inconvenience ofblasting. I Metro has compliedwith this agreement. 27 ANNEX 3 SHo PauloMetro Line 4 Project: AdditionalFinancing ProcurementTables There is no new procurement for this additional financing because there are no new activities. The followingtables arejust to illustratewhere the additional financing finds will be allocated. Table 1:ProjectCostsby ProcurementArrangements' (in US$ millionequivalent) Expenditure Category Procurement Method Total Cost (including contingencies) ICB NCB Other N.B.F 1. Works a.. Turnkey Contract 185 185 (92.5) (92.5) 2. Consulting_Services a.. PMOC & Supervision 4.762 4.762 (2.262) (2.262) 3. Front-endFee 0.238 0.238 (0.238) (0.238) Total 185 5.0 190 (92.5) (2.5) (95) Note: N.B.F. = Not Bank-financed(includes elements procured under parallel co financing procedures, consultancies under trust funds, any reserved procurement, and any other miscellaneous items). The procurement arrangement for the items listed under "Other" and details ofthe items listed as "N.B.F." needto be explained infootnotes to the table or inthe text. Figures inparenthesisare the amountsto be financed by the Bank loan/IDA credit.Front EndFee was not includedherebecause ofpresentwaiver. ~~ 2 For details on presentationofProcurementMethodsrefer to OD11.02, "ProcurementArrangements for Investment Operations." Details on Consultant Servicescan be shownmore easily inthe Table A1 format (additionalto Table A, where applicable). 28 Table 2: Consultant Selection Arrangements(optional) (in US$ million equivalent) ConsultantServices SelectionMethod Total Cost ExpenditureCategory (including contingencies) A. Firms QCBS QBS SFB LCS CQ Other N.B.F. 4.762 4.762 (2.262) (2.262) Total 4.762 4.762 (2.262) (2.262) Note: QCBS = Quality and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F.=Not Bank-financed. Figures inparenthesis are the amounts to be financed by the Bank loan Table 3: Thresholdsfor ProcurementMethodsand Prior Review3 (US$ '000) ! Description Type ofProcurement Prior Review Limit ContractValue ... .. _ _ _ _ _ ._ _ and works under rnkey contract ICB All ICB N o threshold __ - Consulting Services QCBS TORS,short list, > 100 technical evaluation and contracts 3 Thresholdsgenerally differby country andproject. ConsultOD 11.04 "Review ofProcurement Documentation"and contactthe RegionalProcurementAdviser for guidance. 29 ANNEX 4 ,960PauloMetro Line 4 Project:AdditionalFinancing Documentsin the ProjectFile* A. Project Implementation Plan B. Bank StaffAssessments C. Other 0 Environmental Progress Report # 1, CMSP, RT-4.00.00.00/0n4-006 Rev.0 Feb. 2007. 0 Construction Safety Report, PMOC, Feb.2007 Social Safeguards mission of March 1-2,2007, DanielGross 0 Impact0 da variaqgo cambial no empreendimentoda Linha4-Amarela, March 7,2007, CMSP Environmental Review Mission, March 2007, Paul Procee RevisedEconomic Evaluation due to Add. Financing 30