Report No. 10039 World Bank Approaches to the Environment in Brazil: A Review of Selected Projects (In Five Volumes) Volume II: Pollution Control in Sao Paulo April 30, 1992 Operations Evaluation Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ABBREVIATIONS AND ACRONYMS AMA Amasonia M$noreces S.A. (Amason Mining Inc.) CHTSB Companhio do TechnoloSia do Saneamento Amblental (Environmental Sanitation Technology Company) CHBSF CompanhIs Hidro-eletrica do Sao Francieco (Sao Francisco Hydroelectric Company) CIDA Canadian International Development Agency CODSVASF Companhia do Desenvolvimento do Vale do Sao Francisco (Bao Francisco Valley Development Company) CONAMA Conselho Nactional do Mato Amblente (National Environmental Council: CVRD Companhis Vale do Rio Doe (Rio Doe Valley Company) BLETROBRAS Centrat BletrIone Braotleirao S.A. (Brazilian Central glectical Company Inc.) ESMAP Energy Management Assistance Program ESW Economic and Sector Work PAO Food and Agricultural Organization, United Natione PURAI Fundacao Nacional do Indio (National Indian Foundation) IBAMA Instituto Breasleiro do Meio Ambiento e Recursoe Naturais Renovaveie (Brazilian Insvitute for the Lnvironment and Renewable Natrual Resources) IDB Inter-American Development Bank INCRA Instituto Nacional do Colonizacao e Reforma Agraria (National Colonization and Agrarian Reform Institute) INIES Instituto Nacional de Peequisa Economicaee a Sciata IPEA (National Economi, and Social Research Institute, IPEA) IPSA Instituto do Peasquisa Economics Aplicada (Institute of Applied Economic Research) N00 Non-governmental Organization OAS Organization of American Statee OD Operational Directive, World Bank OCD Organization for Economic Co-operation and Development OED Operations Evaluation Department, World Bank on Operational Manual Statement, World Bank POC Programa Grande Caraje (Greater Carajae Program) PLANVASP Plano de Desenvolvimento do Vale do Sao Francisco (Development Plan for the Sao Francisco Valley) POLONOROESRE Programa de Desenvolvimento Integrado do Norceste do Brasil (Northwest Integrated Development Program) POLOSINDICAL (Rural labor union confederation, lower-middle Sao Francisco valley) PROCOP Programa de Controle de Poluicso, CLTESB (Pollution Control Program, CETESB) RIMA Relatorio de Impacto sobre o Meio Ambiente (Environmental Impact Report) SDR-PR Secretaria do Desenvolvimento Regional, Preeidencia de Republic& (Secretariat of Regional Development, Presidency of the Republic) SEAIN Secretaria de Assuntoe Internacionai, SEPLAN (International Affairs Secretariat, SEPLAN) CEHA Secretaria Especial do Meio Ambiente, Ministerio do Interior (Special Environmental Secretariat, Ministry of the Interior) SEMAM Secretaria do Maio Ambiente, Presidencia da Republica (Environmental Secretariat, Presidency of the Republic) SEPLAN Secretaria de Planejamento, Presidencia ds Rerublica (Secretariat of Planning, Presidency of the republic) SISNAMA Siatema Nacional do Meio Ambiento (National Environmental System) SPHA Sao Paulo Metropolitan Area SUDECO Superintendencis do Desenvolvimento do Centro-0ete (Superintendency for the Development of the Center-West) UNDP United Natione Development Program FOR OFFICIAL USE ONLY WORLD BANK APPROACHES TO THE ENVIRONMENT In SRAZILt A REVIEW OF SELECTED PROJECTS POLLUTION CONTROL IN SAO PAULO TABLE OF CONTENTS preface .. . . . . . . . . . . . . .. . . . . . . . . .. . . . Summary and Conclusions ......................................... iii Is INTRODUCTION .......................................... 1 II. SAO PAULO: INDUSTRIALIZATION, URBAN GROWTH AND ENVIRONMENTAL DEGRADATION .......................*....... 3 A. Basic Demographic and Economic Charactetlstits e s...... 3 B. Industrialization and Urban Growth ..................... 6 C. Urban Environmental Problems ...................*.....*. 7 1. Water Pollution: Sources, Levels and Public Health Impact .......................... 8 2. Air Pollution: Sources, Levels and Public Health Impact ..................... 9 3. Other Problems 3.................................. 13 III. POLLUTION CONTROL LEGISLATION AND ENVIRONMENTAL PROTECTION INSTITUTIONS ................................ 14 A. Federal Government .................................. 14 B. State Government ................................. 17 IV. STATE POLLUTION CONTROL STRATEGIES AND MAJOR INVESTMENTS ... 21 A. Water Pollution Control ................................ 21 1. The Sao Paulo Water Supply and Pollution Control Project ....................... .. . 22 2. The Greater Sao Paulo Sewage Collection and Treatment Project ........................... 25 3. Industrial Effluents Program ..................... 27 B. Air Pollution Control .................... . 28 C. conclusion ..... .... .... .. ................... 33 V. THE FIRST INDUSTRIAL POLLUTION CONTROL PROJECT ............. 34 A. Origins, Objectives and Description ............... 34 B. Project Benefits and Risks ....................... 38 C. Project Implementation ............... 00000009.0.9..... 39 D. Project Results ............................. . 43 1. PROCOP Credits ................. . 43 2. Project Financing ........... .....c......... 44 3. Technical Assistance ....................c. 45 E. Project Impacts .... .................. ..... . .. 47 1. Air Pollution ............. ........ ..... ..... 47 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Cont'd) 2. Water Pollution ................... 49 3. Non-Environmental Impacts ........................ 51 F. Overall Asesesment ................................... 52 G. The Bank's Role ....................................... 55 VI. SUBSEQUENT BANK-ASSISTED PROJECTS .......................... 58 A. The Second Industrial Pollution Control Project ........ 58 B. The Sao Paulo State Water Sector Project ............... 61 C. The Third Industrial Pollution Control Project ......... 63 D. Conclusion ....................... 64 VII. THE BaNK AND POLLUTION CONTROL IN SAO PAULO ................ 65 A. Concluatons ...................... 65 B. Lessones ........................ 69 ANNEXt Profile of PROCOP Subloane, 1981-86 Maps State of Sao Paulo and Greater Sao Paulo Metropolitan Area WORLD BANK APPROACHES TO THE ENVIRONMENT IN BRAZIL: A REVIEW OF SELECTED PROJECTS POLLUTION CONTROL IN SAO PAULO PREFACE 1. This is a report on the first of four case studies undertaken by OED and the Brazilian federal Secretariat of Planning (SEPLAN) as part of a larger study entitled "The World Bank and the Environment in Brazils A Review of Selected Projects." From the perspective of OED, the objective of the larger study is to determine how -- and how well -- the World Bank has perceived and dealt with environmental issues and problems in the context of several major infrastructure and regional development projects in one particular country. Brazil was selected for the study both because it is one of the Bank's principal borrowers and because Bank operations have encountered a wide range of ecological conditions and environmental isues ir. che cov.ttry. SEPLAN, in turn, is focusing on how the federal government and its agencies have addressed environmental problems in the course of project preparation and implementation. 2. In addition to the Sao Paulo pollution control effort, the OED/SEPLAN exercise examines Bank-assisted operations in the eastern and western parts of the Amazon region and in the Sao Francisco River valley in the semi-arid Northeast. In these distinct geographic contexts, more concretely, the study is concerned with the principal physical and human environmental impacts of Bank- financed investments. Where applicable, moreover, it also attempts to assess the adequacy, effectiveness and sustainability of specific project components (or parallel programs) designed to protect the natural environment and/or vulnerable social groups, including both Amerindian communities and rural and urban populations that have been forced to relocate due to such interventions as dam and port construction. 3. The objective of the present case study, in turn, is to determine how -- anu how effectively -- the Bank has iupported local agencies in dealing with environmental pollution in the state and, particularly, the metropolitan area of Sao Paulo. While much of the case stuly will be concerned with the first Bank-assisted Industrial Pollution Control Project, the report will also briefly examine two earlier basic sanitation operations (the Sao Paulo Water Supply and Pollution Control Project and the Greater Sao Paulo Sewage Collection and Treatment Project) and touch on several more recent initiatives (the Second and proposed Third Industrial Pollut4on Control Projects and the Sao Paulo Water Sector Project). A review of the experience in Sao Paulo is of particular interest because this is one of the few cases where the Bank has been involved in some form of urban pollution control activity for nearly two decades and where it has attempted to extend a project initially centered on a particular metropolitan area first to an entire state and subsequently to the national level. 4. More generally, the case study attempts to assess to what extent and how the Bank has approached the broader issue of urban environmental managemen, in Sao Paulo. Given the increasing urbanization of the state's population and that in Brazil in general, as well as the continuing industrialization of the metropolitan and national economies, urban environmental problems and government efforts to deal with them are already of considerable relevance and will be of even greater importance in the future. Despite th- increasng attention being paid to issues such as deforestation and global climate change both inside and outside Brazil, moreover, in terms of the numbers of people directly affected, the most serious environm.ntal problems facing the country -- as in many other developing nations -- over the next several decades are likely to be growing urban pollution and inadequate basic sanitation. Furthermore, since the adverse health and other impacts of environmental contamination tend to disproportionately affect the urban poor, there is a significant social, as well as environmental, dimension to these problems. 5. While all field visits made in connection with this and the other case studies were carried out jointly, due to the differences in focus mentioned above SEPLAN and OED decided from the outset to prepare their own reports. During the joint study, more specifically, SEPLAN was represented by ztaff from the Environmental Analysis Unit of the Secretariat of Economic and Social Planning (CAA/SEPES, and from the Institute of Economic Research of the Institute of Social and Economic Planning (IPEA/INPES), under the overall guidance of the Secretariat -- now Department -- of International Affairs (DEAIN). OED, in turn, was represented by one regular staff member and, in all but the present case, two or more specialized consultants. In undertaking the Sao Paulo study, OED and SEPLAN benefitted from discussions with professional staff of the Environmental Sanitation Technology Company (CETESB), the Sao Paulo State Development Bank (BADESP) and the Sao Paulo State Basic Sanitation Company (SABESP), among other state government agencies. Logistical support provided by CETESB during visits to participating industries is also gratefully acknowledged. A report elaborated by CETESB in connection with this case study was utilized in the pr-paration of the present document. Helpful comments on an earlier draft by CETESB and MEFP/DEAIN have also been incorporated in the present version of this report. 6. The report which follows is divided into seven chapters. After a brief introduction, Chapters II and III summarize the basic relationships between urban-industrial growth and environmental degradation in Sao Paulo and the evolution of federal and state pollution control legislation and environmental protection institutions, respectively. Chapter IV, in turn, reviews recent state pollution control strategies and related investments, including the Bank- supported sanitation projects mentioned above. Chapters V and VI respectively focus on the first Industrial Pollution Control Project and on subsequent Bank- assisted initiatives in the areas of basic sanitation and industrial pollution control in Sao Paulo. Chapter VII, finally, assesses the Bank's role in pollution abatement efforts in the state and draws some of the lessons that can be learned from this experience. A particular concern of the concluding chapter is to suggest how the Bank might improve its approach to pollution control and urban environmental management more generally in Sao Paulo and elsewhere in the developing world. WORLD BAIK APPROACHES TO THE ENVIRONMENT IN BRAZILt A REVIEW OF SELECTED PROJECTS POLLUTION CONTROL IN SAO PAULO SUMMARY AND CONCLUSIONS 1. Air and water pollution are among the principal environmental problems facing urban areas in developed and developing countries alike. The combination of large and rapidly growing human qnd vehicle populations and, in many localities, equally rapid industrial development in a context of limited public sector resources means, however, that urban pollution problems are especially severe in the largest cities of the developing world. The provision of basic sanitation infrastructure and othev local services, the regulation of industrial, residential and other locational and land-use decisions and the control of vehicle emissions and industrial discharges have all tended to lag considerably behind urban population growth in the Third World, particularly in its major metropolitan areas. Public sector efforts to combat pollution in most developing nations, moreover, are relatively recent and continue to face a number of significant financial, institutional and political obstacles. 2. The state of Sao Paulo, Brazil provides a dramatic illustration of the types and dimensions of environmental problems that can and frequently do result from rapid and, until recently, largely uncontrolled industrial and urban growth in the developing country context. State government attempts to deal with these problems over the past several decades also illustrate what needs to and can be done to correct this situation and how the World Bank, which has supported pollution control efforts in metropolitan Sao Paulo since the early 1970's, has assisted and can continue to assist local efforts to fight pollution and improve environmental conditions more generally in urban areas in the developing world. The Bank's experience in Sao Paulo, however, also reveals the limitations of taking a partial approach to pollution control rather than confronting the problems of urban environmental contamination in a more comprehensive and coordinated manner. Urban and Industrial Growth and Environmental Degradation 3. Sao Paulo is one of the most urbanized states in Brazil. It is also the most industrialized and affluent state in the country. Much of its urban population and industrial activity, in turn, is concentrated in the Sao Paulo Metropolitan Area (SPMA) which, with a population estimated at 15.3 million in 1985 and a growth rate of nearly 5% a year since 1960, is already one of the largest and most rapidly growing urban centers in the world. Much of this population, however, consists of poor migrants attracted from other parts of Brazil by the rapid industrial growth occurring in and around the metropolitan region since World War II. By the Year 2000, moreover, the metropolitan population is projected to be reach 24 million inhabitants -- by which time the SPMA is expected to be the second largest urban agglomeration in the world after iv Mexico City, while population in the state of Sao Paulo as a whole is likely to exceed 40 million by the turn of the century. 4. Rapid industrialization and urbanization over the past few decades in Sao Paulo have been accompanied by increasingly serious environmental problems which federal and state authorities only systematically began to confront in the 1970's. Given their demographic size and the concentration, scale and composition of the industrial activities located within their boundaries, the principal subregions of concern from an environmental standpoint are the SPMA and the Santos lowlands, especially Cubatao, located less than 70 km from the heart of the metropolitan region. This latter municipality, commonly referred to, until very recently, in Brazil as "the valley of death" or "the most polluted city in the world," is the location of a number of very large steel, petrochemical and fertilizer industries which have been responsible for significant environmental degradation. S. Water pollution in Sao Paulo, as elsewhere, is the result of a combination of increasing industrial effluent% and raw domestic sewage dischargd into local rivers and other water bodies. Air pollution, in turn, is associated - - particularly in the SPHA -- with the rapidly growing number of motor vehicles and the emission of a variety of substances by industrial sources. In both cases, rapid urban-industrial growth, occurring largely in the absence of adequate land- use and transportation planning, locational controls and pollution abatement measures, together with the insufficient provision of basic sanitation services, explains much of the dramatic deterioration in water and air quality witnessed in the metropolitan region and other parts of Sao Paulo over the past several decades. In both cases, moreover, high levels of environmental pollution have been directly associated with an increased incidence of public health problems including cardio-vascular, respiratory and gastro-intestinal diseases. The urban poor and other vulnerable groups, especially young children and the elderly, have been among those most adversely affected by such pollution. 6. Although water and air pollution are probably the most serious urban environmental problems in Sao Paulo, they are by no means the only ones. Other areas of concern are solid waste (including hazardous industrial and non- industrial waste) collection and disposal and frequently associated soil and subsoil contamination, stormwater drainage and related phenomena such as flooding, erosion and mudelides, and noise pollution. While a comprehensive approach to improved environmental management in the SPMA and elsewhere must necessarily contemplate these concerns together with air and water pollution, since the Bank has not yet been directly or extensively involved in these issues in Sao Paulo, they are not considered in detail in the present report. Environmental Protection Institutions and Pollution Control Legislation 7. Federal and state environmental legislation and environmental protection agencies are a relatively recent phenomenon in Brazil, as in many other countries in both the developed and the developing world. In the Brazilian case, the first federal entity specifically responsible for environmental protection, the Special Secretariat of the Environment (SEMA), was established in October 1973. A similar agency in Sao Paulo, the State Environmental Sanitation Technology Company (CETESB), was created in mid-1975. Subsequent years v have witnessed a considerable evolution of official environmental institutions in Brazil, starting with the establishment of a national environmental system (SISHAMA), composed of SEMA and a network of state environmental protection agencies (SEPAs) including CETESB, and the National Environmental Council (CONAMA), which includes both federal and state government and private sector representatives, in August 1981. The most recent institutional event has been creation of the Brazilian Institute of the Environment and Renewable Natur!l Resources (18AMA) through the merger of SEMA and three other federal agencies previously involved in diffe,ant areas of natural resource management, in January 1989. 8. Starting in the mid-1970's, environmental legislation at both the federal and state levels initially emphasized the definition of air and water quality standards and permissible pollution levels. Early federal legislation established the basic legal framework for environmental protection in Brazil and delegated authority to state and local governments to set more precise norms for, and licence the planning, installation and operation of, industrial and other p.eoductive activities, ar well as to define and apply sanctions against polluters. More 6ecent (1983) federal legislation authorized CONAMA to determine the conditions under which polluting industries and other environmentally degrading activities would be required to undertake environmental impact studies and prepare environmental impact statements, known in Brazil as RIMAs. The conditions under which a RIMA would be required to be submitted to the respective SEPA prior to the licensing of a potentially polluting activity were formally spelled out by CONAMA in January 1986. Another important initiative by CONAMA, finally, was establishment of the national Vehicle Air Pollution Control Program (PROCONVE) in May 1986. 9. Beginning in 1968, legislation in Sao Paulo provided more specific guidelines for pollution control in the state. Anticipating similar federal legislation that would only be approved in the early 1980'a, state Law No. 997 of May 1976 was particularly important. This law and its complementary regulating decree instituted a state "environmental pollution prevention and control system," established state government authority to regulate environmental contamination, authorized creation of a licensing system for the construction, installation, expansion and operation of all potentially polluting activities and authorized the application of specific sanctions against polluters. Under this legislation, furthermore, CETESB was given the principal responsibility for overseeing environmental protection activities in Sao Paulo. In 1978-79, the state also adopted legislation disciplining the location and expansion of industries within the SPMA based, for the most part, on environmental considerations. 10. CETESB is currently subordinated to the state Secretariat of the Environment (SMA). Among its basic objectives and legal attributes are: (i) the enforcement of state pollution control legislation; (ii) the monitoring of air and water quality levels; (iii) research and development of pollution control technology; (iv) the establishment of quality standards for pollution control equipment; and (v) the provision of technical assistance and training to state agencies responsible for the operation of water and sewage treatment plants and for pollution control in general. Having a total staff on the order of 2,100, including some 650 professionals, CETESB is widely recognized as the most vi experienced and technically capable environmental protection agency in Latin America. Bank-Suppgorted Pollution Control Initiatives in Sao Paulo 11. The World Bank assisted industrial pollution control projects, approved in 1980 (Loan 1822-BR) and 1987 (Loan 2831-BR), respectively, are part of broader basic sanitation and pollution control investments undertaken by the government of Sao Paulo, primarily in the SPMA, over the past two decades. These efforts include earlier Bank-financed initiatives such as the Sao Paulo Water Supply and Pollution Control Project (Loans 757 and 758-BR), signed in June 1971, and the Greater Sao Paulo Sewage Treatment Project (Loan 1525-BR), approved in February 1978, which were direct precursors to the industrial pollution control operations. The first industrial pollution control project was intended in part to provide financing to industrial polluters for the pretreatment of liquid effluents prior to their being discharged into an expanded and upgraded metropolitan sewer system that was being supported under Loan 1525-BR. Given the increasing deterioration of air quality in the SPMA during the 1970'6, another major objective of the first industrial pollution control project was to reduce particulate matter emissions in the metropolitan region. 12. Neither of the above mentioned basic sanitation projects succeeded in improving water pollution control in the metropolitan area. While having environmental betterment among their central objectives, serious execution delays and shortfalls in local counterpart funding, among other problems, effectively limited their achievements in this regard. As a result, most of the domestic sewage in the SPHA currently remains untreated even though prospects for the coming decade appear to be more favorable. Similarly, delays caused at least in part by national economic difficulties in the early 1980's led to postponement of vehicle emission control measures initially expected in the late 1970's, and, consequently, of the potent.al reductions in air pollution associated with them. Here too, however, if the provisions and timing of PROCONVE are not relaxed, future prospects are for the attainment of significauc improvements in air quality in the Sao Paulo metropolitan area and elsewhere in Brazil by the late 1990's. The First Industrial Pollution Control Project 13. In contrast with the two basic sanitation projects, the first Industrial Pollution Control Project and its follow-on operation have made a substantially more positive contribution to environmental protection in the SPMA, as well as in other parts of the state. This project combined a slightly subsidized credit line (known as PROCOP) for the financing of industrial pollution control devices and treatment facilities with technical assistance to CETESB. At first, the operation experienced implementation difficulties due in part to the economic crisis previously mentioned, in part to insufficient federal and state government counterpart funding and in part to its own administrative complexity. After substantial reformulation and a reduction in the amount of the Bank loan in September 1984, however, commitment and disbursement of PROCOP resources proceeded much more rapidly, such that the extended closing date (June 1986) was easily met. Initially limited to the treatment or pre-treatment of liquid industrial wastes and the reduction of industrial particulate matter emissions in the SPMA, reformulation of the project included, among other modificationes (i) an increase in the Bank's financing of individual subprojects to 50% of their total coat; (ii) expansion of the scope of the project to include sulfur dioxide emis&ions and the disposal of toxic waotess (iII) extension of its geographic coverage to the entire state of Sao Paulo, with emphasis on Cubatao; and (iv) greater flexibility in subproject appraisal procedures a..d subloan financing conditions. 14. The revi3ed project has clearly had a favorable impact in environmental terms, despite the initial difficulties in attracting industrial demand for the PROCOP credit line. Air and water quality indicators in the areas benefitted to the greatest extent by the operation reveal significant reductions in pollution levels as the result of CETESB's efforts during the project implementation period. The direct positive impact has been greatest in Cubatao and in terms of industrial air pollution. The relative failure of the water pollution component, in turn, was due largely to factors beyond the control of either CETESB or the Bank, particularly the serious delays experienced in the execution of the much more ambitious and costly sewage treatment project already touched on above. 15. A review of the implementation experience and results of the project suggest that, even though its original objectives were only partially met, the mid-course changes in its design and operating procedures, in fact, permitted it to address a broader set of industrial pollution issues in Sao Paulo, thereby ultimately amplifying its impact. Furthermore, even though the direct impact of the project on pollution levels in the SPHA was considerably smaller than originally anticipated, there is reason to believe that its indirect consequences have been far more substantial. The credit line established under the project appears to have played a significant catalytic role, especially in the SPMA, where the mere existence of a funding source for pollution abatement was apparently sufficient to induce many local industries to invest in pollution control utilizing their own or other non-PROCOP resources, in the process complementing CETESB's existing arsenal of pollution control weapons. 16. The technical assistance component of the project also strengthened CETESB's analytical and operational capability and promoted the development of a long-term pollution control strategy for the metropolitan region and other areas, including key river basins in the interior of the state. Improved inter- institutional coordination with respect to pollution control between CETESB, the state development bank, BADESP -- which is the financial administrator of PROCOP -- and the state basic sanitation company, SABESP -- which is responsible for the provision of water and sewer services in much of Sao Paulo -- was also directly promoted by the operation. Finally, other important by-products of the project are the second industrial pollation control operation, approved by the Bank in June 1987 and presently in execution, and a possible third such initiative which is currently in preparation. Besides supporting additional industrial pollution control activities in Sao Paulo, the second and proposed third projects extend these efforts to the national level through assistance to SEMA (now IBAMA) and to a number of other Brazilian states also characterized by significant industrial pollution problems. viii 17. In synthesis, the project demonstrates the value of applying a "carrot and stick" approach to industrial pollution problems through which serious %ad persistent enforcement efforts are combined with the provision of credit and technical assistance to support pollution abatement efforts. It also demonstrates the importance of a strong regulatory agency that possesses both the technical capacity and the Institutional determination required to systematically monitor and control industrial polluters. With respent to "institutional determination," more specifically, the role of local public awareness and unambiguous political support by the state government in the relative success of CBTESB's initiatives cannot be overstressed. Consistent World Bank support of CETESB's activities over the past decade has also contributed to the generally positive experience thus far in Sao Paulo with respect to industrial pollution control. 18. The Bank's role in the project vas, i. ed! essentially p.eitive. Bank staff helped CETESB to define its initial priorities in combatting industrial pollution, to determine .ecific enforcement strategies and to establish criteria for the technical and economic evaluation of pollution control subprojects. As the first industrial pollution control project in Latin Ampr4ca and one of the first such operations anywherb, the Bank correctly followed a "learning by doing" approach which eventually achieved largely positive results. When the project ran into major difficulties during the eerly years of execution, moreover, the Bank responded, albeit slowly, with sufficient flexibility to assure a successful final outcome. The projjct's desived contribution in terms of affording the Bank further knowledge about industrial water and air pollution costs and benefits, together with experience in the design and implementation of urban and regional pollution control programs was also clearly attained. Subseauent Bank-Assisted Proects 19. As indicated above, the Bank has continued to support pollution abatement efforts in Sao Paulo and elsewhere in Brazil through the second industrial pollution control operation, as well as a third such operation which is expected to be presented to the Board during the second half of 1990. The Bank has also continued to assist the state in its water supply and sewage collection activities by financing a slice of SABESP's 1989-93 investment program through the Sao Paulo State Water Sector Project approved in June 1989. While the latter operation does not specifically include resources for the expansion of sewage treatment facilities in the SPMA, it does include financing for a comprehensive assessment of domestic waste water pollution in the state. The proposed third industrial pollution control operation, in turn, would extend PROCOP type credit lines to, and provide technical assistance to SEPAs in other Brazilian states. It would also include resources for studies concerning the disposal of hazardous industrial wastes in the state of Sao Paulo and the definition of additional measures to clean up the Tiete River in the SPHA. Conclusions and Lessons Learned 20. In reviewing the Bank's interventions with regard to different aspects of the urban pollution problem in Sao Paulo over the past fifteen years, it is evident that, despite the significant investments that have been made and the real progress that has been achieved on numerous fronts, this problem has ix by no means yet been totally solved. It is also clear that the Bank's approach, while having evolved and broadened subecantially ovvr Cime, was largely piecemeal and still does not directly or fully confront several of the principal sources of environmental contamination in the SPMA. Dealing more effectively with this larger set of pollution-related issues requires both an increased emphasis on economic and policy, together with technical, financial and institutional, measures and application of a more integrated, cross-sectoral approach to public investment and the regulation of productive activities at the urban or metropolitan level. 21. The attempts of Bank-supported pollution control projecte to improve air and water quality in Sao Paulo have, thus far, met with only partial success largely because they have only dealt with part of the problem. Even though CETESB's diagnostic studies in the mid-1970's indicated that motor vehicles accounted for three-fourths of all air pollution in the SFMA, this source has been basically neglected in the Bank's pollution control projects in Brazil. Industry's relative contribution to one major air pollutant -- particulate matter -- moreover, was subsequently found to be less significant than originally thought by either CETESB or the Bank, while a non-industrial source, road dust, was determined to be correspondingly more important. In the case of water pollution, on the other hand, CETESB's attention was focused primarily on industrial, as opposed to municipal, sources, with the idea of pretreating effluents that would be potentially harmful to major planned Bank-assisted sewage collection and treatment facilities in the SPMA that later suffered considerable implementation delays. 