Report No. 10039

World Bank Approaches to the Environmentin Brazil: A Review of Selected Projects(In Five Volumes) Volume IlIl: The Carajas Iron Ore Project

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 otherwisebe disclosed without World Bank authorization.

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ABBRRVIATIONS AND AClONYM8

AMZA Amazonia Minaracoes S.A.(Amason Mining Ina.)

CETESS Companhia do Technologia do Sanoamento Ambiental(Environmental Sanitation Technology Company)

ChESF Companhia Hidro-eletrica do Sao Francisco(Bao Franoisco Hydroelectric Company)

Cl.A Canadian International Development Agency

CODEVAS Companhia de Demenvolvimento do Vale do Sao Francisco(Sao Francisco Valley Developaent Company)

COANAM Coneelho Nacional de Maio Ambiente(National Environmental Council)

CVRD Companhia Vale do Rio Doce(Rio Dooe Valley Company)

ELETROBRAS Contrais Eletricaa Breatleiras S.A.(Brazilian Central Electical Company Inc.)

ESMAP Energy Management Assiatance Program

ESW Economic and Sector WorK

FAO Food an:. Agricultural Organization, United Nations

FUNAI Fundacao Nacional do Indio(National Indian Foundation)

IBAMA Instituto Brasileiro do Meto Ambiento e Recursoa NaturaioRenovaveis(Brazilian Institute for the Environment and Renewable NatrualResources)

IDB Inter-American Development Bank

INCRA Instituto Nacional de Colonizacao a Reforma Agraria(National Colonization and Agrarian Reform Institute)

INPES Instituto Nacional de Pesquisas Economicas a Soctais, IPEA(National Economic and Social Research Institute, IPRA)

IPSA Inetituto de PFequisa Economica Aplicada(Institute of Applied Economic Research)

NGO Non-governmental Organization

OAS Organization of American States

OD Operational Directive, World Bank

OECD Organization for Economic Co-operation and Development

OED Operationa Evaluation Department, World Bank

aMs Operational Manual Statement, World Bank

PGC Frograma Grande Carajas(Greater Carajas Program)

PLANVASF Flano de Desenvolvimento do Vale do Sao Francisco(Development Plan for the Sao Francisco Valley)

POLONOROESTE Programa de Desenvolvimento Integrado do Noroeste do Brasil(Northwest Integrated Development Program)

POLOSINDICAL (Rural labor union confederation, lower-middle Sao Franciscovalley)

PROCOP Programa de Controle de Poluicao, CETESB(Pollution Control Program, CETESB)

RIMA Relatorio de Impacto sobre o Meio Ambiente(Environmental Impact Report)

SDR.PR Secretaria de Desenvolvimento Regional, Prosidencia daRepublics(Secretariat of Regional Development, Presidency of theRepublic)

SEAIN Secretaria de Asauntos Internacionais, SEPLAN(International Affairs Secretariat, SEPLAN)

SEMA Secretaria Especial do Meio Ambiente, Ministerio do Interior(Special Environmental Secretariat, Ministry of theInterior)

SEMAM Secretaria do Meio Ambiente, Presidencia da Republica(Environmental Secretariat, Presidency of the Republic)

SEPLAN Secretaria de Planejamento, Presidencia da Republica(Secretariat of Planning, Presidency of the Republic)

SISNAMA Sistema Nacional do Meio Ambiente(National Environmental System)

SPMA Sao Paulo Metropolitan Area

SUDECO Superintendencia de Desenvolvimento do Centro-Oaste(Superintendency for the Development of the Center-West)

UNDP United Nations Development Program

FOR OFFICIAL USE ONLY

ABBREVIATIMNS AND ACRONYMS

ALBRAS Aluminio Brasiloiro S.A.(Brazilian Aluminum Inc.)

ALUMAR Aluminio Maranhense S.A.(Maranhao Aluminum Inc.)

ALUNORTE Aluminio do Norte S.A.(Northern Aluminum Inc.)

A±ZA Amazonia Mineracoes S.A.(Amazon Mining Inc.)

BASA Banco da Amazonia S.A.(Amazon Bank Inc.)

BNDES Banco Nacional de Desenvolvimento Economico e Social(National Economic and Social Development Bank)

BNH Banco Nacional de Habila'.ao(National Housing Bank)

CDE Conselho de Desenvolvimento Economico(Economic Development Council)

CEDEPLAR Centro de Planejamento e Desenvolvimento Regional, UniversidadeFederal de Minas Gerais(Regional Planning and Development Center, Federal Universityof Minas Gerais)

CEPASP Centro de Educacao, Pesquisa e Assesaoria Sindical e Popular(Labor and Popular Education, Research and Assistance Center)

CETESB Companhia de Tecnologia de Saneamento Ambiental(Environmen_al Sanitation 2echnology Company)

CEUR Centro de Estudios Urbanos e Regionales(Urban and Regional Studies Center)

CIMA Comissao Interna de Meto Ambiente, CVRD(Internal Environmental Commission, CVRD)

CNPq Conselho Nacional de Desenvolvimento Uientifico e Tecnologico(National Council for Scientific and Technological Development)

COLONE Companhia de Colonizacao do Nordeste(Northeast Colonization Company)

CONSAG Construtora Andrade Gutierrez(Andrade Gutierrez Construction Company)

COSIPA Companhia Siderurgica Paulista(Sao Paulo Steel Company)

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

COSIPAR Companhia Siderurgica do Para S.A.(Para Steel Company INc.)

CSN Companlhia Siderurgica Nacional(National Steel Company)

CVRD Companhia Vale do Rio Doce(Rio Doce Valley Company)

DEPER Departamento de Edificios e Projetos, CVRD(Building and Projects Department, CVRD)

DNER Depa..tamento Nacional de Estadas de Rodagem(National Highway Department)

DNPM Departamento Nacional de Producao Mineral(National Department of Mineral Production)

ECSC European Coal and Steel Community

ELETRONORTE Centrais Eletricas do Norte(North Electric Company)

ESMAP Energy Management Assi@tance Program

EVS Equipes volantes de saude(Mobile health teams)

FINAME Agencia Especial de Financiamento Industrial(Agency for Industrial Financing)

FIPE Fundacao Instituto de Pesquisas Economicas, Universidade deSao Paulo(Economic Research Institute Foundation, University of SaoPaulo

FSESP Fundacao Servicos de Saude Publica(Public Health Services Foundation)

FUNAI Fundacao Nacional do Indio(National Indian Foundation)

GEAMAM Grupo de Estudos e Assessoramento de Meio Ambiente, CVRD(Environmental Studies and Advisory Group, CVRD)

GETAT Grupo Executivo de Terras Araguaia-Tocantins(Executive Group of Land Araguaia-Tocantins)

IBAMA Instituto Brasileiro do Meio Ambiente e Recursos NaturaisRenovaveis(Brazilian Institute of the Enviroiment and Renewable NaturalResources)

IBDF Instituto Brasileiro de Desenvolvimento Florestal(Brazilian Institute for Forestry Development)

IBGE Instituto Brasileiro de Geografia e Estatistica(Brazilian Institute of Geography and Statistics)

IDB Inter-American Development Bank

IDCJ International Development Oenter of Japan

IDESP Instituto de Desenvolvimento Economico-Social do Para(Para Socio-economic Development Institute)

INCRA Instituto Nacional de Colonizacao e Reforma Agraria(National Colonization and Agrarian Reform Institute)

INPA Instituto National de Pesquisas da Amazonia(National Amazon Research Institute)

IPEA Instituto de Pesquisa Economica Aplicada(Institute of Applied Economic Research)

IPHAN Instituto do Patrimonio Historico e Artistico Nacional(National Historic and Artistic Patrimony Institute)

IPLAN Instituto de Planejamento, IPEA(Planning Institute, IPEA)

ITERPA Instituto de Terras do Para(Para Land Institute)

IWRB International Waterfowl Research Bureau

JICA Japanese International Cooperation Agency

KfW Kreditanstalt fur Wiederaufbau

MBR Mineracoes Brasileiras Reunidas S.A.(Reunited Brazilian Mining Company Inc.)

MEFP -Ministerio de Economia, Financas e Planejamento(Ministry of Economy, Finance and Planning)

MIRhD Ninisterio de Reforma Agraria(Ministry of ARrarian Reform)

MRDP Maranhao Rural Development Project

NAEA Nucleo de Altos Estudos da Amazonia, Universidade Federal doPara(Amazon Studies Nucleus, Federal University of Para)

NGO Non-governmental organization

NRDP Northeast P.ural Development Program

OAS Organization of American States

OED Operations Evaluation Department, World Bank

PCR Project Completion Report

PGC Programa Grande Carajas(Greater Carajas Program)

PGCA Programa Grande Carajas Agricola(Greater Carajas Agricultural Program)'

PIFI Plano Integrado de Florestamento Industrial(Integrated Industrial Forestry Plan)

PIN Programa de Integracao Nacional(National Integration Program)

PND Plano Naciotal de Desenvolvimento(National Development Plan)

PNRA Programa Nacional de Reforma Agraria(National Agrarian Reform Plan)

POLAMAZONIA Programa de Polos Agricolas e Minerais da Amazonia(Amazon Agricultural and Mineral Poles Program)

POLONORDESTE Programa de Desenvolvimento de Areas Integradas do Nor&este(Northeast Integrated Area Development Program)

POLONOROESTE Programa de Desenvolvimento Integrado do Noroaste do Brazil(Uorthwest Integrated Development Program)

PPAR Project Performance Audit Report

PRODIAT Pro3rama de Desenvolvimento da Bacia Araguaia-Tocantins(Araguaia-Tocantins Basin Development Program)

PROTERRA Programa de Redistribuicao de Terras e Estimulo a Agroindustria(Land Redistribution and Agro-industrial Incentive Program)

SAR Staff Appraisal Report

SDR-PR Secretaria de Desenvolvimento Regional, Presidencia daRepublica(Regional Development Secretariat, Presidency of the Republic)

SEMA Secretaria Especial do Meio Ambiente, Ninisterio do Interior(Special Environmental Secretariat, Ministry of the Interior)

SEPLAN Secretaria de Planejamento e Coordenacao, Presidencia daRepublica(Secretariat of Planning and Coordination, Presidency of theRepublic)

SESPA Secretaria de Saude do Estddo do Para(Para State Health Secretariat)

SIMARA Siderurgica Maranhanse S.A.(Maranhao Steel Company Inc.)

SPI Servico de Protecao do Indio(Indian Protection Service)

SPVEA Superintendencia de Valorizacao da Amazonia(Superintendency of the Valorization of Amazonia)

SUCAM Superintendencia para Campanhas de Saude Publica(Superintendency for Public Health Campaigns)

SUCAR Superintendencia de Implementacao do Carajas, CVRD(Superintendency for the Implementation of Carajas, CVRD)

SUDAM Superintendencia de Desenvolvimento da Amazonia(Superintendency for the Development of Amazonia)

SUDENE Superintendencia de Desenvolvimento do Nordeste(Superintendency for the Development of the Northeast)

SUFEC Superintendencia da Estrada de Ferro Carajas, CVRD(Superintendency for the Carajas Railway, CVRD)

SUMA. Superintendencia de Meio Ambiente e Produtos Forestais, CVRD(Environmental and Forest Products Superintendency, CVRD)

SUNEI Superintendencia do Meio Ambiente, CVRD(Environmental Superintendency, CVRD)

SUMIC Superintendencia das Minas de Carajas, CVRD(Superintendency for the Mines at Carajas, CVRD)

SUPOC Superintendencia do Porto de Ponta da Madeira, CVRD(Superintendency for the Port at Ponta da Madeira, CVRD)

tpy tons per year

UNDP United Nations Development Program

USIMAR Usina Siderurgica do Maranhao(Maranhao Steel Plant)

USIMINAS Usina Siderurgica de Minas Gerais(Minas Gerais Steel Plant)

tRL D BANK APPROACHES TO THE ENVIRONMENT IN BRAZIL:

A REVIEW OF SELECTED PROJECTS

THE CARAJAS IRON aRE PROJECT

TABLE OF CONTENTS

Preface .. .........................i

Sunmary and Conclusione ...... iv

I* INTRODUCTION I

II. PROJECT BACKGROUND 3A. The Macroeconomic Context 3B. The Sectoral Context .................................. 4C. The Bank's Lending Strategy 7

III. THE PROJECT REGION ...... ............ ....... ,......e..... 9A. The Project's Expected Regional Impact 9B. The Project's Area of Influence ................... 13C. Ecological Subregions and General Characteristics ..... 16

1. The Carajas Highlands and the Araguaia-Tocantins Depression .................. ....... .... . 17

2. The Maranhao Sedimentary Plateau ....................... 193. The Maranhao Lowlands 194. General Ecological Features 19

D. Demographic Characteristics ........... *22

E. Socio-economic Characteristics 231. Sao Luis and its Immediate Hinterland ......... 232. The Pindare and Mearim River Valleys ........ 243. The Countryside between Santa Luzia and Maraba 244. The City of Maraba and Surrounding Area ...... 245. The Carajas and Serra Pelada Mining Areas .............. 25

F. Conclusion 25

IV. PREVIOUS OR PARALLEL REGIONAL DEVELOPMENT INTERVENTIONS .......... 27A. The Belem-Brasilia Highway 27B. SUDAM Fiscal Incentives ....... ...* ........... * 28C. The Transamazon Highway and Official Colonization Efforts .... 30D. Other Federal and State Road Building ........................ 32E. The Alto Turi Land Settlement Project ........................ 33F. Private Colonization Schemes ......................... 350. The Tucurui Hydropower Project 36H. Other Large hining and Industrial Projects ...... 37I. Gold Prospecting ......... @**v*v**@***v@e**...................38J. The Grande Carajas Program 40K. GETAT Land Titling and Colonization 43L. The Maranhao Rural Development Projects 45

TabLa of gontentg (Cont'd)

M. The National Agrarian Reform Plan ............................ 49N. The North-South Railway .................. .. ..... ...... ... .. .. 500O Conclusion . ... * * .* ... ................... . 51

V. THE CARAJAS IRON ORE PROJECT ......................*...*.*.*.*.*...* .......... . 52A. Origins, Preparaion and Early Project Implementation ....... 52

lo Project Origine ....... 522. CVRD Preparation and Initial Bank Involvement .......... 533. Relation to Grande Carajas Program ..................... 564. Early Project Development ............................. 58

B. Environmental, Amerindian and Other Issues inProject Design and Appraisal .............................. 591. Preparation and Preappraisal ...................... 602. Appraisal and Post-appraisal 633. Negotiations and Board Presentation ... 66

C. Project Objectives and Description ... 9 ............ e... 681. Mine! Railway and Port Components 682. Urban Development and Other Infrastructure Components to 693. Enviroimental Management and Protection Component .0.... 704. Amerindian Special Project ............................. 735. Project Costs and Financing Arrangements 75

De Conclusion . 76

VI. PROJECT IMPLEMENTATION AND GENERAL RESULTS ....................... 80A. Project Implementation 80

1. Effectiveness ..... so,.....,... 802. Construction and Project Management ... 813. Initial Operations ......... ...... ..t. 834. Project Costs and Financing ............. 84

B. Project Results so..**....861. Production, Sales and Rates of Return 862. Direct and Indirect Employment Impacts ... 883. Transportation Services and Benefits ................... 894. Industrialization and Urban Growth ..................... 91

C. Urban Development Component .*s**................ 921. Carajas and Parauapebas/Rio Verde 922. Along the Railroad 973. Sao Luis 98

D. Conclusion ............. 101

VII. EVALUATION OF ENVIRONMENTAL AND AMERINDIAN COMPONENTS ............ 104A. Protection of the Physical Environment 104

1. Organizational Arrangements for EnvironmentalProtection 104

2. Environmental Control and Preservationat the Mine Site 108

3. Environmental Control and Protection at the Port 1134. Environmental Protection along the Carajas Railway ..... 1145. Ecological Research .... 1166. Environmental Zoning and Related Measures *too 1187. Overall Assessment of CVRD's Environmental Efforts ..... 119

Tabl of Contents (Cont'd)

8* The Bank's Role ( 121B. Protection of Amerindian Communities ......................... 123

lo Pre-project Amerindian Situation 1242. Design and Implementation of the Amerindian

Special Project .............. * 12530 General Projeet Achievements ........................... 1274. C%tetanding Issues .............. * *... * 129S. The Bank's Role ...............*... .. 131

Co Conclusion .......... e *. e **** *********e , .. * 1321. Environmental Protection 1322. Amerindian Protection .e . .. 134

VIII. PHYSICAL ENVIRONF2NTAL IMPACTS .......... .137

A. Deforestation ..... ....... 4,... * 1371. General Considerations 1372. The Extent of Deforestation in Amazonia 1393. Daforestation in the Carajas Region .................... 1404. Direct Project Impacts 1425. Indirect Project Impacts ............................... 143

B . Climate Change ..... * 4 4*44444944* ..a. 145

1. Local or Microclimatic Impacts .... 1462. Regional or Mesoclimatic Impacts 1473. Global Impacts ............................. .. 147

C5 Fauna *......................... 148D. Soils and Surface Waters 149E. Pig Iron Swelting ... 151

1. Pig Iron and Charcoal Production ..... ....... 1512. Sustained worest Management: Requirements *.. . .. 1553. Sustained Forest :lanagement: Possibilities ............. 1584. Reforestation ... .... 44...4444444 ...* 1605. Alternative Energy Sources and Plant Locations ......... 162

F. Conclusion ....4444444494444 * 4444. 99..44 * s... 164

IX. HUMAN ENVIRONMENTAL IMPACTS ........................ 167A. Population, Migration and Employment ..... ............. 167B. Rural Development .9..... ........ ................... 169

1. Land Speculation and Concentration .......... 1692. Land Conflicts and Rural Violence............... 1733. Rural Occupational Structure .................. 1744. Rural Land UseOs *** 4 4 4 4. .9.4. . .4...4.49444444444. 177

5. Food Security and Public Health Conditions 4449494944.... 1786. Socio-political Organization in the Countryside . 180

C. Urban Development as ... 4....44.""4...44.* ........ 9*. .... 1811. Infrastructure and Basic Services see1................a 1812. Employment Generation es*..... * ....... 1813. Project-related Urbanization ........................... 1824. Infra5tructural Deficiencies and Disparities ........... 1835. Urban Poverty and Public Health ............ .......... o 1856. Urban Displacement and Resettlement .... of..... 186

D. Conclusion . .......... * 188

Table of Contents (Cont'd)

X. THE WORLD BANK AND THE ENVIRONMENT IN THE CARAJAS CORRIDOR ......... 191A. Bank and Borrower Approach to Environmental Issues ........... 191

1. Evolving Perceptions of Project Environmental Impacts .. 1942. The Need for a Regional Approach ........ ............... 199

B. Project Adequacy and Effectiv6nese in Dealingwith Environmental Problems ............................. ,. 206

C. Specific Follow-up Measuras for the Carajas Corridor ........ 2111. Regional Development and Environmental Planning ........ 2122. Regional Development and Environmental

Protection Funds ............................. . 2143. Sustainable Rural Development .......................... 2164. Urban Infrastructure and Services ...................... 2175. Environmental Management, Protection and Research ...... 2186. Amerindian Protection ................................ . 2197. Public Health and Environmental Sanitation ............. 2198. Railway Transport ..................................... . 2209. Pig Iron and Charcoal Production ...................... 220

D. Sumary of Principal Lessons tearned and Implicationsfor Bank Procedures ................. ............... 2211. Lessona Learned ........ ........................ 2212. Implications for Bank Ptocedures ....................... 224

ANNEXES

1. Agricultural, Agroindustrial and Livestock Projects Approvedby the Grande Carajas Program through March 1989

II. Pig Iron Smelters and Ferrous Alloy Plants Projected forEarly 1990's along Carajas Railway Corridor

Map: Carajas Iron Ore Project

D AM~~ TORAC§I THE HNVIRONMET -MR A -L AREVIEW OF-SELECTED-PROECTS

THE guRAJS IRON OR PRECT

PREFACE

1. This is a report on the second of four case studies undertaken byOED and the Brazilian federal Secretariat of Planning (SEPLAN) as part of alarger stutdy entitled "The World Bank and the Environment in Brazils A Reviewof Selected Projects." From the perspective of Q"D, the objective of the largerstudy is to determine how -- and how well -- t'l World Bank has perceived anddealt with environmental issues and problems i1 he context of several majorinfrastructure and regional development projects in one particular country,Brazil was aelected for the study both because it is one of the Bank's principalborrowers and because Bank operations have encountered a wide range of ecologicalconditions and environmental issues in the country. SEPLAN, which as of March1990 became part of the Ministry of Econamic, Finance and Planning (NEFP),focused on h',w the federal government and its agencies have addressedenvironmental problems in the course of project preparation and implementation.

2. In addition to the Carajas Iron Ore Project, which involves theeastern part of the Brazilian Amazon region, the OED/SEPLAN exercise examinesBank-assisted operations in the western part of Amazonia, in the middle and lowerSao Francisco River valley in the semi-arid Northeast and in the highly urbanizedand industrialized state of Sao Paulo. In these distinct geographic contexts,more concretely, the study is concerned with the principal physical and humanenvironmental impacts of Bank-financed investments. Where applicable, moreover,it also attempts to assees the adequacy, effectiveness and sustainability ofspecific project components (or parallel programs) designed to protect thenatural environment and/or vulnerable social groups, including both Amerindiancommunities sand rural and urban populations that have been forced to relocatedue to such interventions as dam and port construction.

3. The objective of the present case study is to determine how -- andhow effectively -- the Bank, the Borrower (the Rio Doce Valley Company - CVRD)and the Guarantor (the Brazilian Government) anticipated and dealt with theprincipal environmental consequences of the major infrastructural (ie. rail andport facilities) and productive (mining) activities whose installation was co-financed by the Bank, together with other international and domestic lenders.While much of the case study will be concerned with the physical and humanenvironmental impacts directly and indirectly associated with this undertakingand with the adequacy and effectiveness of the project's environmental andAmerindian protection components, its implementation experience and more generalresults will also be briefly surveyed, as will previous and parallel public andprivate sector development activities affecting Eastern Amazonia and the "Carajascorridor" in particular and the basic characteristics of the project's area ofinfluence at the time it was being prepared and executed. A review of theexperience under the Carajas operation is of particular interest because of thevery different ways in which its potential environmental impacts were treatedin the areas under the Borrower's legal jurisdiction and in those outside itsimmediate control.

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4. More generally, the assa study attempta to explore the environmentalimplications for future Bank operations of carrying out major infrastructure andproductive sector investments in territorially large, tropical (but ecologicallyheterogeneous) and socio-economically dynamic frontier regions such as EasternAmazonia. The case study on the POLONOROESTE Program in the western part of theAmazon region will have a similar focus. Despite many common elements, theCarajas Project, however, is distinct from POLONOROESTE because it was undertakenby the Bank essentially as a single sector operation and primarily in pursuitof macroeconomic and sectoral objectives -- albeit with admitted regionaldevelopmentt benefits -- while the latter was approached multi-sectorally in orderto achieve a combination of regional and rural development and environmentalprotection goals. These and other significant differences between the two casesand the way in which they were approached by the Baeik are specifically exploredin the overview report for the larger OED study.

5. The present report is based on a detailed review of Bank projectfiles, the Staff Appraisal and President's Reports, the Loan and GuaranteeAgreements, Project Completion Report (and PCR background papers) prepared byCVRD and the Bank, minutes of the Board meeting at which the loan for the projectwas approved and other relevant documentation. It is also based on interviewswith Bank staff involved in project appraisal and supervision and a three weekfield mission in March-April 1989 to CVRD headquarters, selected federal andstate government agencies in Brasilia, Belem (Para) and Sao Luis (Maranhao),respectively, and to the Carajas corridor during which Borrower staff, federal,state and municipal officials, environmental agencies, research institutes, localNGOs and affected communities were contacted. With the essential logisticalsupport of CyRD, moreover, the immediate Carajas corridor was surveyed by acombination of helicopter, rail and road transportation and project-supportedfacilities at the Carajas mine site and the Sao Luis port sites were visited,as were the cities and towns of Parauapebas/Rio Verde, Curionopolis, Maraba,Acailandia, Imperatriz, Buriticupu, Santa Luzia and Santa Ines.

6. While all field visita made in connection with this and the othercase studies were carried out jointly, due to the differences in focus mentionedabove, SEPLAN and OED decided from the outset to prepare separate reports. Duringthe Carajas case study, more specifically, SEPLAN was represented by anenvironmental economist from the Institute of Economic Research of the Instituteof Social and Economic Planning (IPEA/INPES) and a hydrological engineer and ananthropologist from the Environmental Analysis Unit of the Secretariat ofEconomic and Social Planning (SEPES/CAA) under the overall guidance of theSecretariat -- now Department -- of International Affairs (DEAIN). OED, in turn,was represented by one regular staff member and specialized consultants,possessing considerable prior familiarity with the project region, in the areasof physical and human environmental impact evaluation, respectively.Representatives of CVRD's Environmental Superintendency (SUMEI) accompanied themission during its entire duration. The present document has also benefitted fromspecific evaluations of the project's environmental and Amerindian protectioncomponents prepared in connection with the PCR exercise by Bank staff orconsultants and which were also based on visits to the project area during thefirst quarter of 1989. Comments from CVRD, FUNAI, the Ministry of Infrastructure

iill

and DEAIN and the Department of Planning and Evaluation (DNPA) of MEFP on anearlier draft have been incorporated in the present version of this report.

7. The report which follows is divided into ten chapters having thefollowing organization. After a brief introduction (Chapter I), Chapter IIreviews the macroeconomic and sectoral context in which the Carajas Project wasinitially prepared by CVRD and appraised by the Bank. This is followed, inChapter III, by a discussion of the project's immediate and lar6or areas ofinfluence, including their principal ecological, demographic and socio-economiccharacteristics and existing development tendencies at the time the operationwas approved and, in Chapter IV, by a brief survey of previous or parallel publicsector or public sector-induced private sector interventions in the region andtheir principal environmental effects. Both are important in order to understandthe general regional development and policy context in which elaboration andimplementation of the Carajas Project took place. This, in turn, is followed,in Chapter V, by a discussion of the iron ore project itself, including itsorigins and early preparation and execution experience, the major environmentaland other issues which were raised during the Bank's appraisal, together witha brief description of project objectives and components, emphasizing itsenvironmental and Amerindian protection measures.

S. Project results and impacts are examined in four chapters. ChapterVI considers the implementation experience and general results of the operationthrough 1988, including its impact on employment and transportation services inthe region and its role in the incipient industrialization of the Carajas-SaoLuis rail corridor. Special attention is given in this chapter to the project'surban development component. Chapter VII assesses the project's envirormentaland Amerindian components. Finally, the project's principal direct and indirectimpacts on the physical and human environments are surveyed in Chapters VIIIand IX. The former includes project impacts on water resources, soils,vegetation, wildlife and climate, with an emphasis on deforestation and theassociated loss of biological diversity, while the latter focuses on its effectson migration, rural development, urbanization and public health, among otheraspects. In both cases, the potential environmental consequences of industrialactivities, particularly pig iron smelting, made possible -- although notdirectly financed -- by the iron ore operation are considered. It should bestressed from the outset that, in the absence of more detailed research and dueto the virtual impossibility of separating p: j2ect impacts from those of otherpublic and private sector interventions in itiv area of influence, these combinedimpacts will be analyzed jointly. Wherever possible, however, the specificenvironmental consequsnces of the iron ore operation will be identified.

9. The report finishes (Chapter X) by summarizing the principalconclusions and lessons learned from the Carajas experience to date in terms ofits impacts on the natural and human environments. This survey pulls togetherthe evidence with regard to how -- and how well -- the Bank anticipated theseeffects and presents general recommendations as to how the Bank should approachoperations with similar characteristics in the future from an environmentalstandpoint. Specific suggestions as to how the Bank might follow up on the ironore project in the larger Carajas region are also made.

iv

WORLD BANM PPROACHESO THE ENVIRONMENT IN BRZIL: A REVIEW 01? SELECTED PROJECTS

THE W&LAS IRONORE PROJECT

SU9MNRY AND CONCLUSIONS

1. The Carajas Project involved major Bank-supported investments intransport -- especially ra:Ll and port -- infrastructure and mining facilities,together with smaller components for urban development and environmental andAmerindian protection, along an 890 kilometer corridor in the eastern part ofthe Brazilian Amazon region. This corridor, which was essentially created by theiron ore operation, connects one of the world's largest and richest mineralreserves located in the Carajas highlands in southeastern Para to a port terminalnear the city of Sao Luis in the north-central part of the neighboring state ofMaranhao. Much of this corridor was originally covered by dense tropical forest,although the easternmost part of the area near the port terminal containsextensive coastal marshlands and other parts of the region crossed by the Carajasrailway consist of drier savannah grasslands. By the time the Bank loan for theiron ore operation was approved, moreover, much of the area where the projectwas implemented was undergoing or had already undergone the processes of rapidrural and urbar settlement, productive occupation and environmental degradationtypical of contemporary frontier region expansion in central and northern Brazil.These processes involved a host of small and large-scale farming, ranching,extractive and other interests, in many cases strongly stimulated by publicsector infrastructure investments -- especially road building -- attempts topromote agricultural colonization and/or official fiscal, credit and otherincentives.

2. Although this was not its primary objective, the project -- and itsrail and road infrastructure in particular -- contributed directly to thewestward extension and acceleration of frontier occupation in Eastern Amazonia,while at the same time successfully installing mining operations and permittingthe export of large quantitias of high quality iron ore and other minerals fromthe deposits in the Carajas highlands. Within the confines of the areas legallycontrolled by the Borrower and Executor, the Rio Doce Valley Company (or CVRD),measures taken to protect the natural environment during project constructionand physical operation were innovative, have, to date, been largely effectiveand, thus, provide a useful model for application in similar projects elsewhere.Attempts to protect tribal populations in the larger area of influence of theiron ore operation, in turn, while experiencing significant implementationdifficulties, have also brought reasonably positive results thus far.

3. Outside the areas under CVRD's control, however, the picture isdistinctly different. The most visible and dramatic manifestation of this isthe extensive deforestation that has occurred along the immediate rail and roadcorridors "opened up" by the iron ore project. Even in less accessible areas onthe periphery of the Carajas mining concession or at somewhat greater distancesfrom the rail anid road corridors, hovever, the rapidly growing "patchwork quilt"of cleared spaces where small farmers, large ranchers, commercial loggers and

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prospectors have attemptes to establish themselves provides a sharp contrast withthe extensive areas proserved in native forest inside the territory controlledby CVRD. Accompanying this deforestation, on the physical environmental side,moreover, are phenomena such as erosion and the rapid loss of soil nutrients,the proliferation of far less productive (from both an ecological and an agro-livestock standpoint) second growth vegetation, water course contamination andthe loss of biological dive&isity, while localized and even broader impacts onclimate may also be occurring in the area. On the human environmental side, inturn, in addition to increasing pressure on local Amerindian reserves, the ironore project, together with other influences acting simultaneously on the region,has contributed directly and/or indirectly to increased migration, rural andurban settlement and land occupation and concentration, accompanied by landconflict, rural violence, a rapidly growing and largely unsatisfied demand forurban infrastructure and services and increasing public health problems,especially malaria, among other difficulties, in its area of influence.

4. Further aggravating the largely indirect adverse environmentalimpacts of the iron ore operation to date is the project-related mineral-basedindustrialization of the Carajas corridor. This process has recently initiatedwith the start-up of charcoal-fueled pig iron smelters in two of the principalurban centers (Maraba and Acailandia) located along the railway corridor, whilea number of additional such industries have been approved for installation inthe region over the next decade. The existing and proposed smelters, which areor will be totally dependent on Carajas ore and rail services, also rely on orplan to utilize fuelwood drawn largely from the native forest. In the absenceof adequate regulation and control, these industries, accordingly, represent avery significant potential threat to the physical and ecological integrity ofthe remaining areas of primary forest in much of Eastern Amazonia, as well asto its Amerindian and other inhabitants. Increasing pig iron-related consumptionof the primary forest in the vicinity of the Carajas corridor over the comingdecades, moreover, is ultimately likely both to undermine the long-term economicsustainability of these industries and to effectively preclude other, lesspredatory, forms of ru:al land use in the region.

5. Given this situat:Lon, the principal question raised by the Carajasoperation from an environmental standpoint is how well its direct and,especially, its indirect -- including potential long-term -- impacts on thephysical and human environments were anticipated and dealt with in projectpreparationt appraisal and implementation by the Borrower (CVRD), the Guarantor(the Brazilian Government) and the Bank? Other than for the direct physicalenvironmental impacts of project construction and routine operation of miningand transport facilities in the areas under CVRD's control and, to a lesserextent, the protection of Amerindian areas during project implementation, theessential answer to this question is not very well. The present report willexplore why this was so. In the process, it will also attempt to suggest whatmight be done in the future lby CVRD and the Brazilian Government -- with orwithout the Bank's assistance -- to more adequately address the environmentalproblems experienced in the Carajas corridor over the past fifteen years, as wellas those likely to be encountered in the area over the next several decades. Thereport will also attempt to indicate how the Bank might better go aboutidentifying, aesessing and mitigating the likely physical and human environmentalimpacts of large-scale (especially transport) infrastructure and/or productive

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projects in the future. The following paragraphs will summarize the principalfindings and recommendations of the report.

Protect Macroeconomic. Sectoral and Bank Strategv Context

6. At the time the Bank loan for the Carajas Project was approved inAugust 1982, Brazil was in the midst of a severe recession following an extendedperiod of economic growth dating from the mid-1960's. Starting in 1979 with thesecond oil price shock, rising foreign interest rates and the emerging downturnof the world economy, Brazil suffered increasing balance of payments problems,a rapid decline in GDP growth and sharply rising inflation. As part of theGovernment's strategy to step up the inflow of foreign exchange, policiesinitiated in the mid-1970's to substitute imported petroleum and promote primaryand manufactured exports were vtinforced and external borrowing was increased.While most new foreign lending came from private sources, the World Bank alsomore than doubled its loan commitments to Brazil in Fiscal Year (FY) 1983 overthe immediately preceding years, with the Carajas Project alone accounting formore than 20% of its new commitments to the country during FY83. At the time itwas approved, moreover, the loan for the iron ore operation was the singlelargest Bank loan to Brazil and one of the largest made by the institutionanywhere in the world.

7. Iron ore was responsible for over a quarter of Brazil's mineraloutput and roughly 90% of its mineral exports, while the mining sector as awhole was responsible for more than 10% of the country's merchandise exports,in 1980. Traditionally, the bulk of Brazilian iron ore had been extracted fromdeposits in the southeastern state of Minas Gerais and exported by CVRD throughthe port of Tubarao in neighboring Espirito Santo. In July 1967, however, aBrazilian subsidiary of the U.S. Steel Company discovered new reserves, laterdimensioned at nearly 18 billion tons of high quality ore, together with otherimportant mineral deposits, in the Carajas highlands. During the 1970's and early1980's, furthermore, as part of the above mentioned export drive, the BrazilianGovernment actively promoted expansion of the mining sector, including bothstate-owned companies such as CVRD and domestic and foreign private enterprises,using a combination of fiscal, credit and other incentives.

8. Much of this activity was focused on exploiting the newly discoveredmineral reserves in Eastern Amazonia, including manganese, copper, gold, nickel,tin and bauxite, as well as iron ore. As part of this effort, high priority forexternal financing was eventually (October 1980) given to the Carajas Projectby the federal administration that took office in March 1979 and specificincentives were established for the larger Carajas region under the Grande (orGreater) Carajas Program (PGC). This program, which was formally created inNovember 1980, covered roughly 900,000 square kilometers -- or an area largerthan that of France and West Germany combined -- and, having the iron ore projectas its centerpiece, included special incentives to stimulate large-scale privatemining, industrial and agricultural investments in the region. CVRD's iron oreproject, thus9 was part of a broader Government effort to promote the productiveoccupation of Eastern Amazonia.

9. Bank support for the Carajas Project, in turn, contributed directlyto two of the principal objectives of its lending strategy for Brazil at the

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time. On the one hand, the operation was expected to help ease the foreignexchange constraint on Brazilian development by supporting a project that wouldsignificantly increase domestic export capacity. On the other hand, it wasexpected to provide part of the medium and long-term capital flows required bythe country in order to sustain a satisfactory level of economic growth andachieve national employment generation and regional development objectives. Arelated concern was to mobilize additional financial support in the short runfrom other international lenders, including the Japanese and German Governmentsand the European Coal and Steel Community, for installation of the iron oreproject. The Carajas operation, in short, was also a key element in the Bank'slending strategy for Brazil in the early 1980's.

Expected ReRional ImDact

10. While the Bank's appraisal documents describe and analyze themacroeconomic and sectoral context of the Carajas Project, the same did not occurwith its human and physical environmental -- or regional -- context. Nor did theBank undertake any kind of systematic study of the area of influence of theCarajas investments before committing itself to funding the operation, as it hadpreviously done in connection with the proposed improvements to the BR-364(Cuiaba-Porto Velho) highway in Mato Grosso and Rondonia in the western part ofthe Amazon region. While the Staff Appraisal Report (SAR) does contain a shortsection on the project's expected regional impact, it does not go into detailwith respect to the ecological, demographic and socio-economic characteristicsof the operation's area of influence, nor does it consider the largerenvironmental implications of proposed project investments.

11. The SAR does, however, highlight the role of the iron ore operationin on-going Government efforts to open up Eastern Amazonia for the productiveexploitation of its natural resources, affirming that the Bank-supported projectwould "contribute substantially" to regional development through the installationof a major east-west railroad linking the "remote Serra dos Carajas area withthe northern sea coast near Sao Luis and through development of a bulk terminalcapable of handling ships up to (350,000] dead weight tons." The iron oreoperation, in short, was expected to "round out" the basic infrastructure thatwas considered to be an essential precondition for future regional development.Over the long run, moreover, the project was also expected to promote thedevelopment of the principal towns in the region into significant commercial andindustrial centers. Finally, the SAR acknowledged that the operation would drawlarge numbers of people to the area, stimulate the growth of supporting servicesand facilities and accelerate the social and economic transformation of EasternAmazonia more generally.

12. In synthesis, the SAR portrayed the Carajas Project as likely to playa "key role in spurring the economic growth of the region," as well as inbeginning "the process of planning and controlling the growth of a territory bothvast in economic potential and unique in environmental features." Given theseaffirmations, however, it is curious that virtually no attention appears to havebeen given during project preparation and appraisal to the ecological and othercharacteristics of, and existing development tendencies in, the project's areaof influence. It is likewise curious that the potential environmental costs ofthe broader regional development tendencies expected to be induced or reinforced

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by the operation were not given greater consideration, nor were more rigorousmeasures proposed to ensure that the process of "planning and controlling" futureregional economic growth would, indeed, occur.

The Project's Area of Influences Definition and Basic Characteristics

13. It was symptomatic of these oversights that even the project's areaof influence was not clearly identified at the time of appraisal and, in fact,was only formally and somewhat arbitrarily defined in relation to the parallelAmerindian Special Project. According to the Loan Agreement, for purposes ofAmerindian protection the "Carajas Project Area" referred to the area within aradius of about 100 kilometers from the iron ore mining site and railway. Thisarea was later expanded by roughly another 50 kilometers on either side of therailway and outward from the mine site. This "Project Area," however, wasutilized only to locate the tribal communities expected to be affected by theoperation and not for broader purposes of environmental planning, naturalresource management or the identification of other vulnerable social groups. Theproject, moreover, was fundamentally inconsistent in this regard since, whilethe SAR clearly suggests that Amerindian populations situated in its area ofinfluence might be harmed by the "accelerated economic development" expected totake place as a result of the operation, the Bank's appraisal also implicitlyassumes that neither the physical environment, nor other local populations wouldbe so affected.

14. Determination of the actual area of influence of the Carajas Project,in any event, is not a simple matter, especially considering that this area isdynamic and will continue to grow as new investments involving the industrialprocessing of Carajas iron ore and/or the increasing utilization or physicalexpansion of project-financed rail and port facilities occur over time. TheCarajas railroad, in fact, has already been extended southward for roughly 100kilometers from close to Acailandia in western Maranhao to Imperatriz on theBelem-Brasilia highway by means of the recently (April 1989) inaugurated initialsegment of the "North-South" railway. The latter is expected some day to connectthe Carajas railroad with existing rail and port systems in central andsoutheastern Brazil. Similarly, a proposed extension of the Carajas railroad fromSanta Luzia in north-central Maranhao to Paragominas in northeastern Para inorder to transport bauxite to a large aluminum plant at Sao Luis may also beundertaken sometime during the next decade. For purposes of the present teport,however, the project's area of influence is largely limited to the municipalitiestraversed by or located in close proximity to the Carajas railway, recognizingthat, in all likelihood, this underestimates its actual area of influence. Thiscorridor, nonetheless, is the area where the project's environmental impactsare likely to have been strongest to date.

15. Even within this more limited area, however, a number of distinctsubregions exist. A cursory examination of the principal ecologicalcharacteristics of the Carajas corridor reveals, for example, that it crosses,passes near or runs parallel to various important Amazonian and pre-Amazonianrivers and, thus, potentially affects a number of different watersheds. Basedon differences in climate, topography and geomorphology, furthermore, the Carajascorridor can be divided into at least three major subregions from an ecologicalstandpoint: (i) the area between (and including) the Serra dos Carajas and the

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highlands near Acailandia, 'which also contains the much less humid Araguaia-Tocantins (river valley) depressiong (ii) the Maranhao sedimentary plateaubetween Santa Ines and Acailandia5 and (iii) the Maranhao lowlands and coastalmarshlands between Sao Luis and Santa Ines. Subregional differences in geology,topography and climate, moreover, also result in significant differences in soiland vegetation types, and, thus, in agricultural potential, as well as inassociated land and water fauna. Considerable biological diversity likewisecharacterizes the region, especially in the, until recently, largely undisturbedtropical forest areas in and around the Carajes highlands and in the coastalmangrove. near Sao Luis.

16. At the time the iron ore project was approved, however, much of thenatural environment in the vicinity of the Carajas railway, particularly in theeastern and central parts of the corridor, had already been altered as a resultof advancing human settlement. As a reflection of this, population in theimmediate Carajas corridor grew at a rate of nearly 6X a year during the 1970's,considerably exceeding overall demographic growth rates for the states of Paraand Maranhao, as well as for Brazil as a whole, and resulting in a populationof more than 1.1 million in 1980. Due largely to migration, demographic growthwas especially rapid in the western and central parts of the corridor (eg.Maraba, Imperatriz and Santa Luzia) and in the city of Sao Luis. The corridor,moreover, could have been divided into at least five subregions based on therelative recency and types of settlement that had already occurred or wereoccurring at the time of project appraisal, specifically: (i) Sao Luis and itsimmediate hinterland (ie. the Maranhao lowlands); (ii) the Pindare and MearimRiver valleys; (iii) the countryside between Santa Luzia and Maraba; (iv) thecity of Maraba and surrounding areas; and (v) the Carajas and Serra Pelada miningareas.

17. In summary, the immediate area of influence of the Carajas Projectwas (and is) quite heterogeneous from an ecological standpoint and, in varyingdegrees in different subregions, had already undergone and/or was undergoingsignificant processes of rural and urban settlement at the time the operationwas prepared and appraised. Much of the Carajas-Sao Luis corridor, in otherwords, was an active frontier zone that was attracting increasing numbers ofmigrants from elsewhere in Brazil in search of land and other economicopportunities. These tendencies and their environmental consequences, while ofdirect relevance for understanding how the iron ore operation was likely toaffect the various subregions along the Carajas corridor, however, were notconsidered in the Bank's appraisal of the project. Furthermore, much of what wasoccurring in the area of influence of the Carajas Project during the 1970's andearly 1980's was directly related to Government development policies andassociated large-scale public and private investments in the region. Theseinterventions likewise received little attention in the Bank's appraisaldocuments.

Previous or Parallel Development Interventions in Eastern Amazonia

18. Prior to the mineral-based Carajas Project and the associated GrandeCarajas Program, Government attempts to promote the development of EasternAmazonia had consisted primarily of large-scale road building -- the Belem-Brasilia and Transamazon highways being the foremost examples -- and directed

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colonization efforta, together with a program of fiscal and other incentivesadministered by the regional development agency, SUDAM, to induce privateinvestors to establish agro-livestock and industrial projects in the region. Bythe late 1970's, these interventionLs had drawn an increasing number of migrantsto the area. However, they were considerably less successful in establishingsustainable agricultural development and -- in the absence of official subsidies-- economically feasible ranching projects, while, at the same time, theystrongly contributed to rapidly rising land values and land speculation, as wellas to increasing deforestation and other environmental problems.

19. Attempts to establish directed agricultural colonization projectsalong the Transamazon highway during the early 1970's were particularlyunsuccessful and were, for the.most part, later abandoned by INCRA, the officialcolonization agency. There were also limited attempts to set up privatecolonization schemes in the region. The Bank itself became involved in effortsto rationalize rural occupation in Eastern Amazonia in the 1970's by supportingthe Alto Turi land settlement project in north-central M4aranhao. This initiativewas later extended and expanded through the Maranhao Rural Development Projectapproved in June 1982 and, more recently, through a second such operation inthe state approved in June 1987 as part of the Northeast Rural DevelopmentProgram.

20. Several other major public and private investments in EasternAmazonia during the second half of the 1970's and the early 1980's are alsoworthy of note. These include the Tucurui hydropower project, located on theTocantins River some 200 kilometers north of Carajas which, having initiatedoperations in 1984, is expected to generate 8,000 megawatts at full capacity,primarily for the consumption of large-scale industrial operations. In additionto the iron ore project, these industries include large, energy-intensivealuminum plants located near Belem (ALBRAS) and at Sao Luis (ALUMAR), both ofwhich were established with incentives under the Grande Carajas Program. TheALUMAR plant, more specifically, shares part of the Island of Sao Luis withCVRD's port terminal at Ponta da Madeira and the neighboring commercial port atItaqui and is the largest privately funded project undertaken in Brazil to date.

21. Finally, several more recent productive and settlement activitiesoccurred largely in parallel to implementation of the iron ore project and havealso influenced migration to, and natural resource use in, the Carajas corridor.These include: (i) the exploitation of gold deposits at Serra Pelada, some 100kilometers to the east of the iron ore mine concession, and elsewhere in theregion; (ii) further -- and, again, largely unsuccessful -- attempts at smallfarmer colonization on the southern edge of CVRD's Carajas mine concession byanother official agency, GETAT, specifically created (and later dissolved) inorder to deal with rising land conflicts in Eastern Amazonia; (iii) numerouscomparatively large-scale agricultural and agro-industrial, as well as mineralprocessing, ventures benefitted by fiscal incentives under the Grande CarajasProgram; (iv) recent actions under the National Agrarian Reform Plan,particularly in the "Brazilnut polygon" area near Maraba, to reaettle ruralsquatters; (v) the aforementioned Maranhao Rural Development Projects; and (vi)the new North-South railway also previously mentioned.

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22. As the above review suggeste, significant Government interventionshave occurred in and near the CrIrajas corridor over the past several decades.Although at first largely unrecognized, moreover, many of these measures werealready having significant physical and human environmental impacts at the timethe iron ore operation was prepared by CVRD and appraised by the Bank. The ironore project, furthermore, was clearly linked to several of these initiatives,particularly the Grande Carajas Prograr and the Tucurui hydropower project.Although these linkages are mentioned in the Bank's appraisal documents, theywere not fully explored in the ex-ante project assessment process. Finally, theBank itself has been directly involved in three rural development projects inthe eastern part of the Carajas railway corridor since 1970.

23. One of these latter operations, the (first) Maranhao RuralDevelopment Project (or MRDP), was literally prepared and ap;raised at the sametime as the Carajas Iron Ore Project. However, there appears to have been little,if any, coordination between these two operations either in Brazil or in theBank. From an environmental standpoint this was unfortunate since the approachfollowed in the NRDP - including land use planning studies, land tenureregularization, forestry development and the supply of agricultural support andsocial services to small farmers and rural communities -- in what was, in fact,part of the immediate area of influence of the Carajas operation, should havebeen systematically attempted along the entire railway corridor, together withthe provision of needed urban infrastructure and services. Had the iron oreproject taken, or been accompanied by, such a multi-sectoral area developmentapproach, it is possible that some of the environmental problems laterexperienced in its larger zone of influence might have been avoided, or at leastsubstantially reduced.

Project Oriftins. PreRaration and Nature of Bank Involvement

24. As noted above, the reserves at Carajas were discovered in mid-1967by a Brazilian subsidiary of the US. Steel Company. Shortly thereafter, CVRDjoined with U.S. Steel in order to determine the extent and quality of iron oredeposits in the area. A joint venture called AMZA was formally established inApril 1970 to undertake feasibility studies for the exploitation of these andot:.er mineral resources at Carajas. This partnership lasted until June 1977 whenU.S. Steel withdrew and AMZA was eventually (1981) fully taken over by CVRD. Thefirst feasibility study for an "integrated" mining, rail and port project wasundertaken in 1972, at which time a number of alternative pipeline, river and/orrail transport solutions for shipping Carajas ore were considered, as well asdifferent port locations. In May 1976, however, President Ernesto Geiselauthorized AMZA to proceed with construction of a railway from the mine site toa port terminal at Ponta da Madeira near Sao Luis, the principal alternativehaving been some combination of rail and barge transport to a port near Belem.The likely environmental costs (eg. deforestation, erosion, loss of biodiversity,etc.) of the various alternatives considered were not taken into account in thisdecision.

25. The World Bank was first approached in connection with the projectin late 1972. The Bank met periodically with officials from the BrazilianGovernment, CVRD and, until it pulled out, U.S. Steel throughout the 1970's inorder to review progress on project preparation, but did not become actively

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involved in the operation until after President Joao Figueiredo authorized CVRDto seek international financial support for the venture in October 1980. Startingin mid-1978, however, CVRD/ANZA began construction in the port area and alongthe eastern end of the rail line using its own resources. As observed above, theGrande Carajas Program (PGC) was created one month later with power to grantfiscal and other incentives, in addition to those already available throughSUDAM, to induce private investors to set up productive activities in the region.Internal documents indicate that the Bank was aware of the Government'sintentions to integrate the iron ore project into the PGC even before the latterwas formally created. It was likewise aware of incipient Government plans toutilize the Carajas railway to support longer-run agricultural, forestry andindustrial activities -- including charcoal-based pig iron production -- in theCarajas corridor. A Bank staff member's recommendation in August 1980 to "workclosely" with the future PGC "on the development of the region," nevertheless,appears to have been totally disregarded until several months after the iron oreproject was approved two years later, at which time the Brazilian Governmentdeclined the Bank's offer of assistance.

26. In the meantime, CVRD pressed rapidly forward with projectimplementation, such that, by the time of the Bank's first and only preparationmission in February 1981, construction was advancing rapidly on several fronts.By the time the Bank began to assess the project in detail, in short, all basicdesign decisions had already been taken and were in the process of beingimplemented. Environmental and Amerindian protection, in turn, did not becomea factor in the Bank's evaluation until relatively late in the projectpreparation process. The first manifestation of these concerns, in fact, did notoccur until January 1980 when a Bank staff ecologist recommended that a detailedenvironmental impact study be carried out "for tll parts" of the Carajasoperation. While the Bank did later request CVID to specify its "plans forcontrolling ecological impacts of the project," no detailed environmental impactassessment of the operation appears to have been undertaken.

27. When the Bank's environmental officer finally visited the CarajasProject during the pre-appraisal mission in July 1981, moreover, his attentionwas largely limited to CVRD's proposed "environmental management" measures forproject construction and subsequent operation. These included the establishmentof an advisory panel of outside scientists and Amazonian experts (GEAMAM) toadvise the company's senior management on project-related environmental issuesand the creation of environmental commissions (CIMAs) at the mine and port sites,together with a variety of pollution abatement and environmental preservationmeasures to be taken in the areas under CVRD's control. The Bank's initial surveyof the project's potential impacts on tribal populations, similarly, did not takeplace until the time of the pre-appraisal mission. During the October 1981appraisal mission, in turn, the Bank further reviewed the project's environmentalprotection component, finding it to be generally satisfactory, while the nationalAmerindian agency, FUNAI, agreed to prepare a plan for the protection of tribalcommunities in its area of influence. The revised version of this plan, whoseinitial draft was found to be unsatisfactory by the Bank, later also receivedconsiderable attention during loan negotiations which were held in June 1982.The project's urban development component, finally, was not assessed by the Bankuntil post-appraisal visits in February and May of 1982.

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28. The principal project issues raised inside the Bank in the periodprior to Board presentation, however, were financial and economic in nature. Themain concern was with the reliability of Bank projections of future internationaliron ore prices and, thus, with the potentially high degree of financialriskiness of the operation which was expected to involve a total cost of on theorder of US$ 4.5 billion. Environmental risks, on the other hand, were not amajor preoccupation during the Board discussion even though attention was drawnto the likely magnitude of the project's direct and indirect regional impacts.Bank management, nevertheless, was asked to provide a status report on theAmerindian protection component mid-way through project implementation. Followingthese deliberations, Bank financing in the amount cf US$ 304.5 million wasapproved for the project on August 10, 1982. Even though this loan representedless than 7Z of the projected total cost of the operation, the real significanceof the Bank's support wae considerably greater since most Japanese and Europeanco-financing was conditioned upon prior Bank approval of the project.

29. In addition to the Bank's catalytic role in mobilizing externalfinancing for the Carajas operation, finally, its role in the project's non-infrastructure and productive components should be highlighted. This isparticularly true in the case of the Amerindian Special Project, which appearsto have been included in the operation largely at the Bank's insistence. On theother hand, the number of agreements and corresponding loan covenants that referto on-going preparation requirements for the project's environmental, Amerindianand urban development components clearly suggest that these parts of theoperation were far less mature at the time of Board approval than the much largermine, rail and port investments.

Project Implementation and General Results

30. Excepting the Amerindian Special Project and, to a lesser extent,the urban development component, implementation of the Carajas operation wasrelatively problem free. The Loan and Guarantee Agreements were signed on August13, 1982, three days after Bank financing was approved, and the loan becameeffective on November 12, 1982. Project implementation was originally expectedto be completed by December 31, 1986 with start-up of iron ore production at 15million tons per year (tpy) by July 1985, followed by anticipated output levelsof 25 and 35 million tpy by the end of 1985 and 1986, respectively. Even thoughconstruction activities proceeded ahead of schedule, due to deterioratinginternational iron ore markets, in January 1983 CVRD decided to delay formalinitiation of project operations by one year. In February 1985, however, as theworld economy again began to grow, CVRD imoved up the projected initiation ofmining operations at the 35 million tpy level to July 1987, only six months afterthe date originally established.

31. Iron ore mining and export operations, in fact, started much earlier(May 1985), with the entire length of the Carajas railway being inaugurated tenmonths ahead of schedule in February 1985. The complete mine-rail-port system,in turn, began operation with the initiation of ship loading activities at Portada Madeira in January 1986 and physical installation of the project was declaredessentially complete by December 1987. Considerable cost savings were achievedduring project implementation and an unutilized balance of nearly US$ 74 million-- or some 24X of the original Bank loan -- was cancelled by the time of last

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disbursement in April 1980. The principal reasons for these savings weredevaluation of the Brazilian cruzeiro in relation to foreign currencies and lowerthan expected prices for many goods and services required by the operation dueto the worldwide recession in the early end mid-1980's.

32. Iron ore output at Carajas increased rapidly from one million tonsin 1985 to 29 million tons in 1988. While the project was expected to reachproduction and export levels of 35 million tpy in 1988, on account of slowerthan expected recuperation of world iron ore markets, the actual figures havethus far remained below 30 million tons. In addition, iron ore prices have fallenwell below appraisal projections, resulting in revenue levels and, hence,financial and economic rates of return substantially lower than those estimatedby the Bank at appraisal. As a consequence, the project's reestimated after taxfinancial rate of return at the time of completion was only 1.2%, compared withan appraisal estimate of 11.7%, while the appraisal and completion ERRs were13.9% and 3.7Z, respectively.

33. On the more positive side, despite its poor financial and economicperformance to date, because it is a comparatively low cost, modern and efficientoperation the Carajas Project is expected to achieve large cash surpluses after1994 when most project debt will have been repaid. The project has also clearlybeen successful in terms of its principal objectives of extracting and exportingiron ore and generating substantial -- if fewer than originally expected --foreign exchange earnings for the Brazilian economy. As anticipated at appraisal,moreover, the iron ore operation has generated important regional employment andincome generr.tion benefits, has provided an increasing range of passenger andfreight transport services along the Carajas corridor and has stimulatedsubstantial urban and industrial growth in its immediate area of influence.

Urban Development Component

34. With respect to urban growth, more specifically, neither CVRD, northe Bank adequately anticipated the extent or speed of the urbanization broughton directly and indirectly by the iron ore project, especially at the westernend of the railway corridor. As a result, outside of Carajas township, the urbaninfrastructure and services provided through the operation were clearlyinsufficient to meet rapidly growing local needs. Both present conditions andCVRD's performance at Parauapebas and its satellite Rio Verde, accordingly,provide a sharp contrast with those characterizing the urban nucleus at Carajas.While the definitive township at Carajas was built to high standards of urbandesign and a broad range of social and other community services have beenprovided, infrastructure coverage and service standards at Parauapebas/Rio Verdehave been considerably lower. The urban nucleus at Carajas, moreover, is clearlya "company town," both because it is administered by CVRD, as opposed to anelected municipal government, and because all those who are not company employeeshave been gradually forced to live outside the mining concession area.

35. Compared with an expected 1988 population of 10,000, on which theprovision of basic infrastructure to the "service town" of Parauapebas hadoriginally been based, the actual urban agglomeration at Parauapebas/Rio Verdehad grown to an estimated 45,000 to 50,000 inhabitants by the time of theOED/SEPLAN visit in April 1989. The unexpectedly rapid growth of these towns

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reflects a number of factors including GETAT's decision to locate agriculturalcolonization projects on the periphery of the Carajas mine concession, increasinggold and other mineral prospecting activities in the vicinity and theestablishment of small farms and ranches of varying sizee in the area. Theprincipal cause, however, has been the attraction of the Carajas operationitself, initially for a large number of construction and associated serviceworkers at the time of the project's physical installation, many of whom laterchose to remain in the area, and, more recently, for those who now provide a widerange of commercial and other services in support of CVRD's on-going operationsand comparatively high income permanent workforce at the mine site.

36. In synthesis, in light of the rapid urban growth occurring throughoutits immediate area of influence, the urban development component of the CarajasProject made only a minimal contribution to local needs. The amount of Bank stafftime allocated for supervision of this component was likewise insufficient. Moregenerally, in most localities along the rail line, the provision of urbanservices over the past decade has been far from adequate and large initialdeficits of infrastructure and shelter have rapidly expanded due to equally rapidurban population growth resulting at least in part from the attraction of theiron ore project. Furthermore, with the exception of Sao Luis, the effectiveinvolvement of state and local authorities in the planning and delivery of urbanservices in relation to the project appears to have been virtually non-existentand, even in Sao Luis, the experience in this regard was highly uneven.

37. Finally, the rapid urbanization which has occurred in connection .uiththe Carajas Project raises a broader issue which is equally germane to itsenvironmental and Amerindian protection components. This issue concerns when andwhere the Borrower's and Bank's responsibilities should end in situations inwhich, even after an investment project has been physically completed, itcontinues to generate significant externalities from a human and/or naturalenvironmental standpoint. This is particularly a concern in operations such asthe present one in which such impacts were poorly anticipated and dealt with fromthe outset and where no systematic attempt was made by either the Borrower/Guarantor or the Bank to strengthen the state and local government agencies thatare ultimately responsible for the provision and maintenance of basicinfrastructure and services -- or to protect the natural environment --in theareas affected by project investments.

Environmental Protection Component

38. Specific environmental protection measures were designed and carriedout as an integral part of the Carajas Project. This component consisted of airand water pollution monitoring and control at the mine and port concessions, soilerosion control along the railway, environmental education and ecologicalresearch, together with the establishment of conservation tracts, greenbeltbuffer zonas, ecological stations and biotic inventories -- for the most partinside or on the periphery of CVRD's mining concession -- and an "environmentalzoning" exercise for the "Carajas region." Implementation of the component wasthe responsibility of CVRD which contracted out some pollution control andecological research activities to other entities. Supervision of these measureswas also largely entrusted by the Bank to CVRD through the aforementionedadvisory panel, GEAMAM, and the local environmental commissions at the mine and

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port sitea. The Bank's attempt to decentralize supervision of project-relatedenvironmental management activities, however. proved to be only partiallysuccessful as GEAMAM's performance, although generally adequate, did not fullycomply with the terms of the Loan Agreement. For the most part, however, CVRDsuccessfully implemented the environmental preservation measures proposed underthe Carajas operation.

39. Altogether, CVRD spent the equivalent of roughly US$ 64 million onenvironmental control and protection activities under the Carajas Project between1982 and 1987, a figure which correspondd to just over 2% of total project costson completion. Slightly over three-fifths of this subtotal was used forhydroseeding (ie. the replanting of vegetation) and landscaping, primarily tocontrol soil erosion along the railroad right-of-way. The second largestexpenditure category involved drainage and effluent control, accounting for justunder 30% of the subtotal. Interestingly, these measures, which togetheraccounted for nearly 90% of CVRD's environmental protection expenditures, areessential for the maintenance of project infrastructure, particularly therailway, and, thus, are highly likely to be sustainable. They were, in short,good investments in economic, as well as environmental, terms and reveal thatCVRD is aware of the frequent convergence of environmental and operationalpriorities.

40. In contrast, those environmental measures which do not offer aclearly foreseeable return to CVRD, particularly basic scientific and ecologicalresearch, appear less likely to be continued. Other environmental controlactions, moreover, especially the monitoring of air and water quality, whilegenerally satisfactory thus far, will need to be further strengthened in orderto adequately counter threats to the environment associated with expected futuredevelopments in the region. These include both the expansion and diversificationof mining activities within CVRD's concession (eg. copper mining) and increasingmineral-based industrialization along the Carajas corridor.

41. Outside the areas under CVRD's jurisdiction, furthermore,environmental preservation measures were almost entirely lacking, therebycontributing to a situation of largely uncontrolled rural settlement and urbangrowth, accompanied by increasing environmental degradation. The "environmentalzoning" activities that were to have been the project's principal "environmentalmanagement" intervention outside the areas directly controlled by CVRD, inpractice appear to have been little more than a set of geo-ecologicalregionalization studies, which, whil.. of considerable scientific interest, werefar from constituting a meaningful zoning exercise from an environmentalplanning, land use regulation or natural resource management standpoint. Finally,except for taking part in occasional seminars and carrying out ecologicalresearch, it is unclear to what extent government agencies other than CVRD, infact, participated in the "environmental work program" expected to be indertakenin connection with the project. It is evident, however, that there was verylittle, if any, involvement of the Grande Carajas Program, SUDAM or state andlocal planning agencies in these efforts.

42. Both the Brazilian Government and the Bank, consequently, appear tohave missed a significant opportunity to encourage more rational land and othernatural resource use in the Carajas corridor. As a result, while the iron ore

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project can in many ways be considered a good example of effective environmentalmanagement in connection with the physical installation and on-going operationof large mining and transport facilities, at the same time it also exemplifiesan inadequate approach to environmental planning and control in the larger regionaffected by these investments. Furthermore, while credit for the project'sconsiderable success in protecting and preserving the natural environment withinthe areas under the Borrower's jurisdiction can be given largely to CVRD,although the Bank's insistence on the importance of proper environmental controlshould also be clearly acknowledged, blame for the comparative neglect ofpotential project environmental impacts in its larger area of influence must alsobe shared between the two, as well as by the Brazilian Government more generally.

43. Finally, it is evident in hindsight that Bank supervision of theproject's environmental component and, more importantly, Bank, Borrower andGuarantor monitoring of its broader enviionmental impacts at the regional levelshould have been considerably more intensive and systematic from the outset.Insufficient Bank supervision and inadequate environmental monitoring, moreover,ultimately reflect the even more serious shortcoming represented by theexcessively narrow approach taken by the Borrower and the Bank in the initialidentification and assessment of project-related environmental impacts. Thisshortcoming, furthermore, was also reflected in the ambiguity of the loancovenants specifically concerned with the environmental aspects of the projectwhich, although obliging rhe Borrower to "take all action as shall be requiredto ensure that the execution and operation of the Project are carried out withdue regard to ecological and other environmental factors," do not specify eitherwhat "due regard to ecological and other environmental factors" or project"operation" mean in practice. Such ambiguity made it virtually impossible forthe Borrower to know precisely what environmental precautions it was expectedto take and made it difficult for the Bank to adequately monitor Borrowercompliance.

Amerindian SDecial Proiect

44. The larger area of influence of the Carajas Project is presentlyestimated to contain roughly 14,000 Amer2.ndians scattered among some 130villages. Almost all of these communities had been in contact with Braziliansociety prior to the iron ore operation. Such contacts, however, accelerated overthe decades immediately preceding the Carajas Project due to the rapid expansionof the agricultural and extractive frontier in Eastern Amazonia. Despitesignificant linguistic and cultural differences, Amerindian communities in theCarajas area have generally retained their native languages, tribal customs andeconomies based on hunting, gathering, fishing and itinerant agriculture. Priorto the iron ore operation, moreover, these groups had suffered significantpopulation losses due to disease and violent conflict resulting from increasingcontact with frontier settlers, together with inadequate health care. Up untilthe time the Carajas Project was undertaken, finally, FUNAI's activity in theregion had been limited.

45. In order to mitigate the expected negative impacts of the iron oreoperation on local Amerindian populationst CVRD signed a contract with FUNAX inmid-1982 for implementation of an "Amerindian Special Project" designed toprovide administrative, land demarcation, health, economic development and

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educational services to tribal communities located in its area of influence.Although the Special Project was to be funded exclusively with resources providedby CVRD, it was considered an integral part of the larger Bank-supported Carajasoperation and the corresponding Loan and Guarantee Agreements included provisionsfor periodic Bank supervision of its activities and review of FUNAI's annual workprogram for the region. The Special 7roject was also one of the first concreteapplications of the Bank's tribal peoples policy issued in February 1982.

46. Despite CVRD's and the Bank's close supervision, implementation ofthe Special Project encountered numerous difficulties including frequent changesin FUNAI's top management and internal organization, substantial budget cuts anda peraisting tendency on the part of the agency to utilize project resources tostrengthen its own administrative and physical infrastructure. These problemseventually (March 1986) led CVRD to suspend disbursements for the component inorder to force FUNAI to address unresolved land tenure issues, especially thedemarcation of reserves and the removal of illegal squatters from tribal areas.Even though this intervention resulted in a reorientation of expenditures underthe Special Project, of the US$ 12.3 million that had been spent by December1988, roughly two-thirds had been utilized by FUNAI to finance public works,equipment, maintenance and personnel, while only one-third had been used for landdemarcation and the provision of Amerindian health and education services.

47. As a result of the Special Project, nevertheless, significantimprovements in the conditions of indigenous communities have, in fact, occurredin the region, particularly in the areas of health care and land demarcation.These achievements are especially evident when the recent experience in theCarajas area is compared with that in other parts of Brazil where FUNAI has notbenefitted from the support of outside agencies such as CVRD and the Bank. Theaccomplishments of the Special Project, moreover, are particularly noteworthyconsidering that Indian lands in the Carajas region have become increasinglycoveted by loggers, ranchers, squatters, prospectors and other interests and thatsignificant bureaucratic and political obstacles continue to impede the morerapid demarcation of tribal areas in the country. Regardless of the successesachieved thus far, however, a number of unresolved land issues remained at thetime the iroa ore project was closed, while significant future threats to tribalreserves are likely to emerge as a result of the continuing expansion of ruralsettlement and other activities -- especially the increasing extraction offuelwood for pig iron-related charcoal production -- in and near the Carajascorridor. More generally, the long-term sustainability of efforts under theSpecial Project to protect regional Amerindian populations is questionable.

48. In view of these concerns, if Amerindians are to be assured a placein the future of the Carajas area, federal government (including CVRD) assistanceneeds to be expanded and sustained well beyond the sums and time horizonoriginally envisioned under the Special Project. What is required, moreconcretely, is the effective guarantee of Amerindian rights -- as defined in the1973 Indian Statue and, more recently, in the 1988 federal constitution -- tothe exclusive use of the natural resources on the lands they inhabit. Futuresupport for Amerindian communities in the Carajas region, moreover, shouldcontinue to concentrate on the demarcation and physical protection of tribalreserves and the provision of appropriate health services. Also required are aneducational campaign that takes the unique social, cultural and environmental

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characteristics of thise populations into account and which is designed toprepare tribal communities to manage, protect and develop these resources fortheir own benefit.

49. The Bank's role in connection with the Amerindian Special Project,finally, should also be highlighted. In the absence of the Bank's initialinsistence, it is doubtful whether the iron ore operation would have includedtribal protection measures at all. Unlike the environmental protection componunt,moreover, Bank supervision of the Special Project occurred at regular intervalsthroughout the period when the Carajas Project was under implementation. The Banklikewise proved to be an important ally to CVRD in its persistent, but frequentlyinconclusive, efforts to induce FUNAI and the federal government to honor theircommitments under the Special Project and Loan Guarantee agreements. Given thecomparatively smooth performance of other components, furthermore, Bankintervention during project implementation may, in fact, have had the greatestrelative impact on the Amerindian subproject. In any event, it is likely that,had the Bank not intervened in support of CVRD, many of the positive resultsachieved under the Special Project might not have been attained. Continued Bankassistance through the second Maranhao Rural Development Project and other futureinitiatives, accordingly, is likely to be essential if adequate Amerindianprotection efforts along the Carajas corridor are to be sustained.

Physical Environmental Impacts to Date

50. The larger area of influence of the Carajas Project is one of thesubregions that have experienced the highest rates of deforestation andassociated environmental degradation in Amazonia over the past two decades. Theiron ore operation has directly and/or indirectly contributed to these processesthrough the following, largely interrelated, factors: (i) the attraction ofworkers and other settlers to the area to help install mine and rail facilities;many of these migrants have remained in the region to pursue prospecting, smallfarming and other (including urban) employment opportunities; (ii) theconsttuction and pavement of new roads and the improvement of existing highwaysin order to provide access to the mine site; (iii) private land speculation alongthe corridors formed by the railway and project-related roads in the expectationof benefitting from increases in land values resulting from these and otherpublic investments; (iv) improved access to extensive and previously much moreremote parts of the region also as a result of the new or improved transportinfrastructure; substantial areas made more accessible by the project havesubsequently been partially or totally cleared through the installation ofranching ventures supported by SUDAM fiscal incentives, the expansion ofcommercial logging activities, the establishment of official colonization schemesand the increasing occupation of rural areas by squatters and prospectors; (v)lumber requirements for construction of the railway itself (especially railroadties) and other project facilities, as well as to provide shelter and servicesfor the population attracted to the area by the operation; and (vi) morerecently, the use of fuelwood derived from the native forest to produce charcoalfor pig iron smelters.

51. Largely as a result of these interventions, land clearing in theCarajas corridor has increased significantly over the past fifteen years. Moregenerally, deforested areas in the state of Para expanded from less than 25,000

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square kilometers in 1978 to nearly 115,000 square kilometers In 1986. Much ofthis deforestation has occurred in the area of influence of the Carajae Projectin the southeastern part of the state where the percentage shares of area clearedin most municipalities considerably exceed the average for Para as a whole. InMaranhao, in turn, total deforested area is estimated to have increased from lesethan 3,000 square kilometers in 1975 to over 50,000 square kilometers in 1988.Again, installation of the iron ore project is one of the factors that havecontributed to this process. Most of the area that has been deforested in theregion, moreover, has been converted to pasture for low density cattle grazingactivities vhich have increased dramatically in much of the area sine 1970.Associated with rapid deforestation in the Carajas corridor, furthermore, arealterations in soil and water quality, the loss of fauna and pcqsibly local andmore general climate alterations.

52. In the case of soils, more specifically, clearing the primary forestin order to introduce crops or pasture land in tropical regions such as EasternAmazonia tends to have several adverse environmental consequences which alsolimit possibilities for developing sustainable agricultural and cattle raisingactivities. These include: (i) decreasing soil fertility due to the loss ofnutrients through leaching; (ii) disappearatce of the most fertile upper layerof the soil as the result of erosion; (iii) reduction of the quantity of organicmatter in the soil previously provided by the now absent forest; and (iv) anincrease in soil densities through compaction, which can become particularlyserious when land is used for intensive grazing or when heavy machinery isutilized in connection with agricultural activity. Experience in the Carajas areahas shown, moreover, that, within several years after the forest is convertedto pasture, a proliferation of weeds and other second growth vegetation generallyoccurs which is both difficult and costly to control. As a result, most pasturelands quickly become degraded and are abandoned within five to ten years afterthey are initially cleared, a process which tends to fuel further deforestationmerely to support the cattle that are displaced. Even in less fragile areas,moreover, in the absence of proper conservation measures, soil fertility tendsto decline over time.

53. The contamination of surface waters, in turn, is largely the resultof changing land use (ie. from forest to crop or pasture.lands) and frequentlyassociated erosion and/or fertilizer and pesticide use, increasing urbanizationand, in the specific case of the Carajas corridor, rapidly expanding prospectingactivities. Mercury contamination associated with gold prospecting has becomea particularly serious problem in the Carajas region, as in other parts QfAmazonia. Rural settlement and related deforestation, moreover, has also resultedin a substantial loss of land and water fauna through the destruction of naturalhabitats, particularly by fire -- which is the traditional means employed bylocal farmers and ranchers to clear the forest and eliminate second growthvegetation -- as well as by illegal and predatory hunting and fishing practices.

54. Finally, even though the available information does not yet permita clear picture as to the possible occurrence of localized climate change in theCarajas corridor, it is known that extensive deforestation in tropical areas isfrequently accompanied by rising temperatures, lower rates of evapotranspirationand increased surface water run-off. Accordingly, deforested areas tend both tocontribute less to atmospheric humidity and to be generally warmer than those

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remaining under their original vegetative cover. The aggregation of microclimaticchanges, when these take place over large areas such as Eastern Amazonia,moreover, can result in alterations in the dynamic equilibria that determineclimate conditions at the regional level and may also contribute to globalclimate change. It is important, therefore, that such variables as temperature,humidity and rainfall be systematically monitored in areas such as the Carajascorridor which are undergoing rapid deforestation.

Pig Iron SmeltinR and Longer-term Physical Environmental Consequences

55. While the Bank-supported Carajas Project cannot be held directlyresponsible for much of the environmental degradation that has taken place inits larger area of influence over the past several decades, it has, nevertheless,indirectly contributed to this procees, primarily by improving accessibility anddrawing coneiderable numbers of new settlers to the region. A more directrelation also exists, however, with respect to the potential deforestation andassociated ecological damage likely to occur in the future in response to thecontinued installation and expansion of pig iron industries in the Carajaacorridor. As noted above, these industries are totally dependent on project-provided iron ore and transportation services and are likely to rely on thenative forest as their principal fuel source unless recent regulations requiringpig iron producers to practice sustained forest management techniques areeffectively enforced and/or alternative energy sources are utilized.

56. If all the pig iron smelters that have already been approved by theGrande Carajas Program are, in fact, installed, it is expected that pig ironproduction along the corridor may reach 630,000 tons a year over the next decade.Before certain limitations were imposed by the Brazilian federal governmenttaking office in March 1990, planning studies projected that annual pig ironoutput could be as high as 2.8 million tons by the year 2010. Taking localvariations in forest composition, soils, climate, regeneration capacity andforest management techniques into account, OED has estimated that under ideal(ie. 15 to 20 year) rotation conditions, an area of nearly 4,500 squarekilometers of native forest would need to be sustainably managed (ie. selectivelyharvested, replanted and reharvested) in order to generate the amount of charcoalrequired to produce 630,000 tons of pig iron on an annual basis. To give a betteridea of the relative size and importance of the areas involved, the total areaplanted in both temporary and perennial crops in the entire state of Para in 1985was 10,500 square kilometers, while the corresponding figure for Maranhao was13,300 square kilometers.

57. There are reasons to believe, however, that the possibilities ofimplanting adequate systems of sustained forest management in and near theCarajas rail corridor may be limited. In addition to technical and ecologicalconstraints on tropical forest regeneration, the experience thus far withattempts at forest management on a much smaller scale by pig iron producers inthe Carajas region is not encouraging, while official efforts to controldeforestation and environmental degradation in the area to date have beensporadic at best. Official agencies responsible for environmental protection ingeneral, and the prevention of deforestation in particular, especially at thestate level, are institutionally and financially weak with staffs that can bestbe described as "poorly trained, underpaid and undermanned" and operating budgets

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that can best be characterized as "woefully inadequate." As a result, presentenforcement capabilities are extremely limited.

58. Previous experiences with large tree plantations in Amazonia,moreover, have been largely unsuccessful, suggest that this alternative isconsiderably more costly than sustained forest management and, in any event,would have to carried out on a scale many times larger than that which has beenattempted thus far in the region in order to meet the projected demand forcharcoal by pig iron emelters in the Carajas corridor. Unless alternative fuelsources (including natural gas, mineral charcoal or even babacu palm nut husks)are utilized, therefore, the most likely scenario will be the continued use ofwood-based charcoal derived largely from the native forest. Thue, if presenttrends persist, the expansion of pig iron production is likely to lead to alevel of deforestation substantially greater than that already observed inEastern Amazonia, further degrading soil and water resources, diminishing fauna,reducing genetic diversity and accelerating pressures on local Amerindian andother reserve areas.

59. In summary, in addition to its own more limited direct environmentalconsequences, the Carajas Project has indirectly reinforced and, in somesubareas, accelerated the adverse physical environmental impacts of other publicand private sector interventions (eg. road building, fiscal incentives,prospecting, etc.) already or simultaneously acting on its area of influence.The recent installation and expected future expansion of pig iron smelters,moreover, appears likely to further exacerbate the project's indirect effectson the natural environment over the next several decades unless decisive stepsare taken to redirect this process. Accordingly, an urgent need exists: (i) tocarefully determine the economic and environmental costs and benefits ofalternative energy sources for the pig iron smelters and other metallurgicalindustries expected to be installed and\or to expand their activities over thecoming decades; (ii) to develop adequate environmental planning and naturalresource management mechanisms for the region; and (iii) to considerablystrengthen official environmental protection agencies.

Human Environmental Impacts

60. Although it is difficult to measure the human environmental impactsof the Carajas Project with any degree of precision, as in the case of thephysical environment, the iron ore operation and, more recently, associatedindustrial investments have had, and will continue to have, a major influencein determining the nature and intensity of social change both within theimmediate railway corridor and in the larger Carajas region more generally.Determination of project-related social impacts, moreover, is especiallyproblematic due to the profusion of federal and other development initiativesmentioned earlier, as well as the operation of macroeconomic and other factors(eg. the generalized economic recession occurring in Brazil during the early1980's) that have influenced migration tendencies, settlement patterns, landpressures and the pace of urbanization on the Eastern Amazonian frontier.Nevertheless, it is possible to identify in a generic sense those social benefitsand costs that are attributable largely or in part to the iron ore project.

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61. There can be little doubt that benefits have accrued to the Carajasregion and its population from development of CVRD'o mining, rail and portcompler.js. As suggested earlier, these include the creation of both short andlonger-term employment in construction, mining and metallurgical industries, aswell as in related commercial and service activities. They also include theprovision of passenger and freight rail and, in the area between Carajas andMaraba and across the Tocantins River, road services, as well as the introductionof urban infrastructure improvements, principally at Carajas, but to a lesserextent also at Parauapebas and elsewhere along the corridor. However, it islikewise evident that the Carajas Project has had several significant negativeconsequences from a human environmental standpoint. Some of these are a directresult of the iron ore operation, while others are largely by-products of trendsalready underway in the area, but which have been exacerbated by the project.

62. In rural areas, for example, there has been a significant increasein land values and property concentration throughout the Carajas corridor sincethe mid-1970's, especially at or near designated "development poles" such asMaraba, Acailandia and Santa Ines where future industrial investments areexpected to be concentrated. Land conflicts and growing landlessness, with ashift to wage labor, as well as the increasing conversion of forest to pasture,are all part of this process. Subsequent dismemberment of larger municipalities(Maraba and Imperatriz), in good measure as a result of the Carajas Project,moreover, has reinforced property speculation in both rural and urban areas. Thegrowth of a charcoal industry to supply pig iron and other metallurgical plants,moreover, is likely to encourage even further land concentration, together --a8 suggested in the previous section -- with the acceleration of already rapidrates of deforestation in the region.

63. The iron ore project has had an even more marked effect on recenturbanization in the Carajas corridor. As indicated above, towns and cities alongthe railway have experienced elevated rates of growth over the past two decades.What were already steady flows of rural to urban migrants prior to 1980 havebecome even larger influxes of people seeking employment and income, especiallyat the eastern (Sao Luis) and western (Imperatriz-Acailandia-Maraba-Parauapebas/Rio Verde) ends of the corridor. As a consequence, at present there is a largedisparity between the rapidly growing local demands for urLan infrastructure andservices, on the one hand, and the ability of municipal authorities to meet theseneeds, on the other. This is reflected in the steady increase in a variety ofenvironmental sanitation-related health problems and a worsening of socialindicators such as infant mortality and poverty levels, more generally, in thearea. One clearly direct impact of the Carajas Project, finally, was therelocation of perhaps as many as 10,000 people to make way for CVRD portfacilities at Sao Luis. Since much of this displacement occurred (1978-79) priorto effective Bank involvement in the project, however, technically there was noviolation of its policy on involuntary resettlement which was not issued untilFebruary 1980.

64. During preparation and appraisal of the iron ore operation,nevertheless, the Borrower and the Bank failed to take adequate account of thebroader potential human environmental repercussions of the investments involvedin the extensive Carajas region. This lapse is surprising in view of the factthat the project was partially implemented in a relatively mature and well-

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populated pre-Amazonian frontier area (ie. north-central Maranhao). PreviousBank experience with the preparation and appraisal of POLONOROESTE, which focusedlargely on just such socio-economic issues, furthermore, should have providedvaluable guidance for dealing with the likely human environmental impacts of theCarajas Project. The comparative neglect of the operation's potential impact onthe human environment is even more puzzling, finally, given the existence of theAmerindian Special Project which was introduced precisely in order to anticipatethe likely adverse consequences of the iron ore operation on tribal communitiesin its area of influence.