22. In the case of air pollution, it is clear in retrospect that a more adequate approach would have required, in parallel to PROCOP, the definition and implementation of measures to reduce vehicle emissions together with non- industrial sources of particulate matter. A more comprehensive and effective air pollution control strategy, in short, would have had to directly confront the issue of vehicle engine construction -- and, thus, the economically and politically powerful automotive industry -- as well as to improve streets and urban infrastructure more generally In peripheral metropolitan neighborhoods. On the one hand, this would have required intervention to regulate vehicle engine standards at the national level, while, on the other, it would have entailed increased public investments for road improvements, together with a more coordinated, multi-sector (and, hence, multi-institution) planning and implementation effort at the metropolitan level. 23. In the area of water pollution, in turn, while the principal difficulty was one of insufficient financial resources to complete planned sewage investments, other factors, including political disagreements among municipalities in the SPHA and between municipal and state governments, as well as inadequate coordination between CETESB and SABESP, also played a role in the poor performance of the various Bank-supported projects. Under these circumstances, however, the Bank should have been aware of the potential political/institutional conflicts that, in fact, subsequently materialized and - - again within the context of improved metropolitan planning and coordination of basic infrastructure provision -- sought to obtain greater ex-ante guarantees that the necessary financial resources and inter-governmental cooperation would be forthcoming. Insufficient coordination between SABESP and CETESB, which, among x other problemes led to the unnecessary duplication of costly sewage treatment facilities in part of the SPM, also suggests that there may have been inadequate coordination across sectors within Bank with regard to supervision of the Sao Paulo sewage treatment and industrial pollution control projects. 24. The principal lesson that can be drawn from this experience for future urban pollution control operations in Brazil and elsewhere is the need to have as full an understanding as possible of the sources and causes of environmental contamination in each particular area -- since those mday vary considerably from one city or metropolita2 area to the next -- prior to developing a specific strategy for combatting the problem and selecting the instrument or instruments for dealing with it. It is likely that such an analysis will reveal that the problem has multiple dimensions and, thus, that it will need to be addressed simultaneously on a number of fronts, using different, but complementary, instruments. The resulting pollution control strategy, in turn, should be implemented in a coordinated and cost effective manner based on clearly established priorities and a clearly defined (and carefully monitored) institutiona. division of labor. Furthermore, this also implies the need to put air and water pollution into the context of the full range of urban environmental problems and to approach their solution at the city or metropolitan level from the broader (and on-going) perspective of urban environmental management. 25. Such an approach will require the coordinated utilization of a broad range of instruments including urban zoning, land use, transportation and infrastructure planning and management, together with economic policy measures that directly affect the pricing of productive inputs and outputs through taxes, subsidies and other mechanisms in addition to the regulations, fines and credits utilized thus far in Sao Paulo. In short, it is likely to require the use of alternatives to the traditional "command and control" approach to pollution abatement possibly including greater reliance on economic incentives such as marketable permits, pollution charges and effluent fees. Furthermore, the environmental impacts of macroeconomic and sectoral policies -- or "implicit" environmental policies -- at the urban or metropolitan and state levels should also be examined in order to determine the extent to which they encourage or discourage pollution and other forms of environmental degradation. 26. -Pollution control efforts, accordingly, should perhaps start by considering the environmental implications of a..isting economic incentives and pricing policies, while environmental costs and benefits should be taken into account in the on-going process of policy definition or redefinition. The modification of such incentives and policies, moreover, implies the need both to take action at the national level, where macro policies are formulated, and to monitor their effects at the local level, where their environmental consequences are ultimately felt. Furthermore, the current emphasis in Sao Paulo and elsewhere on the treatment of industrial wastes as the main pollution control measure should give way to a policy of waste minimization followed by remediation as a last resort. 27. Another major lesson that can be derived from the recent Bank experience in Sao Paulo is the fundamental importance of an adequate legal framework, sufficient institutional (including technical and administrative) capability and strong political support at all levels of governmen-u, but xi especially at the federal and state levels, for the effectiveness and sustainability of pollution control and other environmental protection efforts. Institutional capacity, together with an adequate legislative and judicial framework, is essential in order to properly diagnose and regulate environmental contamination, as well as to design viable and effective pollution control strategies and to administer the instruments necessary to implement these strategies. This, in turn, requires adequately trained personnel and proper logistical support, together with adequately equipped monitoring and laboratory facilities and other installations. 28. The Bank's experience with the industrial pollution control projects in Brazil demonstrates that CETESB presently possesses the technical and administrative capacity, as well as the legislative mandate, to successfully oversee pollution control activities in Sao Paulo. Bank support over the past decade has further strengthened its capabilities in this area. It is important to remember, however, that, while CETESB was formally created in 1975, its foundations were laid with establishment of the State Basic Sanitation Fund (FESB) in 1968 and a major United Nations Development Program/Pan American Health Organization technical cooperation project on pollution control in the early 1970's. Near3y a decade, therefore, preceded the Bank's first interventions with CETESB, which was already a fairly well developed institution by the time the initial industrial pollution control operation was approved. Despite the quality and relative stability of its professional staff and its positive track record thus far, the continued success of CETESB in a period of rapid political and institutional change, however, can by no means be taken as a foregone conclusion. The politicization and/or dismemberment of an agency such as CETESB can quickly destroy the results of several decades of hard won institutional development as has, in fact, occurred in other Latin American countries. 29. CETESB, moreover, is clearly exceptional in both the Brazilian and the Third World context more generally. Accordingly, the principal challenge for future efforts to extend the Sao Paulo pollution control experience to other parts of Brazil and elsewhere will be to develop institutions, at both the national and the subnational levels, that possess a similar capacity to diagnose and deal with environmental problems. In order to be effective, such institutional strengthening is likely to require both time and a steady and reliable flow of financial resources, as well as technical assistance from agencies such as CETESB which have already developed many of the necessary skills. The Bank, in turn, should be prepared to support the strengthening of federal and state environmental protection agencies in Brazil and other countries as long as they demonstrate real willingness to confront pollution and other environmental problems. 30. In order for IBAMA and the SEPAs to be effective and for their efforts to be sustainable, moreover, strong political commitment to the goals of environmental betterment must also be present at both the federal and the state levels. Central government commitment and support will be particularly important in states that presently possess few technical, institutional and financial resources of their own and which, unlike Sao Paulo, lack a tradition of serious environmental protection efforts. Furthermore, as the recent experience in Sao Paulo has also shown, it is likely that the mobilization of public opinion and the participation of non-governmental organizations both at xii the national and the local levels, will be relevant factors in, and possibly necessary preconditions sor, generating and maintaining political commitment to pollution control and other environmental preservation goals. 31. The Bank, finally, should be supportive of environmental education programs for the general public, as well as for government agency and industrial sector personnel, and encourage the participation of community associations and other local and national NGOe in on-going environmental monitoring activities. The mass media, moreover, can and should be stimulated to disseminate such initiatives. The ultimate key to successful pollution control efforts is likely to be an informed and active citizenry which to able to make federal, state and local governments accountable for the enforcement of existing environmental protection regulations and/or for the enactment of new environmental legislation where adequate measures are presently lacking. WORLD BANK APPROACHES TO THE ENVIRONMENT IN BRAZILs A REVIEW OF SELECTED PROJECTS POLLUTION CONTROL IN SAO PAULO I. INTRODUCTION 1.01 On March 27, 1980, the World Bank approved a loan of US$ 58 million (Loan 1822-BR) to help finance the Sao Paulo Industrial Pollution Control Proj ect (hereafter "the first project"). With a total coat estimated at US$ 187 million, the project was designed to provide a line of credit to industries located in the Sao Paulo metropolitan regioa for the purpose of carrying out investments to reduce particulate matter emssions and pretreat or fully treat liquid effluents. The project would also provide technical assistance to CETESB (Companhia do Tenologia de Saneamento Ambiental), the state environmental protection agency. The project was the first concerted effort in Latin America to control industrial pollution in a major metropolitan area 1 and was one of the first such operations financed by the Bank anywhere. a The loan 13came effective on January 15, 1981 and closing was initially scheduled for March 31, 1984. 1.02 Due to a combination of local counterpart funding problems, an initial lack of demand on the part of eligible industries in the metropolitan region and its own administrative complexity as originally designed, the project was substantially reformulated by means of an Amending Agreement approved on September 21, 1984. The Bank loan was reduced to US$ 34 million and the closing date was extended to June 30, 1986. Other important changes introduced at that time or subsequently weres an increase in the Bank's share of total financing of the individual subprojects from roughly 30Z to 50%; expansion of the project to include the reduction of sulfur dioxide emissions and the disposal of toxic wastes; greater flexibility in subproject approval procedures and subloan conditions; and extension of the operation's geographic coverage to the entire SA subsequent pollution control operation for Mexico (Loan 2154), approved in May 1982 and which focused largely on the Mexico City metropolitan area, proved to be generally unsuccessful and US$ 51.3 of the original US$ 60 million Bank loan was cancelled by the time it closed in December 1988. 2 The Bank's first comprehensive urban environmental control project involved rehabilitation of the city of Sarajevo, Yugoslavia. Three loans for a total of US$ 83 million were approved in May 1976 to improve water (Loan 1263) and air pollution control (Loans 1264-1 and 1264-2) in Sarajevo. Bank financing, more specifically, supported implementation of water supply and sewage collection and treatment systems, a sanitary landfill for solid waste disposal and air pollution abatement through the utilization of natural gas and improved urban transport. An even earlier lending operation (Loan 1109 for US$ 20 million, approved in May 1975) financed a ten year program to control water pollution in Finland with an emphasis on industrial discharges. These and other early Bank environmental projects are briefly described in Lee, James A., The Environment. Public Health and Human Ecology - Considerations for Economic Development, Johns Hopkins University Press, Baltimore, 1985, pp. 15-17. 2 state of Sao Paulo, with emphasis on the highly industrialized and polluted municipality of Cubatso, located near the port city of Santos. 1.03 As the result of these modifications, project implementation accelerated rapidly, such that the reduend Bank loan was fully disbursed by the revised closing date. A Project Completion Report (PCR) prepared by the (then) Industrial Development and Finance Division of the Projects Department for the Latin America and Caribbean Regional Office waa transmitted to the Operations Evaluation Department (OED) in June 1987. The operation was subsequently audited by OED, which undertook a field visit in July 1988 and presented a Project Performance Audit Report (PPAR) in April 1989. 3 A follow-on operation entitled the Second Industrial Pollution Control Project (hereafter "the second project"), involving a Bank loan of US$ 50 million (Loan 2831-BR), was approved on June 9, 1987. This project is currently in execution. A third industrial pollution control operation (hereafter "the third project") which would help establish credit lines -- similar to that set up by the first project in Sao Paulo -- in other Brazilian states is presently being prepared for consideration by the Bank. 1.04 This report will review the Bank's role in the efforts to combat environmental pollution in the state, and particularly the metropolitan area, of Sao Paulo. It does so primarily by examining the experience thus far under the projects mentioned above in the context of broader pollution control efforts by the state government over the past two decades, some of which have also counted with Bank financing. It relies heavily on existing documentation on the various Bank-supported operations reviewed -- especially the respective Staff Appraisal Reports (SARs) and, where available, project completion and audit reports -- and on information provided by the principal executing agencies, particularly CETESB. Review of this documentation has been complemented by short field visits to Sao Paulo in January and April 1989 during which OED, accompanied by representatives of the federal Hinistry of Planning and Coordination (SEPLAN), interviewed key officials in the state government agencies responsible for project implementation, as well as informed outside observers, and undertook brief visits to several industries benefitted under the pollution control operations in metropolitan Sao Paulo and Cubatao. 3 OED Report No. 7720 of April 10, 1989. This document contains both the Audit Memorandum and the PCR for this project. 3 II. SAO PAULOI INDUSTRIALIZATION$ URBAN GROWTH AND ENVIRONMENTAL DEGRADATION A. Basic Demographic and Economic Characteristics 2.01 Sao Paulo state occupies an area of some 248,000 square kilometers - - or 2.9% of the national territory -- in south-central Brazil. It is the most urbanized, industrialized and affluent part of the country. While containing roughly 21% of the Brazilian population in 1980, the state registered a per capita income more than twice the national average. Roughly 89% of its population resided in urban areas in 1980, as compared with 68% for Brazil as a whole. The state's population was on the order of 29.5 million in 1985 and is expected to exceed 40 million by the turn of the century. 2.02 Sao Paulo is responsible for a significant share of Brazil's agricultural production. In 1970, the state provided close to half of the national output of coffee, cotton, sugar, rice and corn, the former three being majc traditional export crops. It currently generates roughly 60% of Brazil's sugar cane based alcohol, a major energy substitute for imported petroleum which is used primarily as automobile fuel. Sao Paulo is also presently the world's second largest producer of oranges, an activity which is the basis of another important and relatively recent export industry. The state's industrial sector, in turn, with roughly 29% of the units of production nationwide, employed some 46% of the national industrial labor force and contributed on the order of 52% of total industrial output and value added in 1980. 2.03 Much of the urban population and industrial activity in the state is located in the Sao Paulo Metropolitan Area (SPMA) which was formally established, together with 7 other metropolitan regions, by the federal government in June 1973. 1 It occupies roughly 8,000 square kilometers and presently includes 38 separate municipalities. 2 SPMA is one of the largest and fastest growing urbanized areas in the world, having registered a population of 12.6 million in 1980. By current projections, it is expected to have on the order of 24 million inhabitants in the Year 2000, when it would be the second largest urban agglomeration in the world after Mexico City. The SPMA, moreover, accounted for some 54% of the establishments, 64% of the employment and 63% of value added in the industrial sector in Sao Paulo state in 1980. 2.04 Within the SPMA, both population and industrial activity remain largely concentrated in the municipality of Sao Paulo, even though there has been a clear tendency for their decentralization -- both within the metropolitan region and, in the case of industrial employment and value added, also to other 1 More specifically, by Complementary Law No. 14 of June 8, 1973. A ninth metropolitan region, Rio de Janeiro, was established in 1974. 2 All but one of these municipalities, Vargem Grande Paulista, which was added in November 1983, were included in the metropolitan region at the time of its creation in June 1973. 4 parts of the state -- over the past several decades. * The municipality of Sao Paulo (or "central Sao Paulo") is estimated to have had some 10.1 million residents in 1985, or nearly two-thirds of the metropolitan total in that year. It also contained approximately three-fourths of all industrial establishments and accounted for 63% of secondary sector employment, while generating 55% of industrial value added, in the metropolitan area in 1980. Tables 1 and 2 below present more detailed figures on the evolution and relative shares of population and industrial activity, respectively, in Sao Paulo municipality, the SPMA, Sao Paulo state and Brazil since 1960. Table 1. Evolution of Population in Sao Paulo and Brazil 1960-85 (population in millions) 1960 in- 1280 1985 Sao Paulo Municipality (SPMUN) 3.7 5.9 8.5 10.1 Metropolitan Periphery 1.1 2.2 4.1 5.2 Sao Paulo Metro. Area (SPMA) 4.8 8.1 12.6 15.3 Sao Paulo State (SPS) 13.0 17.8 25.0 29.5 Brazil 70.7 93.1 119.1 135.6 SPMUN/SPMA 77.4% 72.8% 67.5% 66.1% SPMA/SPS 37.4% 45.8% 50.3% 51.5% SPMA/Brazil 6.8% 8.7% 10.6% 11.22 SPS/Brazil 18.3% 19.1% 21.02 21.82 Source: IBGE, Demographic Census for 1960, 1970, 1980; preliminary estimates for 1985. 2.05 After central Sao Paulo, the largest municipalities in the SPMA from a demographic standpoint are Guarulhos, Santo Andre, Osasco and Sao Bernardo do Campo, all of which were estimated to have had populations between 500,000 and 750,000 in 1985. Several others (Diadema, Carapicuiba, Maua and Mogi des Cruzes) were in the 200,000-350,000 range, while yet others (Sao Caetano do Sul, Suzano, Taboao da Serra and Embu) were estimated to have had between 100,000 and 200,000 inhabitants in that year. These same municipalities house much of the metropolitan industrial activity located outside central Sao Paulo. The three "ABC" municipalities (ie. Santo Andre, Sao Bernardo do Campo and Sao Caetano do Sul), situated to the immediate southeast of the municipality of Sao Paulo, are particularly important in this regard. 3 See Hamer, Andrew M., "Decentralized Urban Development and Industrial Location Behavior in Sao Paulo, Brazil - A Synthesis of Research Issues and Conclusions," World Bank Staff Working Papers, No. 732, May 1985 and Townroe, Peter M., "Location Factors in the Decentralization of Industry - A Survey of Metropolitan Sao Paulo, Brazil," World Bank Staff Working Papers, No. 517, July 1983. S 2.06 Outside the metropolitan area, smaller, but, nevertheless, significant industrial concentrations exist in the lowlands near the port of Santos ("Baixada Santista"), some 70 km to the east of Sao Paulo, particularly in the municipality of Cubatao, and in the Paraiba do Sul River valley northeast of the SPM&, in cities such as Sao Jose doe Campos (1985 municipal population roughly 375,000) located along the main highway to Rio de Janeiro. The principal municipalities in the Baixada Santista (Santos, Sao Vicente, Guaruja and Cubatao) were estimated to have had a combined population of close to one million in 1985. Cubatao, moreover, with only 126 manufacturing establishments and slightly less than 18,000 industrial employees, was responsible for nearly 6% of industrial output and 41 of industrial value added in Sao Paulo state in 1980. Table 2. Evolution of Industrial Activity in Sao Paulo and Brazil, 1960-80 1960 1970 1980 A. Establishments Sao Paulo Municipality (SPMUN) 14,578 20,543 24,842 Metropolitan Periphery 2,536 5,245 8,517 Sao Paulo Metro. Area (SPHA) 17,114 25,788 33,359 Sao Paulo State (SPS) 36,254 50,556 62,426 Brazil 110,771 164,793 214,158 SPMUN/SPMA 85.2% 79.7% 74.51 SPHA/SPS 47.2% 51.0% 53.4% SPMA/Brazil 15.4% 15.6% 15.6% SPS/Brazil 32.7% 30.7% 29.1% B. Emplpyment (thousands) Sao Paulo Municipality (SPMUN) 463.9 643.7 920.5 Metropolitan Periphery 121.9 263.2 543.3 Sao Paulo Metro. Area (SPHA) 585.8 906.9 1,463.8 Sao Paulo State (SPS) 831.3 1,295.8 2,287.0 Brazil 1,799.4 2,700.0 5,004.5 SPMUN/SPMA 79.2% 71.01 62.9% SPHA/SPS 70.5% 70.0% 64.0% SPMA/Brazil 32.61 33.6% 29.2% SPS/Brazil 46.2% 48.0% 45.7% Sources IBGB, Industrial Census for 1960, 1970, 1980. All figures refer to establishments with five or more employees. 6 2.07 Table 2 illustrates both the importance of Sao Paulo's industrial park for Brazil as a whole and the decentralization of manufacturing activity which has recently taken place within the metropolitan region and, after 1970, from the SPHA to the rest of the state and the country as well. Tendencies similar to those for industrial employment have also occurred with regard to output and value added in the secondary sector. Thus, while the SPHA accounted for nearly 71% of industrial output and 75% of industrial value added in Sao Paulo in 1970, these shares fell to 59% and 63%, respectively, in 1980. Decentralization within the metropolitan region reflects the growing saturation of Sao Paulo municipality and the increasing spread of new manufacturing establishments, as well as population, to neighboring areas. Table 2 also reveals that industrial activity expanded very rapidly in the SPMA during the 1960's and 1970's, with a total of more than 16,000 new manufacturing establishments and nearly 900,000 industrial jobs, together with close to 8 million new inhabitants, being added to the region over this period. B. Industrialization and Urban Growth 2.08 Historically, urbanization and industrialization in Sao Paulo have been closely associated. 4 Industrialization began in the latter part of the 19th century as a by-product of the growing coffee export economy which was fed by significant foreign migration and spread rapidly across the state and into neighboring Parana. By the early 1900's, considerable capacity for the production of light manufactured goods, particularly in the consumer non-durable goods sectors, had been created, mainly in the capital city, Sao Paulo. This tendency accelerated during World War I, again in the Depression years of the 1930's and, especially, during World War II, all periods when manufactured imports were largely restricted in Brazil. 2.09 During the 1950's and 1960's, the federal government adopted explicit import substitution industrialization policies focusing on the capital, intermediate and consumer durable goods sectors. Largely as the result of its existing manufacturing and financial base, good physical infrastructure, comparatively skilled labor pool and local market potential, Sao Paulo was the pri"cipal beneficiary of these policies, as many of the new industries chose to locate in the state and particularly in the metropolitan region. The important automobile, electrical appliance and related industries, among others, were established or consolidated in the SPMA at that time. Numerous large scale industrial enterprises, both publicly and privately owned, producing intermediate goods, especially steel, petrochemicals and fertilizere, also expanded dramatically in the Santos lowlands, particularly Cubatao, in the decades immediately following the Second World War. 2.10 Associated with the rapid expansion of industrial activity, urban population in Sao Paulo state increased from less than 3.2 million in 1940 to more than 13 million in 1960 and to 25 million in 1980. Population in the SPMA, 4 See, for example, Dean, Warren, The Industrialization of Sao Paulo, 1880-1945, University of Texas Press, Austin, 1969 and Katzman, Martin, Cities and Frontiers in Brazil: Reiional Dimensions of Economic Development, Harvard University Press, Cambridge, Massachusetts, 1977. 7 in turn, grew from 4.8 million in 1960 to 12.6 million in 1980 and an estimated 15.3 million in 1985, or at an average rate of 4.8% per year. Much of this growth has been the result of migration from other parts of the state and the country and, as suggested by the figures in Table 1 above, has tended to occur increasingly outside the central city. During the 1970'a, for example, when some 4i4 million people were added to the population in the SPMA, roughly 62% were migrants, while 42% of all metropolitan population growth occurred outside the municipality of Sao Paulo. Indicative of its national importance, the SPMA accounted for nearly 18% of all urban population growth in Brazil in the 1970's and contained close to 112 of the total population in 1980. C. Urban Environmental Problems 2.11 Rapid industrialization and urbanization in Sao Paulo state since the 1940's have been accompanied by increasingly serious environmental problems, water and air pollution being foremost among them, which federal and state authorities only really began to confront in a systematic way in the 1970's. Given their demographic size and the concentration, nature and scale of the industrial activities located within their boundaries, the principal subregions of concern from an environmental standpoint have been the metropolitan region and the Santos lowlands, particularly Cubatao. 5 Other parts of the state, including inland river valleys and smaller urban centers have also received growing attention from the state environmental agency, CETESB, in recent years. 6 2.12 Water pollution in Sao Paulo is the result of a combination of increasing industrial effluents and raw domestic sewage discharged into local rivers and other water bodies. Air pollution, in turn, is associated, particularly in the SPHA, with the rapidly growing number of motor vehicles and the emission of a variety of pollutants by industrial sources. In both cases, rapid urban-industrial growth, occurring, until relatively recently, in the absence of adequate land use planning, locational controls and pollution abatement measures, together with the insufficient provision of basic sanitation services, explains much of the dramatic deterioration in water and air quality witnessed in the SPMA and elsewhere in the state over the past several decades. Reflective of this situation is the fact that, as recently as 1978, only slightly more than half of all roads in the metropolitan area were paved and less than 40% of its dwellings were connected to the sewerage network. Hardly any of the sewage was treated. The areas least well served were the rapidly proliferating low-income neighborhoods, including many informal squatter settlements, located on the metropolitan periphery. * One published source in English that describes the extent of the metropolitan air pollution problem in Sao Paulo is Thomas, Vinod, "Evaluating Pollution Control - The Case of Sao Paulo, Brazil," Journal of Development Economices, Vol. 19, 1985. For a somewhat more recent view, see CETESB, Qualidade do Ar na Regiao Metropolitana de Sao Paulo e em Cubatao, 1987, Sao Paulo, 1988. 6 See, for example, CETESB, Qualidade das Aguas Interiores do Estado de Sao Paulo. 1986, Sao Paulo, 1988. 8 1. Water Pollution Sauces. _evl# and Publia Health Impact 2.13 Urban and industrial growth., in the absence of adequate control and treatment of liquid effluents, explain the increasing levels of water pollution observed in the SPHA, Cubatao and elsewhere in Sao Paulo state. In particular, the expansion of sewage collection and treatment services has not kept pace with rapid urbanization and industrial growth. As a result, according to the SAR for the first project, only a slightly larger share of the metropolitan population was served by sewage collection facilities in the late 1970's than in 1950, despite an impressive increase in the physical extension of the sewage network. ' Thue, while 933 km of sewage collectors served about 700,000 people, or 322 of the SPH*s population, in 1950, some 6,000 km of collectors served roughly 4.5 million people, or 362 of the metropolitan population, in 1978, leaving some 6.5 million inhabitants still unconnected to the sewerage system in the latter year. 2.14 Further exacerbating the potential public health hazards associated with low service levels, at the time the first project was appraised only 52 of all sewage in the SPHA underwent primary treatment, while the remaining 95% was discharged directly into the existing sewer network, storm drainage canals and local rivers and reservoirs. As a consequence, the rivers which cross the metropolitan area -- especially the Tiete, Pinheiros and Tamanduatei Rivers and their tributaries -- had become open sewers and ground water sources were exposed to contamination from open discharges and septic tanks. According to the SAR for the first project, in terms of biological oxygen demand (BOD), pollution loads in the SPHA's principal water bodies amounted to some 610 tons/day in 1975, of which 442 originated from industrial sources, 412 from domestic sewage and the remaining 15% from urban run-off. 8 2.15 The contamination of water bodies in the SPMA has resulted in clearly documented public health problems. This has particularly been the case in low- income residential areas where shallow wells are frequently used as water sources and outbreaks of typhoid fever, dysentery and other diseases -- including infectious hepatitis and meningitis -- have occurred on numerous occasions. Studies undertaken by researchers at the University of Sao Paulo (USP) found that inadequate water supply and sewage disposal were the primary causes of the rising infant mortality rates observed in the SPH& during the 1960's. Poor basic sanitation was also found to be largely responsible for the widespread occurrence ' World Bank Report No. 2158b-BR, dated February 15, 1980, para. 2.21. * Ibid., para 2.22 and Annex V, Table 17. BOD refers to the amount of oxygen consumed in the biological processes that break down organic matter in water. Large amounts of organic waste use up large amounts of dissolved oxygen, thus the greater the degree of pollution, the greater the BOD. For more on this and other measures of water pollution, see World Bank, Environmental Considerations for the Industrial Development Sector, Washington, Auguot 1978, pp. 30-33. The same source also discusses the monitoring and analysis of air and land contaminants (pp. 22-27 and 33-34, respectively). See also, Palange, Ralph C. and Zavala, Alfonso, "Water Pollution Control - Guidelines for Project Planning and Financing," World Bank Technical Paper No. 73, Washington, October 1987. 9 of acute diarrhea among infants in the late 1960's, especially among low-income families living in peripheral areas unserved by sewerage networks or residing near polluted water courses. * An additional health risk associated with water pollution in the SPMA was the possibility of absorbing carcinogenic or mutagenic compounds through exposure to toxic, but treatable, industrial wastes discharged into rivers or reservoirs that are subsequently used as sources of water for human consumption. '0 2.16 Water pollution is likewise a serious problem in the Santos lowlands, where the Cubatao river and its tributaries receive the effluents of many of the large industries located in the area, as well as polluted waters piped down the Serra do Mar mountains from the Billings Reservoir near the SPHA to generate electric energy for the metropolitan region and the Baixada itself. Occupying a total area of approximately 27,000 square kilometers, the Cubatao river basin played an important role historically in the occupation of the lowlands and has provided much of the water required by the expanding local industrial park. Uncontrolled industrial and domestic (ie. urban) discharges, however, until very recently, had resulted in near total elimination of aquatic life in the Cubatao river and greatly restricted recreational activities in the area. u 2. Air Pollution Sources, Levels and Public Heath Impact 2.17 At the time the Sao Paulo Industrial Pollution Control Project was appraised (1978-79), CETESB estimated that air pollutant emissions in the SPMA were on the order of 7,200 tons per day. Of this total, carbon monoxide accounted for roughly 65%, eilfur oxides for 13%, hydrocarbons for 10%, particulate matter 9 More specifically, infant mortality rates in metropolitan Sao Paulo increased from 70 per thousand in 1965 to 88 per thousand in 1973, after falling slightly from 72 per thousand in 1955-59 and dramatically from 167 per thousand in 1925-29. Due largely to improvements in basic sanitation infrastructure, however, the infant mortality rate in metropolitan Sao Paulo again declined significantly to 45 per thousand by 1983. See Sawyer, Diana, et. al., "The Impact of Urbanization and Industrialization in Mortality in Brazil," World Health Statistical Quarterly, Vol. 40, 1987. For further information on this subject, see IBGE/UNICEF, Perf il Estatistico de Criancas e Maes no Brasil: Aspectos Socio- economicos da Mortalidade Infantil em Areas Urbanas, Rio de Janeiro, 1986. 10 These studies are mentioned in paras. 2.25-2.26 of the SAR for the first project, but no specific references are given. The SAR adds that the risk of ingesting carcinogenic and mutagenic compounds when industrial waste waters receive only conventional treatment prior to being used for human consumption was particularly great in the case of the Rio Grande water treatment plant serving the "ABC" municipalities in the SPMA. It further observed that the effects of this health hazard, while potentially serious, may not be revealed until after 10 to 20 years of continuous ingestion. 11 CETESB, Controle da Poluicao Ambiental em Cubatao: Resultados - Julho/83 a Janeiro/87, Sao Paulo, 1987. An earlier English version of essentially the same document also exists, presenting the results of environmental pollution control efforts in Cubatao through July 1986. 10 for 7% and nitrogen oxides for 5%. Vehicle traffic was responsible for nearly three-fourths of all air pollution in the metropolitan region including roughly 941 of carbon monoxide, 73% of nitrogen oxide, 72% of hydrocarbon, 9% of sulfur oxide and 7% of particulate matter emissions. 12 2.18 Industrial activities, including power generation, were estimated to be the second largest source (221) of air pollution in the SPMA in the late 1970's. Industrial processes were estimated to be responsible for some 65% of total particulate matter and 18% of all hydrocarbon emissions. Industrial power generation -- through the stationary combustion of fuels with relatively high sulfur content -- in turn accounted for 88% of sulfur oxide, 24% of nitrogen oxide and 11% of particulate matter pollution in the metropolitan region. The metallurgical, non-metallic minerals, chemical, textile and food processing sectors -- which accounted for about half of the approximately 14,200 industrial polluters in the area -- were estimated to be responsible for roughly 80% of all industrial air pollution in the SPMA in 1977. Less than 300 establishments, on the other hand, accounted for more than 97% of total industrial particulate emissions. Establishments in the metallurgical sector, more specifically, were estimated to be responsible for 76% of industrial carbon monoxide emissions, while non-metallic minerals industries were found to account for 48% of particulate emissions and metallurgical. chemical, non-metallic mineral and textile firms to generate three-fourths of industrial sulfur dioxide emissions. 2.19 Of the 38 municipalities in the SPMA, only nine were responsible for about 95% of all industrial air pollution in the region. Establishments located in the municipality of Sao Paulo alone accounted for on the order of 45% of the particulate matter discharged into the atmosphere by industries in the metropolitan area in 1977, together with roughly 46% of the nitrogen oxides, 52% of the sulfur oxides, 57% of the carbon monoxides and 72% of the hydrocarbons. When transportation sources are also considered, the municipality of Sao Paulo was responsible for some 60% of all air pollutants generated in the metropolitan region in the late 1970's. Other major sources of industrial air pollution were located in Santo Andre, Sao Bernardo do Campo, Sao Caetano do Sul, Maua and Mogi das Cruzes. 13 2.20 Assessed through a computerized telemetric monitoring network, air quality in the SPMA and Cubatao is determined on the basis of standards adopted by the state of Sao Paulo in 1976. Covering the major pollutants considered hazardous by the World Health Organization (WHO), these standards specify maximum permissible atmospheric concentrations and indicate "attention", "alert" and "emergency" levels for each major pollutant. In the late 1970's, moct of the 12 The figures reproduced in this and the three following paragraphs are drawn from the SAR for the first project (paras. 2.04-2.09 and Annex V, Tables 9 to 15) aLd were derived from cadaetral studies of air pollution sources and air quality monitoring exercises in the SPMA by CETESB. 1 Together, establishments in these five municipalities generated approximately 45% of the nitrogen oxides, 39% of the sulfur oxides, 37% of the carbon monoxide, 33% of the particulate matter and 21% of the hydrocarbons discharged by industrial sources in the SPMA in 1977. 11 relevant air quality standards were exceeded for extended periods of time, particularly in heavily industrialized parts of the metropolitan area and the Santos lowlands. In 1978, for example, "attention" levels occurred on 121 occasions for carbon monoxide and on 51 occasions each for sulfur dioxide and particulate matter in the SPMA where daily air quality standards were exceeded 299 times for carbon monoxide, 121 times for particulate matter and 17 times for sulfur dioxide, respectively. 2.21 The negative effects of air pollution in the SPHA, furthermore, are frequently exacerbated during the winter months by the region's low wind velocities and commov temperature inversions. These factors result in air stagnation and keep pollutants close to the ground, thereby inhibiting the dispersion of emissions in the atmosphere and prolonging human exposure to them. The adverse public health consequences of such exposure, especially in terms of respiratory and cardiovascular diseases, have been reasonably well documented in Sao Paulo. In particular, thermal inversions involving high concentrations of sulfur dioxide and particulate matter have been associated with increases in morbidity and mortality in the metropolitan region. 14 Public health specialists have observed, moreover, that, largely as the result of its poor air quality, Sao Paulo is the only Brazilian metropolis where respiratory and cardiovascular problems rank second to infectious and contagioua diseases among the principal causes of mortality. 2.22 A recent Bank sector study on health policy in Brazil provides additional information on the relationship between air pollution and public health. This study observes, in general, that poor air quality is associated with respiratory impairment and lung cancer and that high levels of carbon monoxide, in particular, can aggravate coronary heart diseases, while lead contamination can increase hypertension. According to the report, more specifically, by the early 1970's air pollution in the SPHA had become so severe that there were noticeable increases in mortalityt "the 1st of August 1973, for instance, was a day of acute air pollution with sulfur dioxide and particu3ate levels twice the (already high) background levels. A review of death records showed that deaths among the elderly and deaths due to respiratory conditions were 50% higher than normal on that particular day." 1 14 The SAR for the first project cites (presumably unpublished) studies by Dr. Herval Ribeiro ("Estudo da Funcao Ventilatoria em Escolares Vivendo em Areas com Diferentes Niveis de Poluicao do Ar - Sao Paulo") dated July 1976 and Dr. Rene Mendes ("Avaliacao de Efeitos da Poluicao do Ar sobre a Saude, atraves do Estudo da Mortalidade Diaria na Grande Sao Paulo e Sao Caetano do Sul") prepared at CETESB in 1973 and 1976, while the aforementioned article by Thomas also cites a paper by Nilda Fernicola and Ernesto Lima entitled "Avaliacao do Grau de Exposicao de Amostrae Populacionais de Sao Paulo so Monoxido de Ccrbono," Revista de Saude Publica, No. 13, 1979. 1 Report No. 7807-BR, "Brazil - Adult Health in Brazil: Adjusting to New Challenges," September 11, 1989 (green cover), page 18. The report also notes that cross sectional studies have shown that "respiratory morbidity among 12 and 13 year olds follows the air pollution gradient in Sao Paulo." Both observations are based on a paper commissioned by the World Bank prepared by Professor D.P. 12 2.23 Prior to the actions taken under the revised first project, the concentrations of industrial air pollutants in Cubatao were even higher than those in the SPHA. Cubatao, in fact, was frequently referred to in Brazil as the "valley of death" and the most polluted city in the world. This situation reflects both the physical location of the city and the scale and sectoral composition of the manufacturing activity in tho area. Located on a narrow strip of land between the ocean and the Serra do Mar mountains, the pattern of wind and rainfall in the area around Cubatao results in a generally hot climate and frequent cloud cover. As is also the case in the SPMA9 when the winds are weak, which occurs frequently in the Baixada, the pollutants in the atmosphere do not disperse, thereby increasing the exposure of local residents to them. The prevailing wind direction from the sea to the mountains, moreover, means that those pollutants that are dispersed are carried directly to the hillsides with a resulting loss of vegetation, accelerated soil erosion and occasional landslides. 16 2.24 The high volume of air pollution in the area, in turn, is due mainly to a handful of large-scale metallurgical and petrochemical industries located between the city of Cubatao and the outlying low-income community of Vila Parisip where pollution levels and associated public health problems have been particularly intense. Indicative of the large quantities of industrial air pollutants in the Cubatao area prior to the reviserd first project are the following emission levels observed by CETESB in July 1984: 236.6 tons per day (tpd) of particulate matter, 78.4 tpd of sulfur dioxide, 61.1 tpd of nitrogen dioxide and 90 tpd of hydrocarbons. These discharges came essentially from 18 large industrial establishments through a total of 230 individual sources, 94 of which were located in two very large federally-owned petroleum and steel firms, PETROBRAS and COSIPA, respectively. " As a result of these emissions, a state of "alert" was declared sitteen times and a state of "emergency" once in Cubatao during 1984. According to CETESB, air quality in Vila Parisi was classified as "inadequate" 32% of the time and "bad" or "terrible" 51% of the time in that year. A similar situation prevailed in 1985. Nogueira of the University of Sao Paulo entitled "Environment Component of World Bank Chronic Disease and AIDS Study," 1988. 16 Daniel Hogan in a recent unpublished paper entitled "Migration, Environment and Population Adaptation in Cubatao, Brazil," presented at the Annual Meeting of the Population Association of America in Baltimore, March 30- April 1, 1989, observes, for example, that, in January 1988, ten people died in an avalanche provoked by the impact of heavy rains on the hillsides near Cubatso, while during the last rainy season (ie. November 1988-March 1989), local and state authorities were forced to relocate families from high risk areas on several occasions in order to avoid a repetition of this type of disaster. 17 CETESB, "Acao da CETESB em Cubatao - Situaaao em Jan/89," Sao Paulo, unpublished, January 1989, pp. 4-5 and Annex 1. 13 3. Other Problems 2.25 While water and air pollution are probably the most serious urban environmental problems, at least in terms of the number of people affected, in Sao Paulo, especially in the SPMA and the Baixada Santista, they are by no means the only ones. Other areas that would need to be considered in any complete survey of urban environmental problems in the state include solid -- including hazardous solid -- waste collection and disposal and frequently associated soil and subsoil contamination, stormwater drainage and related phenomena such as flooding, erosion and mudelides, and noise pollution. n A comprehensive approach to urban environmental management in Sao Paulo or elsewhere, moreover, must necessarily include regulatory measures and specific investments to deal with these concerns as well as with air and water pollution. However, since the Bank has, thus far, not been directly involved in issues other than air and water pollution in Sao Paulo (with the exception of a small solid waste component in Cubatao in the revised first project), other urban environmental problems in the state, while undoubtedly significant and requiring attention, will not be further discussed in the present report. is Lee, op. cit. (PP. 43-51) briefly discusses the principal problems associated with urban solid waste disposal and noise pollution. With regard to hazardous waste disposal in particular, see Batatone, Roger, et. al. (eds.), "The Safe Disposal of Hazardous Wastes: The Special Needs and Problems of Developing Countries," World Bank Technicall aner No. 93, April 1989, 3 volumes. 14 III. POLLUTION CONTROL LEGISLATION AND ENVIRONMENTAL PROTECTION INSTITUTIONS A. Federal Government 3.01 Federal and state environmental legislation and environmental protection institutions are a relatively recent phenomenon in Brazil, as in many other countries in both the developing and the developed world. 1 The first major piece of federal environmental legislation in Brazil was Decree No. 73,030 of October 30, 1973 which created the Special Secretariat of the Environment (SEMA) in the Ministry of the Interior. 2 SEMA's mandate evolved over the years to include the following, among other basic functions and objectives: (i) to rationalize the use of the country's natural resources and environment; (ii) to develop pollution control norms and standards; (iii) to coordinate federal pollution control activities; and (iv) to orient and assist state environmental protection agencies. SEMA was transferred to the newly created Ministry of Urban Development and Environment in June 1985, then reintegrated into the Ministry of the Interior in September 1988, before being dissolved in January 1989 to form -- together with other existing federal agencies in the areas of forestry (IBDF), rubber (SUDHREVEA) and fishing industry (SUDEPE) development, which were also dissolved -- a new entity called the Brazilian Institute for the Environment and Renewable Natural Resources (IBAMA). 3.02 Federal legislation enacted in the mid-1970's, specifically Law No. 1413 of August 14, 1975 and Decree No. 76,389 of October 3, 1975, obliged all new and existing industrial establishments to prevent or correct environmental pollution. This legislation defined the instruments to be used to enforce these requirements including, in addition to penalties to be specified in state and municipal legislation, restrictions on access to public fiscal incentives and credit from official banks and, in extreme cases, the total suspension of productive activity. It also identified "critical areas" throughout Brazil where urban zoning arrangements -- including, among other measures, the definition of "adequate alternatives" for the possible relocation of major polluting industries and the establishment of "reasonable deadlines" for the installation of pollution control equipment -- were to be adopted. The areas identified as "critical' in Sao Paulo state were the SPMA, the Cubatao region and the lower and middle Tiete and Paraiba do Sul River valleys. I For a more detailed discussion of the Brazilian leglislative and regulatory framework with respect to pollution control, see Findley, Roger W., "Pollution Cotrol in Brazil," Ecology Law Quarterlv, Vol. 15, No. 1, 1988. This article also focuses on the experience in Cubatao. 2 This and the other federal legislation cited below is reproduced in CETESB, Legislacao Federal - Controle da Poluicao Ambiental, Sao Paulo, 1988. This document contains all relevant federal laws, decrees and other normative measures approved through September 1988, together with the environmental chapter of the new federal Constitution. The new Constitution was approved by the Brazilian Congress in October 1988. 15 3.03 Initial federal environmental legislation delegated authority to state and local governments both to set norms for the operation of industries and to define and apply sanctions against polluters. The only exception to the latter was in the case of firms considered vital to "national development and security" over which the federal government maintained exclusive power to order the suspension of production in the event of a pollution problem. Since many key industries were potentially included in this category, on negotiating the first industrial pollution control project, the Bank, fearing that the federal government could effectively impede or limit state efforts to reduce pollution in the SPMA, obtained agreement that it would have the right to suspend commitments of loan funds if federal actions were found to adversely affect execution of Sao Paulo's pollution control programs. 3 3.04 In the mid-1970's, additionally, the federal government, through SEMA, issued a number of specific pollution control regulations, including a classification of inland waters -- accompanied by water quality standards and permissible industrial effluent levels -- and the definition of minimum air quality standards. Another interesting, but apparently short-lived, initiative was the Economic Development Council's (CDE) Resolution No. 14, put forward in early 1978, which proposed elimination of federal incentives for all new industrial projects in the Sao Paulo metropolitan area excepting selected small and medium domestically-owned industries that were non-polluting and whose economic viability clearly depended on an urban location. 4 This attempt by the federal government to limit the establishment of industrial activities in the SPMA was followed later the same year by state legislation described briefly in the next jection which specified guidelines for industrial location and licensing procedures for new industrial establishments in the metropolitan region. 3.05 More recently, federal Law No. 6938 of August 31, 1981 defined a national environmental policy and established a "national environmental system" (SISNAMA) for Brazil. It also created the National Environmental Council (CONAN&), presided initially (1981-85) and most recently (1988-89) by the Minister of the Interior and, in the interim (1985-88), by the Minister of Urban Development and the Environment. CONAMA consists of representatives of numerous federal agencies, state governments and the private sector including regional environmental protection associations and national confederations of agriculture, industry and commerce. Under this legislation, SEMA (now IBAMA) was made the Executive Secretary of CONAMA and the central organ of SISNAMA which is composed of state environmental agencies, such as CETESB, throughout Brazil. 3.06 CONAMA's basic responsibilities, as defined in Law No. 6938, included, among others, the establishment of norms and criteria for state government licensing (under IBAMA's supervision) of presently or potentially 3 This appeared as Section 2.03(b) of the Loan Agreement for the project between the Bank, the Federative Republic of Brazil and the National Economic Development Bank (BNDE, now BNDES), which was signed on April 14, 1980. 4 The CDE was a council presided by the President of the Republic and composed of the Ministers in the "economic area" of the federal government, including Planning, Finance, Agriculture, Industry and Commerce and Interior. 16 polluting activities and the definition of national standards for the control of pollution by automobiles and other means of transport. Among the instruments of national environmental policy created or reaffirmed by this law were environmental quality standards, environmental zoning, the evaluation of environmental impacts and the aforementioned licencing and review of polluting activities. With regard to the latter, more specifically, the construction, installation, expansion and operation of presently or potentially polluting or otherwise "environmentally degrading" establishments and activities were made conditional upon prior licensing by the respective state environmental agency. 3.07 Law 6938 was regulated by Decree No. 88,351 of June 1, 1983. Among other measures, this Decree authorized CONANA to define the conditions under which polluting or other environmentally degrading activities would be required to undertake environmental impact studies and present corresponding "environmental impact reports" (RIMAe) as a precondition for licensing. It also determined that separate licenseL must be obtained during the planning stage (licenca previa) and prior to the physical installation (licenca de instalacao) and operation (licenca de operacao) of each such activity. Where applicable, moreover, the operating licence could only be granted upon verification by the state environmental agency that any necessary pollution control equipment was correctly installed and operating properly. Decree 88,351 likewise conditioned the concession of public fiscal incentives and official credit for such activities to prior obtention of the required state licenses. Finally, it further specified the minimum and maximum fines, defined initially in Law No. 6938, to be applied to violators of federal environmental protection legislation. The conditions under which RIMAs would be required to be submitted to state environmental agencies or SEMA prior to the licensing of potentially polluting or otherwise environmentally degrading activil-ies, as well as the basic characteristics and coverage of these reports, were, in turn, specified by CONAMA Resolution No. 1 of January 23, 1986. s 3.08 Another significant and relatively recent initiative at the federal level was CONAMA Resolution No. 18 of May 6, 1986 which established the Vehicle Air Pollution Control Program (PROCONVE). 6 This program was prepared by CETESB and was subsequently adopted with minor changes by CONAMA. It defines phased and increasingly rigorous emission limits and standardized emission testing procedures for all new gasoline, alcohol and diesel powered engines used in automobiles, trucks and buses. Under this resolution, the required reduction of automobile exhaust emissions, including carbon monoxide, hydrocarbons and nitrogen oxides, would occur in three stages starting January 1, 1989. Progressively more stringent vehicle emissions restrictions would become effective on January 1, 1992 and on January 1, 1997, respectively. According to CETESB, the emission limits for carbon monoxide were established under the premise that maximum concentrations of this pollutant should conform by 1999 to the air quality standards previously set for the SPMA, while the proposed limits 5 This Resolution is contained in a publication of the then Ministry of Housing, Urbanism and Environment entitled Resolucoes CONAMA 1984-86, Brasilia, 1988, pp. 33-38. 6 Ibid., pp. 55-71. 17 for hydrocarbons and nitrogen oxides were defined on the basis of an engineering analysis of achievable emission reductions given presently available control technologies. ' 3.09 Among the other notable aspects of PROCONVE are the followings (i) state and local governments were authorized to implement inspection and maintenance programs to verify the effectiveness of vehicle emission control devicess (i) because of the use of ethanol as a fuel, the federal government reserved the right to establish emission limits for unregulated compounds such as aldehydes, alcohole and other organic compoundso and (III) the National Petroleum Council (CNP) was requested to establish a program for reducing the sulfur content in diesel fuel and to define and oversee the elimination of lead in the ethanol-gasoline mixture. For purposes of administration and assessment of the results of the program, finally, CONAMA created a PROCONVE Monitoring and Evaluation Committee to be coordinated by SEMA (now IBAMA). B. State Government 3.10 The Sao Paulo state government first undertook efforts to control environmental pollution in the late 1960's, thus effectively preceding the federal government by some five years in this respect. Pollution control activities in the metropolitan area, in fact, began even earlier with the establishment of the Inter-Municipal Air and Water Control Commission (CICPAA) by the three heavily industrialized "ABC" municipalities and Maus in 1960. In 1968, the state Secretariat of Public Works created the State Basic Sanitation Fund (FESB) to form a research and training center for sanitary engineering, giving particular emphasis to water pollution issues. In 1970, in turn, the state Secretariat of Health established the Superintendency of Environmental Sanitation (SUSAM) for the specific purpose of controlling air pollution. In June 1973, under state Law No. 118, FESB was transformed into an independent public enterprise, having greater financial and administrative autonomy, with the name State Basic Sanitation Technology and Water Pollution Control Company, or CETESB. When merged with SUSAM, under Decree No. 5993 of April 1975, this entity became the present state environmental protection agency having the same acronym and a somewhat different name (State Basic Sanitation Technology and Environmental Defense Company). 3.11 From the outset, federal legislation recognized the prerogative of the states to define more rigorous pollution control standards and, as indicated in para. 3.03 above, left most supervisory and enforcement functions to state governments. In this context, Sao Paulo developed its own supplemental legal framework for the regulation of air and water pollution starting in the mid- 1970's. Specific state legislation of relevance includes Decrees Nos. 5993 of April 16, 1975 and 6371 of July 3, 1975 which resulted in the creation of the present-day CETESB through the merger of two existing agencies. Subsequent state legislation (Laws No. 898 of December 18, 1975 and 1172 of November 7, 1976) established the legal basis for preserving water resources, classified water 7 See Szwarcs Alfred and Branco, Gabriel M., "Automotive Emissions - the Brazilian Control Program," CETESB, unpublished paper presented at the 1987 SAE Government and Industry Meeting and Exhibition, Washington, D.C., 1987. pg. 23. 18 bodies according to their potential use, regulated land uses affecting protected water bodies and defined treatment and pretreatment requirements for industrial effluents. These lawe, in turn, were regulated by Decree No. 9714 of April 19, 1977 which allocated water pollution control responsibilities among state agencies and established approval and licensing procedures for economic activities in protected areas. 3.12 According to the SAR for the first project, however, the "decisive step" in formulating an effective legal framework for pollution control in Sao Paulo was the approval of state Law No. 997 of May 31, 1976 and its regulating Decree No. 8468 of September 8, 1976. ' Law No. 997 instituted a state "environmental pollution prevention and control system," established state government authority to regulate environmental contamination, authorized creation of a licensing system for the construction, installation, expansion and operation of all pollution sources and authorized the application of specific sanctions against violators of state pollution control legislation. Decree No. 8468, in turn, explicitly delegated responsibility to CETESB for applying the provisions of Law No. 997, defined air and water quality standards, detailed the registration and licensing system for all productive enterprises and approved regulations and penalties for purposes of pollution control. Bank negotiation of the loan for the first project, moreover, resulted in the subsequent amendment of Law No. 997 to clear up ambiguities concerning the application of sanctions to polluters in the event of repeated violations, while related modifications of Decree No. 8468 were made a condition of loan effectiveness. 10 3.13 Under this legislation, quality standards and permissible emission levels were defined for each of the major air pollutants (carbon monoxide, sulfur dioxide, particulate matter, etc.). Similar definitions were made with regard to water quality and effluent standards. The legislation also authorized establishment of more restrictive standards for areas where air or water quality should be suitable for recreational purposes, should not be harmful to particular species of plants or wildlife, should not interfere with specific physical properties of the atmosphere or water bodies or should not damage certain natural * This and other relevant state environmental legislation, updated to November 1988, can be found in CETESB, Legislacao Estadual - Controle da Poluicao Ambiental - Estado de Sao Paulo, Sao Paulo, 1988. * Report No. 2158b-BR, op. cit., para. 3.07. The state pollution control legislation that was in effect at the time the first project was appraised is discussed in paras. 3.06-3.08 of the SAR. 10 More specifically, accorking to para. 3.08 of the SAR, "Gince the execution of a pollution control program in the [SPMA) will depend on the enforceability of the existing legislation, during loan negotiations, the Bank agreed with the state government on a definition of the term 'recurring event' under Article 9 of Law No. 997 and Article 88 of Decree No. 8468. Law No. 977 was, in fact, amended by Law No. 1874 of December 8, 1978 to reflect the Bank's concerns. The related condition of effectiveness appeared in Section 6.01(f) of the Loan Agreement and was formally met by amendments to Decree No. 8468 introduced by Decree No. 15,425 of July 23, 1980. 19 resources. Finally, it provided for emergency actions to protect the public in the event of severe environmental contamination, especially major air pollution occurrences, and established a system for responding to citizen complaints about water and air pollution. 3.14 With regard to water pollution, more specifically, state legislation distinguishes among four classes of water bodies in accordance with the type of use and treatment given to all water destined for domestic purposes. These categories range from water which requires little or no previous treatment (Class I) to that which requires sophisticated treatment and is used for boating, landscaping, industrial or irrigation purposes (Class IV). The two intermediate classes both require conventional treatment and are used for irrigating fruit and vegetable gardens or for water sports (Class II) and for keeping fish and other flora and fauna or for watering animals (Class III), respectively. Each of the classes was assigned specific water quality standards in terms of BOD, oxygen and toxic content. 3.15 At the time the first project was prepared, the state Secretariat of Works and the Environment (SOMA) had already classified every major water body in Sao Paulo in accordance with its desired use, while CETESB had undertaken comparisonq between actual and desired levels of water quality in each one in order to t. rget its water pollution abatement actions. During project appraisal, however, the Bank found that the effluent standards adopted under Decree 8468 were contradictory in some respects and that the water quality classifications for some bodies were unrealistically high. As a result, during negotiations of the loan for the first project, the state government agreed to modify its effluent standards prior to disbursing funds for water pollution control subprojects and to amend water quality classifications by January 31, 1981. 1 3.16 In addition to Law No. 997 and Decree No. 8468, the other important state legislation from the standpoint of industrial pollution control is that (referred to in paragraph 3.04 above) which disciplines industrial location and expansion in the Sao Paulo metropolitan region. In this area, the most important measures are state Law No. 1817 of October 27, 1978 and Decree No. 13,095 of May 1, 1979 which present guidelines and regulations for industrial development and zoning in the SPMA. 12 This legislation requires that industrial activities be classified in order to determine permissible locations for their installation or expansion within the metropolitan region through a process which explicitly takes their "pollution potential" into account. Among other provisions, Law No. 1817 obliges all new industrial activities and all existing industries desiring to expand their physical plant or change their production processes to obtain "metropolitan industrial location licensee" in addition to complying with other relevant federal and state regulations, particularly those relating to 11 These concerns were reflected in Section 2.02(f)(iii)(B) of the Loan Agreement and Section 3.05 of the associated Project Agreement between the Bank, the state of Sao Paulo, CETESB, BADESP and SABESP, signed April 14, 1980. 12 This legislation, updated through June 1988, is reproduced in CETESB, Legielacao - Repioes Metropolitanas, Protecao doe Mananciais e Zoneamento Industrial, Part III (Industrial Zoning), Sao Paulo, 1988. 20 environmental pollution control. Decree No. 13,095, in turn, requires industries applying for metropolitan industrial location licenses to present operating licenses or other appropriate documentation provided by CETESB affirming that their installation, expansion or alteration of production process would not generate "effects incompatible with the environment." 