General Conclusions and Lessons

65. In summary, the Carajas Project, by itself and in conjunction withother public and private sector development initiatives, has had -- and is likelyto continue to have -- significant direct and indirect impacts on the physicaland human environments in both its immediate and its larger areas of influence.That this has occurred should not be surprising considering that the iron oreoperation was both an integral part of a broader Government strategy for thedevelopment of Eastern Amazonia and was implemented at a time when much of thesurrounding region was undergoing rapid settlement and productive occupationstimulated by a combination of large-scale public sector infrastructure --espec4 ally road and hydropower -- investments and public policy-induced privateinitiarcives in the mining, industrial and agro-livestock sectors. Theseactivities, moreover, were already taking a significant toll on the physical andhuman environments in the area at the time the Carajas Project was prepared. Inappraising the operation, however, the Bank gave insufficient attention both toits regional policy context and the on-going frontier development process inwhat was soon to become the Carajas corridor. Largely as a result, the projectcontained very few measures to deal with its potential environmental impactsoutside the areas under the immediate jurisdiction of the Borrower, CVRD.

66. In retrospect, it is evident that CVRD's and the Bank's approach tothe identification and mitigation of the potential environmental consequencesof the Carajas operation was excessively narrow. Even though the Bank's appraisaldocuments gave considerable attention to the "environmental management" of theproject'-; physical installation and subsequent operation, except in relation toAmerindian communities, its potential adverse environmental and social effectsin its larger area of influence were not addressed. Furthermore, the Bank'spresentation of the project was fundamentally inconsistent since, while theoperation's potential indirect economic benefits at the regional level wereidentified, its potential indirect environmental and social costs were not. Ex-ante projoct assessment was too narrow in a temporal sense as well, since noattempt was made during appraisal to consider the possible long-termenvironmental consequences of future iron ore-based industrial development.

67. Only gradually during project implementation did the Bank, in fact,become aware of the broader environmental implications of the Carajas Project.Over time, nevertheless, Bank perceptions evolved considerably, from the limited,although clearly pertinent, concern with the "environmental management" ofproject facilities to an explicit recognition of the need to consider theoperation's indirect effects -- including deforestation and land conflict -- onthe physical and human environments and to develop a regional resource management

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plan. This broadening of perceptions, moreover, resulted from a combination ofgrowing internal awareness and external pressures, but, most importantly, fromthe increasingly significant environmental consequences of the project itself.This change in perceptions, finally, also points to one of the principal lessonsof the Carajas experience that is of direct relevance for the evaluation offuture Bank operations involving major transport and productive operations.

68. This lesson refers to the need to take a regional approach to theidentification and assessment of potential environmental impacts in cases suchas the iron ore operation. This is especially important for projects located inareas that are territorially large, ecologically heterogeneous and/or sensitiveand/or which are situated in regions undergoing rapid and complex processes ofeconomic and social transformation. In short, it is particularly important foroperations in large tropical frontier regions such as Eastern Amazonia. Insituations, moreover, where Bank-supported projects are part of largerdevelopment initiatives and/or will interact with other major public and privatesector investments -- as was clearly the case with the Carajas operation -- thelikely results of these initiatives and interactions should likewise beanticipated to the fullest extent possible.

69. The relatively "nearsighted" approach followed in the Bank'sassessment of the Carajas Project, furthermore, contrasts sharply with that takenin the case of POLONOROESTE, where the likely environmental and social risks ofintroducing a major transport improvement in a tropical frontier area, in theabsence of offsetting Government actions, were explicitly recognized in theBank's appraisal. Even though the subsequent experience with POLONOROESTE clearlydemonstrates that, simply taking potential physical and human environmentalimpacts into account in project design by no means guarantees that all thenecessary preventive or corrective measures will be contemplated or that thosewhich are included will be properly implemented, or even implemented-at all, froman environmental perspective the more comprehensive regional approach followedby the Government and the Bank in Northwest Brazil was considerably moreappropriate than the narrower, essentially sectoral, focus applied in the caseof Carajas.

70. The question should be asked as to why the Bank's approaches to theCarajas and POLONOROESTE operations were so different despite the fact that theywere appraised at roughly the same time (1981) and possessed many similarcharacteristics including being centered around major transport investments,having specific Amerindian and environmental protection components and beingundertaken in territorially large tropical frontier areas. At least four factorsappear to have contributed to these differences. First, the two operations wereintended to achieve distinctly different obJectives. While POLONOROESTE soughtto support and rationalize on-going processes of rapid occupation and settlementin the Northwest region through a combination of infrastructure imMrovements,integrated small farmer development schemes and basic social servicee, theCarajas Project was designed to extract and export iron ore and to generateforeign exchange. Only secondarily was the iron ore project expected tocontribute to regional development and, as indicated above, such developmentwas viewed by the Bank largely in economic terms. In short, while the objectivesof POLONOROESTE were primarily regional and social, those of the Carajas Projectwere essentially macroeconomic and sectoral in nature.

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71. Secondly, the preparation and appraisal of these two operations werehandled in different ways by different groupa within the Bank. The CarajasProject, as noted earlier, was treated by the Bank basically as a single sector(mining-cum-infrastructure) operation with Amerindian, environmental and urbandevelopment "appendices." Country programs (ie. the then Brazil Division) hadlittle direct intervention in project preparation and appraisal, largely limitingits role to ensuring collaboration of the co-financiers, while there was noparticipation whatsoever of regional agricultural projects staff even though thelatter were simultaneously engaged in preparation and appraisal of an integratedrural development project in part of the iron ore operation's immediate area ofinfluence. POLONOROESTE, by contrast, was approached by the Bank from both aspatial and a multi-sectoral perspective and was based on the results of a multi-disciplinary regional survey mission. Accordingly, its preparation and appraisalinvolved participation of Bank regional agricultural, transport and public healthproject staff undor the overall coordination of the Brazil Division. Unlike theCarajas Project also, the Bank, assisted by FAO, had considerable involvementin both the basic strategy and the detailed design of POLONOROESTE.

72. Thirdly, in the case of Carajas, the Borrower was a state-owned,semi-autonomous mining company, having a well-deserved international reputationas a well-organized, efficient and financially sound public enterprise, ratherthan the Government itself. From the outset, therefore, the iron ore project wasviewed by CVRD and the Bank as a commercial mining and export venture in whichthe Executor would also be the Bank's Borrower with the federal government'sguarantee. In addition to its very considerable previous experience in the miningsector, moreover, the Brazilian Government had granted CVRD legal rights toexploit the Carajas iron and manganese deposits, together with the rail right-of-way between the mine and port sites and the land concessions required toundertake mining and port activities. In this sense, the project was, indeed,"self-contained," and there was no apparent need to involve other governmentagencies in its implementation with the exception of FUNAI, which was broughtinto the operation essentially because of the Bank's concern with likely projectimpacts on local tribal populations. In retrospect, it is clear, however, that,although apparently self-contained, the Carajas Project has generated significantnegative externalities in its larger area of influence and, thus, that thenarrowly defined iron ore operation should have been at least accompanied -- andideally preceded -- by a broader regional planning and development andenvironmental management exercise for the entire rail corridor.

73. Fourthly, the Bank's effective involvement in project preparationwas limited since all major design decisions had already been taken, much of thedetailed engineering work had been concluded and physical execution was wellunderway by the time the Bank loan was approved. Given the advanced state ofproject preparation by a technically competent, highly experienced andorganizationally sophisticated Borrower, the relatively rapid formal processingof the operation by the Bank, once definitive authorization was given by theBrazilian Government, is not surprising. This meant, however, that the Bank hadvirtually no opportunity to influence such basic definitions from anenvironmental standpoint as the type of transport solution to be utilized, itsspecific routing or the location of port facilities. It also meant that manyprivate land ownership, as well as land and other natural resource use, decisions

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along the specific transport corridors created by the project had already beenmade and that the physical occupation of these areas had begun, as had associateddeforestation, land concentration, expulsion of small farmers and so on. Inshort, by the time the Bank became effectively involved in the Carajas Project,many of the socio-economic and physical development processes directly orindirectly set off or reinforced by the operation, and which would later havesignificant human and physical environmental repercussions, had already been setin motion.

74. This points to a second general lesson derived from the Carajasexperience which is of direct relevance for the preparation and appraisal offuture large infrastructure and productive sector operations, whether in Brazilor elsewhere, specifically the need for the Bank to become effectively involvedin project design as early as possible. A corollary to this is the need toconsider environmental and social -- as well as financial and economic -- costsand benefits in assessing the merits of the design options considered, as wellas in evaluating the alternative finally selected. This will ultimately requirethe integration of environmental and economic analysis, or expressed somewhatdifferently, a full accounting and analysis of environmental, together witheconomic, costs and benefits as part of ex-ante project evaluation. Althoughsuch integration currently presents considerable methodological difficulties,the Bank should dedicate increasing attention to developing -- and helping itsBorrowers to develop -- the tools and skills necessary to quantify, physicallyand, where possible, monetarily, the likely environmental costs and benefits ofproposed projects or, in the impossibility of doing so, to more fully identifysuch costs and benefits. This would at least permit the Bank and its clients toiuke better qualitative judgements as to the relative importance of differenttypes of project costs and benefits, as well as to be more conscious of theprincipal trade-off s between environmental and other kinds of costs and benefits.

75. A third important lesson that can be drawn from the Carajasoperation is the need both for broader coverage and a more precise definitionof environmental covenants in project legal documents. On the one hand, suchcovenants should clearly indicate the responsibilities of the project Executor,Borrower and/or Guarantor with regard to protection of the physical and humanenvironments -- and to sustainable natural resource management more generally -- in the project's area of influence, while, on the other, they should specifyconcrete mechanisms and procedures for identifying and properly dealing withunanticipated (direct and indirect) project environmental consequences occurringduring implementation and subsequent operation. In the case of the Carajasoperation, not only did the ambiguity of the project's environmental covenantsmake it difficult for the Bank to monitor their compliance, more importantly,the narrowness of these provisions left the Bank with insufficient leverage toinduce the Borrower and Guarantor to deal more adequately with such indirectproject impacts as extensive land clearing and concentration, rapid urbanizationand, more recently, increasing deforestation due to iron ore-basedindustrialization along the rail corridor.

76. Associated with the previous lessons, furthermore, is the need tobetter define -- and establish the conditions necessary for proper implementationof -- the measures required to adequately protect and preserve the natural andhuman environments affected by operations such as the Carajas Project. In short,

xxviii

in addition to taking a broade.6 spatial approach to the identification andassessment of the environmental problems potentially resulting from suchinvestments, a spatial approach to the resolution of these problems should alsobe followed. This can take a number of forms ranging from agro-ecological zonlngand land use regulation, accompanied by the strengthening of environmentalprotection and natural resource management agencies, to specific projectcomponents and/or parallel or -- ideally -- prior programs to deal directly withsuch issues as rural land tenure and sustainable small farmer development, forestmanagement and reforestation, public health and basic urban infrastructure andservice provision, possibly together with the financial and institutionalstrengthening of municipal governments, increased ecological and environmentalresearch and, where necessary, measures to protect indigenous populations andother vulnerable social groups, in the areas affected by such investments.

77. Independently of whether the approach ultimately followed involvesa single project or program with multiple components or several interrelatedprojects, moreover, the above considerations also imply the need for the Bankto take a cross-sectoral and multi-disciplinary approach to the identification,preparation and appraisal of investments that are likely to have significantenvironmental Impacts at the regional level, as well as to the eventualsupervision, monitoring and evaluation of these interventions. This representsa considerable challenge to institutions such as the Bank which are organizedsectorally, rather than geographically, within individual countries. In general,however, the Carajas experience suggests that in the future the Bank needs togive more explicit attention to how the projects and programs it supports indifferent sectors affect the particular regions in which they are located, theirinhabitants -- including migrants drawn to these areas by the Bank-assistedinvestments and related activities themselves -- and their natural environments.

78. Finally, considering both that a major consequence of the CarajasProject has been its broader social and ecological impacts on Eastern Amazoniaand that these dimensions were largely overlooked by CVRD and the Bank duringproject preparation, the need to mobilize professional expertise which the Bankhas not traditionally relied upon for project identification and appraisal --including regional planning and natural resource/environmental managementspecialists, together with social scientists other than economists -- is ofparticular importance. Such professionals, furthermore, should be involved fromthe outset so that their participation is not limited to belated, crisismanagement type interventions once projects are nearing appraisal or alreadyundergoing physical execution. It is also necessary to avoid "emergency" measures-- such as the Amerindian component in the present case -- which run the riskof being hastily prepared and, thus, of providing incomplete or otherwiseinadequate solutions to the problems which they are intended to solve. Insynthesis, gteater attention should be given from the very beginning of projectpreparation to defining appropriate safeguards and, where necessary, buildingpreventive and/or compensatory measures into project design to offset expectedadverse physical and human environmental impacts in its area of influence.

Follow-on Measures for the Carajas Corridor

79. In conclusion, the experience under the Carajas operation alsoclearly raises the issue, cited earlier, as to where and when the Borrower's

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and the Bank's responsibilities should end in a situation In which theinvestments they have co-financed have generated and continue to result insignificant adverse environmental consequences in their area of influence. Whilethere are no easy answers to this question, in the specific case of the Carajascorridor, there can be no doubt that a strong need exists both to improve andsustain environmental and Amerindian protection efforts originally undertakenin connection with the iron ore operation and to design and carry out rural andurban development and public health interventions, among other activities, atthe regional level. Furthermore, this need will only increase as urbanization,industrializa.ion and other development tendencies induced, reinforced oraccelerated by the iron ore operation proceed over the coming decades.

80. As the Carajas Project has been at least partially responsible formany of the environmental and social problems experienced in the region sincethe mid-1970'G, moreover, there can also be no doubt that CVRD has a continuingmoral obligation to assist broader government efforts to limit and, hopefully,reverse environmental degradation, as well as to provide needed infrastructureand services to rapidly growing rural and urban populations. In this connection,the company has already taken a number of initiatives in recent years, includingagreements with FUNAI to provide continuing support to several Amerindiancommunities in the area, on-going assistance to the towns of Parauapebas/RioVerde and a proposal to help develop a Forestry Poles Program along the Carajascorridor. Much of the support required, however, will necessarily have to comefrom other federal government agencies -- including the Grande Carajas Program,which is now administered by the Secretariat of Regional Development of thePresidency of the Republic, and the national environmental protection agency,IBANA -- together with state and municipal authorities and the local communitiesthemselves. Given its own participation in the Carajas Project, finally, the Bankshould be open to the possibility of providing additional assistance for sociallyand environmentally -- as well as economically -- sound development projects inthe region. The principal areas where specific follow-on actions should be takenin the Carajas corridor include the following:

(i) Regional Development and Environmental Planning. There is a need toproceed with, amplify and consolidate activities already initiated,completed or proposed which, when properly integrated, would providethe basis for comprehensive regional development and environmentaland natural resource management plans for the area. One concreteoutcome of this process should be the establishment of a permanentregional and environmental planning mechanism for the Carajascorridor. This exercise, moreover, shoulc. include a detailed socio-economic and environmental impact evaluation of the iron ore projectundertaken by a University, independent research institute or privateconsulting firm having relevant previous experience with ex-Rostproject evaluations. Furthermore, specific studies concerning thelegal, institutional, technical and financial requirements foreffective environmental protection and to assess past experience withAmerindian protection in the region should be undertaken.

(ii) Regional Development and Environmental Protection Funds. The aboveplanning and evaluation studies should result in a coherent set ofconcrete proposals for public intervention at the subregional level

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across a number of sectore. In order to finance these measuresspecific regional development and environmental protection fundsshould be created and capitalized with financial contributions fromCVRD, the Grande Carajas Program and other agencies, ideallyincluding external lending institutions such as the Bank. CVRD, morespecifically, should channel part of its revenues from iron ore salesboth in foreign markets and to metallurgical industries in theregion, while PGC should allocate some percentage of its fiscalincentive resources, to these funds. The revolving regionaldevelopment fund would be utilized to help finance -- on a pure loanor mixed loan and grant basis -- specific rural and urban developmentand public health projects in or near the Carajas corridor, whilethe environmental protection fund would provide grants to supportenvironmental planning and monitoring activities -- including theinspection and control of "sustained forest management and/orreforestation projects by pig iron industries -- together withimproved natural resource management and the strengthening of stateand local agencies responsible for environmental protection in thearea.

(iii) Sustainable Rural Develonment. Considerable potential exists for theestablishment of comparatively modest integrated agricultural and/orrural development projects along the Carajas corridor to assistexisting populations of small farmers and other producers. Morespecifically, studies of small farmer development possibilities,followed by concrete interventions to support rural producers, shouldbe pursued in parallel to ecological zoning and forestry developmentactivities in the region. Initial priority should be given toexisting concentrations of small farmers in the "Brazilnut polygon"near Maraba and elsewhere along the corridor where fertile soilsexist and the local population has thus far been able to resist theprevailing process of land concentration and expulsion.

(iv) Urban Infrastructure and Services. In view of the rapid growthexperienced as a direct result of the iron ore project by Parauapebasand Rio Verde and in part as an indirect result of this operationby Maraba, Acailandia, Santa Ines, Sao Luis and other towns alongthe Carajas corridor, these urban centers presently face significantdeficits of basic infrastructure, services and adequate housing, aswell as increasing pressures on state and municipal governments tomeet these demands. There is, accordingly, an urgent need to assessthe exact nature and extent of these deficits, to determine how well-- and with what resources -- local governments are currently copingwith these requirements and to plan and implement the publicinvestments and other measures required both to compensate for pastdeficiencies and meet projected future needs.

(v) Environmental Management. Protection and Research. The adequate useand protection of natural resources -- including land, air, water,fauna and vegetative cover -- should be a major priority in allfuture planning and development activities for the Carajas region.Among other actions, this will require considerable strengthening

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of existing planning and environmental agencies, especially at thestate level. Greatly improved land use and water and forest resourcemanagement, together with the preservation and, where necessary,upgrading of air, water and soil quality should be among theprincipal concerns of such efforts. These measures, moreover, shouldbe accompanied by the expansion of ecological research both in orderto further inerease knowledge about the region's natural resourceendowments and to provide necessary baseline information forsystematic environmental monitoring activities which should also beestablished. Such efforts, furthermore, should include the definitionand subsequent implementation of a comprehensive regionalenvironmental management strategy which gives particular attentionto the legal, organizational, staffing, training, equipment,logistical and funding requirements of the agencies responsible forenvironmental protection activities in the area.

(vi) Amerindian Protection. Sustained and, in all likelihood, expandedefforts by the Brazilian Government with CVRD's support will berequired in order to afford adequate protection to Amerindianreserves in and near the Carajas corridor as these areas come underincreasing pressure from continuing frontier expansion in the region.As in the past, future assistance should emphasize the demarcation,regularization, registration and, most importantly, physicalprotection of tribal lands, together with the provision ofappropriate health care. These services, morecver, should be providedin a way that clearly takes the needs of individual tribalcommunities into account and permits these groups to take a moredirect, active and effective role in the management of their ownaffairs. This is an area, finally, where continued Bank assistanceis likely to be essential.

(vii) Public Health and Environmental Sanitation. Rapid population growth,increasing rural and urban settlement and the proliferation ofprospecting activitiee, together with inadequate basic sanitationinfrastructure and health services, have all contributed tosignificant and probably increasing public health problems in theCarajas corridor. Malaria is particularly serious, as is the growingrisk of mercury contamination, both of which are directly associatedwith placer mining activities, but many other health problems alsoexist in the region. While the recently approved Bank-supportedAmazon Basin Malaria Control Project should contribute to a reductionin the incidence of this particular disease, specific interventions,necessarily including the expansion and improvement of basic urbansanitation infrastructure, solid waste collection and disposal andexpanded and upgraded preventive and other health care services, needto be designed and implemented in the area.

(viii) Railwap Transport. The demand on CVRD to provide additional railservices has been far greater than originally anticipated, especiallyamong the low-income population in the region. Expansion andimprovement of rail transportation, accordingly, Is a key area wheresome of the social costs of the iron ore project could be offset by

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the railway itself, further integrating this recently establishedform of transport into the local economy and providing a directbenefit to those affected by the Carajas operation.

(ix) Pix Iron and Charcoal Production. Despite recent governmentrestrictions, pig iron-related charcoal production still representsa significant potential long-term threat to the physical environmentin the CaraJas corridor. This is, however, a relatively recentphenomenon in the region which needs to be more systematicallystudied in order to determine its potential impacts on localecosystems and populations, as well as to identify possible supportmeasures for those adversely affected. Specific areas of futureinvestigation should include the economics of pig iron and charcoalproduction and the feasibility of using alternative fuel sources forthe former, together with the economic, social and environmental,including public health, consequences of charcoal production on ruraland urban communities and possibilities for introducing alternativeincome generating activities. In this connection, the Carajas energysupply options study proposed under the UNDP/World Bank Energy SectorManagement Assistance Program (ESMAP) should be undertaken as quicklyas possible.

WORLD BANK APPROACHES TO THE ENVIRONMENT IN BRAZIL: A REVIEW OF SELECTED PROJECTS

THE CARAJAS IRON ORE PROJECT

I. INTRODUCTION

1.01 On August 10, 1982, the World Bank approved a loan of US$ 304.5million (Loan 2196-BR) to help finance the Carajas Iron Ore Project (hereafterthe "Carajas Project" or simply "the pvoject"). The Borrower and Executor of theproject was the Companhia Vale do Rio Doce (CVRD)o a large state-owned miningcompany. The Brazilian Government was Guarantor of the loan. The Loan Agreementwas signed on August 13, 1982 and the loan became effective on November 12, 1982.The project was closed on December 31, 1987 and last disbursement was on April21, 1988, by which time an unused total of nearly US$ 74 million of the Bank loanhad been cancelled.

1.02 With a total cost initially estimated at over US$ 4.5 billion, theproject included development of an iron ore mining complex at the Serra dosCarajas -- some 550 kilometers south of the city of Belem in the northern stateof Para -- a deep water port near the city of Sao Luis in the northeastern stateof Maranhao and an 890 kilometer railroad line connecting the mine and portsites. It also entailed township installations at Carajas and smaller urbaninvestments at various points along the railway, other investments in physicalinfrastructure, environmental and Amerindian protection components and a stafftraining program. In addition to the Bank, Japanese, European and American groupsprovided funding for the operation.

1.03 The principal objective of the project was to extract and exportiron ore from the huge, high quality deposits at Carajas. At the time ofappraisal, exports resulting from the project were expected to generate some US$20 billion in foreign exchange earnings over the initial 30 years of the mine'soperation. According to the press release announcing the Bank's decision tosupport the undertaking, the project would also "contribute, through theprovision of basic infrastructure, to the future development of Brazil's largelyunexploited Eastern Amazon Region, including other mineral developments largelyfor export, as well as to agricultural development." 1 These latter activitieswould be carried out primarily through the Grande (or Greater) Carajas Programentailing "regional investments on the order of US$ 60 billion. The pressrelease characterized the CarK #^ deposits as "Brazil'e largest known potentialfor development and export in thd mining sector." 2 Carajas iron ore productionwas expected to reach 35 million tons per year by 1987 with possible expansionto 50 million tons per year at a later date.

1.04 Approximately a year and a half prior to Bank approval of theproject, CVRD created an independent environmental advisory group, GEANAM,composed of prominent scientists and Amazonian specialists, to review all aspectsof the company's activities, with an emphasis on the installation and subsequent

1 Bank News Release No. 83/7, August 12, 1982, page 1.

2 Ibid., page 1.

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operation of Carajas. During loan negotiations, CVRD and the Brazilian Governmentagreed to carry out an environmental work program in the project area includingenvironmental zoning, the establishment of ecological stations, conservationtracts and buffer zones and the undertaking of biotic inventories, pollutioncontrol activities ard other environmental protection measures. Furthermore, asstated in the above mentioned press release, "in anticipation of an acceleratedeconomic development as a consequence of the Carajas project," CVRD agreed toprovide funds to the national indian protection agency, FUNAI, to permit it toexpand and upgrade its activities and services on behalf of the Amerindiancommunities in the operation's area of influence. These activities were toinclude protection of Amerindian lands and provision of improved health services,as well as assistance for education and economic development projects inindigenous communities.

1.05 This report will examine the principal environmental features andimpacts of the Carajas Project to date in its area of influence in northern andnortheastern Brazil. It will attempt to evaluate how -- and how well -- the Bankanticipated and dealt with the project's environmental consequences. The analysiswill focus on the project's impacts on both the natural and the humanenvironments, including its effects on non-Amerindian, as well as Indian,communities, and on its indirect, as well as direct, impacts, to the extent thatthese can presently be observed. In the process, it will examine the adequacy,effectiveness and sustainability of the operation's specific environmental andAmerindian components, and it will consider the Carajas project in the contextof larger historical tendencies and processes of frontier development in theEastern Amazon region. It will likewise consider the interaction between theBank-assisted iron ore project and other public sector interventions -- includingthe Grande Carajas Program -- in the former's area of influence, givingparticular attention to their collective environmental consequences.

3 Ibid., page 2.

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II. PROJECT L4CKGROUND

A. The Macroeconomic Context I

2.01 At the time the Bank loan for the Carajas Project was approved,Brazil wae in the midst of a severe economic recession following an extendedperiod of impressive economic growth from the mid-1960's to 1980. Between 1966and 1980, GDP expanded at an average rate of roughly 92 a year due largely tothe even more rapid growth experienced by the industrial sector. The sharp risein oil prices in 1973, together with the heavy dependency pf Brazilian industryand transport on imported petroleum products, however, led to lower growth rates,balance of payments difficulties and rising inflation in the mid-1970's. Inresponse to this situation and in order to improve medium term growth prospects,the Government adopted a strategy which consisted in part of domesticsubstitution of petroleum imports and increased primary and manufactured exportpromotion.

2.02 Largely as a result of these efforts, during the mid and late 1970'soutput continued to grow at rates averaging around 62 and balance of paymentspressures were for the most part contained through a combination of rapid exportexpansion, import controls, import substitution and increased foreignindebtedness. Growth occurred, however, at the cost of steadily rising internalprices and the increasing vulnerability of the economy to external shocks. Thus,starting in 1979 with the second oil price hike, rising foreign interest ratesand the emerging world recession, the Brazilian economy suffered renewed balanceof payments difficulties, a rapid decline in GDP growth and a new round ofinflation. GDP fell significantly after 1980, expanding at a rate of -1.32 a yearbetween 1981 and 1983, while industrial output declined by an annual average of3.8% over this period. The annual inflation rate, in turn, increased from on theorder of 40% in 1977-78 to roughly 100% between 1980-82 and more than 2002 in1983.

2.03 The situation was particularly dramatir in 1981 when GDP growth was -1.6%, as compared with 7.2% in the immediately preceding year. This was primarilydue to negative growth in the industrial sector where output declined by 5.52in 1981, sharply contrasting with a 7.92 expansion experienced in 1980. WhileBrazil's merchandise trade balance was slightly positive (US$ 1.2 billion) in1981, moreover, it was significantly negative (US$ 6.6 billion) between 1978and 1980, particularly in 1979-80. This imbalance was due primarily to theincrease in oil prices and occurred despite a decreasing volume of petroleumimports from 1979 onward, as well as the restriction of many non-petroleumimports after 1980. Petroleum products, nevertheless, accounted for roughly 442of Brazilian imports in terms of value between 1979 and 1982, including more than52% of this total in the latter year.

1 This section is largely based on the President's Report for the CarajasIron Ore Project (Report No. P-3369-BR) dated July 22, 1982 and the followingBank country economic reports: Brazil: Recent Economic Performance and Prospects,Report No. 4674-BR dated August 22, 1983 and Brazil - A Macroeconomic Evaluationof the Cruzado Plan, World Bank Country Study, 1987.

4

2.04 The current account balance, on the other hand, was highly negativebetween 1979 and 1982, especially in the latter year when the shortfall exceededUS$ 16 billion. This was due largely to growing interest payments on thecountry's rapidly rising foreign debt which increased from US$ 41.3 billion in1977 to US$ 91.3 billion in 1982. Average real interest rates on medium andlong-term foreign debt rose sharply, especially after 1981 -- from 3.9% in 1977to 10.9% in 1982 -- with total interest payments rising from US$ 2 billion inthe former year to US$ 9.3 billion in the latter. The current account deficit,in turn, was offset by a combination of additional external borrowing, thedrawing down of reserves and, to a lesser extent, new foreign direct investment.External borrowing, more specifically, increased from approximately US$ 9.5billion in 1977 to US$ 15.7 billion (US$ 8.2 billion in net terms) in 1982, whileforeign reserves fell by US$ 8.9 billion and new direct foreign investment wasUS$ 2.5 billion in the latter year.

2.05 At the time the Carajas Project was approved, in short, the rapidlydeteriorating macroeconomic situation had caused Brazil's need for externalcredit to rise sharply. While most new lending to Brazil came from privatesources, the Bank also responded to the country's growing foreign exchangedifficulties by significantly increasing its loan commitments from US$ 425million in Fiscal Year 1977 (FY77) to US$ 724 million in FY82 and close to US$1.5 billion in FY83. The Carajas Project alone represented roughly 21Z of thislatter total. At the time it was approved, moreover, the Carajas Projectaccounted for the single largest Bank loan made to Brazil and one of the largestmade by the Bank anywhere in the world. 2

B. The Sectoral Context 3

2.06 The mining sector was responsible for more than 10% of Brazil'smerchandise exports, roughly 1.3% of GDP and about 1% of Government revenues in1980. While some seventy different minerals were produced at that time in Brazil,iron ore dominated national output, accounting for 26% of all mineral productionand more than 90% of the value of mineral exports. In value terms, otherimportant metallic and non-metallic minerals exploited commercially in 1980included crushed stone, limestone, coal, marine salt, manganese, bauxite, goldand tin. In addition, the country possessed large measured reserves of these andother minerals, many of which were located in the Eastern Amazon region. At the

2 The largest previous individual Bank loans to Brazil were the Alcoholand Biomass Energy Development Project (Ln. 1989-BR) approved June 30, 1980 forUS$ 250 million and the Northwest Region Development Program Highway Project (Ln.2062-BR) approved December 1, 1981 for US$ 240 million. Two other largeoperations for Brazil were approved later in FY83, the Water Supply and SewerageSector Project (Ln. 2249-BR) approved March 22, 1983 for US$ 302.3 million andthe Third Agroindustries Credit Project (Ln. 2268-BR) approved April 26, 1983for US$ 400 million.

3 The principal sources for this section were the above mentionedPresident's Report and the Staff Appraisal Report for the Carajas Iron OreProject (Report No. 3921-BR) dated July 6, 1982.

5

time the Carajas Project was appraised, Brazil's mining sector was composed ofsome 670 firms, most of which were privately owned. More than 60% of totalmineral production, however, was concentrated in 50 large companies, three ofthe most important of which -- including CVRD -- were state-owned.

2.07 During the 1970's and early 1980's the Brazilian Government activelypromoted foreign and domestic private sector participation in mining activitiesthrough the provision of fiscal, credit and other incentives. In this connectionalso, the Government gave strong priority to the Carajas Project, grantingspecial incentives to CVRD in late 1980, as well as for the much more ambitiousGrande Carajas Program (PGC). The latter was created by federal decree inNovember 1980 with the Carajas Iron Ore Project as its centerpiece. The PGCinvolved an area of nearly 900,000 square kilometers in the Eastern Amazon regioncovering large parts of the present states of Maranhao, Para and Tocantins.In the words of the President's Report for tha Carajas Project, this area was"unique in mineral potential, and includes iron ore, manganese, nickel, copper,tin, bauxite, gold and others. The conditions are also favorable to agricultural,cattle raising and reforestation activities." 5

2.08 By 1981, Brazil had become the largest iron ore producing countryoutside the Soviet block, surpassing Australia, the United States and Canadaamong other major producers. After the Soviet Union and Canada, moreover, Brazilpossessed the largest iron ore reserves in the world. Roughly 60% of totalreserves, estimated at over 34 billion tons, were located in the Eastern Amazonregion (ie. Carajas), the balance being situated in the southeastern state ofMinas Gerais where the country's iron ore mining activities had traditionallybeen concentrated. CVRD was responsible for close to 65Z of domestic iron oreoutput in 1980.

2.09 Brazilian iron ore production expanded at an average rate of 12.8%a year between 1960 and 1980, with exports increasing at the even higher rateof 14.6% a year. As a result, by 1980, 76% of all iron ore produced in thecountry was exported, as compared with 562 of this total in 1960. Brazilianexports, moreover, represented nearly 23Z of total iron ore exports by uion-Soviet block countries in 1980, as compared with less than 4% in 1960. Iron orethat was not exported was utilized for the most part by the rapidly expandingdomestic steel industry.

2.10 At the time the Carajas Project was appraised, Brazil was the largeststeel producing country in Latin America and the tenth largest in the world,generating output on the order of 15.3 million tons (in crude steel equivalent)in 1980. During the 1960's and 1970's, Brazilian steel production grew at a rateof roughly 10% a year, as compared with a world average of 3.72. State-ownedfirms -- particularly the National Steel Company (CSN) in Rio de Janeiro State,the Sao Paulo Steel Company (COSIPA) and the Minas Gerais Steel Plant (USIMINAS)

4 The state of Tocantins was formally created by the new federalconstitution approved in October 1988. Previously, this area was the northernpart of the state of Goias, from which the new state was dismembered.

5 President's Report, op. cit., para. 27.

-- assisted by a number of World Bank loans during the early and mid-1970's, wereresponsible for over 60% of total output in 1980. 6 Domestic steel consumption,in turn, expanded at an average rate of 92 a year during the 1970's withBrazilian steel exports exceeding imports for the first time in 1979. In responseto the economic recession which began in 1980, however, domestic steel productionand consumption declined sharply in 1981.

2.11 By the time the Carajas Project was appraised, the world iron oremarket was characterized by surplus capacity and depressed prices. This was duelargely to a downturn in international steel demand starting in 1975 whichfollowed closely upon a substantial expansion of iron ore production capacityduring the 1960's and early 1970's. As a result, by 1980 world iron ore outputwas estimated to be some 15% below effective installed productive capacity. Bankprojections of iron ore market behavior during the 1980's, however, concludedthat, by the latter half of the 'decade, this market would either be roughly inbalance under a low (1.82 per year) world steel demand growth scenario, orconfront an increasing supply deficit under a more rapid (2.71 per year) growthtrajectory, unle6s additional mining capacity were to come on stream. Accordingto the SAR for the Carajas operation, moreover, even though iron ore marketexperts disagreed on the precise timing of the absorption of existing excesscapacity, they concurred "in the general expectation that the current iron oreovercapacity will work itself out and might turn into a deficit as early as themid-1980's." '

2.12 In this context and despite its relatively remote location, theproposed Carajas operation was seen to possess substantial advantages overalternative sources of new iron ore production elsewhere in the world. Accordingto the Bank's appraisal, these advantages included the following: (i) the highquality and favorable processing characteristics of Carajas orel (ii) the factthat its deposits were easily minable and possessed substantial long-termpotential; (iii) the existence of numeroue purchase contracts between CVRD andits major foreign customers; (iv) the project's comparatively low operatingcosts; and (v) its operation by "an existing well-managed, experienced andfinancially sound iron ore operating company." e In particular, market risks for

6 These loans included the following: Ln. 0797-BR to CSN for US$ 64.5million approved February 1972; Ln. 0812-BR to USIMINAS for US$ 63 millionapproved April 1972; Ln. 0828-BR to COSIPA for US$ 64.5 million approved May1972; Ln. 1151-BR to CSN for US$ 95 million approved June 1975; and Ln. 1152-BR to COSIPA for US$60 million approved July 1975. The Bank also financed aniron ore project in Brazil in the early seventies through Ln. 0787-BR to theMBR (Mineracoes Brasileiras Reunidas) company for US$ 50 million, approved inAugust 1971.

7 Staff Appraisal Report (SAR), paras. 3.01-3.02. Even the high growthscenario was considered to be conservative in comparison with the rates ofexpansion experienced between 1960 and 1980 when steel production grew at anaverage rate of 3Z annually in the industrialized countries and 8.62 per yearin the developing world, or at an average rate of 3.6Z overall.

a Ibid., para. 3.03. For further details, see paras. 3.04-3.48 of the SAR.

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the project were seen by the Bank to be "minimized" considering that CVRD hadalready negotiated long-term sales contracts with Japanese, German, French,Italian and Korean clients for some 24.7 million tons per year of Carajas orewhich, according to the SAR, "seem to be adequate in assuring sales during itsfirst two years of production build-up." 9

2.13 Appraisal projections of iron ore prices during the 1980's weresimilarly optimistic. Despite the fact that the price of Brazilian iron ore fellsharply during the 1970's, from US$ 72.7 per ton in 1970 to US$ 36.7 per ton in1978, according to the SAR a slight real price increase occurred between thislatter year and 1981, and an additional increment was expected in 1982 on thebasis of CVRD negotiations with its principal foreign purchasers. For purposesof the financial and economic analysis of the project, moreover, the Bank assumedthat iron ore prices would remain constant in real terms between 1983-85, thenincrease by 1.5% per year between 1986 and 1990 and stay constant thereafter. 1°Furthermore, Carajas' production was not anticipated to have a significantimpact on international iron ore prices since, even when operating at its fullinitial capacity of 35 million tons per year in the late 1980's, its output wasnot expected to represent more than 8% of total world iron ore exports.

2.14 In retrospect, this projection of iron ore prices proved to be fartoo optimistic. As indicated in the Bank's PCR for the operation, because ofgenerally weak international demand for iron ore at least through 1987, actualprices for Carajas ore at the time of project completion were only on the orderof U8$ 16.2 per ton, or roughly 56Z below the appraisal estimate of US$ 35.4 perton. Thus, while prices of Carajas' principal produict, sinter feed, were expectedat the time of appraisal to increase by about 25% over the 1985-89 period, infact, they decreased by 11%. 11 The impact of this observed decrease in iron oreprices on the project's export revenues and its financial and economic rates ofreturn will be discussed in Chapter VI below.

C. The Bank's Lending Strategv 12

2.15 At the time the Carajas Project was presented to the Board, theBank's lending strategy for Brazil had four main objectives: (i) to help theGovernment intensify its efforts to increase the productivity and improve theliving conditions of the lowest income groups in both rural and urban areas; (ii)

9 Ibid., para. 3.26. Initial plans were for 5 million tons of iron oreproduction at Carajas in 1985 and 20 million tons in 1986.

10 Ibid., paras. 3.32-3.34 and 8.13. The SAR notes, however, that in lightof the possible iron ore market deficit by 1986 under the high steel demandgrowth scenario mentioned above, these price assumptions may be "tooconservative." (para. 3.34)

11 Project Completion Report, dated May 30, 1989, Part I, para. 21 andPart III, Table 6, Section C.

12 This section is based on the above mentioned President's Report,paragraphs 21-24.

8

to support institutional development and policy reform in order td establish"adequate coordination and control" within the public sector, maximize publicsavings and ensure their rational use through the proper selection of investmentprojects; (iii) to ease the foreign exchange constraint on national developmentby supporting projects designed to increase export capacity and substituteimports; and (iv) to provide part of the medium and long-term capital flowsrequired by the country in order to "sustain satisfactory growth and achieve itsemployment creation and regional development objectives." 13

2.16 The Carajas Project was explicitly seen to contribute to the twolatter objectives of this strategy. According to the President's Report for thisoperation, the principal goal of the project would be to increase Brazil'sexports of iron ore in order to augment its foreign exchange earnings. Withregard to the final objective of the strategy, in turn, the President's Reportaffirms that "continued lending by the Bank in Brazil is regarded by theinternational financial community as a sign of confidence... and encouragesothers to contribute to the country's economic development." 14 A major purposeof Bank participation, in fact, was to attract additional resources from otherinternational lenders -- including the Japanese and German Governments and theEuropean Coal and Steel Community -- to the Carajas Project, thereby furthercontributing to the inflow of foreign capital to Brazil. The Carajas Project,in short, was a key element in the Bank's lending strategy for Brazil in theearly 1980's.

13 Ibid., para. 24.

14 Ibid., para. 24.

9

III. THE PROJECT REGION

3.01 While the Bank's appraisal documents (ie. the Staff Appraisal andPresident's Reports) describe and analyze the macroeconomic and sectoral contextof the Carajas Project, the same did not occur with its human and naturalenvironmental (or regional) context. Nor did the Bank undertake any kind ofsystematic study of the area of influence of the planned Carajas investments,as it had done in the case of the proposed improvements to the BR-364 highwayin Nato Grosso and Rondonia in the western part: of the Amazon region. 1 Whilethe SAR does include a short section on the project's "regional impact"containing relevant, if very sketchy, observations on the likely contributionof the Carsajas operation to the future development of Eastern Amazonia, it doesnot go into detail with respect to the ecological, demographic and socio-economic characteristics of the project's area of influence, nor does it considerthe larger environmental implications of the proposed infrastructure andproduct've investments. Furthermore, even though the SAR touches upon some ofthe important previous and parallel large-scale investments and developmentprograms affecting the Carajas area, it does not fully examine the broaderregional policy context in which these initiatives were situated.

3.02 The SAR's discussion of "regional impact," nevertheless, does clearlyhigUlight the role of the Carajas Project in the on-going efforts of theBrazilian Government to "open up" Eastern Amazonia for productive exploitationof its rich natural resources. Before examining the extent and basiccharacteristics of the project's area of influence, therefore, it is instructiveto briefly review how the Bank's appraisal documents viewed the operation'spotential developmental consequences at the regional level. The rest of this andthe following chapter will further explore the wider regional policy anddevelopment contexts of the Carajas Project.

A. The Project's Expected Regional Impact

3.03 The SAR begins its discussion of the project's regional impact byseemingly equating its location with CVRD's concession around the mine site.According to this document, the project was "located within the Eastern Amazon,in the Greater Carajas region, an area of about 4,000 km2, located north of the8th parallel and between the Amazon, Xingu and Parnaiba Rivers, covering partof the states of Para, Goias and Maranhao." a It next mentions the GrandeCarajas Program (PGC) whose "objective is to develop the region into a highly

I This study was undertaken in Connection with preparation of thePOLONOROESTE program which the Bank subsequently financed through five loansapproved between December 1981 and October 1983. The regional survey waspublished as a country study by the Bank in 1981 under the title Brazil:Integrated Development of the Northwest Frontier.

2 SAR, para. 2.16. This statement is, in fact, quite confusing since thetotal area covered by the "Greater Carajas region," as noted in the previouschapter, is on the order of 900,000 km2 and not "about 4,000 hm2" (or 400,000hectares) which was roughly the size of CVRD's concession around the mine.

10

productive center of basic raw materials, semi-finished and finished products,mostly for export," noting also that the "precise scope and timing" of the PGC,however, "still need to be defined.n 3

3.04 The iron ore project is then situated in the context of the largerdevelopment efforts for the Greater Carajas area. According to the SAR, "one ofthe preconditions to future major developments in the region is the existenceof basic infrastructure. In this respect the Carajas Project will contributesubstantially to regional development through installation of a ma!Jor railroadline in West-East direction linking the remote Serra dos Carajas area with thenorthern sea coast near Sao Luis and through development of a bulk terminalcapable of handling ships up to 280,000 dwt." " The project was portrayed in theSAR as "rounding out basic infrastructure requirements" in Eastern Amazonia whichincluded such other large investments ast (i) the already implanted Belem-Brasilia and Transamazon highways; (ii) the Tucurui hydropower plant, scheduledfor start-up in 1983; (iii) the Itaqui commercial port at Sao Luis already inoperation; and (iv) the Barcarena river port near Belem which, at that time, wasstill under construction. There were, moreover, important linkages among thesevarious investments, including Carajas, although this is not brought out veryexplicitly the SAR, since both the iron ore operation and several largeindustrial export ventures -- most notably aluminum plants located at Barcarena(ALBRAS-ALUNORTE) and Sao Luis (ALUMAR) -- were highly dependent on both theenergy to be generated by Tucurui and the port installations near Belem and SaoLuis.

3.05 Other important mineral development and processing projects are alsomentioned by the SAR. Unlike Carajas, however, these activities were "locatednear commercial waterways or in coastal areas," whereas the infrastructurerequired for the iron ore project would "open up the Serra dos Carajas area inthe interior where the potential for resource development is high." 5 Among theactivities mentioned in this connection were the Trombetas bauxite venture whichhad direct access to the Amazon River, and the ALBRAS-ALUNORTE and ALUMARoperations cited in the preceding paragraph and described more fully in the nextchapter.

3.06 In addition to the iron ore operation, several other projects inpreliminary stages of development were considered by the BAR likely to use the

3 Ibid., para. 2.17. The SAR further observes, however, in this contextthat copper concentrate, ferro-manganese, tin and gold, as well as iron ore,projects were already in early stages of development as part of the PGC.

4 Ibid. para. 2.18. The port at Ponta da Madeira was subsequently designedin such a way as to accommodate ships of even greater capacity, up to 350,000dead weight tons.

5 Ibid., para. 2.19 It should be noted, huwever, that early in projectpreparation -- and prior to effective involvement on the part of the Bank --several transport alternatives, including the use of a pipeline or inlandwaterways, were considered for the shipment of Carajas ore. See Chapter V belowfor further details.

11

Carajas transportation network in the medium term. These projects included: Mi)a copper concentrate venture fot which CVRD had completed exploration and hadprefeasibility work under contract; (i) a ferro-manganese project for which CVRDwas studying a possible joint venture development; (iii) several tin projectsunder implementation by Brazilian private firms; (iv) a bauxite project atParagominas which was being studied by foreign and local companies, includingCVRD; and (v) the mechanized exploitation of gold at Serra Pelada, which had,until that time, been mined by prospactors. 6 A revealing aspect of thisdiscussion -- although not specifically commented upon by the SAR -- is CVRD'sapparently quite extensive role in mineral development activities throughoutEastern Amazonia, a role going well beyond the extraction of iron ore at Caraj as.'

3.07 The SAR likewise affirme that, over the long run, the Carajas Projectwould indirectly stimulate development of the more important towns in the regioninto significant commercial and industrial centers. The PGC is again 'cited inconnection with the future development of seven such centers and their majorproductive activities: Carajas (iron ore), Sao Felix do Xingu (tin concentrate),Maraba (central junction for railway, waterway and highway systems), Tucurui (pigiron and sponge iron), Barcarena and Paragomli.s (alumina and aluminum) and SaoLuis/Ponta da Madeira (semi-manufactured steel products and export sinter, amongothers)." * In light of the present widespread concern both inside and outbideBrazil with the potentially damaging environmental consequences of the pig ironsmelters in the Carajas-Sao Luis corridor, it is interesting to note that theSAR explicitly mentions the possible future production of pig iron in EasternAmazonia, even though it is suggested that this activity would be centered aroundTucurui rather than along the rail line. As will be further discussed in the nextchapter, however, as early as 1979, CVRD had anticipated the possibleinstallation of pig iron industries at or near the principal urban centers (eg.Maraba, Acailandia, Santa Ines, etc.) along the Carajas railway corridor, as part

6 Ibid., para. 2.20. Plans for the "mechanized exploitation" of gold atSerra Pelada were later abandoned by CVRD as the result of social and politicalpressures by prospectors (garimieiros) -- whose number at the peak of SerraPelada's activity in the early 1980's is estimated to have been as high as100,000 -- including a march on CVRD'G facilities at Parauapebas in 1984 whenthe company threatened to restrict access to the site. The following chapterprovides additional details on prospecting activities at Serra Pelada andelsewhere in the Carajas project region.

' While manganese ore is, in fact, being extracted by CVRD within the ironore concession area, the Paragominas bauxite deposits and the Serra Pelada goldmining area are well to the east of the Carajas concession and even the coppermine (Salobo) which CVRD is now beginning to exploit is located outside andslightly to the north of the present concession, as is the large retention pondoperated by CVRD for run-off from the iron ore mine.

8 Ibid., para. 2.21.

12

of a larger regional industrialization strategy. 9 The SAR, however, does notspecifically mention this prospect.

3.08 In its discuseion of the project's potential regional impact, theSAR also notes that, the iron ore operation, "in addition to laying basicinfrastructure, will draw large numbers of persons into the region, stimulategrowth of supporting services and facilities, and accelerate the region's socialand economic transformation." 10 This and the other affirmations reproduced inthe preceding paragraphs, moreover, are echoed in the Bank's economic analysisof the Carajas operation which, in addition to estimating the project's rate ofreturn and calculating its expected foreign exchange benefits, points to "othermajor regional benefits in opening up a remote but resource-rich area of theAmazon." As identified, but not quantified, in the appraisal report, thesebenefits included the generation of economic activity "directly at Carajas, alongthe rail line and at the port city of Sao Luis, and indirectly througho-t theregion." 11

3.09 More specifically, the regional benefits of the Carajas project, asdepicted in the SAR, included the direct employment of about 6,000 CVRD employeesand 2,500 service workers through 1988 and the creation of additional jobs inlater years as "basic workers are drawn by a variety of expected miningdevelopments and other economic opportunities in the region." 12 Urbandevelopment was also expected to be accelerated by the project "through thedevelopment of the new town of Carajas as well as the expansion of existing townsparticularly along the railway line where maintenance and other railway personnelwill be housed and where outsiders are likely to be drawn and at Sao Luis, whichis already an established port city." 13 Finally, the project was expected to"play a key role in spurring the economic growth of the region" and to "beginthe process of planning and controlling the growth of a territory both vast ineconomic potential and unique in environmental features." 14

3.10 Given the above statements concerning the project's regionalimportance and impact, as well as the "unique" environmental features of theEastern Amazon region, it is curious that relatively little attention was givenin the preparation and appraisal of the iron ore operation to the ecological,demographic and socio-economic characteristics of, and existing developmenitendencies in, its immediate area of influence. It is similarly curious that thepotential human and physical environmental costs of the larger regional

9 CVRD, Amazonia Oriental: Programa Preliminar de Desenvolvimento, Rio deJaneiro, 1979.

10 SAR, op. cit., para. 2.21.

" Ibid., para. 9.11

12 Ibid., para. 9.12

13 Ibid., para. 9.13.

"' Ibid., para. 9.14.

13

development processes expected to be set off or reinforced by the Carajas Projectwere not given greater consideration at the time of appraisal, nor were morerigorous measureso proposed in the context of project design to ensure that the"process of planning and controlling" future economic growth in the region would,indeed, occur. It is symptomatic of these oversights, that, even the project'slikely area of influence was not clearly identified at the time of appraisal andwas, in fact, only formally defined with regard to the operation's Amerindianprotection component.

B. The Proiect's Area of Influence

3.11 There are a number of difficulties in determining, even today, theactual area of influence of the Carajas Project. The narrowest concept refersto the areas directly under the legal control of CVRD. These include the 410,620hectare concession around the Carajas mine site in the present municipality ofParauapebas, that until recently was gart of the municiDio of Maraba, from whichit was formally dismembered in 1988. ' These areas also include a 2,221 hectareplot owned by CVRD at the port site at Ponta da Madeira, near the port of Itaqui,on the island of Sao Luis. Finally, they include an 80 meter wide strip alongthe 890 kilometer CVRD-owned railway (ie. roughly 40 meters on either side ofthe tracks) connecting the mine site at the Serra dos Carajas and the portterminal in Sao Luis, together with areas occupied by railroad maintenance patiosat Santa Ines and Pequia, near Acailandia, in Maranhao and Maraba in Para.

3.12 A second and territorially much broader concept of the project'sregion of influence includes, in addition to the areas directly controlled byCVRD, the Amerindian communities expected to be affected by the economicdevelopment brought on directly or indirectly by the Carajas operation. At thetime of appraisal, it was estimated that roughly 4,500 Amerindians lived in thearea of influence of the Carajas Project, which was initially defined as "aradius of about 100 km from the mine and railway." 16 This population residedin 37 different villages on 14 reserves involving some 2.2 million hectares inthree different states. " At the recommendation of its anthropological

"' The former mutnicipality of Maraba -- which covered an area of 37,373square kilometers -- was, in fact, divided into three muj_ip_ios in 1988,Including Curionopolis, where the Serra Pelada gold mine Is located, in additionto Parauapebas, wihere the Carajas mining complex is situated, and the presentMaraba, each of which now occupies roughly one third of the area of the previoussingle jurisdiction.

16 SAR, para. 5.53 and Annex 5-4. This criterion was, in fact, formallyadopted ini the Loan Agreement which, in Article I, Section 1.02(k) identifies"Carajas Project Area" ae "the area included in a radius of about 100 kilometersfrom the iron ore mining site and railway to be constructed under the Project."This definition extends the project region, at least for purposes of Amerindianproteztion, to an area of roughly 19S,000 km2.

17 The specific municipalities involved were Maraba and Tucurui in Para,Amarante do Maranhao, Bom Jardim, Carutapera, Moncao and Montee Altos in Maranhaoand Tocantinopolis in the present state of Tocantins.

14

consultants, however, during the course of project execution CVRD later expandedits Special Amerindian Protection Project -- designed to provide health servicesand other forms of assistance to these communities -- to cover a total of roughly14,000 Indianb,, living in 130 villages on 24 reserves, thereby effectivelyextending the project area to some 150 km on either side of the rail line andoutward from the mine site. is

3.13 An alternative, and more restrictive, approach to defining theproject's area of influence is that taken by CVRD in a recent study of socio-economic development and environmental impact along the Carajas railway corridor.While pointing out that it is virtually impossible to isolate the effects of themining, rail and port investments at the larger regional level on account of themany other factors which have influenced and continue to influence developmentsin Eastern Amazonia, CVRD selected the municipalities whose territory is cut andwhich are directly served by the railroad as the areas where the effects of theCarajas Project have been most immediately felt. In 1980, these municipalitieswere Maraba (now Parauapebas, Curionopolis and Maraba) and Sao Joao do Araguaiain Para, together with Imperatriz (including Acailandia which was subsequentlydismembered from it), Santa Luzia, Santa Ines, Pindare-M4irim, Vitoria do Mearim,Arari, Itapecuru-MirLm, Anajatuba, Santa Rita, Rosario and Sao Luis in Maranhao.Together these municipalities cover roughly 81,500 square kilometers. 19, 20

3.14 The CVRD study correctly indicates, however, that this relativelynarrow corridor represents only a first approximatior to the Carajas railway'sreal area of influence which probably extends over a much broader area -- atleaat in Maranhao -- and, moreover, will change over time. The area of influenceie, indeed, likely to become larger in the future as the result of investmentsassociated with on-going development efforts in the region, many of which aredirectly or indirectly related to the iron ore project. In fact, the expansionof the railway's area of influence has already begun to occur with inaugurationof the first segment of the North-South railroad in April 1989. This link extends

' PCR background paper prepared in 1988 by Maria de Lourdes Davies deFreitas of CVRD on the Amerindian Special Project. In addition to themunicipalities mentioned in the previous note, the other Amerindian areaseventually assisted under the Project were located in Altamira, Itupiranga,Jacunda, Sao Felix do Xingu and Senodor Jose Porfirio in Para, Barro da Corda,Candido Hendes, Grajau and Turiacu in Maranhao and Itaguatins in the new stateof Tocantins. Under this expanded criterion, the Carajas "project area" wouldpotentially involve up to some 290,000 km2.

19 CVRD, Imict.k Ambiental e Desenvolvimento Socio-economico ao lon o daEstrada de Ferro Caraias, Rio de Janeiro, 1987 (3 volumes), Chapter II. Despitethe much larger number of municipalities in Maranhao, those in Para, in fact,occupy a larger share of the area along the immediate Carajas rail corridor,accounting for roughly 57X of the total.

20 In some parts of the CVRD study, the municipalities of Bom Jardim andMoneao, located across the Pindare River just to the north of Santa Luzia andSanta Ines, but not directly cut by the CarajaG railroad, were also considereddue to their close proximity to the rail line.

15

roughly 100 kilometers from the city of Imperatriz to Pequia, near Acailandia,on the Carajas rail line and, by using the latter -- as well as CVRD's rollingstock -- now affords rail connection between Imperatriz and the port of Sao Luis. 2After Sao Luis, Imperatriz is the largest urban center in the Carajas area andpolarizes an extensive region in southwestern Maranhao and the neighboring stateof Tocantins. The Brazilian Government has indicated its intention to extend theNorth-South railroad as far south as Anapolis in the state of Goias, some 1,600kilometers from Acailandia, where it would link up with the exieting rail systemin the central and southern parts of the country.

3.15 The CVRD study also identifies other parts of the Eastern Amazonand Preamazon regions where the railroad's direct are& of influence could expandeven farther over time. These include the entire Carajas "metallurgicalprovince," which is likely to be exploited by CVRD and/or other mining companiesat some future date, thereby potentially extending the railroad's area ofinfluence to other large municipalities in the state of Para immediately to thewest (Sao Felix do Xingu) and south (Conceicao do Araguaia, Redencao, Rio Mariaand Xinguara) of the present iron ore mining site. 22 In addition, thepreviously mentioned bauxite deposits located in Paragominas in northeastern Paraand neighboring municipalities in northwestern and north-central Maranhao(including Bom Jardim, Carutapera and Santa Luzia) are also likely to beexploited at some point in the future, with the ore transported to the previouslymentioned ALUMAR aluminum plant in Sao Luis through an extension of the Carajasrailroad from Santa Luzia to Paragominas.

3.16 Another possible source of expansion of the project's area ofinfluence mentioned by CVRD would be the large-scale exploitation of coconutsfrom babacu palm trees as a renewable energy source for the metallurgicalindustries expected to locate along the Carajas-Sao Luis corridor over the nextseveral decades. This activity could directly extend the railroad's area ofinfluence to the "Parrot's Beak" (Bico do PaDagaio) between the Araguaia andTocantins Rivers in the northernmost part of the new state of Tocantins andsouthward in the Mearim River valley in central Maranhao, since both of theseregions contain large concentrations of native babacu palms. 23 As will bediscussed in some detail later in this report, moreover, the installation of themetallurgical industries themselves -- even though located primarily in, or verynear, the-cities of Maraba, Acailandia, Santa Ines and Sao Luis along the Carajas

21 These two cities are already connected by paved roads -- the Belem-Brasilia highway between Imperatriz and Acailandia and the BR-222 and BR-135highways between Acailandia and Santa Ines and Santa Ines and Sao Luis,respectively -- but shipping freight by rail is considerably less time consumingand expensive than transporting it by road.

2' Significant tin, iron, lead and copper deposits have been identifiedin the former area, while iron, copper, lead and zinc deposits could potentiallybe exploited in the latter.

23 According to the CVRD study (Volume I, pp. 63-64), twelve additionalmunicipalities in Maranhao and eight in Tocantins would be particularly affectedby the large-scale commercial exploitation of babacu.

16

rail line, as well as at Tucurui on the Tocantins River north of Maraba -- willalso have a major socio-economic and environmental impact on the larger regionsurrounding the railroad corridor because of their proposed use of charcoal asa principal energy source. This will be discussed in further detail in ChapterVIII below.

3.17 As the preceding discussion suggests, definition of the real areaof influence of the Carajas Project is not a simple matter, especiallyconsidering that this area will continue to increase in size as new productiveinvestments involving either the industrial processing of Carajas iron ore orthe increasing utilization and/or physical expansion of project-financed railand port infrastructure, occur over time. For purposes of the present report,as in the CVRD study cited in the preceding paragraphs, however, the project'sarea of influence will be largely limited to those municipalities locatedimmediately along or in very close proximity to the Carajas railway, recognizingthat, in all likelihood, this may considerably underestimate the actual regionof influence of the operation. This "corridor", nevertheless, is the area wherethe initial human and natural environmental impacts of the project have beenstrongest and most visible. Given the present dynamism of the Eastern Amazon andPreamazon regions, any more detailed future study of the impact of the iron oreproject will probably need both to refine and to expand the area underobservation, based on a more systematic analysis of the specific linkages betweenthe iron ore operation and other investments and development activities in andnear the immediate Carajas corridor.

C. Ecological Subregions and General Characteristics

3.18 Although this aspect is barely touched upon in the Bank's appraisaldocuments, the project's immediate area of influence is composed of a number ofecologically quite distinct subregions. The ecological diversity within the muchlarger Grande Carajas region is even greater. The only references in the SAR tothe physical and human ecological characteristics of the Carajas corridor,however, are a brief mention of the climate and vegetation at the mine site, ofthe topography, principal settlements and, again, vegetation along the rail line,and the main hydrological features of the port area. At the mine site, forexample, the vegetation is characterized in the SAR simply as "continuousequatorial rainforests except on top of the plateaus where clearings occur,indicating outcropping iron formations," 24 while the rail route is describedas follows: "from Km 0 (Ponta da Madeira) to Santa Ines city (Km 200) thetopography is low lying with many small rivers, swampy in parts and with mediumforest elsewhere. From Km 200 to Carajas (Km 890) the route lies through junglewith large and dense timber and little civilization." 25

24 sARt op. cit. para. 5.01.

"' Ibid., para. 5.17. The SAR also notes that the principal towns adjacentto the railroad are Santa Inen, Imperatriz and Maraba, further indicating thatthe railway would pass throigh the "small villages" of Santa Cruz (Km 282), Calis(Km 385), Pequia (Km 514), Cara (Km 634) and Parauapebas (Km 862), in additionto Maraba (Km 737). Much of the topography along the rail line, moreover, withthe exception of a "hilly area" between Km 415 and Km 530 (having a maximum

17

3.19 A slightly more detailed examination of the principal ecologicalcharacteristics of the Carajas railway corridor reveals initially that it iscrossed by, passes near or closely follows a number of important Amazonian andPreamazonian rivers, flowing for the most part in a northerly direction fromthe Brazilian central plateau either to the Amazon River or the northeasterncoast. In the former category are the Tocantins River and its principaltributaries, the Araguaia and Itacaiunas Rivers to the east and northwest ofthe Serra dos Carajast respectively, as well as the Capim River which flows intothe Amazon just to the west of Belem. The latter includes the Gurupi and TuriacuRivers in western Maranhao and the Pindare, Grajau and Hearim Rivers which flowinto the Bay of Sao Marcos immediately to the west of Sao Luis in north-ce:ntralMaranhao. Along much of the eastern and central portions of its extension,the Carajas railway runs parallel to the Pindare River on a southwest-northeastalignment. Based on differences in climate, topography and geomorphology, theCazajas corridor can be divided into three main subregions from an ecologicalstandpoint: (i) the area between (and including) the Serra dos Carajas and thehighlands near Acailandia containing the Araguaia-Tocantins depression; (ii) theMaranhao sedimentary plateau between Santa Ines and Acailandia; and (iii) theMaranhao lowlands (or Baixada Maranhense) between Sao Luis and Santa Ines. Eachof these subregions will be briefly described below. 27

1. The Caralas Highlands and the Araguaie-Tocantins Depression

3.20 Rising to an average altitude of 600-650 meters above sea level, theSerra dos Carajas (or Carajas highlands) separates the Araguaia-Tocantins valleyto the east and the middle Xingu River basin to the west. Average temperatureat the Carajas mine site in the highlands is approximately 21 degrees Centigrade,being some four to five degrees lower than at Parauapebas at the base of theSerra and at Maraba farther to the east. Annual rainfall in the Carajas highlandsis on the order of 2,000-2,100 mm. Roughly 95% of the area within CVRD'sconcession is covered by dense tropical forest. The remaining highland areas arecovered by a scrub vegetation known as canaa which sits on top of the iron oredeposits and is a clear indication of their presence close below the surface.The canga areas have their own unique flora which have been studied andclassified by the Emilio Goeldi Museum in Belem with resources provided by CVRD

height some 324 meters above sea level), was described as relatively flat.

26 The Araguaia flows into the Tocantins River just to the east of thetown of Sao Joao do Araguaia, while the Itacaiunas joins the Tocantins at Maraba.The Grajau and Mearim Rivers, in turn, join together in the lowlands to the southof Sao Luis before flowing into Sao Harcos Bay.

27 A more detailed description of each of the major subregions along theCarajas-Sao Luis corridor can be found in two articles by Aziz Ab'Saber,"Geomorfologia da Regiao," in Goncalves de Almeida, Jose (ed.) Caralas: DesafioPolitico. Ecologia e Desenvolvimento, Editora Brasiliense, Sao Paulo, 1986 and"Aepectos Geomorfologicos de Carajas" in SEM&IIWRB/CVRD, DesenvolvimentoEconomico e Impacto Amblental em Areas de TroRico Umido Brasileiro: A ExDerienciada CVRD, Rio de Janeiro, 1987.

18

under the iron ore project, as has much of the wildlife and vegetation, togetherwith archaeological sites, in the Carajas highlands. Among the flora found inthe Serra dos Carajas is a medicinal plant, used in the treatment of glaucoma,called iaborandi. This plant is gathered by rural laborers for sale to amultinational pharmaceutical firm and is apparently is in danger of disappearingdue to predatory collection practices. 28

3.21 The Araguaia-Tocantins depression, in turn, extends for some 250kilometers between the Serra dos Carajas and the Serra dos Coroados nearAcailandia and is largely formed by the Araguaia and Tocantins River valleys.Altitudes between the two highland areas vary between 90 and 120 meters abovesea level and a great range of soil types exists in the subregion generatingdiverse forms of surface vegetation. Annual rainfall varies from 1,400-1,500 mmat the base of the Serra dos Coroados to 1,800 at the foot of the Serra dosCarajas. Thus, the eastern portion of this subregion, near Acailandia, isrelatively dry with annual pluviometric levels at Imperatriz and Maraba beingon the order of 1,600 mm and 1,700 mm, respectively. There is a pronounced dryseason in this subregion extending normally for 3 to 4 months (June throughSeptember), the latter part of which is also characterized by relatively hightemperatures and little ventilation. 29 The highest daily temperatures atImperatriz are around 38 degrees Centigrade and occur between the months ofSeptember and November.

3.22 This subregion has undergone substantial deforestation over the pasttwo decades, and particularly over the last ten years, as the result of effortsto introduce pastures and generally small-scale agricultural activities whoselong-run sustainability is questionable given local soil and climate conditionsand the comparatively primitive cultivation techniques utilized in the area.Among the species adversely affected by widespread deforestation in the subregionis the Brazilnut tree, known popularly as the castanheira. Several extensiveareas in the Tocantins and Itacaiunas valleys that were formerly readilyidentifiable by their abundance of the tall Brazilnut trees are now referred tolocally as "castlnheira cemeteries," the burnt-out trunks clearly bearing witnessto the most common technique utilized to remove the dense tropical forest whichpredominated in this area. The Serra dos Coroados, finally, is crossed by the

28 On one occasion, according to sources at the mine site, some 180jaborandi gatherers were forcibly removed from CVRD's concession at Carajas.Invasions by small numbers of collectors, however, are difficult to control,especially near the perimeter of CVRD's area, and there is no control outsidethe concession.

29 This has negative implications for the proposed installation ofmetallurgical industries in cities such as Acailandia and Maraba since the poorventilation during a significant portion of the year means that emissions willnot be easily dispersed in the atmosphere. The relatively limited availabilityof subterranean water sources due to the low water table at AcaJlandia representsanother major constraint on these industries, which require significant volumesof water in their processing activities, as well as other urban-industrialdevelopment activities at this location.

19

Carajaes railway at an altitude of 324 meters above sea level, marking the highestpoint along the rail line east of the mine site.

2. The Maranhao Sedimentary Plateau

3.23 Extending to the east for some 320 kilometers from the Serra dosCoroados to Santa Ines, the Maranhao sedimentary plateau is formed by numeroustablelands ranging in altitude from 300 to 500 meters and having an averageannual rainfall on the order of 1,600 to 1,700 mm. This subregion, althoughalready significantly altered by human intervention at the time the Carajasrailway was built, presents a wide variety of vegetation types, ranging fromAmazonian humid tropical forests to drier forests and savannah (cerrado)grasslands, It also includes large expanses of babacu palms in the Grajau andMearim River valleys. In much of this area, moreover, as is also the case in theabove mentioned Araguaia-Tocantins depression, once the native forest is removed,the spontaneous growth of secondary vegetation makes the management of pasturelands extremely difficult.

3. The Maranhao Lowlands

3.24 Starting to the east of Santa Ines, the Baixada Maranhense is formedlargely by the lower parts of the Pindare, Grajau and Mearim River basins.Beginning with a hilly transition area from the sedimentary plateau, altitudesin this subregion rauge from 100 to 180 meters in the vicinity of Santa Ines toswampy areas near or at sea level closer to the coast. Extensive marshlands andmangroves, influenced by coastal tidal movements and possessing a richterrestrial and aquatic fauna, predominate in the areas near Sao Marcos Bay andthe city of Sao Luis. The entire subregion is covered by a wide diversity ofbotanic landscapes. 30 Given its low-lying topography and humid climate,moreover, the Baixada also contains an abundance of lakes near the principalrivers running through the area. 31 Average rainfall levels in this subregionrange from more than 2,300 mm at Sao Luis on the coast to 2,000 mm at Santa Ines,some 200 kilometers inland. The average temperature at Sao Luis, finally, isroughly 26 degrees Centigrade, reaching a daily maximum of nearly 35 degrees inOctober.

4. General Ecological Features

3.25 The predominant wind direction throughout the corridor and acroesmuch of Amazonia is from east to west, coming inland from the ocean over theNortheast coast and shifting alightly southward during the winter months (June-September) and northward during the summer (December-February). Since the lattershift results in the transportation of greater moisture from the ocean, the latesummer and early fall months also correspond to the period of greatest rainfall

30 See Bacon, Peter and Ferraz, Gilberto, "Managing the Wetlands ofMaranhao," in SEMA/IWRB/CVRD, Desenvolvimento Economico..., op. c it.

3 On the question of climate variations along the Carajas corridort seeMarques, Jose, et. al., "Consideracoes sobre o Clma" lIn Goncalves de Almelda(ed.), Caralas..*9 op. cit.

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throughout the Carajas corridor and much of the rest of that part of Amazoniawhich lies in the southern hemisphere. 32 At the Serra dos Caraj as,consequently, average rainfall levels are highest between January and March, thesame being the case at Maraba and Imperatriz, while the peak monthe in terms ofrainfall in Santa Ines and Sao Luis are from February to April.

3.26 Although there i8 considerable variability in soil origins andchemistry and, thus, in soil quality throughout the Carajas corridor, soilclasses having generally low fertility predominate in much of the region. 3As a result, the introduction of truly sustainable agriculture is problematic.In this connection, Amazonian soil specialists have frequently observed thatthe utilization of soils such as those prevailing in much of the Carajas regioncan result in serious developmental and environmental problems. In general,Amazonian soils are poor in nutrients despite the fact that they are able tosupport the exuberant forest cover typical of tropical areas, giving a falseimpression of high fertility. With the occurrence of deforestation, however, thedynamic equilibrium which characterizee the nutrient recycling process thatsustains the native forest is broken and soil fertility quickly deteriorates.This makes it difficult to grow annual crops in the same location for a periodof more than two or three years in most humid tropical areas, especially withthe low capital-intensive technologies normally utilized by farmers in EasternAmazonia.

3.27 The native forest cover, like the soils, varies significantly alongthe Carajas rail corridor with dense tropical forests predominating in thewestern part of the area and other types of vegetation, including secondarygrowth, characterizing the eastern sections of the region. According to datataken from Projeto RADAI studies in the early 1970's, for example, the areaaround the Serra dos Carajas was composed nearly 752 of dense forest, with theremaining 252 being classified as open forest. In the area around Santa Ines,on the other hand, dense forest occupied roughly 45Z of the area in the 1970'sand secondary growth close to 502, while near Sao Luis, 252 of the area wastaken up by mangrove., 14Z by vegetation typical of humid flood plains and 41Zby secondary growth which, as in the case of the 34region around Santa Ines,covered areas which had previously been in forest.

32 See Marques, Jose, Santos, Jose and Salati, Eneas, "Consideracoes sobreos Ventos na Regiao Amazonica," Acta Amazonica, Vol. 8. No. 1, 1978.

33 See Falesi, Italo, "Solos na Area de Influencia de Carajas," inSEMA/IWRBICVRD, Dsenvolvymento Economico..., op. clt. According to this study,for example, less than 152 of the soils analyzed in the Greater Carajas regionwere classified as possessing high natural fertility and roughly one third ofthese were subject to other constraints such as being located in mountainoustopography or having poor drainage. The rest of the soils were classified aSbeing either of low fertility (roughly 702 of the total), excessively sandy (122)or saline (2.5Z).

34 Projeto RADAM volumee 3 (Sao LUis and Santa Ines) and 4 (Carajae). TheFalesi article, op. cit., indicates that some 682 of the Greater Carajas region(895,000 km2) is covered by forests, 92 by savannah grasslands and the rest by

21

3.28 Associated with the native forest, especially in the western partof the Carajas area and in the coastal marshland regions near Sao Luis, is aconsiderable diversity of animal, bird and aquatic (both freshwater andsaltwater) life, some of which has been inventoried in connection with the ironore project. 35 The Baixada Maranhense, for example, represents the mostextensive refuge for aquatic birds in Northeast Brazil -- especially during thedry season when as many as 50 distinct species of such birds can be encounteredin the coastal marshlands -- while 91 different species of birds were foundinhabiting or utilizing the canga areas at the Serra dos Carajas. Some of thespecies found in the Carajas corridor, moreover, are included in a recent listingof Amazonian fauna that are threatened or in danger of extinction either as theresult of the destruction of their habitats or because of predatory hunting forcommercial or subsistence purposes. 36 Increasing deforestation and settlementin the Eastern Amazon and Preamazon regions augment the risk of the permanentloss of such species, as well as of potentially valuable flora, much of whichis still not properly inventoried and, in many cases, may not yet even beidentified.

3.29 The Carajas corridor, thus, is both extremely rich and highlyheterogeneous in ecological terms. With the exception of the aforementionedCVRD-supported studies carried out by the Goeldi Museum and more recent,planning-oriented research undertaken under the auspices of the Grand CarajasProgram by the National Geography and Statistics Institute (IBGE) in the regionspolarized by Maraba and Santa Ines, much of this natural diversity is still notproperly documented. The IBGE study, moreover, is focusing on the subregionalnatural resource base (geology, geomorphology, hydrology, soils, vegetation,etc.), in order to make recommendations regarding future land use in the areasstudied, and not on its wildlife which remains to be surveyed in detail in muchof the area. 37 Much of the physical environment in the Carajas-Sao Luiscorridor, moreover, has already been substantially altered as the result ofdifferent types of human productive activity over varying periods of settlementin distinct subareas. Much of this occupation either took place prior to thedevelopment of the Carajas Iron Ore Project or has occurred in response to a

various types of flood plain, coastal marshland and secondary growth vegetation.

35 See, for example, Silva, Manoela, "Estudos Botanicos em Carajas,"Novaes, Fernando, "Vertebrados Terrestres da Serra Norte/Carajas," Oren, David,"A Avifauna da Canga Ferrifera"l and Roth, Paul and Scott, Derek "A Avifauna daBaixada Maranhense" in SEMA/IWRB/CVRD, Desenvolvimento Economico..., op. cit.and Tundise, Jose et. al., "Caracterizacao dos Ecossistemas Aquaticos na Areade Influencia da Ferrovia Sao Luis-Carajas,"t mimeo, CVRD, 1986.

36 See Carvalho, C., "The Conservation of Nature in the Brazilian Amazon,"in Sioli, Harold (ed.), The Amazon: Limnology and Landscage Ecology of a MightvTronical River and its Basin, Junk Publishzers, 1987.

37 See, for example, IBGE, Estudo Intekrado de Recursos Naturais em AreasEspecificas do PGC. Itucloo de Maraba, Rio de Janeiro, 1988.

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number of other important government interventions in the region which will bediscussed in the next chapter.

D. Demographic Characteristics 38

3.30 By the end of the 1970's, much of that part of Eastern Amazonia thatwould be directly influenced by the Carajas railway had already become a dynamicand, in some subareas, largely consolidated agricultural and extractive frontierzone. At that time, moreover, the region was already dissected by federal andstate highways such as the Belem-Brasilia, Transamazon and others and, since atleast the mid-1960's, had been progressively settled by small farmers from theNortheast and South, as well as by larger enterprises benefitting from governmentfiscal incentives. According to the 1980 demographic census, the (then) fourteenmunicipalities crossed by the railway had a population of over 1.1 million,ioughly 46Z of which was officially classified as urban. The urban populationin the corridor was largely concentrated in the cities of Sao Luis, Imperatriz,Maraba and Santa Ines, which registered totals of some 247,000, 112,000, 42,000and 40,000 inhabitants, respectively, in 1980. 39 The rural population, whiledispersed more widely throughout the area, was most numerous in Imperatriz(108,000), Santa Luzia (83,000), Vitoria do Mearim (43,000) and Sao Joao doAraguaia (34,000) in that year.

3.31 Between 1970 and 1980, population in the Carajas corridor grew ata rate of 5.7Z a year, which considerably exceeds the averages for the statesof Para (4.52) and Maranhao (2.9%), as well for as Brazil (2.52) as a whole,during this period. Rapid growth occurred both in rural and urban areas,reflecting the frontier expansion process in the region, and was particularlydramatic in the westernmost portion of the area. Population in Imperatriz,Maraba, Sao Joao do Araguaia and Santa Luzia grew at rates of 10.6Z, 9.2%, 8.8Zand 7.02 respectively during the 1970's. Rural population in these fourmunicipalities grew nearly as rapidly as the number of urban residents, or evenmore quickly in the cases of Sao Joao do Araguaia and Santa Luzia. East of SantaLuzia, on the other hand, rural population grew significantly less rapidly thanthat in urban centers, indicating both a shift of the agricultural frontier tothe west and substantial rural to urban migration within the subregion,particularly in municipalities such as Santa IneG, Vitoria do Mearim, Itapecuru-Mirim and Santa Rita, which had been dynamic small-farmer areas in the 1960's.

3.32 About half of the total population in the Carajas corridor in 1980consisted of migrants, 60Z of whom had arrived within the previous decade,

38 Much of the discussion in this section is based on CVRD's study of theCarajas railway corridor, op. cit., Chapter I, Section 4.1 and Becker, Olga#"Consideracoes sobre o Fenomeno Migratorio na Area Servida pela Estrada de PerroCarajas," IBGE, Rio de Janeiro, 1986.

3' The census figure for Sao Luis substantially understates the real urbanpopulation in this municipality since a large part of the population classifiedas "rural" (some 202,000 in 1980) resided on the suburban fringe of the capitalcity just outside its official boundaries -- and frequently without access tocity services -- but was, in fact, urban.

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further attesting to the region's frontier status. To a large extent this influxwas the result of official development policies pursued during the 1970's whichactively encouraged poor farmers to come to Eastern Amazonia from the drought-stricken Northeast, as well as from southern Brazil where mechanized soybean andwheat production was gradually forcing out large numbers of small cultivators.As will be further explored in the next chapter, while some of this settlementwas directed to offi_ial colonization schemes, the vast majority was"spontaneous," occurring without government support.

3.33 As the figures above suggest, most migrants to the Carajas corridorduring the 1970's went to the municipalities of Sao Luis, Imperatriz, Maraba andSanta Luzia. Nearly half of the migrant population remained rural, indicatingthe continued importance of small-scale farming as a source of livelihood,particularly in the central and western parts of the region. Two-thirds of themigrant's employment, however, was in urban areas, particularly in theconstruction, service and commerce sectors. The fact that a substantial shareof total migration to the railway corridor appears to have taken place in asingle year, 1979-80, moreover, is suggestive of the significant new jobopportunities opened up by construction works associated with the iron oreproject, together with the rapidly expanding gold prospecting activities,especially at Serra Pelada near Carajas and Maraba, at that time.

E. Socio-economic Characteristics

3.34 Even before construction of the Carajas railway, therefore, itsimmediate area of influence had already received a large number of migrants,both rural and urban, many of whom had settled in Eastern Amazonia andPreamazonia over a much longer time-span, dating from the early 1900's throughthe 1960's. In socio-economic terms, furthermore, the Carajas-Sao Luis corridorcan be divided into five major subregions in accordance with their differingproductive and settlement characteristics, as will be very briefly illustratedin the following paragraphs.

1. Sao Luis and its Immediate Hinterland

3.35 Located on an island and established since colonial times as thecapital city and major port for Maranhao, Sao Luis, with a de facto urbanpopulation well over 300,000 by 1980, had expanded slowly during the 1950's and1960's, and more dramatically in the 1970's, through increasing migration fromthe interior of the state. Its major economic activities and sources of formalemployment in 1980 were small-scale and light manufacturing industries, commerce,sea and road transport operations, as well as the large state administrativeapparatus. A green belt around the built-up area extending into the surroundinglowlands (ie. the Baixada Maranhense) supplied the capital city with foodstuffsand provided a reasonably steady source of income to the nearby small farmerpopulation. The coastline around the island of Sao Luis, in turn, supported alarge artesanal fishing industry. In common with other Brazilian -- particularlyNortheastern -- cities, however, Sao Luis had substantial and expanding areasof squatter settlement, both inside and outside the city boundaries, housing alarge and rapidly growing informal sector. Poverty and malnutrition predominated,and continue to persist, in these areas, together with the usual associatedsocial ills and health probleme.

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2. The Pindare and Mearim River Valleys

3.36 This area centers around towns of Santa Ines and Santa Luzia which,in the early 1970's, were little more than large villages. The subregion,however, was an area of heavy in-migration by small farmers from the Northeast,particularly during the 1960's. Early penetration occurred along the principalriver valleys, but was later facilitated by the building and/or paving of federalhighways (BR-316, BR-222 and BR-135). This area was -- and remains to asubstantial degree -- characterized by a large concentration of smallholderscultivating predominantly short-cycle, staple food crops such as rice, beans andmanioc, facilitated by relatively fertile soils. Forest-related extractiveactivities such as logging, rubber tapping and, particularly, babacu nutcollection -- the latter forming the basis of a strong local processing industryproducing oil and fiber -- are also important. Throughout the 1970's, large-scale cattle ranches, benefitting from government fiscal incentives, occupiedincreasingly more extensive areas of land in the subregion, in some instancesgenerating serious conflicts with local small farmer and Amerindian populations.Although land concentration has made small farming more difficult and generatedsome landlessness, strong traditions of resistance to land-grabbing (grilagem)and community solidarity in the area have slowed this process to some extent.