3.17 CETESB is currently subordinated to the state Secretariat of the Environment (SMA), established in 1986. Prior to that time, it was linked to the Secretariat of Public Works and the Environment (SOMA), which was divided by the present state government administration into two discrete secretariate, one for works and the other for environmental affairs. CETESB's basic objectives and legal attributes -- as specified in state Decree No. 5993 of April 1975 - - include: (i) enforcement of state pollution control legislation; (ii) monitoring of air and water quality levels throughout the state; (iii) research and development of pollution control technology; (iv) establishment of quality standards for pollution control equipment; and (v) provision of technical assistance and training to agencies responsible for the operation of water and sewage treatment plants. In addition to the above, CETESB has provided important technical assistance to SEHA and other state environmental agencies throughout Brazil. Having a total staff of roughly 2,100, including some 650 professionals, CETESB was characterized in the SAR for the second Brazilian industrial pollution control project as "the most ex erienced and technically competent institution of its kind in Latin America." 3 3.18 CETESB carries out a wide range of tasks including the licensing of new industrial and other installations, the monitoring of pollution levels and pollution control activities and the application of fines to violators of state pollution control legislation. A more precise idea of CETESB's work can be obtained from the following figures which summarize its pollution control activities in 1986: over 3,000 and 4,800 installation permits were granted within the SPMA and elsewhere in the state, respectively; more than 4,600 and 14,000 monitoring visits, in turn, were made to enterprises located in the metropolitan area and elsewhere in Sao Paulo; and, over 300 and nearly 450 fines were applied to violators inside and outside the metropolitan region. Total fines applied by CETESB in the SPMA in 1985, finally, were on the order of US$ 843,000, as compared with US$ 483,000 in 1980. 14 1 Report No. 6673-BR, dated May 19, 1987, Annex 1, para. 3. 14 Ibid., Annex 1, para. 8. These fines are paid into the state treasury (more specifically, into the account of the Department of Water and Energy - DAEE) and, thus, do not return directly to CETESB. While represent.ng only a small percentage of the amount invested in pollution abatement activities, according to CETESB these fines do have an influence on industrial behavior with respect to pollution control. For small and medium sized firms, the amount of the fines applied can, in fact, be significant, while for larger industries, even though the size of the fines may be comparatively modest, the negative publicity associated with the act of being fined for violating a "social contract" with the public to abate pollution has frequently had an impact on the behavior of the offending firms. 21 IV. STATE POLLUTION CONTROL STRATEGIES AND MAJOR INVESTMENTS 4.01 The Bank-supported industrial pollution control projects approved in 1980 and 1987, respectively, are part of broader basic sanitation and pollution control investments undertaken by the state government of Sao Paulo over the past two decades. These efforts include other Bank-financed activities - - such as the Greater Sao Paulo Sewage Treatment Project (Loan 1525-BR), approved on February 28, 1978 and closed on September 30, 1984, and an even earlier pair of loans (757-BR and 758-BR) for the Sao Paulo Water Supply and Pollution Control Project, signed on June 21, 1971 and closed on June 30, 1977 -- as well as oth,er, purely domestic initiatives including the recent measures to reduce vehicle emissions (PROCONVE) briefly described above. The objectives, implementation and results of the Bank-assisted industrial pollution control operations should, thus, be examined in the context of these broader state pollution control interventions. In the specific case of water pollution control, moreover, since the Bank's involvement dates from the late 1960's when Loans 757 and 758-BR were prepared, it is enlightening to briefly review the experience under these earlier operations, together with that under Loan 1525-BR, all of which were direct precursors to the more recent projects for industrial pollution control. A. Water Pollution Control 4.02 At the time the first industrial pollution control project was prepared, the state government's strategy for reducing water pollution centered largely around implementation of a master plan for sewage collection and treatment in the SPMA. This plan, completed in mid-1976 and known as SANEGRAN, vas financed with resources from Loan 758-BR and had the specific objective of elaborating and assessing alternatives for the abatement of water pollution in the metropolitan region. According to the SAR for the first project, the underlying strategy behind SANEGRAN was to utilize existing facilities to their maximum capacity and to provide the additional services necessary to achieve the quality standards established by state legislation for rivers and other major water bodies in the metropolitan region. 4.03 Under the SANEGRAN strategy, decontamination of the SPHA's principal water courses would start with construction of a metropolitan-wide sewage collection system and the elimination of clandestine connections to storm water canals and the existing sewer network. The collectors would be linked to trunk interceptors to be installed along the major rivers running through the area and the interceptors would be connected to treatment plants. The alternative selected under SANEGRAN divided the SPMA into three subregions, each one to be provided with a secondary sewage treatment plant. Upon implementation of the plan, it was projected that by the Year 2000 about 88% of the metropolitan population, or some 19 million inhabitants, would be served by the public sewerage system and 95 m3/second of domestic and industrial effluents would be biologically treated using an "activated sludge process" which had been determined to be the least cost solution. 2 Report No. 2158b-BR, op. cit., para. 3.16. 22 4.04 The sewage treatment plants proposed by SANEGRAN would be implemented in stages, with execution of the first phase to be partially financed by Loan 1525-BR. The first industrial pollution control project, in turn, was intended, in part, to provide financing to industrial polluters for the pretreatment of liquid effluents prior to their being discharged into an expanded and upgraded metropolitan sever system. One major purpose of the pre-treatment of industrial effluents would be to avoid damage to, and increase the efficiency of, the sewage collectors and treatment plants partially financed under the earlier Bank loans. Thus, a direct linkage exists among the various Bank-financed operations for basic sanitation and pollution abatement in metropolitan Sao Paulo over the past two decades. This can be further illustrated through a brief review of the two projects which preceded those specifically designed for industrial pollution control. 1. The Sao Paulo Water Supply and Pollution Control Project 4.05 Loans 757-BR of US$ 22 million (water supply) and 758-BR of US$ 15 million ("pollution control") for the Sao Paulo Water Supply and Pollution Control Project were jointly approved on May 18, 1971. These loans represented the Bank's first interventions in the basic sanitation sector in Brazil. The general objective of the project was to expand and improve water supply and sewage disposal services in the SPMA. Specific goals, as stated in the PCR for the operation, were to provide: (i) water services to all but the sparsely populated sections of the metropolitan area; (ii) sewerage services to 85% of the population served by public water supply; (iii) control of the severe pollution in the surface waters of the region; and (iv) training of local personnel for the operation of sanitation services and technical assistance for institution building. 4.06 The initial Borrowers and Executors of the project were, for Loan 757, the Superintendency of Water and Sewer of the Capital (SAEC), and, for Loan 758, the Metropolitan Sanitation Company of Sao Paulo (SANESP). These entities were later (1973) merged, together with several other local water and sewer agencies, to form the Basic Sanitation Company of the State of Sao Paulo (SABESP). SABESP subsequently assumed responsibility for project execution and repayment of the Bank loans as formalized through a Loan Assumption Agreement signed in December 1974. SABESP also later became the Executor of Loan 1525-BR and has played an important role in the water pollution components of both industrial pollution control projects. 4.07 As briefly described in the respective PCR and Audit Report, the "water pollution" component of the project was intended to result in the collection and disposal of bulk sewage and was viewed both by the state government and the Bank as the first stage of a long-term program to diminish contamination of the rivers flowing through the SPMA. The investments to be financed under the subproject were: (i) construction of some 61 km of interceptor sewers along the banks of the Tiete, Pinheiros and Tamanduatei Rivers and their tributaries and of a 15 km conduit to the Billings Reservoir in the southern part 2 The PCR is contained in the PPAR for these two loans (OED Re-ort No. 2929), dated April 4, 1980, para. 2.02. 23 of the metropolitan area; (ii) construction of a new sewage pumping station at Sao Caetano do Sul, expansion of two existing sewage pumping systems and the upgrading of an existing sewage treatment plant; (iii) provision of machinery and equipment for these facilities; and (iv) staff training and technical assistance, including funds for the preparation of a metropolitan sewage collection and treatment plan (is. SANEGRAN). 3 4.08 More concretely, the sewage component was expected to reduce increasing levels of pollution in the rivers in the SPMA by collecting domestic and industrial discharges before they reached the water courses and dumping them, untreated, into the Billings Reservoir. This reservoir, which was created in the late 1950's by damming the Pinheiros River, was established originally to increase hydropower generation for the metropolitan area and the Santos lowlands, but subsequently also became a water source for part of the SPMA, particularly the "ABC" municipalities. The actions proposed under the project were expected to reduce, if not eliminate, the "objectionable smell and flotsam" from the rivers and to increase the value of nearby land. The dumping of untreated sewage into the Billings Reservoir was apparently not expected at the time of appraisal to have a significant adverse effect on the physical environment or land values in the immediate vicinity, since this was not explicitly considered as a cost in the economic evaluation of the subproject. This analysis, on the other hand, did utilize the expected increases in land values along the margins of the rivers to be "cleansed" by the subproject as its principal economic benefit. ' 4.09 Due largely to a combination of counterpart funding problems and changes in state administrations resulting from successive gubernatorial "elections" (in fact, presidential nominations), substantial delays occurred in the implementation of both components, leading to a three year extension in the original project completion date. Although the water component was executed largely as planned despite construction delays, significant modifications occurred in the "water pollution" subproject, resulting in the eventual cancellation of US$3 million of the original Bank loan. The principal change in the sewer component was the elimination of the 15 km transmission conduit and the associated Sao Caetano pumping station for transporting sewage to the Billings Reservoir. The total length of sewage interceptors was also reduced from 61 to 48 kilometers and the expansion of the existing pumping system was dropped. 5 Interestingly, moreover, in view of the appraisal assumptions regarding the relatively insignificant environmental impact of the proposed investments on the Billings Reservoir, the Audit Memorandum observes that one of the principal reasons why SABESP abandoned the dumping of raw sewage into the reservoir was 3 Ibid., PCR, para. 2.04. " The ex-ante economic evaluation of the subproject was one of the topics that received particular attention in the Audit Memorandum (see OED Report No. 2929, paras. 12-14 and 24). s According to the PCR (para. 2.04) these changes were formalized "by mutual agreement between the Bank and the Borrower" through modifications of the Loan Agreement for the water pollution control project in April 1973 and again in May 1976. 24 the strong negative reaction by the local population who felt that this would adversely affect an area of growing importance in the SPHA for both recreational and residential purposes. 6 4.10 In terms of the concrete results of the "water pollution" component, the PCR concludes that, while the number of people served by the metropolitan sever network increased from 2.2 to 3.5 million between 1971 and 1977, the works completed under the subproject "have not brought about any significant overall improvements in water quality of the river system." It further observes that "while several I:ilometers of interceptors have been completed, the net effect has been to relocate the discharge points, without diminishing the pollution loadings to the streams." It also affirms that, contrary to appraisal expectations as to the likely consequences of the operation, which included achievement of a "marginal improvement" in river quality under the sewerage component, both population -- and hence domestic sewage -- and the volume of industrial effluents had grown substantially in the SPHA during the project execution period, thereby increasing contamination of the area's principal water bodies. Finally, the PCR notes that, with expansion of the public sewerage system under the subproject, "many septic tanks have been abandoned, with the wastes being diverted through the collection system and into the streams," thereby suggesting that the project had itself unwittingly contributed to the growing metropolitan water pollution problem. ' 4.11 The Audit Memorandum, in turn, concludes that, while the operation "enabled the sector to increase the number of people served by public water supply and sewage disposal systems...the sewerage project, as implemented, could not by itself have achieved, and did not achieve, one of the original objectives of reducing river pollution." s On the other hand, in an implicit reference to SANEGRAN and the more recent projects partially financed by the Bank (ie. Loans 1525-BR and 1828-BR), the Audit affirms that the sewerage component represented "the first and important step to the comprehensive measures presently underway" or planned for the future to reduce water pollution in the metropolitan area. Also on the positi4e side, both the PCR and the Audit Report credit the operation and the Bank's participation therein for helping, through support of SABESP, to rationalize and strengthen the institutional apparatus for the provision of basic sanitation services in Sao Paulo. 9 6 OED Report 2929, op. cit., para. 24. ' Ibid., PCR, parse. 4.07-4.08 and 7.02. 8 The connection of a substantial number of additional households to the metropolitan sever system, nevertheless, constituted an important benefit from a public health standpoint and probably contributed to the declining levels of infant mortality in the SPMA between 1973 and 1983 mentioned in note 9 in Chapter 2 above. 9 The quotation is from the PPAM, para. 28, while the observations on institutional strengthening are in parse. 8.02 of the PCR and 31 of the PPAM. 25 2. The Greater Sao Paulo Sewage Collection and Treatment Project 4.12 The Greater Sao Paulo Sewage Collection and Treatment Project, approved in February 1978, involved a Bank loan of US$ 110 million to finance roughly 9% of the total cost -- initially estimated at over US$ 1.2 billion - -of implementation of the first stage of the master plan for sewage collection and treatment (SANEGRAN) in the SPHA. The basic objective of both SANEGRAN and the Bank project was to improve health and environmental conditions in the metropolitan area. According to the PCR for this operation, the project was intended to increase the share of the metropolitan population connected to the public sewerage system from 38% in 1978 to 55% in 1983, while the volume of sewage to be treated would increase from less than 5% to 40% of the total over the same period. '0 4.13 More specifically, the project was intended to provide sever connections to 550,000 households, support the construction of sewage collectors and interceptors, pumping stations and treatment facilities and provide technical assistance, with an emphasis on the reduction of unaccounted-for water and the improvement of SABESP's financial operations. Altogether, following the recommendations of SANEGRAN, three sewage treatment plants were to be built under the project, in the northern (Barueri), southern (ABC) and eastern (Suzano) parts of the SPM, respectively. The Bank loan would be utilized to finance the purchase of equipment and materials for the pumping stations and sewage treatment plants. Unlike Loans 757 and 758-BR, even though SABESP would continue to be project Executor, the Borrower was to be the federal National Housing Bank (BNH), which was also responsible for financing the National Sanitation Plan (PLANASA) initiated in 1970. BNH, through PLANASA, would finance roughly 33% of total project costs, while the state government, through its Water and Sewer Fund (FAE) and capital contributions, would provide the remaining 58%. 4.14 In addition to the actions directly included under the project, several complementary investments associated with SANEGRAN were expected to be implemented in parallel to the Bank-financed operation. The municipality of Sao Paulo, utilizing BNH and local funds separate from those of the project, was to execute a program of water course rectification and canalization for purposes of flood control and prepare a program of financial and technical assistance to industries expected to connect to the sewerage system for the pretreatment of their effluents. SABESP, in turn, with the support of CETESB, was to prepare and implement regulations, a monitoring program and measures to control toxicity levels of industrial wastes, as well as to determine the criteria to be utilized in estimating the charges to industries that opted to connect to the sewer network. Finally, the three "ABC" municipalities, that were neither members of PLANASA, nor part of the SABESP system, were expected to construct interceptors connecting to the project-financed sewage treatment plant to be built in their area, even though they were not legally obliged to do so under the Bank loan. 4.15 Starting in 1981, as the economic and financial situation in Brazil began to deteriorate sharply, counterpart funding problems on the part of BNH s0 OED Report No. 7016, PCR for Loan 1525-BR, dated November 18, 1987, para. 2.05. 26 and Sao Paulo state resulted in growing implementation delays. With the change in state government administrations in 1983, this led to a major reorientation and reduction in the scope of the project as well as to cancellation of more than half (US$ 57.5 million) of the original Bank loan in early 1985. In addition, for a variety of financial and political reasons the "ABC" municipalities decided not to construct the collectors to the southern treatment plant. As a consequence, SABESP stopped work on the ABC plant and concentrated its efforts on the other two facilities, the smaller of which (Suzano) was completed in 1982. Due to continuing financial difficulties, however, construction of the third plant (Barueri) was suspended in late 1984, and the project's focus shifted from sewage treatment to expanding the collection network. 4.16 The state government's revision of the SANEGRAN investment program in 1983-84 led to postponement of completion of the ABC plant until after 1990, as well as the decision to divide construction of the Barueri plant into two stages originally scheduled for completion in December 1986 and December 1989, respectively. In reality, the first stage of the Barueri plant only began operation in April 1988, with half the capacity that the complete plant will eventually have (7 m3/second). At the time the PCR was written, moreover, the much smaller Suzano plant was utilizing only 10% of its full (1.5 m3/second) capacity, primarily because the neighboring municipality of Mogi das Cruzes - - which like the "ABC" municipalities is not part of the PLANASA and SABESP systems -- had not constructed the necessary interceptors and because a local paper mill, that generates 1 m3/second of sewage and which was originally expected to connect to the SANEGRAN system, decided instead to install its own treatment facilities, utilizing financing from the first industrial pollution control project for this purpose. 4.17 The present state government of Sao Paulo, which took office in early 1986, has given priority to improving sewage treatment in the SPMA with the declared intention of reducing pollution in the Tiete, Pinheiros and Tamanduatei Rivers and the Billings Reservoir. To do this, it plans to complete the Barue-i plant by 1990, redirect sewage from other areas in order to utilize the full capacity of the Suzano facility and proceed with construction of the ABC plant, completing its first stage in 1991. In order to build the sewer interceptors required for the treatment plant serving the "ABC" municipalities the state government and SABESP have secured financing from the Inter-American Development Bank. 1 These actions, if implemented as presently proposed, would n More specifically, this project was approved in December 1986 and involves a loan of US$ 163 million. The operation consists of four basic componentst (i) construction of approximately 3,600 km of sewer collectors (ii) the building of 16 km of trunk sewers; (iii) the construction of about 237,000 household connections; and (iv) the preparation of additional projects for some 59 km of trunk sewers. Expected beneficiaries are on the order of 1.6 million people and the project would increase coverage of the metropolitan sewerage system from 50 to 65%. In parallel to this project, the IDB also approved a US$ 77.5 million loan to the municipal government to improve flood control in the city of Sao Paulo through the construction of open and covered storm drainage canals and related highway investmenta. 27 increase savage treatment capacity in the SPA from 1.5 m3/second in 1987 to 12.5 m3/secnd in 1991. 4.18 In terms of project resulte, finally, the PCR affirms that roughly 450,000 households had been connected to the metropolitan sewer system as of June 1986 and that some 3,430 km of collectors and 20 km of interceptors had been installed under the operation. As a result, the share of the metropolitan population connected to the sewer network had increased to 50% in 1985. On the other hand, the PCR also observes that the operation clearly did not achieve its pollution control objectives,.since the three planned sewage treatment plants will not fully come on line until sometime after 1990 -- the original completion date for these facilities having been December 1983 -- and, even then, waste treatment capacity will be 212 less than originally expected at appraisal because of a reduction in the size of the ABC plant. 12 4.19 While Brazil's difficult economic situation in the early 1980's is seen by the PCR as the primary factor responsible for the significant implementation delays and limited achievement of objectives experienced under the project, other factors are also mentioned. These include inadequate assessment of the willingness of industries to connect to the metropolitan sever network -- as opposed to installing their own treatment facilities -- the lack of legally binding agreements with the "ABC" municipalities to build the necessary collectors and poor communication between SABESP and CETESB with regard to the optimal use of existing sewage treatment infrastructure. 13 Additional elements mentioned by SABESP officials recently interviewed by OED in Sao Paulo were the modifications in views and priorities with regard to the original SANEGRAN strategy which accompanied the change in state government administrations that occurred twice during the project execution period and coordination problems between the state government and several key municipalities in the SPMA due at least in part to purely political reasts. 3. Industrial Effluents Proxram 4.20 Since continued industrial discharges of toxic wastes and other dangerous materials into the metropolitan sewerage system would have a seriously negative impact on the physical condition and operational efficiency of the SANEGRAN treatment plants to be financed under Loan 1525-BR, CETESB and SABESP began preparation of a program to treat or pretreat hazardous industrial effluents in 1977. The resulting water pollution control measures, together with a parallel effort to reduce industrial air pollution, would later be partially financed by the Bank under Loan 1822-BR (ie. the "first project"). As the initial step in the preparation of the water pollution component of this latter project, CETESB and SABESP undertook a preliminary survey of some 2,700 industries in the SPHA in late 1979, collecting information about each one including current and projected future levels and composition of liquid effluents and preliminary estimates of pretreatment costs. Roughly 15% of the firms surveyed were found to be major sources of water pollution. Execution of a more detailed survey of 12 Report No. 7016, op. cit., para. 7.01. 13 Ibid., paraes. 8.02-8.06. 28 industrial water polluters in the metropolitan region was subsequently included as one of the monitoring activities to be conducted by CETESB during implementation of the first project and in parallel to the execution of SANEGRAN whose initial stage was originally expected to be completed in 1983. 4.21 Since polluting industries were located in different parts of the SPMA, represented sources of water pollution to different degrees and were not all currently connected -- or intended to connect in the near future -- to the public sever network, it was decided to focus on those sectors and firms having the greatest potential negative impact on water quality and basic sanitation infrastructure. In this connection, in the process of appraising the first project the Bank helped CETESB develop an enforcement strategy based on a simple classification of industries. According to the SAR, this scheme separated polluters into two general categories: (A) those whose effluents were toxic and/or dangerous to either SANEGRAN sever pipes or treatment plants; and (B) those which were less toxic or non-toxic, but which could have possible adverse effects on SANEGRAN investments. 14 4.22 The (A) and (B) categories were further subdivided into: (1) firms presently connected or expected to connect to the SANEGRAN system prior to the planned start-up of the proposed sewage treatment plants; (2) those to be connected only much later or not at all, but which affected Class I, II or III waters (see para. 3.13 above) or (3) those in the same situation as (2), but affecting Class IV waters only. Top priority was assigned to Class (Al) firms, followed by (A2) industries -- which although not immediately or directly impacting on the SANEGRAN system, would, nevertheless, have a serious effect on regional water quality levels -- while Class (B) industries were given lesser priority. It was expected that CETESB and SABESP would collaborate in refining the classification of polluting industries during implementation of the first project, taking into account the timing of treatment plant investments under SANEGRAN. 13 The previously mentioned implementation delays experienced by the latter, however, also had an adverse impact on the water pollution component of the first industrial pollution control project, as will be further indicated below. B. Air Pollution Control 4.23 Systematic attempts to reduce air pollution in the SPMA initiated in the mid-1970's with the promulgation of state Law No. 997 (see para. 3.12 above), under which licensing arrangements for all new economic activities were established. However, prior tt *mplementation of the first project, state actions, other than licensing activ .-ies, in the area of industrial air pollution control were, in fact, limited and occurred largely in response to specific citizeu complaints. The development of effective enforcement measures was, therefore, contingent upon the prior definition of basic control strategies by 14 Report 2158b-BR, op. cit., para. 3.24 and Annex I. For the most part, Group A industries were in the metallurgical, electrical, chemical and textile sectors. 1 This condition was specified in Section 5.05 of the Project Agreement. 29 SOMA and CETESB for each major air pollutant in accordance with the quality standards established by state legislation. For this purpose, Sao Paulo was divided into eleven "air basins" coinciding with previously existing state administrative regions. Each such basin was then divided into "sub-basins" in accordance with topographic and meteorological characteristics. 4.24 The basins and sub-basins were further classified as "saturated" or "non-saturated" for each major pollutant by comparing existing concentrations with state-wide air quality standards. Guidelines were then determined for the location and operation of industrial activities in each sub-basin which included the following: (i) in "saturated" areas, installation of new sources of air pollution or the expansion of existing ones would be permitted only when they did not cause an appreciable increase in pollution levels; (ii) in both "saturated" and "non-saturated" basins, relocaticn of highly polluting activities would be encouraged; (iii) no new sources of air pollution would be allowed where they would create a nuisance to adjacent residential or commercial areas; and (iv) for new sources involving pollutants for which air quality standards had not yet been defined, emissions control would be by the best available technology as defined by CETESB. 1 4.25 Given its large and rapidly growing population, concentration of motor vehicles and industrial activities and associated high levels of chemical and particulate emissions, top priority in CETESB's air pollution control efforts was initially given to the SPMA. A first attempt to deal with the metropolitan air pollution problem was "Operacao Branca" ("White Operation"), a campaign launched by SOM& and CETESB in 1975-76 in response to public complaints about specific industrial pollution sources. As part of this effort, stationary sources of particulate matter were surveyed and a complete inventory of local industrial air polluters was prepared. Based on this effort, CETESB concluded that, in order to effectively meet state air quality standards in the metropolitan region, it would be necessary to control stationary industrial combustion units for sulfur dioxide discharges, industrial production processes for particulate matter and gasoline-powered vehicles for carbon monoxide emissions. Specific programs were then developed to deal with each of these major air pollution sources. 4.26 Since the principal source of sulfur dioxide pollution was the stationary combustion of high sulfur fuels, and given prevailing atmospheric conditions in the SPMA (see para. 2.21 above) which sharply limited the possible effectiveness of "high stacks" for the dispersion of emissions, the principal options for the reduction of this pollutant were the increasing use of fuels 1 Report 2158b-BR, op. cit., para. 3.28. In essence, the strategy was to determine, for each air basin, the reductions in emissions that would be required in order to meet pre-established state air quality standards. Once these reductions were achieved, emission limits would be established, defining the maximum amounts and concentrations of specific pollutants that could be discharged without exceeding quality standards, taking into account available control technologies and the conditions under which each major pollution source would be permitted to operate. 30 - having low sulfur content and the conversion of industrial combustion processes to non-petroleum based sources. With regard to the former, starting in the mid- 1970's state authorities neqotiated with PETROBRAS to supply the SPMA with larger amounts of low sulfur oil. 7 As additional measures, SOMA and CETESB sought to prohibit the installation of new high sulfur fuel consuming industries in the metropolitan area and to require construction of "high stacks" for both new and existing industries using more than 100 tons of fuel per day. After reformulation of the first project in 1984-85, moreover, the PROCOP program also provided financing for the conversion -- from diesel oil to electricity -- of industrial combustion processes. " 4.27 The first project, as originally formulated (see para. 5.03 below), gave emphasis to the reduction of particulate matter emissions. According to the SAR for the project, priority was given to this pollutant because, of all the pollution control programs being developed by SOMA and CETESB, the one for particulate matter was "the most advanced and defined." 19 Other reasons cited were thats (i) its implementation would be entirely under the control of state authorities; (ii) adequate information and experience had already been accumulated by CETESB; and (iii) appropriate local technology was available. Implementation of the particulate matter control program under the first project was to focus on the 284 firms that had been found to be responsible for close to 98% of all industrial particulate emissions in the SPHA (see para. 2.18 above). Within this target group, moreover, enforcement efforts would initially concentrate on the largest polluters. 4.28 Based on mathematical modelling exercises, CETESB concluded that, in order to meet state Pir quality standards for particulate matter, existing sources in the SPHA would have to reduce their emissions by approximately 75%. The Bank's review of CETESB's technical studies and other information at the n Immediate results of this effort were the provision of a year-round source of low sulfur fuel to firms located in the most critical areas within the SPMA and an increase in the allocation of low sulfur oil to the metropolitan region as a whole during the winter months when the uir pollution problem was most serious. 1 In 1983, more specifically, due to the economic recession a surplus of electric energy occurred in Sao Paulo, leading the state energy companies to offer electricity at subsidized prices to industrial users. In conjunction with this, CETESB, through PROCOP, offered financing for boiler conversions. The subsidy was removed two years later once energy demand again increased. According to CETESB, however, most industries have continued to use electric boilers because they have proven to be considerably cleaner than diesel boilers and their utilization has resulted in other savings (such as avoiding the need for storage space for diesel fuel reserves). By using electric boilers, moreover, industries are able to avoid fines from CETESB. The principal threat to the sustainability of this tendency in the short run is the risk of a shortage of electric energy in the SPMA over the next several years until the transmission lines from the Itaipu hydropower plant that are presently being installed are fully operational. 19 Report No. 2158b-BR, op. cit., para. 3.34. 31 time of appraisal of the first project, however, suggested that the proposed strategy would be neither cost effective, nor sufficient to deal effectively with micro-particulate emissions which are the most dangerous from a public health standpoint. As a result, during loan negotiations, agreement was reached on a revised strategy which would require new and existing industrial plants to control their particulate discharges by 90% and 802, respectively, and include complementary corrective actions to reduce non-point sources of particulate matter emissions so as to comply with state air quality standards by 1983. Disbursement of Bank funds for air pollution subprojects was made contingent upon issuance of specific particulate matter emission standards for all relevant industrial subsectors so as to make this strategy operational. 20 4.29 As indicated earlier (see para. 2.17 above), the principal source of air pollution in the SPHA is vehicle-generated carbon monoxide. At the time the first project was appraised, state authorities had already indicated their intention to limit this pollutant by establishing and enforcing progressive emission standards for new vehicles. At that time, based on negotiations between state environmental agencies and the automobile industry beginning in 1977, it was anticipated that new motor vehicles would be manufactured with proper emission control equipment as early as 1982. 21 Given the size, age and growth rate of the vehicle fleet in the SPMA, it was not expected that this measure would have a major short-run impact on carbon monoxide levels in the region. Together with other measures affecting the automobile industry, however, it was expected to have a significant medium and long term impact on carbon monoxide emissions in the SPHA and in Brazilian cities more generally. 4.30 Foremost among the measures expected to significantly reduce carbon monoxide emissions over the long run was the production of ethyl alcohol burning automobiles which was part of broader efforts undertaken by the Brazilian government in response to the oil price shocks of the 1970's to substitute imported petroleum by alternative domestic energy sources. The production of alcohol was financed, in part, by the Bank-supported National Alcohol Program - PROALCOOL. 22 At the time the first industrial pollution control project was appraised, the automobile industry had already announced its intention to annually produce at least 250,000 vehicles fueled by 100% ethyl alcohol, beginning in 1980. By 1987, some 3.5 million alcohol run vehicles had been manufactured in Brazil, corresponding to roughly one-third of the national fleet. 4.31 Well before this, however, and in order to combat air pollution more rapidly, Sao Paulo state government officials decreed the mandatory use of a 20 Ibid., para. 3.35. The corresponding condition was included in Section 2.02(f)(iv) of the Loan Agreement. 21 Report No. 2158b-BR, op. cit., para. 3.31. 22 Loan 1989-BR for US$ 250 million, approved May 12, 1981. For a recently published evaluation of some of the principal (including environmental) impacts of this program, see Borges, Uta et. al., PROALCM0L - Economia Politica e Avaliacao Socio-economica do Programa Brasileiro de Combustiveis, Universidade Federal de Sergipe, Aracaju, 1988. 32 "balanced" gasoline containing 15% ethyl alcohol in the SPHA. This initiative taken in mid-1977 apparently contributed to the lower atmospheric concentrations of carbon monoxide observed in the metropolitan area in 1978 when compared with the immediately preceding years. The SAR for the first project also mentions that local authorities were considering the possibility of imposing annual tune-ups of gasoline powered vehicles in order to further reduce carbon monoxide and other emissions, but that, due to the "operational issues" involved, no specific timetable had been set for putting such a measure into effect. 23 A recent Bank health sector study, nevertheless, mentions reports by CETESB that, due in part to the introduction of alcohol as a vehicle fuel, levels of lead in the atmosphere in the SPMA were 70% lower in 1983 than in 1978 and that there had been similarly noticeable reductions in carbon monoxide levels over this period. 2 4.32 Considering, on the other hand, that the national motor vehicle emissions control program (PROCONVE) was only established in 1986 and that the proposed progressive reduction in emissions from new vehicle engines has only recently begun and will not reach maximum effectiveness until after 1997 (see para. 3.08 above), the expectations at the time of appraisal of the first project in this regard were clearly unrealistic. In all likelihood, the deteriorating economic situation in Brazil after 1980 -- with its sharp recessive impact on industrial output and employment in Sao Paulo -- contributed to a postponement of emission controls by the economically important and politically powerful automobile industry. According to OED interviews with CETESB officials, the successful campaign to establish PROCONVE in the mid-1980's, in turn, can be attributed in large measure to increasing political pressure in support of this program by states other than (and in addition to) Sao Paulo. Once fully in place, it is anticipated that vehicle emission controls will result in a significant improvement in air quality in the SPHA and other Brazilian cities. CETESB has estimated that these measures, if implemented as proposed, would result in reductions of 632 for carbon monoxide, 50% for hydrocarbon and 35% for nitrogen oxide emissions by 1999. 25 23 Report No. 2158b-BR, op. cit., para. 3.31. 24 Report No. 7807-BR, op. cit., pg. 37. The report further observes, however, that since, by 1986, only 35% of the light vehicle fleet was powered by alcohol engines, "this evidently was not the only or even the principal factor. The substantial improvements vere primarily a result of the effectiveness of the CETESB program in reducing emissions." 2 Szwarc and Branco, op. cit., pg. 25. They also note that if, instead of the emission limits actually established by PROCONVE, Brazil had adopted the 1981 United States emission limits to be enforced in 1987, the potential emission reductions would be 90% for carbon monoxide, 85% for hydrocarbons and 67% for nitrogen oxide. Adopting these higher standards was considered infeasible by the authors, however, "due to the present unavailability of advanced emission control technology in Brazil and... the necessity to adapt, in a very short time, emission control syetems developed elsewhere for the Brazilian vehicles and fuels." 33 C. Conclusion 4.33 The preceding paragraphs reveal that there have been a number of attempts to deal with water and air pollution in the state of Sao Paulo, with an emphasis on the metropolitan area, over the past two decades including, but not restricted to, the Bank-assisted industrial pollution projects which will be reviewed below. Several of these initiatives, more specifically major sanitation investments in the SPHA in the 1970's and 1980's, were also financially supported by the Bank. While having environmental betterment, particularly water pollution control, among their central objectives, the serious implementation delays and shortfalls in counterpart funding -- and hence in planned investments -- experienced by the two Bank-supported sanitation operations have effectively limited real achievements in this area thus far, since most of the domestic sewage produced in the SPMA remains untreated. Nevertheless, prospects for the next decade appear to be more favorable. Similarly, delays caused, at least in part, by national economic difficulties have led to postponement of vehicle emission control measures, and, consequently, of the potential reductions in air pollution associated with them, although here too future prospects are for the attainment of significant improvements in air quality in the SPMA and elsewhere in Brazil by the Year 2000. 4.34 Thus, while the underlying strategies for reducing water and air pollution in the SPHA and the state of Sao Paulo in general have been basically sound, incomplete or deferred execution of programmed investments and regulatory measures have resulted in slower progress than desirable -- and originally expected -- toward attaining the objectives of a cleaner and healthier physical environment. In this context, the industrial pollution control projects reviewed in the next chapter appear to have made a more positive contribution toward the goal of environmental betterment, particularly with regard to air pollution. Furthermore, these operations have helped to establish and support an important mechanism to finance pollution control investments by industrial enterprises, as well as providing key technical assistance to what is clearly the strongest state environmental agency in Brazil. This entity, moreover, has provided considerable assistance both to the federal environmental protection agency (initially SEMA, now lBAMA) and to similar institutions in other states, thereby contributing directly to growing efforts throughout the country to control pollution and improve environmental management more generally. The Bank's support of these initiatives over the past decade, in turn, also appears to have played a highly relevant role. 34 V. THE FIRST INDUSTRIAL POLLUTION CONTROL PROJECT A. Orgineo Objectives and Description 5.01 The first Industrial Pollution Control Project ("first project") had its origins in discussions between the Bank and the government of Sao Paulo in 1976 in connection with the preparation of the Greater Sao Paulo Sewage Treatment Project. As indicated in para. 4.20 above, in order to make full use of, and avoid damage to, the sewage collection and treatment facilities to be constructed under the latter project, it was necessary to prevent the discharge of toxic industrial effluents into the public seier system by means of adequate pretreatment of these wastes. Thus, the first project was originally identified as an industrial water pollution control operation that would directly complement Bank-supported sewer improvements in the Sao Paulo metropolitan region. Following enactment of federal and state environmental legislation in the mid-1970's and in view of the rapidly deteriorating environment in the SPMA, the state government requested in 1977 that the project9s scope be expanded to include air, as well as water, pollution control. 5.02 The project was initially appraised in February-March 1978 and negotiated in October of that year. However, due to a request by Brazilian authorities that the Bank loan be contracted by the federal (rather than the state) government, the project was not presented to the Board until after several post-appraisal missions in the second half of 1979 and renegotiation of the loan in January 1980. It was finally approved in March 1980. According to the PCR for this operation, the delay in loan processing proved to be beneficial in that it permitted more adequate preparation of certain technical, financial and institutional aspects of the operation including the establishment of air and water quality standards to guide investment and a better definition of CETESB's enforcement strategy. The PCR also observes that preparation of the project turned out to be more complex than initially anticipated and that the Bank worked closely with local environmental agencies, federal and state banks and representatives of the industrial sector in order to organize a "comprehensive" pollution control program. The Bank also mobilized technical assistance by the Pan American Health Organization (PAHO) to help CETESB to prepare the project. 5.03 As stated, without further elaboration, in the SAR, the project was situated in "the framework of Brazil's pollution control policies and the Bank's urban development strategy for that country" and had the following objectives with an emphasis on the SPMA: (i) to reduce particulate matter emissions as part of CETESB's corrective and preventive particulate matter pollution control strategy which was designed to meet state air quality standards for that particular pollutant for ten years starting in 1983; ' OED Report No. 7720, op. cit., PCR, paras. 2.03-2.04. 35 (ii) to significantly reduce industrial discharges of toxic substances in the SPMA's rivers and gradually achieve by 1984 some of the water quality standards defined in existing state and federal pollution control legislation; (iii) to reduce health hazards caused by environmental pollution with its proportionately greater effect on the urban poor by avoiding the recurrence of episodic pollution and minimizing the incidence of chronic water or air-borne diseases; (iv) to complement the Bank's Greater Sao Paulo Sewage Collection and Treatment Project by permitting the discharge of pretreated industrial effluents into the planned general sewerage system; and, (v) to build up CETESB's operational and technical capability for designing and implementing an integrated long-term pollution control strategy in the SPMA and the rest of the state. 2 5.04 The project consisted of two major components, a line of credit to finance industrial air and water pollution subprojects and the provision of technical assistance to CETESB. Total costs for industrial pollution control subprojects were estimated at US$ 180 million equivalent, of which US$ 152 million would be financed by a combination of World Bank, state government and BNH funds, with the remaining US$ 28 million to be provided directly by the beneficiary industries. Of the US$ 180 million total, moreover, at the time of appraisal and based on industrial surveys carried out by CETESB in 1977-78, it was estimated that roughly 58% (US$ 104 million) would be absorbed by air and 42% (US$ 76 million) by water pollution control subprojects, respectively. An additional US$ 7 million was expected to be allocated for technical assistance. 5.05 Bank Loan 1822-BR in the amount of US$ 58 million corresponded to 31% of estimated total project costs and the remainder, in US dollar equivalents (and percentage shares), was expected to come from the following sources: Sao Paulo state government - US$ 75.2 million (40%); BNH - US$ 25.8 million (14%); and participating industries - US$28 million (15%). State government funds would come from annual budgetary appropriations channeled through the State Fund for 2 Report 2158b-BR, op. cit., para. 4.02. Given the dimensions of the country, the magnitude and complexity of its urban problems and the limited amount of Bank resources available for investment in towns and cities, the Bank's urban development strategy for Brazil, as summarized in the SAR (Report No. 2361- BR) for the Medium-Sized Cities Project (Loan 1720-BR), approved in June 1979, entailed the concentration of efforts in specific subsectors (particularly basic sanitation, transport and low-cost shelter) and the channeling of resources through key federal intermediaries (including BNH) in order to support the Government's efforts to increase the productivity and improve the living conditions of the urban poor. 36 Basic Sanitation (FESB) or to CETESB. S BNH's contribution would take the form of a loan to the state government and would be used exclusively to finance the water pollution component. Signing of this credit was made a condition of Bank loan effectiveness. * 5.06 The World Bank loan was channeled through the National Bank for Economic and Social Development (BNDES) s to a special subaccount for the Pollution Control Program (PROCOP) established specifically for this purpose in the state basic sanitation fund (FESB). FESB was administered by the Sao Paulo State Bank (BANESPA). Overall supervision of PROCOP would be the responsibility of a steering committee composed of the state Secretaries of Public Works and the Environment (later Secretary of the Environment), Finance, Planning, Metropolitan Affairs, Industry and Commerce and representatives of the Department of Water and Energy (DAEE), the Sao Paulo State Development Bank (BADESP) -- which later became the financial administrator of PROCOP -- CETESB and SABESP. 6 According to the SAR, due to the "highly technical nature of the project and the fact that the demand for PROCOP's financing would depend largely on the enforcement of pollution control legislation by CETESB," this latter entity was made responsible for the technical evaluation and supervision of the subprojects presented for PROCOP financing with the assistance of SABESP in the case of water pollution control investments. 7 Coordination among BADESP, CETESB and SABESP would be assured by inter-institutional a reements, the signing of which was also a condition of Bank loan effectiveness. 5.07 As initially designed, the PROCOP credit line would be utilized to finance particulate matter and water pollution control investments by industries located in the SPHA. The door was left open, however, for the financing of 3 The state government's contribution included US$ 4 million for CETESB. These resources were to be used to finance part of the project's technical assistance component, for which the Bank loan would provide another US$ 3 million. 4 This condition was included as Section 6.01 of the Loan Agreement. 5 BNDES was still formally known as the National Economic Development Bank (BNDE) at the time the loan was approved and the Loan Agreement signed. 6 This steering committee was, in fact, the orientation council of FEEB previously established by state Decree No. 907 of December 29, 1972. ' Report No. 2158b-BR, op. cit., para, 4.10. This condition was included in Section 6.01(b) and Section 6.02(a) of the Loan Agreement. The former refers, more specifically, to contractual arrangements between BADESP and CETESB for purposes of coordinating their respective functions in carrying out the project, while the latter refers to the authorization or ratification of the Project Agreement by the state government, BADESP, CETESB and SABESP. A specific agreement concerning their respective project implementation responsibilities was also signed between CETESB and SABESP. 37 subprojects elsewhere in the state as long as specific pollution control programs encompassing these inve. tments or individual subprojects not included in such programs had been previously approved by the Bank. As an incentive for industries to use PROCOP funds, these resources would be onlent at slightly below market interest rates. Onlending rates would be further differentiated according to the size of the beneficiary firm, with smaller establishments receiving somewhat more favorable conditions than larger ones. Initial onlending terms included a minimum subloan amortization period of ten years and a minimum grace period of three years so as to "ensure that the debt-service position and borrowing capacity of the subloan beneficiaries would not be adversely affected by the required pollution control investments." 9 5.08 It was anticipated at appraisal that, based on industry's needs and the expected subproject processing capacity of the participating state agencies, approximately 600 subloans would be granted with PROCOP funds, including roughly 250 for particulate matter and 350 for water pollution control, involving average amounts of US$ 400,000 and US$ 215,000, respectively. It was further expected that beneficiaries of funding for particulate matter control would originate in the metallurgical, non-metallic mineral, chemical and food sectors, while those taking subloane for water pollution control would come from a much broader range of industrial subsectors. All subloan applications would be evaluated and approved on technical grounds by CETESB before being reviewed on a financial basis by BADESP. An upper limit for eubloans not requiring prior Bank approval was established at US$ 400,000. 5.09 Eligibility for financing under PROCOP was limited by federal law to domestically controlled firms in the private or public sectors. Since state law required that all new productive activities comply with established air and water quality standards, eligibility for access to PROCOP funds was also restricted to establishments already in operation at the time the Loan Agreement was signed. Given these conditions, the SAR affirms that PROCOP financing would be made available only to "existing private and public industrial concerns that (i) decide to comply with established pollution control standards by undertaking treatment individually or jointly with other firms, or by pretreating their effluents and emission discharges; (ii) will be required by CETESB to relocate; and (iii) decide to comply with the established pollution control standards by altering or changing their technological or production process(es)." 1 To prevent use of the slightly subsidized PROCOP funds for purposes other than pollution control, in the case of relocations or changes in production technologies, funding of subprojects would be limited to "the costs that would be required to attain the pollution control targets through a least-cost direct treatment or pre-treatment solution." " ' Report No. 2158b-BR, op. cit., para. 4.15. Ibid., para. 4.21. u Ibid., para. 4.22. In the case of relocations that result in increased production capacity, more specifically, PROCOP financing would be limited to the hypothetical least cost for establishing a plant of similar size and characteristics as the plant to be relocated. (para. 4.23) In either case, the 38 5.10 Finally, the project's technical assistance component would consist of a three year training program, the acquisition of laboratory and monitoring equipment and the preparation of studies. The training program was designed to help staff at CETESB, other state government agencies and private industries to implement the project and to improve their environmental pollution control capabilities more generally. Altogether, it was anticipated that some 3,300 participants would benefit from training activities under the operation. Of this total, roughly 80% were expected to come from the industrial sector, 11% from state agencies (including CETESB) and 9% from private consulting firms. The training component would be administered by a coordinating committee at CETESB chaired by the Superintendent of Training and was estimated at appraisal to cost US$ 1.75 million, while the monitoring, laboratory and research components were expected to absorb another US$ 5.25 million. B. Prolect Benefits and Risks 5.11 In appraising the first project, .o attempt was made to quantify benefits. The SAR essentially limited itself to a qualitative assessment of the operation's contribution to larger societal objectives in the areas of environmental improvement and economic development. Among the "substantial" non- quantifiable social and economic benefits associated with the project were its likely positive impact on "the health and living conditions of the population, notably of the low income groups living near industrialized areas and contaminated rivers and ground water sources." This impact, it was argued, would be felt primarily through a decrease in cardiovascular, respiratory and water- borne diseases and would have a "synergetic" effect on the larger community by "reducing infant mortality, increasing life expectancy, decreasing the costs of medical care, improving labor productivity and inducing greater utilization of outdoor recreational facilities and green spaces." 12 5.12 Other benefits which were expected to derive from execution of the project included: (i) providing a "government response to the increasing popular demand for actions to reduce air and water pollution levels and reverse the process of environmental deterioration" in the SPHA; (ii) supporting the objectives of PLANASA which had already been adopted by the state government in 1977 under the SANEGRAN master plan for sewage collection and treatment; (iii) promoting institution building, especially by increasing the technical, operational and enforcement capability of CETESB, with an emphasis on areas such as pollution control technology, project design and analysis, pollution monitoring and emission source testing, and engineering and environmental economics; (iv) signaling "the Bank's increased emphasis on environmental protection and interest in programs aimed at improving the environment;" and (v) helping the Bank to acquire further knowledge about industrial water and air pollution control costs and benefits and experience in the design and execution reference costs for treatment or pre-treatment would be determined by CETESB's technical staff. 12 Ibid., para. 6.01. 39 of "regionally integrated pollution control programs*..which should be useful for possible future pollution control programs elsewhere." 13 5.13 Project risks identified at appraisal, in turn, included possible "opposition by industrialists to non-profitable 'forced' investments" which might delay project implementation in view of the fact that most pollution control projects had negative financial rates of return and that investments in a number of industrial sectors in the SPHA had begun to decline in the months immediately preceding Board presentation of the project. 1 These risks, it was affirmed, could be reduced to the extent that political support for the agencies responsible for project execution and the enforcement of pollution control legislation continued to be forthcoming from the state government. Other risks mentioned in the Appraisal Report referred to possible delays which might affect the water pollution component "in thcse areas where river rectification 6nd canalization requirements and interferences with heavy motorized traffic may delay the implementation of SANEGRAN" and problems related to institutional coordination. 1 To minimize these risks, inter-agency coordination mechanisms and agreements had been established in connection with both the Greater Sao Paulo Sewage Collection and Treatment Project (ie. Loan 1525-BR) and the present project (as mentioned in para. 5.06 above). C. Proiect Implementation 5.14 The project's original effectiveness date, July 15, 1980, had to be extended four times until January 15, 1981. The principal conditions of effectiveness included the signing of the loan from BNH to the state government, the contribution of US$ 5 million equivalent by the state government to the PROCOP account, the formalization of increased legal sanctions against polluters (see para. 3.11 above) and the approval of PROCOP's by-laws by the inter-agency steering committee established by the project. 16 According to the PCR, although BNH did, in fact, sign a loan agreement with the state, which was subsequently ratified by the federal Senate, resources were never released to PROCOP under this credit due to BNH's insistence on a relending rate higher than that 1 Ibid., paras. 6.01-6.04. 1 Ibid., para. 6.05. With regard to the macroeconomic situation, more specifically, while overall industrial output in Brazil grew by nearly 82 in 1980, it declined sharply to -5.5% in 1981, 0.62 in 1982 and -6.8% in 1983. This drop in production particularly affected the industrial park in the SPMA, where the level of employment in manufacturing activities declined by almost 252 between mid-1980 and the end of 1983, and apparently also had a major depressive effect on industrial demand for PROCOP funds during the initial years of project implementation. 13 Ibid., para. 6.07. 16 These conditions were all contained in Section 6.01 of the Loan Agreement. 40 originally set during negotiations. 1 In more recent discussions with OED, however, this explanation was rejected by both CETESB and BADESP whose representatives alleged that BNH's contribution was never forthcoming in part because of the increasingly difficult financial situation of the latter institution in the early 1980's and in part on account of growing political differences between the state and federal governments. Whatever the actual reasons, the practical result was effective nullification of the federal government's financial contribution to the project. 5.15 At the time of appraisal, it was assumed that the Bank loan would be fully disbursed by the end of March 1984. By the original closin date, however, less than 22 of the loan resources had been utilized, despite the fact that, by 1983, some 35 large firms were reported to have initiated air pollution control investments in the SPHA using funds from sources other than PROCOP. The reasons cited in the PCR for the non-utilization of project funds included the following factors not anticipated or fully foreseen by the Bank at appraisal: (i) the least-cost alternative test -- mentioned in para. 5.09 above -- involved time and money costs which industries were unwilling to bear; (ii) the PROCOP subloan review procedures established by the Bank were seen as too demanding and time consuming, especially for smaller industries; (iii) the ten year minimum repayment period was perceived by many companies to be excessive since it tied up their loan collateral; and (iv) the severe economic recession of 1981-83 resulted in a sharp decrease in all industrial investment in the SPHA, including that for pollution control. ' 5.16 Additional problems which specifically plagued the water pollution control subprogram included inadequate initial coordination between CETESB and SABFSP, the difficulties surrounding the BNH loan and the major implementation delays affecting the SANEGRAN sewage plan previously described (see parae. 4.15- 4.16 above). According to the PCR, agreement between CETESB and SABESP regarding their respective roles was not formally reached until September 1981 and another two years were required for these agencies to decide on a list of priority polluters and to define a corresponding enforcement program. The PCR also notes that, while effectiveness of the BNH loan was dropped by the Bank as a disbursement condition in May 1982 when the government of Sao Paulo agreed to provide the required counterpart funds, due to the continuing economic and financial crisis in the state, these latter resources never materialized. With 1 OED Report 7720, op. cit., PCR, para. 2.05 and footnote 3, page 5. 1 Ibid., PCR, para. 3.02. The PCR further observes that BADESP'o total commitments fell dramatically in 1983-84 when compared with the immediately preceding year (ie. from roughly US$ 281 million in 1982 to an average of only US$ 53 million during the two following years) and mentions that "it Is also possible that CETESB's pollution enforcement effort during the height of the recessionary period was les vigorous than in previous years, reflecting the realities of economic circumstances." (para. 3.06) CETESB points out, however, that the decrease in industrial output occurring as a result of the recession, in and of itself, also resulted in lower levels of pollution, such that, in order to meet industrial emission and effluent targete, less control was, in fact, required. 41 the visible slowdown in the construction of the sewage treatment works, moreover, industries became increasingly reluctant to make new investments for the pretreatment of effluents and it became "politically difficult" for state authorities to insist that companies connect to the metropolitan sewer network and pay SABESP tariffe. 19 5.17 As a result of the growing implementation difficulties faced by the operation during 1982-83, in April 1983 CETESB proposed changes in the original project design Intended, at the same time, to broaden its scope and make its subloan processing arrangements and conditions more agile and attractive to potential industrial subborrowers. Most of the proposed modifications were, in fact, incorporated into an Amending Agreement approved by the Bank Board on September 21, 1984. The principal changes contained in this Agreement were: (i) reduction of the Bank loan from US$ 58 to US$ 34 million; 2o (ii) extension of the operation to the entire state of Sao Paulo; (iii) expansion of the project to include control of sulfur dioxide pollutants and toxic wastes; (iv) an increase in the Bank's share of subloan financing from 28% for water and 33% for air pollution control subprojects, respectively, to 50% in both cases; and (v) definition of more flexible subloan terms. The simplification of subproject appraisal procedures, however, was not approved by the Bank until June 1985. 5.18 In response to these modifications, subloan commitments and disbursements picked up rapidly after 1984, such that, by the end of June 1986, some US$ 25.6 million of the Bank loan had been disbursed, a total which rose to US$ 33.9 million by December 31, 1986. As will be further explored below, much of these funds were utilized to finance pollution control subprojects in Cubatao, which became eligible for PROCOP financing after the Amending Agreement clearly opened up the program to the entire state. The focus on Cubatao reflected both the severity of the pollution problem in this municipality and the growing attention it began to receive in the national mass media, making it an increasingly senetive political issue in the state. 