3. The Countryside between Santa Luzia and Maraba

3.37 Although increasingly dynamic in demographic terms, this part ofthe corridor remained thinly populated throughout the 1970's. In 1980, much ofthis area still consisted of forest broken occasionally by large cattle ranchesand limited, but expanding, small farmer settlements. Amerindian territories nearthe Carajs%s railway such as the Caru reserve, home of the Guaja near Buruticupu,and the Mae Haria area belonging to the Gaviao tribe near Naraba, in particular,have maintained significant extensions of rainforest almost totally intact. Formuch of this stretch, moreover, the railway runs parallel to the BR-222 highwayconnecting Santa Ines to Acailandia, and, toward the end of the 1970's,substantial areas between the two transport corridors, which are separated bydistances varying from zero to fifty kilometers, were deforested and convertedto pastures, thereby largely precluding settlement by small cultivators andstimulating significant lumbering activity. Imperatriz, located on the Belem-Brasilia highway south of Acailandia -- which, at that time was still a districtof the former -- had, by 1970, already established itself as an importantregional service center of some 35,000 inhabitants, expanding to a city of wellover one hundred thousand people ten years later.

4. The City of Maraba and Surrounding Area

3.38 Maraba, located at the confluence of the Tocantins and ItacaiunasRivers, is linked to Belem by the PA-150 highway and lies on the Transamazonhighway built between 1970 and 1974. During the early 1970's, Maraba became amajor point of arrival and departure for migrants to Eastern Amazonia, as wellase the base of operations for large livestock and lumbering enterprisesestablished in the vicinity with fiscal incentives in response to theGovernment's official development strategy for the region. As a result, Maraba'spopulation of less than 15,000 in 1970 nearly tripled to some 42,000 by 1980.

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The generation of considerable wealth for a small number of large landowners,commercial interests and businessmen as the rqsult of this growth, however, wasparalleled by a rapid expansion in the urban poor population, fueled byexpulsions of small farmers as pasture formation spread in the surrounding areas,especially to the south along the as yet unpaved PA-150 road.

3.39 Until the late 1960's, the main economic activity in the countrysidearound Maraba consisted of Brazilnut extraction in an area of roughly 1.2 millionhectares known as the "Brazilnut Polygon" (Poligono das Castanheiras). Based onlong-term leases granted by the state government during the 1930's, theseBrazilnut estates gradually extended their areas extra-juridically, maintaininga network of tenant farmers and nut gathe' ; in relationships of dependencyamounting to debt bondage. This closed system started to break down during the1970's, however, when outside commercial interests began to set up cattle ranchesin response to federal incentives and substantial numbers of small farmers insearch of land occupied some of the Brazilnut estates. As a consequence, asignificant portion of the land in the area was converted to pasture orsubsistence crop production, in the process generating widespread incidents ofland conflict and increasingly rapid deforestation.

5. The Caraias and Serra Pelada Mining Areas

3.40 Until work started on the Carajas mine complex axid gold wasdiscovered at Serra Pelada in the late 1970's, this region was virtuallyuntouched rainforest. Except for the adjacent Xicrin-Kayapo reserve having apopulation of some 300 Indians, the only inhabitants of much of the area betweenthe unpaved PA-150 highway (running south from Maraba to Xinguara and Conceicaodo Araguaia in southern Para) and Carajas were small groups of prospectors,subsistence farmers and Brazilnut collectors. Until construction of the PA-275highway in the late 1970's as part of the Carajas Iron Ore Project, there wereno major penetration roads in the area, thereby effectively limitingpossibilities of rural settlement. The present towns of Parauapebas/Rio Verde,Curionopolis and Eldorado -- later established, largely spontaneously, as supportcenters for the Carajas and Serra Pelada mines -- moreover, did not yet exist.

F. Conclusion

3.41 In synthesis, the immediate area of influence of the Carajas Projectis quite heterogeneous from an ecological standpoint and, in varying degrees indifferent subregions, had already undergone, or was actively undergoing,significant processes of rural and urban settlement -- based on various formsof productive (including extractive, as well as ag:icultural and livestock)activity -- at the time the operation was prepared and appraised. 40 Much of the

40 In its comments on an earlier version of this report, CVRD observesthat, "having been conceived in the 1970s and being implemented in anecologically heterogeneous and sensitive area, the Carajas Project had toconfront inexperience on both the Brazilian (particularly CVRD), and the Bankside in relation to the evaluation of environmental and social variables. Withrespect to the operation's area of influence, neither party had sufficientsensitivity to anticipate the complexity of the environmental actions required

26

Carajas-Sao Luis corridor, in short, was an active frontier zone which wasattracting increasing numbers of migrants from northeastern, central and evensouthern Brazil in search of land and other economic opportunities. 41 Thesetendencies and their environmental consequences, while of direct relevance forunderstanding how the Carajas Project was likely to impact the Eastern Amazonand Preamazon regions, however, appear not to have been considered in the Bank'sappraisal process, despite the fact that there was substantial awareness aboutthem both in Brazil and elsewhere in the Bank at the time. £2

3.42 Much of what was occurring in the late 1970'. in the area ofinfluence of the Carajae Project was directly related to evolvlng federal andstate government development policies and associated large-scale public andprivate investments in the region. These interventions, however, receivedrelatively little attention -- and no analysis -- in the Bank's appraisaldocuments for Carajas, as the discussion at the outset of this chapter concerninghow the project's "regional impact" was viewed in the SAR clearly suggests. Asa result, the broader regional policy context of the Carajas Project appears tohave been largely overlooked by the Bank in appraising the operation, despitethe benefits that this operation was expected to generate in terms of regionaldevelopment. It is, thus, relevant to consider, if only in retrospect, the natureand principal environmental impacts of the major public sector interventionsoccurring in Eastern Amazonia immediately prior to, or in parallel with, the ironore project and which, together with the Carajas venture, help to explain thegrowing environmental problems presently encountered in the area.

in response to project implementation. Rapid human occupation, ;.imulatedinitially by road, and later rail, infrastructure had the effect of expandingthe project's area of influence well beyond that initially expected."

41 In its observations on the draft report, CVRD also highlights the factthat much of the region where the iron ore project was implemented was alreadyundergoing a process of frontier expansion where "productive processes were beingdeveloped among agro-ranching activities which were markedly inadequate In viewof the nature of Amazonian soils. The fact that Brazilian legislation at thetime did not require environmental impact studies, together with insufficientknowledge of Amazonia's environmental complexity, hindered a broader evaluationof the impacts induced by implantation of the...project."

42 As examples, two studies covering important parte of the project's areaof influence were well-known to students of frontier expansion in EasternAmazoniat Valverde, Orlando and Dias, Catharina V., A Rodovia Belem-Braeilia:Estudo de Geografia Regional, IBGE, Rio de Janeiro, 1967; and Velho, Otavio C.,Prentes de Expansao e Estrutura -Araria: Estudo do Processo de Penetracao numaArea da Transsmazonica, Zahar Editores, Rio de Janeiro, 1972. The former waS acomprehensive study of the initial (including environmental) impact of the Belem-Brasilia highway focusing on the area between Imperatriz and Paragominas, as wellas other sections of the road, while the latter examined frontier expansion inthe Tocantins valley, particularly the area around Maraba. Furthermore, the Bankfinanced two rural development operations In the eastern part of the Carajascorridor during the 1970's and early 1980's although no reference to them iscontained anywhere in the appraisal documents for the iron ore projec.t.

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IV. PREVIOUS OR PARALLEL REGIONAL DEVELOPMENT INTERVENTIONS

4.01 As the preceding chapter has indicated, various parts of the CarajasProject region had already undergone or were undergoing rapid processes of socio-economic transformation at the time the iron ore operation was appraised andapproved by the Bank. In the eastern and central parts of the region moreconcretely, small farmer agricultural frontier settlement dated from the 1950'sand 1960's (Pindare and Hearim valleys) or even earlier (in the lowland areascloser to Sao Luis), while the area between Santa Luzia and Maraba wasparticularly dynamic during the 1970's. Much of this activity, especially after1960, occurred directly in response to actions and policies pursued by the publicsector, particularly the federal government, in Amazonia in general and in theEastern Amazon region in particular.

4.02 As in the case of the ecological, demographic and socio-economiccharacteristics of the Carajas corridor, these interventions -- and theirenvironmental impacts -- were largely overlooked by the Bank in the preparationand appraisal of the iron ore project. They are, nevertheless, important bothfor understanding how the Carajas Project fit into the Government's largerdevelopment strategy for the region and how this operation, in conjunction withother influences, has, directly and indirectly, affected the environment in itsimmediate area of influence. The principal public interventions iu the Carajas-Sao Luis corridor, both prior to and roughly simultaneous with implementationof the iron ore project, together with their most important consequences in humanand physical environmental terms, will be briefly reviewed below more or lessin chronological order.

A. The Belem-Brasilai!Highwa!

4.03 Until the 1950's, government initiatives to develop Amazonia hadconsisted largely of unsuccessful attempts to revive ghe region's decaying rubberindustry, which had fallen off sharply in the period following the boom yearsfrom 1870 to 1912. 1 In 1953, however, the Superintendency of the Valorizationof Amazonia (SPVEA) was created and linked directly to the Presidency of theRepublic, with a mandate to stimulate regional development through extractive,agro-livestock, mineral and industrial activities. Apart from creating theconcept of "Legal Amazonia," 2 SPVEA's main achievement was to oversee

a The history of development and public intervention in the Amazon regionthrough the 1970's is summarized in Hahart Dennis J. Frontier Develonment Polclyin Brazil: A Study of Amazoniat Praeger Publishers, New York, 1979.

2 "Legal Amazonia" includes the North census region (ie. the present statesof Acre, Amazonas, Para and Rondonia and the Federal Territories of Amapa andRoraima) pltu the non-northern states of Hato Grosso and Tocantins (formerly thenorthern part of Goias) and much of the central and western part of Maranhao,which is classified as part of the Northeast region for statistical purposes."Legal Amazonia" is the area where, since 1963, eligible fIrms tay receive fiscaland credit incentives, for the installation of certain types of economicactivity, from SUDAS and tho Bank of Amazonia (BASA), reopectively, both of thooc

28

construction of the region0s first major penetration road, known as the Belem-Brasilia highway. The dirt road was completed in 1960 and the highway, officiallyinaugurated in 1964, was totally paved by 1973. Linking Belem, near the mouthof the Amazon River,.. to the new federal capital, the 2,000 kilometer BR-010highway broke Amazonia's traditional isolation from the more developed parts ofthe country and stimulated the first major influx of settlers from southern andcentral Brazil.

4.04 It has been estimated that during the 1960's the Belem-Brasiliahighway directly attracted somewhere betwepn 175,000 and 320,000 migrants, whilepopulation in the overall area of influence of the road was estimated to haveincreased from 100,000 in 1960 to roughly two million in 1970. 3 Whatever theexact figure, there is little doubt that the highway, together with secondaryand feeder roads, greatly accelerated the pace of unplanned spontaneoussettlement in central and northern Goias, western Maranhao and eastern Para,leading, among other consequencee, to serious environmental deterioration,especially along the northern segment of the road between Imperatriz and Belem,as the adjacent rainforest was rapidly cleared by a combination of smallholdersand large cattle ranchers, the latter taking advantage of the newly createdfiscal incentives discussed in the next section. Illustrative of this process,for example, is the area around Paragominas in northeastern Para where theinstallation of large cattle estates during the 1960's and 1970's, and theresulting depopulated lands, degraded pastures, soil erosion and leaching,epitomize the social and ecological pitfalls of attempts to establish extensivelivestock operations in Eastern Amazonia.

B. SUDAN Fiscal Incentives

4.05 As in many other ways, 1964 waS a watershed year in the BrazilianGoverDment's development strategy for the Amazon region and, two years later,"Operation Amazonia" was launched to promote public expenditure on basic economicinfrastructure and encourage private investment in productive activities by bothdomestic and foreign entrepreneurs. In 1966, the discredited SPVEA was replacedby the Superintendency for the Development of Amazonia (SUDAN) which quicklyextended the policy of fiscal incentives, originally established in 1963 toattract outeide capital for industrial ventures, to agricultural and livestockenterprises as well. Under this scheme, firms were allowed to offset 50% of theirfederal liucome tan liabilities (up to 752 of total investment costs) on the

agencies being headquartered In Belem.

3 The first figure is from Martine, George, "Recent ColonizationExperiences In Brazil," in Barbira-Scazzocchio, P. (ed.) Land, Peogle andPlantnins_in Contemnorary Amazoni, Center for Latin American Studies, Universityof Cambridge, 1980. The second and third estimates come respectively fromXatzman, Martin, Cities and Froptiers in Brazil, Harvard University Press,Cambridge, Mass., 1977 and Mahart Dennis J.$ GovernmentJ Policie andDefreostation in Brazil's Amazon Reairi, World bank, Washington, 1989.

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condition that these funds be applied in projects approved by SUDAN and locatedn "Legal Amazonia." '

4.06 SUDAN incentives became very popular with corporate investors suchthat the number of approved projects rose rapidly from a mere handful in 1966to close to one thousand by 1985. Roughly two-thirds of these projects were inthe livestock sector, the majority of which were located in southeastern Para,northeastern Mato Grosso and western Maranhao. These ranches cover up to tenmillion hectares and have enjoyed credits of approximately US$ 700 million, orslightly less than half of the total fiscal incentive funds allocated by SUDAN. 5In addition to the tax incentives, subsidized rural credit was extended toAmazonian cattle ranchers under both regional and national livestock developmentprograms.

4.07 Taken together, SUDAN-administered tax holidays and subsidized credithave had major social and ecological impacts on Eastern Amazonia. While not theonly causal factor, the massive resources pumped into livestock development haveencouraged land speculation rather than productive activities, as well as landconcentration, the expulsion of smallholders to newer frontier zones andenvfronmental degradation. Between 20 and 50Z of Arazonian pastures, which havea life expectancy of less than ten years in the absence of costly fertilizers,pesticides and herbicides, have been permanently dograded, drastically reducingstocking rates from one to 0.25 animals per hectarta by the fifth year. 6 Assuggested in the previous chapter, the thin soils characteristic of much ofEastern Amazonia are prone to rapidly declining fertility, erosion, compaction,leaching and weed invasion once the primary forest is removed, processes whichare exacerbated by the methods commonly utilized to convert forest to pastureincluding, in addition to outright burning, the use of chemical defoliants and/ormetal chains pulled by a pair of large tractors or bulldozers, the correntao. IIronically, moreover, in a region characterized by chronic underemployment and

4 This mechanism was, in faet, modeled after a similar arrangementestablished for the impoverished Northeast region (including Maranhao) in 1961and administered by SUDENE, the Northeast regional development superintendency.

,5 Mahar, Gernment Policies, op. cit.

6 Hecit, Susanna, "Environment, Development and Politicst CapitalAccumulation in the Livestock Sector In Eaetern Amazonia," orld,Daeylonmegnt,Vol. 13, No. 6, June 1985.

' See Caulfield, Catherine. In the Rainforent, Pan Books, London, 1986;Branford, Sue and Clock, Oriel, h_e_Last Front1ert Fighting over Land in the&tXzont Zed Pres, London, 1985; and Siolip Harold, ImazonIa. Pu ndamentos daREoloegl da Malor Reaiao de Plorestos Tronicais, Editora Vozes, Petropolls, Riode Janeiro, 1985.

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growing landlesness, livestock ranches create only one permanent job per twothousand heads of cattle, at an average cost of US$ 63,000 per job. a

4.08 Recent research by IPEA, an Institute attached to the PlanningMinistry, has revealed the extent to which enterprises nominally devoted tolivestock production are, in fact, vehicles for obtaining cheap credit which isthen frequently diverted into other activities. This has created a property,rather than cattle, boom in which land values have risen by up to 100% per annumin real terms in ranches that were in many instances actually understocked withcattle. 9 The high frequency of sales and the use of property titles to obtainsubsidized credits which were then spent elsewhere led the IPEA investigatorsto conclude that land was in demand more for speculative than for productivepurposes, with many cattle ranches existing largely only on paper despitesubstantial government incentives. 10 Although SUDAM officially ceased grantingfiscal incentives to areas of "dense forest" in 1979, moreover, these measuresappear to have had a limited effect thus far in slowing down pasture formationin the area. 11 The outcome of the Government's suspension of SUDAM incentivesfor cattle projects in Amazonia in October 1988, in turn, remains to be seen. 12

C. The Transamazon Highwav and Official Colonization Efforts

4.09 The Plan for National Integration (PIN), announced in 1970, and theFirst National Development Plan (I PND) for the period 1970-74 introduced a newphase in Amazonian settlement. Although the incentives to livestock and pastureformation continued, the early 1970'e also witnessed a major new road buildingprogram with a parallel emphasis on directed agricultural colonization. The 5,000

Skillings, Robert and Tcheyan, Nils, Economic Devegloment Prosnects ofthe Amazon Region of Brazil, SAIS, Johns Hopkins University, Baltimore, 1979.A study by Alfredo Wagner ("Expansao Fundiaria e Expansao Camponesa," mimeo,1985) in the municipality of Sao Felix do Araguaia in Eastern Amazonia found,for example, that 29 cattle enterprises with 1.5 million hectares of paeturegenerated a mere 200 permanent jobs.

9 Gasquee, Jose G. and Yokomizo, Klando, "Avaliacao dos Incentivos Fiscaisna Amazonia," mimeo, IPEA, Brasllia, 1985.

10 Gasques and Yokomizo report, for example, that among 33 long-standingSUDAM supported cattle ranches In southern Para whose records they examined,only 162 of the proposed investments had, in fact, been made.

11 Fearneidep Phillip, "Environmental Destruction in the Brazilian Amazon,"in Goodman, D. and Hall, A. (odo.) The Puture of Amazopiat Destruction orSustainable Development?t, Macmillan, London, 1990.

" This was one of the measures taken at the time of President Sarney'sannouncement of the Noss& Natureza ("Our Nature") program on October 12, 1988In response to growing domestic and International reaction to the extensiveburning of the Amazon rainforest -- particularly in Rondouia and Eaetern Amazonia-- and to other environmental problems in Brazil.

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kilometer Transamazon highway (BR-230 or "Transamazonica"), linking the Northeastto Amazonia was, according to popular accounts, inspired by President Medici'sobservation of the suffering caused by the 1970 drought in the former region,allegedly inducing him to pledge to unite "men without land to land without men."PIN made available 30% of fiscal incentive funds to finance the east-westTransamazon, together with the north-south Cuiaba-Santarem highway (BR-165) andirrigation projects in the semi-arid Northeast. Official colonization projectswere to be undertaken along a twenty kilometer strip on either side of theTransamazon highway to absorb part of the Northeast's "excess" population, whileat the same time -- and largely for geo-political reasons -- facilitating theintegration of Amazonia into national soclety. 13

4.10 From 1972, when the first stretch of the Transamazon was opened,until 1974, the newly created Institute for Colonization and Agrarian Reform(INCRA) hoped to resettle 70,000 families along the principal Amazonianpenetration highways. A nationwide campaign was mounted to attract migrants fromsouthern, as well as northeastern, Brazil to official colonization projectssituated along the Transamazonica, particularly at Maraba, Altamira and Itaitubain the state of Para. Initially, plots of 100 hectares were offered, Cogetherwith housing and other infrastructure and social services, at highly subsidizedprices. In receipt of subsistence and production allowances, colonists were tobe located in planned new rural and small urban settlements known as aRrovilas(70 families), agropolis (600 families) and ruropolis (20,000 population). Theresults of this scheme, however, proved to be generally disappointing, despitethe significant expenditure of government funds, as less than 8% of the originaltarget with respect to the number of families to be settled was actuallyachieved. 14 As a consequence, both INCRA and disillusioned colonistssubsequently abandoned the Transamazon venture, the former opting for newer andapparently more viable frontier zones in Rondonia and many of the latter for more"spontaneous" forms of settlement elsewhere in Eastern Amazonia. For everygovernment-sponsored colonist in the region, moreover, there were at least fouror five who attempted to settle in the area with no official assistance.

4.11 The failure of directed colonization along the Transamazonica hasbeen attributed to a variety of institutional, ecological, technical, culturaland political factors. INCRA received much criticism at the time for its apparentinability to process the large number of applications during the early stagesof the program, while bureaucratic delays disrupted the agricultural calendarand frustrated harvests. Furthermore, basic infrastructure, educational, health,credit, extension and other necessary services were not provided in sufficient

13 As will be further explored below, private colonization ventures werealso encouraged, principally along the Cutaba-Santarem highway in Mato Grosso,largely with the objective of absorbing better capitalized small farmersdieplaced from rural areas In southern Brazil.

14 See Smith, Nigel, Rainforest Corridorst The_Transamazon ColonizationSeheme, University of California Press, Berkeley, 1982 and Fearnside, Phillip,"Brazil's Amazon Settlement Schemes," Habitat Internacional, Vol. 8, No. 1.,1984. Some eetimates of the total amount invested in the Transamazon higlhwayand associated colonization efforts run as high as US$ 2.3 billion.

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quantity or at all. The land, itself largely infertile except for a few pocketsof good soils -- which, moreover, had not been properly identified prior toestablishing the location of the colonization projects -- was, on its own,insufficient to secure a livelihood in an environment which settlers from boththe Northeast and southern Brazil found to be unfamiliar and frequently hostile. *

These problems were compounded by overcentralized and inefficient planning byINCRA and other government agencies, the construction of roads which wereimpassable during the rainy season, the provision of fast growing crop varietieswhich matured at the wettest time of the year and crop vulnerability to pestsand diseases, as well as long delays in providing colonists with the land titlesnecessary for obtaining subsidized credit, a process already made difficult forsmallholders by bureaucratic red tape and institutional rigidity on the part ofboth official and private banks. 16

4.12 Government planners were reluctant at first to recognize the basiclack of commitment to, and high costs of, providing a supportive and sustainableagrarian environment for small farmers in Eastern Amazonia, tending instead to"blame the victims" by suggesting that responsibility for the failure of directedcolonization schemes along the Transamazon lay primarily with the settlersthemselves. 17 These arguments, nevertheless, were effectively used by planners,politicians and SUDAM, in particular, to pressure the federal government toabandon the policy of small farmer settlement in favor of the earlier preferencefor "productive occupation" of Amazonia by large-scale private enterprises,represented by the powerful Association of Amazonian Businessmen (Associacao dosEmpresarios da Amazonia) headquartered in Sao Paulo. This policy reversal leddirectly to the advent of POLAMAZONIA in 1976 as part of the Second NationalDevelopment Plan (II PND) for the 1975-79 period which proposed a renewedemphasis on large corporate agribusiness, livestock production and privatecolonization schemes, together with continued infrastructure investments, andmining and mineral processing activities, including the exploitation of iron oreat Carajas.

D. Other Federal and State Road Buildinx

4.13 In addition to the Belem-Brasilia and Transamazon roads, a numberof other federal and state highways constructed and/or paved during the 1960'sand 1970's greatly facilitated settlement of the Carajas portion of EasternAmazonia. Although less grandiose, these roads have been more effective than

15 Seet in addition to SrSithp op. cit., Bourne, R., Assault on the Amazon,Gollancz, London, 1978 and Moran, Emilio, DeveloDinit the Amazon, IndianaUniversity Preses, Bloomington, 1981.

6 These aspects are highlighted in Bunker, Stephen, Underdeveloging theAmazon, University of Illinois Prese, Urbana, 1985 and Moran, Emilio, "Privateand Public Colonization Schemes In Amazonia," Goodman and Hall (eds.), op. cit.,ae well as many of the sources mentioned in the preceding notes.

17 Wood, Charles and Schmink, Marianne# "Blaming the Victims Small Farmerrroduction in an Amazon Colonization Project," Studies in Third World Societies,Vol. 17, February 1978.

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the Transamazon in securing occupation of the area. Unlike the Transamazonica,the Belem-Brasilia and Cuiaba-Santarem highways linked the Amazon frontier toimportant urban centers, as did roade such as the Belem-Teresina (BR-316), whichpasses through Bacabal and Santa Ines, the Acailandia-Santa Ines-Sao Luis (BR-222) in the Pindare valley and the Para state highways joining Maraba withTucurui and Carajas (PA-150 and PA-275). The total road network in Amazonia hasgrown eight fold since the mid-1960's, from about 6,000 kilometers in 1965 to46,000 kilometers only twenty years later. 18 The rapid expansion of highwaybuilding and an agrarian policy strongly biased in favor of larger, capitalizedfarmers have been arguably the most important stimuli for the recent occupationof the region. 19

E. The Alto Turi Land Settlement Project

4.14 This project, although much less ambitious than the colonizationefforts along the TranGamazonica, was nearly contemporaneous with them and isof particular interest for two reasone. On the one hand, it was physicallylocated in the Preamazonian part of the Carajas railway corridor, in north-central Maranhao just to the northwest of Santa Ines on either side of the BR-316 highway which connects Teresina, the capital of the neighboring state ofPiaui, and Sao Luis (via Santa Ines) to Belem. Secondly, It was partiallyfinanced by the World Bank, through a loan for US$ 6.7 million approved on July6, 1972 and closed on December 31, 1980. This operation, moreover, representedthe Bank's first experience in rural development in Northeast Brazil and itsfirst experience in directed colonization anywhere in the country. 20 The basicpurpose of the project was to productively settle and provide physicalinfrastructure (mainly feeder roads) and agricuiltural and community services tosome 5,200 small farmers and their families.

4.15 The cperation was to be implemented in three distinct stages inthree contiguous sub-areas, running from southeast to northwest along the BR-316 highway, in a region which had become increasingly subject to spontaneousoccupation by migrants from other parto of the Northeast. The Bank viewed theproject as an attempt to demonstrate the feasibility of a low-cost alternativeto the kind of agricultural colonization proposed by INCRA for the Transamazon,

ls Mahar, "Government Policies...," op. cit. pg.

19 On the large farmer biae in Brazil's agrarian (and fiscal) policy andits impact on deforestation, see Binswanger, Hans, "Brazilian Policies thatEncourage Deforestation In the Amazon,t" Environment Department Working PaperNo. 16, World Bank, April 1989. An earlier version of this paper appeared underthe title "Fiscal and Legal Incentives with Environmental Effects on theBrazilian Amazon," Agricultural and Rural Development Department, mimeo, 1987.

20 The Bank loan was 853-BR. The project waS audited by OED and theresulting PPAR (Report No. 4242) presented to the Board on December 29, 1982.The following observations are based largely on the PPAR. Starting in early1976, the Bank approved a series of integrated rural development projects formost of the states In Northeast Brazil, Including Maranhao, the latter being,in part, a follow-on operation to the Alto Turi project.

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in an area possessing many of the same ecological and socio-economiccharacteristics as Eastern Amazonia. A special agency (COLONE), subordinated toSUDENE, the regional development superintendency for the Northeast, wasestablished to implement and operate the project.

4.16 Despite initial difficulties which led to significant executiondelays and cost overruns, COLONE was eventually able to provide roughly 6,000settler families with varying levels of support, permitting many of them togradually improve their income levels over time. As a pilot approach to low-cost agricultural settlement, however, the project was a failure, and severalof its major objectives, including environmental protection, were, at best, onlypartially achieved. As was the case with official colonization efforts along theTransamazon highway, land tenure and titling issues proved to be particularlycomplicated and, at one point, included a boundary conflict with a neighboringAmerindian reserve that was later amicably resolved. Also as in the case of theTransamazonica, institutional weaknesses and inter-agency coordination problemshindered project execution and contributed to COLONE's inability to provide areplicable model for directed rural settlement in a tropical frontier setting.

4.17 For the purposes of the present evaluation, the project'senvironmental impact is of particular relevance. The field observations of theAudit mission (July 1982) in this regard are largely similar to those of themore recent OEDISEPLAN mission (April 1989) to the Carajae rail corridor whosefindings will be described more fully in Chapters VII, VIII and IX below.According to the PPAR, "the audit mission noted, while driving on the BR-316and project area roads, the nearly continuous ar.ea of secondary shrubs andbushesl only a few blackened remnants of tall tro?ical trees have remained. Inthe knuwledge that this area was only recently covered by tropical forests, thevisual impression forcefully underscores the environmental impact of this andsimilar projects. Thus, although the project has not demonstrated the 'means ofpreserving a balance between developing new land and retaining the ameliorativeeffects of forest areas and paoture,' its environmental objectives remain asvalid as ever and much remains to be done to achieve them." al

4.18 The PPAR further affirms that "the failure of the environmentalcomponent is to a large extent due to the fact that insufficient allowance wasmade for it at appraisal," adding that, wlhile the project contained "clearlystated environmental objectives," they were neither translated into specific

21 PPAR, para. 47. The objective of "preserving a balance..." was quoteddirectly from the Appraisal Report for the project (para. 8.06). The PCRobserved, however, that "as the primary forest in sub-areas I and II had beenseverely depleted before the project was effectively initiated, it is difficultto determine how the project, as designed, could have been reasonably expectedto demonetrate these effects in these areas." (para. 9.05) The PCR also notedin the same paragraph, however, that "the project did not apparently foresee theneed to foster reforestation efforts" and that "in the large section (sub-areaIII) of project lands which Is still thought to be mainly in primaryforest...COLONE is now finding it necessary to call for ... guards (from thenational forestry service, IBDF) to assist in controlling the indiscriminatefelling and burning of virgin forest lands."

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components, nor costed as part of the operation. 22 More generally, theexperience under the project indicates both the difficulty of controlling theuse -- and restricting the misuse -- of the native forest by spontaneoue settlersand colonists alike and some of the adverse ecological consequences associatedwith its removal in tropical areas. It is unclear, however, whether -- or to whatextent -- these lessons were taken into account by the Bank in the design andex-ante evaluation of the subsequent Carajas Project since there is no referenceto the Alto Turi experience in the appraisal documents (or anywhere else in thefiles) for the iron ore operation despite the partial geographic overlap betweenthe colonization project and the area of influence of the Carajas railway.

F. Private Colonization Schemes

4.19 The apparent reversal of official colonization policy in the mid-1970's away from the directed settlement of small farmers was also reflected inthe establishment of numerous private schemes in Eastern Amazonia. Encouragedby government incentives, companies from southern Brazil have benefitted fromthe opportunity to acquire at nominal prices -- and to parcel and resell atconsiderable profits -- huge areas of land in the region. Between 1968 and 1984,INCRA approved a total of 71 private settlement projects situated in Mato Grosso(66), Para (3) and Maranhao (2). Pioneered in 1973 by the 400,000 hectare SINOPventure along the Cuiaba-Santarem highway in Mato Grosso, these private schemesinclude Indeco (400,000 ha), Cotriguacu (one million ha), Canarana (700,000 ha)and Tucuma (400,000 ha), located near the Carajas Project. The economicperformance of these projects has been mixed with some schemes being obliged toabandon large tracts due to soil exhaustion and others successfully able todevelop crop production and agri-businese activities.

4.20 Numerous problems have arisen with these ventures, however, thatcall into question the wider feasibility of private colonization in Amazonia.The invasion of Amerindian lands by colonizing companies has created severeconflicts in several areas. 23 At Tucuma, near Carajas, the entire project areawas invaded by some 12,000 families of landless small farmers (Doseeiros) andgold prospectors, while much of the valuable commercial timber on the site wasextracted by unregistered logging enterprises. This resulted in temporaryabandonment of the enterprise by the large construction company (ConstrutoraAndrade Gutierrez - CONSAG) that had initially set up the venture utilizingfiscal incentives granted by the Grande Carajas Program, in anticipation offederal intervention under agrarian reform legislation. Despite their generallypoor economic record, private colonization schemes, like offilial land settlementprojects, haves, r-erthelese, acted like magnets, drawing large numbers of land-hungry farmers to Eastern (and other parts of) Amazonia from northeastern andsouthern Brazil alike.

22 PPARp par&. 48.

23 For example with the Sururu and Cintas Largas in Aripuana and theTxukarramae and Freen-Akarore in Colider, both In Mato Grosso, as reported inBranford and Glock, op. cit, and Speller, P., "The Role of the State In theSettlement of Northern Mato Grosso," mimeo, 1987.

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G. The Tucurui Hvdrogpowe Project

4.21 As suggested in the previous chapter, large-scale industrialdevelopment -- particularly mineral processing -- in Eastern Amazonia is heavilydependent on abundant (and relatively inexpensive) supplies of electricity. TheTucurui hydropower project on the Tocantins River, some 200 kilometers north ofthe Carajas mining complex, is the largest such facility ever built in an areaof tropical ral.nforest and the fourth largest in the world. Inaugurated inNovember 1984, three years behind schedule and at a cost estimated at US$ 4billion, its twelve turbines will eventually generate a total of 8,000 mega-atts.As the linchpin of the Grande Carajas Program (PGC), it supplies the aluminumcompanies of ALBRAS-ALUNORTE at Barearena and ALUHAR at Sao Luis -- whichtogether will consume between one third and one half of Tucurui's total output -- as well as the Carajas iron ore mine and the needs of the rapidly growing townsand cities in the region.

4.22 The implementation of Tucurui, which was not financed by the Bank,was beset by a number of major social and environmental problems. Up to 35,000people were displaced by the dam and reservoir which covers an area of 2,500square kilometers. Serious problems arose in this connection because no planningauthority was created to oversee and coordinate a comprehensive resettlementstrategy, a task left to a poorly equipped power company, ELETRONORTE. 26 Smallfarmers without land titles were especially hard hit, and even 800 INCRA settlersin the Transamazon colonization project near Maraba were required to be relocatedfrom their cultivated plots to areas of uncleared rainforest on account ofTucurui-related flooding of a 100 kilometer stretch of the BR-230 highway.

4.23 Ecological problems, in turn, have arisen at Tucurui due either tothe effects of deforestation of surrounding areas or the failure to adequatelyclear vegetation from the region to be flooded. The rapid pace of surroundingdeforestation, in fact, has given rise to fears that Tucuruil's future performancemay be hampered by siltation. Environmentalists have been most concerned,however, about ELETRONORTE's failure to ensure that a large part of the area tobe flooded was cleared of vegetation prior to inundation, which can lead toproblems of "acid water" and subsequent turbine decay, proliferation of waterweeds and water-borne diseases such as malaria, bilharzia and oncherciasis (orriver blindness), as well as aerobic decomposition of rotting biomass. 25

24 According to Luc Hougeot ("River Impoundment-related PopulatioaDisplacement in Brazilian Amazoniat The Tucurui Resettlement Program, 1976-84,"mimeo, 1985), due to the use of inadequate procedures and legal concepts fordefining and targeting compensatory measures, many families were, In fact,evicted with little or no indemnification for the lose of lands, housee and otherpossessions. Alleged mietreatment of dieplacees by ELETRONORTE gave rise to avociferous protest movement by the local population and NGOs, which laterexperienced some limited success in obtaining compensation.

25 See Goodland, Robert, "Environmental Reconnaissance of Tucurui HydroProject," ELETRONORTE, Brasilia, 1977 and Instituto de Pesquisas da Amazonia(INPA), Estudos da Ecologia o Controle Ambiental na Repiao da UHE TucuruisRelatorlos Setorisis, Hanaue, 1982.

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Despite early warnings from sources both inside and outside Brazil, only in 1980was a company (CAPEMI) contracted to undertake the task of deforestation atTucurui. 26 Following many operational problems and financial difficulties,however, CAPEMI went bankrupt in 1983, having cleared only 3Z of the 65,000hectares (5.6 million cubic meters of timber) it had originally been contractedto cut.

H. Other Large Mining and Industrial Projecte

4.24 Two major integrated aluminum projects were conceived during the1960's and 1970's which, like the iron ore operation, were later integrated intothe Grande Carajas Program. Designed to exploit what are believed to be theworld's richest reserves of bauxite, estimated at 2.2 billion tons and locatedat Trombetas in northwestern Para and in Paragominas, these are the largestindustrial ventures in Eastern Amazonia apart from the Carajas Project. 27 TheUS$ 1.9 billion ALBRAS-ALUNORTE complex at Barcarena, near Belem, consisted oftwo joint ventures between the Nippon Amazon Aluminum Company and CVRD. ALBRAS(Aluminio do Brasil) was expected to produce 320,000 tons of aluminum annually,while ALUNORTE (Alumina do Norte) would supply 800,000 tons of alumina.

4.25 Initial delays in Japanese participation in ALBRAS were minimizedby the Brazilian Government's agreeing to provide basic infrastructure andheavily subsidized electricity tariffs. Production at ALBRAS started in 1982,reaching 100,000 tons of aluminum in 1986. The second phase of this project hasbeen held up, however, pending the outcome of negotiations concerning additionalconcessions to thei Japanese, thereby delaying plans to increase productioncapacity to 320,000 tons. The ALUNORTE half of the project, in turn, was due tocome on stream in 1985, but was subsequently postponed when the Japanese withdrewfrom the venture in 1987. 28

4.26 ALUMAR (Aluminio do Maranhao), the region's second major aluminumcomplex, is,a US$ 1.3 billion joint venture between the American ALCOA, whichholds 602 of the shares, and Billiton Metals, the mining subsidiary of RoyalDutch Shell, which controls the remaining 402. As the largest privately fundedproject ever undertaken in Brazil, ALUMAR has a planned annual capacity of

26 CAPEMI, best known for its management of the Brazilian Army's pensionfund, received foreign loans totalling US$ 180 million, in a joint venture withthe French Bank, Maison Lazard Freres, in order to undertake this activity.

27 For a general survey of Amazonian mineral potential, see Santos, BrenoA., Amazonia - Potencial Mineral e Persnectivae de Desenvolvimento, QueirozEditor, Sao Paulo, 1983. Breno Santos is the Brazilian geologist who made theinitial discovery of the Carajas iron ore deposits in 1967.

26 See Neto, F., "Development Planning and Mineral Mega-projects: SomeGlobal Considersations," in Goodman and Hall (eds.), op. cit., and Latin AmericaComnodity Review, October 30, 1986 and January 10, 1987. The Japanese withdrewfrom ALUNORTE when doubts were raised about ite economic feasibility givenproduction costa of US$ 200 per ton of alumina, as compared witht US$ 112 per tonfor alumina imported from Suriname and Venezuela.

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500,000 tons of alumina and 110,000 tons of aluminum, initially using bauxitefrom Trombetas under a ten year contract. ALUMAR was favored by exceptionallystrong official support and initiated production in 19849 two years prior toALBRAS. Concessions included SUDAM and later PGC incentives, subsidizedelectricity tariffs and easy access to land and water resources at Sao Luis.ALCOA later sold 362 of its Brazilian subsidiary to the large construction firm,Camargo Correa, using the US$ 260 million revenue derived from PGC tax incentivesto the latter to finance ALUMAR's second stage which was inaugurated in 1986.By 1990, ALUMAR is expected to be the third largest aluminum smelter in theworld.

4.27 Despite its record of industrial success, ALUMAR has also apparentlyhad significant adverse human and ecological impacts in and around Sao Luis. Ithas been estimated, for example, that the ALUNAR complex -- which covers onesixth cf Sao Luis island's 60,000 hectares -- displaced up to 20,000 people,mainly small farmers and fishermen, most of whom were not adequately compensatedor rehoused. Although the plant created some 2,000 skilled and semi-skilled jobs,moreover, many employees were brought in, of necessity, from industrial areasin the South. This venture, nevertheless, together with port operations at Itaquiand Porta da Madeira, among other activities, has stimulated significant recentmigration to Sao Luis, increasing local underemployment and greatly strainingthe city's capacity to provide needed infrastructure and services. Furthermore,fish catches have reportedly fallen off in the Sao Luis area as a result of plantconstruction activities and the alleged pollution of the sea by "red mud," whilealuminum hydroxide emissions are reported to have damaged crops and contributedto a rising incidence of respiratory illnesses and skin diseases J.n the vicinity.Finally, the area's rich marine wildlife associated with extensive mangroveformations along the coastline is thought to be presently endangered as theresult of the project. 29

I. Gold Prospecting

4.28 In addition to these large-scale, highly capital-intensive mineralprocessing activities in Eastern Amazonia, highly labor-intensive goldprospecting has expanded rapidly since the 1970's, serving as a major source ofemployment and in-migration to the region. It is estimated by the prospectorsunion (USAGAL) that,. in Amazonia as a whole, which accounts for 852 of nationalgold production, the number of garimpedros has increased from 450,000 in 1986to over one million in 1989. Small producers were responsible for 802 of Brazil'sannual production of 140 tons in 1988. Within the immediate vicinity of theCarajas mines, more specifically, there are literally hundreds of locations where

29 Sources on ALUMAR's human and physical environmental impact in Sao Luisinclude English, B. Alcoa na Ilha, Caritas Brasileira, Sao Luis, 19841 Galvao,R., "Alcoa, a Besta Pera nas Terras de Sao Luis," Pau Brasil, November-December1984, pp. 22-26; and, Morrison$ R., et. al., "Distribuicao de Macaricos, Batuirase Outras Aves Costeiras na Regiao Salgada Paraense e Reentrancias Maranhenses,"Espaco. Ambiente e Planeiamento, CVRD, Vol. 1, No. 4, April 1986. English reportsthat a local NGO, the Committee for the Defense of the Island of Sao Luis, formedin reaction to these problems, has been generally successful in attractinginternational media attention to the situation in Sao Luis.

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simple prospecting activities are undertaken. The most famous of these sites isundoubtedly Serra Pelada which is managed by DOCEGEO, a CVRD subsidiary. Situatedless than 100 kilometers by road from the iron ore mine, its rich deposits werediscovered in the late 1970's. By the time the federal government intervened in1980, however, over 30,000 gamneiros from all over Brazil had arrived and inits heyday in the early 1980's this number reportedly grew to nearly 100,000.Although mining activity has subsequently fallen off, Curionopolis, the town onthe PA-275 highway which grew up spontaneously to support prospecting activitiesat Serra Pelada, was reported to have on the order of 20,000 inhabitants in mid-1989 and had recently become the seat of a new municipality with the same name.

4.29 There is no doubt that gold prospecting has greatly increased therate of in-migration to the Carajas region and provided a vital supplementarysource of employment and income to small farmerb in Eastern Amazonia. A surveytaken among 1,000 families in Alto Alegre, Maranhao, in 1984, for example, foundthat roughly 80Z had one or more male members involved at least seasonally inprospecting activities, mainly in nearby southeastern Para. 30 The importanceof gold panning is further underlined by the firm resistance which Serra Peladaprospectors have put up against attempts to mechanize production. A march in1984 by some 2,000 garimpeiros upon CVRD installations at Parauapebas, duringwhich some of the community facilities in the town were burned, persuaded theBrazilian Congress to revoke a decision to close the mine. The strength offeelings concerning this question was also manifested in December 1987 when 1,500prospectors from Serra Pelada staged a demonstration against closure of the mineon the Carajas railway bridge crossing the Tocantins River near Maraba. 32

4.30 Both at Serra Pelada and at smaller prospecting camps in the regionsurrounding the Carajas iron ore mine, moreover, as in other areas de garimpothroughout Amazonia, serious public health problems have been registered, mostnotably a high and growing incidence of malaria. According to the Staff AppraisalReport for the recent Amazon Basin Halaria Control Project, there is a clearcorrelation between the location of new agricultural settlement areas, gold andother mineral prospecting sites and malaria. The SAR for this project affirms

30 Gistelinck, Frans, Caraias. Usinas e Favelas, Sao Luis, 1988. Manygarimpeiros are also poor subsistence farmers or rural laborers who prospect inorder to supplement family incomes, as well as with the hope of "striking itrich." Contributing to the seasonality of prospecting activities, Serra Peladais closed each year during the rainy season due to flooding and the associatedrisk of mudalides which have killed numerous prospectors.

31 The Government administrator at Serra Pelada, Col. Sebastiao Rodriguesde Houra (nicknamed "Major Curio," hence Curionopolis) apparently forestalledone such move by appealing directly to President Figueiredo during a 1983 visitaccording to a book by R. Rotscho (Serra Peladat Uma Perida Aberta na Selva,Editor& Brasiliense, Sao Paulo, 1984).

32 According to international news sources, police intervention againstthe ftarimDeiros resulted in the deaths of up to thirty people during thisincident. (Amnesty International, Brazilt AuthorizedVWiolence in Rural Areas,London, 1988)

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that "malaria is the most pervasive public health problem of the Amazon regionand continues to spread into new areas at an alarming pace." 33 It notes thatmalaria incidence is presently concentrated in three states (Rondonia, Para andMaranhao) and within a relatively small number of municipalities (includingMaraba and Imperatriz) which were "either areas of new settlement, placer mining,or are adjacent to such areas." 34 The report further observes that recentstudies by SUCAM, the national malaria control agency, indicated that areas ofhigh malaria incidence have "exported" significant numbers of cases to otherparts of the country and that the "mining campa of Amazonia, especially southernPara, are even more prolific (than those in Rondonia) in their generation andspread of malaria across Brazil." 35

J. The Grande Caralas Program

4.31 The Grande Carajas Program was formally instituted by federalexecutive Decree-Law No. 1,183 on November 24, 1980. One month later Decree-Law No. 1,825 of December 22, 1980 established a special system of tax andfinancial incentives for investors within its 900,000 square kilometer area ofjurisdiction -- covering fully 112 of Brazil's national territory -- andcomplementing the incentives already administered by SUDAI and SUDENE.Subsequently extended until 1995, private investors were originally grantedtotal exemption from income taxes plowed back into productive projects withinthe Greater Carajas region. This exemption was later reduced to 50%, the balanceof the resources being channeled into economic and social infrastructure in thearea, as well as small enterprises. By encouraging mineral, agro-livestock,lumbering and infrastructure projects, it was hoped that further industrial andagribusiness ventures would be attracted to the PGC's "development poles,"particularly along the Carajas railway corridor at Parauapebas, Maraba,Acailandia, Buriticupu, Santa Ines, Rosario and Sao Luis.

4.32 Federal Decree No. 85,387, also of November 24, 1980, created anInterministerial Council, supported by an Executive Secretariat, linked directlyto the Presidency of the Republic. The Council, which is chaired by the Ministerof Planning and presently includes ten other federal ministers and the Governorsof Para, Maranhao and Tocantins, is responsible for appraising, approving,monitoring and evaluating projects funded by the PGC. According to official

33 Report No. 7535-BR dated April 21, 1989, para. 2.7.

34 Ibid., para. 2.8. The number of cases of malaria reported in Maraba in1986 was 9,513, while that in Imperatriz was 5,430 according to Annex 3 of thisreport. At Sao Felix do Xingu, immediately to the west of Carajas, and inRedencao, immediately to the south -- which are also significant narimio areas -- however, the number of positive cases in 1986 were 25,656 and 7,007,respectively. The total number of malaria cases registered in Para in 1987 wason the order of 120,000, while that in Naranhao was roughly 55,000.

35 Ibid., para. 2.9. To illustrate this point, the SAR adds that a studyof 53,000 malaria cases in 1985 revealed that 9,000 carriers of the parasitetravelled from prospecting areas in Sao Felix do Xingu to 381 municipalities indifferent parts of Brazil including 18 states outside the Amazon region.

41

figuree, through March 1989, a total of 57 projects had been approved under theprogram involving total investments on the order of US$ 13.8 billion. Majorcomponents of the POC include CVRD's iron ore mine, railway and port complex,the ALBRAS-ALUNORTE and ALUMAR aluminum plants and the Tucurui hydroelectricproject. In addition, a number of smaller mineral processing, agricultural,livestock and lumbering projects, including pig iron smelters -- listed inAnnexes I and II -- have been established or are planned and have importantenvironmental implications.

4.33 The concept of an "integrated" regional development program on sucha basis had its origins in studies undertaken by CVRD with assistance from theJapanese International Cooperation Agency (JICA), part of the Japanese Ministryof Foreign Affairs. 36 These plans drew together under a regional developmentlabel several major schemes already underway such as che iron ore mine andrailway and the Tucurui dam, which had all commenced in 1978, CVRD's jointventure with U.S. Steel to develop the Carajas Project having collapsed in 1977. 37JICA technicians were closely involved in the preparation of early studies whichrecommended that priority be given to export-oriented mineral, agro-livestockand silvicultural projects in the Carajas region. 38 CVRD's 1980 report entitled"Eastern Amazonia: A National Export Project," seems to have been particularlyinfluential in persuading the incoming Figueiredo Government (1979-85) to adopt

36 In its comments on the preliminary draft of this report, CVRD observesthat "the externalities created by implantation of the infrastructure requiredto transport [Carajas] iron ore indicated the possibility of establishing othernew and complementary enterprises in Eastern Amazonia which would create a solidbase of support for regional economic development. From this perspective, CVRDpresented a sketch of agro-industrial and mineral processing under%,akings thatwere consistent with the transport system and mineral deposits at Carajas. Eventhough they did not go beyond the preliminary proposal stage, these ideasinspired the Brazilian Government to elaborate development strategies for EasternAmazonia, [leading) in 1980 to the special regime of tax and financial incentivesfor enterprisee [under] the Grande Carajas Program (PGC) which was created atthat time....At' this point, CVRD's preoccupations returned exclusively toimplantation of the Carajas Iron Ore Project, it being important to streGs thatCVRD at no time participated In the decieion processes of the InterministerialCouncil of the PGC."

37 As will be further described in the next chapter, CVRD and U.S. Steelformed a joint operation in 1970 under the name Amazonia Mineracoes S.A. (orAMZA) to extract and export Carajas iron ore. When the latter decided to pullout of the venture in 1977, CVRD proceeded to develop the project alone.

36 Key documents in this connection from CVRD were: Corredor de Caralas:Projetos Potenciais, 1979; Amazonia Oriental: Um Projeto Nacional de Exportacao,19801 and Amazonia Oriental: Plano Preliminar de Desenvolvimento, 1981; and fromJICAt "The First Progress Report for the Study Related to the RegionalDevelopment Plan of the Greater Carajas Program of the Federative Republic ofBrazil," mimeo, Brasilia, 1983; and "The Study Related to the RegionalDevelopment Plan of the Greater Carajas Program of tie Federative Republic ofBrazil," mimeo, Brasilia, 1985.

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this ready-made regional development strategy under the new administrativemechanism of the PGC. S9

4.34 A key element in the strategy to establish integrated industrialactivities along the CaraJas railway corridor is the setting up of some twentyor more pig iron smelters and industrial plants processing iron ore andmanganese. These will be concentrated in new industrial districts alreadyinstalled or soon to be created near the burgeoning towns of Maraba, Acailandia,Santa Ines, Buriticupu and Rosario. Fuelled by charcoal obtained from the nativerainforest, their ecological consequences are dis6cused in Chapter VIII below.As detailed in Annex II of the present document, by March 1989 the PGC hadapproved thirteen pig iron smelters, as well as six ferrous alloy and metallicsilicon plants, having a proposed annual production of 1.5 million tons andexpected to become operational by the early 1990's. All but one of theseindustries, a ferrous allo7 plant in Tucurui, was expected to locate along theCarajas rail line, primarily in Acailandia (6 industries) and Santa Ines (5),followed by Maraba (3), Parauapebas and Rosario (2 each). The first two pig ironsmelters came on stream in early 1988 (COSIPAR in Maraba and CompanhiaSiderurgica Vale do Pindare in Acailandia), whiile two others (SIMARA in Marabaand Viena Siderurgica do Maranhao In Acailandia) initiated operations at thebeginning of 1989. According to the Executive Secretariat of PGC, these smeltersare currently limited to an annual output of 120,000 tons, beyond whichproduction must be verticalized. In this connection, plans already exist to buildsteel mills at Maraba (SIMARA) and Sao Luis (USIMAR).

4.35 While mineral extraction and processing have formed the cornerstoneof the PGC, agriculture and forestry have also figured prominently, at leastduring the early planning stages. Japanese consultants initially promoted theidea that the Carajas transport infrastructure should be utilized for expandinglarge-scale farming and silvicultural activities in an "export corridor." 4"CVRD refined these proposals and suggested a US$ 11 billion program to developten million hectares with 300 cattle ranches of 10,000 hectares each, as wellas four million hectares of mechanized rice cultivation, 2.4 million hectaresfor sugar and manioc production and ethanol distillerles, as well as Eucalyptusplantations to supply the proposed pig iron smelters. 4' Further studies wereundertaken by JICA to explore the export potential of products such as soybeans,

9' While apparently offering a timely mechanism for reconciling BrazilianGovernment, CVRD and private business interests, both domestic and foreign, theadvent of the PGC also led to strong criticism that Brazil had forfeited nationalsovereignty and entered into a dependent relationship with overseas capital. See,for example, IBASE, Carains: 0 Brasil Higoteca seu Futuro, Achiame, Rio deJaneiro, 1983; Cota, R., Caralas: A Invasao Desarmada, Editora Vozes, Petropolis,1984; and Neto, F., ""National and Global Dimensions of Regional Development:A Case Study of Brazi34 n Amazonia," Ph.D. thesis, London School of Economics,University of London, 1988.

40 International Development Center of Japan (IDCJ), A Preliminary Studyof Regional Development of the Caraias Railway Corridor in Brazil, Tokyo, 1980.

41 CVRD, Amazonia Oriental: Plano Preliminar de Desenvclvimento, op. cit.

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palm oil, rubber, Brazilnutso, animal feedetuf Ea and a variety of tropical fruits.However, no furrher action has yet been taken to implement these proposals.

4.36 The most systematic agricultural development plan for the area,however, the PToarama Gr ad Carajas Aericola (PGCA), was produced in 1983 bythie Brazilian Ministry of Agriculture and was budgeted at US$ 1.2 billion.Strongly inflisenced by CVRD's earlier proposals, its broad aims were to increaseand diversify the production of food and industrial goods over an area of tenmillion hectares within seven "development poles" in the Carajas region usingcapital intensive, modern technology. Proposals included controle ondeforestation, the establishment of 3.6 million hectares of Eucalyptusplantations to fuel the pig iron smelters and the creation of 19 different smalland medium-.sized farm models, as well as extensive livestock development andpasture formation. It was anticipated that the capitalization of some 16,000farmers in the region would increase agricultural output eight-fold and generatevaluable export earnings. The technical and administrative capacity of PGC toimplement such an ambitio'ie program, however, was questioned, as were thedistributive implications of a plan which, itl practice, threatened to result inconsiderable land concentration. 12 The Inter-American Development Bank (IDB)was approached for funding, but the above doubts, combined with difficulties inraising the necessary local counterpart resources during a period of fiecalstringency, resulted in the PGCA being effectively shelved.

4.37 Even though the comprehensive attempts to develop agricultural andrelated activities within the Greater Carajas region have, thus far, all metwith a similar fate, numerous ad hoc initiatives have been implanted with PGCfiscal incentives, together, in some cases, with incentives from SUDAN or SUDENE.By mid-1989, as illustrated in Annex I below, over twenty such projects had beensupported by the Grande Carajas Program, ranging ieom the Tucuma privatecolonization project mentioned earlier to palm oil plantations and processingfacilities, ranching, meatpacking, ethanol distilleries, poultry and charcoalproduction. Many of the investors in these enterprises, moreover, are also majorparticipants in PGC's Industrial and infrastructure developments, such as thelarge construction firms of Mendes Junior and Andrade Gutierrez. Despite theincreasing level of investments in these ventures, however, as in the case ofthe SUDAM-supported livestock projects, the number of permanent Jobs created hasbeen relatively small.

R. CETAT Land-TitlinR and Colonization

4.38 The Executive Group for the Araguaia-Tocantins region (GETAT) wascreated by presidential Decree No. 1,767 of February 1, 1980 with jurisdictionover an area of 45 million hectares, equivalent to roughly half that covered bythe Grande Carajas Program. Following abolition of the Ministry of Land Affairs,GETAT became part of the Ministry of Rural Development and Agrarian Reform(MIRAD) and was directly subordinated to the National Security Council. Itsactivities centered on the most volatile land conflict zone in Brazil in the late

42 Fearnside, Phillip, "Agricultural Plans for Brazil's Grande CarajasPrograom: Lost Opportunity for Sustainable Local Development?" World Development,Vol. 14, No. 3., 1986.

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1970's and early 1980's located where the states of Para, Maranhao and northernGoias (now Tocantine) meet and known as the "Parrot's Beak" because of itsdistinctive shape. GETAT's main stated purpose was to diffuse mounting ruralviolence in this area, situated just to the south and east of CVRD's iron oremining concession in the heart of the Greater Carajas region. For this purpose,GETAT was granted special powers to expropriate land, resettle the landless,grant titles and initiate colonization schemes. The agency was eventuallyabolished in 1987 and its activities taken over by INCRA amid allegations thatit had failed to achieve its objectives of implanting a more widespread andequitable system of land titling and distribution in the area.

4.39 Although GETAT distributed some 60,000 land titles covering sevenmillion hectares, this served mainly to consolidate a pre-existing, highlyinegalitarian structure of property ownership in the region. From 1980 to 1985,GETAT demarcated five million hectares, but the 702 of titles for farms under100 hectares occupied a mere 21% of the total area legalized, while the 8Z ofproperties with more than 300 hectares took up 51 of the titled land. '3 From1985-86, the 32 of titled farms with more than 1,000 hectares accounted for 452of the area demarcated, whereas the 33% of legalized properties with less than50 hectares occupied only 6% of the area. One estate of 400,000 hectares absorbed6% of the total area allocated by GETAT. 4" To avoid co.ifrontation with largelandowners, small farmers were encouraged to leave areas of conflict with thepromise of resettlement elsewhere, frequently to marginal agricultural lands onplots below the officially recommended minimum size for Amazonia and with littleregard for maintaining community cohesiveness. A combination of internaloperational problems and external institutional and political constraints appearto have been largely responsible for GETAT's limited effectiveness and eventualdemise. "

4.40 GETAT's record on colonization was also very mixed. Its majoractivity in this regard was to have been the establishment of three contiguous

'3 Wagner, Alfredo, "A Intervencao Governamental face aos ConflitosAgrarios na Regiao Amazonica," mimeo, 1988.

4" MIRAD/SEPLAN, "Dossie sobre a Atuacao do GETAT e a sua Extincao,t" mimeo,Brasilia, 1987 and "Avaliacao da Intervencao Fundiaria do GETAT (1980-87),"mimeo, Brasilia, 1987. According to these sources, moreover, only 6 propertiestotalling 397,000 hectares were expropriated by GETAT "in the sociel interest"as defined by the 1964.Land Statute and the 1985 Agrarian Reform Plan (PNRA)described below.

45 Although GETAT waS heavily criticized for inefficiency, bureaucraticirregularities and procrastination, its powers were effectively limited by thefact that it had to work through the General Procurator of the Republic. Itsinitiatives were further undermined by the slowness of state "AgrarianCommissions" to reach judgments on land issues under the PNRA and by theacknowledged reluctance of MIRAD to exercise its emergency powers in areas ofconflict (see Wagner, op. cit., 1988 and HIRAD/SEPLAN, "Avaliacao..., op. cit,1987 and MIRAD/SEPLAN, "Levantamento dos Proceesoe de Desapropriacao eobJuriedicao do GETAT Realizada em Haraba," mimeo, Brasilia, 1987).

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resettlement projects (Carajas I, II and III) located to the immediate southwestof Parauapebas, just below the southern boundary of CVRD's iron ore concession.By 1987, when GETAT was dissolved, however, only the latter two schemes wereoperational, accommodating just over 2,000 families on 50 hectare plots. CarajasI, which was initially intended to absorb another 4,000 families, was neverimplanted, while eight smaller projects such as Tuere (Tucurul), Rio Preto(Maraba) and Colonia Verde Brasileira (Conceicao do Araguaia), that were to haveresettled an additional 5,000 families, suffered a similar fate. Thus, whilethese resettlement schemes appear to have encouraged significant in-migrationto the Carajas-Parauapebas area by landless small farmers, they did not generatethe stability of tenure originally envisaged.

4.41 The lack of agricultural inputs such as seeds, fertilizers, creditand extension services, as well as even the most basic health and educationinfrastructure, contributed to a turnover rate as high as 90X among the originalsettlers of the GETAT colonization projects at Carajas. Most of these familiesapparently sold their plots to newcomers in order to make quick capital gainsin a highly inflationary macroeconomic environment. Land concentration has alsooccurred within the Carajas colonization schemes, as wealthier farmers haveincreasingly bought out the holdings of their neighbors. 46 The Para statecolonization agency, ITERPA, which took over responsibility for the Carajas IIand III projects from INCRA, has subsequently all but abandoned these ventures,while local officials reported to OED and SEPLAN in April 1989 that the original2,000 families in these settlements had been reduced to no more than 1,200.

L. The Maranhao Rural Develonment Projects

4.42 Although there is no mention of this anywhere in the appraisaldocuments for -he Carajas Project, at roughly the same time as the iron oreoperation was being prepared and appraised, the first Maranhao Rural DevelopmentProject wae also being elaborated and evaluated by the Bank. This latteroperation, appraised in August/September 1981 and approved on June 10, 1982,involved a Bank loan (Ln. 2177-BR) of US$ 42.7 million. It was designed, in part,as a follow-on operation to the Alto Turi Land Settlement Project discussed aboveand, in part, as a land regularization and integrated rural development effortfor the Baixada Maranhense and the Mearim-Pindare valley. As such, it overlappedgeographically with much of the eastern part of the Carajas-Sao Luin corridor,including, among other municipalities, Santa Ines, Vitoria do Mearim, Pindare-lirim, Arari, Anajatuba and Itapecuru-Mirim, all of which are cut by the Carajasrailway. 4

46 One rancher in the Carajas II project, for example, is reported to havepurchased up to 40 colonists' parcels and now post.ssee over 2,000 hectareswithin the scheme.

47 The three latter municilios are located in the Baixada subregion, whilethe three former are in the Hearim-Pindare area. According to the SAR (ReportNo. 3845a-BR, dated May 21, 1982) for this project, the Baixada "is one of themost densely settled and least developed rural areas in the state, and itsstagnant rural economy has encouraged emigration to the state capital lie. SaoLuis) where the migrants have very limited employment opportunities. Ae one of

46

4.43 The project covered a total area of nearly 51,000 square kilometerGand included 47 municipalities broken down into three subprojects for: (i) AltoTuri, involving a total area of 8,500 km2, where the bulk of project investmentswould be in Subarea III that had received relatively little attention in theearlier Land Settlement Project; (ii) the Baixada, occupying 21 municipalitiesand covering close to 23,000 km2, which would be subject both to landregularization and the provision of a broad range of agricultural and socialservices; and (iii) the Mearim-Pindare area, also containing 21 municiRios andan area of more than 19,000 km2. *6 With respect to the latter, morespecifically, the SAR indicates that the project would provide landregularization activities in an area "where agricultural development isconstrained by considerable land tenure uncertainties which otherwise wouldprobably worsen with land pressure generated by various development projects,including construction of the Carajas-Sao Luis railway." 49 Altogether, theoperation was expected L.o provide more secure land tenure to roughly 39,000 smallfarmers, of which some 24,000 would receive a greater or lesser amount ofproduction support services as well. As was the case with nearly all of the ruraldevelopment projects financed by the Bank in Northeast Brazil in the mid-1970'sand early 1980's, this initiative was part of the Government's POLONOIDESTEprogram. so

the original areas of settlement in Maranhao, the Baixada's population is largelyintegrated into communities which have remained, until recently, fairlystable....The increasing pressure for land in Northeast Brazil, and the variousgovernment-sponsored schemes to promote agricultural development, have led tothe conversion of large areas of the state land in the Baixada to cattle andbuffalo rearing, leaving the communities with land shortages and decliningproductivity...." (para 3.02).

8 The Alto Turi area wse characterized in the SAR as originally consistingof "dense tropical forest, much of which has now been cleared through spontaneousand organized settlement." In the Baixada, in turn, topography "ranges fromundulating in the central-north to low-lying on the coastal plaine," while"vegetation is predominantly secondary growth with babacu predominating in lowerareas." The Mearim-Pindare area, finally, was "regarded locally as the 'filet'of Maranhao" having undulating to flat topography and being drained by severallarge rivers. Soils in these areas, however, were found to be of low (Alto Turiand Baixada) or moderate (Mearim-Pindare) fertility (para. 2.07).

49 Ibid., para. 3.09(c).

'0 For a mid-term review of the POLONORDESTE experience, see Brazil: AnInterim Assessment of Rural Development Programs for the Northeast, World BankCountry Study, Washington, 1983. OED is currently carrying out an in-depthanalysis of the rural development experience in Northeast Brazil as a case studyfollow-up to its earlier Bank-wide review of rural development projects entitledRural DeveloRment - World Bank Exierience. 1965-1986, World Bank OperationsEvaluation Stud7, Washington, 1988.

47

4.44 In addition to its emphasis on land regularization, titling andredistribution, this project contained a number of other interesting features

i- ncluding land use planning, forestry and inland fisheries components -- aswell as the more traditional agricultural extension, research and marketingrural road, education, health, water supply and small scale enterprisesubprojects characteristic of integrated rural development projects throughoutNortheast Brazil and elsewhere at that time. With regard to land use, moreconcretely, the SAR affirmed that "in order to assist in the definition of theareas for land regularization and redistribution activities and to provide asound base for subsequent regional planning and agricultural development," landuse capability studies, based both on aerial photography and more conventionalland-based topographical analysist would be carried out in the project regionby consultants, together with soil studies and a socio-economic study to identify"feasible development strategies" for the camios or low-lands part of the Baixadasubregion.

4.45 Inland fishing activities, in turn, were to be supported in fivemunicipios in the Baixada area to "redress the current depredation of fish stocksthrough over-fishing." 52 The forestry component, on the other hand, wouldinclude "identification, protection and management" of two new forest reserves -- one in Subarea III of Alto Turi and the other in the Baixada, respectively -- as well as establishment of a post to "maintain, protect and manage" anexisting reserve in Subarea I of Alto Turi and the execution of a diagnosticstudy in the Baixada and Alto Turi subregions "to define an overall strategy forsubsequent forest protection and reforestation activities in the project area,among other actions. 53 Among several "complementary activities" not includedin the operation, but mentioned in the SAR, moreover, were provisions forAmerindian protection. These referred specifically to two Indian reserves"situated sufficiently close to the project area" to be potentially influencedby developments within it and also located in the area of influence of theCarajas Project, which was expected to take actions to protect them under theassociated Amerindian Special Project. 5'

' SAR for Maranhao Rural Development Pro1ect. op. cit., paras. 3.18-3.20.With respect to the latter, the SAR noted that the principal concern was to"ensure that the long-established communities in this area could participate infuture development," considering that "(t)he present pattern of communal landuse and combination of crop production, grazing and fishing is threatened by therelatively recent establishment of ranches and the enclosure and subsequentalienation of large areas of land." (para. 3.20)

52 Ibid., para. 3.30.

3 Ibid., para. 3.31.

54 Ibid., para. 3.45. In addition to the actions to be taken under theCarajas Project, according to the SAR, the Maranhao rural development operationwould "complement these activities with the provinsion of supporting health careon request, as has been the case in the past with the Alto Turi project, andcollaboration in the demarcation of one of the reserve boundaries shared withthe Alto Turi subproject area."

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4.46 Finally, the Maranhao rural development operation was expected tohave a "significant beneficial impact" on the natural environment. According tothe SAR, the project-supported land use studies "should lead to a more rationaluse of the project area resources both at a regional level and within farms,"while "areas found to be unsuitable for agricuj.ture would be protected and/oreventually reforeBted, thue reducing soil erosion in watersheds and siltationin watercourses." 5' The shift from the traditional slash and burn to moresedentary forms of agriculture to be promoted by the project, moreover, wasexpocted to help restore soil fertility and stabilize land use, while, at thesame time, improving farmers' incomes.

4.47 On June 30, 1987, a second rural development project for Maranhaowas approved by the Bank (Ln. 2862-BR, for US$ 84.0 million), as part of thesecond generation of such operations in Northeast Brazil, now under the name ofthe Northeast Rural Development Program (NRDP). The project would provideassistance to a total of 58 municipalities -- organized into six "regionalplanning units," three of which were for the Baixada, Pindare and Mearimsubareas, respectively -- subject to cadastral and land titling activities underyet another Bank-supported initiative, the Northeast Region Land TenureImprovement Project, financed by Loan 2593-BR (for US$ 100.0 million), approvedJune 25, 1985. 5 Among the municipalities covered by the second ruraldevelopment project are Santa Luzia, Santa Ines, Pindare-Mirim and Vitoria doMearim in the Pindare planning unit and Anajatuba and Arari in the Baixada unit,all of which are cut by the Carajas-Sao Luis railway. 37 Like the other secondgeneration NRDP projects, this operation would provide assistance to low-incomefarmers through components for water resource development, agricultural researchand basic seed production, rural extension, credit, marketing and support torural communities. A small environmental protection component waS also included. 3a

" Ibid., para. 8.08.

56 SAR for Northeast Rural Development Prolect - Maranhao, Report No. 6136-BR, May 26, 1987. According to this document, the 58 municipalities were chosenas priority areas for the Land Tenure Improvement Project on the basis of their"concentration of landless small producers and their underdeveloped agriculturalpotential." (Annex 1, para. 3.)

5' Bom Jardim and Moncao, just across the Pindare River from the Carajasrailroad, are also amorg the municipalities covered by the Pindare planning unitincluded in the project.

58 This component, more concretely, would assist the State Secretariat forNatural Resources establish and protect the Hirador State Park (430,000 ha ofstafe-owned land) covering the watershed of the Itapecuru River which is thesource of water supply for Sao Luis. (SAR, Annex I, para. 35.)

49

Several provisions related to Amerindian protection in the project area,moreover, were established by the Bank as conditions of loan effectiveness.

M. The National ARrarian Reform Plan

4.48 Although, like the second Bank-financed rural development projectin Maranhao, they occurred some considerable time after the Carajas Project wasapproved and largely implemented, two other major federal government initiativesaffecting Eastern Amazonia should also be briefly mentioned before turningspecifically to the iron ore project. The first of these is the National AgrarianReform Plan (PNRA) formally announced on October 10, 1985 as a response by thenew civilian government to the growing problems of land conflicts and ruralviolence in Brazil. The PNRA aimed to redistribute 43 million hectares ofunderutilized public and private land to 1.4 million peasant families by 1989,with the intention of reaching 7 million such families by the year 2000. Underregional reform plans approved in May 1986, a total of ten million hectares wasto be redistributed in Amazonia by 1989, resettling 630,000 landless cultivatorsand their families. 60

4.49 Results of the PNRA have been modest. By February 1988, accordingto official figures, only 11,000 families, or 42 of the original target, hadbeen resettled in all of Brazil, a mere 836 of this total in Amazonia. 61Intensive political lobbying by the rural landowners' pressure group (UDR) duringthe Constituent Assembly resulted in the gradual weakening of the PNRA'sproposals. Overall resettlement targets were revised downward by up to 702 during1987-88. Most importantly from the landowners' point of view, ard in a majordeparture from the 1964 Land Statute, Decree-Law No. 2,363 of October 21, 1987declared ineligible for expropriation any property "effectively exploited" bythe owner, as well as all farms below a certain size -- 1,500 hectares in the

S9 In particular, demarcation of the Geralda/Toco Preta Amerindian reserveand the satisfactory implementation of plans of action previously agreed uponwith the Bank to resolve land conflicts in existing Indian reservations in theproject area and to create a new protected area (Awa/Carutapera) in themunicipality of Bom Jardim for the nomadic Guaja Indians, respectively. Theseactione were to be taken utilizing resources made available under the AmerindianSpecial Project associated with the Carajas Iron Ore Project. (SAR, paras. 3.05and 4.04; Annex 1, para. 37 and Table 1.10; and Annex 4.)

60 See the following documents generated by the Ministry of Agrarian Reform(MIRAD), Brasilia: Progosta para a Elaboracao do Primeiro Plano Nacional deReforma Aararia da Nova Renublica - PNRA, May 1985; Plano Nacional de ReformaAgraria, October 1985; Conflitos de Terra, 1986; Plano Regional de ReformaAgraria - PRRA Para, 1986; and Plano Regional de Reforma Agraria - PRRA Maranhao,1986. In Amazonia, 154 properties occupying three million hectares wereidentified as areas of social tension ripe for compulsory expropriation "in thesocial interest." (Wagner, "A Intervencao Governamental..., op. cit.)

61 Tavares dos Santos, J. "A Colonizacao Agricola: Uma Solucao para a CriseAgraria Brasileira," mimeo, Federal University of Rio Grande do Sul, PortoAlegre, 1988. The figures cited are from MIRAD.

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case of Amazonia -- a provision subsequently incorporated into the new BrazilianConstituation Ln 1988. 62

4.50 The exclusion of "productive" lands from the agrarian reform hashad profound human and physical environmental repercussions throughout Brazil,and in the Carajas railway corridor and its area of influence in particular.Many estate owners, anxious to have their properties declared "productive," haveexpelled smallholders and converted forest areas to pasture, further exacerbatingalready rapid rates of environmental degradation. This legal provision has alsoserved to intensify land conflicts in areas such as the "Brazilnut Polygon" nearMaraba, as posseiros have come under increasing pressure to abandon areas claimedby large proprietors. In 1988, some 200,000 hectares, or one fifth of the"Brazilnut Polygon," occupied by roughly 2,000 families, were eventuallypurchased under the PNRA in an attempt to alleviate growing social tension. Thisprobably has helped to stabilize the small farming population in the immediatearea, partially counteracting the tendencies for rural outmigration which aretypical of the Carajas region. None of the resources reserved by MIRAD to financethese transactions, however, was allocated to providing support services orinfrastructure for the resettled farmers. Furthermore, a Parliamentary Commissionof Inquiry is currently investigating the legality of UIRAD's intervention, whichhas been temporarily suspended pending the outcome. 63

N. The North-South Railway

4.51 The other recent event which is worthy of note is the completion ofthe first segment of the North-South railway. This made possible by the earlierimplementation of the Carajae-Sao Luis railroad. As observed in the previouschapter, this proposed 1,600 kilometer rail line would link Acailandia on theCarajas railway to Anapolis, near Brasilia, at a cost initially estimated at US2.3 billion, but which could ultimately rise to several times this amount. Byjoining the two rail linee, a dual external outlet would be provided both forcerrado cereal products and Carajas minerals, through the ports at Sao Luis inthe north and Tubarao (Espirito Santo), Rio de Janeiro and Santos, near SaoPaulo, in the south.

4.52 The North-South railway, moreover, is expected to. stimulate anincrease in agricultural production over an area as large as 32 million hectaresin the relatively fertile Center West cerrado from a present 1.5 million tonsper year to as much as 100 million tons or more of rice, soybeans, corn and

62 Other concessions included the limiting of expropriation to 75% of theproperty in question and the transformation of agrarian debt bonds (TDAs) issuedin compensation into highly liquid assets which could be used, for example, tobuy land and goods.

63 Local observers reported to OED and SEPLAN that the resultingindefinition has encouraged further land invasions within a mounting climate oftension in the countryside around Maraba.

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wheat. " As indicated abw., the first 108 kilometer stretch of the North-South railvay connecting Imperatriz to Acailandia was officially inaugurated inApril 1989 with hopes that tb;m next 100 kilometers to Estreito in the state ofTocantins would be completed by the end of 1990. At present, there iG no revisedofficial termination date for the remaining 1,400 kilometers, whose completionwas originally set for 1992.

0. Conclusion

4.53 Several general conclusionG can be drawn from the precedingdiscussion. In the first place, very significant governmental interventionsoccurred in the Eastern Amazon and Preamazon regions during the 1960's, 1970'sand early 1980's, and, although largely unrecognized by the Bank, these werealready having important human and physical environmental impacts in the areaat the time the Carajas Project was prepared by CVRD and subsequently appraisedby the Bank. Secondly, the iron ore project itself was clearly linked to someof these interventions, particularly the Grande Carajas Program, and, while theselinkages are mentioned in the Bank's appraisal documents for the Carajasoperation, they, and their environmental implications, were not fully exploredor analyzed as part of the appraisal process. Thirdly, the Bank itself wasinvolved in two important integrated rural development projects in the easternpart of the Carajas railway corridor during the 1970's and 1980's.

4.54 One of these latter operations, the Maranhao Rural DevelopmentProject, was prepared in parallel to the Carajas Iron Ore Project. However, thereseems to have been little, if any, coordination between the two either in Brazilor at the Bank. In the latter case, this may have occurred largely because theprojects were handled by different sectoral' divisions (ie. Industry andAgriculture, respectively), such that, in retrospect, it appears that the Bank's"left hand" may have been basically unaware of what its "right hand" was doingin north-central Maranhao at the time. From an environmental standpoint, thiswas particularly unfortunate because the approach taken in the Maranhao RuralDevelopment Project in what was, in fact, part of the Carajas Project's immediatearea of influence -- including land use planning studies, land tenureregularization, forestry development and the supply of agricultural support andsocial services to small farmers and rural communities -- should have beensystematically attempted along the entire Carajas corridor, together with theprovision of equally needed urban infrastructure and services. Had the iron oreproject taken such an area development approach, it is possible that some of theenvironmental problems that have been experienced in the corridor over the pastdecade could have been avoided, or at least might have been substantially lessserious. Before pursuing this question farther, however, it is necessary toexamine how the Bank approached the Carajas Project, as well as how well itdealt with the operation's expected environmental impacts.

64 See Momma, A. Ferrovia Norte-Sul: Um Sistema de Transgortes nara oDesenvolvimento Regional, Ministry of Agriculture, Brasilia, 1987.

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V. THE CARAJAS IRON ORE PROJECT

A. Origins, Pregaration and Early Proiect Implementation X

1. Proiect Oriains

5.01 Until the mid-1960's, only sporadic geological surveys had beenundertaken in Eastern Amazonia. Previously, the only major activity of note wasthe "Araguaia Project," carried out by the National Department of MineralProduction (DNPM) of the Ministry of Mines and Energy between 1954 and 1966.This project constituted the first systematic aerial reconnaissance of what wasthen the northern part of the state of Goias and southeastern Para. In 1966,utilizing photographs produced by this project, manganese was discovered by aBrazilian subsidiary of the Union Carbide Company some 60 kilometers southwestof Mareba. In July 1967, also utilizing aerial photographs generated by theAraguaia Project, iron ore was discovered at the Serra dos Carajas, roughly 165kilometers to the southwest of Maraba, by the Companhia Meridional de Mineracao(CHM), a Brazilian subsidiary of U.S. Steel.

5.02 In October 1967, DNPM granted survey rights to CMH and, in 1968,CVRD agreed to join Meridional to determine the extent and quality of the ironore deposits at Carajas under research licenses subsequently provided by DNPMin July 1969. The results of these studies, which were carried out between 1969and 1972, revealed that total reserves were on the order of 17.8 billion tonsof high grade, low phosphorous iron ore, making Carajas one of the most important

2mineral provinces in the world. A joint venture between the two companies wasformally established in April 1970 -- through the creation of Amazonia MineracaoS.A. (AMZA), with CVRD controlling 50.9% and U.S. Steel (mainly through CMHM)49.1% of AMZA's capital -- in order to prepare feasibility studies for theexploitation of iron ore and other minerals at Carajas. This partnership lasteduntil June 1977 when U.S. Steel withdrew from the project, selling its share inANZA to CVRD. 3 In April 1981, AMZA was formally merged with CVRD to strengthenthe latter's control over the Carajas Project.

The discussion of the origins, preparation and early development of theproject is based on the SAR, the project correspondence files and CVRD's draftPCR, which contains a detailed chronology of project events. See also Santos,Breno, "Carajas - Historia e Perspectivas" in CVRD's publication EsRaco. Ambientee Planeiamento, Vol 1, No. 2, February 1986.

2 SAR, paras. 5.07-5.08.

3 According to the SAR, U.S. Steel dropped out of the project because ofits scope, the size of the investments involved and a shift in target marketsfrom the United States to Europe and Japan. However, an internal Bank memorandumdated January 7, 1982 observed that "U.S. Steel had apparently wanted to controlthe market for Carajas iron ore and had sought to limit the size of the projectto its own financial capability and the US market, with the ore to be evacuatedby river barge through Belem. This proposal had not been acceptable to CVRD andthe Government of Brazil had wanted to retain control over the project."

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2. CVRD Pregaration and Initial Bank Involvement

5.03 The first feasibility study for the iron ore project was initiatedby AMZA in May 1972. This study proposed an "integrated" venture consisting ofmining operations, a beneficiation plant at the mine site, a transport systemand a port. Several transport and port alternatives were considered and a finaldecision was taken by President Geisel in early 1976 to proceed with constructionof a railway from Carajas to a port terminal at Sao Luis, the other major optionhaving been the shipment of ore by some combination of rail and barge to a portnear Belem. 4 The possible environmental costs (eg. deforestation, loss ofbiodiversity, etc.) of the various alternatives, however, were not consideredin this analysis. According to the SAR for the iron ore project, comprehensivestudies of the northern Brazilian coastline completed in May 1974 demonstratedthat Ponta da Madeira in Sao Marcos Bay, near Sao Luis, was the most appropriatelocation for establishing a deep water port, and, in May of 1976, AMZA wasofficially granted the concession to build and operate the Carajas railroadbetween the proposed port terminal and the mine site. 5 In July 1975, AMZAinitiated physical works in the port area and a month later it began constructionof a road (PA-275) to connect the existing PA-150 highvay (linking Maraba andConceicao do Araguaia in southern Para) and the Serra dos Carajas, an activitythat was concluded in August 1976.

5.04 AHZA initially proposed production of 20 millions tons per year ofiron ore which was to be gradually increased over time to 50 million tons.However, in light of the large investments involved and changing iron ore marketprospects during the late 1970's, as briefly described in Chapter II above, CVRDdirected AMZA to undertake new feasibility studies in 1978. Completed in 1980,these studies suggested that the project should achieve an annual productionlevel of 35 million tone in 1987 with future expansion to SC million tons todepend on the absorptive capacity of the world iron ore market. Throughout the1970's AMZA proceeded with engineering studies for Carajas' mining, rail and port

4 The principal alternatives considered were: (i) the Carajas-Ponta daMadeira railway; (ii) a 320 km rail 'Ink to the Tucurui falls, followed by a430 km waterway section to the Ilha ds J Guaras near Belem; (iii) a 37 km railwayspur to a transhipment point on the Parauapebas River followed by a 834 kmwaterway segment to the Ilha dos Guaras; and (iv) a 770 km railway to the Ilhadoe Guaras. The first alternative was allegedly selected because of therelatively less favorable conditions at Ilha dos Guaras, where, according to aBank internal memorandum of October 21, 1976, there were "high risks ofunpredictable siltation/erosion and continuous wave disturbance." The Bank waslater (May 1978) informed by CVRD that the option of transporting ore by apipeline had also been examined by a consultant in 1972, but was rejected becauseit would be "inadequate for the market envisaged for Carajas," sinterfeed, asopposed to pellets, and because a pipeline would "add nothing to thetransportation infrastructure of the regions where it is built."

3 SAR, op. cit., para. 5.05. There was also a political element in thisdecision since the states of Para and Maranhao were actively competing for theCarajas port facilities.