21 As a result, according to the PCR, in 1983 the newly elected (opposition party) Governor of Sao Paulo "personally intervened" in CETESB's enforcement program for Cubatao, eigning agreements with the principal polluting industries and offering PROCOP funds to 9 Ibid., PCR, parase. 3.03-3.04. An additional factor seems to have been that some industries preferred to install their own less expensive treatment facilities rather than pay SABESP tariffs which reflected the higher costs of the agency's own sewage treatment investments. 20 As an alternative to cancelling US$ 24 million out of the loan, the state government proposed that these resources be utilized to help support a new program to expand the use of electric, as opposed to the highly polluting diesel-fualed, buses for mass transport in the SPMA. According to CETESB, this idea was rejected by the Bank because it would involve investments in a sector (is. transport) distinct from that (industry) of the original operation. 21 The environmental problems at Cubatso became known internationally, moreover, after an explosion and fire following the rupture of a nearby gas pipeline resulted fn the destruction of a large squatter settlement, Vile Soco, and the death of as many as 500 people on February 25, 1984. 42 support pollution control efforts. " It is interesting to observe, moreover, that Cubatao -- where, as noted in para. 2.24 above, the principal polluting industries were huge federally-owned enterprises -- was initially excluded from the project because it was a "national security municipality" directly controlled by the federal government. 23 5.19 Improved project performance after 1984 is also attributed by the PCR to greater enforcement efforts by the state governmen-_ -- the implicit suggestion being that the previous state administration may have been less inclined to confront industrial polluters 24 -- and easing of the local economic recession. With regard to the latter, preliminary national accounts data indicate that significant economic recovery did, in fact, occur after 1983. 25 In synthesis, therefore, the rapid commitment and disbursement of PROCOP funds in 1985 and 1986 reflect a combination of internal administrative, political and economic factors, together with the Bank's willingness to modify the original, considerably more narrow, project design. 22 Ibid., PCR, para. 3.08. 23 According to a recent paper by Hogan, op. cit., the severe pollution problems in Cubatao were also largely ignored by local politicians until 1983 because its resident population, which included a high proportion of poorly educated northeastern migrants, had virtually no political influence at the state and federal levels. This itself, according to Hogan, was a reflection of the high degree of environmental degradation characterizing the area, since all those who could afford to live elsewhere (eg. Santos or the SPMA), did so. It also meant that the population that was most exposed to pollution in Cubatao - - and, thus, was most subject to its adverse health impacts -- was predominantly low-income. Many of these people, moreover, were squatters who settled illegally in areas dangerously close to polluting industries, most of which were later relocated to public housing projects at some distance from the industrial areas following the calamity mentioned in note 21 above. 2* In general, the new Governor of Sao Paulo, having been elected by direct popular votes was, in fact, much more responsive to environmental and social issues than his immediate predecessor who had been indirectly "elected" by a state electoral college composed largely of local government officials, most of whom were affiliated with the party that dominated the federal government and was still highly controlled by the military in the late 1970's. In addition, the previous Governor, himself a wealthy Sao Paulo businessman, was much more closely allied with powerful industrial interests in the state than his successor. as More epecifically, industrial output at the national .evel expanded at a rate of 6% in 1984 and 9% in 1985, while industrial employment in the SPMA increased by about 14% between December 1983 and December 1985. According to the PCR (Table 1, pg. 21), moreover, BADESP commitments also increased significantly in 1985, to nearly US$ 249 million, as compared with only US$ 44 million in 1984. 43 D. Proect Results A. PROCOP Credits 5.20 It was expected at appraisal that the project would provide credit to roughly 350 industrial water polluters and another 250 industrial air polluters in the SPHA (see para. 5.08 above) with subloans averaging on the order of US$ 300,000. Actual results under the project were quite distinct from these initial expectations. According to data provided to OED by CETESB, a total of 111 subloans were granted to 68 different companies, two of which received financing for plants at different locations. The majority of these subloans, however, were made to establishments located outside the SPMA, mainly in Cubatao. As Table 3 illustrates, 41Z of all PROCOP subloans under the first project were made to firms in Cubatao, while 40% went to establishments in the SPMA and the remaining 19% to industries located elsewhere in the state. More detailed information on PROCOP subloans under the first project is presented in an annex to this report. 5.21 PROCOP subloans provided a total of US$ 48.3 million for pollution control investments which were distributed geographically as follows: 49% went to firms located in Cubatao, 33% to industries in the SPMA and 18% to establishments in other parts of the state. Thus, industries in the Sao Paulo metropolitan region, which were the initial target of the project, ultimately received less than a third of the total funding provided by PROCOP between 1981 and 1986. most of which, in fact, occurred during the last two years of this period. Average total investment per firm for pollution control subprojects, moreover, varied significantly by locality, being on the order of US$ 4.1 million in Cubatao, as compared with US$ 936,000 in the SPHA and US$ 865,000 elsewhere in Sao Paulo. 5.22 Of all subloans granted, 742 were for air pollution control, 23% were for water pollution control and 42 were for solid waste disposal. In terms of the total volume of PROCOP funds onlent, 602 were for air pollution control, 392 for water pollution control and 12 for solid waste subprojects. These latter figures compare with expected shares of 582 and 422 for air and water pollution control subprojects, respectively, at the time of appraisal. Average total investment per firm for water pollution control subprojects was roughly US$ 1.9 million, while that for air pollution control subprojects was US$ 1.3 million and the corresponding figure for solid waste disposal subprojects was US$ 550,000. Interestingly, while air pollution control subprojects accounted for the vast majority of those financed by PROCOP in the SPMA and Cubatao, water pollution control subprojects predominated in the rest of the state. 5.23 As Table 3 suggests, most of the firms receiving multiple subloans were located in Cubatao. Foremost among these were the huge federally-owned steel and petroleum companies, COSIPA and PETROBRAS, which together received 27 subloane for a total of roughly US$ 14.3 million to help finance pollution control investments on the order of US$ 30.5 million. In the case of COSIPA, more specifically, four PROCOP subloans for a total of some US$ 7.5 million were granted for water pollution control projects, while seven of the other nine subloans received by this firm were for air pollution control. Altogether, COSIPA alone received US$ 12.8 million in PROCOP funds, or more than one quarter of the 44 total onlent to all industries benefitted under the first project, to help finance US$ 27.7 million in pollution control investments, according to CETESB data. 6 Table 3. Distribution of PROCOP Subloans and Total Pollution Control Investments Suported by the ProJect by Location and Type. 1981-86 Subloan Total Amount Investment No. Subloans No. Firms* (USA millions) A. Location Cubatao 46 13 23.6 52.8 SPMA 44 36 15.9 33.7 Other SP State 21 21 8.8 18.2 TOTAL 111 70 48.3 104.7 B. Subproject Type Air Pollution 82 46 29.1 61.0 Water Pollution 25 22 18.8 42.6 Solid Waste 4 2 0.4 1.1 TOTAL 111 70 48.3 104.7 * Includes two companies receiving subloans for plants at different locations which are counted here as separate firms Source: CETESB 2. Proiect Financing 5.24 Like the expected number and size of subloans, the actual financial contribution of the various participants in the project also differed substantially from that anticipated at appraisal, and at the time the Amending Agreement was approved as well. Due to financial problems associated with the economic recession in the early 1980's, the state government's contribution declined from the roughly 402 of total project costs anticipated at the time of 2 In addition, two privately owned fertilizer firms in Cubatao received six and seven subloans respectively, while one private fertilizer industry in the SPMA received seven PROCOP subloans. One large paper industry located near SABESP's Suzano sewage treatment plant in the SPMA and a federally-owned fertilizer company in Cubatao, moreover, each received three PROCOP subloans involving totals of US$ 3.6 million and US$ 4.1 million, respectively. 45 appraisal to only 9% upon project completion, 27 while the share of total costs borne by participating industries increased from the 152 expected initially to 60% on completion. 2 The Bank's contribution, however, remained at approximately 312 of the total project cost, despite its decrease in absolute terms from US$ 58 million to US$ 34 million and the expected increase to 50% of total project cost stated in the Amending Agreement. 5.25 This difference between the Bank's projected and actual share in total project costs reflects both the increase in the beneficiary industries' participation and a sharp increase in the total cost of the operation from the US$ 63.2 million anticipated in the 1984 Amending Agreement to some US$ 110 million (when the technical assistance component is included) at completion. The PCR attributes the changes that occurred between the Amending Agreement and loan closing to an "unexpected surge" in demand for PROCOP resources which caused CETESB and BADESP to "ration" credit among the largest rubborrowers. 29 The data in Table 3 suggest that much of this "unexpected surge" occurred in Cubatao and involved large state-owned enterprises. 3. Technical Assistance 5.26 The results of the technical assistance component were also mixed. Thus, while the project originally intended to train some 3,300 people, of which roughly 80% were to have come from private industry, by September 1986 slightly less than 1,500 trainees, more than two-thirds of which were CETESB staff, had actually benefitted from a total of 63 courses. 3o The PCR attributes these differences to a combination of factors including the reorganization and reduction of CETESB's training unit soon after appraisal, an initial lack of interest on the part of the industrial sector, together with insufficient 27 Nevertheless, according to CETESB, the state government ultimately contributed US$ 4 million more to PROCOP than had been anticipated at the time the project was reformulated in order to ensure full utilization of the Bank loan and to guarantee that several large industries (located mainly in Cubatao) would, in fact, have the resources necessary to permit them to undertake important pollution control investments. 2 According to CETESB, the relatively high participation of beneficiary industries in total project costs underscores PROCOP's essential role as a catalyst for pollution control in Sao Paulo. 29 OED Report No. 7720, op. cit., PCR, para. 4.03. 30 A more recent report prepared by CETESB specifically for the present study, entitled "Miseao BIRD - 26-27 de Janeiro de 1989 - Atendimento aos Termos de Referencia" (Sao Paulo, August 1988), indicates that a total of 71 technical courses concerning environmental pollution have been given in cunnection with PROCOP, benefitting a total of 1,701 professionals, including 1,121 CETESB staff and 580 outside participants. 46 promotion of the program by CETESB, and the need to train a large number of CETESB personnel due to significant staff increases in its regional offices. 31 5.27 Twelve long-term and twenty-six short-term fellowships were also funded under this component. While the training obtained under the former was judged by the PCR to have met initial expectations, the short-term program was considered less Successful. 3 CETESB, on the other hand, affirmed to OED that all of the external training activities sponsored by the project had been useful. Some twenty-six individual consultancies were likewise carried out under the component, the results of which were generally considered by both CETESB and the Bank to have been adequate. 5.28 The technical assistance component, finally, contained two other elements, the financing of laboratory and monitoring equipment and the carrying out of specific studies. While the equipment acquired under the first project helped CETESB to improve its technical and operational capacity, especially in the area of air pollution control, some of the water pollution monitoring devices purchased quickly broke down and had to be returned for repair or proved to be inappropriate or insufficient for the purposes originally intended. " The principal research carried out under the project, in turn, included studies of the effect of toxic effluents on sewage sludge bacteria efficiency, the toxicity of industrial discharges in the SFMA, processes for the control of sulfur dioxide and mercaptan emissions, treatment and disposal of hazardous industrial wastes, use of microorganisms and cellular cultures to evaluate industrial effluent toxicity and the cost of air and water pollution in the SPMA. All but one of these studies were judged by the PCR to have been Useful. 3 More generally, it credits the research program with "having strengthened CETESB's capabilities in air pollution, toxic wastes and environmental policy development." a OED Report No. 7720, op. cit., para. 5.11 and Annex 4. CETESB observes, however, that with the reduction in the overall size of the project at the time of the Amending Agreement, the technical assistance component was also reduced from US$ 7 million to roughly US$ 4.8 million, thereby helping to explain the smaller number of persons trained than initially projected. CETESB argues, moreover, that the smaller amount of funds that were ultimately used for training and technical assistance were employed more effectively than originally planned, citing as an example the fact that a larger number of studies was undertaken with fewer resources than initially budgeted. 31 Ibid., PCR, Annex 4, paras. 8-9. 31 Ibid., PCR, paras. 15-16. 3 Ibid., PCR, Annex 4, para. 12. Several of these studies, moreover, subsequently provided the basis for state environmental quality standards or permitted compliance with federal standards for industrial toxic discharges. 3 Ibid., PCR, Annex 4, para 11. 47 B. Project Impaets 1. Air Pollution 5.29 Based on a completion report prepared by CETESB in August 1986, the Bank's PCR provides specific indicators of the impact of CETESB's industrial air pollution control efforts in the SPHA and the Cubatao basin, including the relative contribution of the Bank-supported subprojects to the overall results observed. 3 In the SPHA, CETESB's enforcement measures led to significant reductions in both industrial particulate matter and sulfur dioxide emissions between 1978 and 1985. Particulate emissions declined from some 412 tons per day (tpd) in the former year to 130 tpd in the latter, while sulfur dioxide emissions decreased from 445 tpd in 1978 to 80 tpd in 1985, slightly exceeding the target established by CETESB for the latter date (88 tpd). PROCOP subprojects, however, accounted for only 32% of the reduction in particulate matter emissions and 8% of the decrease in sulfur dioxide emissions registered in the SPHA between March 1983 and December 1985. s7 As suggested in para. 4.26 above, part of the decrease in industrial sulfur dioxide emissions in the SPHA appears to have been due to CETESB's successful negotiations with PETROBRAS to limit the amount of high sulfur content fuels supplied to the metropolitan region. However, this reduction was mainly the result of CETESB's control actions more generally, together with the evolution of oil prices which imposed greater rationalization of the use of petroleum-based fuels. * 5.30 After the Amending Agreement opened up the first project to the reduction of sulfur dioxide emissions, additionally, many of the air pollution control subproj eats financed by PROCOP took the form of the conversion of boilers from oil to electricity, thereby eliminating the need to burn high sulfur content fuels and, at the same time, reducing industrial operating costs due to the relatively lower cost of electricity after the second petroleum price shock in the late 1970's. This was particularly important for the reduction of sulfur dioxide emissions. The project's specific contribution in this regard, however, was comparatively modest since most boiler conversions in the SPMA were apparently financed by funds from other sources, particularly FINAME, a BNDES subsidiary which finances the acquisition of domestically produced capital goods including pollution control equipment, on more flexible terms than those initially offered by PROCOP. * Largely for this reason, the PCR concludes that 36 Ibid., PCR, paras. 5.03-5.05 and Tables 1 and 2, pp. 13-14. n7 These figures are reported by CETESB, "Missao BIRD..." op. cit., page 20. CETESB affirms, nevertheless, that the existence of PROCOP played an Important role in "inducing" industries in the metropolitan area to make pollution control investments. 3* This observation to contained in a letter from CETESB dated December 19, 1990 commenting on a preliminary draft of this report. 3 CETESB, however, did provide technical guidance to industries for boiler conversion even when this process was not financed by PROCOP. 48 the industrial air pollution control program in the SPMA "Substantially succeeded with the Bank's role being less prominent than originally anticipated." o 5.31 Despite the significant reduction in particulate matter emissions from industrial sources in the SPH4A, moreover, air quality indicators reveal that atmospheric particulate concentrations in the metropolitan region actually increased slightly between 1978 and 1985, from 115 to 124 micrograms of dust per cubic meter (mg/m3), and were, thus, well above the target established by CETESB (80 mg/m3) for the latter year. The PCR attributes this finding to an overestimation of the relative contribution of industrial sources to particulate matter pollution in the metropolitan region when CETESB made its initial inventory of pollution sources in 1977. 1 More recent studies suggest that road dust, rather than industrial emissions, was (and Is), in fact, the principal source of particulate pollution in the SPMA. * With regard to sulfur dioxide, on the other hand, the decision to target industrial sources proved to be correct, since there was a direct correlation between the reduction in emissions and the improvement in air quality in terms of this pollutant in the SPMA, where atmospheric sulfur dioxide concentrations decreased from 143 mg/m3 in 1978 to 56 mg/m3 in 1985, a level well below the target (80 mg/m3) set by CETESB for the latter year. 5.32 In Cubatao, reductions in particulate matter emissions have also been dramatic, with PROCOP subloans accounting for approximately 70% of the 166 ton per day decrease in this pollutant registered between 1984 and 1988. Altogether, particulate matter emissions were reduced by about 70% and sulfur dioxide emissions by roughly 37% in Cubatao during this period. The PCR suggests that the control measures taken under the project were largely responsible for 40 Ibid., PCR, para. 4.05. This success, furthermore, may not turn out to be permanent since many of the industries that converted from oil to electricity boilers reportedly did not remove their older oil burning equipment and, thus, can readily switch back if and when relative fuel prices again make it more convenient to use oil in the future. 41 OED Report No. 7720, op. cit., PCR, para. 5.04. As one Bank staff member closely connected with the operation has put it, the model initially utilized to estimate the relative participation of different sources in overall particulate matter pollution in the SPMA was simply wrong. CETESB has observed, moreover, that these targets were defined initially on the basis of existing industrial pollution sources in the region and failed to adequately consider the installation of additional polluting industries during the project implementation period. * An important lesson can be learned from this experience for future pollution control projects, specifically that it is necessary to take a more comprehensive approach to the identification and reduction of air pollution sources, as opposed to focusing, as in the present operation, exclusively on industrial sources. This ultimately requires coordinated interventions in several sectors, including road paving and vehicle emissions control, In addition to the reduction of industrial discharges, and, thus, a combination of different instruments and institutional arrangements. 49 the reduction in the number of air pollution "alerts" (see pareas. 2.20 and 2.24 above) in the Cubatao basin, from an average of fifteen per year in 1984-85 to four per year in 1986-88, while the number of "emergencies" has dropped to zero. 4 Other project-sponsored interventions in Cubatao have contributed to reductions in hydrocarbon, amonia, fluoride and hydrogen sulfide emissions by large petrochemical and fertilizer industries. One result of the reduction in emissions, together with deliberate reseeding efforts (initially by helicopter and more recently by small plane), has been the return of vegetation to Serra do Mar hillside areas that had previously lost forest cover as a consequence of severe air, especially sulfur dioxide, pollution in Cubatao (see para. 2.23 above). 5.33 More importantly, there is also empirical evidence that the recent improvements in air quality have had a positive impact on public health cotnditions in Cubatao. As reported in a recent World Bank health sector report for Brazil, the "most authoritative study" in this context is a longitudinal assessment of the effect of the air pollution control program on the respiratory capacity of children in the area. The study, which was undertaken by researchers at the University of Sao Paulo, more specifically, observed a direct correlation between the decrease in air pollutants described above and similar reductions in moderate and severe respiratory impairments among children in Cubatao between 1983 and 1985. " 5.34 According to a recent CETESB report on the situation in Cubatso, finally, of the 320 pollution sources identified among the twenty-five major industries located in the area, 249, or 762 of the total, are presently under control, while the installation of abatement devices for an additional 34 sources is proceeding according to schedule and control of the remaining 37 sources is behind schedule. *" Most of the sources which remain to be controlled emit air pollutants and, despite the massive investments already undertaken, most of them are at COSIPA, which, as of January 1989, had fully controlled less than a third of its total pollution sources. COSIPA is also responsible for all of the individual sources whose control is presently behind schedule and for CETESB's not yet having achieved its target for particulate emissions in Cubatao, which was to reduce this pollutant to 102 of the level observed in 1984. ' OED Report No. 7720, op. cit., PCR, para. 5.05. " Report No. 7807-BR, op.cit., pg. 18. The report cites preliminary findings from an on-going study by researchers at the School of Public Health at the University of Sao Paulo in this connectione Fischer, P.M. and Hofmelster, V.A., "The Effects of Air Pollution at Different Seasons in Normal School Children, State of Sao Paulo, Brazil," 1988, and Rofmaister, V.A. and Fischer, F.M., "Spirometric Changes in Normal Children Living in Different Areas with Air Pollution, Cubatso," 1988. 's CETESe, "Acao da CETESB em Cubatao - Situacao em Jan/89," op. cit., Table 1, pg. 4. 50 2. Water Pollution 5.35 The project's impact on water pollution has been substantially less impressive than that on air pollution. Altogether under the first project PROCOP financed only six water pollution control subprojects in the SPMA, as compared with thirty-eight subprojects for air pollution abatement. According to the SAR for the second project, CETPSB's actions to control industrial water pollution under the first project, however, did lead to a 10% average reduction of organic matter flowing into the highest priority Class I and II water bodies in the SPMA. " On the other hand, the BAR also cites CETESB estimates that the daily pollution load discharged by industrial souzces into all rivers in the metropolitan area, in fact, increased by about 5% between 1980 and 1985, even though industry's relative share of the total decreased from 33% in 1980 to 29% in 1985. This relative decline was apparently due more to the rapid increase in discharges from domestic sources than to any significant reduction in industrial water pollution er s.e47 5.36 The project's comparatively poor performance with regard to water pollution control in the metropolitan region, moreover, occurred for reasons largely outside the control of either its Executors or the Bank. Referring to postponement of the SANEGRAN sewage treatment plants (see parase. 4.15-4.16 above), the PCR for the first project concludes that CETESB was "never able to enforce an effective water pollution control strategy" in the SPMA. 4" It further observes that most of the PROCOP financing for water pollution control subprojects in the metropolitan region was absorbed by a single paper industry that constructed its own "efficient facility" at a cost considerably lower than the tariff which would have been charged by SABESP. This is the same industry whose non-connection to the Suzano treatment plant strongly contributed to the subsequent operation of this facility well below its full capacity (see para. " Report No. 6673-BR, op. cit., para. 2.22. CETESB ("Missao BIRD...," op. cit., pg. 21) reports, in turn, that projects undertaken in the SPMA with PROCOP's assistance were responsible for a reduction of on the order of 361 of industrially generated BOD in the upper Tiete and Juqueri River basins. " According to a recent Bank health sector study (Report No. 7807-BR, op. cit., pg. 38), the establishment of an industrial effluent tariff by SABESP in the early 1980's, under which industries pay according to the volume and biological and chemical quality of the wastewaters produced, nevertheless, did have a positive impact on industrial discharges during this period. Citing an empirical study by L. Miglino and J. Harrington, ("0 Impacto da Tarifa na Geracao de Efluentes Industriais," Reviata DAB, Sao Paulo, Vol. 4, No. 138, 1984), the report observes that "the effects were dramatic, with reductions in volume, 8OD and [suspended solids) of over 401 in just two years." ' OED Report No. 7720, op. cit., PCR, para. 5.06. More specifically, the report observes that "when SABESP had to sharply cutail its construction program, CBTESB enlarged its activities to include the removal of non-toxic biodegradable (BOD) pollutants at their sources. Arranging for these solutions at each plant was more time consuming than the original solution of SABESP's centralized treatment." 51 4.16 above). The PCR adds in this regard that part of the firm's investment might have been avoided had there been better coordination between CETESB and SABESP and had the latter been willing to lower its tariff to a level more acceptable to the polluting industry. 4 5.37 Outside the SPMA, the situation was more positive, especially in Cubatao where CETESB recently reported that 75% of the sources of water pollution were under control and an additional 11% were on schedule for the installation of treatment facilities. 50 By the end of 1988, these efforts had resulted in the reduction of some 60,000 kilograms per day of various pollutants, together with roughly 420 cubic meters per day of sedimentary residuals formerly discharged into the Cubatao River or other water bodies in the area. As a consequence, CETESB has achieved most of its targets for water pollution control in the area, and it has recently been reported that fish are returning to the Cubatao River. 51 As in the case of air pollution, most of the water pollution sources that still need to be controlled are at COSIPA. 3. Non-environmental ImDacts 5.38 In terms of non-environmental impacts, finally, CETESB observes that the project also resulted in direct employment and income generation as well as producing increased state tax revenues. In both cases, these effects were a direct consequence of the increased demand for locally manufactured pollution control equipment, together with locally provided construction services, generated by subprojects financed with PROCOP resources. More specifically, the project was estimated to have directly contributed to the creation of some 3,150 49 Ibid., PCR, para. 5.06. As observed in footnote 18 earlier in this chapter, SABESP's proposed tariff, in fact, reflected the higher costs of its own sewage treatment plant, which it attempted to pass on to the Suzano paper mill. In retrospect, it is evident that some sort of legally binding agreement between SABESP and the industry should have been negotiated prior to construction of the Suzano treatment plant. As pointed out by one Bank reader of an earlier version of this paper, moreover, the Suzano case also raises the general issue of the most cost effective and efficient policy measure for dealing with industrial water pollution which would appear to be the use of effluent fees. According to this observer, the level of such fees would permit each industry to determine whether to treat its own discharges or to use municipal facilities by selecting the option which minimizes its own costs. It is also clear from the Suzano experience that there was a generalized (ie. Borrower and Bank) failure to perceive that public sewage treatment tariffs were sufficiently high to induce the paper mill to treat its own effluent. so CETESB, "Acao da CETESB em Cubatao," op. cit., pp. 5-6. st This is specifically mentioned in an article entitled "Cubatao, 40 Anos, Agora Pode Respirar," ("Cubatao, 40 Years, Now it Can Breathe")in the etado de Sao Paulo, April 9, 1989, pg. 35. 52 jobs 1 and to an additional US$ 12 million in state value added and service tax revenues . F. Overall Assessment 5.39 This project clearly had a favorable impact in environmental terms despite the initial difficulties in attracting demand for PROCOP funds. As illustrated in the preceding section, air and water quality indicators in the geographic areas benefitted to the greatest extent by the operation reveal significant reductions in industrial pollution levels as the result of CETESB's efforts during the project implementation perie!. The positive impact has been greatest in Cubatao and with regard to industrial air pollution, especially sulfur dioxide, while the failure of the water pollution component was due largely to factors beyond the control of either CETESB or the Bank. 5.40 A brief review of the implementation experience and results of the first project thus suggests that, while its original objectives were only partially achieved, the mid-course modifications in design and operating procedures effectively permitted it to address a broader set of industrial pollution concerns in the state of Sao Paulo. Foremost among these were the very serious environmental problems in Cubatao, to the solution of which the project was able to make a substantial contribution. The PCR and the Audit Hemorandum suggest, moreover, that the Bank played a relevant role both in the project's initial implementation difficulties and in its subsequent "turn around" and eventual achievements. 5.41 With reference to its initial objectives (see para. 5.03 above), more specifically, the project's impact on the reduction of toxic discharges into the rivers in the SPHA was limited, as was, consequently, its direct impact on the reduction of water-borne diseases. This failing appears to have been mainly due to the delays experienced in the execution of the much more ambitious Greater Sao Paulo Sewage Collection and Treatment Project, which fell victim to H This refers specifically to manufacturing jobs for the production of pollution control equipment which is concentrated in Sao - Paulo. The full employment impact has undoubtedly been even greater with other sources of employment in the rapidly expanding "environmental engineering" sector in Brazil (particularly Sao Paulo) including consulting firms that provide technical assistance to industries for the design and installation of pollution control devices or facilities and industrial personnel responsibla for the operation and maintenance of such equipment. 53 CETESB, "iessao BIRD.." op. cit., pg. 22. In this connection, the CETESB report cites an unpublished doctoral dissertation by Arlindo Phillipi Jr. entitled "Controls da Poluicao Ambiental - Implantacao de Sistema de Financiamento," presented to the Public Health Faculty of the University of Sao Paulo in 1988. One other interesting non-environmental Impact mentioned by Phillipi (personal communication) was the effective creation of a new industrial "lobby" for environmental control composed of domestic manufacturers of basic sanitation and pollution control equipment, who have formed their own national association. 53 the severe economic and financial crisis and local political problems in the SPHA in the early 1980's, rather than to specific implementation shortcomings in the present operation. Furthermore, even though CETESO's broader enforcement program was successful in bringing about a reduction in particulate matter emissions in the metropolitan area, the project's direct role in this regard was relatively minor. The reduction of industrial emissions ger se, moreover, proved to have a limited impact on overall atmospheric particulate matter concentrations in the SPHA since industries were found to be a less important source of this pollutant than originally anticipated. 5.42 Even though the direct impact of PROCOP credits on pollution levels in the SPMA may, in fact, have been fairly limited, there is reason to believe that the project's indirect consequences have been far more significant. In effect, the project's contribution to overall pollution control efforts in Sao Paulo appears to have been substantially larger than the relatively small volume of PROCOP funds onlent to industries for the acquisition of pollution control equipment and installation of treatment facilities might suggest. According to CETESB, PROCOP's principal function has been as a "catalyst" since the mere existence of a specific funding source for pollution abatement has been sufficient to induce many local industries to make investments in pollution control utilizing their own or other (frequently non-PROCOP) resources. " In short, the existence of PROCOP provided CETESB with increased leverage to induce industries to comply with existing pollution control regulations, in the process reinforcing and helping to make its on-going enforcement activities more effective. 5.43 In addition to representing a key instrument among the various pollution control measures (ie. licensing, fines, etc.) available to CETESB, the existence of -- and, after 1984, successful experience with -- PROCOP led directly to the establishment of a parallel line of credit tor industrial pollution abatement at the national level by BNDES. This credit line, known as "POC-Ambiental," is administered in Sao Paulo by BADESP. As is the case with PROCOP, access to POC-Ambiental funds by industrial subborrowers requires CETESB's prior technical approval of all proposed pollution control subprojects. According to BADESP, the POC-Ambiental credit line and regular FINAME financing for the acquisition of domestically produced pollution control equipment have been utilized to supplement PROCOP financing, whinh is presently limited to 502 of total subproject coste, since 1986, thereby stimulating the use of both sources by industrial investors. ss s' According to CETESB, more concretely, this was the case because these firms were no longer able to fall back on the excuse that they possessed no means of financing the necessary pollution control devices. " According to CETESB ("Missao BIRD...." op. cit., pg. 23), POC- Ambiental, in fact, originated from a proposal by BADESP with the support of CETESB that BNDES set up a credit line for the pollution control projects which, in Sao Paulo, would serve the specific function of meeting industrial de-gand in excess of PROCOP's financial capabilities. 54 5.44 Also on the positive side, the first project succeeded in strengthening CETESB's technical and operational capability and in promoting the development of a long-term pollution control strategy in the SPMA and elsewhere in the state of Sao Paulo. Partly as a consequence of the project, CETESB presently has a well trained and dedicated professional staff which has suffered relatively little turnover during the past decade and a half. The personnel involved in the coordination of PROCOP, both at CETESB and BADESP, have remained largely the same since the program's renegotiation in 1983. Among other benefits, this has facilitated the interaction between CETESB, other state government agencies, the industrial sector and the World Bank. " 5.45 Another important contribution of the project in Sao Paulo was essentially the result of the Bank-prescribed inter-institutional arrangements including both the utilization ot an inter-agency steering committee and specific agreements by CETESB with BADESP and SABESP (see para. 5.06 above). These arrangements required the participation of different state Secretariats and line agencies in the overall orientation and implementation of the project, in the process greatly facilitating the transmission of information about and the mobilization of support for the project across different sectors within the state government. As a consequence, according to CETESB, PROCOP to presently viewed as an instrument of state government policy rather than as "just another sectoral program" identified with one particular agency. This, together with growing public awareness of environmental pollution and the health risks and physical discomforts associated with it, moreover, has directly contributed to the generally strong political support received by the program within the state government since 1983. 5.46 Other important by-products of the first project, finally, are the second and possible third Bank loans for industrial pollution control in Brazil which will be briefly described in the next chapter. The second project has already permitted an additional iajection of funds into PROCOP through the early 1990's, by which time BADESP expects that repayments of the initial subloans will reach a level sufficient to allow the program to continue to finance new subprojects without requiring substantial new external capital. More significantly, the follow-on projects were designed to extend the PROCOP approach to the national level by supporting establishment of the PRONACOP program, originally under the coordination of SENA and now under that of its successor agency, IBAMA, and initiating similar credit lines in other statee, in both cases with the technical backstopping of CETESB. Largely as a result, aeveral Brazilian states outside of Sao Paulo are presently well advanced in setting up their own industrial pollution control and credit programs. 5.47 In synthesis, the project clearly demonstrates the value of applying a "carrot and stick" approach to industrial pollution problems through which 36 Relations between CETESB and the Bank, more specifically, are characterized by the former as having involved mutual respect for the professional maturity and seriousness on both sides, a strong spirit of collaboration and joint endeavor, a wiliingness to learn from experience and an attitude of flexibility when the need arose to incorporate changes in the original project design in order to guarantee a successful outcome. 55 serious and persistent enforcement efforts are combined with the provision of financial resources to support pollution control investments. It also demonstrates the importance of a strong regulatory agency which possesses both the technical capacity and the institutional determination required to systematically monitor and control industrial polluters. With respect to "institutional determination," more specifically, the importance of local public awareness and unambiguous state government political support for pollution control efforts cannot be overstressed. 5 Consistent World Bank support of CBTESB's activities over the past decade, moreover, has also been a contributing factor to the generally positive experience with industrial pollution control in Sao Paulo thus far. G. The Bank's Role 5.48 The Bank's role in the first project was essentially positive. Bank staff helped CETESB to determine its initial priorities in combatting industrial pollution, to define specific enforcement strategies and to establish criteria for the technical and economic evaluation of pollution control subprojects. According to CETESB, the Bank provided valuable collaboration both in the initial preparation and the subsequent reformulation of the operation. In hindgight, the Bank's initial insistence on, and subsequent critical review and revision of CETESB's proposals for, the project's institutional strengthening component is seen by the executing agency to have been highly justified. CETESB also observes that the Bank later fully supported the idea of turning PROCOP into a permanent mechanism for the financing of industrial pollution control activitiee, as concretely manifested in its approval of the second project. 5.49 The Bank's role in encouraging the extension of the PROCOP approach to the rest of the country and utilizing CETESB's capacity and experience to support the establishment of similar programs in other states is also of relevance. Hopefully, CETESB will continue to be an important actor and Bank partner in future efforts to extend pollution control measures similar to those that have proven to be generally effective in Sao Paulo to other parts of Brazil. Likewise on the positive side was the relative continuity of the Bank staff involved in preparation and supervision of the industrial pollution control projects, a factor which, according to CETESB and BADESP, has greatly facilitated interaction toucen the Bank and participating agencies at both the otato and federal levels. " CBTESB ("Iiseao BIRD...," op. cit. pg. 24.) specifically observes in this connection that "the development of (greater) ecological awareness at the level of [civil] society, which has led it to pre@ very firmly for public sector action," together with public perception of the initial improvement in environmental quality in the SPHA and other parts of the state, are the two principal transformations occurring during the project's implementation period that have been of direct relevance to its performance. Not surprisingly given its greater visibility, CETESB also affirms that public pressure has traditionally been much greater with regard to air than to water pollution (pp. 14-15). 56 5.50 In retrospect, however, from the standpoint of CETESB and BADESP, there were also several negative aspects associated with the way the Bank handled the first project. For the most part, these can be attributed to the relative inexperience of both the Bank and the Sao Paulo state government with this kind of operation. In particular, the initial rigidity built into the operation in terms of subproject evaluation procedures and subloan repayment conditions, especially the minimum grace and amortization periods, contributed directly to the difficulties subsequently experienced during the early years of project implementation in attracting industrial demand for PROCOP credits. 5.51 While these problems were eventually resolved, CETESB feels that the Bank took too long (more than two years) to formally approve the proposed changes in procedures which later resulted in a substantial acceleration of PROCOP commitments and Bank loan disbursements. As a consequence of this delay, CETESB argues that many specific pollution control projects which could have been financed with PROCOP funds, particularly in the SPHA, remained ineligible or were funded by other sources. Thus, the project appears to have missed an opportunity to make a greater direct contribution to the achievement of its original objectives and targets for pollution control within the metropolitan area. 5 5.52 This experience, moreover, led the PCR to conclude that "an experimental project of this nature should be allowed more flexibility regarding its design features which could be adjusted upon mutual agreement between the Borrower and the Bank as project implementation proceeded." " The Audit Hemorandum reached similar conclusions with regard to the Bank's performance, observing that "like the project itself, the role of the Bank evolved during implementation, very much for the better." It adds that the "rigid but tentative approach" characterizing the Bank's posture during the preparation and appraisal stages of the operation later gave way to a "flexible, cooperative approach full of initiatives." In its discussions with those responsible for project implementation in Sao Paulo, furthermore, the audit mission encountered "a strong feeling of appreciation and desire for continued Bank participation in CETESB's future work." More specifically, Bank assistance in helping CETESB to obtain "state of the art information and equipment" was particularly appreciated, while "seemingly unnecessary delays in Bank decision making and an unreasonably rigid approach to problems" were not. so 5.51 In short, as the first industrial pollution control project in Latin America end one of the first such operations anywhere, the Bank correctly followed a "learning by doing" approach which eventually achieved largely positive results. When the project ran into major difficulties during the early years of execution, the Bank responded, albeit elowly, with sufficient flexibility to assure a successful final outcome. The learning process which so CETESB ("Hissao BIRD...," op. cit, pp. 25-26) Indicates that this was particularly the case with respect to the reduction of sulfur dioxide emiesione in the SPHA. " OED Report No. 7720, op. cit., PCR, par. 6.09. o Ibid., PPAH, para. 24. 57 took place in connection with project implementation, moreover, appears to have occurred in a highly cordial atmosphere and has benefitted both the local agencies involved and the Bank. In this sense, the desired contribution of the project in terms of affording the Bank "further knowledge about industrial water and air pollution control costs and benefits and experience in the design and execution of regionally integrated pollution control programs" (see para. 5.12 above) has clearly been achieved, even if some of the other objectives of the operation (eg. supporting the goals of PLANASA under the SANEGRAN sewage treatment plan) were attained to considerably lesser extent. 58 VI. SUBSEQUENT BANK-ASSISTED PROJECTS 6.01 Several other Bank-supported operations involving pollution control in Sao Paulo have come (or are expected to come) directly in the wake of the projects reviewed above. These include, specifically, the Second Industrial Pollution Control Project (Loan 2831-BR), which was approved in June 1987, and the Water Sector Project in the State of Sao Paulo (Loan 3102-BR), approved in June 1989. A third industrial pollution abatement project, moreover, is currently being prepared in Brazil for possible appraisal by the Bank in early 1990. Since these operations are in a very real sense the direct "offspring" of the industrial pollution control and basic sanitation projects discussed in the two previous chapters, they will be briefly described in the following paragraphs. A. The Second Industrial Pollution Control Project 6.02 In June 1986, the Brazilian Government requested a follow-on loan to the first project in order to help meet unfilled demand for industrial pollution control investments in the state of Sao Paulo, particularly in Cubatao, and to provide additional technical assistance to CETESB. The scope of the project was subsequently extended to include the institutional strengthening of SEMA (now IBAMA) at the federal level and of selected state environmental protection agencies (SEPAs) outside Sao Paulo. The Second Industrial Pollution Control Project was appraised in November 1986 and negotiated in April-May 1987. Loan 2831-BR In the amount of US$ 50 million was approved on June 9, 1987 to support an operation having a total cost estimated at US$ 100 million equivalent. The Bank loan became effective on July 11, 1988 and has an expected closing date of June 30, 1994. As of February 28, 1991, US$ 12 million (or 24%) of the loan had been disbursed, while more than US$ 12.3 million had been cancelled. 6.03 As stated in the respective SAR, the second project has two basic objectivess to improve public health by further reducing industrial air, water and solid waste pollution in Sao Paulo state and to strengthen IBAMA and the SEPAs by developing their operational and technical capabilities to design and implement integrated long-term industrial pollution control strategies and programs within their jurisdictions. 1 An additional objective is to support IBAMA and CONAMA in their efforts to develop "appropriate incentives" for pollution control investments. 2 1hile continuing to concentrate its efforts in the state of Sao Paulo, therefore, the second project clearly extends the Bank*s support of industrial pollution control efforts in Brazil to the federal government level and to states in other parts of the country. . Report No. 6673-BRo op. cit., para. 3.02. a On the experience with incentives in various countries (including Egypt, Yugoslavia, Algeria and Turkey), see Koomo, Mark, "Economic Incentives and Industrial Pollution in Developing Countrio," TVorld Bank, Environment Department Divi19on Working- Paer No. 1989-2, Washinaton, July 1989. 59 6.04 The second pollution control operation, more specifically, is composed of two parts. Part A involves continued financing of subprojects to reduce all types of industrial pollution in Sao Paulo, together with further institutional strengthening of CETESB. As under the first project, the latter includes the acquisition of specialized monitoring and laboratory equipment, applied research and studies -- particularly in the areas of biological and toxic waste treatment, hazardous risk assessment and cost-benefit analysis -- and the training of industry personnel and CETESB staff in various aspects of pollution control. Part B, in turn, involves institutional strengthening of IBAMA and SEPAs other than CETESB and includes the purchase of laboratory and monitoring equipment, the carrying out of diagnostic studies to determine the nature and extent of industrial pollution problems and to define control strategies for states other than Sao Paulo, an asseasment of local training capabilities, the implementation of training programs for staff at IBAMA and in the SEPAs and technical assistance to IBAMA for the development of incentives for pollution control investment. 6.05 New pollution control subprojects under Part A were estimated at appraisal to involve a total cost of US$ 88.8 million equivalent, while technical assistance activities under Parts A and B would require an estimated US$ 11.2 million. An existing pipeline of some 20 pollution control projects, entailing total investments on the order of US$ 70 million, had already been identified at the time of project appraisal. Roughly half of this investmert was expected to be undertaken by COSIPA in Cubatao in order to complete needed pollution control measures (see paras. 5.34 and 5.37 above), 4 while another US$ 10 million was expected to be invested by four petrochemical companies, including PETROBRAS, in the same area. Altogether, roughly 652 of total investments under the operation were expected to be made in Cubatso. These investments would be financed in equal parts by the Bank loan and the participating industries themselves. Similarly, the Bank would finance 502 of the technical assistance expenses, including US$ 2.6 million for CETESB under Part A and US$ 3 million for IBAMA and other SEPAs under Part B, with the balance to be provided by the Sao Paulo state and federal governments, respectively. 3 3 The Suzano paper mill experience mentioned in the previous chapter provides considerable insight into the development of incentives for pollution control investments. Hopefully, the IBAMA studies on this subject will include a closer examination of this case. 4 As the SAR for the second project points out (para. 3.04), more recent COSIPA installations in Cubatao partially financed by the Bank under Loans 828- BR, approved in May 1972, and 1152-BR, approved in July 1975, already possessed pollution control equipment in operation. See OED Report No. 3522, dated June 26, 1981, for the results of the first of these two loans. s Of the US$ 6 million in technical assistance funds for SEHA (IBAMA) and the SEPAs other than CETESB, more specifically, roughly 532 (US$ 3.2 million) was expected to be utilized for the acquisition of laboratory and monitoring equipment, 402 (US$ 2.37 million) for training activities and 72 (US$ 430,000) for the state diagnostic studies. 60 6.06 As under the first project, loan funds for pollution control in the state of Sao Paulo would be channeled through PROCOP, which would continue under the financial administration of BADESP. CETESB, in turn, would continue to be responsible for technical appraisal and approval of specific subprojects with the assistance of SABESP in the aase of water pollution. Interagency coordination would be governed by the same agreements signed by CETESB with BADESP and SABESP under the first project (see para. 5.06 above). 6.07 Also as under the first operation, Brazilian owned or controlled firms of any size would be eligible to be PROCOP subborrowers, while eligible subprojects would have to be designed so as to achieve reductions in pollution consistent with a pollution control solution acceptable to the Bank. 7 As under the amended onlending conditions for the first project, subloans would have a grace period of up to three years and a repayment period of up to ten years. Unlike the first project (see para. 5.07 above), however, interest rates would be differentiated according to the characteristics of the subproject and not the size of the subborrower. 8 The amount above which individual PROCOP subloans required prior Bank approval, in turn, was raised to US$ 2 million. 6.08 According to the original project implementation schedule, the recommendations on pollution control incentives under Part B were to be developed by SEMA by October 1988 for consideration by CONAMA in January 1989. The diagnostic studies for the twelve states outside Sao Paulo presently having the most significant industrial pollution problems, in turn, were expected i : be completed by December 1989. The training resource study, finally, was to be carried out by one or two consultants and to entail an analysis of the current 6 In response to the coordination problems encountered under the first project (see para. 5.16 above), however, the agreement between CETESB and SABESP was amended to guarantee the "timely exchange of information on proposed water pollution control subprojects to assure that cost effective control solutions are adopted" (Report No. 6673-BR, op. cit. para. 3.12). This measure and the amendment of PROCOP's by-laws to reflect specific changes associated with the second project were included in the Loan Agreement as disbursement conditions for Part A of the operation. 7 Ibid., para. 3.07. The Bank had already approved "comprehensive enforcement strategies" developed by CETESB for water pollution, sulfur dioxide and particulate matter in the SPMA and Cubatao. 8 More specifically, subprojects for controlling particulate matter or sulfur dioxide pollution established prior to April 14, 1980 (is. the date of signature of the Loan Agreement for the first project) and subprojects for controlling other pollutants established before December 31, 1986 would be eligible for an "interest rate Incentive" as long as they involved direct treatment (as opposed to a change in production process or physical relocation of the polluting industry). The "interest Incentive" would involve a lower rate (but no less than 62) than that applied to loans to other subborrowere (which would be no less than 9.5). The principal of all subloans, moreover, would be adjusted monthly for inflation in accordance with changes in the national treasury bond index. 61 situation with regard to environmental training in Brazil. It would also determine which types of environmental training should be provided in the future, and by which institutions. 6.09 Due in part to the organizational changes resulting from SEMA9s transformation into IBAMA, the incentives study has not yet been undertaken and is likely to require more direct technical assistance from the Bank than was contemplated at the time of appraisal. The state diagnostic studies, on the other hand, have been largely completed by CETESB, which was specifically contracted by SEMA for this purpose. These studies have identified the principal locations of air and water pollution in each state, the specific industries responsible for this pollution, the amounts of pollutants already reduced and remaining to be controlled in each area and the institutional atrengthening requirements of the respective SEPAe (ie. staffing, training, equipment, etc.) to better enable them to monitor environmental contamination and enforce federal and state industrial pollution control regulations. B. The Sao Paulo State Water Sector ProJect 6.10 This operation, which involves a Bank loan (3102-BR) of US$ 280 million and an expected total cost of US$ 600 million, was appraised in January 1989 and includes among its objectives the improvement of environmental and health conditions in Sao Paulo's urban areas through increased water supply and waste water disposal. 9 The gorrower and Executor of the project would be SABESP. The operation consists of a slice (ie. roughly 35%) of SABESP's planned investment program for 1989-93 and is expected to benefit some 6.1 million people with water supply and 2.9 million people with sewerage services in urban centers of varying sizes throughout the state. 1 The project is expected to cover roughly 60% of SABESP's total investments in water supply, including 53% of those in the SPHA and 73% in the interior of the state: and 142 of its total investments in sewerage, including 57% of those in the interior, between 1989 and 1993. This loan became effective on July 6, 1990 and US$ 25.5 million had been disbursed as of February 28, 1991. 6.11 Specific water investments to be financed under the operation include three dame, an outflow control structure and a pumping station to increase water supply to the SPMA, the improvement of other water production installations and 9 According to the respective SAR (Report No. 7650-BR, dated May 17, 1989, para. 2.02), other project objectives ares (i) to help optimize the allocation of scarce sector resources through better investment planning and marginal cost analysis and pricing; (ii) to increase SABESP's operational efficiency and financial healthl (Ili) to help develop new strategies to improve SABESP's ability to implement projects with high social Importance, but not necessarily high financial returna; and (iv) to support government decentralization efforts through the commitment of resources from the state of Sao Paulo and SABESP. ' Other external sources of loan funding for SABESP's 1989-93 investment program are the Caixa Economica Federal, through PLANASA (US$ 300 million), the State Water and Sewer Fund - FAE - (US$ 300 million) and the Inter-American Development Bank (US$ 111.4 million). 62 the construction of water transmission and distribution pipelines, storage tanks and household connections in the metropolitan region together with the construction, extension and/or improvement of water systems in some 50 medium- sized cities and 200 small towns elsewhere in the state. Sewerage improvements, in turn, would include construction of interceptors, a pumping station and a treatment plant in the industrial city of Sao Jose dos Campos, located just outside the SPHA, and the construction and/or extension of sewage systems and treatment facilities in 19 medium-sized cities and roughly 50 small towns. While no specific sewerage investments are contemplated for the metropolitan region, a the project does include resources for an assessment of municipal waste water pollution throughout the state. 1 6.12 The domestic waste water pollution assesment, more concretely, is expected to include the following activities: (i) an inventory of point sources of domestic waste water discharges and the quantification of pollution loads; (ii) definition of effluent quality standards by CETESB; (iii) assessment of the degree and type of treatment required and related investment needs; (iv) assessment of benefits and costs and investment priorities over various planning horizons; (v) evaluation of the ability and willingness to pay of the population directly affected by the proposed interventions; (vi) determination of alternative revenue sources (tariffs, special assessments, state taxes, equity contributions, etc.) to cover investment and operating costs; and, (vii) elaboration of recommendations for the implementation of a domestic sewage pollution control proram, including the possible revision of state water pollution standards. 'The study is expected to be completed by the end of 1991. n The SAR (Annex 5), indicates that, in addition to the US$ 600 million in total investments that would be partially financed by the Bank in connection with the present operation, SABESP's total investment program for 1989-93 includes over US$ 1.1 billion in other expenditures, including approximately US$ 610 million for sewerage collection, treatment and related sanitation improvements in the SPHA. The latter include investments proposed under the revised SANEGRAN master plan such as completion of the Barueri and first stage ABC sewage treatment plants and associated municipal interceptors and are being partially financod under the 1D8 loan to SABESP approved in late 1986 (see par&. 4.17 above). n2 Other project components, according to the SAR (para. 2.05), are institutional developmento Including technical assistance, materials and works for an unaccounted-for water reduction program and improvement, in SABESP's operational and commercial systems, staff training and consultant services for engineering, design and construction supervision. 1 IbId., Annex 5, pg. S. The first of these activitiea was already in progress at the time the SAR for this project was written. 63 C. The Third Industrial Pollution Control Project 14 6.13 This prospective operation, which is currently in preparation, would act directly on the results of the state diagnostic studies financed under the second project (see paras. 6.08-6.09 above) and which are presently nearing completion by CETESB. As in the two previous projects, it would combine a line of credit to industries for the acquisition of pollution control equipment and installation of treatment facilities with technical assistance to participating state environmental protection agencies (SEPAe). It would concentrate on those states experiencing the most serious industrial pollution problems probably including, in addition to Sao Paulo, all the other states in the South and Southeast regions and possibly one or s-re states in the Northeast, North and Center West. 6.14 Given the institutional weakness of most SEPAe outside Sao Paulo and Rio de Janeiro, the technical assistance component of the proposed operation would give emphasis to improving their capacity to monitor and control pollution. Among other actions, this would entail refinement of existing diagnostic studies, the acquisition of additional monitoring and laboratory equipment and staff training. Improvements in state environmental protection legislation, adequate initial staffing and equipment of the SEPAs and development of specific pollution control strategies, in turn, would be preconditions for state participation in the project. It is anticipated that the operation would also include resources for carrying out three or more special studies, two of which would concern serious and persisting environmental problems in Sao Paulo. 6.15 The studies proposed for Sao Paulo, more specifically, would seek to determine appropriate sites for the incineration of hazardous industrial wastes and to define the additional industrial pollution control measures to clean up the Tiete River in the SPMA, respectively. 13 Hazardous wastes are currently produced by a number of chemical and other intermediate good industries in Sao Paulo, while CETESB is only beginning to develop a strategy for dealing with this problem. Further control of industrial effluents discharged into the Tiete River, in turn, would be part of the larger efforts to improve both municipal and industrial sewage treatment under the revised SANEGRAN master plan 14 The information on which this section is based is largely drawn from an Aide Memoir prepared by a September 1989 Bank miesion in connection with this project. n The proposed study for Rio do Janeiro, in turn, would involve preparation of a dynamic water quality model of Guanabara Bay with the objective of improving future management of municipal and industrial effluents discharged into this body of water which is literally surrounded by the highly urbanized and heavily industrialized Rio metropolitan region. FEEMA has been engaged in modelling activities since the mid-1970's. This work has benefitted from the assistance of outside consultants and substantial progress has already been achieved. 64 which alms at increasing coverage of the public sewerage network to 64% of the metropolitan population by 1991 and 881 of this population by the Year 2005. 16 D. Conclusion 6.16 The paragraphs above clearly indicate that the Bank continues to support -- and in an increasingly meaningful way -- pollution control efforts in the state of Sao Paulo, especially in the area of industrial pollution control. They also reveal that these latter activities are presently being extended to other parts of Brazil, initially through the development of state diagnostic studies of pollution sources and control requirtfaents under the second Bank-assisted project and, in all likelihood, through the creation of additional credit lines and the strengthening of environmental protection agencies in other important states in a possible future operation, in the process making full use of the experience accumulated by CETESB in Sao Paulo under the first two projects. The federal environmental protection agency, IBAMA, would also be further strengthened as a result of these operations. This suggests that, apart from its specific impact on air and water quality, the first industrial pollution control project in Sao Paulo has provided much of the basis for development of a similar -- and similarly needed -- program at the national level. In this sense, the environmental impact of this operation has clearly transcended not only the boundaries of the SPH& for which it was originally designed, but also those of the state of Sao Paulo to which it was eventually extended. 16 Report No. 6673-BR, op. cit., Annex 7. Under the revised SANEGRAN plan, moreover, it is also projected that 1002 of the sewage collected in the SPHA will be treated by 2005 and that 50% of the total collected will be treated by 1990. 