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operations based largely on CVRD's earlier experience in its "southern system"in Minas Gerais and Espirito Santo. 6

5.05 According to CVRD's project chronology, the World Bank was firstapproached with respect to the Carajas Project in October 1972 when two directorsof AMZA visited Washington. The Bank's files, in turn, first mention the venturein connection with the visit of the Brazilian Minister of Mines and Energy inDecember 9472, at which time Bank support was requested for the country's majorexport-oriented projects, including Carajas, even though this undertaking wasstill at an early stage of preparation. During the second half of 1973, meetingsby Bank staff were held first with U.S Steel officials in Pittsburgh and laterwith CVRD and U.S. Steel representatives in Washington in which it was affirmedthat the Bank's financial participation in Carajas would assist in attractingother foreign investors to the project. On the latter occasion, oreover, AIZA'spreference for locating the project's port facilities at Sao Luis, rather thanBelem, was manifested to the Bank. 7

5.06 The Bank met periodically with Brazilian Government, CVRD and U.S.Steel representatives throughout the mid-1970's to review progress on thepreparation of the Carajas Project. These contacts included a meeting with thePlanning Minister in July 1975, in which the Government's interest in obtainingBank financing for the operation was reaffirmed and the visit of a CVRD/U.S.Steel delegation to Washington in August 1975 to present the results of theinitial feasibility study. On the basis of its analysis of this study, however,Bank technical staff questioned the selection of a rail, as opposed to river,transport alternative and additional studies were recommended. Visits to the

6 CVRD's "southern system" consists of its mining operation in the "IronQuadrangle" in Minas Gerais, the Vitoria-Minas railway linking the mines toTubarao, near Vitoria, in Espirito Santo and the port facilities, includingpelletizing plants, at the latter. The iron ore deposits in Minas Gerais werefirst discovered in 1910, but large-scale commercial exploitation began only inthe mid-1940's after CVRD was established in 1942. The deep water port of Tubaraowas installed in the 1960's and the existing railway between Itabira and Vitoriawas expanded and upgraded during the 1970's. Total measured iron ore reservesin Minas Gerais in 1980 were on the order c1 9.7 billion tons, while annual salesfrom the southern system in this year were some 62 million tons, with the totalexpected to increase to nearly 73 million tons by 1987 (SAR, p&ras. 4.09-4.16).

' The principal arguments made in support of this option at the time werethat the natural conditions in the Sao Luis area would permit ore carriers ofup to 300,000 dwt to use the facility and that the choice of Ponta da Madeirawould enable the Government to proceed with tentative plans to install a largeexport-oriented, semi-finished steel mill at nearby Itaqui,

8 An internal memo dated September 24, 1975 observed that "the least welldefined and largest element of the project is the transport infrastructure. Indeciding on the railroad, insufficient attention may have bean given to a rivertransport alternative. The Bank should review this question to determine whe;hera prima facie case for rail transport has been established." A Back-to-Officereport dated October 21, 1975 following a mission to review plans for Carajas

55

Bank by the Brazilian Ministers of Planning and Mines and Energy also occurredduring the first semester of 1976, at which time the Government's intention toproceed rapidly with Carajas was ratified and the Bank's support was againrequested. '

5.07 Discussions between CVRD/AMZA and the Bank continued bilaterallyafter the withdrawal of U.S Steel in mid-1977, and the iron ore operation wasformally approved by the Economic Development Council (CDE) of the Brazilianfederal government in February 1978. Construction of the initial 80 kilomietersof the Carajas railway outward from Sao Luis was authorized at that time. During1978 and 1979, CVRD received further government authorizations to expropriatethe land needed to install the railway along its entire length, as well as forimplantation of the rail terminal and port facilities at Ponta da Madeira.According to CVRD, roughly 1,800 squatters were encountered in these areas,n'nly near the port, but their removal was "amicable" and the company providedcompensation to the affected families to facilitate their relocation. 10Physical preparation of the railroad bed initiated in June 1978, starting withthe swampy area in the Baixada Maranhense near Sao Luis, and by April 1979 CVRDhad signed contracts for the extension of the rail line's substructure throughKm 331, as well as for construction of the rail terminal at the port site. InNovember 1979, Bank Preoident McNamara visited Carajas as part of an officialtrip to Brazil. "1

5.08 The change in the Brazilian Government in March 1979 -- which alsobrought with it the appointment of a new President (and a more entrepreneurialorientation) to CVRD -- eventually gave an added impulse both to the iron oreproject and to more general plans for the development of the Greater Carajasregion. Initially, however, the incoming Figueiredo Government was reluctant toconfirm the previous administration's declared priority for the Carajas Project,

observed, however, that the Sao Luis port was preferred because of its "greatersafety" and that the route of the railway had already been "staked out," whilea March 1976 memorandum following meetings with CVRD officials in Brazilindicated that the basic engineering design for the railroad had already beencompleted and that the Ministers of Transportation and Mines and Energy hadrecommended the railway solution to President Geisel, a position which hesubsequently approved.

9 One or these visits was with Bank President McNamara. In this meeting,Brazilian Government officials gave special priority to the Carajas Project asa key element in its global strategy to strengthen the balance of paymentsposition by expanding exports and reducing imports.

10 CVRD's project chronology, attached to its draft PCR, pg. 4.

11 Bank President Clausen later also visited the Carajas Project in March1982, five months prior to Board approval of the operation.

56

despite CVRD's strong desire to p?oceed rapidly with its implementation. 12Internal Bank documents written in late 1979 suggest, moreover, that keyGovernment officials were actively considering alternative approaches to thedevelopment of Eastern Amazonia -- in which the role and relative importance ofCVRD's iron ore project were still unclear -- and that several basic decisionsconcerning the operation, including the railroad option, were once again underreview. An additional concern, both for the Bank and the BrazilianGovernment, was growing uncertainty about the real extent of Japanese interestin the project, which at the time was not perceived to be very strong, while theBank also questioned CVRD's ability to negotiate sufficient purchase contractsfor Carajas ore to guarantse the project's financial feasibility.

3. Relation to Grande Caralas Proaram

5.09 Despite these misgivings, the Figueiredo Government finally approvedthe Carajas Project, once again through the Economic Development Council (CDE),on October 15, 1980, authorizing CVRD to obtain the internal and externalfinancing necessary to implement a project with the capacity to produce 35million tons of iron ore per year as of 1987. Shortly thereafter, on November24, 1980, the CDE also officially created the Grande Carajas Program,establishing its Interministerial Council and defining the types of incentivesthat would be extended to private firms choosing to set up productive activitiesin the larger Carajas area. The Bank clearly had prior knowledge of theGovernment's plans to integrate the iron ore project into the larger Grande

12 An internal memorandum dated June 11, 1979 reporting on Bank contactswith the incoming Ministers of Mines and Energy and Planning indicated that,because of its "enormous financial requirements" the Carajas Project did notenjoy high priority in the federal government's investment program and that theearliect it should be considered for Bank financing was FY81. A meeting with ayet another Planning Minister in November 1979 -- the original minister havingresigned after only six months in office -- moreover, revealed that theGovernment had not authorized AMZA to proceed with the project because it washoped that there would be significant foreign equity participation in Carajasand several other large projects in the region (including ALBRAS-ALUNORTE inBarcarena), thereby freeing up domestic resources.

1) A Bank memo dated December 14, 1979 noted, for example, that the newMinister of Transportation did not fully accept the pure rail alternative since,ulter the decision to construct locks at the Tucurui dam, the Araguaia Riverwould become navigable as far south as Barra dt Garca in Nato Grosso and arail/river transport solution for Carajas ore would involve a smaller capitalinvestment. The Planning Minister, in turn, felt that, despite Carajas'importance in terms of Brazil's long-run balance of payments situation,development of the Tucurui hydropower project would provide a broad range ofopportunities for developing the full potential of Eastern Amazonia, including,in addition to iron ore, manganese, bauxite, nickel, copper and gold, as wellas *food grains and sugar cane development, opening up the possibility ofexporting alcohol through the port of Vila do Condo at Belem. It was furtherobserved that a prefeasibility study was being carried out for this broaderinitiative, which was later to become the Grande Carajas Program.

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Carajas initiative even before the program was formally established, as isindicated in an internal memorandum dated August 5, 1980 which observes that:

Using Carajas tie. the iron ore project) as the base,a major development program is being considered for thestates of Para and Maranhao. The basic concept is todevelop an "export corridor" in the north of Brazilaround two basic interconnected transport systems: (i)the Ponta da Madeira-Carajas railway and (ii) theTrombetas-Belem (Vila do Conde) and Maraba-Belem rivertransport where the ALBRAS and ALUNORTE projects arebeing constructed. The basic nuclei would beCarajas/Maraba, Tucurui, Vila do Conde and Sao Luis. Thetotal cost of the development is estimated at US$ 30billion over a period of about 10 years resulting inannual export earnings of about US$ 12 billion. Animportant side effect would be the strong impact itwould have on industrial development of the Northeast(ie. Maranhao). The future availability of energy atTuocurui promises good prospects for exploitation of thevast mineral deposits in the area which, in addition toiron ore, include: copper.. .bauxite...nickel...(and)manganese.

5.10 Because of their relevance to what has subsequently occurred in theregion and to the Bank's handling of the iron ore operation, two otherobservations in this document should also be quoted textually. In addition tomineral development, the larger Carajas region was also considered to possesssignificant agricultural and industrial development potential. The memorandumaffirms:

The Carajao railway will cross large expanses of landthat are suitable for either forestry or agriculture.The forestry components are closely tied to the proposedindustrial projects, primarily the production of pigiron which will require 25 million m3 of charcoal peryear calling for large forests that will need to beplanted in order to reduce fuel costs. Because of therequirements of IBDF (the national forestry service),about 2.4 million ha would be set aside forreforestation. In addition to exploiting babacu, thepossibility of growing energy crops such as sugar caneand cassava is being studied. Food crops such assoybeans, rice, maize, and cane can be grown in the

14 This memo also notes, in the specific c, e of bauxite, that "immensedeposits have been discovered at Paragominas -'hich could be brought to the portof Itaqui with construction of a 150 km spur to the Carajas railway."

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micro-regions of Pindare, Hearim and Imperatriz inMaranhao and at Carajas and Maraba in Para. 1'

5.11 Finally, the August 1980 memorandum mentions that the BrazilianGovernment was considering setting up an entity "along the lines of theTennessee Valley Authority" to manage these various development programs. Thisentity would shortly materialize as the Interministerial Council and ExecutiveSecretariat of the Grande Carajas Program. In the opinion of the memorandum'sauthor, moreover, "the Bank can make a major contribution to the development ofboth the Amazon and the Northeast by working closely with the new entity on thedevelopment of this region." Judging from the available written record, however,the Bank appears not to have seriously pursued this recommendation until nearlytwo and a half years later, in November/December 1982 -- some three months afterthe Carajas Project had been approved by the Board and the Loan Agreement signed-- when a mission returning from Brazil formally proposed that the Bank offerto support "preplanning efforts through sector work" and "consider thepossibility of helping finance program development for the Greater Carajasregion." 16 At that time, the Brazilian Government responded by indicating thatit was not interested in Bank support for the Grande Carajas Program, turninginstead to the Inter-American Development Bank (IDB) which was requested toassist with an agvJcultural development project for the area. As indicated inthe previous chapter, however, the IDB later decided not to pursue the matter.

4. Early Project Development

5.12 CVRD9 meanwhile, continued to press forward with constructionactivities, initiating work on the airport and clearing the first site to bemined at the Serra dos Carajas in December 1980. 'The pilot beneficiation plantat Carajas, whose installation had started in January 1980, in turn, beganoperation in January 1981, while construction initiated on a transmission linefrom Maraba to the mine site in March 1981. 17 Similarly, definitiveconstruction and pavement of the highways connecting Carajas to Maraba (PA-275

15 Ibid. A later memorandum dated May 8, 1981, following the visit ofCVRD's President to Bank President McNamara on April 27, 1981, similarly observedthat the operation was set in the context of the Brazilian Government's plansfor the "development of the Greater Carajas region (the so-called Grande CarajasProgram) which includes, in addition to the iron ore project, copper, gold,bauxite/aluminum, ferronickel, ferromanganese, pig iron, tin, reforestation andagricultural development in projects in various stages of preparation." TheCarajas railway and port infrastructure would also support the non-iron oreprojects to be developed as part of the Greater Carajas Program. CVRD and theBrazilian Government, moreover, considered the Bank's participation "essentialto mobilize the participation of other external lenders."

16 Back-to-Office report dated December 14, 1982 for the Greater Carajaspre-planning mission undertaken during the period November 15-23, 1982.

17 Completed in May 1982, this system initially transmitted energy by CHESFfrom the Sao Francisco River valley in the Northeast. Since March 1985, however,the system has relayed energy generated by ELETRONORTE at Tucurui.

59

and PA-150), involving a total extension of 205 kilometers, began in July 1981and were completed irn January 1983, according to CVD8's project chronology.

5.13 Work along the Carajas railway also proceeded rapidly as the Bank'sappraisal mission in October/November 1981 was able to assess. The SAR, datedJuly 6, 1982, noted that "CVRD started the construction works for the railroadsubstructure - cuttings, bridges and viaducts, and culverts - two years ago,except for the Tocantins river bridge and the Carajas mine terminal. The 890-km length was divided into 14 sections plus the terminal at the port, with eachsection let out as a separate contract to cover all required works in thesection....A separate contract for the Tocantins river bridge was let August 8,1981 and contracts for t.ie track laying and ballasting are in process of beinglet." 18

B. Environmental. Amerindian and Other Issues in Project Desig,n and Annraisal

5.14 The above observations clearly indicate that physical execution ofthe project was well advanced on all fronts by the time the Bank appraised theoperation and, in fact, by the time of the first and only formal Bankpreparation mission which took place in February 1981. 19 They also suggestthat, by the time the Bank began to consider the project in detail, the basicdecisions, including those having important human and physical environmentalimplications -- such as the type of transport solution to be adopted in orderto ship Carajas iron ore to the coast and its routing and the location of thoport facilitie& -- had been taken and were already in full implementation priorto any detailed evaluation by the Bank. It also reflects the fact that, from theoutset, the project was viewed by both CVRD and the Bank essentially as asectoral (ie. mining with associated infrastructure) operation rather than aspart of a broader, multi-sectoral, area development effort, despite its obviousimportance for and, as far as the Government was concerned, de facto integrationwith, other development initiatives in the Greater Caeajas area and despite itssignificant and acknowledged regional impacts.

5.15 It is, thus, not altogether surprising that, in terms of theenvironmental issues surrounding implementation of the project, the Bank's focuswas essentially a narrow one, the primary concern being to avoid or amelioratepossible adverse environmental impacts associated with the installation andfuture physical operation of mining, rail and port activities within CVRD-controlled areas in the Carajas corridor. Furthermore, environmental concernsonly became an element in the Bank's consideration of this operation relativelylate in the project preparation process. Except for a memorandum from theEnvironmental Advisor's Office in January 1976, suggesting that the Bank's

le SAR, op. cit. paras. 5.21-5.22. The degree of work completion as ofDecember 1981, according to the SAR, was: earthmoving along the rail line - 45%;earthmoving at Sao Luis terminal - 84%; bridges along the line - 32%; culvertsalong the line - 56%; and concrete retaining walls - 40%.

19 The SAR indicates that a preappraisal mission was carried out inJune/July 1981 and that post-appraisal visits were made by various Bank technicalspecialists in January/FPbruary and March 1982, respectively.

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experience in the earlier MBR Iron Ore Project (Ln. 0787-BR) in this regardwould be relevant to the Carajas operation, no mention of environmental issuesappears in the project correspondence files until January 1980. This latterreference was contained in an internal memorandum in which the "very difficultclimatic and geographic 4onditions" and "fragile ecology" in the Amazon regionare cited and the need to carry out a "detailed environmental impact study forall parts of the Carajas Project" is recommended. 20 While tLe Bank subsequentlyrequested that CVRD present its plans for controlling the project's ecologicalimpacts, a proposed environmental reconnaissance mission was delayed until wellafter the Brazilian Government reaffirmed Carajas' priority for Bank financingin mid-October 1980. 21

1. Prenaration and PreaRpraisal

5.16 Despite chis stated concern with the project's likely environmentaleffects, the February 1981 preparation mission for the Carajas operation didnot include an environmental specialist, nor were environmental questions listedamong the issues mention d bv the mission team in its Back-to-Office report orthe accompanying Project Brief. The issues that were identl;.iad included: (i)project management and implementation ("the size and nature of the CarajasProject, located in a remote territory and consisting of massive railroad, mineand port developments, make strengthening of CVRD project managementcapabilities important"); (ii) financing plan ("the financing requirements ofthe project, particularly for the Government, are sizeable"); and (iii) marketconstraints ("there is considerable oversupply of iron ore at present,") Inlight of these issues, the Project Brief affirmed that the Bank's role insupport of the operation would be "critical" in two respects, by providirng a"icatalytic effect" on other external funding sources, as well as reinforcingBrazilian Government commitment to the undertaking, and by strengthening projectorganization and management arrangements in CVRD "for efficient projectimplementatiou." 229 23

20 This memo refers specifically to two documents, a paper by RobertSkillings and Nile Tcheyan entitled "Economic Development Prospects of the AmazonRegion of Brazil" dated November 16, 1979 -- and produced while the former wason sabbatical leave from the Bank at the Johns Hopkins School of AdvancedInternational Studies (SAIS), where the latter was a graduate student -- and the"Environmental Assessment of the Tucurui Hydroelectric Project," prepared in 1977by Robert Goodland, who at that time was a private consultant.

21 The January 9, 1980 memo recommended that the Bank undertake anenvironmental reconnaissance mission to prepare a full impact study and suggestedthat environmental issues be explicitly included in a forthcoming Aide Memoirto the Borrower "to make sure that CVRD knows that they need to be carefullyaddressed." This Aide Memoir was eventually sent in March 1980 requesting, amongmany other items, C%RD's "plans for controlling ecological impacts of theproject."

22 The BTO report is dated Narch 23, 1981. The response of the Bank'sEnvironmental Adviser's Office (April 2, 1981) to the BTO and Project Brief wasto inquire whether the project'e environmental aspects had been found acceptable

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5.17 A Bank environmental officer die' participate in the projectpreappraisal mission, which took place .n July 1981, and another Bank staffmember carried out a preliminary survey of the Amerindian situation in the areaat rouShly the same time. 24 The latter reported that, although there were arelatively large number of Indian reservations in the Greater Carajas region,only four such are. (Catete, Mae Maria, Caru and Pindare) were in closeproximity to the iron ore project. Potential issues related to the Amerindiancommunities includeds (i) the possible transmission of diseases to Indiana byconstruction workers and migrants; (ii) the existence of squatters (nosseiros)in each of the four reserves adjacent to the mine or railway and the risk offurther invasion of Amerindian lands; and (iii) the fact that the proposedrouting of the Carajas railroad passed through a portion of the Mae Mariareserve to the east of Maraba (as did a state road and an ELETRONORTEtransmission line), for all of which the community had been monetarilyindemnified. In view of these issues, it was recommended that an Amerindianspecialist participate in the upcoming appraisal mission.

5.18 The Bank environmental officer, in turn, indicated that, since 1972,CVRD had undertaken twelve "environmentally related" studies in connection withproject preparation and stated that the company's environmental management hadbeen considerably strengthened in January 1981 through the establishment of anindependent Environmental Studies and Advisory Group (GEAMAM), composed of ninesenior Brazilian environmental and Amazonian specialists. GEAMAM was created inpart because of previous environmental problems experienced in CVRD's southernsystem. Its role would be to advise CVRD management on environmental aspects ofall company activities, with emphasis on the installation and subsequentoperation of Carajas. As part of its activities, GEAMAN would produce an"environmental management manual" for all CVRD operations and support companyefforts to define and implement environmental protection guidelines and

by SEMA and the Bank and to warn that, since detailed project engineering hadbeen largely completed, opportunities to "design out strongly adverseconsequences are siipping.tt

23 In order to deal with the financing plan issue and so as to maximizeits "catalytic effect" in this regard, the Bank organized several Carajas"lenders meetings" at its Paris office, the first of which was held on September21-22, 1981. The Brazilian Government was represented at this meeting, throughthe Planning Ministry (SEPLAN), the National Economic Development Bank (BNDE)and CVRD, together with potential European, Japanese and American co-financiersof the Carajas Project. Subsequent "lenders meetings" were held on January 11-12 and June 1, 1982. At these meetings, the Japanese Government and the EuropeanEconomic Community explicitly conditioned approval of their own loans for theiron ore project to the results of the World Bank's appraisal.

24 The terms of reference of the environmental officer for this missiondated June 30, 1981, however, curiously restricted his analysis to the"environmental consequences of the project...excluding the so-called GreaterCarajas Program, and to fact-finding on general environmental and ecologicalproblems."

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procedures to be followed by all contractors. In addition, in June 1981 CVRDcreated an Internal Environmental Commission (CIMA) at the Carajas mine site andproposed to set up two other such commissions, one for the port area and theother for the railway, by the end of 1981.

5.19 In general, the preappraisal mission found that CVRD was taking thenecessary environmental precautions. It was noted, for example, that "thepotential for erosion and siltation on the very steep slopes at the project siteis being carefully addressed by CVRD," and that "while large parts of theproject will be very dusty...the entire mine will be thoroughly irrigated atall times when it is not raining....Ore will be moistened prior totransportation both to reduce losses and control dust and, possibly, also atthe port site to reduce the potential for duet pollution during wagon dumping."It was further anticipated that "all overburden dump sites and tailings willhave prudently designed retention dams based on CVRD's wide experience insouthern Brazil" and that "five or six experimental tracts will be acquired atvarious sites along the rail alignment." Access roads and rail cuttings andembankments appeared "adequately culverted, graded and stabilized," and theproposed "greenbelts" around the townsite, airport and mining areas withinCVRD's concession were described as "a commendable approach, although theirdesign and management; has yet to be planned." On the other hand, it was alsoobserved that major parts of the project area were largely unknownscientifically, but likely to contain a significant number of wildlifesanctuaries and that, while "CVRD/CIHA's no hunting policy appears to becomplied with adequately by CVRD and its contractors...just outside CVRD'sconcession and control, forest animals and products are commonly on sale by non-project personnel." 23

5.20 Following the preappraisal mission, a second Project Brief wasprepared. In contrast to the first such document, both environmental andanthropological concerns were listed as issues, together with the project'sfinancing plan, its management and implementation and the iron ore market. Withregard to the first of these concerns, the new Brief observes that developmentof the iron ore project "raises sensitive questions with respect to itspotential impact on the environment in the Greater Carajas region within theAmazon. The project is the first major project in the region...and as suchcarries important environmental responsibilities." It is further affirmed thatCVRD's environmental work was "serious and comprehensivc., but as yet incompletewith respect to evaluations, studies and follow-on design of preventive measuresfor inclusion in the project." The effectiveness of measures taken by CVRD tocontrol erosion and dust and water pollution, moreover, still requiredevaluation. 26

5.21 With respect to "anthropological" issues, in turn, the revised Briefnoted that FUNAI, the national Indian protection agency, had been in contactwith the four Amerindian groups in the immediate project area "providing health

25 All quotations in this paragraph are taken from the Back-to-Officereport of the Bank environmental specialist dated August 21, 1981.

26 Revised Project Brief, September 10, 1981.

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and agricultural services and presiding over negotiations between the Mae MariaIndians and CVRD over the indemnization for the right-of-way of the railroadline which traverses a corner of the reservation." The Catete reserve of theXicrin Indians just to the west of CVRD's mining concession, moreover, was ofparticular concern. Since this reserve had remained "virtually untouched andisolated" until initiation of the project, the Xicrin were likely to beparticularly vulnerable to disease upon inevitably coming into contact with non-Amerindian populations. As a result, FUNAI had insisted on the inclusion of"precautior.ary measures" in all construction contracts and, together with CVRD,had identified other actions to be taken including the demarcation ofreservations, resolution of the squatter ?roblem and the provision of long-termhealth care to Amerindians in the area.

2. Appraisal and Post-agpraesal

5.22 The project appraisal mission, undertaken between October 26 andNovember 11, 1981, included both an anthropologist and an environmentalspecialist, together with w4iuing and transport engineers, financial analystsand other professionals. With regard to Amerindian questions, as a result ofconsultations with FUNAI it was decided both to increase the geographic scopeof the area of influence of the Carajas Project to include all Indian groupsliving in a radius of 100 kilometers around the mine site and rail line and toprepare a special assistance program. The Bank mission concluded that it wouldbe necessary to strengthen Amerindian protection measures in the region "inorder to safeguard legal provisions under the Brazilian Indian Statute." FUNAIagreed to submit a proposal for a special Carajas Amerindian project for Bankappraisal by January 15, 1982. 28 Tne environmental specialist, in turn,reported that CVRD had hired its first "ecologist" to direct the CIMA at themine site and established as priorities the extension of GEAMAN's activities toat least 1987, the cuntracting of an officer to direct the CIMA at the port andenvironmental zoning of the area of influence of the project by January 30,1982. 29

5.23 A post-appraisal issues paper revisited many of tha concernshighlighted above, but dropped environmental and Amerindian considerations fromthe list. This paper suggested that the major issues still requiring attentionwere largely financial in nature, including: (i) rates of return (which were

27 Ibid.

28 A subsequent memorandum from the Bank's Environmental Advisor datedFebruary 2, 1982 suggested that the proposed Amerindian Special Project bedirectly financed as part of the larger iron ore operation "rather than trustingless manageable indirect arrangements," as had been the case with the earlierNorthwest Region Development Program. The Bank, however, later decided once againto go the indirect route by having CVRD fund FUNAI in parallel to the Bank-supported iron ore operation, rather than financing the Amerindian componentdirectly with loan or other project resources.

29 Back-to-Office reports of the anthropologist and environmentalspecialist dated November 10, 1981 and November 23, 1981, respectively.

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marginal); (ii) additional equity requirements; (iii) private sectorparticipations (iv) cost overrun guarantee provisions; (v' financing plancompletion; (vi) escrow arrangements; and (vii) market risks. Literestingly, theissues paper is prefaced by the statement that "the Government and CVRD envisagean extensive scheme for development of the Greater Carajas region and considerthie project to be fundamental to the larger program since the infrastructurewill make possible many subsequent development projects." 30 Following aDecision Meeting tu discuss this paper, the preceding issues were reduced tothrees (i) financing plan (loan and equity financing); (ii) cost overrunfinancing; and (iii) new investment restriction ("to ensure that new investmentsadditional to those already included in the financial projections would notadversely affect execution of the Carajas Project.") 31

5.24 A memorandum dated May 6, 1982, however, identified the principalpost-appraisal issues as: (i) the adequacy of the technical design and accuracyof cost estimates for the port and railway components; (ii) the capability ofthe iron ore market to absorb Caraja.' outpat without a depressant effect on oreprices; and (iii) economic justification for the project in light of possibleadditional production potential in CVRD's southern system. With regard to thesecond issue, it was affirmed that "Carajas production is not expected todepress iron ore prices since market demand is forecast to be sufficientlystrong to absorb CVRD's incremental production." In relation to the thirdconcern, in turn, it was argued that the estimated economic rates of return (13%and 152 for 35 and 50 million tons of iron ore per year, respectively), are"satisfactory for new mining projects where large capital investments and longlead times to development are required" and that "the role of the project as amajor foreign exchange earner is...particularly important to the Government'splans to improve Brazil's balance of payments." 32

5.25 With regard to the first of these issues, moreover, particularattention was given to the transport component during the post-appraisal period,including the relation between project rail and port infrastructure and otheron-going or planned transportation investments in the larger Carajas region. Inthis connection, a Bank consultant reviewed the Ministry of Transportation's

30 Appraisal Mission Issues Paper dated December 4, 1981. In a DecisionMeeting held on December 8, 1981 to discuss this paper, however, bothenvironmental and Amerindian issues were raised. With regard to the former itwas noted that "appropriate environmental safeguards" were being built into theproject and institutional mechanisms (ie. GEAMAM, CIMAs) were being adopted "toensure that operations would be carried out in accordance with adequateenvironmental standards." In relation to the latter, it was stated that, as acondition for the proposed Bank loan, the Government would be required to carryout a special program, satisfactory to the Bank, for the protection of theAmerindian communities within a 100 km radius of the rail line "along the linesrecently agreed for the recently approved loans for the Northwest regiondevelopment program." (Decision Memorandum, January 7, 1982)

31 Revised Project Brief, January 7, 1982.

32 Transmittal memorandum for yellow cover SAR, May 6, 1982.

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policy for Eastern Amazonia, observing, among other things, that "all imne,agricultural and industrial products from the Carajae area will be carriedthrough the new rail line up to Sao Li3is or through the Tocantins-Araguaia Riversystem up to Belem." 33 FurLhermore, nince the rail and port componentecorresponded to more than 602 of total project capital costs, the Bank decidedto undertake a detailed post-appraisal review of this part of the operationthrough two specialized transport missions which visited Brazil in January-February 1982. 34 These missions generally ratified the findings of the originalappraisal, observing that CVRD had made fgll use of the previous experience inits southern system in planning and costing the Carajas transport infrastructureand that engineering work for the railway had been carefully done with siteinspections confirming that sound construction practices were being followed. "

5.26 A final aspect which was evaluated only after the Bank appraisalmission had already been carried out was the project's urban developmentcomponent. This analysis mainly took the form of a review of the project'stownsite plans during two brief post-appraisal visits by a Bank urbandevelopment specialist in February and May 1982, after which concretesuggestions were made concerning ways to improve township design, housing andurban infrastructure provision and related environmental planning, especiallywith regard to installation of the new urban nucleus near the mine site. Otherconcerns were the implementation of basic infrastructure and social servicesfor the town of Parauapebas, just to the east of CVRD's holdings at Carajas,

33 Internal memorandum dated January 20, 1982. The memo also noted thatnavigation through the Tocantins-Araguaia system needed to be improved, that itwas expected that these improvements would come about largely as a result ofconstruction of the dam for the Tucurui hydropower project, that a new seaport(Vila dn Conde) was needed near Belem and that numerous roads needed to beconstructed, paved or otherwise upgraded in the area. Among the latter, the BR-222, connecting Acailandia and Sr.nta Ines, was expected to be completely pavedby the end of 1982, while it had not yet been determined when or with whatresources the nlanned road section of the Carajas railroad bridge over theTocartins River would be constructed. CVRD later decided to build Soth the roadand the rail sections of this bridge as part of the iron ore project, therebyproviding an additional transport benefit to the region.

34 While the formal justification for these missions was that it wasessential that the transport system be "designed and operated so that themovement of iron ore to the port and its loading aboard ship are to the lowestpossible capital and operating costs," according to an internal memorandum ofFebruary 2, 1982, there was also an element of interdepartmental rivalry in thisconcern since the Carajas Project -- including its transportation component -- had initially been appraised by the industrial, rather than the transport, sideof the Bank. Indicative of this was a eomment in the January 1982 DecisionMemorandum to the effect that the December 1981 Issues Paper "did not adequatelyreflect that the project was primarily a 'transportation' project."

35 These observations are based on the Back-to-Office report of theprincipal post-appraisal transport mission dated March 9, 1982 and the abovementioned yellow cover SAR transmittal memorandum.

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and the need to develop land use controls and regulations for the port area inSao Luis.

5.27 With regard to Parauapebas, more concretely, the Bank urbanspecialist recommended that the town's sanitation infrastructure and communityfacilities be designed to accommodate an expected population of 10,000 residentsby the late 1980's and obeerved that there was an "urgent need" f r theprovision of urbanized lots by December 1982 "since more than 20 families arecurrently squatting on the edge of tcun" In what was soon to become the largesatellite community of Rio Verde. In the case of Sao Luis, in turn, thespecialist noted that, prior to initiating conatruction of the port terminal inearly 1981, CVRD had relocated some 700 squatter families to a new site (MontesPelados) where a school and some commercial facilitiea had been provided.However, a new group of squatters had subsequently moved into a large informalsettlement called "Guarda" opposite the entrance to CVRD's port concession. Itwas, therefore, recommended that CVRD assist state and local authorities toprepare a land use and zoning plan around the port and access highway area atPonta da Madeira including the integration and upgrading of the Monte Peladosand Guarda settlements. 36

3. Negotiatipn adBrdPresentation

5.28 The principal concerns within the Bank immediately prior tonegotiations which took place in early June 1982, howeiver, continued to beprimarily financial and economic in nature, with one sen:.or advisor expressingstrong reservations about the operation because it was "an extremely riskyproject of only marginal or little value costing US$ 4.5 billion." 9' Inresponse to this observation it was suggested that, although the riskiness ofthe operation whould be made clearly evident in the appraisal report, thedocument should also justify why these risks were worth taking, while greateremphasis should be given to "the unquantified benefits and impact of the projecton future regional development." 38 CVRD's ability to finance its share of theproject, the Bank's awareness of and agreement with CVRD's overall investmentprogram and the Bank's concern with the difference between Brazilian domesticand international iron ore prices were the other issues raised in the finalinternal review of the appraisal report.

5.29 During loan negotiations with CVRD and the Brazilian Government, theAmerindian component received particular attention. The draft CVRD-FUNAIagreement (convenio), which had been sent to the Bank shortly beforenegotiations bsean, was found to be inadequate since it did not extend theterritorial scope of the Amerindian Special Project to a radius of 100 km fromthe mine and railway as had been recommended by the Bank at appraisal. It wasagreed during negotiations, however, that CVRD wovld provide the resources

36 Back-to-Office report dated May 11, 1982.

* Memor&ndum dated May 13, 1982 commenting on the yellow cover SAR.

38 Mer.orandum dated June 10, 1982 transmitting comments of senior Bankmanagement on the green cover appraisal report.

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(estimated at US$ 13.6 million equivalent) necessary to implement this componentover the iron ore project's expected fliv year execution pericd. In addition,CVRD agreed to actively "assist" FUNAI to carry out this SpeOCial Project, ratherthan merely to "enable" the latter to do so by providing funding, while theGovernment agreed "to take all further measures necessary for protecting theAmerindian population in the Carajas Project area." Furthermore, it was agreedthat the Bank would be given a "reasonable opportunity" to comment on FUNAI'sannual work program for the Carajas area prior to its final approval by theagency. Among other subjects discussed at negotiations, finally, it was alsoagreed that, under the project's urban development component, a land use andzoning plan for the port-rail.way terminal area in Sao Luis would be jointlyprepared by CVRD and the appropriate state and local authorities by the end of1982. 39

5.30 The Cars s Project was approved by the Bank's Board ,r Directoraon August 10, 1982. Tn the formal presentation of the operation before theBoard, the project's regional development benefits received particular emphasisand it was clearly situated in the context of the Greater Carajas Program. TheBank's role in project design was also stressed. More specifically, it wasaffirmed that;

In addition to its direct contribution to export earnings, the'roject offers to open up a region which is unique in mineralwealth...as well as in conditions favorable to agriculture,cattle-raising and forestry. The Government has developed theGrande Carajas Program to plan and outline the regionalinvestments that might realize the area'a raw material wealth,semi-manufacturing and manufacturing possibilities, and fullexport potential....The project...will give access to theCarajas region and accelerate investment in areas previouslyconsidered too remote to be developed. The project w:.- spurgrowth through its own employment of about 6,000 perb 6:s andthe indirect employment of numerous others drawn to animportant frontier... .The Bank has taken an active andimportant role on the underlying work in Carajas, starting in1972 when the Government first discussed the project withus...Significant modifications have been made since projectinception, including important reductions in project scope,strengthening of project management arrangements and thedesign of comprehensive environmental programs.

5.31 The Bank press release dated August 12, 1932, announcing approvalof the Carajas loan and mentioned in Chapter I above, similarly focused on theoperation's expected impact on Eastern Amazonia, as well as on its Amerindian

39 These observations are based on a memorandum dated June 18, 1982containing minutes of the negotiations on the Carajaes Project held between June9 and 15, 1982.

40 Selected excerpts from written statement prepared to introducediscussion of the %arajas Project at the Bank Board meeting of August 10, 1982.

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and environmental protection provisions, explicitly citing the CVRD-FUNAIconven .o and the crecion of GEAMAM in this context. During the Board meetingitself, moreover, the Amerindian Special Project received particular attention,with one Director specifically requesting that a report on the status of thiscomponent be presented roughly eighteen months after loan approval. Other issuesraised in the meeting included: (i) the likely magnitude of the project's directand indirect regional impacts; (ii) the fact that, unlike most operationspresented to the Board, physical execution of the project was already welladvanced, a factor which, together with the Bank loan's comparatively smallparticipation in total investment costs and financing for Carajaso mighteffectively limit the Bank's leverage with the Borrower and Guarantor; and (iii)the riskiness of the operation and the fact that the Board's decision to supportit would, ultimately, be largely made on the basis of the Bank's relativelypytimistic projections as to the future prospects of the world iron ore market.

C. Project Objectives and Description 42

5.32 The project's declared basic objective was to develop, exploit andexport iron ore from Carajas in order to increase Brazil's foreign exchangeearnings and improve its balance of payments. A secondary objective was tocontribute, through the provision of basic infrastructure, to the subsequentdevelopment of other resourceG in Eastern Amazonia, largely also for exportpurposes. The various components of the project, as appraised by the Bankand, for the most part, executed by CVRD, are described briefly in the followingparagraphs.

1. Mine. Railway and Port Components

5.33 Most of the iron ore deposits at Carajas are located in two areas,about 35 kilometers apart, known as "Serra Norte" and "Serra Sul" (or thenorthern and southern highlands), respectively. Of total reserves of some 17.8billion tons of iron ore, roughly 6.1 billion are located at Serra Norte and10.9 billion at Serra Sul. Mining activities started at the N4E deposit at SerraNorte, which was selected because of its relatively low overburden ratio, easyaccess to the railroad and measured reserves of nearly 1.3 billion tons of highquality iron ore. The N4E mine is a conventional open-pit operation in which oreis extracted using a standard electric shovel/truck mining system. The twoprincipal outputs are sinter feed (roughly 80% of the total at currentproduction capacity) and pellets (20%).

4' These observations are based on the written transcript of the Boarddiscussions of the project.

42 Except as otherwise indicated, this section is based on the SAR.

43 President's Report, op. cit., para. 31. In commenting on an earlierversion of this report, CVRD affirms that it was exclusively concerned with theformer objective, while the Government instituted the Grande Carajas Program topursue the latter, establishing a clear division of responsibilities betweenthe two with respect to the process of regional development.

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5.34 Iron ore beneficiation involves three stages of crush:Lng andscreening, with tailit.gs pumped into retention ponds. Processed ore istransported by conveyor belts to a stockpile area, where sinter feed and pelletsare stored separately, then transferred by bucketwheel reclaimers to two largesilos located directly over the railway track for subsequent loading onto thetralins. Manganese ore is also presently being extracted in much smallerquantities at another location withio, CVRD's mining concession and istransported by truck to a stockpile area near the railroad loading terminal.

5.35 The railway is a single track, 1.6 meter gauge system having a totalextension of 890 kilometers with four maintenance stations (Sao Luis, SantaInes, Pequia, and Maraba) and 36 crossing loops. There are a total of 63 bridgesalong the route, the longest of which (2.3 km) crosses the Tocantins River atMaraba. The standard ore train has 160 wagons, with a capacity of 98 tons each,and is pulled by three 3,000 HP locomotives. Five ore trains leave the mine siteevery 24 hours and each round trip, including loading and unloading, requiresroughly 2.2 days. The train schedule was developed using Centralized TrafficCottrol (CTC) and Automatic Traffic Control (ATC) systems. Passenger trains alsopresently travel between Parauapebas and Sao Luis three times a week in eitherdirection.

5.36 The port is located in sheltered water roughly 10 km southwest ofSad Luis and 1.5 km north of the port of Itaqui on Sao Marcos Bay. A naturaland stable 88-km seaward approach channel, 1.6 km wide, permits simultaneoustwo-way traffic for ships of up to 280,000 dead weight tons (dwt). With advancearrangements larger ships of up to 360,000 dwt can also be accommodated at theport. Arriving ore is unloaded by tipping the wagons, then is transferred to oneof several stockpiles and eventually transported to the ship loading area by acombination of bucket wheel reclaimers and conveyors. The limiting factor onport capacity is the number of ships which can be handled per year al. the singleberth. It was anticipated at appraisal that berth occupancy for a 35 million tonper year capacity would be on the order of 64%.

2. Urban Development and Other Infrastructure Components

5.37 The Carajas townsite is on a 640 m plateau about 12 km from the N4Emine. A temporary wrban nucleus, located close to the mine site, is presentlyin the process of being deactivated with the progressive transfer of CVRDemployees to the definitive township which is equipped with good housing, basicinfrastructure, community facilities -- including several schools and a largehospital -- and commercial and recreational areas. For a first phase ofproduction (corresponding to operation of the mine at 35 million tons per year),a total of some 2,700 housing units was projected at appraisal for a combinationof CVRD staff and contract service workers at the definitive nucleus. CVRD'sCarajas mine administration superintendency, however, has apparently restrictedresidence in the new town to company employees, with service workers, thus,being forced to live in Parauapebas/Rio Verde outside CVRD's concession some 40km east of the mine site. According to the SAR, CVRD's past experience withItabira in Minas Gerais was fully considered in designing Carajas township and

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local environmental and climatological factors were adequately taken intoaccount. 44

5.38 Urban infrastructure and housing investments, on a much smallerscale, were also to be made through this component of the project in Parauapebasand other locations along the Carajas railway. In Parauapebas, basic sanitaryinfrastructure and social aervices (schools and a small hospital) were to beprovided to accommodate a population of up to 10,000 by 1988. ̀" Unlike Carajastownship, which would be administered initially by CVRD, management andoperation of the new town at Parauapebas would be the responsibility of themunicipality of Maraba. In the localities other than Carajas and Parauapebas,"urban" investments consisted mainly of the provision of housing units for CVRD(railway) employees, plus assorted community facilities, in the towns ofRosario, Vitoria do Hearim, Santa Ines, Nova Vida, Pequia and Maraba. Finally,at Sao Luis, the urban development component included the above mentioned (para.5.27) land use and zoning plan for the area around the port/terminal facilitieshaving the declared objective of ensuring that "the area does not develop intoa small company town and that existing squatter groups near the port areresettled in a new location and other squatter developments along the accesshighway to the port are controlled." 46

5.39 Additional physical infrastructure to be implemented under theproject included: (i) ant electrical substation at the mine site, a 180-km 230-kV transmission line from the existing substation in Maraba to Carajas and a230-kV line along the railway from Maraba to Sao Luis to supply communitiesalong the railroad and the port at Sao Luis; (ii) a water supply syetem formining activities and the Carajas township; (iii) reconstruction and pavementof 170 km of roads (PA-275/PA-150) connecting Carajas with Maraba; and (iv) anairport, having a 2,000 meter runway capable of accommodating commercial jetaircraft, located inside CVRD's concession near the mine site.

3. Environmental Manasaement and Protection Component

5.40 This component consisted of a number of specific environmentalmonitoring, planning and conservation activities. With regard to monitoring,

44 SAR, para. 5.35. A more detailed description of the definitive Carajastowmship is presented in Annex 5-2 of the appraisal report. CVRD agreed atnegotiations to submit for Bank review and approval an urban development planfor a second-stage expansion of Carajas township (for a 50million tons per yearmining output level) by June 1, 1985.

45 The plans for Parauapebas, unlike those for the nucleus at Carajas,were not appraised by the Bank prior to loan approval. It was, therefore, agreedthat CVRD would furnish the Bank with completed plans for this township forreview and approval no later than September 30, 1982.

46 SAR# para. 5.40. At negotiations CVRD agreed to prepare such a planjointly with state and municipal agencies by December 31, 1982 and to enter intoagreement with the appropriate state and local authorities to carry it out nolater than June 30, 1983.

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more concretely, CVRD's Buildings and Projects Department (DEPEK) in theSuperintendency for the Implementation of Carajas (SUCAR) -- together with theabove mentioned independent environmental advisory group (GEAMAM) and thleInternal Environmental Commissions (CIMAG) -- was given responsibility foroverseeing project construction activities at the mine, railroad and port sitesand ensuring that all contractors adhered to company environmental guidelinestsee para. 5.18 above). 47 During loan negotiations, CVRD agreed both tomaintain GEAMAM with staff, functions and responsibilities satisfActory to theBank and to allow it to make site inspections of the project at least twice ayear through 1985 and at least once a year thereafter. In addition to the CIMAalready established at the mine at the time the project was approved, a secondsuch commission was to be set up at the port in Sao Luis, with these two groupshaving joint responsibility for monitoring the rail component. 4"

5.41 A second major element in the environmental subproject was pollutioncontrol. At the normative level, GEAMAM had already elaborated an environmentalmanagement manual for all of CVRD's activities including Carajas by the time theproject was appraised by the Bank, while DEPEK had prepared detailed proceduresfor environmental protection, including the minimization of dust, water andnoise pollution at the mine and port sites, as well as along the railroad. Theseprocedures were to be applied to the activities of all contractors duringconstruction and to those of CVRD itself during the subsequent operation ofproject facilities. The CIMAs at the mine and port were given directresponsibility for overseeing implementation of these provisions.

5.42 Even though pollution problems were expected to be less serious thanin its southern system, according to the SAR, CVRD, nevertheless, made directuse of its earlier experiente at the Itabira mines, Tubarao port and 550-kmconnecting railway in designing specific pollution control measures for theCarajas project. However, as a result of the concern with marine pollution,

47 GEAMAM consisted of specialists in Amazonia, Amazonian biology,climatology, conservation, geomorphology, soil science and tropical agronomy.The Executive Secretary of the group was CVRD's Technical Advisor who reporteddirectly to the company's President and oversaw DEPEK's environmental activities.GEAMAM's specific functions included: (i) studying, discussing and proposingmeasures concerning the use of natural resources and their conservation in CVRD'saareas; (ii) suggesting measures to prevent or reduce possible environmentaldamage; (iii) assessing plans, programs or projects on environmental issues andon the use and conservation of natural resources. The CIMAs, in turn, werecomposed of both CVRD and contractor personnel and were supervised by a seniorenvironmental specialist in DEPEK at CVRD headquarters in Rio de Janeiro. (SAR,Annex 5-3, paras. 1-5)

48 Originally, there were to be three CIMAs, but their number was laterreduced to two.

40 SAR, para. 5.52. The reasons why pollution was expected to be lessserious at Carajas included the following: (i) Carajas ore is predominantlysinter feed which is less dusty than the finen ores produced in the south; (ii)Carajas sinter feed is more humid and, thus, is shipped wetter than ore in the

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particularly the flushing of oil holds by cargo ships, CVRD decided to undertakea study to determine the most effective way to control such pollution in theport area. During loan negotiations, furthermore, CVRD agreed to submit for theBank's approval by December 31, 1982 -- and to subsequently carry out to theBank's satisfaction -- a pollution control program for the Carajas operation.CVRD also agreed to maintain a continuous exchange of views with the Bank duringthe course of project implementation "on the adequacy and progress of allenvironmental, ecological and pollution control actions undertaken.. .with regardto the execution and operation of the project." '

5.43 Finally, this component included an "environmental work program"which was to entail a technical and ecological evaluation of the immediateproject area, together with assistance in carrying out biotic inventories,consL..vation and other environmental measures. The proposed work program was tobe de1 ailed by CVRD, in conjunction with Government environmental agencies, andsent to the Bank for approval by September 30, 1982. 51 CVRD agreed atnegotiations, moreover, to carry out the work program, once approved, with theassistance of other agencies in a manner and according to a timetablesatisfactory to the Bank. The ecological research later undertaken by the GoeldiMuseum in Belem, and mentioned in Chapter III above, formed part of thisprogram.

5.44 Among the activities which were given priority in the work programwere: (i) environmental zoning; (ii) the definition of conservation tracts andbiotic inventories; (iii) the establishment of greenbelt bufferzones; and (iv)the creation of ecological stations. With regard to environmental zoning, morespecifically, based on DNPM resource surveys and other relevant data, CVRD wasexpected to prepare a 1:100,000 scale map for the Carajas region, indicatingthe location of mineral deposits, IBDF forestry tracts, agriculturalcolonization projects, FUNAI reserves and other Amerindian areas. This map wouldthen be utilized to facilitate land use planning with the objectlfee of reducingthe incidence of incompatible activities and permitting the conservation ofspecific subareas. Based on the results of this exercise, CVRD would review theforest areas, both inside its concession around the mine and along the railway,in order to identify appropriate locations for the establishment of conservation

southern system; and (iii) as indicated in Chapter III above, the prevailingwinds at Sao Luis are from east to west (ie. city to port) rather than thereverse, as is the case at Tubarao.

50 SAR*, para. 5.52.

51 The other agencies '.o be involved in this process were: SEMA, theSpecial Environmental Secretariat, and SUDAM, the Superintendency for AmazonDevelopment, both of which were subordinated to the Interior Ministry; CNPq,the National Scientific and Technological Development Council in the Ministryof Planning; IBDF, the Brazilian Forestry Development Institute connected tothe Ministry of Agriculture; and IPHAN, the National Historical and ArtisticPatrimony Institute, linked to the Ministry of Education.

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tracts. 52 Biotic inventories would also be undertaken in areas within CVRD'sconcession where deforestation was envisaged. Bufferzones were to be installedso as to minimize negative project impacts on areas immediately surrounding themining sites, port facilities and rail corridor. Lastly, in order to avoid theillegal or predatory use of flora and fauna within its mining concession, CVRD,with IBDF's assistance, would establish guard posts on the perimeter of itsholdings, particularly on the PA-275 highway just to the west of Parauapebas,so as to control access to the area.

4. Amerlndian Special Project

5.45 At the time of appraisal, it was estimated that slightly more than4,500 Amerindians lived in 14 different reserves, occupying aome 2.2 millionhectares, within a radius of about 100 kilometers from the Carajas mine andrailroad. While all of these Amerindian groups already received some form ofassistance from FUNAI prior to the iron ore project, the agency's effectivenesswas greatly limited by budgetary, administrative and other constraints. Thus,in anticipation of the likely acceleration of development in the region as aconsequence of Carajas, a special Amerindian protection project was prepared byFUNAI to be funded by CVRD in parallel to the Bank-financed iron ore operation.According to the SAR for the latter, the objective of the Special Project wouldbe to "minimize potential adverse impacts by undertaking preventive measures andby creating more viable conditions within the Amerindian reserves." '3Establishment of the Special Project, interestingly, was the first concreteapplication of the Bank's recently issued tribal peoples policy which had beenprepared largely in response to the potential Amerindian impacts of the earlierNorthwest Region Development Project (POLONOROESTE). 54

5.46 As described in an Annex to the SAR, the Special Project wasdesigned to include a combination of "emergency and preventive programs, inresponse to possible threats to the physical and cultural survival of theAmerindians posed by the railway line; by increases in spontaneous settlement,mining and other extractive activities; and in the anticipation of futurerequirements to ensure viable and independent forms of subsistence for theAmerindians." '5 Specific components of the Amerindian Special Project included:

52 According to the SAR, at the time of project appraisal, CVRD had alreadyacquired some 20,000 ha for this purpose.

53 SAR, para. 5.55.

54 Operational Manual Statement 2.34 entitled "Tribal Peoples in Bank-financed Projects," issued February 1982. See also the Bank's publication TribalPeonles and Economic Development: Human Ecologic Considerations, Washington, May1982.

55 Ibid., Annex 5-4, pa:a. 4. It was further observed that the SpecialProject "reflects FUNAI's philosophy that long-term minimization of adverseimpacts can be achieved through substantial social and economic assistance to(i) create self-sustaining living conditions inside the reserves that wouldcompare favorably to alternative lifestyles of the outside world, and (ii)

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(i) land protection1 (ii) health; (iii) education; (iv) economic developmentprojects; (v) protection of the Guaja Indians; and (vi) administrative supportfor FUNAI.

5.47 The demarcation and/or protection of Amerindian lands, moreconcretely, was of particular concern at the time of appraisal for the nomadicand "unacculturated" Guaja Indians, the Parakana tribe, which was being forcedto relocate from its traditional lands due to flooding caused by the Tucuruihydropower project, and the Xicrin-Kayapo Indians, located just to the west ofCVRD's concession and whose land had recently been invaded by a large livestockand lumbering enterprise. Under the land protection component of the SpecialProject, resources would be provided to permit FUNAI to evict existing squattersfrom Indian lands, establish safeguards against future invasions of Amerindianareas, redefine and demarcate lands for the Guaja and Parakana tribes, settledisputes and pending lawsuits over reserve boundaries and formally register allreserve areas with the federal patrimony service (Servico de Patrimornio daUniao). In addition, funds would be allocated under other components of theSpecial Project for minor demarcation actions in other Amerindian reserves inthe project area, general improvements in transportation and communications forexisting Indian Posts, the establishment of new observation posts, the expansionand upgrading of FUNAI's staff and the acquisition of equipment needed tomaintain reserve border markings.

5.48 From a financial standpoint, the largest components of the SpecialProject were for the provision of health services, the promotion of economicdevelopment projects and support for FUNAI's administrative activities. Thefirst of these was designed to include: (i) improvement of FUNAI's existingmobile health services in order to provide better immunization, curative,emergency and dental care; (ii) establishment of "Casas do Indlo" ("Indianhouses") in Maraba and Sao Luis to accommodate Amerindians in need of moreextensive medical treatment; (iii) funding of hospitals in Maraba and Sao Luisfor the provision of health care to Indians; (iv) the upgrading of healthservices at all 14 FUNAI-administered Indian Posts and in outlying villages;and (v) provision of potable water and improved sanitation and housingconditions in some of the larger Amerindian communities in the project region.The economic development component, on the other hand, was intended to assistAmerindians to add "modern cultivation practices" to traditional subsistenceactivities so as to enhance their possibilities of becoming self-sufficient infood production and economically more independent. The individual projects tobe supported, moreover, would be "adopted to each community's needs, culturalcharacteristics and environmental conditions and, in the cases of largerproduction schemes, market conditions." 56

provide Amerindians with the education required to eventually deal on an equalbasis with the surrounding society."

56 Ibid., Annex 5-4, para. 12. More specifically, the component wouldprovide equipment, inputs and technical assistance for agriculture, livestock,fruit and other food production or extractive projects, the latter includingBrazilnut and babacu nut collection and processing.

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5.49 The FUNAI administration component would improve transportation andhousing conditions for staff working at Indian Posts in the Carajas project areaand permit the hiring and training of additional field personnel to supportlocal Amerindian communities. The education component, in turn, would involvethe construction and staffing of schools in outlying villages and thedevelopment of bilingual teaching programs. Finally, the Guaja protectioncomponent would fund efforts to contact and immunize small nomadic bands ofGuaja Indians, located in and around the existing Caru and Turiacu reserves innorth-central Maranhao, and to improve the situation of a group of Guaja thathad already been attracted into the Caru reserve. 7 These actions would beundertaken by PUNAI through an emergency assistance program.

5.50 In order to monitor FUNAI's activities under the Special Project,CVRD contracted a group of consultant anthropologists and public healthspecialists indicated by the Brazilian Anthropological Association (ABA). Inaddition, the Government agreed, at loan negotiations, to send bi-annual reportson the status of project implementation to the Bank. It was also agreed that theBank would have the opportunity to comment on FUNAI's annual work program forthe Carajas area and that Bank staff, accompanied by representatives of FUNAI,would be permitted to carry out periodic field supervision of the project.

5. Project Costs and Financing Arrangements

5.51 Total investment and working capital costs for the Carajas Project,including physical and price contingencies, were estimated at the time ofappraisal to be slightly under US$ 4.0 billion. When financial costs were added,this total was expected to rise to just over US$ 4.5 billion. Among project basecosts (ie. total project costs net of contingencies), 53.5% (US$ 1.7 billion)was for the railroad component, 19.5% (US$ 623 million) was for the minecomponent and 7.3% and 5.6% (or US$231 million and US$ 179 million) were for theport and urban development components, respectively, while the remaining 13.7%(US$ 435 million) was for project management. The Amerindian Special Project wascosted at US$ 13.6 million and the environmental managemant and protectioncomponent, while not specified at appraisal, was later found to have involveda cost of some US$ 64 million. 58 For the mine, rail, port and urban developmentcomponents, more specifically, investment costs were primarily for civil works(including land acquisition and road construction) and the purchase of

" The Caru reserve is located just to the north of the Carajas railwayand to the northwest of Sarta Luzia, while the Alto Turiacu reserve bordersdirectly on the Alto Turi colonization area. The SAR notes that the first contactwith this latter contingent of 26 Guaja Indians had generated "unfortunateresults" since they were "now grouped in small settlements along the southernborder of the Caru reserve, immediately opposite a major railway constructioncamp and next to a densely populated small town area, while their contacts andhealth situation go uncontrolled by FUNAI." (SAR, Annex 5-4, para. 14)

56 The cost of the environmental subproject is taken from a consultant'sreport recently presented to the Bank's Country Operations Division for Brazil(Anderson, Anthony, "The Carajas Iron Ore Project: Assessment of theEnvironmental Components," Belem, April 1989, pg. 27).

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equipment, while under project management the principal cost categories were forCVRD supervision and construction management contracts.

5.52 Project financing, in turn, was expected to total US$ 4.5 billion,with contingency funding of an additional US$ 400 million. Of the total, roughly40% (US$ 1.8 billion) was equity capital -- consisting of US$ 1.4 billiongenerated internally by CVRD and US$ 400 million in the form of reinvestedGovernment dividends and CVRD convertible debentures -- and 60% (US$ 2.7billion) was debt. Of the latter, slightly over US$ 1.2 billion was fromdomestic Brazilian sources, primarily BNDES (nearly US$ 700 million) and FINAME(some US$ 320 million), while US$ 1.5 billion was to come from foreign lendersincluding the World Bank. In addition to the Bank loan of US$ 304.5 million,external financing of the Carajas Project included over US$ 530 million fromvarious Japanese sources, US$ 400 million from the European Economic Commission(through the European Coal and Steel Community), US$ 130 million from the GermanKfW and US$ 58 million from the US Exim Bank, among other sources.

5.53 The Bank loan thus represented 20.4% of total expected fEoreignfunding for the operation and 6.7% of total anticipated project financing netof contingency commitments. Its real significance, as suggested earlier, wasmuch greater, however, since most of the Japanese and European financing wasmade conditional upon Bank approval of the project. Furthermore, Bank supportof the operation was also a relevant factor in assuring Brazilian Government,including BNDES/FINAME, financing for the project, as well as in CVRD's raisingof additional equity capital through convertible debentures.

D. Conclusion

5.54 As the immediately preceding discussion indicates, the Bank's rolein helping to put together a multi-lender funding package for the CarajasProject was, perhaps, even more significant than its own direct firLancialsupport of the operation which, nevertheless, as was indicated in Chapter IIabove, represented the largest single loan to Brazil by the Bank up to thattime. The Bank's role in the design of the non-infrastructure and productivecomponents of the operation, moreover, was also highly relevant, both in thecase of the environmental subproject and the Amerindian Special Project, whileit likewise provided valuable technical assistance with regard to the urbandevelopment component. On the other hand, the number of agreements and resultingloan covenants related to on-going preparation activities for the project'senvironmental, Amerindian and urban development components suggests that theseparts of the operation were far less mature at the time of Board approval thanthe mine, rail and port components, which, in fact, were already well advancedin their physical implementation and together accounted for more than 80% oftotal investment costs (or well over 90% of this total when project managementcosts are excluded).

5.55 Three aspects of the design of the Carajas Project, as summarizedin the prece~ding discussion, merit additi*onal comment before turning morespecifically to the operation's implementation experience, general results andimpacts on the natural and human environments. The first refers to therelationship between the iron ore project and the larger Grande Carajas Program(PGC). The Carajas Iron Ore Project was clearly considered by the Brazilian

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Government -- at least from shortly after the time when the Figueiredoadminiatration took off ice in 1979 -- as the "centerpiece" of the PGC, which wasestablished primarily in order to attract foreign and domestic privateinvestment for the installation of large-scale mining, industrial andagricultural enterprises in Eastern Amazonia. The Carajas railway and portfacilities were, in fact, explicitly identified in the federal Decree-Law whichcreated the PGC as the key infrastructure investments which would makeimplantation of the "Carajas export corridor" possible. Even though this programhad not been totally defined at the time the iron ore project was appraised, it,nevertheless, had been legally established more than a year and a half prior toBank approval of the loan for Carajas, its general thrust was well known and itwas prominently cited in the Staff Appraisal and President's Reports, the Boardpresentation of the project and even the press release announcing formalapproval of the Bank's partial tinancing of the operation.

5.56 More generally, the role of the iron ore operation in opening up theEastern Amazon region for future development is specifically pointed to in thesedocument. as one of the major (non-quantified) benefits of the Carajas Project.To quote only one of these sources, the above mentioned press release affirmedthat "the project is expected to have a major impact on accelerating thedevelopment of the Greater Carajas region by providing basic infrastructurelinking the remote interior by rail with the northern sea coast near SaoLuis....It will spur both directly and indirectly the development of towns andareas in the region into commercial, agricultural and industrial centers." 59The possible costs, including the potential environmental costs, associated withstimulating accelerated development of the Eastern Amazonian and Preamazonianfrontiers, however, were not clearly identified or analyzed by the Bank.

5.57 Curiously, moreover -- and this is the second aspect that should behighlighted -- unlike the Northwest Region Development (or POLONOROESTE) Programin northwestern Mato Grosso and Rondonia, which also involved the introductionof a major transportation improvement in a rapidly growing Amazonian frontierarea (and for which the Bank had already approved four loans by the time theiron ore operation was presented to the Board), the approach followed in thecase of Carajas was essentially sectoral in nature. In other words, the CarajasProject, despite its expected (and desired) contribution to regional economicgrowth, was prepared and appraised basically as a mining-cum-infrastructureoperation, rather than as a multi-sectoral area development program containingagricultural, forestry, health and region-wide environmental protectioncomponents, as in POLONOROESTE, or other regional development subprojects. Asa result, the Bank-supported Carajas Project incorporated only very limitedactions related to larger regional development issues (ie. the Amerindiancomponent, a few widely scattered urban investments and a contractualrequirement for execution of an "environmental zoning" exercise by CVRD and theenvironmental agencies of the federal government).

5.58 Undoubtedly, moreover, largely because of the way in which it wasinitially defined and subsequently implemented (ie. without the significantparticipation of any federal, state or local government agencies other than CVRD

5 Bank press release of August 12, 1982, op. cit., pg. 2.

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and FUNAI), the environmental safeguards built into the Carajas Project wereessentially restricted to the territory directly controlled by, or under thelegal jurisdiction of, theise two agencies. As noted in Chapter III above, alongmost of the Carajas rail corridor this involved an area of only 40 meters oneither side of the tracks, while, outside of CVRD's concessions at the mine andport sites, there was virtually no attempt to control, or even systematicallyidentify, the project's potential environmental impacts. Nor was there anyeffort to determine and plan for adequate land and natural resource use in theextensive areas "opened up" or otherwise affected by the project outside CVRD'sdominion except in the eastern part of the Carajas corridor, through the firstMaranhao Rural Development Project -- described in the previous chapter --which, ironically, was not even mentioned in the appraisal documents forCarajae.

5.59 In addition, the iron ore operation was fundamentally inconsistentin its approach to dealing with potential regional impacts, since for purposesof the Amerindian Special Project, designed "in anticipation of an acceleratedeconomic development as a consequence of the Carajas Project," an area ofinfluence involving a corridor 100 kilometers wide on either side of the railline and outward from the mine was formally adopted in the Loan Agreement signedby the Brazilian Government and the Bank. Except for the protection ofAmerindian areas, however, very few other actions were proposed for this largerregion of influence involving a total area of nearly 200,000 square kilometers.In contrast to the explicit preoccupation with the Amerindian communities, forexample, virtually no attention was given to the project's potentially adverseimpacts on other populations (eg. small farmers with or without land title,Brazilnut and bg]_ag_u nut collectors, garimneiros, etc.) already residing in thearea. These populations were substantially more numerous than the Amerindiansand similarly vulnerable to many of the adverse effects of the "acceleratedeconomic development" expected to result from Carajas -- as the Bank's appraisalreport for the Maranhao Rural Development Project itself points out -- not tomention the large numbers of people expected to be attracted to the region bythe iron ore operation, together with the other forces that were actingsimultaneously on the region and which were largely unrecognized and unanalyzedin the Bank's appraisal of the iron ore operation.

5.60 A third aspect related to the design of the Carajas Project --which, like the previous considerations, represented a significant shortcomingin the Bank's anticipation of its potential environmental consequences -- wasnot to have more adequately considered the physical and human environmentalimplications of the longer-run development processes likely to be set in motionby the installation of the iron ore mine and its associated transportationinfrastructure. This oversight is especially puzzling in light of the project'sexpected catalytic role in stimulating future regional economic growth, as wellas in view of the general objectives of the Grande Carajas Program which wereclearly known. The extent of the present concern with the potential adverseenvironmental effects of the pig iron smelters in the Carajas-Sao Luis corridortestifies to the significance of this omission. Of relevance in this context wasthe Bank's admitted awareness of the preliminary PGC and CVRD plans "to developthe [Eastern Amazon] region into a highly productive center of basic rawmaterials, semi-finished and finished products" and to establish "the moreimportant towns and areas in the region into commercial and industrial centers,"

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as stated in the SAR. The bank likewise knew that the proposed regional growthcenters would include Carajas, Maraba and Sao Luis and that the industrialactivitiei to be promoted in the area would include pig iron and semi-manufactured steel products, among others.

5.61 In this connection, moreover, given that iron ore is a necessaryinput for both pig iron and steel production and that the Brazilian Governmenthad openly declared its intention to manufacture mineral-based exports inEastern Amazonia, the recent installation or approval of pig iroil smelters andother metallurgical industries along the Carajas-Sao Luis corridor to takeadvantage of Carajas iron ore and project-financed rail and port infrastructurecould clearly have been foreseen by the Bank. This was especially the casegiven the history of CVRD's "southern system," where numerous pig iron and steelindustries grew up along the iron ore export corridor (ie. the Rio Doce valley)in Minas Gerais and Espirito Santo from the 1940's onward. Considering,furthermore, that many of thes3 activities have traditionally depended oncharcoal as a source of fuel and that charcoal production has historically hada major impact on the rates and extent of deforestation in south-central Brazil,the likely consequences of installing pig iron industries in the Carajas region,where the forest is still comparatively abundant, were also quite foreseeable.Not only could the Bank have anticipated the future development of charcoal-burning pig iron and other metallurgical industries in the Carajas corridor,given its locational advantages and the earlier experience in Minas Gerais, aswas indicated in the first section of this chapter, there is documentaryevidence that the Bank, in fact, possessed concrete knowledge of thispossibility even before the Greater Carajas Program was officially launched inNovember 1980.

5.62 In synthesis, the basic conclusion that can be drawn from the abovediscussion as to how well the Bank anticipated the potential environmentalconsequences of the Carajas Project during its design and appraisal stages isthat the Bank's approach in this regard was largely "nearsighted," both from aspatial and a temporal perspective. On the one hand, except in relation toAmerindian communities, the Bank did not adequately concern itself with theproject's likely direct and indirect impacts on the natural and humanenvironments in its larger area of influence, which extended well beyond theareas (particularly the 40 meter band on either side of the railroad) over whichCVRD had legal control. On the other hand, neither did the Bank adequatelyanticipate the potential environmental consequences of future developments madepossible by the project, particularly the industrial processing of iron ore inthe Carajas-Sao Luis corridor. Finally, the Bank's later unsuccessful attemptto pursue a broader regional planning strategy by offering to assist the GrandeCarajas Program several months after the iron ore project had already beenapproved -- and, thus, after the Bank's potential leverage in this regard hadeffectively disappeared -- in retrospect clearly appears to have been a case ofresponding with "too little, too late." In light of the subsequent environmentaland social problems in the area of influerce of the Carajas Project, this lattereffort can, perhaps best be characterized as an attempt to "close the barn doorafter the horse had already escaped."

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VI. VPRgOJCT IMPLEMENTATION AM gENERAL RESULTS

6.01 Before attempting to assess its environmental and Amerindianprotection components and to eummarize its broader physical and humanenvironmental impacts, it is useful to briefly review the implementationexperience and principal non-environmental results of the Carajas Project. Forthe most part, the documentary sources for this review will be project completionreports prepared by the Bank and CVRD, together with Bank project files.Particular attention will be given to the urban development component in thischapter both because the execution experience and results of this part of theoperation will not be further discussed below and, more importantly, because theyreflect a number of the unanticipated problems that have affected the human andphysical environments in the project's area of influence more generally.

A. Project Imnlementation

1. Effectiveness

6.02 Excepting tha Amerindian Special Project and, to a lesser extent,the urban development component, implementation of the Carajas operation wasrelatively problem free. The Loan and Gularantee Agreements for the operation weresigned on August 13, 1982, three days after Bank financing had been approved bythe Board, and the loan became effective on November 12, 1982. Conditions of Bankloan effectiveness included the effectiveness of parallel loans from Japanesesources, the European Coal and Steel Community and the German KfW. 1

6.03 Although they were not formal conditions of effectiveness, CVRD wasalso required under the Loan Agreement to furnish by September 30, 1982, for Bankreview and approval, final plans for Carajas township, together with a plan toaccommodate 10,000 people at the service town of Parauapebas by 1988. Anenvironmental "work program" to be prepared jointly by CVRD and "Governmentenvironmental agencies" was also required to be sent to the Bank by this date. 2

X Loan Agreement, Section 7.01(a). The Japanese loans in question includedan import loan (US$ 250 million), a direct loan from the Japanese Exim Bank (US$ 50 million) and Japanese commercial bank syndication loans (US$ 150 million).The ECSC and KfW loans, in turn, were for US$ 400 million and US$ 130 million,respectively.

2 Loan Agreement Sections 3.01(c) and 3.10(e), respectively. Otherconditions established in the Loan Agreement in connection with the urbandevelopment component included: (i) preparation, and submission by December 30,1982, of a land use and zoning plan, satisfactory to the Bank, for the port-railway terminal area in. Sao Luis, including the resettlement of e.-istingsquatter groups and measures to control squatter invasions along the highway tothe port (Section 3.02(a)); (ii) an agreement by June 30, 1983 between CVRD andstate and municipal authorities to carry out the above mentioned plan for theport area (Section 3.02(b)); and, (iii) preparation, and submission to the Bankfor comment by June 1, 1985, of a plan for the second phase development of

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These documents were, in fact, submitted by CVRD within the established timeframe and were approved by the respective technical divisions of the Bank in lateOctober 1982.

2. gpnstruction and Proiect Management

6.04 Project construction activities, which were already well under wayby the time the Bank loan was approved, 3 also proceeded smoothly. ' The PCRattributes this to a combination of the relative technical straightforwardnessof the majority of the works involved, 3 despite their large dimensions, and,above all, to CVRD's competent management of the physical construction process.This, in turn, reflected both the company's earlier experience in theimplantation of similar mining and infrastructure facilities in its southernsystem and its effective utilization of consultant firms for detailed design andother planning activities, as well as for the administration of construction workin the field. 6 According to the PCR, construction activities were divided intoa large number of "manageable" contracts, while installation of the mine and,railroad in particular represented "a pioneering verture (posing] unique

Carajas township (Section 3.03).

3 According to CVRD's draft PCR, nearly 24,000 workers were, in fact,engaged in project construction activities in August 1982. This is reported tohave teen the maximum number of construction laborers employed at any pointduring the implementation period. The first Bank supervision mission carried outin October 1982 affirmed, moreover, that construction works along the railroadand in the port area were ahead of schedule and that project costs, particularlyfor equipment, were proving to be considerably lower than estimated at appraisal.

4 According to the Bank's PCR (para. 12), the only major change in initialproject design was the decision to install one ship-loader, instead of two suchfacilities, as a cost saving measure, while modifications were also made to oneof the piers at the port in order to reduce the effect of eddy currents.

5 PCR, paras. 11-12. The major exception was the bridge across theTocantins River. Although originally planned only for rail traffic, thisstructure was later redesigned at the Government's request to carry motorvehicles as well, thereby providing an important additional transportationbenefit to the region, and especially to the area polarized by Maraba.

6 According to the SAR (Report No. 3921-BR, op. cit., paras. 6.05-6.06),CVRD awarded six large contracts to private Brazilian engineering firms inconnection with parts of the project to be co-financed by the Bank: five for on-site construction management (for railway superstructure, Tocantins bridgeconstruction, port construction and equipment erection, mine installations andtownsite construction, respectively) and one to provide general support forprocurement activities. In addition, nineteen local firms had previously beenhired to supervise construction of railroad infrastructure, but most of thisactivity had already been completed by the time the Bank loan was approved.

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engineering challenges arising from isolation, lack of infrastructure, vegetationand adverse weat' 'r conditions in the CaraJaG area." 7

6.05 At the time of appraisal, it was anticipated that projectadministration within CVRD would require some 750 people -- including 131 at themine site and 189 in Sao Luis -- all of whom were formally assigned to theCarajas Implementation Superintendency (SUCAR), in addition to employees of theaforementioned consulting management fivms which were expected to utilize as manyas 1,700 people at the height of construction activities. CVRD project managementwas headed by a Project Director, who was supported by divisions for generalengineering, planning and control, construction engineering and contracts,general procurement and administration, together with field constructionsuperintendents at Carajas and in Sao Luis. Sixteen specialized Brazilian orinternational consultants, including four each for the offices at the mine andport sites, were also to be hired by CVRD to assist with on-going project designand execution. 8 Most of the proposed consultant positions, however, were neverfilled as CVRD waG later succeasfully able to convince the Bank that it wascapable of handling the activities involved with its own experienced staff.

6.06 Project implementation was expected to be completed by December 31,1986 with start-up of iron ore production at 15 million tons per year (tpy) byJuly 1985, followed by expected output levels of 25 and 35 million tpy by theend of 1985 and the end of 1986, respectively. Although construction activitieswere proceeding ahead of schedule, in January 1983 CVRD decided, with the Bank'ssubsequent approval, to delay formal initiation of project operations by one yearbecause of deteriorating international iron ore markets and associated problemsin finalizing marketing arrangements for Carajas' ore. In February 1985, however,as the world economy picked up, CVRD again moved up projected initiation of mineoperations at the 35 million tpy level to July 1987, only six months after thedate originally established.

7 Ibid., para. 12. This is similarly stressed in CVRD's PCR.

8 Report No. 3921-BR, op. cit. para. 6.07-6.08 and Loan Agreement, op.cit., Section 3.05(a). More concretely, four consultants were expected to assistthe Project Director in his management, technical and procurement activities forthe mine, railway, port and urban development components, respectively, whilefour other consultants, also based at CVRD headquarters in Rio de Janeiro, wouldwork in company departments concerned with procurement issues, contracting andadministration, work planning and cost control. The consultants in Sao Luis, inturn, would assist the local Superintendent of Works in the areas of portconstruction, railway infrastructure and superstructure and planning and costcontrol, while those at Carajas would perform similar functions in connectionwith mine and townsite construction activities. Two of the consultants, a portspecialist and a railroad expert, had, in fact, already been hired by CVRD onthe basis of terms of reference approved by the Bank prior to Board presentationof the project.

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3. Initial Overations

6.07 Iron ore mining and export operations, in fact, started considerablyearlier. The second Bank project supervision mission in April 1983 reported thatthe road and transmission line connecting the mine site to Maraba, as well asthe airport at Carajas, had already been completed. 9 The first 213 kilometersof the Carajas railroad, covering the stretch between Santa Ines and Sao Luiswas inaugurated by President Figueiredo in November 1983, '° while the firstshipment of Carajas manganese ore left the commercial port of Itaqui near SaoLuis later that same month.

6.08 The entire length of the railroad was inaugurated ten months aheadof schedule, on February 28, 1985, while the first shipment of Carajas iron ore,processed by a pilot beneficiation plant at the mine site, was exported to Japanthrough Itaqui in May 1985. The definitive iron ore beneficiation plant, in turn,initiated its activities in early December 1985, followed later the same monthby the start-up of a similar plant for manganese ore and departure of the firstautomatically loaded ore train from Carajas. By the end of 1985, 563,000 tonsof iron ore and 115,000 tons of manganese ore extracted from Carajas had beenexported through the port of Itaqui.

6.09 The complete Carajas mine-rail-port system began operation with thecommencement of ship loading activities at CVRD's port terminal at Ponta daMadeira in January 1986. The maritime terminal was officially inaugurated byPresident Figueiredo in March 1986, one day after passenger service on theCarajas railway began. Once fully in operation, CVRD reports that 11.6 milliontons of iron ore and 115,000 tons of manganese ore were exported through Pontada Madeira in 1986, while another 169,000 tons of manganese ore were exportedthrough the port at Itaqui, figures that increased to 22.8 million, " 174,000

9 Supervision mission report dated May 19, 1983. This report also notedthat regular commercial airplane service had been established between Carajasand Brasilia, Belem and Sao Luis and that considerable progress had been madein terms of the provision of basic infrastructure for Carajas and Parauapebastownships. At the time of this mission, moreover, over half of the constructionwork necessary to install the Carajas-Sao Luis railroad had also been completed,including 70% of that required for the Tocantins River bridge.

10 According to a May 1983 letter from the President of CVRD inviting BankPresident Clausen to this event, this segment of the railroad would be utilizedinitially to transport (and export through Itaqui) timber extracted from theregion around Santa Ines. This was considered by CVRD to be illustrative of the"benefits derived from the existence of an efficient transport system in thearea" and, more generally, of the Carajas Project's "major impact" in terms ofdeveloping the "potentialities of the region."

" In its draft PCR, CVRD also records that the largest ore ship in theworld, having a carrying capacity of 365,000 dead weight tons and builtespecially to transport Carajas iron ore from Sao Luis to Rotterdam, was loadedat Ponta da Madeira in January 1987.

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and 139,000 tons, respectively, during 1987. 12 In March of 1987 CVRD completedthe urban infrastructure required at Caraj ae township to support iron ore miningoperations at the 35 million tpy level and physical implantation of the projectwas declared essentially complete by December 1987. SUCAR, finally, was dissolvedin February 1988 and mining, rail and port operations were fully turned over tospecific superintendencies under CVRD's Production Directorate.

6.10 The Carajas iron ore operation, in synthesis, represented a majorundertaking both in engineering and in physical construction terms. Accordingto data provided by CVRD, project implementation involved on the order of 124million cubic meters of landscaping -- of which 110 million cubic meters wererequired for the railway alone -- and consumed 452,000 cubic meters of cement.It also involved erection of nearly 300,000 square meters of buildings, mainlyin connection with Carajas township, some 11,400 tons of metallic structures andthe installation of close to 28,000 tons of equipment. Implantation of theCarajas railway involved the laying of more than 1,100 kilometers of track,including the main line (ie. 890 km) and crossing, waiting and other serviceareas, as well as utilization of some 2.2 million wooden ties, 2.4 million cubicmeters of gravel and nearly 160,000 tons of rails. 13 More generally, assummarized in the PCR,

the project concept was based on the installation anduse of advanced technology for mining, transport ofminerals and supplies, and bulk handling. Mining andbeneficiationwere. .basedonstate-of-the-art equipmentand infrastructure, suited to the requirement of a low-cost, high-volume extractive operation. The concept oftrain loading and unloading is modern and efficient,high performance bulk handling and ship loadinginstallations were selected for the port and the Carajasrailroad was designed as one of the most advanced heavyhaul transport systems tin the world]. 14

4. Prolect Costs and Financing

6.11 Considerable cost savings occurred during project implementationand, as a direct result, an unutilized balance of nearly US$ 74 million, or some24%, of the original Bank loan was cancelled 15 by the time of last disbursement

12 According to CVRD, Carajas iron ore exports surpassed the 50 million tonmark on June 25, 1988, while total exports for the first three quarters of 1988were 22.6 million tons of iron ore and 357,000 tons of manganese ote$ withroughly 60% of the latter being shipped from Ponta da Madeira.

13 CVRD, draft PCR, op. cit., Part III.

14 PCR, op. cit., para. 6.

'5 As will be discussed further below, CVRD preferred to cancel the entireunused loan balance rather than apply at least part of these resources for theexpansion and improvement of urban infrastructure at Parauapebas/Rio Verde as

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in April 1988. I According to the Bank's PCR, actual non-financial costs ofinstalling the project were less than US$ 2.8 billion at completion, as comparedwith an estimated US$ 3.75 billion at appraisal, representing a 262 decrease.The principal reasons for these savings were favorable exchange rates betweenBrazilian and foreign currencies and lower than expected prices for goods andservices required by the operation as a result of the worldwide recessionoccurring in the early 1980's, together with CVRD's effective 30st controlmeasures throughout the course of project implementation.

6.12 Cost savings were relatively greatest for the mine component, whichrequired 40% fewer resources than initially anticipated. The rail, urban andport facilities, in turn, were implemented at costs ranging between 16% (port)and 212 (rail) below the corresponding appraisal estimates. Project management,on the other hand, utilized 602 more resources than projected at appraisal forreasons that are not clarified in either the Bank's or CVRD's PCR. Part of theseadditional costs, however, may refer to environmental protection activities,which were not made explicit in the cost tables presented in the SAR, but wereestimated by a Bank consultant on project completion to have been roughly US$64.4 million. "

6.13 With regard to the Bank loan, more specifically, the major coat itemat appraisal was railway equipment (US$ 174.6 million), followed by"unallocated" (US$ 52.5 million), construction steel (US$ 29.1 million), civilworks for the mine and townships (us$ 15.5 million), mining equipment (US$ 13million), technical assistance (US$ 9.1 million), port equipment (US$ 6.5million) and a US$ 4.5 million commitment fee. On completion, the largest costitem actually financed under the Bank loan remained railway equipment (US $81.6million) -- which represented approximately 352 of the loan resources disbursed,although it absorbed less than half of the funds originally anticipated -- whilethe second largest expenditure category was "technical assistance" (US$ 80.8million), whose share of the Bank loan increased from only 32 at appraisal tonearly 35% on completion. Most of what was actually financed under the headingof "technical assistance" in fact consisted of time tranches of the management

was proposed by the Bank.

16 The Bank's PCR (Part III, Table 5) indicates that total financingrequired by the project was some 26% less than originally anticipated as the co-financiers were also able to decrease the amount of loan funds extended for theoperation. In this connection, CVRD reports that total foreign resources actuallyused for the project were on the order of US$ 1.145 billion, as compared withthe US$ 1.488 billion (excluding US$ 400 million in contingency loans which werenot needed) expected at appraisal.

1' Report 3921-BR, op. cit., pg. 55 and Anderoon, Anthony, op. cit., Table3. The breakdown of theae costs is discussed in the next chapter. The majorsubitems under project management in the cost table presented in the SAR weremanagement contracts (US$ 196 million) and CVRD supervision (US$ 183 million).Increases in these costs undoubtedly also contributed to the increment observedat completion.