65 VII. THE BANK AND POLLUTION CONTROL IN SAO PAULO A. Conclusions 7.01 Air and water pollution are among the principal environmental problems facing cities in developing and developed countries alike. The combination of large and rapidly growing human and vehicle populations and, in many cases, equally rapid industrial development in a context of limited public sector resources means, however, that urban pollution problems and their associated public health impacts are particularly serious in the largest metropolitan areas of the developing world. The provision of basic sanitation infrastructure (especially sewage collection and treatment) and other local services (such as solid waste collection and disposal), the regulation of industri&l, residential and other locational and land-use decisions and the control of vehicle emissions and industrial discharges have all lagged considerably behind urban population growth In the Third World, particularly in many of its major metropolitan areas. Public sector efforts to combat pollution in most developing nations, moreover, are relatively recent and, as the Bank's oai experience in Brazil and elsewhere has demonstrated, have been only partially successful at best. 7.02 The state of Sao Paulo provides a dramatic illustration of the types and magnitudes of environmental problems which can and frequently do result from rapid and, until recently, largely uncontrolled industrial and urban growth, at both the metropolitan (SPHA) and the regional (Cubatao) levels. ' State government attempts to deal with these problems over the past decade and a half also illustrate what needs to and can be done in order to correct this situation and how the World Bank, in particular, has supported and can continue to support local efforts to fight pollution and improve urban environmental conditions more generally. The Bank's experience in Sao Paulo, however, also reveals the limitations of taking a partial approach to urban pollution control, rather than attempting to confront the problems of environmental contamination in a more comprehensive and coordinated manner. 7.03 * Since previous sections of this report have described the nature, dimensions and impacts of the urban pollution problem (Chapter II), summarized recent federal and state legislative and institutional responses to this problem (Chapter III) and discussed the design, implementation and major results (or lack of results) of several Bank-oupported investment projects that have attempted 1 Mexico City and its surrounding area would probably provide an even more dramatic example of the relationship between urban and industrial growth and environmental degradation. It also provides a sharply contrasting experience to Sao Paulo in terms of the relative success of the Bank's efforts thus far to support pollution control. A comparison of the two cases might, therefore, be a good subject for a future ORD study on urban environmental management. Furthermore, it might be interesting to compare the Latin American with the Asian experience in this regard, especially that in India and China where the Bank is also now beginning to become directly involved in urban pollution control programs. 66 to deal with environmental pollution problems in the state and, particularly, the metropolitan area, of Sao Paulo (Chapters IV, V and VI), this concluding section will largely limit itself to highlighting the principal conclusions that can be drawn and lessons that can be learned from the Bank's experience in this context thus far. Particular attention will be given to the implications of the experience in Sao Paulo for future government efforts, and Bank support of these initiatives, to reduce industrial and other forms of pollution elsewhere in Brazil and in other developing countries. 7.04 In reviewing the Bank's interventions with respect to different parts of the urban pollution problem in Sao iaulo over the past fifteen years, it is evident that, despite the significant investments that have been made and the real progress that has been achieved on numerous fronts, this problem has by no means been solved. It is also clear that the Bank's own approach, while having evolved and broadened over time, still does not directly or fully confront several of the principal sources of urban environmental contamination in the area. Dealing with this larger set of pollution-related issues and problems requires both an increased emphasis on economic and policy, together with technical, financial and institutional, measures and application of a more integrated, cross-sectoral approach to public investment and the regulation of productive activities requiring actions at both the national and the urban/metropolitan levels. 7.05 The potential benefits of such an approach can ultimately be measured in terms of the number of people that are presently affected by water and air pollution and other urban environmental problems and which are likely to be so affected in the future. In a developing metropolis such as Sao Paulo this number is likely to be on the same order of magnitude as the metropolitan population itself. More generally, this also points to the fact that, despite the growing attention given in the developed world to issues such as deforestation and global climate change, the most serious environmental Issue facing many developing countries in terms of the number of people directly affected is urban pollution. 7.06 The attempts of Bank-supported industrial pollution control projects to improve air and water quality in the Sao Paulo metrnpolitan region have, thus far, met with only partial success, largely because they have effectively dealt with only part of the problem. In the case of air pollution, more specifically, according to studies undertaken by CBTESB in connection with preparation of the first project, the principal source of emissions in the SPHA in the mid and late ' A recent article by Tim Campbell entitled "Environmental Dilemmas and the Urban Poor" (in Jeffrey Leonard, et. al., Environment and the Poor: Development Strategies for a Common Agenda* Transaction Books, New Brunswick, New Jersey, 1989), for example, not only indicates the very large and rapidly growing numbers of people adversely affected by environmental contamination in cities in the developing world and points out some of the key linkages between urban poverty and the environment, but also eloquently argues the case for the need to redress the existing imbalance between essentially "rural" versus "urban" environmental concerns on the pnrt of international lending agencies and NG0s, among other entities, which presently tend to give much greater ettention to the former. 67 1970's consisted of motor vehicles, which accounted for nearly three-quarters of all air pollution in the region. Industry, by contrast, was estimated to have been responsible for less than one-fourth of total air pollution in the metropolitan area at that time. Industry's relative contribution to one major air pollutant, particulate matter, moreover, was also subsequently found to be less significant than originally thought by either CETESB or the Bank, while a non-industrial source, road dust, was determined to be correspondingly more important. In the case of water pollution, in turn, CETESB's attention was focused largely on industrial, as opposed to municipal, sources, with the idea of pretreating effluents that would be potentially harmful to major planned Bank- supported sewage treatment facilities in the SPMA that later suffered serious implementation delays. 7.07 At the time the first industrial pollution control project was appraised, it was already evident both to CETESB and the Bank that the actions to be taken under the operation represented only a partial solution to the larger air and water pollution problem in the SPMA, not to mention that in the state of Sao Paulo as a whole. With regard to the SPMA, however, it was expected that parallel measures, especially in the areas of sewage treatment (ie. SANEGRAN) and vehicle emissions control, would be sufficient to resolve these other concerns. In retrospect, it is clear not only that these parallel efforts, in fact, have taken considerably longer to materialize than initially anticipated by the Bank, but that, by following a parti&L approach, the direct impact of the first project was considerably smaller than it might otherwise have been, even despite substantial modification of the operation in 1984 to include other industrial pollutants and to expand its geographic coverage to the entire state. 7.08 In the case of air pollution, more specifically, a more adequate approach would have required, in parallel to PROCOP, the definition and implementation of measures designed to significantly reduce emissions generated by motor vehicles as well as non-industrial sources of particulate matter. * A more comprehensive and effective air pollution control strategy for the SPMA, in other words, would have had to directly confront the issue of vehicle engine 3 CETESB observes that the focus on industrial sources, in part, reflects the fact that it has io power to fine municipalities for violations of environmental quality standards. Despite this constraint, however, CETESB, together with the state Secretariats of Planning and of the Environment and local industries, is working with a number of contiguous municipalities in several important river basins outside the SPMA in order to combat water and air pollution in a more integrated fashion. See, for example, CETESB, Aeso Integrada de Controle da Poluicao na Bacia do Rio Piracicaba - Relatorio Anual 196 Sao Paulo, 1987. A similar program exists with seven municipalities in the area around the city of Jundiai close to the metropolitan region. 4 CETESB maintains that it, in fact, proposed undertaking a research project on non-industrial pollution sources under the technical assistance component of the first project, but that the Bank did not accept this proposal because it was considered to be outside the immediate scope of the operation. 68 construction standards * -- and, hence, the economically and politically powerful domestic automotive industry -- as well as the need to improve roads, and, thus, urban infrastructure (aince, ideally, water and sewer pipes should be installed before streets are paved) in peripheral metropolitan neighborhoods more generally. Furthermore, instruments complementary to those actually utilized under the industrial pollution control project would have been required including regulation of engine construction to diminish vehicle emissions at the national level and increased public investments for road improvements, together with a more coordinated, multi-sector (and multi-institution) planning and implementation effort, at the metropolitan level. 7.09 In the area of water pollution control, in turn, the principal difficulty experienced during the early 1980's was that of insufficient financial resources to complete planned sewage collection and, particularly, treatment facilities. Other factors, however, further complicated this situation including political disagreements between municipalities in the SPMA both among themselves and with the state and federal governments. The fact that several key municipalities in the metropolitan region were not integrated into the SABESP system or eligible to receive financing from PLANASA proved to be an especially serious impediment to the implementation of sewage treatment investments and, thus, to the more rapid resolution of the metropolitan water pollution problem. Under the circumstances, the Bank should have been more aware of these potential political/institutional conflicts and, again within the context of improved metropolitan planning and coordination of basic infrastructure provision, sought to obtain greater ex-ante guarantees that the necessary financial resources and inter-governmental cooperation would be forthcoming. 7.10 Unfortunately, moreover, the experience in Sao Paulo is an all too typical example of the way the Bank has tended to intervene in the "water sector" in large urban areas, whereby water supply normally takes precedence over sewage services and sewer investments are generally the first to be cut or postponed when funding is short. While the priority given to water is frequently justified, the comparative neglect of sewage collection and treatment in large developing cities is not. This is especially true in those cases where water pollution reaches the levels that it has in metropolitan Sao Paulo. Under these s While the rapid production of alcohol-fueled care did have a positive impact in this context, a large number of older care continue to rely on gasoline (actually a gasoline-alcohol mixture in which the former predominates) or, in the case of trucks and busees on diesel oil, the demand for which, in fact, grew much more rapidly than that for alcohol and gasoline combined between 1976 and 1985, according to figuree presented in a recent PCR (Table 4.3) for the Alcohol and Biomass Energy Development Project (Loan 1989-BR). Furthermore, even though the rapid expansion of alcohol-fueled light vehicles in the SPHA and. elsewhere in Brazil has, indeed, contributed to a substantial reduction in lead and other air pollutants, including carbon monoxide, nitrogen oxides and hydrocarbons, such engines give off aldehyde emissions whose potential negative impacts on the environment are not yet fully known. Of even greater immediate concern is the fact that the present shortage of alcohol in Brazil is leading many vehicle owners to convert alcohol burning engines back to gasoline, with a corresponding increase in the associated emissions. 69 circumstances, a 90% water coverage and a 40 to 502 sewerage coverage is unacceptable. 7.11 Insufficient foresight and poor coordination between SABESP and CETESB, finally, directly led to a situation in which private industrial waste water treatment facilities financed through PROCOP contributed to the substantial under-utilization of a public sewage treatment plant in the eastern part of the SPHA. Bank financing was involved in both cases, moreover, which also implies a need for improved coordination of Bank supervision efforts when projects in different sectors potentially impact on one another and on the same geographic area, whether this involves an urban neighborhood or an entire region. Partly as a result of the lack of coordination in this instance, an unnecessary duplication of basic sanitation investments occurred in on' part of the metropolitan region, while the construction of badly needed sewage treatment facilities was delayed in other parts of the SPMA. B. Lessons 7.12 In synthesia, even though the Bank-supported industrial pollution projects in Sao Paulo have undoubtedly made a positive contribution in environmental terms, they have not been, in and of themselves, sufficient to resolve the metropolitan air and water pollution problem. The principal lesson that can be drawn from this experience for future urban pollution control operations in Brazil and elsewhere is the need to have as full an understanding as possible of the sources and causes of environmental contamination in each particular area -- especially since these may vary considerably from one city or region to the next depending on their demographic size, scale and composition of productive activity and physical setting -- as well as a clear idea as to the relative contribution of each major pollution source prior to developing a specific strategy for combatting the problem and selecting the instrument or instruments to deal with it. 7.13 It is likely that such an analysis will indicate that the problem has multiple dimensions and, thus, that it will need to be attacked on a number of fronts simultaneously. The resulting pollution control strategy, in turn, should be implemented in a coordinated and cost effective manner based on clearly established priorities and a clearly defined (and carefully monitored) institutional division of labor. This ultimately implies, moreover, the need to place air and water pollution in the context of the full range of urban environmental problems, including solid (municipal, as well as hazardous industrial) waste collection and disposal, storm drainage and noise pollution, among others. In short, it implies the need to approach industrial and other types of pollution at the city or metropolitan level from the broader perspective of urban environmental management. 6 Independently of which specific components 6 As summarized in a recent World Bank-UNDP draft project document entitled "Urban Management and the Environment" (Washington, September 1989), the priority areas under such an approach would include: (i) improving municipal (liquid and solid) waste collection coverage and efficiency; (ii) improving municipal waste treatment and disposal; (iii) coordinated pollution control actions across levels of government and urban subsectors; (iv) achieving sustainable utilization of 70 of any broader urban environmental program might eventually be financed by the Bank or other external lending agencies, this more comprehensive approach to the identification of problems and determination of priorities for environmental protection would be justified if only to avoid repeating situations where government interventions have limited success because they fail to consider the larger picture. 7.14 Such an approach would also require coordinated utilization of a broad range of instruments including urban zoning, land use, transportation and infrastructure planning and management, together with economic policy instruments which directly affect the pricing of productive inputs and outputs through taxes, subsidies and other mechanisms in addition to the combination of regulations, fines and credits that has been utilized thus far in Sao Paulo. 7 In short, it will be necessary to explore alternatives to the traditional "command and cont%ol" approach to pollution abatement possibly including greater reliance on economic incentives such as marketable permits, pollution charges and effluent fees. o Since these various instruments, moreover, are available in different degrees to different levels of government, their utilization will need to be resourcess and (v) incorporating environmental planning and management techniques into city-wide strategic planning and implementation. See also two recent papers by Carl R. Bartone (PPR/INURD), "Environmental Issues in Urban Management," draft, Washington, May 1989 and "Urban Management and the Environment in Developing Country Cities: Priorities for Action," prepaved for a conference entitled "Cities, the Mainspring of Economic Development in Developing Countries," Lille, France, November 6-10, 1989. ' Many of the former instruments are summarized in a recent World Bank (Environment Department) and United Nations Center for Human Settlements (Habitat) proposal (Washington, October 1989) for the development of policy guidelines for disaster prevention and mitigation in metropolitan areas of developing countries, which is itself a serious urban environmental problem in many areas, while Kosmo, op. cit., describes a number of economic incentives and how they have and might be used in order to influence the "production" of pollution in the developing world. See also, Bernstein, Janis D., "Alternative Approaches to Pollution Control and Wabte Management: Regulatory and Economic Instruments," World Bank/UNDP, Urban Management and the Environment Discusson Paper No. 3, Washington, April 1991. a In addition to Kosmo's report cited in the previous note, see Oates, Wallace E., "The Role of Economic Incentives in Environmental Policy," paper presented to the American Economics Association session on Economics and the Environment, December 1988. Oates (pg. 1) summarizes the underlying rationale for the use of economic incentives as follows: "Economists essentially [see) excessive pollution as the result of an absence of prices for certain scarce environmental resources and (prescribe) the introduction of prices in the form of unit taxes or 'effluent fees' to provide the needed signals to economize on the use of these resources." 71 coordinated vertically, or in inter-governmental terms, as well as horizontally, or in spatial terms. 7.15 In addition, the environmental impacts of macroeconomic and sectoral policies should be examined to determine the extent to rwhich they encourage or discourage environmental degradation. Since all public sector policy decisions and policy instruments affect the utilization of economic resources, including natural resources, they also influence the production of air and water pollution and other forms of environmental contamination, independently of their specific economic or social objectives. 10 In this sense, most, if not all, macroeconomic and sectoral policies are also implicit environmental policies. 7.16 Pollution control efforts, accordingly, should, perhaps, begin by considering the environmental implications of economic incentives and pricing policies, while environmental costs and benefits should be taken into account in the on-going process of policy definition and redefinition. The modification of such incentives and policies, moreover, implies both the need to take action at the national level, where most of these macro policies are formulated, and to monitor their effects at the local level, where their principal environmental 9 In relation to the effectiveness of such incentives, more concretely, the Sao Paulo experience, particularly with respect to the impact of fines and sewage treatment fees on industrial decisions, merits additional study. In any event, in order to succeed, both command and control and economic incentives require adequate local capacity for the monitoring and evaluation of pollution levels and sources. Thus, the existence and suetainability of a technically capable institution such as CETESB is a key precondition for effective pollution control. 10 Kosmo, op. cit., ("Abstract") mentions some of the relevant relationships in this context: "energy and water subsidies encourage excessive use of theve inputs in favor of those highly polluting industries that rely heavily on them. Natural resources are not only wasted, but more air pollution results and additional liquid and solid wastes enter the waste stream. Price controls that artificially lower the prices of final products such as fertilizers or cement also exacerbAte industrial pollution since they provide inadequate incentives for enterpriseb (which are often state-owned and financially strapped) to invest invesource recovery technologies. Finally, macroeconomic policies such as interest rates, exchange rates and trade policies play an important role in determining industrialization patterns and the availability of financing for pollution abatement investments." n More specifically, Kosmo ("Abstract") affirms that "although policies such as effluent charges and tax incentives for installation of pollution abatement equipment or relocation of industry should be considered, measures first need to be taken to remove existing distortions that discourage pollution abatement. Otherwise all well-intentioned policies will be undermined. Subsidies for water, electricity and other forms of energy, price controls on financial products that discourage product recovery by industrial enterprises and trade policies which favor highly polluting industries are the most urgent areas for reform." 72 impacts are ultimately felt. Furthermore, the current emphasis in Sao Paulo and elsewhere in the treatment of industrial wastes as the main pollution control measure should give way to a policy of waste minimization followed by remediation as a last resort. 7.17 Another major lesson that can be derived from the recent experience with pollution control in Sao Paulo, particularly with a view toward future attempts to replicate these efforts in other Brazilian states or other developing countries, is the fundamental importance of an adequate legal and regulatory framework and sufficient institutional capacity (including technical and administrative capability) together with strong political support at all levels of government -- but especially at the federal and state levels -- for the effectiveness and sustainability of pollution control and other environmental protection efforts. Institutional capability, together with an adequate legislative and judicial framework, is essential in order to properly diagnose and regulate environmental contamination, as well as to design and enforce viable and effective pollution control strategies and to devise and to administer the instruments necessary to implement these strategies. This, in turn, requires adequately trained personnel and proper logistical support, as well as adequately equipped monitoring and laboratory facilities and other installations. 7.18 The experience under the first two industrial pollution control projects demonstrates that CETESB, indeed, possesses the technical and administrative capacity -- as well as the legislative mandate -- required to effectively oversee and carry out pollution control activities in Sao Paulo. These two operations, moreover, have provided important additional support to CETESB in many areas, thereby further strengthening its technical and operational capabilities. It is important to remember, however, that, although CETESB was formally establisk i in 1975, its foundations were laid with creation of FESB in 1968 and a major UNDP/PAHO technical cooperation program for pollution control in the early 1970's. Nearly a decade, therefore, preceded the Bank's first interventions with CETESB, which was already a fairly well developed institution by the time the initial industrial pollution control operation was approved. Despite the quality and relative stability of its personnel and its good track record to date, the continued success of CETESB in a period of rapid political and institutional change should not be considered a foregone conclusion. The politicization and/or imemberment of an agency such as CETESB can rapidly destroy the results of several decades of institutional development. 12 7.19 CETESB, moreover, is clearly exceptional in both the Brazilian and in the Third World context more generally. Thus, one of the major challenges for any attempt to extend the Sao Paulo pollution control experience to other parts of the country will be to develop institutions, at both the federal and 12 This, in fact, has occurred in other Latin American countries including Colombia with the recent extinction of INSFOPAL, the former national water agency, and Mexico with the fragmentation and weakening of the Water Contamination Control Directorate of the Secretariat of Hydraulic Resources (SRH/DGCCA) in the late 1970's. OED is grateful to Carl Bai tone for these examples as well as for the more general observations reproduced in this paragraph. 73 the state levels, that possess a similar capacity to deal with urban and other environmental contamination problems. The heavy emphasis being given to the strengthening of the principal SEPAs outside Sad Paulo and Rio de Janeiro under the proposed third industrial pollution project for Brazil, accordingly, is a correct one and this process of institutional support will undoubtedly benefit both from the existing installed capacity at CETESB and its counterpart in Rio de Janeiro (the State Foundation of Environmental Engineering or FEEMA) and the experience gained by CETESB, IBAMA and the Bank under the first two operations. 7.20 In order to be effective, however, such technical assistance and institutional strengthening is likely to require both time and a steady and reliable flow of financial resources. The Bank should, therefore, be prepared to make a long-term commitment to support the development of federal and state environmental protection institutions in Brazil (and elsewhere) as long as they demonstrate a real willingness to confront pollution and other environmental contamination problems. In order for IBAMA and the SEPAs to be effective, moreover, in addition to technical and administrative capacity, strong political commitment to the goals of environmental protection must be present at both the federal and the state levels. Central government commitment will be particularly important in states possessing fewer resources of their own and lacking a tradition, such as that in Sao Paulo, of serious efforts at environmental protection. This is, in fact, the most important challenge facing both the Brazilian Government and the Bank with respect to the proposed third industrial pollution control project that is presently in preparation. 7.21 Furthermore, as the recent experience in Sao Paulo also demonstrates, it is likely that the mobilization of public opinion and the participation of non-governmental organizations, both at the national and the local levels, will be important factors in -- and possibly necessary preconditions for -- generating and maintaining political commitment to pollution control and other environmental preservation objectives. The Bank should, thus, also be supportive of environmental education programs for the general public, as well as for government and industrial sector personnel, and stimulate the participation of community groups and other local and national NG0s in on-going environmental monitoring activities. The mass media can and should also be encouraged to disseminate euch initiatives. The ultimate key to successful pollution control efforts in both urban and non-urban areas in developing countries such as Brazil will be an informed and active citizenry that is able to make federal, state and local governments accountable for the enforcement of existing environmental protection regulations, for the definition, enactment and implementation of new environmental legislation where needed and for the proper use of public resources allocated for such purposes. 74 ANNEX PROFILE OF PROCOP SUBLOANS, 1981-86 No. Projects No. Firms* Tot. Invest. Subloan Amt. (US$ 000) (US$ 000) A. By Pollution Type Air 82 46 60,949 29,112 Cubatao 35 7 33,278 14,974 SPMA 38 30 22,133 11,540 Other SP 9 9 5,538 2,598 Water 25 22 42,637 18,840 Cubatao 7 4 18,450 8,252 SPMA 6 6 11,555 4,352 Other SP 12 12 12,632 6,236 Solid Waste 4 2 1,104 411 Cubatao 4 2 1,104 411 B. By Location Cubatao 46 13 52,832 23,637 Air 35 7 33,278 14,974 Water 7 4 18,450 8,252 S. Waste 4 2 1,104 411 SPMA 44 36 33,688 15,892 Air 38 30 22,133 11,540 Water 6 6 11,555 4,352 Other S.Paulo 21 21 18,170 8,834 Air 9 9 5,538 2,598 Water 12 12 12,632 6,236 TOTAL 111 70 104,689 48,363 Single Proj. Firms 64 47 41,251 20,192 Multiple Proj.Firms 47 12 63,438 28,171 * Firms receiving loans for more than one type of pollution control and/or which have more than one plant location are counted as separate firms. Source: CETESB; calculations OED 75 PROFILE OF PROCOP SUBLOANS, 1981-86 No. Projects No. Firms* Tot. Invest. Subloan Amt. (Z) (Z) (Z) (Z) A. By Pollution Type Air 73.9 65.7 58.2 60.2 Cubatao 31.5 10.0 31.8 31.0 SPMA 34.2 42.9 21.1 23.9 Other SP 8.1 12.9 5.3 5.4 Water 22.5 31.4 40.7 39.0 Cubatao 6.3 5.7 17.6 17.1 SPMA 5.4 8.6 11.0 9.0 Other SP 10.8 17.1 12.1 12.9 Solid Waste 3.6 2.9 1.1 0.9 Cubatao 3.6 2.9 1.1 0.9 B. By Location Cubatao 41.4 18.6 50.5 48.9 Air 31.5 10.0 31.8 31.0 Water 6.3 5.8 17.6 17.1 S. Waste 3.6 2.9 1.1 0.9 SPMA 39.6 51.4 32.2 32.9 Air 34.2 42.9 21.1 23.9 Water 5.4 8.6 11.0 9.0 Other S.Paulo 18.9 30.0 17.4 18.3 Air 8.1 12.9 5.3 5.4 Water 10.8 17.1 12.1 12.9 TOTAL 100.0 100.0 100.0 100.0 Single Proj. Firms 57.7 79.7 39.4 41.8 Multiple Proj.Firms 42.3 20.3 60.6 58.2 * Firms receiving loans for more than one type of pollution control and/or which have more than one plant location are counted as separate firms. Sourcet CETESB; calculations OED 76 PROFILE OF PROCOP SUBLOANS, 1981-86 Invest./Proi. Invest./Firm Subloan/Proj. Subloan/Firm (US$ 000) (USS 000) (US$ 000) (US$ 000) A. By Pollution Type Air 743.3 1,325.0 355.0 632.9 Cubatao 950.8 4,753.9 427.8 2,139.1 SPHA 582.4 737.8 303.7 384.7 Other SP 615.4 615.4 288.7 288.7 Water 1,705.5 1,938.0 753.6 856.3 Cubstao 2,635.8 4,612.6 1,178.8 2,062.9 SPMA 1,925.8 1,925.8 725.3 725.3 Other SP 1,052.6 1,052.6 519.7 519.7 Solid Waste 275.9 551.9 102.9 205.7 Cubatao 275.9 551.9 102.9 205.7 B. BX Location Cubatso 1,148.5 4,064.0 513.8 1,818.2 Air 950.8 4,753.9 427.8 2,139.1 Water 2,635.8 4,612.6 1,178.8 2,062.9 S. Waste 275.9 551.9 102.9 205.7 SPHA 765.6 935.8 361.2 441.4 Air 582.2 737.8 303.7 384.7 Water 1,925.8 1,925.8 725.3 725.3 Other S.Paulo 865.2 865.2 420.7 420.7 Air 615.4 615.4 288.7 288.7 Water 1,052.G 1,052.6 519.7 519.7 TOTAL 943.1 1,774.4 435.7 819.7 Sing. Proj. Firms 644.5 877.7 315.5 429.6 Mult. Proj. Firms 1,349.7 5,286.5 599.4 2,347.6 * Firms receiving loans for more than one type of pollution control and/or which have more than one plant location are counted as separate firms. Source: CETESB; calculations OED BRAZIL SECOND INDUSTRIAL POLLUTION CONTROL PROJECT State of Söo Paulo ond Greater So Paulo Metropolitan Area MINAS GERAIS STATE OF SÅO PAULO Regional Departments M - State boundaries GR. SAN JOS DO -- Regional Department boundaries GDRC S 5S O . R. PRE TO Grecirer São Paulo RIBEIRAO ARAÇATUBA PRETO PRESIDENTE PRUDENTE BAURU MINAS GERAlS CAMPINAS ..s./IARIO mARILIA D j1DE VALE DO PARABA -EATER O-ArSÅ0 PAUL1-0 SOROCABA J PaLä BRAZIL~ - San PERLPARANA LITORAL A7nzIIC CCEAN SAOPAU 50 00 50 200 250 wK t o1o00 ;50 CAMPINAS -IVALE DO 2 4 i PARA IBA 6 -3 _ NOR -r"AST 20 19 -- 24\. 12 - 25 SOROCADA NORTHWEST 25 5 lo1326 7 10 SAQ PAULO 2 CENTER 27 E A 28 29- :36 22 1632 SSO HEAST jSOUT wEST 35GREATER SAO PAULO METROPOLITAN AREA I- .- Sub-regions and Municipalities Schematic drawing-scale approximate --••- Region Department boundaries 7LTORL----.Sub-regionboundaries 717 LITORAL ---Municipal boundaries ..L...... ,.. Sio Paulo Center CENTER 8itcpevi NORTHEAST 2Suzoeso Så0 PauloCity 9J~ndirw IArujo SOUTHEAST NORTH lOOsasco 20Guarulhos 30Dd I Caieiras l lPiropora do Bom Jesus 21 Santeisabel 31 Maud 2 Francisco Morato 12 Sontana do Parnaiba EAST 32R,beiråo Pires 3 Franco do Rocha SOUTHWEST 22Biritibu Miriam 33Rio Grande da Serra 4Mairipora 13Cotia 23FerrGz de Vasconcelos 34Santo André NORTHWEST 14Embu 24Guararema 35Såo Bernardo do Compo - 5Barueri 15Embu Guaçu 251taquoquecetuba 36Sdo Caetanc do Sul 6Cajamar I6ltapecerica da Serra 26Mojidaes Cruzes 7 Caropicuiba Ta do Serra 27Poa