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contracts for the supervision of project construction activities. l The thirdmost important cost item in terms of actual Bank financing was mining equipment(US$ 34.4 million), whose participation in the Bank loan also increasedsignificantly (from roughly 4% at appraisal to nearly 152 on completion). Theserather substantial changes reflect revisions in the allocation of Bank loanfunds at CVRD's request in March and September 1983 and again in March 1984 inresponse to the cost savings mentioned above. 19

B. Prolect Results

1. Production, Sales and Rates of Return

6.14 The basic results of the project in terms of exports through thethird quarter of 1988 have already been touched upon above. Iron ore productionat Carajas increased rapidly from 1.0 million tons in 1985 to 24.4 million tonsin 1987 and a projected 28.6 million tons in 1988. Carajas iron ore sales, inturn, jumped from less than 600,000 tons in 1985 to an estimated 29.8 milliontons in 1988. In both cases, however, actual figures lagged considerably behindappraisal projections due to deteriorating iron ore market conditions in theearly 1980's and the relatively slow recuperation of these markets during thelatter part of the decade. Thus, while the project was expected to reachproduction and sales levels of 35 million tons in 1988, the actual figuresremained below 30 million tons.

6.15 In addition to lower than expected output and sales, iron ore priceshave also remained well below appraisal projections, resulting in revenue levelsand, consequently, financial and economic rates of return substantially lowerthan those initially estimated by the Bank. As noted in the Bank's PCR, eventhough the price of sinter feed, which is Carajas' principal product, wasexpected to increase by about 25% in current terms between 1985 and 1988, infact, it declined by 112 over this period, such that in the latter year it was

18 This is explained in an annex to the report of the sixth supervisionmission, undertaken in February 1986. According to this annex, two thirds ofproject management costs -- which ultimately corresponded to some US$ 435million, or roughly 12% of total non-financial project costs -- were directlyattributable to CVRD, including costs associated with the operation of schools,hospitals and other social facilities installed at or near the mine site, as wellas that of the Carajas airport, while the other one third were attributable tothe management firms (32%) and to actual technical assistance (1Z).

19 Even after these revisions, however, there were significant shifts inthe relative shares of the different cost components financed under the Bank loanas is indicated by the eventual cancellation of US$ 24.7 million that had beenallocated for railway equipment, together with US$ 35 million in the"unallocated" category and US$ 6.6 million and US$ 5.3 million for mining andport equipment, respectively.

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some 56% below the appraisal forecast. 20 Since iron ore sales are also some 15%below appraisal projections and are expected to remain at around 30 million tpyover the next several years, actual revenues are currently some 40% belowappraisal estimates.

6.16 Thus, even though project capital costs were roughly 25% lower thanoriginally expected and operating costs are also reported to be lower thananticipated, the net effect of these factors, together with significantly lowerrevenues, has been a substantial decrease in both the financial and economicrates of return of the project in relation to appraisal estimates. According tothe PCR., the after tax FRR at the time of completion was 1.2%, aS compared with11.72 at the time of appraisal, while the corresponding ERR estimates were 3.7%and 13.9%, respectively. As a result, the Bank's PCR concludes that the projectis "submarginal" when re-evaluated at present price and cost levels. However,it also affirms that "since [CaraJas] is a low-cost operation in relation toothAr iron ore mines around the world, it can survive even considerable marketdownswings with minimal financial damage and is expected to show large cashsurpluses after 1994 when most of the project debt has been repaid." 21 Longer-run financial perspectives, accordingly, are considerably brighter than thecurrent situation. Despite the low rates of return presently estimated by theBank, moreover, the Carajas operation has clearly been successful in terms ofits principal objectives of extracting and exporting large quantities of highquality iron ore and generating substantial -- if fewer than originally expected-- foreign exchange earnings for the Brazilian economy. 2

20 PCR, op. cit., para. 21 and Part III-8. The actual price, morespecifically, was estimated at US$ 16.2 per ton at completion as opposed to US$35.4 per ton at appraisal.

21 Ibid., para. 21. The SAR (Report 3921-BR, para. 8.44) identifieddepressed iron ore prices as one of the risks potentially facing the project,but also stated that "most market experts tend to expect price increases of upto 2% per annum through 1985 and of greater percentages thereafter as the marketstrengthens." Subsequent events have proven that this was not to be the case.

22 In its observations on an earlier draft of this report, CVRD affirmsthat "there can be no doubt that the Carajas Project filled, in an very adequateway, a gap in the equilibrated supply of iron ore to the world steel industry.Without Carajas, the excellent performance of the world steel sector over thepast several years could not have occurred....Even though 100% of the appraisalprojections were not achieved, the evolution of results reveals that thesetargets were nearly attained: 31.3 million tons in 1989 and an expectation of34 million tons in 1990. The price behavior of the iron ore market during the1980's contradicted the predictions of the foremost international specialists,including those of the Bank itself, without compromising Carajas' success....It is premature to interpret the economic-financial results, principally ratesof return, when both prices and quantities reflect peculiar short-term marketsituations."

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2. Direct and Indirect Emplovment Impacte

6.17 As noted aboveg at the peak of construction activities (August1982), roughly 24,000 workers and nearly 2,500 employees of CVRD and privatemanagement consultant firms were directly engaged in project implementation.According to CVRD, on the order of 80X of the construction workere came from thelow-income North and Northeast regions, while most of the administrative andsupervisory personnel, especially CVRD staff, were brought in from the Center-South. Many of the construction workers, moreover, chose to remain in the regionafter the project was completed either as prospectors, small farmers or rurallaborers or in some kind of urban employment. The very rapid growth of townssuch as Parauapebas and its satellite Rio Verde' at the eastern edge of theCarajas mining concession is due in good measure to the permanence of formerconstruction workers in the area.

6.18 Project implementation also had very important indirect employmentimpacts both within and outside the Carajas corridor. Whole townships (eg.Parauapebas and Rio Verde) have grown up in order to provide a wide variety ofgoods and services (commerce, entertainment, public administration, education,health care, etc.) first to construction workers and later to those directlyinvolved in on-going project operation and other primary sector activities(prospecting, small farming, ranching, etc.) that have developed in itsimmediate area of influence. 23 Other types of indirect employment generated orsustained by the project, moreover, benefitted the domestic industries -- mostof which were located in Sao Paulo or elsewhere in south-central Brazil -- thatprovided the materials and equipment utilized in project implementation.

6.19 While the information presently available does not permitquantification of the industrial employment positions created as a result ofproject demands for goods and services produced outside the region, CVRD's draftPCR does give an idea of the relative importance of the iron ore operation inthis regard. It indicates that, of the roughly US$ 980 million in equipment andmaterials required by the project, 912 (or US$ 890 million) was provided byBrazilian industry, while only 9% was imported from abroad. Among the majordomestically produced items consumed by the project was the rolling stock forthe Carajas railroad which included nearly 2,900 ore wagons, some 570 othertypes of cargo wagons, 14 passenger cars and 74 locomotives. CVRD's PCR alsopoints out that the Carajas operation had an important impact on the nationalshipbuilding industry, specifically through joint Norwegian-Brazilianconstruction of two large ore and petroleum carriers. 24

23 The nearly simultaneous appearance and subsequent rapid growth ofCurionopolis and El Dorado reflect similar multiplier effects created byprospecting activities at nearby Serra Pelada.

24 CVRD draft PCR, Chapter V, "Suprimentos.II The Brazilian share of thejoint shipbuilding contract was US$ 143.5 million. CVRD observes, moreover, thatthe project's impact on the industrial sector was particularly important becauseit came at a time of severe recession in the national economy.

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6.20 As the iron ore project has moved into the operation phase, thenumber of employment positions directly associated with it has declined, but thejobs created in connection with on-going mining, rail and port activities, inaddition to being permanent, also generate high levels of income, especiallywhen compared with other employment opportunities in the region. As of September1988, nearly 4,200 persons were reported by CVRD to be directly engaged in theoperation and maintenance of the Carajas Project, including some 1,720 at themine site, 1,940 for the railroad and 520 at the port. It is likely that atleast 2 to 3 indirect permanent jobs (especially in local commercial and serviceactivities) have been generated in the region as a result of each directemployment position established by the project, particularly in light of therelatively high salaries received by CVRD employees. The OED/SEPLAN mission'svisit to Parauapebas/Rio Verde provided strong visual evidence of the importanceof the Carajae mining activity for the local economy which appeared to bebooming. Indirect project employment impacts elsewhere along the rail corridorhave been similar to, if smaller than, those on the immediate periphery ofCYRD's mining concession.

3. TransDortation Services and Benefits

6.21 In addition to iron and manganese ore, the Carajas railroad providestransportation for both other goods and passengers. Even before ore shipmentsbegan, in fact, the railroad transported lumber for export, as well as equipmentand construction materials (eg. gravel) utilized in project implementation. Fromthe outset, moreover, it has transported the diesel oil that fuels the oretrains themselves. Passenger transportation, in turn, began in 1986. Morerecently (April 1989), as noted in Chapter IV above, the first segment of theNorth-South railroad between Imperatriz and Pequia, near Acailandia, has beenopened and, by linking up with the section of the Carajas railroad betweenPequia and Sao Luis, has permitted rail access between southwestern Maranhao andthe new state of Tocantins, on the one hand, and the port of Isaqui, on theother. Rail service, both for passengers and cargo, has been particularlyimportant during the rainy season when many non-paved roads in the Carajascorridor are impassable.

6.22 Although the bulx of the goods transported by the railroad stillconsist of Carajas iron and manganese ore -- some 59 million tons of the formerand 1.1 million tons of the latter through September 1988, according to CVRD -- a wide range of other products have also been carried by the railway. Theseinclude, as already menU4oned, diesel oil (320,000 tons through September 1988)and lumber (63,000 tons), together with railroad ties (46,000 tons), cement(30,000 tons), beverages (28,000 tons), vehicles and machines (16,000 tons),other fuels (11,000 tons), soybeans (5,000 tons) 25 and, starting in 1988, pigiron (55,000 tons), as well as other types of cargo (254,000 tons) not specifiedby CVRD. The transport of products other than Carajas ores, especially soybeans,

25 With inauguration of the first section of the North-South railroad,soybean shipments in particular should increase substantially since this new raillink greatly improves access of the soybean producing cerrado areas in southernMaranhao and, especially, Tocantins to export markets via the port facilitiesin Sao Luis.

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pig iron and, eventually, other metallurgical products, will become increasinglyimportant in the future. In short, it is clear that, as originally intended, theCarajas railroad has, indeed, represented a significant improvement in regionaltransport infrastructure and, as such, even aside from soybean and pig ironproduction, is likely to have induced an ircrease in regional agricultural andindustrial activity. 26

6.23 The provision of passenger transport by the Carajas railroad hasalso resulted in an important benefit to the regional population. Operatingthree times a week in each direction between Parauapebas and Sao Luis, therailroad carried more than 210,000 passengers during its first nine months ofservice in 1986 and transported on the order of 400,000 passengers during both1987 and 1988. Many of these passengers consist of small farmers and rurallaborers in northern and central Maranhao that are seasonally employed inprospecting activities in southeastern Para. The railroad, in short, has greatlyfacilitated the mobility of the intraregional labor force in Eastern Amazonia.

6.24 Project-sponsored road improvements have likewise been a majorfactor in opening up the Carajas corridor -- and especially the western part ofthe project's immediate area of influence -- to additional migration, therebyalso contributing to rapid rural and urban settlement. The PA-275 highway, whichwas constructed and paved in connection with the Carajas operation and connectsCVRD's mining concession to the existing PA-150 highway (that was also pavedunder the project) and, thus, to Maraba to the north and important cattleranching areas such as Xinguara and Conceicao do Araguaia to the south, has beenparticularly important in this regard. In addition to constituting a direct roadlink between Maraba and the iron ore project, PA-275 has also facilitatedoverland access to Serra Pelada and other prospecting areas in the region, tothe former GETAT agricultural colonization projects just to the south and eastof CVRD's mining concession and to the towns of Curionopolis and Parauapebas/RioVerde.

6.25 Even the Carajas rail line itself has played a role in theimprovement of road transport in the region. The addition of a road section tothe Tocantins River bridge, which was originally intended to carry only oretrains, has already been mentioned. Especially during construction, moreover,

26 In general, by reducing transport costs, any major road or railimprovement tends to stimulate an increase in agricultural and other land-utilizing (or land-based natural resource extractive) market-oriented productiveactivities. This, in fact, is the basia of classical agricultural location theoryand much of regional economic growth theory as well. See, for example, Chisholm,Michael, Rural Settlement and Land Use, Hutchinson, London, 1968 and Isard,Walter, Location and Snace-Economy: A General Theory Related to IndustrialLocation. Market Areas. Land Use. Trade and Urban Structure, MIT Press,Cambridge, Mass., 1956. Transport improvements are particularly important forthe development of frontier regions such as Eastern Amazonia, where the spreadof commercial agricultural settlement and primary extractive activities is oftenaccompanied by a parallel expansion of subsistence agriculture, together withurban-based industrial and service activities largely oriented to local markets.

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both the access roads to the railway and apparently also the rail bed itselfwere utilized for the circulation of passenger vehicles, including buses, aSwell as bicycles, riders on horseback, pedestrians and even cattle. 27 Moregenerally, local public use of project transport infrastructure was not clearlyor fully anticipated at the time of appraisal and, in addition to representinga relevant -- if largely unintended -- benefit of the operation, alsoillustrates the kinds (and complexity) of regional impacts which large transportand other infrastructure projects frequently have9 even when their objectivesare essentially sectoral or macroeconomic in nature. This is particularly truein dynamic frontier areas undergoing rapid occupation and settlement, as wasclearly the case in much of the Carajas corridor, where, moreover, a substantialpart of this process was directly or indirectly induced by the iron ore projectitself.

4. Industrialization and Urban Growth

6.26 Finally, a major indirect consequence of the Carajas Project -- thatwill be discussed more fully in the next section and in Chapters VII and IXbelow -- has been its impact on incipient industrial development andurbanization throughout the Carajas corridor. The most direct manifestation ofthis linkage are the Carajas-ore consuming metallurgical industries that haveeither already been installed or are expected to soon be established in theregion, including both pig iron smelters and other iron or manganese oreprocessing activities. More specifically, at the time of the OED/SEPLAN missionto the Carajas area in April 1989, four pig iron smelters -- two each in Marabaand Acailandia -- were already in operation, out of a total of thirteen suchindustries that had been formally approved for installation along the railcorridor with fiscal incentives from the Grande Carajas Program.

6.27 These thirteen industries -- which are further described in Annex1I of this report -- if installed as presently planned, would produce more than1.3 million tons of pig iron a year when operational and provide directpermanent employment to over 5,000 people. Six of these smelters are expectedto be located in Acailandia, five in Santa Ines and two in Maraba. In addition,as of March 1989, six other iron ore consuming (eg. ferro-alloy) industries havealso been approved by the PGC for installation in the region. When operational,they are expected to directly employ roughly another 3,400 workers and togenerate more than 300,000 tons of iron ore-based output annually. Of theseindustries, two are expected to locate in Rosario, two in Parauapebas and oneeach in Maraba and Tucurui. None of the above industries, however, would bepresent in the Carajas region in the absence of the iron ore project.

27 A January 1984 CVRD letter to the Bank in reply to the findings of theBank's third project supervision mission (September 1983) notes, for example,that internal company environmental working groups had been established in orderto consider problems "concerning people and cattle using the (rail] right-of-way." In response to what appear to have been Bank complaints about suchunauthorized usage of this right-of-way, CVRD affirmed, moreover, that "ourpolicy must adjust to operational parameters and the requirements of localinhabitants and their necessities will be given consideration."

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6.28 These metallurgical industries and others similar in nature thatwill be established in the more distant future to process Carajas iron,manganese, copper and other minerals, moreover, will necessarily also generatea significant amount of indirect employment, both as the result of theproduction of non-mineral input supplies (eg. charcoal or other local naturalresource-based fuels) 28 and the provision of transportation and other servicesand -- as in the case of the Carajas mine itself -- as a result of the increaseddemand for locally produced or provided goods and services on the part of thosedirectly and indirectly employed in or by these activities and their families,In short, the mineral processing industries made possible by the availabilityof iron and other ores and the transport infrastructure and services providedthrough the Carajas Project are likely to have very substantial and positivemultiplier effects in terms of employment and income throughout the entirerailway corridor, extending even to more distant points ouch as Tucurui notlocated along the Carajas rail line.

6.29 Much of this employment will inevitably be generated in towns andcities, especially Parauapebas, Maraba, Acailandia, Santa Ines, Rosario and SaoLuis, and, thus, is likely to provide a major additional impulse for urbangrowth in the region. In all likelihood, moreover, given the socio-economiccharacteristics of the surrounding region, the number of people seeking jobs inthese industries and related commercial and service activities willsubstantially exceed the total that can be productively employed, so that thevolume of rural to urban migration within the region may substantially increase.It is also likely that an increasing number of migrants will be attracted fromoutside the immediate Carajas corridor, particularly from the neighboring semi-arid Northeast. In synthesis, therefore, as was anticipated in the Bank'sappraisal report, the iron ore project has already been -- and will continue tobe -- an important indirect source of industrial and urban growth in EasternAmazonia. Accordingly, it is of particular relevance to briefly consider theadequacy and effectiveness of the project's urban development measures.

C. Urban Develoi)ment Component

1. Caraias and Parauapebas/Rio Verde

6.30 As was indicated in the previous chapter, the Carajas Projectcontained a specific urban development component which consisted largely of theinstallation of a completely new township inside CVRD's mining concession in theCarajas highlands and the provision of basic physical infrastructure and socialservices for a similarly new "service town" to be located just outside thecompany's gates at Parauapebas. As the PCR indicates, the township at Carajaswas, indeed, successfully constructed and presently provides a high quality ofhousing, basic infrastructure and community services (including a variety ofrecreational facilities) to CVRD's employees; by contrast, project-related urbaninvestments at Parauapebas have been far from sufficient to meet the growingshelter and service needs of the rapidly expanding population in this town and

28 The production of charcoal, in particular, is a very labor intensiveactivity as is the collection of babacu nuts, which represents one alternativeto wood-based charcoal as a fuel source for the pig iron smelters.

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its satellite, Rio Verde. 29 Purtherm9re, despite the availability of land, CVRDmanagers at the mine site have reneged on their initial commitment to house partof the non-CVRD service workers involved in mining operationis at Carajastownship, 30 clearly establishing this nucleus as a company enclave, on the onehand, while further increasing pressure on already inadequate urbaninfraetructure and services at Parauapebas and Rio Verde, on the other.

6.31 The OED/SEPLAN mission confirmed that the definitive township atCarajas S has, indeed, been built to very high standards of urban design andhas been provided with excellent services and community facilities, which, inaddition to primary and secondary schools, include a supermarket and othershops, a bus station, a cinema, sports arenas, a day care center, garbagecollection and disposal services and, perhaps, most importantly, a regionalhospital which, in all likelihood, is the best such facility anywhere in EasternAmazonia outside of Belem and Sao Luis. Residential housing, in turn, comparesfavorably with that in middle and upper middle class suburbs anywhere in Brazil.A special guest house for the Brazilian President and other visiting dignitarieswas also built by CVRD near the definitive Carajas nucleus. The township andall basic services within it, morbover, are fully administered and wellmaintained by CVRD. As mentioned in the Bank's PCR, finally, Carajas townshipis not allowed to grow without the consent of CVRD and is expected to remain atits present size until production is substantially increased. 32

6.32 The situation at Parauapebas/Rio Verde presents a sharp contrast tothat at Carajas. The findings of a Bank supervision mission in March 1986clearly point to the increasing disparities between the two project-supportedurban centers. The report of this mission, more concretely, affirmed that, whileprogress on "Carajas new town" was "satisfactory," major problems remained tobe solved in Parauapebas and Rio Verde which were estimated, at that time, to

29 PCR, op. cit. paras. 16-17.

30 Section 3.04 of the Loan Agreement stipulated, more specifically, that"cCVRD shall reserve about 1,000 lots for additional service workers in the firststage of development of (Carajas township] and shall enter arrangements with BNHor other financial agencies, acceptable to the Bank, for carrying out a creditprogram for financing the construction or purchase of the houses to be built onsuch lots, in order to enable the permanent settlement of such service workersin such townsite over a period of about 5 years from the Completion Date." Thusfar at least, CVRD has not complied with this condition.

31 A temporary urban nucleus, locatel closer to the initial iron ore miningsite, is being gradually dismantled with the progressLve relocation of CVRDemployees to the permanent nucleus and the transfer of contract workers toParauapebas.

32 PCR, op. cit., para. 16.

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have a combined population somewhere between 45,000 and 50,000. 33 This figurecompares with an expected 1988 population of 10,000 upon which theinfrastructure plans approved by the Bank in October 1982 for the "service town"of Parauap.bas were originally based. Rio Verde, more specifically -- locatedjust to the east of Parauapebas along the PA-275 highway -- had mushroomed froma reported population of some 3,000 in early 1984 to on the order of 25,000-30,000 people in early 1986. "

6.33 Rio Verde, which was completely unplanned, was described by theMarch 1986 supervision mission as a "burgeoning town," spreading out along thehighway, that was soon expected to be contiguous with Parauapebas and whosephysical infrastructure was essentially limited to ungraded lanep and precariouselectrical connections. The eame report emphasized that, in order to avoidepidemics, there was an urgent need to expand the existing water pumpingstation, water treatment plant and water distribution networke to serve bothcommunities, while street upgrading, storm drainage and street li§hting, as wellas additional schools and health facilities, were also needed. s In general,housing conditions in Rio Verde were also highly inadequate -- the highly variedand frequently precarious wooden structures strongly contrasting with thehomogeneous masonry and tile-roofed constructions at Carajas -- while periodicflooding of squatter occupied lowland areas was common. The OED/SEPLAN mission'svisit to Parauapebas/Rio Verde in April 1989 revealed that little had changedin this respect.

6.34 The growth of Parauapebas and Rio Verde reflects a number offactors, including GETAT's decision to locate agricultural colonization projectsnear the Carajas Project and extensive gold and other mineral prospectingactivities in the vicinity, as well as the spontaneous establishment of smallfarms and ranches of varying sizes in the area. All of these activities,however, were made possible by the road infrastructure installed in connection

3 Supervision mission report dated April 30, 1986. This documenthighlights the "urgent need" to expand water and sewer networks at Parauapebasand to rebuild and enlarge community facilities, including the municipalbuilding, police station and jail that had been burned down during ademonstration by Serra Pelada gold miners (see para 4.29 above).

34 The first of these estimates is given in a oupervision mission reportdated March 9, 1984. This report referred to Rio Verde as a "squatter colony."

35 Supervision mission report dated April 30, 1986, op. cit. This repotcalso observes that, even though CVRD had already spent some US$ 13.7 million inParauapebas, at least another US$ 18 million were required to introduce neededimprovements in infrastructure networks and community facilities in Parauapebasand Rio Verde. The report recommended that these improvements be "set within anintegrated land use planning framework" and proposed that such a plan be preparedby consultants to CVRD on the basis of terms of reference approved by the Bank.Such a plan apparently was drawn up in mid-1986, but a subsequent Banksupervision mission (in September-October 1986) continued to stress the "urgentneed to rehabilitate, sanitize and expand the urban networks of Parauapebas toserve the expansion areas in Rio Verde."

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with the iron ore project and much of the population that has agglomerated inParsuapebas/Rio Verle was initially drawn to the area either as constructionworkers or in order to serve the construction camps through commercialactivities, restaurants, bars, boarding houses, pharmacies, etc., in what is avery common pattern on the Amazonian frontier. Rio Verde, i: fact, had itsorigins as the "red light district" for the construction camps near Carajas andParauapebas, just as Curionopolis initially appeared in order to provide similarservices to Serra Pelada gold prospectors. Both, however, have subsequentlyevolved into respectable, if still poorly serviced, commercial frontier boomtowns. 36

6.35 Neither CVRD nor the Bank adequately anticipated the rapidurbanization brought on directly and indirectly by the iron ore project,especially at the western end of the Carajas corridor. As a result, the urbaninfrastructure and service investments provided through the project forParauapebas were clearly insufficient. Furthermore, while the Bank's PCR iscorrect in affirming that CVRD did provide the basic infrastructure for thistownship as stipulated in the Loan Agreement and that "local and stateauthorities did not complement and maintain this infrastructure or extend it tomeet the requirements of a greater than expected influx of settlers," 37 thisdocument neglects to mention that state and local authorities were nevereffectively involved in the Carajas Project by CVRD or the Bank and that theysimply did not possess the resources required to make the necessaryimprovements. At the time the iron ore operation was being implementedParauapebas and Rio Verde, as well as Curionopolis, were still formallydistricts of the municipality of Maraba. This municipality, moreover, was unableto adequat.'y cope with the rapidly growing demands for urban infrastructure andservi-es in the city of Maraba itself -- whose population had similarlymushroomed, partly as a result of the construction of the Carajas railway -- letalone those of outlying towns some 100 to 150 kilometers away.

36 In commenting on an earlier version of this report, CVRD observes that"the region where the project was installed was an area of expansion of theagricultural frontier. Attracted by the possibility of gaining access to landand stimulated by the Government, large numbers of landless rural workers,principally from the Northeast, came to the region. The premature closing ofthe agricultural frontie- for speculative ends, through which agriculturalproperties were maintained unproductive, impeded landless peasants from obtainingaccess to these areas for cultivatioa, swelling urban centers and aggravatingurban unemployment in the region. The opening of various gold prospecting siteswas another factor attracting population to the area, with as many as 100,000people prospecting at Serra Pelada alone. As a result, numerous urban centers(eg., Curionopolis) appeared with only minimal infrastructure. These factors,rather than the deactivated workers at the end of Carajas' construction phase,were responsible for the explosive growth of Parauapebas. and Rio Verde.Furthermore, many of the laborers employed by the contractors...were dislocatedto new works elsewhere."

37 PCR,. op. cit., para. 17.

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6.36 Bank supervision efforts for the urban component of the CarajasProject were apparently restricted for budgetary reasons to a single mission -- involving les1 than one week -- a year, which was clearly not sufficient giventhe constantly widening disparity between the initial demcgraphic projectionsand the evolving reality of urbanization along the rail corridor. The Bank'slast specific supervision mission for the urban development component sas inSeptember-October 1986 and it appears that little additional Bank follow-upregarding urban development problems in the region occurred after this date. 8

While a letter to CVRD following the next-to-last general project supervisionmission in March 1987 does make reference to the Bank's continuing concern withthe "unexpected spontaneous growth" of these towns and acknowledges that CVRDwas "currently reviewing" its future role in this regard, the Bank affirms onlythat "we would be interested in learning about any decisions in this respect,"further suggesting that it would be important that "local authoritiesappropriately complement CVRD's actions by necessary infrastructure investmentsand maintenance." 39

6.37 The Bank's PCR observes, finally, that, toward the end of projectexecuti%,n, the idea of using part of the undisbursed balance of the Bank loanto fund additional urban development investments at Parauapebas/Rio Verde wasdiscussed and eventually rejected by CVRD, presumably because of thecomparatively high cost of using external resources for this purpose. 40 In theabsence of such funding, however, it appears that little further investment inurban infrastracture and services has occurred to date, despite the continuinggrowth of these towns. At the time of the April 1989 OED/SEPLAN mission,moreover, CVRD was still in the process of "reviewing its future role" in thisrespect. The recent transformation of Parauapebas into a municipality separatefrom Maraba is, nevertheless, a promising development since, starting in 1989,the new county would have direct access to local mineral tax revenues generatedby the Carajas Project and other mining activities within its territory that hadpreviously been almost totally absorbed in the city of Maraba. The newly electedlocal authorities had also initiated discussions with CVRD management in

38 The last documents in the project files specifically dealing with urbandevelopment matters in the Carajas corridor were a back-to-office report for theSeptember-October 1986 mission dated February 25, 1987 and a memorandum providingsupplemental comments on the proposed plans to improve Parauapebas and Rio Verdedated March 11 9 1987.

39 Letter dated June 4, 1987 from the Bank to CVRD concerning the findingsof the April 1987 supervision mission. No recommendation is made, however, asto how -- or with what resources -- either CVRD or "local authorities" shouldgo about doing this.

40 PCR, op. cit., para. 17. The PCR indicates, on the other hand, that CVRDdid continue to provide "technical advice" for health, education and socialservices to these towns.

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relation to the company's on-going "moral obligation" to help improve livingconditions in the municipality. 4

6.38 In any case, as of early 1987, the Bank's already very limitedinvolvement in urban development activities in the Carajas corridor effectivelyceased altogether. The immediate reason why this occurred was probably that theurban development specialist who had accompanied this component from appraisalonware retired from the Bank at the time of its reorganization in mid-1987. Amore important and definitive reason was the fact that implementation of theoperation as a whole was drawing to a close. For both reasons, Bank monitoringof, and sporadic attempts to deal with, the serious and persisting urbanproblems affecting the western part of the Carajas corridor were clearlydiscontinued well before these problems could be satisfactorily resolved.

6.39 The experience under the urban development component of the Carajasoperation, thus, raises the broader issue as to both where and when CVRD's andthe Bank's responsibilities end in a situation such as this in which, even afteran investment project has been fully implemented in physical terms, itcontinues, directly or indirectly, to generate -- or at least to stronglycontribute to -- significant social and/or environmental problems in its areaof influence. This is particularly a problem in projects sucl-h as the present onein which such adverse impacts were poorly anticipated and dealt with from theoutset and in which no attempt was made (by either the Guarantor or the Bank)to financially and institutionally strengthen the state and local governmentagencies that ultimately have to assume responsibility for the provision andmaintenance of the basic urban infrastructure and services in the areas affectedby the operation. This extremely important and complex issue will be furtherdiscussed in the concluding chapter of this report.

2. Along the Railroad

6.40 The urban development component of the iron ore project alsoincluded comparatively small investments in infrastructure and housing atvariou& localities along the Carajas railroad, largely for the purpose ofproviding adequate shelter and other amenities for company employees involvedin on-going rail operation and maintenance activities. According to the SAR, inaddition to accommodations for some 100 CVRD railroad maintenance and service

41 In its observations on the preliminary draft of this report, CVRDindicates that "the Executive Secretariat of the Grande Carajas Program had,among other responsibilities, that of coordinating with other government agenciesthe actions required for regional development. Therefore, it was the PGC's (andnot CVRD's] responsibility to involve state and local authorities to supply localcommunities with infrastructure and basic services. (Nonetheless,] CVRD hae beenmaking efforts to improve living conditions in Parauapebas/Rio Verde. Newinvestments are being made to adjust the infrastructure of these urban centersto the explosive population growth they have experienced. It should be recalledthat CVRD's tax payments (presently some US$ 3.2 million per month, of which 20%,or US$ 640,000 is transferred by the state of Para to Parauapebas/Rio Verde]constitute an important source of resources for the states and municipalities.Firms contracted by CVRD pay an rdditional US$ 100,000 to Parauapebas."

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workers at Parauapebas, some 280 housing units and community facilities wouldbe provided through the project for "key railway operation personnel" atRosario, Vitoria do Mearim, Santa Ines, Nova Vida, Pequia and Km 650, togetherwith roughly another 470 units at Maraoa. The latter were to be sold to CVRDemployees, but financed through the National Housing Bank (BNH), rather thanbuilt directly by the project. 42

6.41 While no reference to the subsequent implementation of theseinvestments is made in either the project files or the Bank's and CVRD'scompletion reports, rapid visual inspections by the OED/SEPLAN mission of someof the areas benefitted suggest that the projected housing units were, in fact,built. 43 In addition, OED and SEPLAN were informed by CVRD that it providedother forms of urban development assistance (eg. support for planning activitiesand road paving) to towns along the railroad, particularly Maraba, but noconcrete data on the exact nature or amount of such expenditures were madeavailable to the mission. As a result, it is impossible to determine the fullextent of CVRD's actual contribution to urban development efforts in the region.

6.42 Project-related investments for infrastructure and services incities and towns, other than Parauapebas, along the immediate Carajas-Sao Luisrail corridor, however, were clearly minimal both in absolute terms and, moreimportantly, in relation to the very rapidly expanding needs of these centers.Part of these requirements, moreover, was the direct result of the influx ofpopulation attracted to the Carajas corridor by construction and otheractivities directly or indirectly associated with implantation of the iron oreoperation, as OEDISEPLAN interviews with local authorities in Maraba, Santa Inesand elsewhere plainly revealed. The broader urban development impacts of theCarajas Project, however -- which again raise the issue as to where and whentVRD's and the Bank's responsibilities should leave off with regard to projecteffects at the regional level -- are discussed in greater detail in Chapter IXbelow.

3. Sao Luis

6.43 At the time of project appraisal, the Bank clearly expressed itsconcern about existing urban development problems in the area immediatelysurrounding CVRD's rail and port terminal facilities at Ponta da Madeira near

42 Report No. 3921-BR, op. cit., para. 5.39. No further detail as to thespecific investments involved is provided in the SAR.

43 CVRD's draft PCR provides virtually no information on the urbandevelopment component of the project except to indicate that instead of the US$179 million (net of contingencies) originally expected to be spent for theinstallation of urban facilities, only US$ 144 million were in fact utilized forthis purpose. This latter figure, nevertheless, still represented an amountsubstantially greater than the cost of many of the Bank's individual free-standing urban development projects in execution throughout the world at thattime. The Bank's PCR, moreover, addresses itself only to urban investments atCarajas and Parauapebas, totally ignoring interventions under this componentalong the railway and in Sao Luis.

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Sao Luis. As observed at the beginning of this chapter, the Loan Agreement forthe Carajas Project included a clause requiring preparation of a land use andzoning plan for the area around the port terminal, as well as the signing of anagreement between CVRD and state and municipal authorities for the subsequentimplementation of this plan. Particular attention was to be given to therelocation of existing squatters along the BR-135 highway leading to CVRD's portfacilities and to definition of the meaeures necessary to avoid future squatterinvasions in the area.

6.44 From the outset, however, CVRD qonfronted serious difficulties inits atterapts to induce state and local authorities to comply with theseconditions, while its own efforts to resolve the resulting impasse appear, atleast initially, to have been half-hearted. As early as December 1982, a meetingbetween the Bank specialist responsible for supervision of the project's urbancomponent and his CVRD counterpart concluded that, while the major land useswithin the company's port terminal concession were "well defined," there was apersisting need for the areas outside this property, especially along eitherside of the BR-135 road, together with the land to the east and south of theCVRD concession, to have "the same careful delineation." "' The internal Bankmemorandum which reported the results of this meeting, moreover, recommendedthat the land use plan for the port area be extended to two large squattercommunities, involving some 90,000 people, located immediately to the south("Vila Maranhao") and north ("Vila Anjo do Guarda") of CVRD's concession, while"manRue [ie. coastal marshland] and beach protection zones" should be defined,together with expansion areas for housing, commercial, service and communityfacilities, since these squatter "towns" could be expected to double in sizeover the next decade. 's

6.45 Changes in the state government, together with disagreements betweenlocal officials and CVRD, 46 were apparently largely responsible for delays in

44 Internal memorandum dated December 30, 1982 regarding thei abovementioned meeting.

45 The December 1982 memo further suggested that all existing and futuresquatters along the access road to the port should be "channeled" into these twovilas, while local and state agencies should carefully regulate the location ofindustrial activities in the area for environmental reasons. More specifically,it t.rges that "permitted uses should be grouped into two basic categories: onet- l: produces no environmental hazards or effluents (eg. warehousing and storage)can be placed near existing wetlands; (while) a second group of industrialprocessing plants with effluents that must be treated and recycled should belocated inland with adequate buffer zones... since the entire [Sao Luis] peninsulais a large breeding ground for shrimp and crustaceans."

46 The state government claimed, more specifically, that newly constructedCVRD breakwaters at Ponta da Madeira had altered tidal currents and wereresulting in increased sedimentation near the port of Itaqui located just tothe south of Ponta da Madeira. CVRD, however, was later able to prove that thiswas not the case. In addition, CVRD's construction of an administrative centerfor the port terminal facilities had apparently restricted public access to

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the preparation and implementation of the required land use plan. An internalmemorandum written after the Bank's third supervision mission in September 1983mentions that CVRD's relations with both the city of Sao Luis and stategovernment authorities "continue to deteriorate," while the full mission reportidentifies "the poor relationship and lack of communication between CVRD and theauthorities in Sao Luis," together with land tenure problems and "unauthorizedand uncontrolled settlements in the vicinity of the mine, along the railway, inthe terminal area in Sao Luis and...in Amerindian reservations," as problems of"increasing concern." 47 CVRD's difficulties with the municipality were, infact, only resolved after the company agreed to help improve local highwayinfrastructure *e

6.46 As a result of CVRD's improved relations with the state and localgovernments, the next supervision mission (April-May 1984) was able to reportconsiderable progress with respect to the land use plan which, according to theBank's urban development specialist, clearly demarcated industrial, commercial,residential, institutional and ecological zones, together with squattersettlements. '9 Even though local officials indicated that this plan had alreadybeen enacted into law, however, the Bank's urban specialist observed that themunicipality's enforcement measures remained inadequate. Not surprisingly,therefore, the Bank's fifth supervision mission (May 1985) identified the "urbansprawl" around the CVRD site in Sao Luis, together with "the failure to properlyoccupy Parauapebas township because of the uncontrollable development of thenearby squatter town of Rio Verde" as the project's principal persisting"environmental issues." 50 Since this is the laet specific reference in the

nearby beaches, thereby causing an additional source of tension with themunicipality.

4" Back-to-office report of Bank environmental specialist, following avisit to the Carajas Project, dated September 22, 1983 and supervision reportdated October 13, 1983.

48 A letter dated January 19, 1984 from CVRD to the Bank, notes, forexample, that "adjustments" with the municipality of Sao Luis had been made inDecember 1983 after CVRD's payment of local license fees for construction workswithin the port terminal area and a "generous donation" to local authorities inorder to construct a bridge linking two key areas within the city, together withan agreement between the national highway department (DNER) and the municipalityto duplicate that part of the BR-135 road connecting the center of Sao Luis withItaqui.

'9 The urban specialist's back-to-office report, in fact, praises the stateplanning agency for its proposed ecological conservation measures near the portsite, but also observes that some eight large "squatter colonies" with roughly50,000 inhabitants remained opposite CVRD*s main entrance, having "developed overthe last 5 years of CVRD's activities." In the case of the largest of thesecommunities (Vila Anjo do Guarda), however, CVRD provided water supply, schoolsand health posts "as their contribution to area improvements."

50 Supervisior. mission report dated June 17, 1985.

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Bank's project documents (including the PCR) to urban development activities inthe port area, it is ultimately unclear whether the land use and zoning plan wasever effectively implemented or not.

6.47 As it became increasingly evident that the municipal governmentwould be unable to undertake the investments necessary t. upgrade the slumsettlements in the port vicinity without a considerable injection of additionaloutside resources, finally, it was hoped that such improvements would be fundedthrough a Second Medium-Sized Cities Project. This proposed follow-on operationwas under consideration by the Brazilian Government and the Bank between 1983-86 and Sao Luis was expected to be one of the principal beneficiary cities.However, the Bank and the Government later decided not to proceed with a secondintermediate cities project, which has left Sao Luis largely without theresources necessary to deal with the problems and demands resulting from itsvery rapid rate of growth, due at least in part to increased Carajas-relatedport activity at Itaqui and Ponta da Madeira.

D. Conclusion

6.48 The experience under the urban development component was clearlymixed. As indicated in the preceding section, implementation of this componentwas characterized by a sharply contrasting performance on the part of C/w atCarajas (ie. within the mining concession area) and elsewhere -- especially atParauapebas/Rio Verde, but also at Sao Luis and other points along the railroad-- where the provision of urban services, although by no means the exclusiveresponsibility of CVRD, has clearly been far less adequate and where thesignificant initial deficits of basic urban infrastructure and services haverapidly expanded as the result of equally rapid population growth. As suggestedabove, much of this urban population growth -- particularly in the western partof the Carajas corridor -- has occurred directly or indirectly in response tothe iron ore project.

6.49 More generally, the results of the Carajas Project were also mixed.On the one hand, the iron ore operation was, indeed, an impressive undertakingfrom a variety of standpoints. The Carajas region contains one of the richestmineral deposits in the world and the Bank-supported project established one ofthe largest open-pit mining operations on the planet -- by one of the world'sforemost mining enterprises -- and included construction of a major railroad,together with a deep water port, two new townships and other regional transportinfrastructure. Iron ore production at Carajas is currently on the order of 30million tons per year, while smaller amounts of manganese ore are also beingextracted for export and CVRD plans to initiate the mining of nearby copperdeposits shortly. Since Carajas output is sold almost exclusively in externalmarkets, the project will have a significant positive long-run impact onBrazil's balance of payments.

6.50 The project was prepared, implemented, and appears to be operatedefficiently, with major infrastructure works completed earlier than scheduledand well under appraisal cost estimates. Altogether, more than 60 small bridgesand one major road-rail crossing were built along the railway between Carajasand Sao Luis, while the project also included the construction and/or pavementof some 170 km of highways Sonnecting the mine site to the city of Maraba and,

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thus, to the Transamazon, Belem-Brasilia and other important road links inEastern Amazonia. Total project design, execution and financial coats amountedto some US$ 3.5 billion, of which the Bank ultimately financed roughly US$ 231million, while other international lenders provided another US$ 914 million.Brazilian sources, in turn, provided the remaining US$ 2.4 billion, includingCVRD's own contribution of some US$ 1.66 billion.

6.51 In addition to the extraction, transportation and export of iron andmanganese ore, moreover, the Carajas Project has generated other importantbenefits and contributed to several significant developments in its larger areaof influence. One of these benefits refers to the transport of freight otherthan Carajas mineral output starting in 1985 and of passengers betweenParauapebas and Sao Luis since 1986. In 1988, for example, some 560,000 tons ofgoods other than iron and manganese ore -- including diesel oil, gasoline,alcohol and other fuels, gravel, cement and other construction materials,lumber, agricultural commodities (especially cereals), beverages, vehicles andequipment, pig iron and other products -- together with more than 400,000passengers were transported by the Carajas railway. With the inauguration of theinitial section of the North-South railway in April 1989, moreover, the project-financed railroad has, in effect, been extended from Acailandia to Imperatriz,from where agricultural and other products generated in southwestern Maranhaoand Tocantins can now be transported for export through Itaqui and Ponta daMadeira. 'The iron ore project has also been directly and indirectly responsiblefor significant employment and income generation along the Carajas corridor, inthe process contributing both to the incipient industrialization and spread ofrural settlement, as well as very rapid urban growth, throughout much of thearea as will be further explored in Chapter IX below.

6.52 On the negative side, however, the project is presentlycharacterized by (reestimated) financial and economic rates of return (1.2Z and3.71, respectively) which are barely positive and well below the cut-off point(10Z) normally utilized by the Bank in order to determine project success orfailure from an economic standpoint. These low rates of return are the resultof a combination of smaller than expected iron ore sales and much lower thanprojected iron ore prices, despite substantial reductions in both projectinstallation and operating costs. From this standpoint, therefore, even thoughit has resulted in a well-executed and generally well-managed, large-scale andmodern mining operation, and even though -- as the Bank's PCR concludes 51 __

51 The PCR (op. cit., para. 28) observes, more specifically, that "theproject's main benefits, resulting from continuous production of low-cost ironore, principally for export, are very likely to be sustainable over the longterm. The projected production period was 35 years at appraisal but will probablybe considerably longer. The technical risks of the operation appear small. Thefinancial risks, already low, will decrease after repayment of the bulk of theloans in 1995...and will make the operation resistant to possible operating costincreases....Moreover, in the long run, an expansion of the project's capacityto 50 million tpy appears possible, particularly if new projects in Africa donot materialize. This would provide the project with additional protectionagainst financial risks because of higher volumes and, thus, further reductionin production costs."

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its benefits are, indeed, highly likely to be sustainable, the Carajas venturecan not presently be considered a successful project.

6.53 The project's (largely indirect) adverse impacts on the physical andhuman environments in its extensive area of influence in southeastern Para andnorthern, central and western Maranhao, finally, are the other importantnegative feature of the Carajas operation. On the one hand, even though itsspecific environmental and Amerindian protection components -- which will beassessed in the next chapter -- have, in fact, had numerous beneficialconsequences to date, the long-term sustainability of many of these benefits isquestionable. On the other hand, the Carajas Project failed to adequatelyanticipate the potential repercussions of the large investments involved on thenatural environment in the surrounding region, as well as on its non-Amerindianpopulation. Here the blame must ultimately be shared between the Borrower andthe Guarantor and the Bank.

6.54 On the Bank side, more specifically, even though both environmentaland Amerindian protection components were included in the Carajas operation atthe Bank's insistence, as the PCR puts it, the project's "main weakness" wasprobably the insufficient ex-ante evaluation of its possible indirect impactsand the lack of appropriate provisions for influencing and controlling theseimpacts "in order to avoid or at least mitigate undesirable environmentaleffects." 52 Among the lessons drawn by the PCR from the experience under thisoperation, accordin=.ly, is that "for a project the size of Carajas implanted ina fragile environment, the secondary developments should have been carefullyassessed at appraisal and more effective precautions...built in to guard againstthe adverse effects of these developments." ' The fundamental correctness andimportance of this lesson will be highlighted by the discussion of the broaderphysical and human environmental consequences of the Carajas Project in the lastthree chapters of this report.

52 Ibid., pera. 33.

53 Ibid., para. 35(il).

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VII. EVALUATION OF ENVIRONMENTAL AND AMERINDIAN COMPONENTS

7.01 The Carajas Iron Ore Project contained specific environmental andAmerindian protection components that were briefly described in Chapter V above.The present chapter will attempt to assess the adequacy, effectiveness andsustainability of project-related efforts to preserve the natural environmentand to protect indigenous communities directly or indirectly affected by theCarajas Project. In the case of the environmental protection component, morespecifically, the chapter will examine CVRD's activities within the areas underits direct jurisdiction, including the mining concession, the right-of-way ofthe Carajas railroad and the port concession. Project impacts on the naturalenvironment in its larger area of influence will be the subject of the nextchapter. Likewise, on the human environmental side, the present discussion willrestrict itself to project consequences ant protection measures specificallyrelated to tribal populations. Other human environmental impacts of the Carajasoperation will be explored in Chapter IX.

A. Protection of the Physical Environment '

1. Organizational Arrangements for Environmental Protection

7.02 From an administrative standpoint, responsibility for operation ofthe iron ore project is presently divided among three units, all of which aresubordinated to CVRD's Production Directorate: (i) the Carajas MineSuperintendency (SUMIC), which has its headquarters at the mine site; (ii) theCarajas Railroad Superintendency (SUFEC), with headquarters in Sao Luis; and(iii) the Pc ,ta da Madeira Port Superintendency (SUPOC), also headquartered atSao Luis. 2 Each of these Superintendencies contains an Environmental Divisionwhich is advised by an Internal Environmental Commission (or CIMA). 3 The CIMAs,which were formally established in June 1981, are currently composed of employeesfrom various parts of CVRD and members of the local community, but, during the

1 This section, in addition to presenting the results of the OED/SEPLANmission FOR the Carajas Project in March-April 1989, also relies heavily on areport by Anthony Anderson entitled "The Carajas Iron Ore Project - Assessmentof the Environmental Components" dated April 1989. Mr. Anderson visited theCarajas corridor in March-April 1989 under a consulting assignment for the WorldBank in parallel to preparation of the Project Completion Report (PCR) for theiron ore operation.

2 As noted in para. 5.40 above, during the construction phase, these unitswere subordinated to the (then) Department of Buildings and Projects (DEPEK)within the Superintendency for Implementation of the Carajas Project (SUCAR).

3 Although three separate commissions were originally envisioned, thefunctions of the proposed CINA for the railroad were later divided and combinedwith those for the mine and port areas based at Carajas and Sao Luis,respectively. According to Anderson (op. cit., pg. 15), CIMAs were also createdat each of the urban nuclei established or supported by CVRD along the route ofthe Carajas railway.

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construction phase, they also included representatives of the private contractorsinvolved in project implementation. These commissions have the responsibilityto examine and make recommendations to CVRD management regarding environmentalissues and problems related to the activities of the Superintendencies with whichthey are associated. More specifically, the CIMAs have focused on such concernsas environmental education, waste disposal, landscaping of community areas,operation and maintenance of recreational facilities, among others. In general,they appear to have been effective. 4

7.03 The Environmental Divisions within the various operationalSuperintendencies for the Carajas Project are presently overseen by theEnvironmental and Forest Products Superintendency (SUMAF) at CVRD headquartersin Rio de Janeiro. SUMAF substituted the former Superintendency of theEnvironment (SUNEI) -- responsible for this area at the time of the OED/SEPLANmission in April 1989 -- which had been divided into environmental engineeringand natural resources departments. f The dual subordination of the EnvironmentalDivisions to the operational Superintendencies in the field and SUMEI, however,occasionally caused problems with regard to the activities of these units,especially at the mine site. 6 SUMAF, in turn, advises and evaluatesenvironmental aspects of the activities carried out by CVRD's operational unitswithin a process of decentralized management. In addition, an EnvironmentalCommittee has been created at the senior management level in which all of theSuperintendencies are represented and which deliberates and authorizes allmatters related to company environmental policy. 7

7.04 As indicated in Chapter V, a blue ribbon advisory panel (GEAMAM),linked directly to the Administrative Council of the President of CVRD, wascreated in December 1980. In addition to advising CVRD's chief executive on

4 According to CVRD environmental officials interviewed by Anderson,however, the effectiveness of the CIMAs may have diminished somewhat in thepost-implementation period.

3 In addition to overseeing the Environmental Divisions at Carajas andSao Luis (ie. SUMIC, SUFEC and SUPOC), SUMEI also coordinates similar unitsestablished at Itabira (SUMIM) in Minas Gerais and at Vitoria (SUEST) andTubarao (SUPOT, SUPEL) in Espirito Santo which monitor environmental aspects ofCVRD's southern system operations.

6 Anderson (op. cit. pg. 23) has observed, for example, that, while "thisarrangement is probably necessary for decentralized administration of activitiesat a given locale. ..it can also lead to conflicts in which the authority of SUMEI-- a relatively small Superintendency within CVRD -- is undermined." At the minesite, more specifically, SUMIC "tends to monopolize authority and weaken thecontrol of SUMEI over the local environmental program." Relations between SUMEIand the port Superintendency (SUPOC), on the other hand, are reportedly very goodleading Anderson to surmise that these differences may explain the "apparentlylower priority given to environmental monitoring at the mine as compared to theport."

7 CVRD comments on the previous version of this report.

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environmental matters, GEAMAM, which consists of an Executive Secretariat andnine specialists in areas related to environmental management and Amazoniandevelopment, also currently oversees the activities of SUMEI. The role of GEAMAMwas clearly a major preoccupation of the Bank at the time the Carajas Projectwas appraised. This is clearly reflected in the Loan Agreement in which threeof the seven clauses that specifically concern the environmental component ofthe operation refer to its activities. More concretely, the Loan Agreementrequired CVRD: (i) to maintain GEAMHM with staff, functions and responsibilitiessatisfactory to the Bank; (ii) to cause GEAMAM to carry out site inspections atleast twice a year through 1985 and once a year thereafter and to furnish CVRDwith a report, satisfactory in scope and content to the Bank, after each of thesevisits presenting observations and recommendations as to the environmentalactions being undertaken by the company; and (iii) to provide the Bank withcopies of these reports, together with CVRD's comments and a description of anyactions to be taken in response to GEAMAM's recommendations. a

7.05 GEAMAM, in short, appears to have been viewed by the Bank as avehicle for carrying out supervision of the various environmental measuresassociated with project execution. As will be illustrated below, however, thispioneering attempt to transfer a substantial part of environmental supervisionresponsibility to the Borrower was only partly successful in the case of Carajas.More generally, on the other hand, based in part on the Carajas model andexperience, consideration of the establishment of GEAMAM type blue ribbon panelsto oversee environmental aspects of "major projects with serious and multi-dimensional environmental concerns" has recently been recommended in the Bank'snew Operational Directive on Environmental Assessment. 9

7.06 GEAMAMA's performance during project implementation, althoughgenerally adequate, nevertheless, failed to completely comply with the terms ofthe Loan Agreement described above. According to the Bank's PCR for the Carajasoperation, "some deficiencies occurred in the performance of the advisorycouncil, whose composition has not continuously been up-to-strength, whosereports were not regularly transmitted to the Bank, whose recommendations werefrequently not followed by CVRD, and whose site visits were less frequent than

a Loan Agreement, Sections 3.10 (a), (b) and (c). A fourth clause (Section3.10(d)) required CVRD to maintain adequate organizational and staffingarrangements for the proposed environmental control activities, including theestablishment and operation of the CINAs at the mine and port sites.

9 Operational Directive 4.00 Annex A (September 1989). More specifically,the recommendation (para. 15) is that, for projects of the type indicated above,"the Bank should explore with the borrower whether the latter needs to engagean advisory panel of independent, internationally recognized, environmentalspecialists, to review and advise on inter alia, the Terms of Reference andfindings of the Environmental Assessment [now required by the Bank for allinvestment projects that are expected to have significant environmental impacts],the implementation of its recommendations, and the development of environmentalcapacity in the implementing agency/ministry. Such a panel should meet at leastonce a year until the project is operating routinely and environmental issueshave been addressed satisfactorily."

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planned." 10 One former member of GRAMAM has observed, moreover, that the grouphas assumed largely a "decorative role" within CVRD in recent years and presentlyhas little effective impact on company environmental policies. I Despite theseproblems, the Bank's PCR concludes that "the two environmental commissions (nowdivisions) are doing a generally effective job of maintaining high environmentalstandards throughout the area under CVRD control." 12

7.07 At the time of the OED/SEPLAN mission in April 1989, finally, thestaff of the three Environmental Divisions at Carajas and Sao Luis included atotal of ten professionals having university degrees, 31 specialists withvocational or technical training and 237 workers with less than high schooleducation. 13 These workers are supported by 19 university, five vocational andfive primary level SUMEI staff in Rio de Janeiro, who dedicate roughly 60% oftheir time to company operations in Amazonia. The vast majority of the universitylevel staff in the field, however, do not have specific academic training in

10 Project Completion Report dated May 31, 1989, Part I, para. 18. CVRDhas also hedged on its commitment under the Loan Agreement to "maintain theorganizational arrangements and staffing" for environmental control bymarginalizing the very capable former coordinator of the environmental andAmerindian protection components within SUMEI and by substituting the head ofthe Environmental Division at the mine site, who was an ecologist, by anagronomist having little prior ecological training and experience.

XI The former GF-AAM member was Professor Aziz Ab'Saber, a retiredgeographer from the University of Sao Paulo, who was interviewed by OED on April10, 1989. The decreasing effectiveness of GEAMAM is attributed by some observersto significantly diminished attention by, and the greatly reduced leverage of,the Bank -- which had been a major supporter of this group -- once the CarajasProject was completed. This, in turn, raises the more general issues of thesustainability of such environmental advisory panels once direct Bank involvementceases and the Bank's own responsibilities (if any) for longer-run environmentaloversight in such cases once the investment projects it finances enter theoperation stage.

12 PCR, op. cit. para. 18. In its observations on the earlier draft ofthis report, CVRD disagreed with the view that the CIMAs have become lessimportant and that GEAMAM has a largely "decorativ3 function," affirming insteadthat the latter continues to be active and that "CVRD is making a great effortto implement all of its recommendations. The CIMAs, in turn, are operating aslocal environmental auditing agencies, detecting problems and proposing solutionswhich are channelled to the respective Environment Departments for analysis."

13 Of these totals, four university, 15 vocational and 103 primary levelstaff were located in Carajas, while six university, 16 vocational and 134primary level staff were based in Sao Luis. Among the latter, moreover, twouniversity, nine vocational and 86 primary level personnel were in the Divisionresponsible for the railroad, while the remainder were assigned to the Divisionfor port operations.

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environmental matters, 14 while most of the low-skilled employees based atCarajas and Sao Luis are responsible for physically carrying out theenvironmental vigilance and recuperation activities briefly described in thefollowing sections. 15

2. Environmental Control and Preservation at the Mine Slte

7.08 Included among the envirormental control activities at the Carajasmine site is the monitoring of air and water quality. Such activities have, infact, been undertaken in the areas under CVRD's jurisdiction at least in partin response to a clause in the Loan Agreement requiring the company to prepareand carry out a pollution control program satisfactory to the Bank. This program,more concretely, was to include measures to control marine pollution in the portarea and dust, noise and water run off at all project construction sites. 16

Around the mine site, more concretely, air quality is sampled at six collectionpoints on a monthly basis. Water quality is also monitored through the physical,chemical and biological analysis of samples taken four times a year at fifteenlocations both inside and on the periphery of CVRD's concession. These sitesinclude the two retention lakes for iron ore run off and the tailing pond forthe manganese mine, as well as several spots on the nearby Itacaiunas, Geladoand Parauapebas Rivers, especially near the places where the Carajas railroadand project roads cross these waterways.

7.09 The OED/SEPLAN mission was unable to obtain the results of air andwater quality monitoring activities at Carajas from CVRD. 17 Although

14 The situation at the port is apparently better than that at the mine inthis regard. CVRD higher level environmental staff at both locations, butespecially at Carajas, should, nevertheless, be reinforced by the hiring oftechnicians with more specific environmental backgrounds, while existingpersonnel would undoubtedly benefit from additional training.

15 In its observations on the previous version of this report, CVRDindicates that it is aware of the need to provide specialized technical trainingto its environmental staff, that the areas of greatest deficiency and the aspectsto be covered have been identified and that a training program is in progress.

16 Loan Agreement, op. cit., Section 3.10(f). More specifically, CVRD wasrequired to present its pollution control program for the Bank's approval byDecember 31, 1982. A comprehensive monitoring program was designed by CETESB onCVRD's behalf and has been subsequently and, for the most part, satisfactorily,implemented.

17 In commenting on the draft of this report, CVRD affirms that "on theoccasion of the OED/SEPLAN mission, the monitoring networks were lese extensivethan at present and the information produced up to that time was in the finalphase of being organized in a data base and, thus, could not be provided to themission. Currently, the situation is different as the present monitoring network(air and water) covers both iron ore and manganese mining, as well as providingthe 'background' for other areas (ie., the gold project at Igarape Bahia and thecopper project at Igarape Salobo). Monitoring of air quality is done through

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environmental staff at the mine affirm that no significant changes in air orwater quality have occurred since the outset of the project, this could, thus,not be independently verified by the mission. It is clear, however, thatmonitoring data from the mine site, which have been generated since 1983, arenot being systematically processed and analyzed by CVRD. In terms of air quality,more specifically, it is, in fact, likely that mining operations have had arelatively minor impact. This is largely due to the particular characteristicsof Carajas ore including its relatively high water content which diminishes theamount of dust generated during processing and transport operations. is

7.10 Studies undertaken between 1983 and 1986 by researchers at the GoeldiMuseum in Belem, on the other hand, indicate that water quality in the areasaround the Serra dos Carajas has, in fact, been altered as the result of humanintervention in the region. 19 The evidence of such alteration includes changesin color, increased turbidity, a relatively high concentration of sediments andrelatively low concentrations of dissolved oxygen, together with the presenceof fecal coliforme at various localities. The principal areas affected includeseveral streams, or igaranR, near the Serra dos Carajas and the Verde andParauapebas Rivers. The Goeldi Museum scientists recommend that improved samplingprocedures be developed and additional studies undertaken in order to bettercharacterize regional water quality problems, as well as to guarantee adequatecontinuity of water resource monitoring, giving special attention to gold,manganese and copper mining areas both within and near CVRD's concession.

monthly collection land analysis] of dust at 12 points (as compared with 6 atthe time of the OED/SEPLAN mission)... .Water quality monitoring covers the basinsof the Itacaiunas River with 15 sampling points and the Parauapebas River with30 sampling points, with analysis every other month (at the time of theOED/SEPLAN mission, there were only 15 points)....Collection initiated inDecember 1982 under convenio with the Goeldi Museum, but was taken over by CVRDin 1985 (with) analysis carried out at the water treatment station at Carajas."

18 Anderson, op. cit., pp. 10 and 26. With respect to the latter aspect,Anderson observes that "the richness of the iron ore precludes the need forconcentration or beneficiation other than crushing, grinding, washing andclassification to obtain fine-grain ore for sinterization and naturalpellets....thus greatly diminishing the environmental impact of miningoperations....eBecause of the high rainfall at the Serra, the water content ofthe ore is typically 9Z in the rainy season and 6-7% in the dry season....Although it greatly increases transport expense, this... *reduces the dust producedduring the mining and transport of ore."

19 Amaral, et. al. "Projeto Estudo e Preservacao de Recursos Humanos eNaturais da Area do Proj eto Ferrro-Carajas," final report to CVRD containingthe results of research carried out by the Museu Emilio Goeldi between 1983-87under contract to CVRD, Belem, 1988. In its observations on the preliminaryversion of this report, CVRD acknowledges that these finding are corrects, butstresses that they were caused by "interferences external to the iron oreproject."

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7.11 At present, waste waters from iron ore mining operations appear tobe adequately treated in two sedimentation lakes, the larger having an area of314 hectares and the smaller an area of 102 hectares. Considering that theestimated saturation period for the larger of these lakes is roughly anotherdecade, however, an alternative solution will have to be developed by CVRD inthe future. The tailing pond for the manganese mine, in contrast, already appearsto be largely saturated and, thus, requires more immediate attention in termsof the identification of a more adequate solution for the retention of sediments.There will also clearly be a need to establish a settling pond for tailingsgenerated by CVRD copper mining activities at Serra Salobo, located some 15kilometers to the north of the Carajas concession. 20

7.12 Domestic sewage from Carajas township, finally, is treated instabilization ponds. 21 In the absence of consietent reporting, it is presentlyimpossible to assess whether water quality at and near the Carajas mine sitehas improved as the result of CVRD's water resource management efforts. In anyevent, a detailed analysis of existing information should be undertaken,supplemented, if necessary, by more intensive monitoring of both surface andsubterranean water quality in the region. Furthermore, both CVRD's staff and itslaboratory facilities at the mine site will need to be expanded and upgraded inorder to carry out any such effort. 22

7.13 Also as parc of project-related environmental monitoring activities,five meteorological stations have been installed at different locations aroundthe mining concession. These sites include the Carajas airport, the iron ore mine

20 The Salobo deposits are the largest such reserves in Brazil and areestimated to contain some 1.2 billion tons with an 83Z copper content. CVRDexpects to produce on the order of 45,000 tons of concentrated copper per yearfrom this mine, which is estimated to require an initial investment of roughlyUS$ 500 million. In its observations on an earlier draft of this report, CVRDaffirms that environmental monitoring at this site is "already occurring," whilethe dam to contain sediments from the manganese mine has been expanded in orderto "guarantee greater environmental security."

21 In commenting on the draft report, CVRD observes that the sewagetreatment plant at Carajas was designed for a capacity of 25,000 people, but asthe township's population has not surpassed 8,000, through 1989, no effluentswere discharged into the region's water courses. As of January 1990, when sucheffluents began to be discharged, specific monitoring procedures have beenadopted with analysis by the Laboratory of Operation and Chemical Processes ofthe Technological Center of the University of Para.

22 Anderson (op. cit., pg. 26) reports that CVRD's laboratory at the minesite for the chemical analysis of water samples is "old and clearly in need ofrefurbishing" and is presently under the administration of a geologist who mustdivide his attention between this and other responsibilities. In commenting onthe draft report, CVRD observes that the person presently in charge of thelaboratory is a sanitary engineer with operational experience in an undertakingof similar scale to Carajas and that it plars to improve the installations andequipment of this facility.

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and the manganese mine. Based on the handful of years for which meteorologicalinformation is presently available, considerable variability exists among thedata registered at these posts, primarily reflecting differences in the locationsand altitudes of the stations which are widely scattered around the hilly Carajasregion. While it is still too early, moreover, to detect any clear tendencieswith regard to climatic variables such as temperature, precipitation and humiditythat can be attributed to human interventions in the region, these parametersshould continue to be carefully monitored.

7.14 CVRD's environmental preservation activities at the mine site, inturn, include the establishment and maintenance of botanical and zoologicalparks. The objectives of these parks, according to one of the CVRD employeesdirectly involved in their administration, are: (i) to preserve plant and animalspecies; (ii) to educate both those who live in Carajas township and visitorsfrom outside the CVRD concession with respect to the importance of speciespreservation; (iii) to raise animals for purposes of repopulation, giving specialemphasis to primates and studies of feeding, behavioral and reproductivepatterns;. (iv) to produce seedlings for reforestation, particularly with speciesthat are native to the region; and (v) to provide recreational opportunities forlocal residents and visitors. 23 In order to accomplish these goals, however,the CVRD staff responsible for these parks needs to be increased in number andbetter trained. 24 Specific agreements with universities or scientific researchinstitutes might be the best way for CVRD to achieve its proposed objectives.

7.15 The botanical park at Carajas is located in a 100 hectare area andpossesses research installations including a herbarium and a seed laboratoryamong other facilities. It also incorporates a 400 meter trail through nativeforest along which several hundred tree species are identified. In addition, atree nursery presently provides seedlings and transplants of some 70 differentornamental plants and fruit and lumber trees. The zoological park, in turn,occupies an area of 30 hectares and contains more than six hundred animals,particularly birds, mammals and reptiles. In order for these parks to becomemore than tourist attractionst however, it will be necessary for CVRD toreinforce classification and research efforts which (as of April 1989) hadsubstantially faltered due to a lack of trained personnel. CVRD could do thiseither by the hiring of additional qualified staff or through agreements withinstitutions such as the Museu Goeldi that already possess the scientific andtechnical capability necessary to carry out such initiatives.

7.16 A much more significant part of the project's environmentalprotection component, however, has entailed the establishment of forest andbiological reserves and other buffer zones both inside and, more recently, onthe northern and western perimeters of CVRD's concession at Carajas. In addition

23 See Nepomucemo, L. et. al. "Atividades da CIMA/Carajas" in

SEMA/IWRB/CVRD, op. cit., pp. 297-304.

24 In its comments on the previous version of this report, CVRD affirmedthat its park employees receive regular training from the Goeldi Museum andother sources.

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to CVRD's permanent preservation of some 250,000 ha within its concession, 25

in May 1989, the President of Brazil officially decreed the creation of thefollowing conservation and preservation areas: (i) the Tapirape-Aquiri NationalForest, an area of 190,000 ha located just to the northwest of CVRD's concessionat Carajas and immediately to the north of the Catete Amerindian Reserve; (ii)the Tapirape Biological Reserve, an area of 103,000 ha just to the north of theTapirape-Aquiri National Forest; and (iii) an Environmental Protection Areadenominated Igarape Gelado situated immediately to the north of the Carajasconcession. 26 The Tapirape Biological Reserve contains a high concentration ofBrazilnut trees, which have now been largely wiped out as the result ofincreasing deforestation in the Tocantins-Itacaiunas River valleys in areas tothe north and east of Carajas, and is, thus, expected to serve as an importantgenetic reserve for this species. This area, interestingly, also contains theSalobo copper deposits and other significant mineral reserves. 27

7.17 A final component of CVRD's environmental protection activities atthe Carajas mine site has involved on-going environmental education. Theseinitiatives have the objective of improving awareness among company employees,their families and the local population more generally, regarding the need forconservation measures. Among the activities pursued through this program areecological education courses, the promotion of home gardens, the commemorationof important dates from an environmental standpoint (such as "Amazon ForestWeek") and the dissemination of environmental concerns through local newspapers,television and other media, as well as through speeches and presentations atschools and other local community facilities.

25 According to Anderson (op. cit., pg. 17), within CVRD's 411,000 haconcession at the mine site, 55,000 ha were allocated to three forest reserves,nearly 41,000 ha to buffer zones and close to 157,000 ha to "protection." Inaddition, much of the total area expected to eventually be utilized for mineralextraction (approximately 132,000 ha) will remain largely preserved in forestor other native vegetation (ie. cania) until it is required for miningactivities.

26 More precisely, these areas were established by Presidential DecreesNos. 97,718 (Igarape Gelado), 97,819 (Tapirape Biological Reserve) and 97,820(Tatirape-Aquiri National Forest), all dated May 5, 1989. According to Anderson(op. cit., pg. 16), together with the 439,000 hectare Catete Amerindian Reserve,designation of these areas as reserves could "assure preservation of over onemillion hectares in a region that will probably be largely deforested by the endof the century." It also provides a significant buffer between the areacharacterized by increasing settlement immediately to the north and south of theCarajas concession and the, thus far, considerably less occupied Xingu Rivervalley farther to the west.

27 In addition to large amounts of copper, substantial quantities of gold,molybdenum and silver, se well as radioactive deposits, have been detected inthis area according to Santos, "Recursos Minerais," op. cit.

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3. Environmental Control and Protection at the Port

7.18 Under the project's environmental component, the monitoring of airand water quality is also carried out by CVRD at the port site in Sao Luis. Forthe monitoring of surface water and sediments, more specifically, a total offourteen sampling stations were established, including four in Sao Marcos Bayjust beyond the port terminal installations, seven in the train unloading areaand three in the ore storage y, rds, beginning in 1985. Likewise, starting in1987, eleven sampling stations (including three in 1990) for the monitoring ofsubterranean water quality have been established in the rail and port terminalareas. Finally, nine air quality monitoring stations have been set up immediatelyaround the port site, supplemented by three additional such stations at variouslocations in the city of Sao Luis and another station at the nearby historicaltown of Alcantara.

7.19 According to CVRD, a wide range of mineral dust and other dischargesand effluents are monitored at the port site. OED/SEPLAN mission interviews withCVRD environmental officials at Ponta da Madeira, as well as with representativesof SUMEI in Rio de Janeiro, revealed, however, that, although environmentalmonitoring activities do occur on a regular basis, as at the mine site,systematic reports concerning air and water quality at the port are not readilyavailable. 28 There, thus, appears to be a need to develop better procedures forthe processing and dissemination of the information generated through air andwater quality monitoring activities, together with the possible revision ofcollection points and sampling frequencies. In addition, there is a need toexpand and improve laboratory facilities and computational equipment, as wellas to increase the number of technicians directly involved in pollution controlin the port area. 29 Despite these problems, however, CVRD's air and waterquality monitoring appears to be considerably more adequate in Sao Luis than atCarajas.

7.20 Potential air pollution problems at the port site, moreover, aremitigated by two key factors, the relatively high water content of Carajas orealready mentioned in para 7.09 above and the prevailing wind direction which

28 The OED/SEPLAN mission was able to obtain only a single report preparedby CETESB from CVr.D, but this document, while appearing to contain all therelevant air and water quality parameters, nevertheless, required substantialupdating. Attempts by the mission to obtain information directly from CETESB inSao Paulo were also unsuccessful.

29 Based on interviews with the chief of CVRD's Environmental Division forthe port, moreover, Anderson (op. cit., pg. 28) observes that additionalenvivonmental personnel will be required once large shipments of pig iron andferromanganese begin since pollution as the result of iron run off and seepageis likely to increase. In commenting on the preliminary version of this report,CVRD indicates that "the technic.,l staff at the present laboratory at the portis sufficient. Automatic data processing has been introduced. A definitivelaboratory is expected to be build during 1991, recently purchased equipmentwill be put into operation and additional specialized technical personnel willbe hired."

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blows from the port to the sea. Reflecting these characteristics, monitoringdata indicate that, with the exception of the ore storage area, air-bornesediments are actually lower at Ponta da Madeira than (due to other industrialand vehicular sources) at the neighboring city of Sao Luis. In any case, theyappear to be well below internationally accepted limits. On the other hand,marine pollution, caused primarily by oil discharges from cargo ships in the portarea, is apparently a recurring problem despite CVRD's commitment under the LoanAgreement to develop and implement a plan for the control of such pollution. 30

7.21 Two waste water treatment plants are used by CVRD in the port area.One is a conventional sewage treatment plant for domestic effluents, while theother consists of a decantation tank and stabilization pond located near thearea where iron ore is unloaded from trains prior to being reloaded onto ships.Insufficient information made it impossible for the OED/SEPLAN mission to assessthe efficiency of these treatment systems. However, this should be verified inany future or more detailed evaluation of project environmental protectionmeasures. A reforestation program also exists at the port site involving roughly40% of the 2,500 hectare area occupied by CVRD. Various tree species are beingplanted in order to form a green belt around the rail and port terminal areas.

7.22 A meteorological station has also been installed at Ponta da Madeira.The principal purpose of this station is to gather information that would permita more complete analysis of atmospheric pollution problems in the area. As wasalso the case at the Carajas mine site, finally, CVRD has undertaken a seriesof environmental education activities both for its own employees and localcommunities at the port site in Sao Luis. These activities are essentially thesame as those carried out at the Carajas mining concession briefly described inpara. 7.17 above.

4. Environmental Protection along the Caraias Railway

7.23 The Carajas railroad is maintained by four stations, one located atSao Luis which is responsible for maintenance activities between the portterminal and kilometer 212, the second at Santa Ines (responsible for the stretchbetween km 212 and km 450), the third at Pequia -- near Acailandia --

30 Anderson (op. cit., pg. 21) indicates in this connection that, eventhough the Bank's Appraisal Report for the Carajas Project (para. 5.52) mentionedthat CVRD was engaged in a three year study to define measures to prevent marinepollution at Ponta da Madeira, the current head of the Environmental Divisionat the port, who has occupied this position since 1983, was unaware of any suchstudy. In commenting on the draft report, CVRD affirms with respect to maritimeoil discharges in the port area that it possesses a water quality monitoringprogram with two anniual campaigns and the only accidental spill that has occurredthus far was the result of the grounding of the ship "Hyundai" in 1988 at adistance of six miles from the port.

31 As part of this program, some 120,000 seedlings, transplanted from anursery established by CVRD at the port area, were planted between November 1988and April 1989.

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(responsible for km. 450 to 650) and the fourth at Maraba (km. 650 to 890). Soonafter construction was completed, a process of restoration of the vegetationremoved during installation of the railroad was initiated in the strip roughlyforty meters wide on either side of the railway. This was done through a processknown as "hydroseeding,It using a variety of native and exotic grass and legumespecies. 32

7.24 Thus far, this treatment appears to have been largely successfulboth in controlling soil erosion and in restoring vegetation to the immediaterail corridor. In several stretches along the railroad, however, erosioncontinues to be a problem and additional control measures, including improveddrainage and further restoration of vegetation, needs to be undertaken by CVRD. 3In addition to planting different grass and legume varieties, CVRD has alsoinitiated the planting of trees produced at the nursery in Sao Luis along therail line. 34 Roughly 90,000 seedlings were planted during the eight monthsprior to the OED/SEPLAN mission and, according to CVRD environmental officials,the total prcgram is expected to extend over 15 years. This effort, however,should be accelerated.

7.25 Finally, CVRD, through its forestry subsidiary (Florestas Rio DoceSA) operates a number of experimental stations and forest reserves at variouspoints along the Carajas-Sao Luis corridor. These include a 17,000 ha reserveat Maraba in southeastern Para, a 10,000 ha reserve at Buriticupu in centralNaranhao and smaller aread at Acailandia (2,000 ha), Pindare-Mirim (1,000 ha)and Rosario (1,000 ha), the latter three all in Maranhao. The main purpose ofthese stations is to test the technical and economic viability of differentvarieties of planted tree species (particularly Eucalyptus) for celluloseproduction. However, as will be discussed in the next chapter, the results ofthese experiments is also of direct relevance for assessing the feasibility offorest management for fuelwood and, hence, charcoal production.

32 Although hydroseeding is considerably more expensive than conventionaltechniques for the restoration of vegetation, its principal advantage is thatit permits the much more rapid reestablishment of vegetative cover, especiallyon steep slopes and, thus, more effective erosion control. Anderson (op. cit.,pg. 20) notes, moreover, that CVRD successfully adapted this technique to thespecific environmental conditions present along the railroad corridor and alsoused hydroseeding, together with other innovative measures, to restore vegetationin both the mine and the port areas.

33 In its observations on the draft report, CVRD indicates that it is awareof these problems and that, at GEAMAM's recommendation, specific actionstincluding revegetation with regional species, have been taken to avoid theiraggravation. A program to monitor (surface and subterranean) water, air and soilquality along the rail line is expected to be inaugurated during 1991.

34 Anderson (op. cit., pg. 20), however, observes that on steeper slopeswhere the risk of erosion is especially great, conditions for tree establishmentare considerably more limited particularly because of grazing activities andfires (for the most part deliberately set to clear pasture land) which havebecome increasingly frequent along the immediate rail corridor.

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5. Ecological Research

7.26 T'he environmental component of the Carajas Project likewise includedecological research activities which were undertaken, for the most part, byscientists at the Goeldi Museum in Belem. Given the previous lack ofenvironmental research in the region, these studies constitute an importantcontribution to scientific knowledge about southeastern Para and central-westernMaranhao. 35 The Goeldi Museum's work, which was undertaken between 1983 and1987, consisted largely of the following: (i) a general ecologicalcharacterization of the Carajas region; (ii) archaeological studies with emphasison salvaging sites of archaeological significance in or near the mining areas;(iii) a botanical inventory; (iv) earth science studies including the abovementioned monitoring of changes in soil and water resource quality; and (v) azoological inventory with an emphasis on terrestrial and ornithological fauna.

7.27 Even though the Goeldi team responsible for carrying out thisresearch was comparatively small, a number of relevant publications have resultedfrom this effort. Some of this work was presented at a seminar in Belem jointlysponsored the Special Secretariat of the Environment (SEMA), the InternationalWildfowl Research Bureau and CVRD in September-October 1986. 36 The finalresults of the research projects supported under the Carajas operation aresummarized in a volume presented by the Goeldi Museum to CVRD in January 1988. 37

This report, while containing important information from a scientific standpoint,does not, however, attempt to assess the environmental impacts of the iron oreproject as such. On the other hand, it does provide key elements of what couldbe used as an initial frame of reference (or environmental base line data)against which future impacts associated with the Carajas Project and other majorinterventions in its area of influence can be gauged. It would be extremelyuseful, therefore, if the Museum were to further integrate the various componentanalyses so as to present a more synthetic overview of the regional ecology. 38

7.28 In briefly reviewing the ecological studies conducted in connectionwith the Carajas Project, finally, the OED/SEPLAN mission concluded (and soindicated to CVRD) both that the work undertaken thus far by the Goeldi Museumshould be continued and extended to other aspects of the natural environment in

35 Prior to the work supported by CVRD in connection with the Carajasoperation, the Goeldi Museum had undertaken studies in the area between theAraguaia-Tocantins and Xingu River valleys in the mid and late 1950's, but, ingeneral, the project region was (and is) still poorly known in scientific terms.

36 The papers presented at this seminar, including those by severalresearchers from, the Museu Goeldi (eg. articles by Silva, Novaes and Oren) weresubsequently published in SEMA/IWRB/CVRD, op. cit.

37 See Amaral, et. al., op. cit.

38 This, in fact, was directly recommended by the OED/SEPLAN mission toMuseu Goeldi staff involved in this research at a meeting in Belem on March 31,1989.

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the region and that a more holistic or integrated approach should be pursued infuture research efforts. Goeldi Museum scientists have, in fact, stronglyindicated their interest in continuing to undertake environmental research inthe Carajas corridor, not only because the area uaider CVRD's control is likelyto be one of the few places in the region not subject to increasing deforestationover time, but also on account of its broad range of ecosystems, ready accessand excellent infrastructure. CVRD, however, appears to be reluctant to providesignificant additional financial support for basic scientific and ecologicalresearch in the area. 39

7.29 The continuation of scientific research in the Carajas corridor, inaddition to permitting further improvement of the still incomplete informationbase concerning the region, would also facilitate the evaluation of environmentalchanges in the area over the long run. This is particularly relevant in the caseof the iron ore operation whose productive life may extend for as long as 500years. In this connectiono more specifically, the OED/SEPLAN mission recommendedthat:

li) CVRD should continue to support ecological research activitiesin the Carajas region to be undertaken by interested Brazilianand foreign scientists under the coordination and supervisionof the Goeldi Museum or some other scientific agency (possiblyincluding a subcommittee of a strengthened GEAMAM);

(ii) special emphasis should be given to the monitoring ofenvironmental impacts in the Carajas corridor in general andto studies designed to assess the availability and quality ofwater and soil resources in particular, since these are likelyto represent important constraints on future developmentpossibilities in the region;

(iii) future research should also seek to improve existing knowledgeand understanding of the physical environment, includinggreater information on climate differences and changes, at thesubregional level; and,

39 Anderson (op. cit., pg. 31) attributes the absence of a greaterappreciation of the need for continuing research at Carajas to a "lack ofscientific perspective within CVRD as a whole, [a] situation [which] can onlybe reversed through a firm commitment by management to promote scientificallyrelated activities." To correct this problem, he proposes that, in addition tomaking a long-term commitment to basic research in the region, CVRD should hirea senior scientist "of sufficient stature to obtain financial support fromnational and international funding sources.... [to develop] a multi-disciplinaryresearch program that should include collaboration with scientific institutionsin Brazil and abroad." He further recommends that the Bank "assume an active rolein encouraging CVRD to take these steps." In commenting on the draft report,however, CVRD disagrees with this view, affirming that it maintains variousconvenios with scientific institutions in Brazil and abroad and that "it hasn'tmeasured its efforts to allocate resources for research of scientific interestin its areas of activity."

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(iv) this research program should provide direct support throughfellowships and research grants to capable students at boththe masters and the doctoral levels who are interested inpreparing theses or dissertations on aspects related to theregional environment and development.

6. Environmental Zoning and Related Measures

7.30 The final major element of the environmental protection componentwas the development and implementation of an environmental work program for theproject area. Even though its content was not specified in detail, the LoanAgreement did require CVED, together with the "appropriate environmentalagencies" of the Brazilian Government, to prepare "a work program, satisfactoryto the Bank, related to the environment of the Carajas Project (includingenvironmental zoning, ecological stations, setting aside of conservation tracts,establishment of buffer zones, biotic inventories, and other areas ofenvironmental protection), and thereafter carry out such work program, jointlyor with the assistance of such agencies, in a manner and according to a timetablesatisfactory to the Bank." 40 As indicated in the previous chapter, CVRDsubmitted the proposed work program by the date required under the Loan Agreementand it was approved shortly thereafter by the Bank.

7.31 Aside from establishment of biotic inventories, conservation areasand buffer zones within or on the immediate periphery of CVRD's concession (asdescribed in para 7.16 above), the results of this subcomponent appear to havebeen limited to' a set of studies later published by SEMA and CVRD, includingpart of the ecological research by the Museu Goeldi briefly discussed in thepreceding section. 41 While, as suggested above, these studies are ofconsiderable scientific relevance, they did not contribute directly to theenvironmental actions taken under the Carajas Project. Most notably, the workcarried out under this subcomponent outside the Carajas mining concession didnot lead to any kind of effective environmental zoning exercise in the project's

40 Loan Agreement, op. cit., Section 3.10(2). The date by which the workprogram was required to be presented to the Bank was September 30, 1982. The"appropriate environmental agencies" apparently included SEMA, the nationalforestry institute (IBDF) and SUDAN, among others, with which CVRD was alreadyworking at the time of project appraisal "to obtain a technical and ecologicalevaluation of the project and assistance in biotic inventory, conservation andother environmental necessities," according to the SAR (para. 5.51). Section 3.10of the (Loan) Guarantee Agreement signed by the Bank and the Brazilian federalgovernment for the Carajas Project, in turn, stipulated that "the Guarantor shallcause its environmental agencies to fully cooperate with the Borrower [ie. CVRD1in the preparation and execution of the program referred to in paragraph (e) ofSection 3.10 of the Loan Agreement in the terms set forth therein." Neither theLoan Agreement, nor the Guarantee Agreement, however, identified the federalenvironmental agencies to which these clauses specifically referred.

41 SEMA/IWRB/CVRD, op. cit.

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area of influence. 42 In short, no larger environmental, land use or naturalresource planning or management process was promoted at the regional level underthe component. *

7.32 Furthermore, on the basis of the information available, it is unclearwhether or to what extent government agencies other than CVRD actuallyparticipated in the preparation and execution of the proposed environmental workprogram, except to sponsor seminars and ecological research. 44 What is clear,however, is that there was no direct involvement of the Grande Carajas Programor of state and local planning agencies in this effort. Nor, apparently, wasthere any significant involvement of SUDAN, the entity specifically responsiblefor regional development in Amazonia. As a result, the operation and the Bankappear to have missed an excellent potential opportunity to encourageenvironmental planning and more rational land use and development in the Carajascorridor, as well as to better anticipate and ameliorate adverse projectenvironmental impacts in the project's larger area of influence.

7. Overall Assessment of CVRD's Environmental Efforts

7.33 Altogether, CVRD spent some US$ 64.4 million equivalent between 1982and 1987 on environmental control and protection activities under the Carajasoperation, a figure which is equivalent to roughly 2.2% of total project costs.Slightly over three-fifths of this total (US$ 39 million) was utilized forhydroseeding and landscaping activities, primarily, but not exclusively along

*2 The closest approximation to any kind of ecological or environmentalzoning undertaken in connection with the Carajas Project appears to have beena geomorphological regionalization study by Professor Aziz Ab'Saber (who was amember of GEAMAM at the time) that was later published in the SEMA/IWRB/CVRDvolume (pp. 201-232) cited above under the title "Aspectos Geomorfologicos deCarajas." Professor Ab'Saber's regionalization was later also utilized in CVRDIsdiagnostic study entitled Impacto Ambiental e Desenvolvimento Socio-economicoao Longo da Estrada de Ferro Caralas (op. cit.) which contained a chapter thatpresented a "geo-ecological characterization" of the Carajas corridor.

43 In its observations on the earlier version of this report, CVRD notesthat the first environmental zoning proposal developed by the company, dated1985, covered the Carajas Iron Ore Project concession and was based on studiesby the Goeldi Museum and GEAMAM researchers. More recently, a "macro-plan" foruse of the area of the Carajas concession was completed in 1989.

44 The Bank's PCR (para. 19) argues that implementation of the measuresincluded in the environmental action program "for areas beyond CVRD's directcontrol depended directly on the Government's environmental agencies....Implementation of these measures, which were not part of the project financedby the Bank, was less effective due to the weakness and lack of resources of[these] agencies. Implementation of these measures could have been improved ifthe original project design had provided some funding for strengthening of theinstitutions concerned." While the latter statement is undoubtedly true, theinformation available to the OED/SEPLAN mission suggests that agencies other thanCVRD may have had virtually no participation in these activities at all.

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the railroad. The second largest expenditure category was drainage and effluentcontrol which accounted for just under 30% (US$ 18.6 million) of the total. Theother three expenditure items (air and water quality monitoring, zoo-botanicalpark and research) together absorbed the remaining 11% (US$ 6.8 million).

7.34 The hydroseeding, landscaping and drainage measures, which togetheraccount for nearly 902 of project environmental protection costs, interestingly,are also essential for on-going project operation and the maintenance of projectinfrastructure. 65 This is especially evident in the case of those actions takento control erosion control in order to avoid damage and/or disruptions to therailroad. In this sense, these were clearly good investments in economic, as wellas environmental, terms and reveal that CVRD is aware of the frequent convergenceof environmental preservation and operational concerns. Not surprisingly,moreover, as the Bank's PCR indicates, these are also the areas where CVRD'senvironmental management has bean most consistent and where its future"environmental" efforts are likely to be largely concentrated. 46

7.35 In short, as the PCR concludes, environmental protection measuresat the Carajas mining concession, immediately along the railroad and in the portarea have been generally effective and are likely to be sustainable given CVRD'sproven capabilities and self-interest in guaranteeing adequate operationalconditions for project infrastructure and mineral extraction activities. 47 Onthe other hand, those environmental measures which do not offer a clearlyforeseeable return to CVRD -- particularly basic scientific and ecologicalresearch -- are less likely to be sustained, while other measures -- especiallythe monitoring of air and water pollution -- although generally sufficient thusfar, need to be further strengthened in order to adequately counter threats tothe environment directly associated with future developments in the region. Theseinclude both the expansion and diversification of mining activities within CVRD's

45 In commenting on the earlier version of this report, CVRD acknowledgesthat its investments in hydroseeding, landscaping and drainage were, in fact,elevated "because this was the period of implantation of the project...It isimportant to stress that the level of environmental investment should beconsidered from a dynamic standpoint throughout the life of the project. Justas an example, in the 1988-89 period, this investment was on the order of US$7 million in the mine, railroad and port areas. The corresponding figures for1990 and 1991 should be on the order of US$ 2.3 and 3.2 million."

416 The PCR (ibid. para. 18) states, more specifically, that "environmentalactions related directly to mining, transport and bulk handling are exemplary,[while] environmental monitoring, education, conservation and basic research havebeen weaker." Anderson (op. cit., pg. 26), in turn, affirms that "hydroseedingand landscaping in critical areas of the mine, along the railroad and at the portare especially impressive."

47 PCR, para. 32. It adds that "environmental management in these areasis simplified by the fact that protection measures have been well designed fromthe beginning and that CVRD, which has efficient envireimenrtal staff and a goodtrack re i~r. . - .

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concession itself and increasing industrialization and urban growth along muchof the Carajas corridor. "3

7.36 Outside the areas under CVRD's immediate dominion, on the other hand,environmental preservation and control were almost altogether lacking during theproject implementation period, strongly contrlbuting to a situation of largelyuncontrolled rural settlement and urban development, accompanied by increasingenvironmental devastation, which will be described in some detail in the nexttwo chapters. As a result, while the Carajas Project is, in many ways, anexcellent example of effective environmental management associated with theirstallation and operation of large mining and transport facilities, at the sametime it is also an example of inadequate environmental planning and control inthe larger region directly and indirectly affected by these investments. Whilecredit for the former can be attributed jointly to CVRD and the Bank, whichstrongly supported -- indeed insisted on -- proper environmental protectionmeasures in connection with the Carajas Project, blame for the latter must alsobe shared between the two.

8. The Bank's Role

7.37 As noted in the first section of this chapter, the Bank essentiallydelegated much of the supervision of the environmental aspects of the CarajasProject to CVRD, more specifically to GEAMAM#i the CIMAs and the company'sprofessional envirormental staff. While the idea of developing an internalenvironmental monitoring capability within CVRD was, in fact, a good andnecessary one, in retrospect it is evident that, in practice, this alone wasnot sufficient to assure full compliance with the environmental covenants of theLoan Agreement, especially in relation to the environmental planning andmanagement measures to be taken outside CVRD's immediate areas of interest andlegal and physical control. In any event% such measures were only vaguely definedin substantive and in institutional terms at the time of project appraisal, anambiguity which is reflected in the Loan Agreement itself.

7.38 In synthesis, it appears, in hindsight, that Bank supervision of theenvironmental component and, more importantly, Bank monitoring of the physicalenvironmental impacts of the Carajas operation in its larger area of influence,should have been considerably more intensive from the outset. Bank oversight ofthe project's environmental component was, in fact, clearly foreseen in the LoanAgreement through a specific clause which required that CVRD, "at the Bank'srequest, exchange views with the Bank on the adequacy and progress of allenvironmental, ecological and pollution control actions undertaken by the

48 As Anderson (op. cit., pg. 28) observes, "although CVRD's pollutioncontrol efforts are exemplary, this should not justify decreased expendituresfor monitoring. Future mining of less concentrated minerals such as copper,increased transport and shipping of less chemically stable materials such aspig iron and population growth and industrialization in the port and along therailroad represent potentially serious challenges to the maintenance ofenvironmental quality within the project area. The impacts of these activitiescan only be assessed if crucial environmental parameters are adequately monitoredboth before and after these activities begin."

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Borrower with regard to the execution and operation of the Project.," 49 However,due, in all likelihood, to a combination of the comparative shortage of Bankenvironmental staff during the early and mid-1980's and CVRD's own substantialenvironmental monitoring capabilities, dank supervision efforts in this area werelimited. '

7.39 The more serious shortcoming with regard to the Bank's participationwith respect to the physical environmental aspects of the Carajas operation,however, is the narrow approach taken in the initial definition of potentialproject or project-related environmental impacts, both in spatial and in temporalterms. Since this failing was already discussed in some detail in Chapter Vabove and will be revisited ±n the final chapter of this report, it will not befurther examined here. It is important to observe, however, that, even had theBank's supervision of the project's environmental component been significantlymore intenoive than it, in fact, was, this probably still could not havecorrected the deficiencies which resulted fundamentally from the absence of amore adequate approach to regional environmental planning and management ininitial project design.

7.40 Finally, it is also evident in retrospect that the terms of the LoanAgreement itself were insufficiently well defined to adequately guide eitherCVRD or those responsible for project supervision in the Bank with regard totheir responsibilities for environmental planning, monitoring and preservationin connection with the Carajas Project. Section 3.10 of the Loan Agreement statestextually that "the Borrower shall take all action as shall be required to ensurethat the execution and operation of the Project are carried out with due regardto ecological and other environmental factors" prior to indicating the morespecific requirements with respect to the activities of GEAMAM and the CIMAS,the preparation and implementation of the environmental "work program," pollutioncontrol measures and the "exchange of views" be:ween CVRD and the Bank which havealready been commented upon above. This general statement, however, is unclearboth as to what "due regard to ecological and other environmental factors" meansand as to what "operation of the Project" entails. Some of the problems whichhave subsequently arisen as a result of these ambiguities will be addressed inthe concluding chapter of this report. Suffice it to say at this juncture that,

49 Loan Agreement, op. cit., Section 3.10(g).

50 Based on his interviews with CVRD environmental personnel, moreover,Anderson (op. cit., pg. 25) affirms thet "key staff at CVRD report a lack ofcontinuity in the Bank's inputs concerning the environmental components of theProject, which has severely hampered its effectiveness." The OED/SEPLAN mission,however, was also informed by CVRD environmental staff that, from the outset,Bank environmental personnel, and Bank operational staff more generally, werehighly supportive of their attempts to convince CVRD management of the need toinclude, maintain and/or strengthen environmental control and protection measuresas part of the Carajas Project. Conversely, the Bank's withdrawal from theCarajas operation after physical implementation was completed is seen as beingunfortunate from the standpoint of the sustainability of environmental protectionefforts at CVRD, particularly in those areas where these efforts do not closelycoincide with operational priorities.

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in the future, Bank Loan Agreements should be considerably more explicit withrespect to the environmental management obligations of Borrowers (and, ifapplicable, Guarantors) for projects such as the Carajas operation that arelikely to have significant direct and indirect environmental repercussions.

B. Protection of Amerindian Communities '1

7.41 The area of influence of the Carajas Project is presently estimatedto be the homeland of some 14,000 Amerindians living in over 130 villages andrepresenting 15 different tribal groups. In order to mitigate the potentialadverse effects of the iron ore operation on these communities and to preparethem for the chanyis expected to occur as the result of the future occupationand development of the Carajas corridor, CVRD signed a contract with the NationalIndian Foundation (FUNAI) in mid 1982 for implementation of an "AmerindianSpecial Project." 52 As indicated in Chapter V above, this project was designedto provide administrative, land demarcation, health, economic development andeducational services to Amerindian populations in the area of influence of theiron ore operation. The CVRDIFUNAI agreement was originally intended to coversome 4,500 Indians living in a radius of 100 kilometers from the Carajas mineand railroad. However, based on the suggestions of anthropological consultantshired by CVRD, the contract was subsequently extended to include a total oftwenty four Amerindian Reserves occupying large areas of the states of Para,Maranhao and Tocantins. 53

1 This section is drawn from a report by Shelton Davis, Senior Sociologistin the Environment Division of the Technical Department for the Latin Americaand Caribbean Region (LATEN) at the World Bank. The report was elaborated inconnection with the Bank's PCR for the Carajas Project and is based, in part,on a field visit to the project region in January 1989. Given the recency andcoverage of this report, OED decided not to undertake an independent assessmentof this component and is grateful to Mr. Davis for permission to reproduce hisfindings.

52 Section 3.11(a) of the Loan Agreement for the project, morespecifically, required that CVRD enter into an agreement with FUNAI, satisfactoryto the Bank, providing funding for the Amerindian Special iroject. Under Section3.05(b)(i) of the Guarantee Agreement, in turn, the Brazilian Government agreedto "cause FUNAI to: (A) enter into the agreement referred to in Section 3. 1(a)of the Loan Agreement and to perform all of its obligations under such agreementand (B) furnish to the Bank periodic reports on the status of the Amerindianpopulation living in the Carajas Project area." In both the Loan (Section 3.11)and the Guarantee (Section 3.05(a)) Agreements, moreover, it was affirmed thatthe interested parties (ie. CVRD, the Brazilian Government and the Bank) "agreethat the strengthening of measures to protect the indigenous Amerindianpopulation in the Carajas Project Area is essential to the carrying out of theProject."

53 While the hiring of anthropological consultants by CVRD was notspecifically required by the Loan Agreement, Section 3.11(b) of this Agreementdid require that CVRD "take all necessary action to assist FUNAI to carry outthe Special Project."

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1. Pre-vroiect Amerindian Situation

7.42 With the exception of the Parakana and Awa/Guaja groups, almost allof the tribes in the Carajas region had been in permanent contact with Braziliansociety prior to the project. Some of these groups (eg. the Apinaje andGuajajara), in fact, had been in contact with non-Indian populations -- includingsettlere, missionaries and government agents -- for centuries. Other indigenousgroups (such as the Xicrin-Kayapo, Gavioss and Surui), on the other hand, hadresisted such contact until relatively recently and only accepted control byFUNAI (or its predecessor, the Indian Protection Service - SPI, which wasreplaced by FUNAI in 1967) after violent conflicts occurring as a result of theexpansion of the agricultural and extractive frontiers in Eastern Amazonia beganto threaten their very existence.

7.43 Despite the significant linguistic and cultural differences amongthe various Amerindian populations in the Carajas area, several generalizationscan be made about their situation prior to implementation of the iron oreproject. First, all of these groups had maintained their native languages andtribal customs despite varying degrees of exposure to larger Brazilian ruralsociety. Traditional kinship and marriage rules, initiation ceremonies andvillage organizations, together with subsistence economies b-sed on hunting,gathering, fishing and itinerant agriculture, continued to characterize thesecommunities. Secondly, although many tribal groups had declined by as much as90X in the early stages of contact with Brazilian society and certain isolatedcommunities (eg. the Parakana and Awa/Guaja) were still in danger of extinctionas the result of disease or massacre, most Amerindian groups in the region hadsurvived the (frequently fatal) effects of diseases such as measles, influenzaand tuberculosis introduced by non-Indian settlers and were slowly increasingin size. 54

7.44 At the time the Carajas Project was initiated, moreover, FUNAI stillhad a relatively limited presence in the region. In those places where it wasactive, however, the agency's basic approach to protecting Amerindian communitieswas to attempt to transform them into self-sufficient economic units. In muchof the project area, more specifically, this meant that emphasis was given tothe promotion of extractive activities, especially the gathering of babacu andBrazil nuts, as well as to commercial agricultural (ie. rice production), grazingand handicraft production possibilities. Products generated or collected on FUNAIreservations were then traded for manufactured goods such as utensils, tools andclothing with FUNAI's intermediation. 55 Finally, even prior to Implementation

54 At the time the project was implemented, in fact, some tribal groupsin the area were experiencing a kind of "demographic take of f" and some villageshad demographic profiles (ie. high birth rates, large numbers of young people)similar to those of neighboring Brazilian rural communities.

55 This control, however, was not universally accepted as some Indiangroups (including the Gavioes on the Mae Maria reservation) asserted their socio-economic autonomy and resisted FLNAI's effortsi to monopolize thecommercialization of their forest resourcas.

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of the iron ore project, the process of frontier expansion in Eastern Amazonia,as briefly described in Chapters III and IV above, had already become anincreasing threat to the territorial integrity, habitat and physical and culturalsurvival of many tribal groups. Thus, the Carajas Project was clearly just one -- although perhaps the most important -- among numerous elements in a rapid ruralsettlement and urbanization process affectiag Amerindian areas in the region thathad begun at least a decade earlier.

2. Design and Implementation of the Amerindian SRecial Prolect

7.45 As noted in Chapter V, the Amerindian Special Project was introducedrelatively late into the Carajas operation. In fact, CVRD had decided upon thedesign of the mine and the routing and construction of the railway long beforeany consideration was given to the potential direct or indirect impacts of theseinvestments on the Indian populations in the region. None of the environmentalstudies which CVRD commissioned in the decade prior to Bank approval of the ironore operation specifically contemplated tribal commiunities, nor did FUNAIundertake any ex-ante analysis of the possible impact of proposed projectinvestments on the indigenous groups for which it was responsible.

7.46 Preparation of the Special Project presented to the Bank by FUNAIin January 1982, moreover, did not involve the participation of the affectedAmerindian populations. Nor was it based on an anthropological assessment ofthe needs and desires of these communities. Instead, for the most part it focusedon the expansion of FUNAI's physical and administrative infrastructure in theCarajas corridor, both at the Indian Post (ie. on-reservation) and at theregional delegacy levels. Largely for this reason, prior to granting itsapproval, the Bank required that the Project be reformulated to give greaterattention to the provision of services to Amerindian communities.

7.47 Based on the revised proposal, in June 1982 CVRD signed a five yearcontract -Tith FUNAI providing USS 13.6 million equivalent to finance executionof socio-economic projects for indigenous populationa in the Carajas area. Thecontract stipulated that, in carrying out these projects, FUNAI would maintainits normal activities in the region including the identification, demarcationand regularization of Indian lands. It also indicated that CVRD would hire a teamof consultants to monitor implementation of the Special Project (or hereafter"Project") in the field, and that FUNAI, through CVRD, would provide the Bankwith access to Indian areas for purposes of carrying out its own supervision. 56

56 More specifically, Section 3.11(c) of the Loan Agreement required CVRDto "take all action necessary to enable the Bank's staff reasonable access to[the Amerindian) population and to any information which the Bank may reasonablyrequire with regard to the execution of the Special Project and to any furthermeasures being taken for the protection of the interests of the Amerindianpopulation ir. the Carajas Project Area." Section 3.05(b)(ii) of the GuaranteeAgreement required the Brazilian Government to "afford" Bank staff access to thissame population and information. Section 3.05(b)(iii) of the latter Agreement,in turn, required the Guarantor to "annually, before final approval of FUNAI'oprogram for the following year for the protection of and assistance to theAmerindian population in the Carajas Project Area, afford the Bank a reasonable

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7.48 From the outset, CVRD took an active interest in the AmerindianProject, placing a specific staff person in charge of it, hiring a team of eightanthropologists, two physicians and a lawyer to help monitor its implementationand using its considerable influence to ensure that FUNAI complied with itscontractual obligations. On various occasions, moreover, it intervened directlyin project execution by flying emergency food and medical supplies to tribalareas, by pressuring state and federal agenaies to remove squatters fromAmerindian reserves and by providing Indian communities with legal assistancein order to defend their lands. Despite these efforts, however, CVRD frequentlyfound itself frustrated and constrained by FUNAI's poor institutionalperformance. Illustrative of the problems experienced, during the projectexecution period, the President of FUNAI changed ten times, the agency's annualoperating budget was cut by more than 25%, its legal power under the 1973 IndianStatute was curtailed through the creation of a special Inter-ministerial WorkGroup on Indigenous Lands and it underwent a major reorganization that furtherdiminished its already limited capacity to provide health, education and otherservices to Amerindian areas.

7.49 In addition to these difficulties, there appears to have been abasic perceptual difference between CVRD and FUNAI concerning the ultimatepurpose of the Special Project. Based on the advice both of its outsideconsultants and the Bank, CVRD increasingly came to view progress in Amerindianland protection and health service delivery as fundamental to Project success,while FUNAI continued to be primarily interested in building up its owninfrastructure and capacity to establish commercialized economies at the Indianreserves in the region. As a result, by mid-po nt in the Special Projectimplementation period, as operation of the Carajas railway began and rapiddemographic growth and agrarian changes were resulting in increasing levels ofconflict and violence in the area, it became clear that FUNAI was, in f&ct,utilizing Project resources mainly to expand its own administrative structurerather than in order to provide needed land protection and social services toAmerindian communities. "

7.50 As a result, in March 1986, with about 61% of the funds that hadbeen allocated under the Special Project already spent, CVRD suspended furtherdisbursements in order to force FUNAI to address unresolved land issues,especially the demarcation of reserves and the removal of squatters and ranchersfrom Amerindian areas. This initiative proved to be effective since SpecialProject funds were increasingly directed toward land and health matters after

opportunity to comment on such program."

St Thie bias was clearly evident in the disbursement of resources underthe Special Project between 1982 and 1986, during which period nearly 80% ofthe total was spent for public works, equipment, personnel and maintenance,while only 10% was disbursed for land demarcation, 62 for health and 1% foreducation. In its comments on an earlier version of this report, however, FUNAIaffirms that "we are convinced that, in the absence of these initial investments,significant improvement in the living conditions of indigenous populations wouldnot have been possible."

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this date. In July 1987, additionally, with some US$ 3.3 million remaining inthe Special Project budget, CVRD renegotiated its contract with FUNAI, furtherreinforcing the emphasis on these areas.

7.51 This reorientation, which was recommended by CVRD's consultinganthropologists and supported by the Bank, has led to a somewhat more balancedoutcome in terms of Project expenditures. Thus, by December 1988, with a totalof US$ 12.3 million disbursed, land demarcation accounted for roughly 17% ofthese expenditures, while health services responded for 11%. Despite thisimprovement, however, approximately two-thirds of all Special Project resourceswere utilized to finance FUNAI public works, equipment, maintenance andpersonnel, while less than 1% went was utilized for Amerindian education.

3. General Proiect Achievements

7.52 As a result of the Amerindian Special Project, significantimprovements in the conditions of indigenous communities have occurred in theregion in at least two areas, health and land demarcation. This achievement isespecially evident when the experience in the Carajas region is compared withthat in other parts of Brazil where FUNAI has not benefitted from the financialand/or strategic suppoit of outside agencies such as CVRD and the Bank. Morespecifically, according to CVRD's health consultant, the increase in theAmerindian population in the region which had initiated prior to implementationof the Special Project continued during its execution period in at least sevenof the tribal communities situated near the iron ore mine in the state of Paraamong which the annual rate of population growth averaged 3.7%. s8

7.53 The principal reason for this positive situation, especially amongrecently contacted groups, was the general effectiveness of the health caredelivery system established by CVRD's medical consultant in collaboration withFUNAI. This system involved: (i) the placement of trained nurses capable ofdoing simple laboratory, diagnostic and treatment work in all of the Amerindiancommunities; (ii) the reorganization of FUNAI's mobile medical teams (or EVSs)to provide more regular visits to Indian villages; (iii) the signing of contractswith regional hospitals to provide more intensive medical care for Indiansneeding such assistance outside their villages; and (iv) the mobilization of thefederal Public Health Service (SUCAM) to spray against malaria and vaccinate theAmerindian population against other endemic diseases. As a result of theseefforts, both morbidity and mortality rates appear to have fallen significantlyamong tribal communities in the Carajas region.

7.54 Despite the apparent success of this subproject, the extent to whichFUNAI will be able to sustain these activities is questionable due to its ownpersisting financial difficulties and the imminent conclusion of the CVRD/FUNAI

58 Among the Amerindian groups surveyed, more precisely, population growthbetween 1981 and 1988 was positive in all cases, with absolute increments rangingfrom 8% to 41% over this period. Even the three Parakana groups, which came intopermanent contact with Brazilian society either just prior to or shortly afterproject initiation, were characterized by relatively high demographic growthrates.

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agreement. In fact, since 1987 it appears that there may have been a substantialdecline in the quality of health care services in the Maraba area, even thoughthe situation in this subregion is still considerably better than that inMaranhao where, even though health posts were built or renovated with SpecialProject funds, the system of trained nurses, regular EVS visits and hospitalcontracts was never established. More generally, the system set up under theAmerindian Project appears to suffer from inadequate attention to the trainingof Indian health monitors, community health education and the adaptation ofhealth care services to the cultures of local indigenous groups. Like othercomponents of the Special Project, in short, the tribal health care system wascreated without either the active participation of the beneficiary communitiesor prior anthropological assessment and has been insufficiently integrated withother health-related aspects of Amerindian life. The long-run sustainability ofAmerindian health improvements in the Carajas corridor, accordingly, is likelyto prove impossible unless more systematic emphasis is given to these culturaland educational aspects.

7.55 The other area where the Amerindian Special Project has resulted insignificant achievements is land demarcation. Largely in response to CVRD andBank pressures, over time FUNAI has come to pay greater attention to tribal landissues in the Carajas region such that, at present, more land is probablydemarcated and regularized in the project area in relation to the size of theAmerindian population involved than in any other part of Amazonia. As of early1989, more concretely, over 3.2 million hectares had been identified, demarcatedand/or regularized in 24 Indian reserves in the area of influence of the ironore project. Of these areas, only three (involving some 395,000 ha) had beeninterdicted and identified but not yet demarcated, while seven (1X230,000 ha)had been demarcated but not fully regularized and listed in the Federal PropertyRegistry and fourteen (1,620,000 ha) had been both demarcated and fullyregularized and registered. '

7.56 The principal achievement of the Special Project in this regard,however, was that CVRD was able to use its financial resources and politicalinfluence to induce FUNAI to move several indigenous areas (eg. the Apinaje andParakana reserves in 1985 and the Geralda de Toco Preto reserve in 1987) throughthe long and arduous process of demarcation and regularization. This is aparticularly noteworthy accomplishment considering, on the one hand, that Indianlands in the Carajas region have become increasingly coveted by prospectors,loggers, ranchers, squatters and other interests over the past decade and, onthe other, that significant bureaucratic and political obstacles continue toimpede more rapid demarcation of tribal areas. Deapite these noteworthysuccesses, however, a number of unresolved Amerindian land issues continue to

59 These figures, indeed, compare very favorably with the nationalperformance in relation to Indian land demarcation. As of mid-1985, of anestimated 400 total Amerindian areas throughout Brazil, 122 had still not yetbeen identified by FUNAI, 43Z had been identified but not demarcated, 33X hadbeen demarcated but not regularized and only 102 were fully regularized andregistered. In contrast, the corresponding figures for the Carajas area in early1989 were: interdicted - 4X, identified - 8%; demarcated - 30% and regularized -58Z.

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exist, while future threats to the integrity of Indian areas as the result ofexpanding rural settlement and other activities (including the growing extractionof fuelwood for charcoal production) are likely to increase in the Carajascorridor.

4. Outstanding Issues

7.57 As the CVRD/FUNAI agreement draws to a close, more specifically,there are several outstanding legal and development issues that will need to bedealt with if the future security of Amerindian communities in the Carajas regionis to be assured. On the legal side, as indicated in the previous section, atleast three tribal areas (the Apyterewa Parakana in Para and the Awa/Guaja andthe Krikati in Maranhao) either still need to be demarcated or are in a situationin which the demarcation process is under judicial review. Furthermore, in atleast five other indigenous areas, Indians have petitioned FUNAI to redemarcatetheir lands, while in four reserves, settlers (or even whole towns as at SaoPedro dos Cacetes on the Canabrava reserve) will need to be compensated andrelocated. 60 CVRD is aware of these issues and, as of early 1989, still had US$1.3 million remaining in the Special Project budget in order to complete the landdemarcation process. 61 However, it is uncertain how long this process will takegiven the substantial bureaucratic and political obstacles which continue tostand in the way of the regularization of Amerindian lands in Amazonia.

7.58 The second major area of concern is the potential impact of futuredevelopment projects and productive activities in the Carajas corridor onAmerindian areas. Nearly all of the indigenous communities in the region arealready being affected and/or are likely to be affected in the future byinvestments over which they will have little, if any, control. More concretely,at a minimum, eleven reserves are or will be traversed by roads, eleven alreadyhave illegal settlers within their boundaries or are being cleared for theestablishment of cattle ranches, nine have been invaded by garimOeiros or arethe object of mineral investigation claims or permits, eight are affected byhydroelectric projects or crossed by high voltage transmission lines, eight arethe location of commercial timber ventures, five are the site of agricultural

60 The redemarcation of indigenous areas is particularly problematicbecause Decree No. 94,945 of September 1987 mandates FUNAI to complete thedemarcation of all Amerindian lands in the country before revising the boundariesof those areas that have already been demarcated, even if erroneously.

61 These funds were expected to be allocated primarily to cover the costsof demarcation of the Awa and Krikati reserves and to resolve outstanding landissues at the Apinaje, Xicrin Bacaja/Trincheira, Mae Maria and Catete reserves.There are also funds within the current Maranhao Rural Development Project (Loan2862-BR approved in June 1987) to complete land demarcation, compensation andregularization procedures at the Geralda do Toco Preto, Urucu-Jurua and Canabravareservese In its observations on the draft report, CVRD affirms that theseissues, "which do not depend exclusively on the company's actions, continue tobe administered and monitored in order to achieve the objectives stipulated inthe second extension of the FUNAI/CVRD agreement."

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settlement projects or rural non-Indian towns and two are affected by theextraction of medicinal plants by outsiders. 62

7.59 More generally, as illustrated in Chapters III and IV above and inChapter IX below, a process of rapid industrialization and urban and ruraldevelopment continues to occur in the Carajas corridor and is having dramaticand possibly irreversible effects on both the physical and the human environmentsin the region, including the traditional habitats and cultures of Amerindianpopulations. These processes and their repercussions, moreover, can only beexpected to increase in the future, especially to the extent that Indian landsare opened up for mineral developments and timber production to fuel pig ironsmelters and/or other metallurgical industries in the Carajas corridor.Accordingly, if Amerincians are to be assured a place in the future of theCarajas area, assistance must be expanded and sustained well beyond the sums andtime horizon envisioned in the Amerindian Special Project undertaken inconnection with the iron ore operation. 63

7.60 What is required, more specifically, is the effective guarantee ofAmerindian rights -- as defined under both the 1973 Indian Statue and, morerecently, the 1988 Brazilian federal constitution -- to the exclusive use of thenatural resources on the lands they inhabit. 64 Also neeced are an educational

62 In its comments on an earlier version of this report, FUNAI suggeststhat the situation is "not as critical" as the Bank indicates in that only fiveareas are affected by hydroelectric enterprises, six by non-Amerindian occupants,and one by prospectors, while eight reserves are cut by roads. It furtherobserves that the fact that mining companies possess exploration permits forareas located inside various reserves represents "little or no threat" in viewof the 1988 Constitution's transfer of authority to the Congress to authorizeany mineral exploration and extraction on tribal lands. With respect to illicitlogging activities, in turn, FUNAI acknowledges that these "unfortunately occur"as a result of the "disorderly occupation" of the region which is totally beyondthe agency's control.

63 In its observations on the preliminary version of this report, FUNAIconcurs that continuing industrialization of the Carajas corridor is likely topresent increasing difficulties for the region's Amerindian populations. FUNAIobserves, more specifically, that "the task of protecting indigenous territories,many of which are covered by largely untouched forest, in an area characterizedby rapidly accelerating deforestation, human settlement and charcoal-basedindustrial expansion obviously surpasses the capacity of any [Amerindian)protection agency. Only a collective effort on the part of all of the entitiesinterested in environmental preservation can avoid an assault on such areas inMaranhao and Para under the presently evolving scenario."

64 Article 231 of the new constitution explicitly recognizes "the socialorganization, customs, languages, beliefs and traditions, and the rights ofIndians over the lands which they traditionally occupy, it being theresponsibility of the Union to demarcate, protect and make others respect alltheir possessions." Paragraph 2 of Article 231, more specifically, affirms thatthe "lands traditionally occupied by Indians are destined to their permanent

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campaign designed to prepare Indians to manage, protect and develop theseresources for their own benefit and that takes into account the unique social,cultural and environmental characteristics of the Carajas region. In the absenceof such measures, even though increased administrative control over Indiancommunities will almost certainly occur and advances in the legalization ofIndian lands may continue to take place, there will be little real assurance thatthe natural habitats and resources of Amerindian populations will be adequatelyprotected or that the self-development of indigenous communities and cultureswill be effectively promoted.

5. The Bank's Role

7.61 As suggested in the preceding paragraphs, the Bank's role in supportof CVRD in its often difficult dealings with FUNAI was of considerable importancefor the tangible (and hopefully sustainable) achievements of the AmerindianSpecial Project. According to the PCR for the Carajas Project, the Bank playeda significant role in ensuring effective implementation of the Amerindiancomponent and in particular in supporting CVRD "to control FUNAI" in theexecution of the Special Project. 65 Unlike the environmental component reviewedearlier, moreover, specific Bank supervision missions (consisting either ofregular Bank staff or specialized consultants) for the Amerindian Projectoccurred regularly throughout the period when the Carajas operation was underimplementation.

7.62 While this supervision effort was motivated in part by therequirement mentioned in para 5.31 above that a mid-term report on the statusof the Special Project be sent to the Bank's Board of Directors within someeighteen months after loan approval, it reflected to an even greater extent agenuine concern on the part of Bank staff with the performance of this componentand the fate of the Amerindian populations in the region more generally. As aresult, supervision missions for this component continued to have an importantimpact on Special Project execution well after the mid-term review report waspresented to the Board in October 1984. 66 Given the relatively smooth execution

poscsssion, (including] exclusive use of the resources of the soil, rivers andlakes existing on them." According to paragraph 3 of the same article, moreover,the exploitation of mineral (ie. subsoil) resources and the use of waterresources for hydropower generation or other purposes on Indian lands, in turn,can only occur with explicit authorization of the federal Congress, "afterhearing the affected communities," and with their participation in the proceedsof any mineral extraction that subsequently occurs.

65 PCR, op. cit., para. 34.

66 This report concluded, more specifically, implementation of the SpecialProject up to that time had been "uneven," with relatively good progress onhealth and economic development activities but "slower progress" with regard toche protection of Indian lands. It further noted that, while combined action byCVRD, FUNAI and the Bank had succeeded in reducing some of the "bureaucratic andpolitical" impediments to progress on land matters, "constant attention rnd closemonitoring" would continue to be necessary in order to improve performance in

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of most of the other components of the Carajas Project, finally, it is likelythat Bank intervention may, in fact, have had the greatest relative impact onthe Amerindian Special Project. In any event, it is highly likely thato in theabsence of Bank intervention, many of the positive results that were achievedunder this component might not have occurred. Similarly, continued Bankparticipation through the Maranhao Rural Development Project and other futureinitiatives is likely to be an essential precondition for sustaining progressin Amerindian protection in the Carajas corridor.

C. Conclusion

7.63 Among other features, the Carajas Iron Ore Project is particularlynoteworthy for its environmental and Amerindian protection components. Theenvironmental protection component, more specifically, combined pollutionabatement and other ecological preservation measures, reflecting andincorporating the company's earlier experience in its southern mining,transportation and port complex in Minas Gerais and Espirito Santo. At the timethe Carajas Project was appraised, moreover, the design of this component wasconsidered to represent a significant innovation in Bank-assisted mining andinfrastructure operations. Its major shortcoming was that it was essentiallylimited to the areas under CVRD's direct legal and physical control. TheAmerindian Special Project, in turn, was incorporated into the iron ore operationat the Bank's insistence. While neither the environmental nor the Amerindiansubproject was directly financed with resources from the Bank loan, both werespecifically contemplated in the Loan and Guarantee Agreements and were viewedby the Bank as integral parts of the overall Carajas operation.

1. Environmental Protection

7.64 The positive results of CVRD's efforts to preserve or restore thenatural envirornment at the mine and port sites are clearly evident to the outsideobserver. The mining areas are surrounded by forest reserves and buffer zoneswhich occupy much of the company's 411,COO hectare concession. The miningconceesion, moreover, is bordered by a large existing Amerindian reservation andnewly created ecological reserves immediately to the west and northwest. In allof these areas, the native forest has been -- and is likely to continue to be -- largely maintained. In addition, areas have been acquired by CVRD near Maraba,Buriticupu and elsewhere along the Carajas corridor for forestry research, whiletree nurseries have been established both at the mine site and near the port inSao Luis.

7.65 Significant efforts to monitor and control water, dust and noisepollution, furthermore, have characterized CVRD's mining, transport and portterminal activities to date, while an agreement with the Goeldi museum hasresulted in a systematic inventory of flora, fauna and archaeological sites insubstantial parts of the project region. Through replanting and hydroseeding,additionally, CVRD has already restored or is in the process of restoring areasnear its mining and port operations and along the rail line from which vegetationhad been removed during construction. Finally, the company has carried out an

this area.

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environmental education program for its employees and local communitiebthroughout the railway corridor. In short, in many respects CVRD's environmentalprotection efforts in connection with the Carajas Project represent a verypositive example as to how environmental and productive concerns can beeffectively integrated in a large-scale investment operation.

7.66 Thus far, these initiatives appear to have effectively minimizedthe adverse environmental impacts directly associated with project implementationand operation in the territory immediately under CVRD's control. The OED/SEPLANmission, nevertheless, tentatively identified several areas where improvementsand/or more definitive solutions are required. These include additionalstrengthening -- as well as continual training -- of project environmental staff,especially at the mine site, the establishment of a more definitive tailing pondfor the manganese mine, definition of a longer-run solution for the retentionof run-off from the iron ore mining operation, increased control of erosion alongthe rail line and greater control of oil discharges by ships in the Sao Luis portarea. Other basic conclusions reached by the OED/SEPLAN mission with regard tothe environmental protection component of the iron ore project included thefollowing:

si) the administrative and technical subordination of theEnvironmental Divisions at the Carajas mine and port sites toCVRD's field Superintendencies and to its EnvironmentalSuperintendency at headquarters, respectively, has resultedin several conflicts and, at least at the mine concession, toa lower priority frequently having been given to scientificand ecological concerns relative to purely operationalconsiderations;

(ii) actions recommended by GEAMAM have not always been followedby CVRD, a fact which seems to reflect both insufficientattention on the part of company management to the suggestionsmade by this advisory group and insufficient contact by itsmembers with the daily operational realities of the CarajasProject; it is, thus, important both that GEAMAM bestrengthened and that its participants be given more frequentopportunities to visit the Carajas region and to interact withCVRD operational staff;

(iii) the processing and analysis of air and water quality data,especially at the Carajas mine site, is presently inadequate,thereby making it difficult to assess the true effectivenessof CVRD environmental control systems and equipment;

(iv) with the routinization of mining and transport activities inthe Carajas iron ore operation, there will be a naturaltendency for environmental concerns -- particularly those notalso directly associated with operational priorities -- to berelegated to a second plane; in order to avoid this, CVRDmanagement will need both to renew its commitment toenvironmental protection and to develop a mechanism thatpermits it to systematically assess the company's activities

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in this area through some form of environmental performanceauditing procese, ideally carried out either by independentconsultants or a subcommittee of GEAMAM;

(v) a detailed study of the environmental impacts of all miningactivities directly or indirectly associated with the Carajasoperation -- including the extraction of copper, manganese,gold and other minerals, as well as iron ore, in the region -- should be undertaken since development of these activitieswas clearly foreseeable on the basis of existing mineralresource potential studies for the Carajas area; 6 and,

(vi) the potential environmental impacts of the likely futureexpansion and "verticalization" of mineral-based industrialactivities in the Carajas corridor also merit detailedanalysis.

7.67 The two latter concerns are of particular importance since, as willbe discussed in some detail in the following chapters, the indirect physical andhuman environmental impacts of the Carajas Project have extended well beyond theareas under CVRD's immediate control. As already suggested in Chapter V above,the failure of the project to adequately anticipate and ameliorate the broaderenvironmental consequences of the iron ore operation at the regional level is,perhaps, its most serious deficiency from both a design and an implementationstandpoint. This shortcoming, moreover, is all the more unfortunate in light ofthe project's generally very positive record with respect to environmentalprotection within the territorial boundaries of the operation itself, even ifthis may be due more to operational than to ecological considerations ner se.The fact that a broader regional approach to identifying and dealing with theproject's physical and non-Amerindian human environmental impacts was not takenfrom the outset, furthermore, is ironic considering that precisely such anapproach was followed by CVRD and the Bank in their attempts to protectAmerindian communities in the Carajas corridor, while a more integrated regionaldevelopment focus was also applied by the Brazilian Government and the Bank inthe nearly simultaneous -- if ultimately largely unsuccessful -- effort to limitenvironmental degradation in northwestern Hato Grosso and Rondonia, whilesupporting the development of these areas through the POLONOROESTE Program.

2. Amerindian Protection

7.68 The Carajas Amerindian Special Project, following closely afterdefinition of a similar "Special Project" for the POLONOROESTE Program, was oneof the first, if not the first, concrete applications of the Bank's policy on

67 In its observations on the draft report, CVRD indicates thatenvironmental impact assessments for its gold and copper mining projects in thearea had already been concluded and was being analyzed by the environmentalcontrol agency of the state of Para. The technical documentation required inorder to obtain operating licenses for iron ore and manganese mining activitieswas likewiee being analyzed by thie agency, while operating licenses for therailway and port had already been granted.

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tribal peoples. While implementation of the Carajas Amerindian Project wasconsiderably more problematic than that of the environmental protectioncomponent, it, nevertheless, appears to have registered important and hard wonachievements, especially with regard to land demarcation and the provision ofhealth services. However, land-related issues, particularly the regularizationof tribal areas and the removal of squatters in some Indian reserves, and thelong-term sustainability of the results achieved to date remain matters ofconsiderable concern. In order to guarantee the future protection of Amerindiancommunities in the area of influence of the Carajas Project, accordingly, presentefforts in support of these populations should be continued and expanded. Thisshould be done, moreover, in such a way that tribal populations themselves areable to assume a much more active role in the definition of priorities, thedelivery of basic social services and the implementation of economic developmentprojects in benefit of their respective communities.

7.69 More generally, perhaps the most important conclusion that can bedrawn from the experience under the Carajas Amerindian Project is that theprovision of funds to an agency such as FUNAI is not, in and of itself,sufficient to guarantee that this agency will use these resources to the directbenefit of indigenous communities. To the contrary, there appears to be a commontendency for (generally resource-starved) Amerindian protection agencies inBrazil and elsewhere to use such funds primarily in order to meet their ownbureaucratic needs and/or to increase their administrative control over thetribal communities under their "protection". To avoid this tendency, a largershare of these resources should be invested directly in Indian communitiesthemselves, giving particular emphasis to land demarcation and regularization,together with the provision of adequate health services and basic educationalskills, all of which are required if Amerindian populations are to be effectivelyable to better manage and control their own affairs.

7.70 Any future program for the protection and development of theAmerindian communities in the Carajas corridor " or in other parts of Brazil,accordingly, should include the following, among other actions:

(i) a detailed assessment of the effects of large infrastructureand industrial development projects on Indian communities andtheir immediate physical environments in the early planningand feasibility stages of such operations;

68 In its comments on the preliminary version of this report, CVRD affirmedthat many of these recommendations are already being carried out in response toa Senate resolution of 1986 which obliged CVRD "as counterpart to concession ofthe use of the Carajas mine area, to guarantee the support of existing indigenouspopulations in the proximity of the conceded area and in the form agreed withFUNAI." As a result, specific agreaments were signed between CVRD, FUNAI andthe Xicrin (1989) and Gaviao-Parkateje Indians (1990) to provide support in theareas of health, education, "vigilance" and productive activity. The latterincludes a variety of activities including cattle raising and a study of wildlifemanagement under the orientation of agricultural and forest extensionists.

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(ii) the active and informed participation of the indigenouscommunities themselves in the design, implementation andevaluation of special projects on their behalf;

(iii) preparation and execution of a plan for adapting such projectsto the social, cultural and environmental characteristics ofeach indigenous community;

(iv) provision of resources and direct legal and anthropologicalassistance to tribal populations so that they can design andcarry out protection and development programs on their ownbehalf;

(v) identification, demarcation and regularization of allindigenous lands in the area of influence of large investmentprojects such as the iron ore operation prior to theirimplementation;

(vi) elaboration and implementation of a plan including the trainingof Indian health monitors, community health education andrespect for traditional Indian culture and medical practicesin any health care program specifically targeted on Amerindianpopulations;

(vii) preparation of a systematic inventory of existing naturalresources on tribal lands (including fish, wildlife, forestryand other extractive resources) and determination of how theycan best be used to satisfy Amerindian nutritional andcommercial needs; and,

(viii) development and implementation of a plan for providing Indianswith the necessary educational, organizational and financialskills so that they can manage their own resources andcommunities in a culturally appropriate and environmentallysustainable fashion.

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VIII. PHYSICAL ENVIRONMENTAL IMPACTS

8.01 This and the following chapter will respectively summarize theprincipal impacte of the Carajas Iron Ore Project on the natural and humanenvironments to date. They will also attempt to portray likely futureenvironmental consequences of the project-related industrialization of theCarajas-Sao Luis corridor, a process which has recently initiated withinstallation of the firGt four pig iron smelters in Maraba and Acailandia.Wherever possible, the specific impacts of the iron ore operation will beidentified. Hozaver, in many instances, without much greater empirical researchthan was possible to undertake in the present study, it is impossible to separatethe effects of the project from those of other public sector or (public sector-induced) private sector actions that have recently occurred in Eastern Amazonia,since these interventions have acted together to bring about major environmentalchanges in the area. As in Chapter III above, the focus in this and the nextchapter will be mainly on the municipalities traversed by the Carajas railroad,but, where of relevance, the project's larger area of influence will also beconsidered.

A. Deforestation

1. General Considerations

8.02 The increasing deforestation of tropical areas is a matter of concernfor several reasons. In the words of one noted environmentalist, "forests arearguably the most important vegetation zone on the face of the earth today... .Yeton every side, from the equator to the arctic, (they] are being depleted or willshortly be depleted through human agency at a rate that could well reduce manyof them to impoverished remnants by the end of the next century." 1 Among theworld's forests, those in tropical areas are of particular significance both inbiological and in economic terms. According to one recent study, even thoughclosed tropical forests occupy only about 7Z of the earth's land surface, theycontain more than half of the world's species. 2 To again quote the writer citedat the outset, "tropical forests are specially .rich in species and in theevolutionary capacity to generate new species. As tropical forests are cleared

1 Myers, Norman, "The Future of Forests," in Friday, L. and Laskey, R.(eds.), The Fragile Environment, Cambridge University Press, Cambridge, 1989,pg. 22.

2 Reid, Walter and Miller, Kenton, "Keeping the Options Alive; TheScientific Basis for Conserving Biodiversity," World Resources Institute,Washington, D.C., October 1989, pg. 15. These authors note, more specifically,that, although "the fraction of the entire world's species that occur in tropicalforests can't be accurately estimated because the total number of species inseveral potentially large taxonomic groups...is unknown....half of allvertebrates and vascular plant species occur in tropical foreste and if thetremendous species richness of anthropods in this biome is any indication, atleast 50Z -- and possibly as much as 90Z -- of the world's total species arefound in closed tropical forests."

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wholesale, there will be an impoverishing impact on the very course of evolutionitself." 3

8.03 One reason why tropical forests are important, therefore, is theiressential contribution to biological or genetic diversity. As the largestremaining tropical forest region in the world, Amazonia takes on particularrelevance in this context. The Amazon forest alone is estimated to support some30,000 species of plant life, as compared with roughly one third this total inall of temperate South America and an infinitely smaller number in the forestsof North America. 4 Furthermore, many tropical plant species in Amazonia andelsewhere still remain largely unknown, but may contain valuable medicinal andother economically important properties that may be totally lost to mankind asthe result of deforestation.

8.04 The Amazon forest, in short, houses a wide variety of flora andfauna. One study, for instance, found that a single hectare of forest near Manauscontained 235 different tree species having more than five centimeters indiameter, s while roughly 2,000 fish species are known to exist in the Amazonbasin, a number which is eight times higher than that in the Mississippi Riverbasin and ten times greater than that in all of Europe. The physical survivalof many fish and animal species in tropical regions such as Amazonia, in turn,intimately depends on the continued integrity of the surrounding forestecosystems. Deforestation, thus, not only threatens the rainforest itself, butalso endangers many insect, fish, bird and animal species through the associateddestruction of habitats, ultimately including those of forest-based tribalpopulations.

8.05 In addition to generating and preserving biodiversity, forests --particularly in tropical areas -- provide other significant "environmentalservices," including climate regulation at the local, regional and even global

3 Myers, op. cit., pg. 22. To further quote Reid and Miller (op. cit.,pp. 10-11), "for most well-studied groups of organisms, species richnessincreases from the poles to the equator. The species richness of freshwaterinsects, for example, is some three to six times higher in the tropics than intemperate sites. Similarly, tropical regions have the highest richness of mammalspecies per unit area, and vascular plant species diversity is much richer atlower latitudes....All of Dsnmark possesses less than twice as many species (ofall sizes) as there are tree speciesein one hectare in Malaysia."

4 Mahar, "Government Policies...," op. cit. pg. 1. Or as Reid and Miller(op. cit., pg. 11) put it, "forty to one hundred species of trees may occur onone hectare of tropical forest in Latin America, compared to only ten to thirtyon a hectare of forest in eastern North America."

s Prance, Ghillean, "Introekction to Tropical Rain Forests$," in Prance,G. (ed.) Tropical Rain Forests and the World Ltmo9phere, Westview Press, Boulder,Colorado, 1986, cited in Mahar, "Government Policies...," op. cit. Reid andMiller (op, cit., pg. 11) observe similarly that one area of Amazonian tropicalforest near Iquitos in Peru has nearly 300 tree species greater than 10 cm indiameter per hectare.

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levels, while deforestation can result in substantial environmentaldisequilibria. The most important of these services and disequilibria have beensummarized as follows:

forests help regulate the hydrodynamics of greatwatersheds and river basins such as the Ganges and theAmazon. When forests are cut, particularly on slopingland, water runs off unimpeded, taking large quantitiesof soil and nutrients with it, thus depleting theagricultural potential of the deforested area andcausing increased flooding and silt accumulationdownstream. Forests also help regulate climate, at leastat local level, through their moisture-cycling processesand their reduction of the reflectivity of the earth'ssurface... .Forests harbour much more carbon in the formof plant tissue, detritus and soil than the rest of theplanet put together, so they play a critical role in theglobal carbon budget. As forests are eliminated byburning, they serve as an anthropogenic source of carbondioxide, thus contributing to the 'greenhouse effect,'a phenomenon that may transform our planet to a profounddegree within just another few decades. In various ways,then, forests exert a great gyroscopic effect inmaintaining the dynamic stability...of many biosphericfunctions, including many functions that keep the planetcapable of sustaining life as we know it. 6

2. The Extent of Deforestation in Amazonia

8.06 Until the 1960's, Amazonia remained practically unaltered in termsof its forest cover. As indicated in Chapter IV, large-scale spontaneoussettlement of the eastern part of the region began only in the late 1950's wi;:hconstruction of the Belem-Brasilia highway. Subsequently, in the 1970's, withthe building of the Transamazonica and the road connecting Cuiaba and Santarem,as well as construction or improvement of the highways linking Cuiaba with PortoVelho (BR-364) and this latter city with Manaus and Boa Vista (in Roraima),occupation of the region accelerated. Largely as a result, the population inAmazonia Legal has increased six fold, from 3 million to an estimated 18 millioninhabitants, since 1970. Deforestation has directly accompanied this process.

8.07 Even though considerable doubts exist concerning the real extent ofthe deforestation that has already occurred in the region, it is, nevertheless,known that the rate of alteration of the primary forest in many subareas followsan exponential curve and that at least 10% of the total area of Amazonia Legal(or some 490,000 square kilometers) has been affected. This corresponds to anarea slightly smaller than that of Spain or, within Brazil, to that occupied bythe states of Sao Paulo, Rio de Janeiro and Parana together. Some estimatesbased on recent LANDSAT images go even higher, with one recent World Bank

6 Myers, op. cit., pp. 1-2-24.

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publication suggesting that, by 1988, deforestation mar hasre affected nearly600,000 square kilometers, or 12Z of "Legal Amazonia".

8.08 Even this higher figure, however, underestimates the actual extentto which the Amazonian forest has been "disturbed" by human intervention sinceit is necessary to consider not only those parts of the region where primaryforest cover has been totally removed, but also the much larger areas wherehardwood timber of commercial value has been selectively extracted. Many partsof Amazonia which presently appear as forested in satellite photographs have,in fact, already bean subject to logging activities, which, in the absence ofreplanting, have resulted in their impoverishment from both an ecological and,particularly, an economic standpoint. One study, for example, estimates that asmuch as 20% of the Amazonian forest, involving a total of close to one millionsquare kilometers, may already have been partially or completely altered byhuman intervention. a

3. Deforestation in the Caraias ReRion

8.09 The area of influence of the Carajas Iron Ore Project is one of theAmazonian subregions that have experienced the highest rates of in-migrationand deforestation over the past two decades. 9 The Carajas Project has directlycontributed to these processes by attracting large numbers of people to EasternAmazonia. Even though it was possible to anticipate the amount of deforestationlikely to result directly from installation of the Carajas rail, mine and portfacilities, this estimate was not made by either CVRD or the Bank. Moreimportantly, the likely indirect impacts of the project on forested areas in itslarger region of influence were ignored despite the fact that, even prior toimplementation of the iron ore operation, existing federal and State roads andlarge-scale agricultural and ranching activities were already resulting insignificant rural occupation and deforestation in the Carajas corridor.

8.10 Deforestation in the Carajae region has accelerated as a result ofthe following, largely interrelated, factors directly or indirectly associatedwith the iron ore project:

7 Mahar, "Government Policies...", op. cit., Table 1. This area is largerthan that of France and Switzerland combined.

8 Malingreau, J. and Tucker, C., "Large-scale Deforestation in theSoutlteastern Amazon Basin of Brazil," Ambio, Vol. 17, No. 1, 1988. In additionto selectively "mining" the forest, loggers frequently damage the areassurrounding the more valuable tree species that are extracted due to carelessor predatory logging practices. Furthermore, by building penetration roads, theyeffectively open up new areas for settlement by small farmers and posseiros.

9 The corridors formed by other large-scale transport improvements,especially the BR-364 highway between Cuiaba and Porto Velho and, to a lesserextent, the BR-165 road linking Cuiaba and Santarem, are the other majorsubregions that have been characterized by these processes.

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(i) the attraction of migrants to the area to help install theCarajas mine and railroad; many of these workers have rpmainedin the region to pursue prospectin', small farming and other(including urban) employment opportunities;

(ii) the construction of new roads and the reconstruction and/orpavement of existing ones to provide or improve access to themine site;

(iii) private land speculation along the corridors formed by therailway and project-supported roads, as well as in the Carajasarea more generally, in order to take advantage of expectedincreases in land values resulting from these and other publicinvestments;

(iv) improved access to extensive and previously much lessaccessible parts of the region due to the new or improved roadand railroad infrastructure; substantial parts of the areaopened-up by the iron ore project have subsequently beencleared through the implantation of ranching venturessupported by SUDAM fiscal incentives, the expansion of loggingoperations, the establishment of official colonizationprojects and increasing occupatinn of rvral areas by squattersand prospectors;

(v) lumber requirements for construction of the railroad(especially railroad ties) and other facilities (eg.buildings. other mine installations, etc.) directly connectedwith the project or to provide shelter and services to thepopulation attracted to the region by the iron ore operationand other local productive activities; and,

(vi) more recently, the use of fuelwood to produce charcoal forthe pig iron smelters located along the Carajas-Sao Luiscorridor.

8.11 Largely as a result of these Anterventions, deforestation in theproject's area of influence has increased significantly over the past decadeand a half. Studies undertaken by SUDAM based on satellite images reveal thatthe deforested area in the state of Para has increased from some 24,900 sq. km.in 1978 to roughly 114,800 sq. km. in 1986, or from less than 2% of the state'sterritory in the former year to nearly 10% in the latter. 10 The vast majority(99.2%) of the areas cleared were originally in forest.

8.12 Much of this deforestation, moreover, has occurred in thesoutheastern part of the state, where the percentage shares of area cleared inmost municipalities considerably exceed the average for Para as a whole. In the(former) municipality of Maraba, for example, nearly 20% of the total area

10 SUDAH, Levantamento da Alteracao da Cobertura Ve2etal Natural - Estadodo Para, Convenio IBDF/SUDAM, Technical Report, Belem, 1988.

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originally in forest had been cleared by 1986 according to SUDAM. By comparison,studies carried out in connection with the RADAM Project revealed that only 0.4%of the municipality had been deforested in the early 1970's. 81 According toSUDAM also, 551 of the total area of the neighboring municipality of Sao Joaodo Araguaia -- which, like Maraba, is cut by the Carajas railway -- had beendeforested by 1986. l2 Recent research by IBGE in an 8,000 sq. km. areapolarized by the city of Naraba, moreover, indicates that while only 140 sq. km.(or 1.8% of the total area of the region) had been deforested by 1972, thisfigure had increased to roughly 640 sq. km. (8%) in 1980 and to close to 2,990sq. km. (37Z) by 1985. 13

8.13 In Maranhao, in turn, where rural settlement is less recent than inmuch of southeastern Para, deforestation has also accelerated over the pastdecade. According to figures reproduced in a recent World Bank study, the totalarea cleared in Maranhao increased from some 2,940 sq. km. (or 1.1% of thestate) in 1975, to more than 10,670 sq. km. (4.11) in 1980 and an estimated50,670 sq. km. (19.71) in 1988. 14 While data at the municipal level are not asreadily available for Maranhao, an IBGE study similar to that carried out forthe region around Maraba found that less than 1% of the area originally underforest cover around Santa Ines, which is also ini the Carajas-Sao Luis railcorridor, remained intact in 1988. 15

4. Direct Project Impacts

8.14 In addition to the land clearing required for the installation ofmining, ore processing, transport and urban facilities at or near the mine and

11 A study by Orlando Valverde ("Conflitos e Equilibrio Ecologico noPovoamento em Expansao da Faixa Proxima a Estrada de Ferro Carajas" in ParaDesenvolvimento, No. 23, Jan-June 1988), in turn, indicates that 12.4% of themunicipality of Maraba had been deforested by 1983 which suggests that the areacleared between 1983 and 1986 alone corresponded to more than half again thetotal deforested in this locality through 1983.

12 Less than 20Z of this municipality, in contrast, had been deforestedby 1983, according to Valverde, op. cit.

13 IBGE, Estudo Inte2rado de Recursos Naturais em Areas Esgecificas doPrograma Grande Carsias - Nucleo de Maraba, Rio de Janeiro 1988.

14 Mahar, "Government Policies...,"1 op. cit. Table 1. Mahar'scorrespondin$ figures for Para are roughly 8,655 sq. km. (0.7% of the state) in1975, 33,915 sq. km. (2.7X) in 1980 and 120,000 sq. km. (9.61) in 1988.

1" OED/SEPLAN discussions with IBGE staff responsible for natural resourcestudies in the areae around Maraba and Santa Ines, under contract to the GrandeCarajas Program, Brasilia, March 1989.

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port sites, 16 construction of the Carajas railway directly involveddeforestation of an 80 meter strip along most of its length of 890 kilometere.In some sections, however, the area cleared was considerably wider in order topermit the installation of train stations, crossing areas, maintenance yards andhousing for CVRD personnel. When the various access areas and complementaryfacilities are included, it is likely that as much as 20,000 hectares, most ofwhich was previously in forest, may have been cleared in order to install therailroad.

8.15 The other major source of deforestation directly associated withimplaLltation of the railway was the selective extraction of high quality timberfor the fabrication of railroad ties. Approximately 2.2 million ties wererequired for construction of the Carajas railroad. Since roughly four ties canbe produced per cubic meter of lumber and a typical forest in the region 17generates roughly eleven cubic meters of high quality wood per hectare, theequivalent of about 44 ties can be extracted per hectare of forest. A simplecalculation, thus, suggests that at least 50,000 hectares were selectively cutin order to produce the ties required by the Carajas railroad. Considering thatit is likely that not all of the timber extracted for this purpose could beconverted into ties, the total area affected by this process was probably evenlarger. 18

5. Indirect Project Impacts

8.16 As indicated in the previous chapter, most of the areas withinCVRD's concession at the Serra dos Carajas not currently occupied by miningactivities and associated transport and urban facilities have been preserved innative forest. This situation, however, compares sharply with that just outsidethe concession boundaries where a "patchwork quilt" of deforested areas can beseen in places (including prospecting, squatter and official colonization areas)where road and rail accees remains limited. Much of the area to the immediatesouth and southeast of the CVRD concession, more specifically, has already been

16 Anderson, op. cit, indicates that the urban, rail and road installationsat the Carajas mine site occupy 14,300, 4,250 and 7,700 hectares respectively,while present and future mining activities are expected to require roughly132,000 of the concession's 411,000 hectares. The remaining areas are allocatedto forest reserves (55,000 ha), buffer zones (40,000 ha) and "protection"(155,750 ha).

17 Such as the 10,000 ha reserve located at Buriticupu, between Acailandiaand Santa Ines in Maranhao, managed by a CVRD subsidiary and visited by theOED/SEPLAN mission in April 1989.

la In commenting on the preliminary draft of this report, CVRD argues thatthe selective extraction of lumbrr for this purpose had an impact of "littlesignificance" in terms of deforestation "as this is the usual process forexploiting wood in tropical areas."

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occupied and deforested by farmers 19 and ranchers, while there are strongindications that this same process is also underway to the northeast and north. 20

Near total clearing, in turn, has occurred along the major transport arteriesthemselves. 21

8.17 As suggested above, much of this deforestation is the result ofactivities indirectly associated with the Carajas operation or made possible toa greater or lesser extent by project-related infrastructure improvements. Whileit is impossible to determine the exact extent of the project's indirect effectson forest cover in its area of influence, the figures presented earlier in thischapter suggest that they have probably been substantial. Even though the exactlimits of this area vary (and, in any event, are both dynamic and difficult toidentify), local sources confirm that land occupation and forest clearing in theregion have accelerated since, and in numerous subareas even before,implantation of the Carajas railway, affecting an area of at least 40 kilometerson either side of the railroad and the PA-275 and PA-150 highways.

818 Considering that much of the deforested land along the Carajas-SaoLuis corridor, particularly in the western part of the area, has beentransformed into pasture supporting very low cattle densities, it can behypothesized that the principal motive behind this form of occupation has beenland speculation. In addition to the access to government fiscal incentives andother subsidies which the installation of "ranching" projects permitted untilvery recently in Eastern Amazonia, the creation of pasture and the introductionof cattle has frequently been used in order to legitimize the occupation oflarge land areas in the region. 22 Data from the Agricultural Census

19 In its observations on the previous version of this report, CVRD pointsout that "the most significant" cause of the occupation of the area by smallfarmers and landless rural laborers is the "highly concentrated land tenurestructure in the Northeast and Center-West regions which constitutes a factorthat permanently expels the rural population that has been regularly mligratingto Amazonia."

20 The area immediately to the west of the CVRD concession, which consistsof the Catete (Xicrin-Kaiapo) Amerindian Reserve, however, continues to bepreserved in primary forest.

21 The one exception is the Mae Maria Reserve, inhabited by the GaviaoIndians and located just to the east of the Tocantins River near Maraba, thesouthern part of which is cut by the Carajas railway. Thus far, this area appearsto have remained largely in native forest despite numerous invasions by non-Amerindian populations

22 CVRD, in commenting on the draft report, observes that "the coincidencebetween the period of intense growth of ranching activity in the region andinstallation of the Carajas Iron Ore Project is the result of the [government)strategy for productive occupation of Amazonia in the 1960's. The objective wasto attract entrepreneurial capacity to the region to invest in modern agro-ranching activity. Firms from the southern part of the country received largeareas of land at symbolic prices and subsidized credit to install agro-ranching

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substantiate the increasing importance of cattle (and, hence, of pasture land)in the area after 1970. According to this source, while the number ofagricultural establishments grew by 6.3% a year and the total land area in farmsand ranches expanded by 5.1% per annum between 1970 and 1985 in the western partof the Carajas corridor, 23 the cattle population grew by 14.8% annually, orfrom roughly $6,000 head in 1970 to more than 680,000 in 1985. 24 Much of thisgrowth occurred in the mid and late 1970's when the Carajas Project wasinitiated and the number of ranches approved by SUDAM for installation withfiscal incentive in southeastern Para increased significantly. 25

B. Climate Change

8.19 Potential impacts of major infrastructure and productive investmentssuch as the Carajas Project and associated deforestation on climate in an areasuch as Eastern Amazonia can be examined at the local, regional and globallevels. The gathering of empirical evidence concerning climate change requirescareful monitoring of variables such as temperature and humidity at differentlocations within a region over a considerable length of time. The attributionof regional and global climate changes to specific, even if large-scale, humaninterventions in the physical environment, however, is complicated by the factthat many other anthropic actions are also likely to influence climaticvariables in the same area, thereby making determination of cause and effectrelationships very difficult at best. While the available information does notpresently permit clear conclusions as to the actual direct and/or indirectimpact of the Carajas Project on local and extra-local climate conditions, itis, nevertheless, possible to indicate what kind of changes might be expectedto result from such an undertaking at each of these levels. 26

enterprises. This policy obtained partial success as evidenced by the data ongrowth of the cattle population presented in the text."

23 This area includes the municipalities of Maraba and Sao Joao do Araguaiain Para and Imperatriz and, after 1980, Acailandia in Maranhao.

24 IBGE, Censo AMropecuario for 1970 and 1980 and Sinogse Preliminar doCenso Agropecuario for 1985. The number of rural establishments in thesemunicipalities, more concretely, grew from roughly 8,900 in 1970 to more than22,100 in 1985, while the total area in farms and ranches expanded from justunder 1.1 million ha to nearly 2.3 million ha over this period.

25 On the latter tendency, see Redwood, John III and Barreto, Francisco,"Avaliacao dos Programas de Desenvolvimento Rural: Norte e Centro Oeste" inUFPE/IPEA/SUDENE, Desigualdades Regionais no Desenvolvimento Brasileiro, Vol.3 ("A Politica de Desenvolvimento Regional"), Recife, 1984, Chapter 4, Part 4,("Os Incentivos Fiscais da SUDAN e a Ocupacao Recente da Amazonia"), pp. 416-435.

26 In its observations on the draft report, CVRD concurs that deforestationcan have impacts on climate at the local or "micro" level, but argues that itwould be premature to draw any conclusions in relation to possible globalconsequences.

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1. Local or Microclimatic Impacts

8.20 As suggested in para. 8.05 above, microclimatic changes occurwhenever primary forest is cleared and replaced by other types of vegetation.As indicated in th8 previous section, native vegetation has been removed andsubstituted both as a direct and, more extensively, as an indirect consequenceof the Carajas Iron Ore Project throughout its area of influence. Thesubstitution of forest cover by annual crops or pasture introduces changes inthe balance of solar radiation and in the local hydrological cycle and, as aresult, in both temperatures and atmospheric humidity. 27

8.21 In tropical areas generally, rainwater is partially absorbed by treecover and subsequently evaporates. In dense tropical forest, more specifically,approximately 25% of total precipitation is retained by the vegetation, neverreaching the soil. This process is especially important for rains of lowintensity. The remaining 75%, however, does fall to the earth, where roughlytwo-thirds later returns to the atmosphere in the form of water vapor from thetranspiration of plants and the remaining one-third is drained by streams --commonly known in the Brazilian Amazon as igaraRes -- which eventually ~:low intotCie region's vast river system.

8.22 It can, thus, be estimated that a tropical forest such as thatcovering the Serra dos Carajas, which annually receives some 2,100 mm of rainwater, returns roughly 1,575 mm to the atmosphere through evapotranspiration,while the remaining 525 mm run off into local igarares and rivers. These figuresfurther suggest that a large portion of the solar energy in the region isconsumed in the process of evaporation. In this context, plants and treesfunction as pumps absorbing water from the soil and transferring it back to theatmosphere as water vapor utilizing solar energy. The energy that is effectivelyetored in the water vapor, which corresponds to on the order of 75% of "netradiation" (ie. the difference ietween initial radiation and the energy whichsubsequently returns to space), is denominated "latent heat," while theremaining solar enorgy is used either for photosynthesis (2%) or to warm theatmosphere (23%).

8.23 With the replacement of forest by other types of vegetation, thequantity of water lost through surface run-off increases. As a result, the amountof water that penetrates the soil and is available for absorption by plant andtree roots (where they exist) is correspondingly smaller. As a furtherconsequence, evapotranspiration in a non-forested system is lower than that ina forested one. This likewise means that the balance of solar radiation isaltered, with a smaller fraction of solar energy utilized to produce water vapor

27 Even deforestation in order to plant trees for commercial purposes canaffect hydrological and other environmental variables at the micro level intropical areas. As Reid and Miller (op. cit. , pg. 8) indicate, "establishingtimber plantations may increase timber productivity, but reducing speciesdiversity in this way may increase the frequency of floods and soil erosion orreduce water flows during dry seasons, and it obviously harms the species thatare removed (thereby diminishing the ecosystem's 'genetic library')".

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or "latent heat" and a larger share utilized to warm the atmosphere. Accordingly,deforested areas tend both to contribute less to atmospheric humidity and to begenerally warmer than those remaining under their original vegetative cover.

8.24 The extent to which the above mentioned phenomena actually occurcan be determined through the systematic measurement of temperature and humidityvariations over time in areas that are cleared of native vegetation. The greatestchange is normally manifested by maximum daily temperatures. 2S Deforestation,similarly, contributes to a decline in relative humidity of the air, as weil asin absolute atmospheric humidity levels. The intensity of the resultingvariations in temperature and humidity, however, will ultimately depend onseveral factors, especially soil types and depths, the kinds of substitutevegetation which are planted or grow spontaneously once the original forest isremoved and the farming or ranching practices that are utilized in each locality.In addition to the variations resulting from changes in the hydrological andthermal balances, deforestation can also lead to a modification of local aircirculation patterns which directly and indirectly influence the balancespreviously mentioned and are further affected by local topographical conditions.

2. Regional or Mesoclimatic Impacts

8.25 The aggregation of microclimatic changes, when these take place overlarge areas such as Eastern Amazonia, can also result in alterations in thedynamic equilibria which determine atmospheric and climatic conditions at theregional level. In the specific case of the area of influence of the CarajasProject, the impact of local climate _hanges may be even more extensive since,as was indicated in para. 3.25 above, this region intercepts air maeses whichsweep westward from the Atlantic Ocean to the Andes across all of Amazonia. Withthe occurrence of large-scale deforestation in the Greater Carajae area, it can,thus, be expected not only that increased surface run-off will decrease thestorage of rain water in the soils and result in greater erosion, but also that,over time, the air masses which flow over the region will become both warmer andless humid. Since these air masses are responsible for much of the rain whichfalls in the areas to the west of Carajas, it is possible that increasingdeforestation in Eastern Amazonia may eventually result in rising temperaturesand decreasing precipitation, especially during drier parts of the year,throughout much of the region. 29

3. Global Impacts

8.26 Large-scale modification of land use and deforestation in the areaof influence of the Carajas Project may also contribute to global climate changein at least two ways. With the change in the regional hydrological balance and,consequently, in the solar energy balance, a smaller quantity of water vapor isgenerated by evapotranspiration in Eastern Amazonia. Part of the water vapor

28 Increases of more than 5 degrees Centigrade in maximum temperatureshave been recorded in deforested areas in some parts of Africa for example.

29 See Salati, Eneas and Nobre, Carlos, "Possiveis Alteracoes Climaticasna Amazonia em Decorrencia do Desmatamento," mimeo, Piracicaba, Sao Paulo, 1989.

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produced in tropical areas is normally transferred to the polar regions whereit is condensed, in the process liberating heat originally generated in thetropics and warming the polar atmosphere. Significant changes in tropical landuse and vegetation, thus, can affect the transfer of solar energy from equatorialto polar regions, such that the associated decrease in the generation of "latentheat" in warmer areas also leads to a decrease in the heat transferred to colderparts of the globe.

8.27 The other and better known way in which extensive deforestation caninfluence global climate change is through its contribution to the "greenhouseeffect." As indicated in para. 8.05 above, the clearing and subsequent burningof forest areas (and of charcoal originating either in native or planted forest)results in a transfer of carbon stored in the earth's biomass to the atmospherein the form of carbon dioxide. The release of carbon dioxide, in turn,contributes to global warming since this, together with other "greenhouse gases,"increases atmospheric retention of long-wave heat radiation emitted by the earth.The quantity of carbon lost during the transformation of forest cover into othertypes of land use in areas of dense vegetation such as Eastern Amazonia has beenestimated at between 140 ̂ rd 250 tons per hectare. Accordingly, the totalemission of carbon dioxide due to the deforestation that is estimated to haveoccurred in Para and Maranhao over the past decade is on the order of 2.8 billionmetric tons.

C. Fauna

8.28 The native fauna in tropical frontier areas such as Eastern Amazoniahave come under increasing pressure as extractive activities (mining, logging,etc.) and rural settlement have advanced. The principal causes are:

(i) destruction of natural habitats; in the case of the immediatecorridor formed by the Carajas rail line, this effect iaaggravated by the fact that the 80 meter strip created aninitial discontinuity across numerous local ecosystems, andthis hiatus has greatly increased over time as the result ofsubsequent extensive deforestation on either side of therailway;

(ii) fire, which is the traditional practice used by farmers andranchers to clear the forest and later to eliminate weeds andother second growth vegetation in order to "clean" pasturelande, also destroys mating areas, nests, eggs, young andadult insects, birds, mammals and other wildlife; and,

(iii) legal and illegal hunting of both small and large birds andanimals; large mammals such as the jaguar are still huntedfor the value of their skins in the Carajas area even thoughthis is illegal, while many bird species, especially songbirds,are captured live and caged for sale in southern Brazil. s

30 Numerous hunters were encountered in various parts of the Carajas regionby the OED/SEPLAN mission in April 1989.

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8.*Zi Vsrious kinds of anthropic actions, moreover, directly affect thestoc'& of aquatic fauna in the region. These include clearing the forest in thevallays (or varzeas), and along the banks of igarapes, rivers and lakes. Theelimination of such forested areas, which is prohibited under Brazilian law,adversely affects both the food supply and the reproductive patterns of manyfish species. 31 In addition, water pollution, through the use and subsequentrun-off of fertilizers and pesticides in nearby agricultural areas, togetherwith the utilization of mercury for gold prospecting, not only results in thedeath of large numbers of fish and other aquatic fauna, but also contaminatesmany of those which survive, thereby presenting a potentially serious humanhealth hazard as well.

8.30 A further source of surface (and subterranean) water contamination,moreover, is that resulting from increasing and largely uncontrolled urban andindustria. growth in the Carajas region. In the absence of adequate basicsanitationt infrastructure and other pollution control measures, the disposal ofuntreated domestic sewage and industrial effluents into local streams, riversand other water bodies has increased proportionately to the rate of urban growthin the area over the past two decades. As will be further discussed in the nextchapter, this situation has presented an increasingly significant health riskto both the local aquatic and human populations.

D. Soils and Surface Waters

8.31 Changes in the quality of both soil and water resources have alsooccurred in the Carajas area. Within CVRD's concession at the Serra dos Carajas,soil alterations have occurred in the mining, ore processing and transportationareas, as well as at the site of the urban centers. Some degree of waterpollution also occurs at the mine site due to the "washing" of iron and manganeseores as part of their processing prior to being transported to Sao Luis. The twolakes created by CVRD at the mine site to retain suspended solids appear to begenerally effective and are dimensioned for at least a decade. It is unclear,however, whether these lakes can be operated at present levels of efficiency muchbeyond this time, such that, as indicated in the previous chapter, alternative,longer-run solutions will need to be defined.

8.32 At the port site in Sao Luis, in turn, earth moving and associatedsoil modifications were also substantial as a result of the installation ofadministrative, maintenance, storage, transport and unloading facilities. As isalso occurring at the Carajas mine site, however, affected areas at the port are

31 Mahar, "Government Policies...,'' op. cit., for example, cites a"pioneering study" of Amazonian fisheries which found that most of the commercialfish species in the region feed on fruits, seeds, insects and detritus fromnearby forests that are flooded on an annual basis. The study concluded thatdeforestation of these areas would result in a significant reduction of thesespecies and, by extension, of the income generated through their capture andcommercialization. See Goulding, Michael, "Amazonian Fisheries," in Moran, Emilio(ed.), The Dilemma of Amazonian Development, Westview Press, Boulder, Colorado,1983.

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presently being recuperated by CVRD through the replanting of various treespecies. Residual waters containing sediments generated in the ore unloadingarea, in turn, are treated in a decantation lake, while domestic wastes areprocessed by an on-site sewage treatment plant.

8.33 As is the case with deforestation, the situation with respect tosoil and water quality is much more problematic along the Carajas railway thanat either the mine or the port sites, mainly because of the project's indirectimpacts. The principal problem is the difficulty of implanting sustainableagricultural and ranching activities along the Carajas corridor since, as wasindicated in para. 3.26 above, most soils in the region are characterized bylow natural fertility. In many subareas, soils are either too sandy or too poorlydrained to adequately support crop production. In this context, moreover, lan-Iclearing for agriculture or cattle raising in tropical areas such as EasternAmazonia normally has several adverse environmental consequences including: (i)decreasing soil fertility due to the loss of nutrients through leaching; (ii)disappearance of the most fertile upper layer of the soil as the result oferosion; (iii) reduction of the quantity of organic material in the soilpreviously provided by the now absent forest; and (iv) an increase in soildensities through compaction, a problem which can become especially criticalwhen heavy machinery is used in connection with agricultural activities. 32

8.34 Experience in the Carajas region has shown, furthermore, that, withinseveral years after forest is converted to pasture, a proliferation of weeds andother second growth vegetation normally occurs that is both difficult and costlyto control. As a result, many pasture lands quickly become degraded and areabandoned within five to ten years after they are cleared, in the process fuelingfurther deforestation in order to support the cattle that are displaced. Evenin areas of better soils, moreover, fertility loss tends to occur over time dueto a combination of poorly planned soil resource utilization and generally non-existent soil conservation practices. As a consequence, soil degradation hasbecome a critical problem in much of the Carajas corridor, having becomeparticularly dramatic in some subareas (such as that around Santa Ines) wherereforestation has become an urgent necossity.

8.35 The contamination of surface waters, in turn, is largely the resultof changing land use, together with the expanding settlement associated withrecent regional development trends, especially rapid urbanization anduncontrolled gold prospecting. Mercury contamination, in particular, has becomea serious problem in the Carajas region. Liquid mercury is added to river

32 Anderson (op. cit., pg. 8) similarly observes that "most of the landuses that substitute forest cover are inherently unsustainable, as is evidentfrom the vast stretches of abandoned pastures that accompany the railroadthroughout most of its length. Concomitant with deforestation are species loss,soil compaction, flooding, spread of diseases, deculturation of indigenouspeoples and general impoverishment of rural inhabitants."

3S In commenting on the draft report, CVRD indicates that studies that itrecently carried out, whose results were simultaneously analyzed by laboratoriesin Brazil, Holland and Sweden, reveal "the initiation of (mercury] contamination

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sediments in the process of gold extraction to form a gold-mercury amalgam. Partof the mercury used in this process inevitably spills into adjacent watercourses. The amalgam is then heated to separate out the gold, giving off mercuryvapor which is frequently inhaled by prospectors, often resulting in mercuryintoxication whose symptoms include memory loss, insomnia, irritability and avariety of gastro-intestinal and muscular disorders, among other problems.

8.36 A recent study undertaken in gold prospecting areas in various partsof Para has evaluated the degree of mercury contamination among garimPeirosthrough the chemical analysis of hair samples. 3 The concentrations of mercuryencountered varied in accordance with the length of time individual prospectorshad been involved in placer mining activities and the specific tasks in whichthey were engaged. Mercury concentrations among this population ranged from 1.5parts per million (ppm) to 13.7 ppm, while many of the persons examined displayedthe symptoms of mercury intoxication described above. Local Amerindian groupswere also tested with the Kaiapo Indians in the Gorotire Reserve found to havethe highest concentrations of mercury (4.7 ppm) among the different tribalpopulations surveyed (for which the average was 3.0 ppm). Since the Kaiapo donot themselves participate in prospecting activities, it is probable that thesource of intoxication is tha nearby Fresco River, which receives mercury run-off from numerous Rarim os -.n the municipality of Sao Felix do Xingu, locateddirectly to the west of the Carajas Iron Ore Project.

in various water courses in the region, even though the levels detected are stillbelow those established [as acceptable] by Brazilian legislation. Thiscontam4 tion was caused by garimpeiros who invaded CVRD's concession. Theseprospectors were expelled as soon as they were discovered by the federalpolice...Another possible source of contamination...are the prospecting campssituated i: the vicinity of the concession. These, however, are subject toBrazilian law and control by federal and state environmental agencies. [CVRD's]mercury monitoring data for the region were officially communicated to IBAMA andthe state environmental secretariat (SESPA) in the state of Para."

34 Sena Couto, R., Camara, V. and Sabroza, P., "Intoxicacao Mercurial:Resultados Preliminares em Duas Areas Garimpeiras no Estado do Para," ParaDesenvolvimento, 1988.

35 Altogether, according to a May 27, 1989 article in the Folha de SaoPaulo, it is estimated that more than 600,000 garimneiros may presently beoperating in Amazonia. Gold production in the region was reportedly on the orderof 700 tons between 1980 and 1988. Since roughly two tons of mercury are utilizedper ton of gold produced, this means that on the order of 1,400 tons of mercurymay have been discharged into the Amazonian environment over this period. As muchas half of this total appears to have been in the state of Para, with most ofthe rest occurring in Rondonia, Mato Grosso and Roraima.

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E. Pig Iron Smelting

1. Pig Iron and Charcoal Production

8.37 The production of pig iron along the Carajas-Sao Luis corridor isa direct and natural consequence of the extraction of iron ore at th.e Srra dosCarajas. 3 Four pig icon industries, two in Maraba and two in Acailandia, allof which were visited by the OED/SEPLAfl mission in April 1989, are currently inoperation and numerous others have been formally approved by the Greater CarajasProgram (PGC). 37 The industries already installed each currently have thecapacity to produce on the order of 60,000 tons of pig iron per year (tpy), orroughly 240,000 tpy collectively. Recent planning studies for the Carajascorridor projected annual production of pig iron of as much as 2.8 million tonsby the year 2010. 38 Starting with -- and in addition to -- pig iron, finally,many of the metallurgical industries expected to locate in the Carajas corridorover the next several decades plan eventually to "verticalize" their output byproducing various types of finished steel commodities. 39 Since the time the

36 Moreover, as indicated in Chapter V above, the establishment of pigiron and other iron ore based industries in the area was part of CVRD's strategyfrom the outset which was later materialized in the basic design of the GrandeCarajas Program (PGC) to which CVRD's earlier planning studies directlycontributed. As Anderson (op. cit., pg. 35) puts it: "the inetallation ofmetallurgic industries in the region has long been envisioned by CVRD as alogical offshoot of the Iron Ore Project, and it was an integral part of the PGCdevelopment model from its inception."

3' According to the Department of Planning and Evaluation of the Ministryof Economy, Finance and Planning (DNPA/IZEFP), since the first draft of thisreport was prepared (ie., early 1990), six of the pig iron industries originallyapproved to receive fiscal incentives under the Grande Carajas Program have beenexcluded by the Secretariat of Regional Development, that was established by thenew federal administration which took office in March 1990. Consequently, ifthese firms decide to develop projects in the region, they will have to do soexclusively with their own resources, which is considered unlikely. This isexpected to reduce likely future demand fo. charcoal in the area.

38 These studies, which were jointly contracted by CVRD and the PGC andwere nearing completion at the time of the QED/SEPLAN mission in March-April1989, have focused largely on the potential future industrialization of theCarajas corridor. They were undertaken by a consortiam of private consultingfirms headed by NATRON SA., a Rio de Janeiro based engineering concern. TheOED/SEPLAN mission met with a representative of NATRON in Brasilia in March 1989who summarized the principal conclusions of the studies. The final results,however, have not yet been made public by PGC/CVRD and, thus, were not availablefor preparation of the present report.

39 In addition to PGC fiscal incentives, several factors help to explainthe attraction of metallurgical industries to the corridor. As summarized byAnderson (op. cit., pg. 37), they include the following: "the iron ore furnishedfrom Carajas is of exceptionally high quality, and tLe railroad provides

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original OED case study report was written (March 1990), however, measures haveapparently been taken to limit pig iron production in the region to an estimated630t000 tons per year.

8.38 Nonetheless, the installation of pig iron smelters in the Carajas-Sao Luis corridor should be carefully analyzed from various standpoints,including their ecological, economic and social sustainability. The balance ofthis chapter will focus on the possible environmental impacts of pig ironsmelting in the region. Since no physical constraint exists with respect to thelong-term supply of iron ore given both the dimensions and the quality of theCarajas reserves and the availability and efficiency of CVRD's transportinfrastructure, the critical variables with regard to the economic feasibilityof this activity are the cost and sustainability of the principal energy sourcefor smelting operations.

8.39 The pig iron industries that are already in operation, as well asmost of those which are currently planned for installation in the Carajascorridor, use or plan to use wood-based charcoal both as an energy source andas a reacting agent. According to information obtained in the field by theOED/SEPLAN mission, these industries use an average of 0.85 tons of charcoal toproduce one ton of pig iron. Thus, as a first approximation, roughly 204,000tons of charcoal are necessary in order to produce 240,000 tons of pig iron per

inexpensive and reliable transport of raw materials and finished products. Theregion contains a large and underutilized labor pool, local labor unions arepractically nonexistent, and wage levels are among the lowest in Brazil. Landin the region is comparatively inexpensive, and ample and relatively cheapsources of non-mineral charcoal are available from the currently extensiveforests."

40 In its observations on the draft document, CVRD informs that "theSecretariat of Regional Development (SDR) of the Presidency of the Republic,which has assumed control of the Grande Carajas Program, has limited the annualproduction of pig iron by existing and yet-to-be-installed metallurgicalindustries in the region to 630,000 tons,...a much smaller figure than thatinitially anticipated for the area. Even more recently, a federal governmentdecree prohibited the concession of fiscal incentives to metallurgical projectswhich exploit wood-based charcoal extracted from the native forest in the GrandeCarajas Program area, restricting such incentives only to projects that producecharcoal from previously planted forests. This measure is designed to impedethe disorderly expansion of metallurgical production in the region."

41 The other mineral inputs for pig iron production do not presentlimitations either sinre they are required in much smaller quantities, areavailable locally in adequate supply and their prices are relatively low. Theseinputs include quartzite (which is ueed in the proportion of 0.1 ton per ton ofpig iron), limestone (also 0.1 to 1) and manganese (less than 0.05 ton per tonof pig iron). The ratio between iron ore consumed and pig iron produced, in turn,is roughly 1.8 to 1. See, IDESP, "Impacto de Implantacao do Polo Siderurgico naEstrutura Produtiva e no Movimento Migratorio em Maraba," Relatorio de PesauisaNo. 12, July 1988.

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y,* The area of forest that would have to be cut annually in order to generatethie -mount of charcoal can be estimated on the basis of the requirements of asingle pig iron furnace of the type already installed in the region, each ofwhich is capable of producing approximately 5,000 tons per month. 42

8.40 The wood burning "hot tail" (rabo q_uente) ovens utilized to preparecharcoal in the Carajas region generate an average of 1.1 tons of charcoal everyseven days, or roughly 4.4 tons per month. This means that, in order to maintaina smelter with an average output of 5,000 tons of pig iron per month (and takinginto account losses in loading, unloading and transportation), roughly 1,000charcoal producing ovens will be required. Even though part of the charcoalproduced in the region, at present, is derived from leftover scraps of lumberat local sawmills, this should not be considered as a major long-term sourcesince recent legislation restricts the cutting of primary forest, both for theimplantation of agro-ranchAng activities and for charcoal production.

8.41 More importantly, however, since deforestation is likely to continue-- legally or illegally at least in the short and medium run, as sourcescloser to the pig iron smelters are exhausted the extraction of fuelwood and theproduction of charcoal will necessarily tend to occur at increasingly greaterdistavtces from the towns and cities where these induatries are located -- and,thus, with increasingly higher transportation costs -- a fact which has clearimplications for the long-term economic sustainability of these undertakings. 4

42 Accordingly, for the production of 60,000 tons of pig iron per year, atthe 0.85 to 1 ratio, on the order of 51,000 tons of charcoal are required, afigure which corresponds to 4,250 tons of charcoal per month or an average ofsome 142 tons per day.

43 More concretely, SUDAM fiscal incentives for the installation of cattleprojects in Amazonia were suspended in October 1988 and the then BrazilianInstitute of Forestry Development (IBDF), which is now part of the BrazilianInstitute for the Environment and Renewable Natural Resources (IBAMA), recentlyrequired that all industries, including pig iron smelters, consuming more than4,000 cubic meters of charcoal per year supply their own fuelwood directly orunder contract with third partiee "on the basis of rational exploitation" in anamount "equivalent to the consumption of the industrial unit, including futureexpansions." (See IBDF Normative Decree, or Portaria Normativa, No. 06-0 ofJanuary 5, 1989). These industries, which were already required under PortariaNormativa No. 242 of August !7, 1988 to present an Integrated Industrial-Forestry Plan (or PIFI) for approval by IBDF, are obliged under the more recen,Decree to supply 50% of their total charcocl needs out of their own forestryprojects by 1990 and 100% of their needs from these projects by 1995.

44 Anderson (op. cit. pg. 35) observes, for example, that in the case ofMinas Gerais, charcoal currently represents some 60-70% of the price of pigiron. Under such conditions, reforestation is economically inviable whichprobably accounts for the fact that pig iron industries in that state presentlyderive only about 20Z of their non-mineral charcoal from plantations, the restbeing supplied from native forests at distances as great as 1,000 kilometers.For this reason, he concludes that "high fuel costs relative to final product

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in any event, it is evident that, if current regulations limiting deforestationand requiring the "rational exploitation" of forest resources by pig ironsmelters are not enforced by state and federal environmental protection agencies,the remaining native forests in the areas surrounding Maraba and Acailandia (andeventually also Santa Ines, Santa Luzia and Pindare-Mirim, among other towns andcities in the Carajas corridor) will be progressively cleared until theydisappear altogether, just as previously occurred in Minas Gerais as a resultof the installation of metallurgical industries. 45 The realistic prospects forachieving the "rational exploitation" of forest resources in Eastern Amazoniashould, thus, be examined in further detail.

2. Sustained Forest Management: Requirements

8.42 On the assumptions that wood-based charcoal (as opposed to mineralcoal, natural gas or other fuel source) technologies are maintained and that pigiron smelters and other metallurgical industries will continue to be located orexpanded along the Carajas-Sao Luis corridor, the medium and long-run solutionfor sustainable fuel production would require the utilization (and reutilization)of native and/or planted forests through techniques of "sustained management." 46

Precise determination of the area necessary for sustained forest management,however, is difficult given the present lack of scientifically reliableinformation in the region. -n addition, a wide variation exists with regard tothe amount of carbon stored in the biomass in the various ecosystems along theCarajas corridor. Ihese differences are largely due to soil variations at thesubregional level which, in turn, reflect, distinct topographies and localclimate conditions, among other factors.

8.43 Utilizing information obtained during the OED/SEPLAN visit to theforest reserve at Buriticupu, the following analysis will take the aforementioned

value is probably the single most important factor contributing to theinstability and general stagnation of pig-iron industries in Minas Gerais."

45 For reaseons which are discussed more fully in section 3 below, Anderson(op. cit., pg. 42) concludes that, despite recent IBDF regulations, the continuedinstallation of charcoal-consuming industries in the Carajas corridor is likelyto be a major cause of future deforestation in the region. More specificrlly,he estimates that deforestation for charcoal production may involve an area ofsome 1,524 sq. km. per year. This estimate lies roughly midway between similarprojections by Fearnside (1,000 sq. km/year) and Valverde (2,237 sq. km./year)contained in "technical annexes" to a document prepared by an entity called thePopular Juridical Support Institute entitled "Inquerito Civil: Programa GrandeCarajas" (Rio de Janeiro, January 1989) in a suit to force the PGC to halt theapproval and installation of additional charcoal-based metallurgical industriesin the Carajas area.

46 "Sustained management" techniques generally imply selective cutting ofareas originally in primary forest on a rotating basis over a multi-year cycle.Rotation normally occurs over a 12 to 20 year cycle, although in some cases r25-30 year rotation period is required depending on the specific characteristicsof the forests and ecosystems involved.

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differences into account. Based on an inventory of existing species, the amountof timber appropriate for commercial utilization by sawmills and for use asfuelwood (or "lenha") for charcoal production has been determined by CVRD'sforestry subsidiary at Buriticupu. Considering three alternative intensities (or"treatment-") for exploiting a forest with characteristics similar to the reserveat Buriticupu (ie. clear cutting, selective harvesting of all individual treeshaving diameters larger than 45 centimeters, and selective cutting of trees withdiameters under 10 cm and over 45 cm, leaving the rest, together with four largetrees for seed production, to grow for future exploitation), the average valuesof lumber and lenha obtained were: (a) clear cutting - 19 cubic meters of lumberand 380 steres of fuelwood; 47 (b) selective cutting of trees with diametersover 45 cm - 15 m3 of lumber and 161 ateres of lenha; and (c) selective cuttingof trees having diameters under 10 cm and over 45 cm - 15 m3 of lumber and 248steres of fuelwood. 48

8.44 Assuming a production of lenha on the order of 250 steres per hectare(as at Buriticupu when roughly 100 trees of medium diameter and 4 trees of largediameter are left for regeneration) and a rotation period of 20 years, the arearequired to produce sufficient charcoal to support the pig iron smelters alongthe Carajas corridor can be estimated. As pre-iously noted, 0.85 tons of charcoalare necessary to produce one ton of pig iron. Since 0.85 tons corresponds toroughly 3.8 cubic meters of charcoal, some 3.8 m3 of charcoal are required toproduce one ton of pig iron. Since approximately three steres of fuelwood arerequired, in ,urn, to produce one cubic meter of charcoal, on the order of 11.4steres of lenha are, thus, necessary to produce one ton of pig iron.

8.45 In the aggregate, this means that in order to produce 60,000 tonsof pig iron per year, a smelter which consumes on the order of 51,000 tons ofcharcoal will, in effect, require some 680,000 stereo of harvested fuelwood onan annual basis. Admitting, as above, that 250 steres of fuelwood can beextracted per hectare, this implies that one pig iron furnace will require lenhafrom an area of approximately 2,720 ha of native forest, or its equivalent,annually. With a twenty year rotation period, this then implies that an area of54,440 ha will be needed to sustai- a single furnace producing 60,000 tons ofpig iron a year.

3.46 Using basic data on the "productivity" of the native forest fromanother CVRD reserve area at Maraba in southeastern Para gives somewhat differentresults. At Maraba, the quantity of commercially exploitable timber is roughly30 m3/ha (as compared with 16 m3/ha at Buriticupu) and the amount of _enha per

47 The volume of fuelwood is conventionally measured in "steres" with onestere being equal to one cubic meter of stacked wood including the (inevitableand variable) space between logs.

'a It should be noted, however, that, at Buriticupu, the lumber that couldbe effectively utilized by sawmills, which was originally estimated to be as muchas 200 m3 per hectare, was found to be considerably less than this amount inpractice (ie. 16 m3 per hectare on average) because of substantial termite andfungus damage, together with inadequate trunk shapes, among many of the largertrees. Thie situation is apparently common in much of the area.

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hectare is also higher, due in part to better soil and climate conditions.Assuming that these more favorable conditions will permit a reduction of therotation period from 20 to 15 years and that the average amount of fuelwoodproduced is on the order of 280 steres/ha (as opposed to 250 steres/ha atBuriticupu), based on the same calculations presented in the previous paragraph,it can be estimated that one 60,000 ton pig iron furnace will require 2,430 haof forest per year or a total forested area of 36,450 ha for a 15 yearregeneration period.

8.47 The differences between the two sets of figures presented abovereflect local variations in forest composition, soils, climate, regenerationcapacity and forest management techniques in diffarent parts of the Carajascorridor, as well as rotation periods of different lengths, characteristicswhich -- for detailed planning purposes -- must ultimately be determined foreach specific locality from which fuelwood is to be extracted. An average oftheee two results, however, can be used to approximate the area required togenerate sufficient charcoal to sustain pig iron production in the amountscurrently projected along the Carajas-Sao Luis corridor. Accordingly, assumingthat some 45,450 hectares of forest 49 will be needed to support annualproduction of 60,000 tons of pig iron, in order to produce the 630,000 tons ofpig iron per year presently projected by CVRD, a total area of roughl z 477,225ha (or 4,723 sq. km.) of forest will need to be sustainably managed.

8.48 A more detailed analysis would also need to determine the amount ofprimary forest still available for sustained management in the areas surroundingpig iron production centers in the Carajas corridor. According to a diagnosticstudy undertaken for CVRD by the Federal Rural University of Rio de Janeiro,some 10,060,000 ha of forest remained uncleared in a 300 km wide strip along theCarajas railroad in 1985, of which roughly 7,320,000 ha (73%) was unexploitedand 2,740,000 ha (272) had already been selectively logged. These figures,however, do not separate out Amerindian Reserves, parks and other reserve areas,which occupy substantial areas and should be deducted in order to determine theactual area potentially available for future forest management. Furthermore,given the very rapid rate of deforestation occurring in the region, the aboveestimates would need to be updated for planning purposes and the remainingavailable forest areas (is. net of official reserves) would have to bespecifically located in relation to the pig iron producing poles (eg. Maraba,Acailandia, Santa Ines, etc.) in the corridor.

49 This is a simple average of the figures estimated on the basis of thedata for Buriticupu (54,440 ha, twenty year rotation) and Maraba (36,450 ha,fifteen year rotation), respectively.

50 To give a better idea of the comparative size of the area involved,according to the most recent Agricultural Census, the total area planted intemporary and permanent crops in the state of Para in 1985 was roughly 1,050,000ha (or 10,500 sq. km.), while the corresponding figure for Maranhao was on theorder of 1,3309000 ha (or 13,300 sq. km.).

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3, Sustained Forest Management: Possibilities

8.49 According to specialists familiar with both the Carajas region andthe characteristics of Amazonian frontier development more generally, the realpossibilities of implanting a system of sustained forest management in the areaare probably limited. '5 A report recently prepared for the World Bank by aforestry expert based at the Goeldi Museum in Belem, for example, observes that"long-term studies of nutrient cycling have led to the conclusion that lowlandforests in Amazonia should be managed for moderate extraction of hligb-qualityproducts such as fine timbers, which can be exported with relatively littlenutrient loss. In contrast, these studies show that harvesting of largequantities of biomass for production of low-quality products such as pulp orcharcoal can lead to unsustainable nutrient losses and long-term degradation offor'est ecosystems." 32 The same report also quotes the chief of research atCVRD's forestry subsidiary at Buriticupu as affirming that it is "still tooearly" to assess the long-term effects of the forest management studies presentlybeing carried out in the regiont.

8.50 In addition to these technical constraints, the experience thus farwith attempts at forest management by pig iron producers in the Carajas corridorsuggest that these efforts bave been half-hearted at best. 53 In one case, forexample, one of the two pig iron manufacturers based in Acailandia contractedwith CVRD's forestry subsidiary to manage 6,000 ha of the reserve at Buriticupuin order to produce charcoal. After less than 50 ha of this area had beenexploited, however, CVRD terminated the contract because the industry had failedto comply with the provisions of the agreed management plan. The same pig ironcompany subsequently bought a previously logged 5,200 ha area and has announcedits intention to acquire a total of 18,000 ha for charcoal production. Thisarea, however, would only theoretically be able to generate the amount offuelwood required if it were to be cut once every 6 to 9 years, a rate whichfalls well below the 12. year rotation period specified by the company in its

51 See, for example, the "technical annexes" by Fearnside, Valverde andothers in the document prepared by the Instituto de Apoio Juridico Popular, op.cit.

52 Anderson (op. cit., pg. 38). The studies cited were undertaken inSuriname by researchers connected with the Agricultural University in Wageningen,Holland. See Graaft N., "A Silvicultural System for Natural Regeneration ofTropical Rain Forest in Suriname," 1986, and Poels, R., "Soils, Water andNutrients in a Forest Ecosystem in Suriname," 1987.

53 In commenting on a preliminary verbion of this report, moreover,DNPA/MEFP observes that even "in Minas Gerais, a state that possesses soil,regional and climate conditions superior to those of Amazonia, to date, it hasnot been possible to induce pig iron producers to draw more than 20% of thecharcoal they consume from planted forests. All of the rest comes from nativeforest."

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management plan for the area and is even farther below the 25-30 year rotationperiod recommended by CVRD's forestry subsidiary. S

8.51 Another factor justifying skepticism as to the real possibilitiesof effectively introducing sustained forest management in the Carajas area isthe current institutional weakness of the federal and state agencies responsiblefor envrironmental protection -- including the pre rention of deforestation -- inthe region. At p-esent, official control of deforestation and environmentaldegradation, more generally, in the Carajas corridor is sporadic at best. 5$ Asdescribed in the aforementioned forestry consultant's report, "with staffs thatare poorly trained, underpaid and undermanned, and operating budgets that arewoefully inadequate, the state [environmental protection] agencies...areincapable of enforcing sustained forest use over the vast and poorly accessibleareas within their districts." 56 As a result of these and relatedconsiderations. the consultant concludes that:

all evidence suggests that the likelihood of [pig-ironindustries] using the natural forest sustainably isalwost nil. This is true not only because of the natureof pig-iron industries, which -- with their low profitmargins and high economic instability -- makes theminherently ill-suited for the long-term economiccommitment and risks associated with forest management.It is also true because of the nature of the localgovernment agencies responsible for regulating the useof natural resources. Furthermore, the very nature offrontier expansion in Amazonia acts to undermine theimplementation of sustainable forms of forestexploitation....In short, a combination of ecological,economic, political and social factors mitigates againstthe sustained use of forests for charcoal production inthe PGC region. Despite government attempts to legislatesustained forest management, the establishment of pig-

54 Ibid., pp. 39-40. As a result, Anderson concludes that the company willclearly "require a far larger forest area if it is to achieve its statedobjective of sustained forest management" and adds the opinion that "thesediscrepancies are no accident: they reflect a consistent lack of concern forthe long-term consequences of forest exploitation."

ss The OED/SEPLAN mission was informed by the state IBDF representativein Belem in April 1989, for example, that he had to rely on only some 40-50inspectors possessing limited logistical support to "control" illegaldeforestation in the entire state of Para which has an area of nearly 1.3 millionsquare kilometers.

56 Anderson, op. cit., pg. 41.

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iron plants and other charcoal-demanding industries willinevitably lead to the destruction of native forests. 57

4. Reforestation

8.52 Given the dim prospects described above, well before primary forestsdisappear altogether in the Carajas region, other options for the production ofbiomass and/or the use of alternative energy sources need to be seriouslyconsidered. If the predominant combustion technology among pig iron industriesis to continue to rely on wood-based charcoal, the alternative of producinglenha in totally reforested areas will also need to be carefully examined. Bothfrom a technical and an economic standpoint, however, the viability of large-scale reforestation in Eastern Amazonia appears to be questionable.

8.53 Based on preliminary test results with various species of plantedEucalyptus obtained by CVRD's forestry subsidiary at several localities alongthe Carajas corridor (eg. Acailandia, Buriticupu, Maraba, Nova Vida, Pindare-Mirim and Rosario), expected productivity appears to average ar rund 280 mts perhectare for a seven year cutting cycle. Under these conditions, in order tomaintain one pig iron furnace producing 60,000 tons per year, a total plantedarea of 17,010 hectares would be required. The production of a total of1,578,000 tons of pig iron on an annual basis, in turn, would requireapproximately 447,360 ha (or 4,474 sq. km.) of planted forest, while productionof 2.8 million tons of pig iron would necessitate on the order of 793,800 ha(7,938 sq. km.) of reforested area.

8.54 The actual experience with reforestation in Amazonia, however, hasthus far been limited, while the areas mentioned in the previous paragraphgreatly exceed those which have been reforested in the region to date. Thelargest area of tree plantations in Amazonia is located at the Jari Project, a1.6 million hectare estate on the Jari River in northern Para, formerly ownedby the American entrepreneur Daniel Ludwig. Through 1986, this project includedthe plantation of roughly 75,000 ha (750 sq. km.) of Eucalyptus and otherspecies, primarily for the production of cellulose. 38 The attempts to introduce

57 Ibid., pp. 41-42. With respect to the "undermining" impact of frontierexpansion in Eastern Amazonia, more specifically, Anderson refers to increasingpressures on Dosseiros to invade land "subjected to extensive and unapparentforms of occupation" such as forest management. In this connection, one of thetwo pig-iron industries located in Maraba informed the OED/SEPLAN mission thatjust such a land invasion had recently occurred in an area that it had acquiredto produce charcoal under a sustained management arrangement. An additionalcomplicating factor mentioned by Anderson is the increasing risk of fire in areassubjected to selective forest exploitation. This danger is particularly seriousin the area around Acailandia, where annual rainfall levels are lowest along theCarajas corridor and where the future demand for charcoal is likely to beconsiderable.

58 See Fearnside, Philip, "Jari at Age 19: Lessons for Brazil's

Silvicultural Plans at Carajas," Interciencia, Vol. 13, No. 1, Jan-Feb., 1988.It should be added that commercial reforestation at Jari started in 1973 and

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large-scale homogeneous Gmelina, Pinus and Eucalyptus varieties at Jari,however, have been plagued by various kinds of diseases and other problems thathave adversely affected their productivity.

8.55 An even more serious drawback, however, refers to the cost and,thus, the financial and economic viability, of reforestation in the Carajaecorridor given present pig iron prices. While precise figures are notimmediately available, as the earlier experience in Ninas Gerais suggests, thecosts of reforestation in Eastern Amazonia, despite low land and labor prices,are likely to be sufficiently high to make the planting of fuelvood for theproduction of charcoal inviable. In any event, the cost of producing charcoalfrom fuelwood plantations will certainly be considerably greater than that ofextracting lenha from the native forest, at least in the short and medium run.In economic terms also, the difficulties experienced at Jari are instructive.As summarized in one recent article on the project after nearly twenty years ofoperation:

Jari's plantations have proved to be far more costly and lessproductive than originally envisioned. Problems have includedinappropriate soils for some of the species planted,intolerance of some species to the occasionally severe dryperiods inherent in the variable climate that characterizesAmazonia, and a variety of pests and diseases. Despite theseproblems, Jari continues to pursue silviculture in theexpectation that future increases in world pulp prices,combined with continued reduction of costs and risks in theproduction process, will make the operation profitable.However, neither Jari's continued dedication to silviculturenor its substantial achievements in eliminating operatinglosses can be interpreted as meaning that large scalesilvicultural plantations are now an economically viabledevelopment mode in Amazonia.

8.56 In extrapolating from this experience to the projected fuelwoodneeds for charcoal production in the Carajas corridor, the same article observesthat "because of their vast area, the silviculture plantations necessary tosupply the pig-iron plants of Carajas would face problems and uncertainties evengreater than those at Jarn. The magnitude of the investment required by such ascheme also indicates the likelihood that the.. .pig-iron plants...will use largeamounts of wood from felling native forests for as long as these forestscontinue to exist in the area." 60 Finally, the article on Jari concludes in a

the maximum area planted in any one year (1983) was roughly 22,900 ha.

5 Ibid., pp. 23-24.

60 Ibid., pg. 24. On the basis of the characteristics of the first sevenpig iron smelters approved by the PGC by 1986, Fearnside estimates that morethan 710,000 ha of Eucalyptus plantations would be required to supply theircharcoal needs. This figure is equivalent to nearly ten times the area plantedin trees at Jari.

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manner similar to that of the earlier discussion on the possibilities ofeffectively introducing sustained forest management in Eastern Amazonia, byrecognizing that "native forest felling does avoid, at least temporarily, thecosts of planting and maintenance associated with silviculture. The pig-ironplants of Carajas are therefore likely to become major forces speeding thedeforestation of Eastern Amazonia." 6

5. Alternative Energv Sources and Plant Locations

8.57 In light of the doubtful technical and economic viability ofreforestation, together with the likely impossibility of introducing adequateforest management practices, on the scales required in the Carajas corridor,alternatives to wood-based charcoal as the energy source for pig iron smeltersshould be carefully considered, 62 as should alternative locations for plannedmetallurgical industries in the region. One possibility, for example, would beto use babacu palms that are extremely abundant in several subregions both inPara and, particularly, in Maranhao and which tend to appear in many placesthroughout Amazonia whenever the native forest is removed. Experiments havealready been made involving the burning of babacu nut husks which appears toproduce a charcoal of excellent quality. This source has the additionaladvantage of being highly renewable, since the fruit of the tree is utilizedrather than the trunk. In any case, further study is required with respect tothe requirements of babacu nut gathering (especially on private lands) andcombustion, as well as in relation to more rational planting techniques and thegenetic improvement of babacu palm species.

8.58 Other alternative energy sources include coke (ie. mineral coal),which would have to be imported either from southern Brazil (Santa Catarina) orabroad (Colombia) and natural gas, which would need to be brought in fromwestern Amazonia or from off-shore sources at the mouth of the Amazon River,among other possibilities. In conjunction with consideration of fuel sourcesother than wood-based charcoal, moreover, alternative locations for pig ironproduction should also be explored. One possibility, for instance, might be to

in trees at Jari.

61 Ibid., pg. 24. Fearnside further concludes that the problems involvedin sustaining large-scale reforestation efforts such as Jari apply not only tothe Carajas corridor, but "to any project that calls for establishing vastexpanses of tree plantations in the region." Accordingly, he recommends that "theplanners at Carajas and other projects should ponder well the lessons learnedat Jari."

62 As will be further explored in the next chapter, an additional argumentagainst the production of wood-based charcoal concerns the health problemsassociated with operation of the "hot tail" ovens, principally the constantexposure of charcoal producers to the smoke given off by the burning process.Recognizing the health hazards involved, the Secretariat of Health in the stateof Para, for example, has required that all rabo guente ovens presently annexedto sawmills located within the city limits of Maraba be transferred to areasoutside the urban center.

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concentrate such production near the coast (ie. in the vicinity of Sao Luis),where the cost of imported coke would be less than at other points along theCarajas corridor due to the avoidance of inland transportation costs. Some ofthe same ships that take iron ore and pig iron to external markets from the portat Ponta da Madeira could undoubtedly also supply coal relatively economicallyto Sao Luis, especially when compared with locations farther to the west.

8.59 In any event, a full analysis of alternative energy sources andplant locations for the production of pig iron and other iron ore-basedmetallurgical products should be undertaken prior to the approval orinstallation of any additional industries in the Carajas-Sao Luis corridor. 63

This study should clearly assess the environmental and social, as well as theeconomic, costs and benefits of the various alternatives considered beforemaking recommendations for the future development of the region. 64 In additionto its potential impact on deforestation, moreover, this study should considerother environmental constraints on industrial development at differentlocalities along the corridor including such variables as water availability,climate and wind direction and intensities at different times of the year --especially in places such as Acailandia and Maraba -- as well as the specificpollution and human health risks associated with charcoal, pig iron and othermetallurgical production activities in the region.

8.60 As will be further discussed in the concluding chapter of thisreport, finally, any such assessment should be complemented by a larger multi-sector regional planning exercise for the Carajas corridor. This mustnecessarily include the definition of subregion specific sustainable rural landuse and urban development strategies and the identification of correspondingregulatory and investment needs and alternative financing sources, among othermeasures. In addition to the federal government, municipal and stateauthorities, NGOs and representatives of directly affected local populationsshould actively participete in any such planning exercise, as well as in thesubsequent implementation of the resulting development inte-ventions. Given itspast involvement in the iron ore project and other -- especially ruraldevelopment -- activities in the Carajas corridor, moreover, the World Bankshould be willing to support these regional planning activities and, ifrequested by the Brazilian Government, to help prepare and finance associatedinvestment programs.

63 In its comments on an earlier version of this report, DNPA/MEIPexplicitly agreed with the "importance that alternative energy sources and otherimprovements (in relation to industrialization of the Carajas corridor] bestudied so as to minimize the negative environmental effects that [this process]could cause."

64 Such a study has, in fact, already been proposed to the BrazilianGovernment by the Bank under the auspices of the UNDP/World Bank Energy SectorManagement Assistance Program (ESNAP). See, for example, ESMAP, "Brazil: CarajasEnergy Supply Options Study - Activity Initiation Brief," Washington, August 1988and ESMAP, "Brazil: Carajas Energy Supply Options Study - Terms of Reference,"Washington, September 1988.

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F. Conclusion

8.61 As indicated in the previous chapter, in many ways the Carajas IronOre Project provides a positive example as tc how envirormental concerns shouldand can be integrated into the design and implementation of large-scaleinfrastructure and mining irvestments. On the other hand, the operation alsoprovides a clearly negative example as to what can happen in physicalenvironmental terms when similar concerns are not systematically extended to thelarger area of influence of such interventions. 65 Largely as a result of thehighly differentiated treatment -- from an environmental planning and protectionstandpoint -- given to the areas over which it did and did not have directcontrol, the environmental situation outside CVRD's concessions at the mine andport sites and beyond the 80 meter right-of-way of the Carajas railroad is, atpresent, distinctly different from that within these boundaries.

8.62 The areas outside CVRD's control, but adjacent to the Carajas-SaoLuls railway and located along the roads installed and/or upgraded in connectionwith the iron ore project, in particular, present a sharply contrasting pictureto those inside the company's minin8 and port concessions. Over the past decadeand a half, extensive areas in the Carajas corridor have been subject to rapiddeforestation, including the unlawful removal of forest cover on steep slopesand hilltops, in most cases allegedly for the installation of pasture land. Veryfew cattle, however, are presently in evidence on much of the land initiallyconverted to pasture, -while there are clear signs of second growth vegetationand soil erosion in many areas. Between the mine site and Maraba along both theCarajas railway and the PA-275/PA-150 highways, more specifically, very littleforest cover can still be observed, while the only stretch of continuous primaryforest remaining along the roughly 200 km rail link between Maraba andAcailandia is where it cuts the Mae Maria Amerindian Reservation. Even in lessaccessible areas on the southern and northern perimeters of CVRD's concessionat Carajas, a patchwork of deforested areas where small settlers and prospectorsare attempting to establish themselves can be clearly seen frow the air.

8.63 According to early World Bank project preparation reports, however,much of the above mentioned areas, together with other subregions traversed bythe Carajas-Sao Luis railway between Acailandia and Santa Ines, were almostentirely covered by primary forest prior to project implementation. The Bank'sStaff Appraisal Report, for example, observes that the railroad route between

65 In its comments on an earlier draft of this report, the Ministry ofInfrastructure highlights the "enormous structuring power" of the project andindicates that "the principal problems identified by the present case studvcould have been anticipated and pertinent actions taken had environmental impactevaluation studies been carried out at the project conception stage. That suchstudies were not undertaken at that time is largely explained by the fact that,under Brazilian federal law, environmental assessments were not required until1981 or fully regulated until 1986, while the Carajas Project was initiatedduring the 1970s. Nonetheless, the Ministry points out that such studies werecarried out during project implementation, "permittt4ng the adoption ofenvironmental control measures for mining activities, rail transport and portoperations which are considered exemplary by all knowledgeable specialists."

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Santa Ines (km 200) and Carajas (km 890) "lies through jungle with large anddense timber and little civilization." Today, the "jungle" and its "large anddense timber" are nowhere to be seen, while the signs of "civilization" areincnrasingly evident. More generally, much of the area in southeastern Para andcentral and western Maranhao has undergone substantial land use change over thepast two decades. According to data obtained by the OED/SEPLAN mission in April1989, on the jrder of nine million hectares had been deforested in Para, mainlyin th'; southeastern part of the state, between 1978 and 1986, while roughly fourmillion hectares suffered a similar fate in Maranhao between 1980 and 1988.Associated with this deforestation, moreover, have been local and, perhaps,regional and even global climate change, the loss of terrestrial and aquafaunaand other forms of biodiversity, localized soil and water contamination, amongother kinds of physical environmental degradatJon.

8.64 While the Bank-assisted Carajas I x Ore Project can not be helddirectly responsible for much of this environmental damage, it has, nonetheless.indirectly -- if unintentionally -- contributed to this process by greatlyimproving accessibility to and within the region and by attracting considerablenumbers of new settlers to the area. This has particularly been the case alongthe immediate rail and road corridors estblished by the project. Many of therecent migrants to the Carajas area came initially as construction workers orin pursuit of other employment opportunities directly or indirectly associatedwith the iron ore operation as well as in connection with nearby prospecting andagricultural colonization ventures whose physical access was made possible orgreatly facilitated by project-related infrastructure improvements.

8.65 As will be further explored in the next chapter, furthermore,improved physical access has also enhanced land values and stimulated increasingland concentration in the area by making it more attractive for outsideinvestors to establish large-scale cattle ranching projects. In parts of theregion, this process has contributed to the expulsion of small farmers andoccasional violent conflicts over land occupation. Many such ranching projects,additionally, have been implanted essentially as a way of gaining access toofficial fiscal favors and subsidized credit, as well as to acquire largeparcels of land, which are held primarily as a hedge against inflation and/orfor purposes of speculation. In the process of preparing pastures on theseholdings, moreover, commercially valuable hardwood is normally extracted andsold to the booming local lumber industry, primarily for export to south-central Brazil or abroad, while most of the remaining vegetation is burned. Inmuch of the project's area of influence, finally, once the primary forest iscleared, the underlying soils rapidly tend to lose their nutrients, and, hence,their productive value either as pasture or for agricultural purposes, whileprocesses of physical degradation, abandonment and the clearing of new areasgenerally follow.

8.66 The Carajas Project, thus, has tended to reinforce and, in certainareas, accelerate the adverse physical environmental impacts of other public andprivate sector interventions (road building, fiscal incentives, prospecting,etc.) already acting on the region, in the process contributing to stepped updeforestation, an associated loss of biological diversity and other negativeecological consequences. Further exacerbating the project's direct and indirectimpact on the physical environment to date, moreover, is the recent installation

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of a number of charcoal burning plhg iron smelters along the Carajas-Sao Luiscorridor. While present levels of pig iron (&ind, hence, charcoal) output arestill relatively small, all four existing industries have plans to expand and/or"verticalize"' their production, while numerous other pig iron pro4ects havealready been approved by the Grande Carajas Program for future installation inthe region. A planning exercise for the Carajas corridor, in fact, anticipatedregional production of as much as 2.8 million tons of pig iron and 9.5 milliontons of steel products annually, potentially requiring annual consumption ofsome 5.5 million tons of charcoal, by the year 2010. Federal decrees promulgatedin 1990, however, presently restrict pig iron production in the area to 640,000tons per year.

8.67 Rough estimates made by the OED/SEPLAN mission indicate that, inorder to generate sufficient charcoal to meet the latter target through aprocess of "sustained forest management," an area of secme 477,225 hectares (or4,723 square kilometers) would be required. Despite recent official regulations,the likely alternative to sustained management and/or the complete reforestationof existing degraded and largely abandoned pasture lands -- both of which implysubstantial costs and technical uncertainties -- is the continued devastationof the remaining areas of primary forest in the Carajas region, followed by theextraction of fuelwood at increasingly greater distances over time from thecenters where the pig iron industries are located. This, in fact, is preciselywhat occurred historically in order to fuel pig iron smelters in Minas Gerais,a process that strongly contributed to the virtual disappearance of nativeforests in that state. Among the risks associated with the potential destructionof the remaining primary forest in the Carajas corridor, moreover, is theincreasing pressure likely to be generated on the very Amerindian areas whichthe Bank-supported iron ore project has sought to protect and preserve.

8.68 Since continued clearing of the native forest is likely to involvea financial cost which is significantly lower than that for either sustainedforest management or reforestation, at least ir the short and medium run, caremust be taken by the appropriate -- but, at present, technically andinstitutionally weak -- official environmental protection agencies to verify andcontrol the sources of charcoal utilizad by pig iron producers in the Carajascorridor. In addition, the viability of alternative energy sources and plantlocations for pig iron and other metallurgical industries should be thoroughlyexamined, taking the potential environmental and social, as well as economic,costs and benefits of the various possible options clearly into account. Thisexercise, in turn, should be complemented by larger multi-sector regionalplanning and development efforts for the Carajas corridor, which shouldnecessarily include the active participation of local governments and directlyaffected populations, as well as state and federal planning and environmentalagencies. As a logical extension of its earlier involvement in the Carajas IronOre Project and in several rural development operations in the region, finally,the Bank should be willing to provide technical and financial support for theseactivities.

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IX. HUMAN ENVIRONMENTAL IMPACTS

9.01 This chapter will examine the principal human environmental impactsassociated with the Carajas Project, excluding those specifically involvingAmerindian communities which have been described in Chapter VII above. Forpurposes of the following discussion, 'human environmental" impact:- will includethe project's effects on population growth, migration and employment and onvarious aspects of recent rural and urban development, including public healthconditions, in its immediate area of influence. Since -- in the absence of muchmore extensive field research than could be undertaken within the resourcelimitations of the present study -- it will frequently not be possible to isolatethe specific consequences of the iron ore operation from those of other publicand private interventions occurring at roughly the same time in the Carajascorridor, much of the discussion which follows will concern larger socio-economic transformations which have affected -- and continue to affect -- non-Amerindirun populations in the region. Wherever possible, however, the directlinkages between the phenomena discussed and the Bank-supported Carajas Projectwill be identified.

A. Pogulation. Migration and Employment

9.02 The Carajas Project has contributed to a large influx of populationto the railway corridor, especially in the western portion of this area. IBGEpopulation estimates for 1985 indicate that the municipalitias located alongthe corridor, as a group, witnessed population growth on the order of 5.8% ayear between 1980 and 1985, as compared with roughly 2.2% for Brazil as a wholeduring this period. Total population in the area, according to these estimates,increased from slightly over 1.1 million inhabitants in 1980 to nearly 1.5million in 1985, or by more than 350,000 people. In all likelihood, these rapidgrowth rates have continued over the past several years, although a definitivepicture regarding demographic tendencies in the Carajas area during the latterhalf of the present decade will only be possible once the results of the 1990census become available.

9.03 More concretely, IBGE estimates suggest that population in themunicipality of Maraba more than doubled fror just under 60,000 in 1980 to nearly134,000 in 1985, thus expanding at an av.rage rate of 17.4% per year. InImperatriz, in turn, even though the demographic growth rate was less dramatic(6.9%) than in Maraba, the population increment in absolute terms was evengreater, with the number of residents increasing from some 220,000 in 1980 toover 307,000 in 1985, when Acailandia -- which was dismembered from Imperatrizafter 1980 -- is included. The new municipality of Acailandia alone registeredan estimated population of more than 70,000 in 1985. X

X SUCAM estimates (as reported in Gistelinck, op. cit.) indicate that, by1986, population in Imperatriz exceeded 281,000, while that in Acailandia wasslightly over 83,000, bringing the combined total to nearly 365,000.

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9.04 At the other end of the Carajas corridor, moreover, growth wassimilarly impressive in absolute terms with the population of Sao Luis expandingfrom 450,000 in 1980 to close to 565,000 five years later according to IBGEestimates. 2 Smaller municipalities along the corridor, especially Sao Joao doAraguaia (5.7%) and Itapecuru-Mirim (5.52) likewise registered significant growthrates, while population also increased substantially in Santa Luzia, Santa Inesand Vitoria do Mearim (which were all estimated to have grown at a rate around4.4%). Only Anajatuba, Pindare-Mirim, Arari and Rosario -- all of which arerelatively small municipalities located fairly close to Sao Luis -- while stillregistering positive population growth rates, may have suffered net out-migration during the 1980-85 period according to IBGE estimates.

9.05 In comparison with the eastern part of the Carajas corridor near SaoLuis, all the other municipalities in the area -- especially Maraba, Imperatriz,Sao Joao do Araguaia, Itapecuru-Mirim and Sao Luis -- received substantial netin-migration during the first half of the 1980's. Much of this is likely to haveoccurred directly or indirectly as a result of the Carajas Project, although thediscovery of gold at Serra Pelada and the GETAT colonization projects were alsoimportant factors in the inflow of population to Maraba. s While IBGE does notbreak down the 1985 population estimates by urban versus rural location, mostof the observed increase undoubtedly took place in towns and cities, particularlySao Luis, Imperatriz, Maraba, Acailandia and Parauapebas, with much of the growthof the latter three being a direct consequence of the iron ore project.

9.06 As described in somewhat greater detail in Chapter VI, the CarajasProject has been responsible for substantial amounts of temporary and permanentemployment in the area. CVRD indicates, for example, that when constructionactivities were most intense at the mine, rail and port sites (August 1982), atotal of some 27,000 workers was employed. The vast majority of these workerswere brought in by contractors from outside the immediate Carajas area, both fromsouthern and northeastern Brazil. Many of these migrants, however, chose toremain in the region after construction activities were completed. Permanentemployment at the mine, along the railroad and at the port by CVRD and itsservice contractors, while involving considerably smaller numbers than duringthe construction phase, is, nevertheless, significant. According to CVRD's PCR,as of September 1988, nearly 4,200 people were employed at the mine, port andalong the railroad in order to operate the project at a level of roughly 30million tons of iron ore per year. A large share of these employees was alsobrought in from outside the region, mainly from CVRD's southern system in MinasGerais and Espirito Santo. More will be said about the project's impact on

2 SUCAM estimated a population of just under 597,000 in Sao Luis in 1986.

3 In its comments on the draft report, CVRD argues that much of thedemographic growth in the region during the first half of the 1980's, as in thepast, was due to the westward expansion of the agricultural frontier, with lowerrates of growth being registered in parts of the corridor (eg., Imperatriz)between 1980-87 than during the 1970's. CVRD also notes that a large share ofthe labor force utilized in the installation of the iron ore project werepermanent employees of the construction firms involved, while that part that wascontracted locally consisted mainly of unskilled landless rural workers.

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employment generation below in connection with its effects on urban developmentin the Carajas corridor.

B. Rural Development

9.07 Under the heading of rural development impacts, a number of specific,but interrelated, recent tr.nsformations in the rural sector in Eastern Amazoniawill be briefly described. These include accelerating land speculation andconcentration, growing land conflicts and rural violence and changes in ruraloccupationul structure and land use, together with impacts on rural health andfood security and on socio-political organization in the countryside over thepast decade and a half. As suggested at the outset of this chapter, thesetendencies are a combined and complex response to a variety of public and privatesector interventions in the Carajas corridor over the past several'decades, theirou ore operation being the foremost among them.

1. Land Speculation ard Concentration

9.08 Available evidence strongly suggests that the twin processes of landconcentration and property speculation characteristic of Amazonian developmentover the past twenty five years have been reinforced in a substantial part ofEastern Amazonia by the Carajas Project. Although polarization of land ownershipin the region had already reached an advanced stage before 1980, the iron oreoperation has clearly exacerbated this process. The project, more specifically,has stimulated increased land occupation in the immediate vicinity of the mine,railway and port areas, as well as along the roads (PA-275 and PA-150) installedandlor upgraded under the operation. To the extent that the iron ore project isa sine qua non of associated undertakings such as the Grande Carajas Program andthe North-South railway, moreover, it has also served as a catalyst for landconcentration in a much larger area.

9.09 In direct terms, construction of the mine and railway to Sao Luis,together with the hi8hways connecting Carajas and Maraba, has led to a generalrise in rural property values along the entire Carajas rail and road corridors.This impact has been especially significant in the areas near major towns andcities such as Maraba, Acailandia, Santa Ines and Sao Luis where industrial andrelated infrastructure developments are, or soon will be, concentrated. "

4 In commenting on the preliminary version of this report, CVRD affirmsthat the land concentration in the project area "constitutes an integral partof the agricultural frontier occupation process throughout Brazil and the regiondid not contradict the norm. In the first instance, the frontier is occupiedby landless farmers in search of parcels to cultivate. Land is seen as a factorof production rather than a means of exchange....The production processcharacteristic of this front is one of slash and burn in order to plant. Afterthe harvest, the slash-burn-plant process proceeds in other areas, which impliesthe permanent necessity to expand the agricultural front. The initially clearedareas are then occupied by a second wave, who use the land as a means of exchangeand for cattle raising, leading them to put together the small parcels intolarger holdings. Analysis of census data indicates that land concentration isa continuous process that is generalized throughout the country."

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Expansion of the highway network as a function of the Carajas operation -- andthe resulting improvement in access both to and within the region -- togetherwith major influxes of laborers seeking employment on in project or project-related construction and the closely associated growth of a variety of localcommercial and service activities have all contributed to the recent appreciationin land values in the region.

9.10 An additional boost to property values and land prices has occurred,moreover, due to the dismemberment of large municipalities as an unanticipatedconsequence of) the Carajas Project investments, the rapid growth of rural andurban population in outlying districts of territorially large pLunicipios and thepolitical pressure for independence thus generated. New and fast-growing townssuch as Parauapebas, Curionopolis and Acailandia -- emancipated from Maraba andImperatriz, respectively -- hav. recently (1988) acquired their own municipalstatus and with it control over their own financial activities and increasedlocal revenues, which, in the case of Parauapebas and Curionopolis, include thosegenerated from the iron ore and gold mines at Carajas and Serra Pelada,respectively. The municipality of Maraba, on the other hand, has lost theseimportant revenue sources. ' The increase in land values associated with thecreation of new municipalities can be particularly dramatic; following thk birthof the municipality of Parauapebas in late 1988, for example, rural propertyvalues in some areas rose by nearly 3000% -- from Crz$ 7 to Crz$ 200 per hectare-- according to local informants.

9.11 Another possible future political-administrative-financialrepercussion of the Carajas Project should also be mentioned. When OED visitedthe Carajas-Maraba area in April 1989, a significant political movement, ledprimarily by local mayors, was emerging -- similar to that which resulted in thecreation of the state of Tocantins -- having the objective of petitioning thefederal government to establish another unit of the Brazilian federation to becalled the state of "Carajas." 6 Should the creation of a new state in southern

5 In compensation for the dismemberment of Parauapebas, local authoritiesagreed that a large pig iron smelter, that was originally to have been set upat Parauapebas, would be relocated to Maraba for future installation in therecently established industrial district situated directly to the south of thiscity. The industrial district of Maraba is located between the PA-150 highwayand the Carajas railway and houses two of the four pig iron plants presently inoperation in the Carajas corridor. CVRD plans to build a short spur from theexisl:ing railway into the Maraba industrial district, primarily in order to servethe pig iron smelters.

6 The creation of new states in Brazil, especially in the Center West andNorth regions, has a number of recent precedents aGide from the aforementionedcase of Tocantins. The former state of Mato Grosso was divided into two states -- Mato Grosso and Mato Grosso do Sul -- in 1979, while the Federal Territory ofRondonia was formally elevated to statehood in December 1981. The newConstitution approved by the Brazilian Congress in October 1988, moreover, inaddition to creating Tocantins, also authorized the future transformation of theFederal Territories of Amapa and Roraima into states.

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Para, in fact, occur at some point in the future, this would result in thegeneration of significant additional revenues -- initially in the form of federaltransfers -- together, in all likelihood, with stepped-up investments in physicalinfrastructure and associated further appreciation of rural land values in thearea directly polarized by the Carajas mining operation.

9.12 The iron ore project has also contributed in less immediately evidentways to the generalized trend in Amazonia toward rising land values and theconcentration of property ownership. Tax breaks and other incentives granted tolivestock, lumbering and pig iron, among other, enterprises under the GrandeCarajas Program have made Eastern Amazonia an increasingly attractive place forprivate investment. At the same time, such subsidies, combined with high ratesof inflation, have encouraged the acquisition of large land holdings purely forspeculative purpo3es. Due to the territorial overlapping with longer-standingregional development programs in the Northeast and Amazonia, moreover, manybusiness ventures receiving tax holidays under the Grande Carajas Program canalso benefit from SUDENE or SUDAM incentives. 7 The construction and recentopening of the first segment of the North-South railway has likewise increasedthe upward pressure on land prices in the region and encouraged propertyconcentration in the Carajas corridor, particularly in the area betweenAcailandia and Imperatriz, as well as elsewhere in southern Maranhao, Tocantinsand beyond.

9.13 Agricultural census data reveal a strong tendency toward increasingland concentration in most of the microregions containing or bordering on theCarajas railway corridor from the inception of the mine and its associatedtransportation infrastructuire in the late 1970's and the PGC in 1980. 8 At themicroregional level, between 1980 and 1985, the proportion of total farmlandoccupied by small holdings with less than ten hectares -- which account forroughly 70-90% of all cultivators -- fell from 15% to 4% in Pindare, from 5% to3% in Imperatriz, from 10% to 6% in Mearim, from 3% to 0.2% in northern Goias

7 Enterprises located anywhere in the state Maranhao are eligible toreceive incentives granted by SUDENE, which covers the entire Northeast censusregion plus the northern part of the state of 'iLnas Gerais, while those locatedwest of the 44th parallel -- just to the east of Sao Luis -- can also benefitfrom incentives granted by SUDAM, whose area of jurisdiction is "Legal Amazonia."

8 The "homogeneous microregion" is a unit utilized by IBGE for statisticalpurposes. Each such microregion aggregates a number of contiguous municipalitieswithin the same state having roughly similar ecological characteristics andgenerally, but not always, polarized by a relatively large urban center. Themicroregions (and respective municipalities) in the immediate Carajas railwaycorridor are: (i) Sao Luis (Sao Luis and Rosario); (ii) Baixada OccidentalMaranhense (Anajatuba, Arari and Vitoria do Mearim); (iii) Itapecuru (Santa Ritaand Itapecuru-Mirim); (iv) Pindare (Santa Luzia, Santa Ines, Pindare-Mirim); andImperatriz (Imperatriz and Acailandia) in Maranhao; and Maraba (Maraba, Sao Joaodo Araguaia, Parauapebas and Curionopolis) in Para. The larger area of influencealso includes the Mearim microregion in Maranhao, the Xingu, Araguaia Paraenseand Guajarina microregions in Para and the Extremo Norte Goiano microregion inTocantins.

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(ie. the "Parrot's Beak") and from 44% to 152 in Sao Luis. Conversely, the areain establishments larger than 1,000 hectares -- which account for less than onepercent of all farmers -- grew substantially over the same period from 9% to 53%in the Sao Luis microregion, from 10% to 37% in Pindare, from 222 to 37% inImperatriz and from 38% to 58% in what was formerly northern Goias.

9.14 While data at the state or microregional level illustrate the broadtendency with respect to land concentration in Eastern Amazonia, informationfor individual municipalities helps to pinpoint more localized impacts onlandownership patterns in the areas immediately affected by the iron ore project.In the municipality of Santa Ines, for example -- which, in addition to beingdirectly served by the Carajas railroad, is also the proposed future site of anumber of PGC approved metallurgical plants -- smallholders with less than 100hectares have seen their share of farmland drop from 33% to 21% between 1980 and1985. The area in establishments between 1,000 and 10,000 hectares in thismunicipality, in turn, more than doubled from 23% to 49% over this brief period.Yet even census data at the municipal level is of limited use when analyzing thespatially concentrated changes in landownership that appear to have occurred asa direct result of the infrastructure investments associated with the CarajasPro4ect. Informants in Maraba, for instance, indicated to OED that, in the late1970's farmers in parts of the municipality had already purchased large tractsof land along the proposed path of the Carajas railway, subsequently acceleratingthe pace of deforestation and pasture formation. Carefully focussed fieldstudies, however, would be necessary to ascertain the precise nature, extent andmotives of such localized changes.

9.15 These concentrationist tendencies, however, are neithergeographically uniform, nor constant over time. During the 1980-85 period, forexample, the agricultural census shows an increase in both the number ofsmallholdings and the proportion of farmland occupied in establishments of lessthan 100 hectares in some microregions such as Maraba and Xingu. This apparentanomaly is due to several factors. Firstly, IBGE census data tend tosubstantially understate the actual degree of land concentration since theymeasure spatial units ("establishments") without regard to multiple holdings bythe same owner or his direct family members. Secondly, in relatively small areas-- such as parts of the "Brazilnut Polygon" near Maraba -- the influx ofposseiros, subsequent estate occupations, the MIRAD interventions and GETATsettlement schemes -- all of which were briefly described in Chapter IV above-- have produced some de facto land redistribution to the benefit ofsmallholders, albeit on a relatively limited scale and with no guarantee thatthis process may not soon be reversed in the absence of production support andother basic services. 9 Thirdly, in recent years there has been a shift ofcapital investments from Amazonia to the more fertile Center West cerrado, whichis clearly reflected in the rapid expansion of soybean production, livestock

9 The limited success of these projects is epitomized by the recentreconcentration of properties in the GETAT colonization schemes near Carajasdescribed in Chapter IV. Land titling by GETAT may also have had a marginallypositive effect, but, as likewise indicated in Chapter IV, it has servedprimarily to consolidate existing polarized landownership rather than to bringabout significant property redistribution in favor of small farmers.

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herds and mechanized agriculture in the latter area. Finally, the generaleconomic crisis of 1980-83, financial reforms which facilitated profit-makingon the domestic money market and the declining availability of subsidized ruralcredit may also have slowed down large land acquisitionis in Eastern Amazonia by1985.

2. Land Conflicts and Rural Violence

9.16 Brazil, in general, and Eastern Amazonia, in particular, havewitnessed a gradual escalation in rural violence since the mid-1960's as a resultof the growing struggle over land among small cultivators and Amerindian groups,on the one hand, and large commercial farmers, ranchers and speculators, on theother. Land-grabbing (grilagem) has inexorably followed the agricultural frontieras migrants have moved westward from the Northeast and northward from the Southover the past three decades. Although land conflicts are by no means a recentphenomenon on the Brazilian agricultural frontier, there has, in fact, been amarked increase in rural violence in Eastern Amazonia during the 1980's. To theextent that they have pushed up land values, encouraging property concentration,and stimulated in-migration, encouraging competition for land, the Grande CarajasProgram and the Carajas Iron Ore Project must share some of the responsibilityfor this trend. At the same time, the rise in rural violence in the Carajas areain the mid-1980's is also partially due to the agrarian reform law (PNRA),discussed in Chapter IV above, which, by excluding nominally "productive"properties, has led directly both to additional pasture formation and increasingattempts to evict small farmers. Federal and state laws requiring thedeforestation and conversion to pasture of a given proportion of the total areaclaimed as a prerequisite for obtaining legal land title have further exacerbatedthis process.

9.17 According to official figures, by 1981 over half of Brazil's landconflicts took place in Amazonia, with this share rising to almost two thirdsby 1987. 10 The "Parrot's Beak" area near the Carajas Project in EasternAmazonia is a particularly strong focus of rural violence. " This areawitnessed 104 land-related deaths in 1985 and 69 such fatalities in 1986,corresponding to roughly two-thirds of the combined total for the states of Para,Maranhao and Goias (now Tocantins and Goias). In the first six months of 1985alone, no fewer than 36 peasant farmers from only three municipalities in theCarajas Project area died at the hands of gunmen in land conflicts, while 16 such

10 MIRAD, Conflitos de Terras, Brasilia, 1987.

11 In its observations on the draft of this report, CVRD attributesviolence in the Parrot's Beak area to the "encounter of two migratory fronts,originating in different regions and pursuing distinct objectives. One came fromthe south of Goias, extending [northward] along the Belem-Brasilia and wascomposed of large ranchers. The second, composed of landless peasants expelledfrom the Northeast, moved in search of available land for agriculture. Theencounter of these two fronts exacerbated land conflicts. This region today ischaracterized by the highest level of rural violence in the country."

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deaths occurred in a two week period in 1986. 12 Long-standing disputes insixteen estates in the municipios of Maraba, Sao Joao do Araguaia and SantaLuzia, in the immediate Carajas rail corridor, and nearby Xinguara and Conceicaodo Araguaia in southeastern Para, accounted for almost 90 deaths between 1985and 1987. 1'

9.18 Traditionally, most deaths associated with land conflicts inAmazonian frontier areas have resulted from the hiring of gunmen by largelandowners to expel peasant farmers. In Eastern Amazonia, however, the risingnumber of fatalities is due in part to more widespread and better organizedresistance by posseiros. The posture of more active resistance is reflected inthe spread of estate occupations (invasoes) throughout the region, as well asin the increased number of gunmen and bodyguards killed by their intended victimsin land disputes. In the case of the sixteen estates in the Carajas region citedabove, for example, fully one-third of the fatalities fell into this category.

3. Rural Occupational Structure

9.19 The changing pattern of rural landownership in much of Brazil hasbeen accompanied by a modified occupational structure whose main characteristichas been a gradual reduction in the number of independent smallholders inrelation to other categories of rural workers. In Amazonia, generally, and inEastern Amazonia, in particular, an official policy bias against small producers,together with open public sector support of large enterprises such as cattleranches and relatively poor soil conditions and inadequate agricultural services,has prevented the region from permanently absorbing small cultivators on asignificant scale and stimulated rural out-migration, as well as a sharp increasein wage labor, in many subareas. In Brazil overall, the proportion (and numbers)of landowners and their families in the rural labor force dropped from 80% (16.3million) in 1975 to 74% (15.6 million) in 1980. Over the same period, however,temporary wage laborers increased from 8% (1.7 million) to 10% (2.2 million) andpermanent wage workers from 7% to 10% of the rural labor force. 14

9.20 In Amazonia, according to INCRA data, temporary wage labor grew by120% between 1972 and 1978 and by 55% from 1978 to 1986. These workers wereabsorbed mainly by smaller and medium-sized properties in the 10 to 100 and 100to 1,000 hectare categories, which together employ two-thirds of all temporaryfarmhands. The number of temporary laborers in the region almost tripled between1972 and 1978, from 24,000 to 65,000. While preliminary INCRA survey results for1986 do not permit such disaggregation, it is likely that this trend continued.The increase in the use of permanent wage labor in Amazonia has certainly been

12 Centro de Educacao, Pesquisa e Assessoria Sindical e Popular (CEPASP),"Questoes Fundiarias," Maraba, mimeo, 1986.

13 The assassinations of several prominent activists, including lawyersand churchworkers, who supported small farmers in the region, duriag the sameperiod further highlighted this problem. See Amnesty International, op. cit.

- 14 Guanziroli, C. "Informacoes Basicas sobre a Estrutura AgrariaBrasileira," mimeo, IBASE, Rio de Janeiro, 1984.

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significant in the early 1980'e, demonstrating a rise of over 7% during thisperiod. 15 Largri-scale acquisition of land for pasture formation and extensivegrazing practices (ie. very low cattle densities per hectare), as well as pureland speculation, have not only squeezed out small farmers, but have alsogenerated little employment.

9.21 Land concentration in the area traversed by the Carajas railway,more specifically, has produced what many local observers call an "emptying ofthe countryside," as smallholders have left either under direct pressure or asthe result of wider factors emanating from adverse agrarian policies and themacroeconomic situation which make farming on this scale increasingly difficult.In the municipalities bordering on the Carajas railway, two-thirds of theregion's 100,000 or so farming families do not own the land they work, but areincreasingly hired under temporary verbal contracts as wageworkers, sharecroppersor tenants. 6 Furthermore, many of these farm workers are no longer allowed tolive on the land they cultivate, but reside in poor squatter neighborhoods inburgeoning towns such as Acailandia and Maraba, travelling increasing distancesto their places of work. Independent smallholders tend to be concentrated inrelatively reduced areas which have successfully resisted the monopolization ofland by large estates such as the "Brazilnut Polygon" in Para and areas near thePindare and Curu Rivers in Maranhao or where official colonization schemes --such as those on the southern periphery of the Carajas Project or situated alongthe Transamazon highway near Maraba -- have provided some (limited) security oftenure. 1

9.22 One new source of rural employment arising from the Carajas Iron OreProject, in addition to temporary jobs created by construction activities, isthe production of charcoal as fuel for pig iron smelters and other industrialplants along the railway corridor discussed in the previous chapter.Metallurgical companies provide financial incentives and technical assistancefor the establishmant of charcoal ovens to both large and smaller landownerswilling to use their timber reserves in this fashion. Although part of the woodutilized for this purpose presently comes from sawm.'ll residues, these willquickly become insufficient as the demand for charcoal grows. Already, littlemore than a year after the first pig iron smelters came on stream, there aresigns that growing numbers of small cultivators are contemplating becoming either

IS See the following INCRA publications: Estatisticas Cadastrais -Recadastramento 1972, Vol. 1, Brasilia, 1974; Estatisticas Cadastrais -

Recadastramento 1978 - Brasil e Grandes Regioes, Vol. 1, Brasilia, 1985; andEstatisticas Cadastrais Anuais (Dados Preliminares), Brasilia, 1986.

16 Gistelinck, op. cit.

17 CVRD, in commenting on the draft report, observes that "the railroadshould not be attributed responsibility for the emptying of the countryside inthe rural areas along the Carajas corridor. This is a general phenomenon thatoccurs throughout the country caused by land concentration and is responsiblefor the swelling of urban areas both in the corridor and in the metropolitanperipheries of south/southeast Brazil (Rio de Janeiro, Sao Paulo, BeloHorizonte)."

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suppliers of timber to charcoal producers or charcoal manufacturers themselvesin oTder to supplement their low incomes. A class of middlemen (emRreiteiros)acts as intermediaries between small producers with no transport facilities oftheir own and the pig iron industries. In addition, there has been a steadyincrease in the number of wage laborers (carvoeiros) who man and supervise thecharcoal production process using batteries of mud-brick, dome-shaped rabo quenteovens. Due to the specialized nature of this process and the lack of trainedlocal manpower, part of the labor required to operate these ovens is brouglht infrom Minas Gerais, where charcoal has long been produced for the local iron andsteel industry. 'a

9.23 One recent comparative study of two communities near Maraba suggeststhat, where small farmers already possess land titles and relative security oftenure, charcoal manufacture is an attractive option, but that untenured2isseiros have been less tempted to pursue this activity for fear of beingevicted on the grounds of carrying out destructive deforestation. However, hightransportation costs due to poor road conditions, increasing distances of timbersources, the relative dependence on skilled labor from outside the region, aswell as growing political pressure to limit predatory use of the rainforest,could impose limits on the extent to which such activities can offer significantemployment opportunities in and around towns and cities such as Maraba,Acailandia, Santa Ines and Rosario. In Santa Ines, moreover, as suggested in theprevious chapter, the possibility of using babacu husks rather than timber couldresult in an alternative -- and much more easily renewable -- source of charcoal.Many potential charcoal producers among the farming population, furthermore, areconcerned about the environmental damage which such activities could cause interms of deforestation and associated erosion and soil degradation. '9 Clearly,this is an area requiring more detailed investigation before the pig iron andsteel industries are permitted to expand further in the Carajas corridor.

9.24 In summary, with the exception of several centers of small farmeractivity along the Carajas railway corridor -- such as the "Brazilnut Polygon"near Maraba and the Pindare region near Santa Ines -- the trends observableduring the 1970's have continued throughout the 1980's. As landownership hasbecome more concentrated and pasture formation more prominent, independentsmallholder farming has become less sustainable in social, political andecological terms. The Carajas Iron Ore Project and the wider program to whichit is linked have indirectly contributed to or reinforced these processes at theregional level. In addition, more direct impacts on employment are evident. Somediversification of job opportunities has been generated by large-scaleconstruction works at the mine and along the railroad. Gold prospecting in theregion, stimulated to a large degree by Carajas mining interventions, is alsoimportant either as a complement to or substitute for small farming activitieswhich -- in the absence of official support -- have become increasinglyprecarious in much of Eastern Amazonia. The installation and likely future

18 See, for example, Baer, Werner, The Development of the Brazilian SteelIndustry, Vanderbilt University Press, Nashville, Tennessee, 1969.

19 IDESP, Agricultura e Siderurgia numa Regiao de Fronteira, ResearchReport No. 14, Belem, October 1988.

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expansion of metallurgical industries along the Carajas corridor, together withrelated activities such as charcoal production, finally, have introduced totallynew elements in this process, whose 3)ng-run impact on rural employment patterns,while likely to be substantial, is difficult to predict at this early stage.

4. Rural Land Use

9.25 Changing patterns of landownership and rural employment in theCarajas corridor have been accompanied by distinctive trends in land use andcropping patterns. The growth of large estates in Eastern Amazonia goes hand inhand with pasture formation as a prerequisite for livestock raising(pecuarizacao) and to demonstrate "productive" occupation, in many instpncesmasking the ultimate objective of property speculation. Heads of beef cattleincreased by 14% in all of Brazil between 1980 and 1985, but figures for manysubareas in the Carajas region have been considerably higher, with herds growingby anywhere from 10% (Maraba) to 240% (Araguaia Paraense, immediately to thesouth of Maraba) during this period. In Eastern Amazonia, moreover, the areaplanted in long cycle or permanent crops has tended to increase much faster thanthat in short cycle or temporary crops which form the mainstay of the local diet. 20

These trends are consistent with the gradual decrease in importance ofindependent small farmers in much of the larger Carajas region. Thesesmallholders, although occupying only 20% of the farmland, produce roughly 80%of the area's basic food crops and generate more than 80% of the jobs in thecountryside. 21

9.26 Such changing land use patterns are not peculiar to Amazonia.Nationwide during the past three decades, concentration of landholdings has beenaccompanied to a substantial degree by a shift to commercial crops such assoybeans, oranges, coffee and sugar. Correspondingly, production of basicfoodstuffs has fallen significantly. Between 1975 and 1983, for example,Brazilian output of rice declined by 19%, beans by 432 and manioc by 31%. 2

It would be misleading, therefore, to attribute such patterns in Eastern Amazoniaentirely to the iron ore project or even the Grande Carajas Program. However,the arrival of the railway, resulting increases in land values and associatedproperty speculation and the general concentration in rural land ownership haveclearly exacerbated existing tendencies. This bias is reinforced in the greaterCarajas region by the PGC's failure to introduce programs to support small

20 Data are drawn from IBGE agricultural census reports for 1980 and 1985.In the state of Para, for example, the area devoted to export crops such ascoffee, cocoa, black pepper and rubber grew by 25% between 1980 and 1985, andbeef cattle expanded by 34%, while growth irn the area planted to rice, beans andmanioc amounted to only 12%.

21 Burger, D. and Kitamura, P. "Importancia e Viabilidade de uma PequenaAgricultura Sustentada na Amazonia Oriental," in Kohlhepp, G. and Schrader, A.(eds.), Homem e Natureza na Amazonia, ADLAE/Forschungschwerpunkt Lateinamerika,Geographisces Institut, University of Tubingen, 1987.

22 Jaguaribe, Helio, et. al., Brasil 2000 - Para um Novo Pacto Social, Paze Terra, Rio de Janeiro, 1986.

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farmers which might offset some of these regressive impacts by increasing ruralemployment and boosting local food production. One positive indirect futureimpact of the Carajas railroad, on the other hand, may lie in its link with thenew North-South railway and the impetus this might give to grain production inthe cerrado of southern Maranhao and nearby Tocantins. The extent to whichpopulation elsewhere in the Carajas corridor will benefit from this, however,is unclear.

5. Food Security and Public Health Conditions

9.27 In addition to the tendencies summarized above, possibly significantimpacts on the health and nutritional status of the rural population in the areaof influence of the Carajas Project may occur as the result of a loss of foodsecurity arising from longer-term trends such as the shift from staple foodproduction to livestock and cash crops for export, the monopolization of landin largely unproductive estates, increasing landlessness among small farmers andthe rise in temporary wage labor. Within the larger Carajas region, there isalready evidence of a growing food deficit. Major cities such as Belem, ts wellas towns along the Carajas rail line itself, are experiencing problems inmaintaining supplies of basic foodstuffs which must increasingly be imported fromthe Center-South, over two thousand miles away. This observation is corroboratedby the results of a national survey which revealed that Belem and other urbanareas in Amazonia had Brazil's highest prices for staples such as rootvegetables, green vegetables, beans and fruits. 23 Insofar as changing land use,employment and production patterns reduce real incomes and purchasing power ofthe rural pipulation, and, in the absence of compensatory factors, the loss infood entitlements is likely to be reflected in a lower effective demand forstaple foods, diminished food intake and consequent nutritional and hea.Lthproblems. 24

9.28 There are at present no disaggregated data for Amazonia which wouldpermit closer examination of the spatial distribution of malnutrition. However,some information can be drawn from a national survey undertaken in the early1980's which indicated that the population in the Amazon region had a caloricdeficit of 15%, the highest in Brazil. 25 Further comparative evidence may beobtained from studies of sisal production in northeastern Brazil and soybeanfarming and cattle ranching in the South which demonstrate a strong associationbetween expanding commercial crop production, land concentration and increasing

23 Thomas, Vinod, Differences in Income. Nutrition and Poverty withinBrazil, World Bank Staff Working Paper No. 505, Washington, 1982.

24 For a general discussion of these relationships, see Sen, A. Povertyand Famines: An Essay on Entitlement and Deprivation, Clarendon Press, Oxford,1981.

25 Thomas, op. cit.

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malnutrition. a5 Even allowing for some increases in off-farm incomes in theCarajas area, it is likely that similar nutritional consequences will occur inthis region if current trendp continue.

9.2V Both rural and urban-based workers engaged in the production ofcharcoal along the Carajas railway corridor will probably suffer adverse impactson their health. Experience with domestic charcoal manufacturing locally, as wellas in the iron and steel producing areas of Minas Gerais, suggests that pulmonarycomplaints and chest infections will arise due to smoke inhalation and theeffects of prolonged exposure to intense heat. Charcoal employees, moreover, arepoorly paid and frequently fall victim to debt bondage (aviamento) arrangements.Workers in the charcoal industry in Amazonia, moreover, are not protected bylabor legislation, nor do they enjoy social welfare or security benefits. 27 Inaddition, the situation of such workers is frequently compounded by the isolationof rural production units, the temporary or seasonal nature of their activitiesand the difficulty of organizing labor unions under such circumstances.

9.30 Other health problems have arisen or multiplied as the result of therapid increase in population attracted to the Carajas area by installation ofthe iron ore mine and railway and the Tucurui hydropower dam starting in the late1970's. Health data at the municipal level reveal a substantial increase indisease levels in key areas affected by the Carajas developments. In themunicipalities of Maraba, Parauapebas and Tucurui, for example, the most commonofficially recorded diseases are malaria, leprosy, tuberculosis, venerealdiseases and leishmaniasis, together with gastro-intestinal problems tiue toparasitic infections. 28 As noted in Chapter IV above, malaria is a particularlyserious problem in and around prospecting (garimpo) areas on the periphery ofthe Carajas mine site and elsewhere in Eastern Amazonia, with Maraba andImperatriz being among the municipalities currently registering the highestnumber of malaria cases in all of Brazil. These health problems can be attributedto various factors, ranging from the introduction by outsiders -- includingconstruction workers, small farmers, rural laborers and gold prospectors -- ofpreviously unknown diseases to the area's insufficient basic sanitationinfrastructure and inadequate supply of public health facilities in relation tothe needs of its rapidly growing rural and urban populations. Moreover, closelinkages are also likely to exist between this pattern of morbidity andmalnutrition associated with low and variable levels of incomes and employment,together with growing food deficits in the region.

26 See Gross, Daniel and Underwood, Barbara, "Technological Change andCaloric Costs: Sisal Production in Northeast Brazil," Human Organization, Vol.73, No. 3, June 1971; Flueret, P. and Flueret, A., "Nutrition, Consumption andAgricultural Change,"' Human Organizatign, Vol. 39, No. 3, June 1980; andVictoria, G and Vaughan, J., "Land Tenure and Child Health in Southern Brazil:The Relationship between Agricultural Production, Malnutrition and ChildMortality," International Journal of Health Services, Vol. 15, No. 2, 1985.

27 IDESP, Impacto de Imnlantacao do Polo Sideruriico na Estrutura Produtivae no Movimento Migratorio em Maraba, Research Report No. 12, July 1988.

28 Fundacao SESP, Programa e Orcamentacao Integrada, Belem, 1989.

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6. Socio-political Organization 4n the Countryside

9.31 The increasing competition over access to land associated with thestepped-up occupation of Amazonia during the past two decades has producedseveral interesting modifications in the rural power structure in the immediatearea of influence of the Carajas railway. Traditional landowning hierarchies suchas the Brazilnut plantation owners near Maraba have seen their power base erodedby the penetration of outside corporate commercial and financial interests fromsouthern Brazilg as well as by federal agencies such as GETAT, INCRA, MIRAD andCVRD. 29 Even though these traditional groups may have lost some of theircontrol over land in the region, they have simultaneously diversified theireconomic and political interests, many taking full benefit of the boom in urbanreal estate and commercial activities accompanying Maraba's recent rapidpopulation growth.

9.32 The change in socio-political organization in the region is alsopartially due to a strengthening of collective action by peasant farmers indefence of their landboldings and llvelihoods. Although the institutionalizedrepresentation of small farmer interests through political parties and ruraltrade unions has historically been weak -- and largely remains so -- as indicatedearlier in this chapter, more spontaneous forms of sma'Llholder resistance havegrown significantly. Thus, for example, by 1988, one-fifth of the 1.2 millionhectares in roughly forty large estates in the "Brazilnut Polygon" had beenoccupied by more than 2,000 families, involving a total of some 20,000 people. 30Land conflicts in the region became so intense at one point that they werecollectively referred to as the "Brazilnut war" ("a guerra dog castanhais").Specific studies reveal the evolution of the defensive tactics utilized by0osseiros from disorganized to well-coordinated actions in response to theirsituation. 31 Peasant occupations, in fact, became so entrenched in the"Brazilnut Polygon" that, as indicated in Chapter IV above, the Ministry ofAgrarian Reform (MIRAD) was led to intervene in 1988 to purchase and legalizesome of the disputed areas in favor of the occupying small farmers.

29 Emmi, M. "Estrutura FundiaLta e Poder Local: 0 Caso de Maraba," M.Sc.thesis, NAEA, Federal University of Para, Belem, 1985.

30 Commissao Pastoral da Terra, Relatorio de Conflitos - 1988, Belem, 1988.

31 Hebette, Jean and Colares, Jose, "Small Farmer Protest in t'ie GreaterCarajas Program," in Goodman and Hall (eds.), op. cit. Even though no preciseestimates are available, evidence culled from a variety of sources suggests thatas many as 6,000 peasant families, or some 50,000 people, have been involved inestate occupations in recent years in Para and Maranhao. These invasoes have,on occasion, been supported by rural trade unions, especially in Para, and byother organizations -- including the Church and local NGOs -- representing theinterests of landless farmers.

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C. Urban Development

9.33 The Carajas iron ore operation's impact on urban development can beseen in terms of both benefits and costs. Among the former are important servicesprovided as the result of project investments in interurban transportimprovements and intraurban basic sanitation and social infrastructure. Theyalso include project-related urban employment and income generation alreadytouched upon in Chapter VI above. The latter include the negative aspects ofrapid urbanization, associated infrastructure and service deficiencies,underemployment, poverty and public health problems -- particularly in thewestern part of the Carajas corridor (ie. the area between Acailandia andParauapebas) -- together with urban displacement and involuntary resettlement,especially in the port area at Sao Luis. The following paragraphs will discussthese factors in somewhat greater detail.

1. Infrastructure and Basic Services

9.34 The Carajas Project has brought some clearly identifiable directbenefits to towns and cities along the railway corridor. As noted in ChapterVI, even though the Carajas railway itself was originally designed to carry onlyiron ore, due to local demand it now transports a variety of other kinds offreight and a significant and growing number of passengers. Thus, as reportedearlier, in 1988, the railway carried some 560,009 tons of merchandise rangingfrom food products to diesel oil and pig iron, in the process generatingconsiderable savings in transport costs. 32 From the time passenger serviceswere introduced in 1986, on the other hand, the number of persons transportedby the Carajas railway has rapidly increased from some 200,000 in the first yearof operation to approximately 407,000 in 1988, according to CVRD figures. Givenpresent levels of demand, moreover, CVRD is planning to increase passengerservice from three to four roind trips per week. In addition, as also observedin Chapter VI, outside its oncession at the mine site, CVRD built basicsanitation infrastructure, as weil as a secondary school and a hospital, inParauapebas, made urban road improvements in Maraba, and erected housing for itsemployees in various towns and cities along the rail corridor.

2. Emplovment Generation

9.35 During construction, the, iron ore operation directly generated asubstantial amount of direct, if temporary, employment which resulted in demandfor, and additional employment and income from, a wide variety of commercial andservice activities in the region, especially in the area near the mine site.Permanent employment during the operational phase of the project, in turn,presently amounts to some 4,200 jobs within CVRD alone, a total which is expectedto increase by as much as another 207. when the mining operation expands to 35million tons per year. Even at the current level of production, however, thepermanent jobs provided directly by the project, in all probability, support atotal of between 20,000 and 25,000 people when family member3 and other

32 Gistelinck (op. cit.) notes that, due to very low operating costs, railfreight charges in the region are roughly only one-third those of road haulageand 60% cheaper than river transport.

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dependents are considered, and it is likely that perhaps two to three times thisnumber are supported throughout the Carajas corridor from various forms ofemployment intdirectly related to the operation. Since CVRD salaries are high bylocal standards, moreover, so is the resulting demand for goods and services,much of which is met by a thriving commercial sector located at nearbyParauapebas/Rio Verde. The indirec,; employment and income impact of the projectat other localities, including Maraba, Acailandia, Santa Ines and Sao Luis, whileundoubtedly smaller than at Parauapebas/Rio Verde, has, nevertheless, contributedto the recent dynamism of these local economies.

9.36 Additional jobs will be created as the result of a range of mineralprocessing activities associated with the iron ore operation, including pig ironsmelting and ferrous alloy production. The thirteen itndustrial projects approvedthrough January 1989 by the Grande Carajas Program alone, if installed asplanned, would result in an estimated 5,200 direct and 31,500 indirect employmentopportunities in the Carajas corridor. A relatively small proportion of thesejobs would be in the factories themselves, the majority being derived fromassociated charcoal production. It has been estimated, for example, that one pigiron furnace requiring an annual supply of 216,000 cubic meters of charcoalwould need to be served by ten production units employing -- between lumbergathers and charcoal manufacturers -- as many as 650 workers. 33 Officialprojections for the total amount of employment to be generated in variousindustrial branches (ie. in metallurgical, food processing, construction,lumbering, charcoal and other industries) are that some 85,000 jobs will becreated directly and another 106,000 indirectly in the railway corridor by theYear 2000. Although such estimates must be treated with caution, it is,nevertheless, likely that the growth of industrial activities will, over time,provide additional employment within the processing units themselves and, moregenerally, encourage the development of local commerce to services to supportthe needs of an expanding urban population and cash economy along the corridor.

3. Project-Related Urbanization

9.37 Many of the region's severe urban social, economic and physicalenvironmental problems stem from the sheer speed with which towns and citieshave expanded since 1980, placing heavy pressure on already inadequateinfrastructures and local service provision capabilities. As indicated above,Sao Luis had a total population of roughly.450,000 in 1980, but current estimatesrange as high as 850,000 and it is expected that, by 1995, the city's populationcould reach 1.3 million. Growth rates of smaller urban centers along the Carajascorridor have been even more rapid. Acailandia, for example, as a district ofImperatriz boasted only a few thousand inhabitants in 1980, but now as anindependent municipality hae a population well over 80,000, while Maraba has morethan quadrupled in size in less than e decade from a town of 40,000 in 1980 toa city with close to 200,000 inhabitants in 1989, according to local authoritiesinterviewed by OED and SEPLAN. The twin towns of Parauapebas and Rio Verde,separated only by a small river and located adjacent to CVRD's mining concessionat Carajas, did not even exist until the iron ore project came into existence,but now have a combined population on the order of at least 25-30,000 and have

33 Ibid.

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grown at rates as hU,h as 30% a year. Over the next decade, other towns arelikely to expand rapidly along the railway at places like Nova Vida andBuriticupu in Maranhao around planned pig iron smelters and agroindustrialenterprises. Overall, along the Carajas corridor one estimate is that half amillion people will have left the countryside by 1995, turning what was untilrecently a predominantly rural population into a largely urban one.

4. Infrastructural Deficiencies and Disparities

9.38 Although municipal governments, with limited assistance from CVRD,have made some limited attempts to provide the fast-growing urban centers alongthe Carajas corridor with improved facilities, on the whole these efforts havebeen inadequate. The rapid in-migration stimulated directly or indirectly by theiron ore project and other public interventions in the region has placed a heavyburden on local authorities which have been universally unable to expand urbanservices sufficiently to meet rapidly growing local needs. Political changeshave, in some cases, exacerbated this situation. As noted above, Maraba hasrecently lost significant revenues derived from taxes on Carajas ore productionand (federal government-controlled) gold prospecting at Serra Pelada through thedismemberment of the former districts of Parauapebas and Curionopolis. In somecases, moreover, CVRD and the Bank totally misjudged the pace of urbanization.Parauapebas was expected to have a population of 10,000 by 1988, but has exceededthis projection by at least 50%, while its satellite, Rio Verde, which presentlyhas an equivalent size, was not contemplated at all. 35

9.39 The growth of Parauapebas/Rio Verde, as suggested in Chapter VI, hassignificantly exceeded original expectations for several reasons. One motive hasbeen the location and subsequent semi-abandonment of the GETAT colonizationprojects near the Carajas mining operations. While made possible largely as theresult of the project-provided PA-275 road connection between PA-150 and theSerra dos Carajas, the development of these colonization projects was notformally authorized until October 1982, or roughly one month after CVRD had beenrequired to submit definitive plans for Parauapebas to the Bank for review andapproval. Thus, the additional demands associated with installation of theseschemes were not taken into account in planning the town's initial basicinfrastructure. Nor were the demands generated by the widespread and rapidlyexpanding small-scale prospecting activities in the areas around the Carajasmining concession -- for which the urban agglomeration at Parauapebas/Rio Verde

34 Ibid.

35 According to the SAR (para. 5.38), CVRD originally planned basicservices in Parauapebas for a population of 5,000, but later revised its plansat the Bank's insistence to accommodate 10,000 people by 1988. The SAR furtherindicated that, if necessary, an adjacent area -- presumably the location ofpresent-day Rio Verde, immediately to the east of Parauapebas -- could be usedto absorb additional growth of the town up to a population of 20,000 by the Year2000. If present trends continue, however, Parauapebas/Rio Verde's populationwould, in fact, exceed, 50,000 by the Year 2000.

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has subsequently come to serve as an important support center -- fully taken intoaccount in this process. 36

9.40 Also contributing to the greater than expected growth of Parauapebashas been CVRD's refusal to house service workers at the definitive urban nucleusat the Carajas mine site despite the availability of land at that location andan agreement with the Bank at loan negotiations to the effect that CVRD wouldreserve lots for the permanent settlement of service workers in the townsiteover a period of about five years from project completion. 3' As a result,Carajas township has in reality become a pure company town, providing a qualityof housing and basic urban infrastructure and services to CVRD employees farsuperior to that available to contract service workers and most other residentsat Parauapebas/Rio Verde and in other urban areas in the region. Physical accessto the Carajas township, as to the Carajas mine site, airport and otherfacilities, moreover, is tightly controlled by a CVRD security force located justacross the river to the west of Parauapebas on the continuation of the PA-275highway, which, within the CVRD concession, is operated as a private road.

9.41 The initial disparity in service and amenity levels between Carajasand Parauapebas/Rio Verde has been further exacerbated by the fact that, whileCVRD directly operates and maintains all urban infrastructure and communityfacilities at the former, until very recently this responsibility in the caseof the latter was left to the (former) municipality of Maraba. The seat of thismunicipality was located in the city of Maraba, some 170 kilometers fromParauapebas, which, as suggested above, has also faced extremely rapid growthin demand for urban infrastructure and services over the past decade. As aconsequence, Parauapebas/Rio Verde was largely neglected by municipalauthorities, with needed urban infrastructure remaining largely unbuilt and muchof the existing project-supported infrastructure and facilities being poorlyoperated and maintained. Now that Parauapebas is an independent municipality withits own revenue base, it is hoped that this situation will improve. The necessaryupgrading of local service levels, however, will require significant additional

36 The director of the hospital at Parauapebas indicated to OED, forexample, that a substantial part of its clientele consists of local Rarimpeiroswho have fallen victim to malaria or frequent incidents of violence (knife fightsapparently being the preferred variety) either at the prospecting camps or intown during periods of "rest and relaxation." Parauapebas' satellite, Rio Verde-- as is the case with many frontier towns, including Curionopolis near SerraPelada -- in fact had its origin as a group of bars, restaurants and "nightclubs"to serve Carajas construction workers and local prospectors. Due to the highincidence of malaria and other diseases, another important service provided bytowns such as Parauapebas/Rio Verde and Curionopolis is both formal and informalhealth care, the latter administered mainly by local pharmacies, which, togetherwith a variety of other private health services, tend to proliferate rapidly ingrowing Amazonian frontier areas. In Rondonia, where the situation is similarto that near Carajas, for example, this necessary, but often highly exploitative,activity has been locally baptized as "the malaria industry."

" SAR, para. 10.01 (b) (ii) "Agreements with CVRD."

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investments in urban infrastructure that go well beyond short-run mvnicipalresource generation capabilities.

9.42 More generally, all of the major towns and cities along the Carajasrailway corridor -- including Acailandia, Santa Ines and Sao Luis, in additionto Parauapebas/Rio Verde and Haraba -- suffer from common problems in thisregard. Water supplies are usually untreated, sewage and trash collection andstorm drainage systems are restricted to few, higher income neighborhoods, whilesewage treatment and adequate solid waste disposal are basically non-existent.Parauapebas' water supply, for example, is taken directly from the local riverwhich is contaminated with mercury from gold prospecting activities at nearly"Serra Peladinhal" and other garimnos, and there are no cisterns to capture theabundant rainfall. The small minority of the population possessing the necessaryresources sink their own wells. However, the widespread use of private wells,together with the effects of extensive deforestation around most towns in thearea, could lead to a significant lowering of the water table. Few roads in thetowns (including Parauapebas/Rio Verde) and poorer districts of larger cities(especially Maraba and Acailandia) are paved, leading to substantial soil erosionand, in extreme cases, the collapse of houses built precariously by squatterson marginal areas of land. Throughout the area, urban transit is difficult inthe rainy season and the poorly drained dirt streets quickly become rutted byvehicle traffic.

5. Urban Poverty and Public Health

9.43 Due to the extremely rapid influx of migrants, expansion of townsand cities in the Carajas corridor has been largely synonymous with the growthof squatter neighborhoods in which, perhaps, as much as 80% of the non-ruralpopulation currently lives. In major centers such as Sao Luis and Maraba, entirenew poor districts (bairros populares) have sprung up. The satellite town of RioVerde is essentially a poorly-serviced, large-scale squatter settlement, whichhas mushroomed to a population of 15,000 or more in little over five years. 38

In these low-income neighborhoods, the level of formal employment among maleadults usually does not surpass 10%, the majority combining seasonal jobs inagriculture with irregular activities in construction work and gold prospectingor being engaged in a variety of marginal, urban commercial and serviceoccupations (biscates). Women -- and many children -- are similarly(under)employed in a wide range of informal commercial and service activities.

9.44 These urban districts, moreover, are often located in swamplands,subject to periodic flooding -- as in parts of Rio Verde, Maraba and Sao Luis-- or on steep hillsides -- as in Acailandia -- which are poorly provided, ifat all, with municipal services. As suggested in the previous section, these

38 Local informants indicate that Rio Verde was settled by squatterslargely because the administrator of Parauapebas appointed by the municipalityof Maraba initially made lots in the latter available only to those who coulddemonstrate their ability to build permanent structures complying with minimumdesign standards. As a result, the contrast in housing standards between RioVerde and Parauapebas is nearly as striking as that between the latter andCarajas township.

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neiglhborhoods generally lack running water and health care facilities, have nosewage or drainage networks or paved roads, and even schools are frequentlylacking or greatly overcrowded. Acceas to formal education, in fact, remainsprecarious in much of the region; in poor neighborhoods in Sao Luis, for example,only 442 of primary school-aged children are effectively enrolled, while in themunicipality of Maraba, 65Z of the population received no more than one year ofschooling. 39 Lack of basic facilities -- from school buildings to teachingmaterials -- and of adequately trained teachers, together with the need tosupplement family incomes, contribute to the low enrollment and high drop-outrates in local urban areas.

9.45 Widespread urban poverty and malnutrition are reflected in highindices of infant mortality, which average 125 per 1,000 live births in SaoLuis. In the same city, almost 902 of the low-income population suffers frominfections caused by intestinal parasites. 40 While most of these problems stemonly partially and indirectly from the Carajas Project given the numerous factorswhich have induced migration to, and urban growth in, the region, some publichealth impacts are more directly linked to iron ore mining and the associatedverticalization of production. Such is the case with atmospheric pollution fromthe pig iron (and future steel) plants, as well as from charcoal production.State health authorities in Para, for example, have already documented anincrease in allergic, respiratory and dermatological complaints in the city ofMaraba which are directly related to the new industrial developments there. '1As a consequence, the state health secretariat has recently required that allcharcoal producing rabo auente ovens be located outside the city boundaries.

6. Urban DieDlacement and Resettlement

9.45 One major direct urban impact of the Carajas Iron Ore Project,finally, is the displacement of population in Sao Luis to make way for theconstruction of CVRD's rail and port terminal facilities. Although accuratefigures are difficult to obtain, informed local observers estimate that as manyas 10,000 people -- CVRD admits to 1,800 -- mainly from small communities offishermen and farmers within the city's "greenbelt" were removed in order tobuild these installations. An additional 20,000 people were displaced by thenearby ALUMAR aluminum plant, which occupies fully one-fifth of the island. Asnoted in Chapter IV above, environmental problems also arose due to seawaterpollution created by building operations and waste disposal at the ALUMAR site,resulting in declining fish catches. From a social standpoint, however, thegreatest controversy surrounded the manner in which expropriation andresettlement were carried out since many displacees apparently received no

39 The figure for Sao Luis is taken from Gistelinck, op. cit, while thatfor Maraba is drawn from IDESP, Estatisticas Demograficas do Para, Belem, 1987.

40 Gistelinck, op. cit. Intestinal parasite-related diseases were alsoreported by local officials to be the principal health problem affecting childrenin Parauapebas/Rio Verde, as well as being a principal cause of infant mortalityin the immediate Carajas area.

41 FSESP, op. cit.

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compensation in terms of alternative homes or jobs and were given limited cashindemnity. 42

9.46 A detailed anthropological study of the fishing village of Boqueirao,part of the 2,200 hectares expropriated by CVRD in 1978 in order to build itsrail terminal and port complex and only one of several small communitiesaffected, illustrates the problem. 4 Faced with the prospect of summar;eviction and, as squatters without land titles, the prospect of only minimalcompensation for improvements (benfeitorins), the community defended itsinterests in the courts over a period of five years. During this time, it isalleged that the villagers were subjected to intimidatory tactics, which led manyclaimants to abandon the cause. After a protracted legal struggle, CVRD agreedto relocate some thirty remaining families to a new hilltop site (originallyknown as "Montes Pelados," now renamed "Alto do Alegre") and to provide a primaryschool, social center, electricity supply and communal standpipes. Thesefamilies, however, did not receive their plots until three years after paymentof monetary compensation for improvements on the land that had been expropriated,during which time much of the cash had been spent on family support. " As aresult, many people had insufficient funds to purchase construction materialsto rebuild their homes and had to rely on charity. Furthermore, their previousoccupations as fishermen and farmers were no longer viable at the new location,the sea being eight kilomerers away and the local soils being completelyinfertile.

9.47 Despite the problems experienced by the people of Boqueirao, thisvillage was apparently the exception to the rule in obtaining any substantialcompensation at all. Most of the traditional, closely-knit communities affectedby Carajas and ALUNAR-related developments were simply disbanded with noattention given to providing alternative sources of housing or employment. Manydisplacees simply relocated in squatter settlemento such as nearby Itaquibacanga,which is presently estimated to have a population of more than 80,000, while,in all likelihood, net underemployment in the area increased. One strikingindication of the social impact of this large movement of people is given by the

42 In its observations on the previous version of this report, CVRD affirmsthat it did not utilize "extra-legal means to coerce the former occupants of thearea where the port at Ponta da Madeira was being implanted. The affected groupwas previouply inventoried and subsequently compensated in accordance with thelaw. In addition, CVRD built urban infrastructure at the localities where thesefamilies were resettled."

43 Oliveira Santos, H. Nos Mares do Ferro: Regercussoes Sociais do PGCpara os Setores PoRulares do Maranhao, M.Sc., Department of Sociology, FederalUniversity of Ceara, Fortaleza, 1984.

4' Andrade, M. and Correa, C. "Mataram a Pobreza," Para Desenvolvimento,No. 20/21, 1986-87.

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reported rise in infant mortality rates among evicted groups from 90 to 190 per1,000 live births. 45

9.48 For the most part, this problem occurred prior to intensive WorldBank involvement in the Carajas Project -- which dates essentially from thepreparation mission in early 1981 -- since CVRD's construction activities andthe associated dislocation of population in the port area were initiated in 1978.As the displaced populations had already left the immediate area before the Bankbecame aware of the problem, there was, technically, no formal violation of theBank's policy on involuntary resettlement, which, moreover, did not even existuntil February 1980. 46 On the other hand, from the time Bank staff began toexamine the urban component of the Carajas Project in early 1982, the need toadequately plan and provide for the upgrading of squatter communities near theport area in Sao Luis was persistently raised both with CVRD and the relevantstate and municipal authorities during a succession of preparation andsupervision missions, with little concrete results. A subsequent attempt to dealmore directly with this problem by including Sao Luis in a proposed second Bank-financed medium sized cities project was also frustrated when the Bank and theBrazilian Government later decided not to go ahead with this operation. 47

D. Conclusion

9.49 Although it is difficult to measure the human environmental impactsof the Carajas Project with any degree of precision, the above discussion revealsthat the iron ore operation and associated infrastructural and industrialinvestments have had, and will continue to have, a major influence in determiningthe nature and intensity of social change both within the immediate railwaycorridor and in the larger Carajas region more generally. Disaggregation ofCarajas Project-related impacts is made problematic due to the profusion offederal and other development initiatives, such as highway building and PGC,SUDAN and SUDENE fiscal incentives, as well as the operation of macroeconomicand other factors which influence the migratory process, local settlementpatterns, pressure on land and the pace of urbanization. Nevertheless, it ispossible to identify those social benefits and costs that are attributablelargely or in part to the iron ore operation.

45 See Galvao, op. cit., and Gistelinck, op. cit. As noted in Chapter IV,however, local pressure groups such as the "Committee for the Defence of theIsland of Sao Luis" and Church organizations mounted a vociferous protestcampaign which achieved a degree of international attention through newspaperreports and television documentaries.

46 See OMS 2.33 entitled "Social Issues Associated with InvoluntaryResettlement in Bank Financed Projects," February 1980.

47 The first Medium Sized Cities Project, approved in June 1979 and closedin December 1986, involved a loan of US$ 70 million (Ln. 1720-BR) and includeda number of secondary cities in northeastern, central and southern Brazil, butSao Luis was not among them.

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9.50 There can be little doubt that benefits have accrued to the Carajasregion and its population from development of CVRD's mining complex, railwayand port installations. These include the creation of short and longer-termemployment in mining, construction, metallurgical industries and associatedcommerce, the provision of freight and passenger rail service and -- in the areabetween Carajas and Maraba, as well as across the Tocantins River 4 -- roadtransport, as well as the. introduction of urban infrastructural improvements,principally at Carajas and Parauapebas. In addition, the project-related increasein local consumer demand and the resulting stimulus to commercial and serviceactivities already observed in the area is likely to expand employment and incomegeneration even further in the future as the project-induced industrializationprocess in the Carajas corridor intensifies and diversifies. However, it is alsoclear that the iron ore project has had several significant negative consequencesfrom a human environmental standpoint, some of which are identifiable as a directresult of the Carajas operation and others which are largely by-products oftrends already underway in the region, but which were exacerbated by the Bank-financed CVRD venture.

9.51 In rural areas, there has been an increase in land values andproperty concentration along the Carajas corridor since the late 1970's,especially at or near designated "development poles" such as Maraba, Acailandiaand Santa Ines, where future industrial investments will be concentrated. Landconflicts and growing landlessness, with a shift to wage labor and the conversionof forest to pasture, are all part of this process. Subsequent dismemberment oflarger municipalities (ie. Maraba and Imperatriz) in good measure as a resultof the Carajas Project's influence, moreover, has reinforced property speculationin both rural and urban areas. The growth of a charcoal industry to supply pigiron and other metallurgical plants, whose existence is entirely dependent onCVRD iron ore and transportation infrastructure, is likely to encourage furtherland concentration, together with an acceleration of the already rapid rates ofdeforestation in the area. These may be regarded as direct impacts of the ironore project, although complementary government programs described in Chapter IVabove have also played an important role.

9.52 The CVRD project has had an even more marked effect on the recentnature and rate of urbanization in the Carajas corridor. 49 Towns and citiesalong the railway have experienced phenomenal rates of demographic growth overthe past decade. What were steady rates of rural to urban migration prior to1980 have subsequently become massive influxes of people seeking employment,especially at the eastern (Sao Luis) and western (Acailandia-Maraba-Parauapebas-Carajas) ends of the corridor. Project-related construction works were an

48 Originally, the highway section of the railroad bridge across theTocantins River was to be built at some undetermined future date by the Ministryof Transportation using resources not associated with the Carajas Project, butCVRD later constructed both the rail and the road parts of the bridge usingproject funds.

49 In commenting on the earlier version of this report, CVRD disagreed thatthe iron ore project had a "preponderant effect on the nature and rhythm ofurbanization along the corridor...which had more complex causes."

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important stimulus to this process, particularly during the period of mostintensive activity from 1980-84, but other attractions such as the lure of goldprospecting -- as well as rural "push" factors -- were also important. As aconsequence, thero Is presently a complete mismatch between existing urbaninfrastructure and the ability of municipal authorities to cope with the rapidlygrowth in demand for basic urban services and facilities. This is reflected,according to official data, in the rapid increase in a variety of health problemsand a worsening of social indicators such as infant mortality and poverty levels.One clearly direct impact of the Carajas Project, finally, was the removal ofperhaps as many as 10,000 people from their homes in order to make way for CVRDrail terminal and port installations in Sao Luis.

9.53 During preparation and appraisal of the iron ore project, insynthesis, the Bank failed to take adequate account of the broader humanenvironmental repercussions of large-scale mining and transport investments inthe extensive Carajas region. This lapse is surprising in view of the fact thatpart of the project was implemented in a relatively mature and well-populatedPreamazonian frontier area. Previous Bank experience with POLONOROESTE, whichfocused primarily on such wider socio-economic issues, moreover, should haveprovided valuable guidance for dealing with the potential regional impacts ofthe Carajas Project and, thus, avoiding some of the more obvious pitfalls.Furthermore, even though the Bank and the state government did, in fact, attemptto deal with many of these concerns in the eastern part of the corridor throughthe first Maranhao Rural Development Project, there appears to have been nocoordination between this initiative and the iron ore project either in Brazilor within the Bank. The neglect of the iron ore operz.-Ajon's potential impact onthe human environment is even more puzzling, finally, given the existence of aspecial Amerindian protection component which was introduced precisely in orderto anticipate the project's likely adverse impact on indigenous groups, whileits potential negative effects on other vulnerable low-income populations in thearea were largely ignored.

9.54 Although it is unlikely that current Bank policies and practiceswould allow such an omission to occur in the future, the Carajas Project shouldstill serve as a salutary reminder of the potential social costs inherent inadopting too narrow an approach to operations that are likely to have substantialhuman environmental consequences. The inclusion of more adequate socio-economicimpact analysis in the initial stages of the project cycle in order to betteranticipate the possible negative effects of such operations on the humanenvironment would permit an earlier definition of compensatory measures thatmight alleviate the worst potential side effects of these interventions. It couldalso directly contribute to the planning of parallel or future rural and urbandevelopment and environmental protection activities in the area of influence ofsuch investments. In the case of the iron ore project, in particular, such anapproach might have permitted the Brazilian Government and the Bank to have dealtmore adequately at the regional level with such crucial questions as rural landand other natural resource use, the provision of needed urban infrastructure andservices and forced resettlement, among other human and physical environmentalissues.

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X. THE WORLD BANK AND THE ENVIRONMENT IN.THE CARAJAS CORRIDOR

10.01 As the two previous chapters have illustrated, even though they arevery difficult to measure or even to properly identify, the Carajas Iron OreProjects by itself and in conjunction with other public and private sectordevelopment initiatives, has had -- and is continuing to have -- significantdirect and indirect impacts on the physical and human environments in both itsimmediate and its larger areas of influence. As indicated earlier in this report,that this has occurred should not be surprising considering that the Carajasoperation was both an integral part of a broader government strategy for thedevelopment of Eastern Amazonia and was implemented at a time when much of thesurrounding region was undergoing rapid settlement and productive occupationstimulated by a combination of large-scale public sector infrastructureinvestments and public policy-induced private initiatives in the mining,industrial and agro-livestock sectors. These activities, moreover, were alreadytaking a significant toll on the physical and human environments in the area atthe time the iron ore operation was prepared. For the most part, however, inappraising the Carajas Project the Bank gave little attention to either thebroader regional policy context or the on-going frontier development process inwhat was soon to become the Carajas-Sao Luis corridor. As a result, the Carajasoperation contained few measures to deal with its potential environmental impactsoutside the areas immediately under the jurisdiction of the Borrower, CVRD.

10.02 The present chapter will attempt to pull together this and othermajor conclusions from the overview of the environmental aspects and consequencesof the Carajas Project contained in the preceding chapters. In doing so, it willfocus on how the Bank and the Borrower initially perceived and approached theproject's potential environmental impacts and on the operation's adequacy andeffectivene6s in dealing with the broader human and physical environmentalconsequences of the investments involved. In the course of this discussion, thechapter will also attempt to draw lessons from the Carajas experience both forpossible future interventions in the project's area of influence and forprospective Bank operations involving large mining and physical infrastructureinvestments and/or tropical frontier regions, more generally. Finally, thechapter will consider the implications of this experience for Bank procedures -- including project identification, preparation, appraisal, supervision,monitoring and evaluation -- and will indicate, in passing, areas whereadditional research regarding the project's environmental impacts would bedesirable.

A. Bank and Borrower Approach to Environmental Issues

10.03 As suggested at the end of Chapter V, in retrospect it is clearlyevident that CVRD's and the Bank's approach to the identification and mitigationof the potential environmental impacts of the Carajas operation at the time ofproject preparation and appraisal was excessively narrow. While the SAR does giveconsiderable attention to what it labels "environmental management" of theproject's physical implementation and subsequent physical operation, as indicatedabove, this refers almost exclusively to the areas under the Borrower's direct

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legal control. a The iron ore operation's potential environmental and socialimpacts on its larger area of influence are never addressed in the SAR or otherpreparation and appraisal documents except, to the Bank's credit, 2 in relationto the numerous Amerindian communities, scattered throughout the region, whichwere expected to be affected by the "accelerated economic development" consideredlikely to occur ac a consequence of the project.

10.04 As pointed out in Chapters III and V, however, the Bank's approachwas fundamentally inconsistent in this regard since it essentially ignored thefact that the above mentioned "accelerated economic development" -- which was,nevertheless, claimed as a (non-quantified) benefit of the project -- wouldlikewise affect both the physical environment and the non-Amerindian populationsalready residing in its area of influence, together with a potentially largenumber of new migrants likely to be drawn to the Carajas corridor by theundertaking. Thus, while the potential indirect economic benefits of the CarajasProject at the regional level were, in fact, explicitly alluded to in theappraisal documents, 3 its potential social and environmental costs were not.More seriously, as a result of this partial view of the project's likely humanand physical environmental consequences, the operation contained virtuallynothing in the way of measures to control, ameliorate or compensate for theseimpacts.

10.05 In s,4ort, excepting its prospective -- and largely indirect --impacts on local Amerindian groups, the project's potential repercussions wereviewed quite narrowly in a spatial or territorial sense. As the discussions inChapters V and VIII illustrate, moreover, the project's potential environmentalimpacts were perceived very narrowly in a temporal sense as well. More

1 According to the SAR (Annex 5-3 paras. 9-12), the only "environmentalmanagement" activity that was not essentially limited to areas under thecompany's direct control was "environmental zoning" which was to entailpreparation of a 1:100,000 scale map of the "Carajas Region" by CVRD indicating"mineralized deposits, IBDF tracts, INCRA areas, FUNAI reserves and otherAmerindian-occupied areas... [which] will facilitate planning for appropriate landuse, reduce the incidence of incompatible activities and allow for systematicconservation of special tracts."

2 The existence of the Amerindian Special Project in connection with theCarajas operation, in fact, was primarily due to Bank insistence. There is noevidence that CVRD had considered including an Amerindian component in theoperation prior to Bank involvement. To the company's credit, however, despitethe considerable difficulties experienced during implementation of the Amerindiencomponent, many of its positive results must be attributed to CVRD's closesupervision and occasional direct intervention in the Special Project, in whichcareful Bank supervision also played an important role.

3 As previously noted, according to the SAR, these included, inter alia,"opening up a remote but resource-rich area of the Amazon," the generation ofeconomic activity "directly at Carajas, along the rail-line and at the port cityof Sao Luis and indirectly throughout the region" and the acceleration of urbandevelopment in the region.

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concretely, no attempt appears to have been made during appraisal to considerthe possible long-term physical and human onvironmental consequences of project-supported mineral production in its area of influence. Even though the Bank wasaware of CVRD's proposals for future iron ore-based industrial development inthe Carajas corridor and, at least in a general sense, also had knowledge of thefiscal incentive mechanism established largely for this purpose under the GrandeCarajas Program, the specific linkages between the iron ore project and otherregional development activities were not clearly identified prior to or duringappraisal, nor was attention given to their environmental implications.

10.06 The seriousness of this latter omission has subsequently become .eryevident as a result of the significant threat to the native forest in EasternAmazonia presented by pig iron smelters, the first of which initiated productionin 1988. As described in some detail in Chapters VI and VIII, these smelters aretotally dependent on both iron ore and transportation services provided by CVRDthrough the on-going operations of the Carajas Project. They are also dependenton presently abundant -- and, hence, relatively low cost -- local fuelwood thatis converted into charcoal in order to reduce iron ore to pig iron. Current plansare for the substantial expansion of metallurgical activities in the Carajascorridor over the next several decades. Despite recent federal governmentregulations requiring such industrial establishments to produce increasing sharesof the fuelwood they will consume through "sustained forest management" orreforestation projects, in the absence of rigorous inspection, control and, wherenecessary, the application of meaningful sanctions by official environmentalagencies and/or the development of alternate fuel sources that do not involvedestroying the native forest, it is likely that the already extensivedeforestation occurring in Eastern Amazonia will continue and probably acceleratein much of the region over the foreseeable future.

10.07 Only gradually during the course of project implementation does theBank appear to have become aware of the broader human and natural environmentalimplications and consequences of the Carajas operation. Part of this awarenesscame about, moreover, due to the reaction of groups outside the Bank to evolvingevents in the project's area of influence. Despite this growing awareness, thereappears to have been a persisting tendency on the part of CVRD and the Bank todissociate the iron ore operation from other developments in the region thatwere not themselves financed through the project -- especially those associatedwith the Grande Carajas Program -- but with which it was directly or indirectlylinked. In addition, because of the narrow way in which the project'senvironmental control measures were initially defined, the Bank's possibilities

4 Anderson (op. cit., pg. 8) points out, for example, that throughout muchof the period when the Carajas Project was in implementation both CVRD and theBank went to considerable lengths to distinguish the iron ore operation from thePGC. According to Anderson, this position was justified by the argument that"although the two initiatives were originally conceived as part of a singledevelopment package... they have been administered separately and...theenvironmentally-related aspects of the PGC are largely outside the control ofCVRD....Yet in one important aspect, the two initiatives remain inextricablylinked: the on-going establishment within the PGC region of metallurgicindustries that utilize non-mineral charcoal as their primary source of fuel."

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of effectively intervening to help resolve emerging environmental problems underthis operation were, in fact, very limited. It is, nevertheless, instructive tobriefly trace how the Bank and CVRD were led progressively over time to take atore comprehensive view of the Carajas Project's environmental repercussions.

1. Evolving Perceptions of Proiect Environmental Impacts

10.08 The first post-appraisal reference in the project files to thelinkage between the Carajas operation and broader development tendencies in itsarea of influence came in March 1983 -- or less than eight months after approvalof the Bank loan -- in a report by two Bank staff members on a meeting withEuropean NGOs, at which CVRD was also represented. This report affirms that adocument prepared by the NGOs "draws no clear distinction between the iron oreproject...and developments in the Greater Carajas area and sees the iron oreproject primarily as the backbone for the penetration of the Greater Carajasregion." 5 According to the participating Bank staff, the NGOs' criticisms were"mainly levelled against the perceived 'start-up' role and broader regionalimplications of the iron ore project and less against any of its specific designprovisions." Among the questions raised, for example, was "why no measures [hadbeen] taken to accommodate the plight of poor and landless farmers in the GreaterCarajas area, while, for Amerindians, an area of influence of 100 kilometers fromthe mine and from the railroad had been readily adopted and considerableresources had been made available?" 6

10.09 The European NGOs concluded that "more forceful steps" should betaken by the Brazilian Government "to accommodate the indirect effects of theCarajas Iron Ore Project in the form of land tenure and regularization andpoverty-oriented rural development initiatives and environmental protectionmeasures." While no specific Bank response to this recommendation is recordedin the project fileo, the results of this meeting apparently did provoke anencounter shortly thereafter between the President of CVRD and the ExecutiveSecretary of the Grande Carajas Program at which it was resolved that there wouldbe a combined PGC/CVRD/CNPq effort to review the environmental issues associatedwith recent developments in the Carajas region specifically raised by the NGOs. 7The principal outcome of this review appears to have been the preparation, during

5 Internal Bank memorandum dated March 4, 1983.

6 Ibid. This document goes on to observe that it was the NGOs' "view thatthe iron ore project and the prospect of the future Greater Carajas activitieshave fueled land speculation and, in its wake, a current unlawful and forcibleexpulsion of thousands of small "Rosseiro" subsistence family farmers from landsto which some of them might, in fact, already have a rightful claim....Furtherthey claim that land speculation also entails large-scale environmentaldestruction in the form of forest clearings and lack of cultivation."

' The occurrence of this meeting was mentioned in an internal Bankmemorandum dated March 18, 1983. CNPq is the Brazilian National ScientificResearch Council, which, like the Executive Secretariat of the Grande CarajasProgram, was subordinated to the federal Ministry of Planning (SEPLAN).

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1984-85, of a collection of essays on different topics related to developmentof the Greater Carajas area that were published by CNPq in book form in 1986. e

10.10 The next explicit reference to the PGC/Carajas Project linkage camein the report of a Bank environmental specialist following a supervision missionin August-September 1983 in which it was affirmed that, "whether we like it ornot," the Bank-supported iron ore operation had been formally declared part ofthe Grande Carajas Program and that CVRD management was becoming "increasinglyconcerned with environmental (Gpecifically including human ecology or social)issues associated with the iron ore project in a wider regional context." Thereport adds that "C'=D's concern with these matters and their apparent magnitudeshould prompt the Bank to allocate more attention to them than in the past." 9The Bank followed up this mission with a letter to CVRD stressing the "greatimportance of social aspects" and by downgrading the project's overallperformance rating or account of "the increased seriousness of the problemsrelated to the environment." '° There is no evidence in the project files,however, that the Bank, in fact, effectively increased its attention to thebroader "human ecological" issues surrounding the operation since subsequentmissions essentially limited their attention to the more immediate problemsconcerning increasing squatter settlement at Parauapebas/Rio Verde and near theport at Sao Luis discussed in Chapter VI above.

10.11 Concern over the potential adverse environmental effects of pig ironproduction in the Carajas corridor, in turn, was not specifically raised in Banksupervision work until July 1985 and was initially focused on the proposedinstallation of a single smelter at Parauapebas. " The principal preoccupationin this case, moreover, was with the air pollution and associated health problemsexpected ti be generated by this industry given that Parauapebas was surroundedby hills which cut off ventilation around the town. It was suggested that Maraba,which was not constrained topographically in this way, might be a more

6 Goncalves de Almeida, Jose Maria, Caralas: Desafio Politico. Ecol1Riae Desenvolvimento, op. cit. This interesting work, indeed, covers a broad rangeof physical and human envivonmental issues affecting Eastern Amazonia andconcludes with the proposal of an action program for the Grande Carajas areaunder the suggestive title, "toward an ecodevelopment policy." It is unclear,however, to what extent the PGC or the Brazilian Government more generally hassubsequently followed up on CNPq's recommendations.

9 Back-to-office report dated September 22, 1983. The report also proposesthat "supervision missions examining social aspects should be strengthened" andthat the. Bank "should address these questions at the program level."

10 Letter from the Bank to CVRD dated October 12, 1983 and supervisionreport dated October 13, 1983. The latter specifically cites "land tenure andsettlement activities in the vicinity of the mine and along the railroad andreported increased settlements within Amerindi&n reservations" as illustrativeof the "increased seriousness" oi project-related environmental problems.

11 This is discussed, more specifically, in an internal Bank memorandumdated July 22, 1985.

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appropriate site for the proposed smelter. 12 More importantly, the Bank pointedout that, since this was the first of possibly a large number of such "metal-based" industries, it was an opportune time to "implement a prudent long-termindustarial siting plan...including the iron ore mine and CVRD's concession,Maraba, the railroad area, the Sao Luis area and other sites with industrialpotential." " It was further suggested that some of the unallocated Bank loanfunds might be utilized by CVRD to contract "an independent international landuse/environmental planner" for this purpose.

10.12 CVRD's response to the Bank's recommendation appears to have beentwo-fold. On the one hand, in October 1985, with the assistance of individualBrazilian consultants, the company initiated a diagnostic study which was carriedout over a period of eighteen months and whose report was later published inthree volumes under the title "Environmental Impact and Socio-economicDevelopment along the Carajas Railway." 14 A second response was to contractanother diagnostic and planning exercise to a consortium of private consultingfirms headed by a Rio de Janeiro-based engineering enterprise, NATRON SA.Although formally labeled a "master plan for integrated regional development,"this latter study, which was sponsored jointly by CVRD and the Grande CarajasProgram, was primarily concerned with industrial development prospects along theCarajas corridor. is

12 This industry apparently later did shift its location to tAaraba. Thereport of an April 1986 supervision mission by the Bank's urban developmentspecialist mentions that "the proposal by private investors to build a pig ironplant between Parauapebas and the railway patio appears to be dead due in largemeasure to the opposition of the environmental monitoring unit of CVRD. A morelogical location is the Industrial District of Maraba."

13 The urgent need for preparation of a land-use plan on account of theproposed "industrial, pig-iron related, investments...planned in Parauapebas"was also mentioned in the Bank's follow-up letter to CVRD following a projectsupervision mission in February 1986.

14 CVRD, Impacto Ambiental e Desenvolvimento Socio-economico ao lonno daEstrada de Ferro Carajas, op. cit., no date (but presumably 1987). This studywas coordinated by CVRD's.chief environmental officer for the Carajas Project,involved extensive field work and contained, together with a set of generalconclusions and recommendations, chapters on: (i) the area of influence of theCarajas railway; (ii) a geo-ecological characterization of the region; (iii)"contemporary social processes;" (iv) land tenure and agro-livestock production;(v) industrial production; (vi) urban development; (vii) health; (viii)education; and (ix) food supply.

15 The final report for the NATRON study was nearing completion at the timeof the OED/SEPLAN mission in March-April 1989, but public dissemination of thedocument has apparently been held up by CVRD and PGC. The mission did, however,meet with representatives of NATRON, CVRD and PGC in Brasilia in March 1989. Onthis occasion, NATRON presented its tentative projections and proposals for theCarajas corridor. In its comments on the draft report, CVRD informs that PGC had"technical responsibility" for this study and that the final version of the

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10.13 The broader environmental ramifications of pig iron and othermineral-based industrial activities along the Carajas corridor, however, werenot mentioned in the project files until May 1986 when a back-to-office reportaffirmed that "the biggest environmental risk (to the region] may accrue fromthe pig iron developments expected to begin in 1988." 16 The long-run threat tothe natural environment posed by pig iron production was also a major topic ofdiscussion at an international seminar -- at which the Bank was represented -- on economic development and environmental impacts in humid tropical areas inBrazil that was sponsored by CVRD, t1s federal Special Environmental Secretariat(SEMA) and the International Waterfowl Research Bureau (IWRB) in September-October 1986. One of the principal conclusions of this seminar, as reported bythe Bank's participant, was that "with the pig iron threat, it is imperative thata master plan of the Carajas corridor...be prepared on ecological, social andeconomic concerns." 17

10.14 From this time onward, the principal focus of the Bank's dialoguewith CVRD and the Brazilian Government on environmental matters in the Carajascorridor revolved around the pig iron industries. However, given the advancedstate of project implementation and, more importantly, the fact that the Bankhad no contractual relationship with the PGC -- which was the public sectoragency directly responsible for authorizing pig iron production in the region -- the Bank's leverage was, in fact, very limited. Within CVRD, in turn, basedon the results of a feasibility study by a German consulting firm on steelproduction possibilities in the Carajas region, la the chief of the company's

document was edited and published under the "exclusive responsibility" of theExecutive Secretariat of PGC which handled its distribution.

B6 Back-to-office report by the Bank's environmental specialist dated May29, 1986. This report observed, more specifically, that the first proposed pigiron plant would demand some 500,000 tons of charcoal per year from "intactforest" and that current plans called for "sustained yield forestry" in a 300km radius from the smelter. It further noted that "since sustained yield forestryhas never been achieved anywhere in the world, it is risky to expect it to beachieved in this case....[erd that] exploitation of all charcoalable trees inan area followed by long rotation tree plantation means that practically all theenvironmental value of the forest will be lost."

17 Back-to-office repot dated February 25, 1987. This report adds that"the forests around Carajas could be devastated in 10 years if the pig iron plantis allowed to operate near Parauapebas." It was also suggested that "such plantsshould be located closer to (the] coast where alternate energy sources areavailable with less threat to the environment."

18 The findings of this study were presented in two volumes by the Minas

Gerais-based Korf Tecnologia Siderurgica Ltda, under the title Centrais de Acoao longo da Estrada de Ferro Caralas, in 1987. Although the OED/SEPLAN missionwas not able to consult this study, an internal memorandum by the Bank'senvironmental officer dated June 25, 1987 commenting on SUNEI's summary of thisdocument observes that it provided "a pessimistic environmental assessment of

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newly established Environmental Superintendency (SUMEI) manifested his ownpreoccupation with the potential long-term threat to the native forest presentedby the continued installation of pig iron sumelters in the region. 19 An August1987 telex to CVRD, moreover, specifically registered the Bank's concern withthe environmental ilmplications of the "pig iron smelters planned within the(Carajas] project's zone of influence." This telex also observed that, eventhough "we are aware that CVRD and the Bank do not support the smelters....since 100Z of the smelter ore will by sold by CVRD and since the 2ig ironproduced will be shipped by CVRD's rail, there are direct linkages." 2

10.15 Finally, in responding to an August 1987 letter from a group ofinternational NGOs expressing preoccupation over the potential negative impactof the pig iron industries on the natural environment and Amerindian communitiesin the Carajas region, the Bank stated that it shared the concerns of theseorganizations and agreed with their "reco=mendation that long-term measeres betaken to address the process of deforestation and land conflict already in place,including the development of a regional resource management plan." I 1'o suchplan, however, has yet been undertaken for the Carajas corridor even thou6h, asindicated in Chapter VIII above, the Bank has proposed that a study ofalternative energy sources for the pig iron smelters be carried out under theUNDP/World Bank ESMAP program and, at one time, the Planning Ministry appearsto have considered undertaking a study of the indirect regional impacts of theCarajas Project. 22 Neither of these studies has yet materialized. 23

the pig iron project and associated charcoal developments and advises (CVRD] touse its influence to oppose further cutting of forest resources for thispurpose."

19 Internal CVRD memorandum dated April 7, 1987 contained in Bank projectfiles. SUMEI was established in February 1987.

20 Telex dated August 7, 1987. An internal Bank memorandum dated July 20,1987 was even more categorical. The installation of pig iron smelters in theCarajas corridor was described as "the single most urgent environmental issuein Brazil and, in all likelihood, in the entire Amazon basin," further notingthat "the Bank's concern in this matter is warranted....[since pig iron]developments in the Greater Carajas region are to a large extent a spin-off ofthe Bank-supported Carajas Iron Ore Project." It notes, finally, that theenvironmental achievements of this project "are now dwarfed by the prospect ofgeneralized deforestation."

21 Letter from the Bank to the Environmental Defense Fund dated September15, 1987 (emphasis OED). This letter also acknowledges that "key to thedevelopment and implementation of such a plan would be the strengthening ofgovernment institutions which handle environmental concerns."

22 Tentative plans for the latter were described in a back-to-office reportdated December 14, 1987 which also mentioned a possible request by the PGC forBank assistance in the areas of agro-ecological zoning, forest management andprotection and small farmer-oriented activities in the Grande Carajas region.To OED's knowledge, however, no such -request has subsequently been received by

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2. The Need for a Regional APnroach

10.16 As the above review suggests, the Bank's perceptions of theenvironmental issues associated with the Carajas Project evolved considerablyover the course of its implementation, from the rather limited -- althoughclearly pertinent -- concern with "environmental management" of the installationand day-to-day operation of mining, rail and port facilities at the time ofpreparation and appraisal to the much broader needs to consider its effects(including deforestation and land conflict) on the physical and humanenvironments in its larger area of influence and to elaborate a "regionalresource management plan" by the time of completion in late 1987. This evolutionof perceptions, which ultimately resulted from a combination of internal Bankawareness and external pressures, but, most importantly, from the increasinglysignificant and largely unanticipated consequences of the project itself, clearlypoints to one of the principal lessons of the Carajas experience for future Bankoperations involving major (especially transport) infrastructure and productivesector investments affecting large geographic areas.

10.17 This lesson, more specifically, refers to the need to take a regional 24

approach to the identification and assessment of potential environmental impactsin cases such as the iron ore operation. 25 This lesson is particularly

the Bank.

23 In its observations on an earlier version of this report, CVRD indicatedthat "recently under its own initiative, [the company] elaborated a program forthe PGC area destined to improve the efficiency of the charcoal ovens and toincrease the productivity of forest exploitation and the production of charcoal.This proposal was channeled to the federal government and to the Bank, as wellas to financial and support institutions for scientific and technologicaldevelopment, with the intention of obtaining funding for implantation of theprogram. Another study that was conceived and ui dertaken by CVRD is entitled'Urbanization and Industrialization of the Municipality of Sao Luis -Environmental Consequences."'

24 Throughout the rest of this discussion the terms "regional" or "spatial"will be used interchangeably to refer to the area of influence of a particularinvestment project. "Area of influence," in turn, will refer to the geographicarea over which the project in question has a direct and/or indirect impact onthe physical and humar. environments, recognizing both that the exact boundariesof this area of influence will be both difficult to determine and that they arelikely to change over time. An individual project's area of influence, moreover,will also frequently overlap with those of other private and public sectorinvestments and, thus, the respective environmental impacts of these variousinterventions are also likely to interact.

25 In its comments on an earlier version of this report, DEAIN of theMinistry of Economy, Finance and Planning (MEFP) reaches a similar conclusion,observing that "the experience of Brazilian Government agencies in this and otherlarge-scale infrastructure projects recommends the need to consider and deal with

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important for projects located in areas that are not only territorially large,but ecologically heterogeneous and/or sensitive, as well as for operationssituated in regions undergoing rapid and complex processes of settlement andproductive occupation. In short, it is particularly important for operations inlarge tropical frontier regions such as Eastern Amazonia. As stated moregenerally in a recent Bank publication on environmental management and economicdevelopment, since the "ecological linkages among sectors" mean that a "systemshock" such as the deforestation resulting from a transportation improvement asin the case of Carajas 26 can produce impacts "in locations quite distant fromthe initial act of natural resource degradation, project evaluation ...needs toconsider effects within a spatial unit of account." 27

l

10.18 Expressed in other words, large infrastructure and/or productiveprojects, especially those which "open up" or substantially contribute to theincreased settlement of new areas -- even when this is not their principalobjective -- need to be viewed and analyzed in terms of their potentialenvironmental impacts in both their immediate and their larger areas ofinfluence. Furthermore, as suggested in the preceding chapters, this analysisshould be concerned with the indirect, as well as the direct, environmentalconsequences of such interventions and with their human, as well as theirphysical, environmental impacts. Finally, it should also attempt to anticipatetheir long-run, as well as their short-term, environmental effects. Morespecifically, potential project impacts on migration, rural and urban populationgrowth and distribution and the expansion and territorial spread of productive(including extractive) activities, together with the likely repercussions ofthese tendencies on land, water and other natural resource utilization andquality should be considered at both the regional and subregional levels.

this type of operation as an action of integrated regional development and notas a simple sectoral investment....Along these lines, the recent creation of aSecretariat of Regional Development, linked directly to the Presidency of theRepublic, is an indication of the Government's awareness of and preoccupationwith those of its activities which have significant regional impacts."

26 The example of a "system shock" given in the original text is that ofagricultural colonization in a previously afforested area which has "variouscumulative effects. Loss of tree cover increases soil erosion, erosion adds towatercourse sedimentation, which reduces electricity output and raises floodplains and so on." Pearce, David and Markandya, Anil in Schramm, Gunter andWarford, Jeremy (eds.) Environmental Management and Economic Develogment, JohnsHopkins University Press, Baltiaore, 1989, "Marginal Opportunity Cost as aPlanning Concept in Natural Resource Management," pg. 43.

27 Ibid. pg. 50 (emphasis OED). While the "spatial unit of account"recommended by Pearce and Markandya is the watershed, in the case of majortransport interventions such as the Carajas rail and road investments which, aswas indicated in Chapter III above, affect a number of different watersheds,the more appropriate spatial unit is the area of influence, which can only bedetermined once the project's likely direct and indirect environmental impactsare identified.

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Analysis at the subregional level is particularly important when project areasof influence are extensive and/or ecologically heterogenous.

10.19 In situations, moreover, where Bank-supported projects are themselvespart of larger development initiatives and/or will interact with other majorpublic and private investments -- as was clearly the case with the CarajasProject -- the likely results of such initiatives and interactions in physicaland human environmental terms should also be anticipated to the fullest extentpossible. More generally, when large-scale Bank-assisted infrastructure andproductivp sector projects are superimposed on areas which are already beingrapidly transformed as the result of other development activities -- whetherinduced by the public sector or occurring spontaneously -- it is essential toadequately understand the nature and underlying dynamics of these processes, aswell as to consider how the proposed Bank-assisted interventions are likely toaffect and be affected by existing development trends.

10.20 This can, perhaps, best be done by first identifying the probablearea of influence of the new investments to be made, then surveying and analyzingthe principal physical, demographic, socio-economic, political and institutionalcharacteri6tice of, and recent past and present development tendencies andprocesses in or affecting, this area and, finally, by attempting to "project"the likely effects of the proposed operation on this scenario, giving particularattention to the environmental dimensions of these likely impacts. Where suchinformation is available, furthermore, the actual environmental impacts ofsimilar types of investments previously unZertaken in areas having similarcharacteristics should also be systematically considered. Over time, moreover,some sort of on-going regional environmental monitoring and evaluation mechanismshould be established. This is a distinctly different approach than that followedby CVRD, the Brazilian Government and the Bank in relation to the CarajasProject.

10.21 The first general lesson that should be learned from the Carajasexperience, in synthesis, is the need for the Bank to more adequately assess -- and take Into account in project design -- the broader ecological, historicaland regional policy and development contexts in which any largi-scaleinfrastructure and/or productive sector project will be implemented andsubsequently put into operation. This did not occur in the case of Carajas.Instead, the SAR and other preparation and appraisal documents give theimpression that the iron ore project would be implemented in an ecologicallyhomogeneous and largely virgin territory inhabited by a few Amerindians in anarea essentially removed from -- or somehow immune to -- the on-going processesand pressures of frontier expansion. This was clearly not the case. Theimpression is also given that, once installed, the only significant linkagebetween the Bank-supported operation and future regional development activitieswould be the provision of transport services, which it is suggested, would bringnothing but benefits-to the area and its non-Amerindian population. Subsequentevents, however, have also clearly demonstrated that this was not to be the case.

10.22 In short, the Bank's appraisal documents for the iron ore projectgive the impression that the operation's impact on its larger area of influencewould be almost universally positive and that the venture would be largely devoidof environmental risks or social costs that might require broader Government

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actions. The only exceptions were the environmental problems associated directlywith construction and subsequent operation of the mine, rail and port facilitiesin the areas controlled by CVRD and, as noted above, the potential adverse impactof project-related or induced developments on local Amerindian groups, which,thus, required the intervention and institutional strengthening of the federalagency responsible for the protection of indigenous areas, FUNAI. Other than CVRDand FUNAI, however, no federal, state or local government agencies had anysignificant involvement In -- or were directly strengthened in connection with -- the Carajas Project.

10.23 This picture is in sharp contrast with that presented in theappraisal documents for the previoafsly approved first three Bank loans for thePOLONOROESTE Program. This program was a large-scale road infrastructure andrural development intervention in another part of Amazonia. Differently from theCarajas Project, however, in this case the Bank's appraisal identified thepotential environmental and social risks and costs associated with pav2ng the1,500 km Cuiaba-Porto Velho highway in the absence of a wide range of otherGovernment actions. Even though the subsequent experience with POLONOROESTEclearly demonstrated that, simply taking potential physical and humanenvironmental impacts into account in project design by no means guarantees thatall the necessary preventive or corrective measures will be contemplated or thatthose which are included will be properly implemented or even implemented at all,from an environmental perspective the relatively much more comprehensive"regional" approach followed by the Government and the Bank in Northwest Brazilwas, nevertheless, considerably more appropriate than the narrower, essentiallysectoral, focus applied in the case of Carajas.

10.24 The question can be legitimately asked as to why the Bank'sapproaches to the Carajas and POLONOROE-TE operations were so different despitethe fact that they were appraised at roughly the same time (1981) and possessedmany similar characteristics. Indeed, although located in different parts ofAmazonia, both operations involved very large total investments, were supportedby sizeable Bank loans, were centered around major transport improvements andinvolved specific environmental and Amerindian protection components that wereconsidered to be -- and, in fact, were -- quite innovative at the time thecorresponding loans were approved. More importantly, both operations wereundertaken in territorially large, predominantly tropical, regions and had evenlarger -- and expanding -- areas of influence. Furthermore, both of these regionswere ecologically heterogeneous and contained or bordered on subareas that areparticularly sensitive from an environmental standpoint. Finally, both ventureswere implemented at a time and in the broader socio-economic, political andinstitutional context of on-going frontier occupation by a variety of actorsresponding to a wide range of economic and policy incentives, not the least of

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which were the prospect 2 and subsequent reality of the Bank-supportedinvestments themselves.

10.25 Two major reasons for the differences in approach were that, despitethe many similarities between these operations, they were intended to achievevery different objectives and involved different sectors within the Bank. Withregard to objectives first of all, while POLONOROESTE sought to support andrationalize the on-going processes of rapid occupation and settlement of theNorthwest region through a combination of major infrastructure improvements,integrated small farmer development (including agricultural colonization)projects, the provision of basic social services and environmental and Amerindianprotection measures, the Carajas Project was designed to extract and export ironore in order to generate foreign exchange. Only secondarily was the iron oreoperation expected to contribute to regional development and this "development"was seen by the Bank exclusively in economic terms. In short, the objectives ofCarajas were largely macroeconomic and sectoral, rather than -- as in the caseof POLONOROESTE -- primarily regional and social in nature.

10.26 A second reason is that the preparation and appraisal of these twooperations were handled in distinctly different ways by distinctly differentgroups within the Bank. The Carajas Project, as indicated above, was treatedessentially as a single sector (ie. mining cum infrastructure) project, despitethe fact that it contained urban development, environmental and Amerindianprotection "appendices". Country programs (ie. the then Brazil Division) appears,in fact, to have had little intervention in project preparation and appraisal,largely limiting its role to ensuring the participation of the co-financiers,while there was no involvement on the part of regional agricultural staff.Furthermore, in a technical sense, the project was essentially already preparedby the time the Bank became effectively involved.

10.27 POLONOROESTE, by contrast, was approached by the Bank both from aregional and a multi-sectoral perspective. The effort initiated with a cleardefinition of the program's territorial coverage and a multi-disciplinary surveymission -- which included a staff ecologist, together with transport,agricultural and regional economics and development specialists -- was sent tothe Northwest region in parallel to project identification in an attempt toimprove the Bank's previously very sketchy knowledge about the area, its physicalenvironment, productive potential, recent settlement dynamics and existinggovernment policies and programs upon which, it was felt, the design of anyfuture Bank-supported interventions should be based. Subsequent preparation andappraisal of the program by the Bank with the assistance of the FAO, moreover,involved staff and/or consultants from the regional agricultural, transport andpublic health project divisions under the general coordination of country

28 In both cases, a substantial part of the physical occupation, landconcentration and associated deforestation that occurred along the route or inthe vicinity of Bank-assisted transport improvements, in fact, took place inanticipation -- and, thus, in advance -- of these investments. As alreadysuggested, much of this occupation in the specific case of the Carajas area,moreover, appears to have been undertaken largely for purposes of landspeculation.

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programs. Differently from the Carajas operation also, overall Bank (and FAO)involvement in project preparation was considerable.

10.28 The more narrow approach followed by the Bank in the case of theCarajas Project, especially its neglect of rural land use and natural resourcemanagement issues in the railway corridor and the corresponding lack ofinvolvement of the regional agricultural projects staff, was both ironic andultimately unfortunate since -- as was indicated in Chapters IV and V above -- the latter group was simultaneously engaged in the appraisal of an integratedrural development project for Maranhao which involved the easternmost part ofthe Carajas corridor among other parts of the state. It is ironic because,judging from the project files and appraisal documents, the Bank staff involvedin the preparation and evaluation of the iron ore project appear to have takenno notice of the activities of their agricultural colleagues, even though thegeographic areas directly affected by the two operations signif .antly overlappedand, as the agricultural staff were aware, but the mining/transport specialistswere apparently not, implementation of the Carajas Project would have a majorimpact on future development in the eastern part -- as well as along the rest -;- of the corridor. It is also unfortunate because the Maranhao Rural DevelopmentProject attempted to incorporate a number of very interesting land use planningand environmental protection features which, if applied at that time along theentire Carajas corridor, might have avoided, or at least substantially reduced,much of the ensuing environmental degradation in the area.

10.29 Two other important factors probably also help to explain therelatively narrow approach taken by the Bank in the case of Carajas. One is thatthe Borrower and principal executing agency was a state-owned mining company,CVRD, rather than the Government itself. From the outset the iron ore projectwas viewed by both CVRD and the Bank first and foremost as a commercial miningand export venture for which the Executor would also be the Bank's borrower withthe federal government's guarantee. This, indeed, was appropriate given bothCVRD's charter and role within the Brazilian public sector and the fact that,as the recipient of the revenues to be generated by Carajas ore exports, itwould be in a financial position to directly repay the Bank's loan and otherforeign funding utilized for installation of the project.

10.30 As indicated in Chapter II, moreover, CVRD had a well-deservedinternational reputation as a well-organized, efficient and financially soundmining company with considerable previous experience in the sector. It had alsobeen granted legal rights by the Brazilian Government to exploit the Carajas ironand manganese deposits, together with the rail right-of-way between the mine andport sites and the required land concessions for mining and port activities atCarajas and Ponta da Madeira, respectively. In this sense, the operation was,indeed, "self-contained," and there was no apparent need for the formalinvolvement of other government agencies with the exception of FUNAI. Inretrospect, however, it is clear that the nature and dimension of the project'sindirect effects were such that, although apparently self-contained, the Carajasoperation, in fact, generated very significant negative externalities in itslarger area of influence and, thus, that the narrowly defined iron ore operationshould have been at least accompanied -- and ideally preceded -- by a broaderregional planning and development exercise for the entire rail corridor.

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10.31 A fourth major factor which conditioned the Bank's approach to theCarajas Project was that, as mentioned above and described in Chapter V, theBank's effective involvement in project preparation was very limited due to thefact that all major design decisions had already been taken, much of theengineering work had been concluded and physical execution had already initiatedby the time the Bank loan was approved. Even though discussions between CVRD andthe Brazilian Government, on the one hand, and the Bank, on the other, date fromthe early 1970's and project construction began in earnest in the late 1970's,the Government's definitive decision to request the Bank's financial assistancefor the operation was not made until October 1980 and the Bank's first and onlypreparation mission did not occur until February 1981, some nine months beforeappraisal. 29 Given the very advanced state of project preparation by atechnically competent, highly experienced and organizationally sophisticatedBorrower, the relatively rapid formal process±ng of the operation by the Bank,once a "green light" was given by the Brazilian Government, is not surprising.

10.32 This did mean, however, that the Bank had virtually no opportunityto influence such basic decisions from an environmental standpoint as the typeof transport solution to be developed through the project (ie. rail versuspipeline versus river transport or some combination thereof), its specificrouting and the associated location of the port facilities (ie. Sao Luis orBelem). It also meant that many private land ownership, as well as land and othernatural resource use, decisions along the immediate corridors formed and "openedup" by the transport investments made through the Carajas Project had alreadybeen taken and that the physical occupation of these areas had already begun,as had the associated deforestation, land concentration, expulsion of smallnosseiros and so on. In short, by the time the Bank became effectively involvedin the iron ore project, many of the specific socio-economic and physicaldevelopment processes directly or indirectly stimulated or reinforced byimplantation of the operation, and which would later result in significant humanand physical environmental consequences, had already been set in motion.

10.33 This points to a second important general lesson of the Carajasexperience whlich is of direct relevance for the preparation and appraisal offuture infrastructure and productive sector operations in Brazil or elsewhere,more specifically, the need for the Bank to become effectively involved as earlyas possible in the project design process. A corollary to this is the need toconsider human and physical environmental -- as well as financial and economic -- costs and benefits in assessing the merits of the alternatives considered inproject design, as well as in the final evaluation of the option eventuallyselected. This will ultimately require an integration of environmental andeconomic analysis, or expressed in a somewhat different manner, a full accountingand consideration of environmental, together with economic, costs and benefits

29 As noted in Chapter V, moreover, this mission was shortly (July 1981)followed by a preappraisal mission, while appraisal and post-appraisal missionswere made in October-November 1981 and February 1982, respectively.

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as part of ex-ante project evaluation. 30 Although this currently presents verysignificant methodological problems, 31 the Bank should direct increasingattention to develoT ng the tools and skills necessary to quantify -- physicallyand, where possible, monetarily -- the environmental costs and benefits ofproposed projects and, in the impossibility of doing so, to at least more fullyidentify these coats and benefits and, thus, make more conscious and betterinformed qualitative judgements as to their importanco in relation to otherproject costs and benefits. This, in short, should be a key element in theassessment of any future investment project which is likely to ha-e significantenvironmental impacts.

B. Project Adeguac, and Effectiveness in Dealing with Environmental Problems

10.34 The discussion in the chapters above clearly suggests that, while,the specific environmental protection component of the Carajas Project may, forthe most part, have been adequately designed and generally effective in tex-sof the more lmmediate "environmental management" issues and problems expectedto be encountered in the course of the physical construction and the subsequentroutine operation of the mining, rail and port facilities, from the standpointof the project's broader physical and human environmental impacts it was far fromsufficient. 32 An essentially similar conclusion is drawn in several places inthe Bank's PCR for the iron ore operation. In assessing CVRD's performance, forinstance, the PCR affirms that, "retrospectively, the Borrower should have, along

30 In its comments on the previous version of this report, CVRD observedthat "from the experience accumulated to date in the implementation of theCarajas Iron Ore Project, it is evident that international agencies and thegovernments of countries involved in projects of this nature should establishnew criteria for projects of such complexity, introducing the concept of'ecological economics' to complement traditional techniques of economic-financial analysis in addition to ex-ante analyses of economic and socialimpact."

31 Some of these difficulties, at both the macro and the project levels,are described in the chapters by El Serafy, Salah and Lutz, Ernst, "Environmentaland Natural Resource Accounting") and Pearce and Markandya, op. cit., in Schrammand Warford (eds.), op. cit. On the former subject, see also, Ahmad, Yusaf, ElSerafy, Salah and Lutz, Ernst (eds.) Environmental Accounting and Sustainableincome, World Bank, Washington, D.C., 1989.

32 The comparative success of the project's environmental protectioncomponent, moreover, appears to be due, at least in part, to the strongcoincidence between environmental and operational considerations, especially theneed to avoid soil erosion along the railroad bed and dust pollution at the mineand port sites. The comparative success of the Amerindian protection component,in turn, appears to have been largely due to CVRD and Bank vigilance over theactivities of PUNAI, while the benefits derived therefrom by local tribalpopulations are only likely to be sustainable if at least the same level offinancial and institutional support continues to be available in the future andif the Indian communities are permitted a more direct and active role in themanagement of their own affairs.

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with the lenders, required more effective mechanisms to safeguard againstundesirable secondary effects of the project on the environment." With regardto the Brazilian Government's performance, in turn, the PCR states that "theGuarantor, although in general compliance with the obligati-ons in the Loan andGuarantee Agreements, could have been more effective if PUNAI, as well as theGovernment's environmental agencies, had been better staffed and funded toeffectively fulfill their responsibilities." 3

10.35 The Bank's performance under the operation, finally, was judgedlargely in the same terms by the PCR which observed that "the main weakness ofth3 Bank was probably the insufficient appraisal of the possible indirect impactof the project and the lack of appropriate provisions for influencing andcontrolling that impact in order to avoid or at least mitigate undesirableenvironmental of fects." 31 Illustrative of inadequate project design with regardto environmental issues, in addition to the near total absence of measures todeal with natural resource utilization and broader project environmental impactsat the regional level, is the essential ambiguity of the environmental covenantsin its Loan and Guarantee Agreements alreadv referred to in Chapter VII above.It is likely that this ambiguity ultimately reflects the Bank's insufficientunderstanding of the operation's potential environmental repercussions at thetime it was appraised.

10.36 As mentioned in para. 7.40 above, the Bank's specific environmental"conditionalities" in the Loan Agreement for the Carajas operation were prefacedby the following statement: "the Borrower shall take all action as shall berequired to ensure that the execution and operation of the Project are carriedout with due regard to ecological and other environmental factors." Thisstatement is ambiguous on at least two major counts which makes it difficult bothto interpret and, more importantly, to comply with by the Borrower and to monitorby the Bank. On the one hand, neither the Loan Agreament itself, nor the Bank'sappraisal documents upon which the former is based, contain a clear definitionof the meaning of the phrase "with due regard to ecological and otherenvironmental factors." This phrase, in fact, is doubly unclear since neitherthe "ecological and other environmental factors" referred to are specified, noris the operational significance of "with due regard to" spelled out. 35

33 PCR, op. cit., para. 36. The PCR also alerts that "a project of the sizeand visibility of Carajas will always be considered responsible in public opinionfor secondary developments whether their link to the project is strong or weak."

34 Ibid., para. 33 (emphasis OED).

35 A Bank Legal Department study of environmental covenants in loanagreements based on a review of a large number of projects across all regionsmakes essentially the same point. According to the draft version of the reportfor this study dated November 24, 1987: "general covenants requiring the Borrowerto exercise due regard to the environment are generally viewed, at best.. .as non-binding guidelines for project execution and operation... .Because they are basedon a vague standard, they do not give the Bank leverage, nor is the Bank preparedto use contractual remedies to ensure that environmental issues are resolvedduring project execution" (pg. 12, emphasis OED).

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10.37 In addition, there is also considerable room for differinginterpretations as to what is meant by the phrase "operation of the Project."More concretely, it is unclear whether "operation" refers exclusively andnarrowly to the actual physical functioning of project-provided facilities andactivities (ie. ore extraction, processing and storage, rail transportation andship loading by CVRD) or if it also refers more broadly to the utilization ofproject output as the result of on-going project operations (eg. the use ofproject-generated iron ore for pig iron production in the case of Carajas),especially when such utilization would and could not have occurred in the absenceof the Bank-supported investments and, thus, is at least indirectly the resultof the project's physical production activities. The Bank appears to have appliedthe former, more narrow, definition in the case of Carajas, if for no otherreason than that the private industries that produce pig iron are legrlly, ifnot functionally (in the sense that they are totally dependent on iron ore andtransportation services provided exclusively by the company) independent of CVRD, 36

with which the Loan Agreement was signed. While this interpretation may belegally correct, it also obviously leaves the door wide open, as far as the Bankis concerned, for the uncontrolled use of the goods and services produced as theresult of investments which it has co-financed.

10.38 Whatever the correct legal interpretation of the Loan covenant citedabove, it is, nevertheless, evident that it was insufficiently well defined toavoid potentially serious physical environmental damage in the Carajas corridoras a result of the way in which part of the project-supplied iron ore is nowbeing used by third parties. As the PCR puts it in assessing the Bank'sperformance under the operation with specific reference to the Loan's contractualdocuments:

the environmental provisions of the Loan Agreement weredetailed and extensive as far as the area under CVRDcontrol was concerned. However, the provisions forenvironmental control beyond that area, included in theGuarantee Agreement, depended principally on theGovernment's environmental agencies, which areinstitutions with inadequate resources and practicallyno decision making power. In hindsight, it is obvious

36 CVRD apparently does, however, have a minority interest in at least oneof the pig iron smelters already in operation at Maraba and has indicated itsintention to build a short rail spur from the main Carajas railway directly intothe Industrial District of Maraba, where thio and other metallurgical industrieseither are already located or are expected to be situated in the future, so aeto further facilitate the transportation of iron ore, pig iron and other productsto and from these establishments. Furthermore, CVRD determines the price and,hence, the cost of both iron ore and rail transportation for pig iron producersand, thus, directly affects the economic feasibility of these activities.

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that these environmental provisions will not suffice forsimilar projects in the future.

10.39 The preceding discussion suggests two other major lessons that canbe derived from the way environmental issues and problems were handled by theBank in the Carajas Project. One is the need for a more explicit definition ofenvironmental covenants in project legal documents, including a clearerspec'fication of the "ecological and other environmental factors" which need tobe considered in the implementation and operation of the project, together witha more concrete determination of what procedures should be followed to deal witheventual unanticipated adverse project impacts on the surrounding natural andhuman environments. This again also implies the need for a more comprehensiveapproach from the outset both to the identification of potential projectenvironmental impacts and to the definition of specific measures to "avoid orat least mitigate undesirable environmental effects" as the Bank's PCR for theCarajas operation puts it.

10.40 The associated lesson, accordingly, is the need to better define andmore fully incorporate measures to protect and preserve the physical and humanenvironments potentially affected in an adverse manner by large-scaleinfrastructure and productive operations such as the Carajas Project into theinitial design of these operations themselves or by means of prior and/orparallel interventions with this purpose at the level of its area of influence.This can and probably should take a number of forms, ranging from agro-ecological zoning and land use regulation and natural resource management,accompanied by the institutional strengthening of environmental protectionagencies to specific project components or entire parallel projects dealingixplicitly with such issues as rural land tenure and sustainable small farmerdevelopment, forest management and reforestation, public health and basic urbaninfrastructure and service provision, possibly together with the financial andinstitutional strengthening of municipal governments, as well as with additionalecological research and, where necessary, measures to protect tribalpopulations, in the areas affected by the initial infrastructure and productiveinvestments. 38

37 PCR, op. cit., para. 33. Similarly, with specific reference to theestablishment of pig iron smelters in the Carajas corridor, Senator ClaibornePell, in a letter to the United States Treasury Department dated January 18, 1989and cited in Anderson (op. cit., pg. 8), states: "if the terms of the loan havenot been violated, this incident points to the challenge facing the Bank'senvironmental review process, which clearly needs to be broadened to go beyondsimply the environmental effects of an individual project. It does little goodfor World Bank financed projects to be environmentally sound while ancillaryprojects are environmentally destructive."

38 In its observations on the preliminary draft of this report, DEAIN/MEFPaffirms that "it is recommendable that future projects contemplate institutionaldevelopment components, compatible with their scale and complexity, for themonitoring and evaluation both of their execution and of their regional andenvironmental impacts."

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10.41 In the case of Carajas, more specifically, the Bank should haveconditioned its participation in the iron ore project to the preparation andImplementation of integrated rural development projects, such as the oneactually undertaken at that time in northern and central Maranhao, along theentire Carajas corridor. Furthermore, as in the case of POLONOROESTE and to alesser, but nevertheless still significant, extent also in north-centralMaranhao, any such rural development initiative should have included specificland use and natural resource management and environmental protectioncomponents. Unlike both POLONOROESTE and the Maranhao Rural Development Project,furthermore, any such region-wide development effort should have ideallycontemplated urban and municipal development requirements as well. In short, inaddition to taking a broader spatial approach to the identification andassessment of the environmental issues and problems associated with theinstallation of iron ore operations and related transport infrastructure inEastern Amazonia, a spatial approach to their solution should also have beenattempted. 3

10.42 Independently of whether the approach ultimately followed involvesa single project or program with multiple components or several interrelatedprojects, finally, the above considerations also imply the need to apply acoordinated cross-sectoral and multi-disciplinary, as well as a regional,approach to the identification, preparation and appraisal of large-scaleinvestments that are likely to have significant environmental Impacts, as wellas to the eventual supervision, monitoring and evaluation of theseinterventions. 40 This presents a major challenge for institutions such as theBank that are, for the most part, organized sectorally (at least withinindividual countries) rather than geographically. In general, however, the Bank

39 As noted in Chapter V, the Bank, in fact, tried to interest theBrazilian Government in Bank support for broader regional planning activitiesin the Grande Carajas area some three months after the iron ore project wasapproved, but the Government declined such assistance. Had the Bank originallyconditioned its financing of the Carajas operation to such an effort, it ispossible that some of the project's indirect negative environmental impacts inits larger area of influence might have been avoided or at least substantiallydiminished.

40 This is also stressed both by Jeremy Warford in Chapter 2

("Environmental Management and Economic Policy") and Norman Myers in Chapter 5("The Environmental Basis of Sustainable Development") of Schramm and Warford,op. cit. Warford argues that "economic assessments and projections willnecessarily be fraught with massive uncertainty, given the complexity of thevarious physical and behavioral linkages in natural resource management. It istherefore imperative that economists...collaborate actively with many otherspecialists including engineers, agriculturalists, natural and social scientists,lawyers and management experts. Above all, a multisectoral and multidisciplinaryapproach is called for." (pp. 20-21) Myers, in turn, observes that "theenvironmental interconnections of natural resource systems constitute an'objective reality' that...is often in conflict with the compartmentalizedapproach of human institutions....In response, we need to adopt a moreintegrative approach to natural resource issues." (pg. 50)

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should give greater attention to how the projects and programs it supports indifferent sectors affect the particular regions in which they are located --whether these are defined administratively or ecologically 41 -- theirinhabitants and their physical environments.

10.43 Finally, considering both that a major consequence of the CarajasProject has been its broader economic, social and ecological impacts on EasternAmazonia and that these dimensions were largely overlooked by CVRD and the Bankduring project preparation, the need to mobilize types of professional expertisewhich the Bank has not traditionally relied upon in the past In projectidentification and appraisal -- including both regional planning andenvironmental management specialists, together with social scientists other thaneconomists -- is of particular importance. Such professionals, moreover, shouldbe involved from the outset, so that their participation is not limited tobelated, crisis management type interventions once projects are nearingappraisal or already undergoing physical execution. It is also necessary toavoid "emergency" measures (such as the Amerindian protection component in thepresent case) which run the risk of being hastily prepared and, thus, providinginadequate solutions to the problems with which they are intended to deal. Inshort, greater attention should be given from the very beginning of projectpreparation to defining appropriate safeguards and, where necessary, buildingpreventive and/or compensatory measures into project design in order to offsetexpected adverse environmental impacts in its larger area of influence.

C. Specific Follow-up Measures for the Caraias Corridor

10.44 As indicated in the discussion of its urban development componentin Chapter VI, the experience under the Carajas operation raises the importantissue as to where and when CVRD's and the Bank's responsibilities should end ina situation in which the major infrastructure and productive investments thatthey have co-financed have generated, and continue to result in, significantadverse physical and/or human environmental consequences in their immediate andlarger regions of influence. While there are no easy answers to this question,as suggested in the previous section, there can be no doubt that there is a needboth to greatly improve environmental and Amerindian protection efforts and to

41 An "ecological" definition of the region to be considered refersspecifically to the watersheds and other environmentally distinct subareasaffected by a particular investment project, while an "administrative" definitionrefers to the municipal and state government units that are so affected. Whileit is very unlikely that a purely administrative definition of a project's areaof influence will coincide with its ecological one which is clearly the morerelevant area from an environmental impact assessment standpoint, from a publicintervention (ie. planning, regulatory and Investment) perspective, the set ofcontiguous munic4.palities in which the ecological area of influence is largelycontained is likely to be the more relevant "project region." An administrativelydefined area of influence, moreover, also tends to facilitate data gatheringfor environmental assessment since much information from existing secondarysources, such as periodic demographic and economic census surveys in theBrazilian case, is generally available at the municipal (but not submunicipal)level.

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support and expand sustainable rural and urban development, as well as publichealth, activities in the Carajas cor4ldor, as elsewhere in Eastern Amazonia.Since the iron ore project has been at least partially -- if indirectly --responsible for many of the environmental and social problems subsequentlyexperienced in the region, moreover, there can also be no doubt that CVRD hasa continuing moral obligation to assist broader government efforts both to limitand, hopefully, reverse environmental degradation and to provide neededinfrastructure and services to rural and urban populations in the area. 42

10.45 Most of the support required, however, will need to come from otherfederal government agencies -- including both the Grande Carajas Program and thenational environmental protection agency, IBAMA -- together with state andmunicipal authorities and the local communities themselves. Given its ownparticipation in the iron ore project, moreover, the Bank should be open to thepossibility of providing additional assistance for socially and environmentally-- as well as economically -- sound development projects in the region. Thefollowing paragraphs will present preliminary ideas as to some of the areaswhere such assistance is needed and suggest some more specific ways in whichCVRD, the Brazilian Government and the Bank could support future environmentalprotection and sustainable development efforts in the Carajas corridor.

1. Regional Development and Environmental Planning

10.46 The most immediate need in terms of follow-up actions in the Carajascorridor is to proceed with, amplify and consolidate activities alreadyinitiated, completed or proposed which, when properly integrated, would providemuch of the basis for comprehensive regional development and environmental andnatural resource management plans for the area. The activities already completedinclude CVRD's 1987 study of the environmental impacts and socio-economicdevelopment in the corridor created by the iron ore project (which, however,would require updating in certain areas) and the study coordinated by NATRON onindustrialization alternatives in the corridor, both of which were mentioned inpara. 10.12 above. Much of the work undertaken in connection with the earlierOAS-Brazilian Government regional development study (known as PRODIAT) for theAraguaia-Tocantins River basins may also still be of considerable directrelevance for any such effort. 43 Other relevant studies that have already been

42 In commenting on the draft of this report, CVRD affirms that "as anentrepreneurial organization directed toward its specific activities, the companydoes not neglect its social function in the areas in which it operates, asillustrated, for example, by its provision of urban infrastructure in varioustowns and cities along the Carajas rail corridor."

43 See Ministerio do Interior-Organization of American States, Plano deDesenvolvimento da Regiao do Araguaia-Tocantins (1985/94), Brasilia, 1987. Thisexercise, which was carried out between 1981 and 1985, covered most of that partof the Carajas corridor located in the state of Para, but only a small part ofthe segment located in Maranhao. In addition to the publication mentioned above,which is the final report of the PRODIAT study, over twenty other, more specific,diagnostic and planning documents were published by this project between June1982 and September 1985.

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initiated are the detailed natural resource surveys for the areas around Marabaand Santa Ines being carried out by IBGE under the sponsorship of the PGC (andcited in Chapter IlI above), which should also be extended to other parts of theCarajas corridor and eventually to Eastern Amazonia as a whole, and UNDP-assisted efforts by SUDAM to use remote sensing to monitor deforestation in thestate of Para, which should be expanded also to Maranhao. Finally, the proposedUNDP/World Bank ESMAP Carajas Energy Supply Options Study, mentioned in ChapterVIII, should be undertaken as quickly as possible.

10.47 One of the concrete outcomes of this process should be theestablishment of a permanent regional environmental planning mechanism for theCarajas corridor. Since parts of two states are involved, this mechanism shouldbe based at the federal government level -- perhaps, physically andadministratively located in a technically and institutionally strengthened PGCor SUDAM -- but permit the active and effective participation of state andwunicipal authorities, as well as SEPLAN, CVRD, IBAMA and key federal sectoralagencies (eg. ELETRONORTE, DNER, etc.) 44 through some kind of inter-governmental and inter-sectoral steering committee. Flexibility should exist,moreover, in terms of expanding the territorial focus and jurisdiction of anysuch body in order to accommodate changes in the area of influence of theCarajas railway itself. The area alrAady affected by the first segment of theNorth-South railway between Acailanlia and Imperatriz and that which would bedirectly impacted by the proposed rail spur between the existing Carajasrailroad and Paragominas in northeastern Para, for example, clearly fall intothis category.

10.48 The studies mentioned above, furthermore, should be complemented bya more detailed socio-economic and environmental impact evaluation of theCarajas Iron Ore Project. As in the present report, any such study shouldconsider both direct and indirect impacts on both the human and physicalenvironments in the project's immediate and larger areas of influence. Theearlier proposal by the Planning Ministry -- mentioned in para 10.16 above --to carry out a study of the indirect effects of the Carajas operation, inshort, should be revived and expanded. Such a study, moreover, should be jointlyoverseen by the Environmental Analysis Unit of the Planning Ministry(CAA/SEPLAN), the Regional Development Unit in IPEA/IPLAN, CVRD/SUMEI, the PGCand the state Secretariats of Planning in Para and Maranhao and be contractedout to a University, independent research institute or private consulting firmwith considerable previous experience in undertaking ex-post projectevaluations. Moreover, specific environmental and sociological-

44 IBANA, subordinated to the Ministry of the Interior, is the federalenvironmental protection agency; ELETRONORTE, which is linked to ELETROBRAS, bothof which are subordinated to the Ministry of Mines and Energy, is the electricalenergy holding company for the North region; and DNER, which is subordinated tothe Ministry of Transportation, is the national highway department.

45 Possible candidates might be the Institute of Economic ResearchFoundation (FIPE) of the University of Sao Paulo, the Center for RegionalDevelopment and Planning (CEDEPLAR) at the Federal University of Minas Gerais,the Department of Rural Economics at the Federal University of Vicosa, also in

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anthropological expertise should be mobilized as part of this effort. Any suchevaluation should give particular attention to the linkages and interactionsbetween the iron ore project and other important investments and programs at theregional level. 46

10.49 Finally, specific studies concerning the legal, institutional,technical and financial requirements for effective environmental protection inthe Carajas corridor -- and Eastern Amazonia more generally -- should beundertaken. This study should be overseen by IBAMA, with participation by theEnvironmental Analysis Unit of IPEA/IPLAN and the state environmental protectionagencies for Para and Maranhao. In carrying out the study, it would be importantto assess past experience in the region under existing legal and institutionalarrangements, particularly in the areas of agro-ecological zoning, rural landuse, deforestation, air and water quality control and forest and parkmanagement. It would also be appropriate to review past experience and thepresent situation with regard to the identification, demarcation, administrationand protection of -- and the pr6vision of basic social services to -- Amerindianreserves as part of, or in parallel to, this exercise with the participation ofFUNAI and independent anthropologists.

2. Regional Development/and Environmental Protection Funds

10.50 The above mentioned regional development and environmentalmanagement planning studies should result in a concrete set of proposals forpublic intervention at the subregional level across a number of sectors. Whileit is likely that most, if not all, of the proposed interventions would beimplemented under existing institutional arrangements -- which, however, in manyinstances would need to be substantially strengthened -- it will, nevertheless,be necessary to identify funding sources for needed investments, institutionalbuilding and other (including additional legal, regulatory and enforcement)measures required to support sustainable development and the proper monitoringand control of natural resource use a9d environmental quality in the Carajascorridor. Furthermore, in some cases the aforementioned studies themselves, aswell as on-going regional and environmental planning activities will need to befinanced. One way of generating the necessary resources would be through theestablishment and capitalization of specific regional development andenvironmental protection funds to which CVRD and the PGC should directly

Minas Gerais, the Nucleus of Amazonian Studies (NAEA) at the Federal Universityof Para, the Goeldi Museum in Belem or the National Institute of AmazonianStudies (INPA) in Manaus, or (ideally) some combination thereof (eg. FIPE orCEDEPLAR and the Museu Goeldi).

46 Such an evaluation exercise could also be extremely useful in terms ofdeveloping appropriate methodologies for carrying out similar analyses for othermajor infrastructure and/or productive investments. A good methodologicalstarting point for any such evaluation would be work already sponsored by theEnvironment Department of ELETROBRAS and carried out in part by FIPE concerningthe regional and environmental impacts of large hydropower projects in Brazil.Similar studies coordinated by the Centro de Estudios Urbanos e Regionales (CEUR)in Buenos Aires would also be of direct relevance.

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contribute. State and local governments, as well as external lending agenciesincluding the Bank, could also participate in these funds. 4

10.51 CVRD, more specifically, should contribute by channelling some partof the revenues derived from its sale of iron ore both in foreign markets andto metallurgical industries within the Carajas region itself to the proposedfunds, 4' while the PGC should allocate some percentage of its fiscal incentiveresources to these funds. 49 The regional development fund would be utilized tohelp finance specific rural and urban development and public health projectsalong the Carajas corridor. The environmental protection fund, in turn, wouldbe used to support environmental planning and monitoring activities -- includinginspection and control of "sustained forest management" and/or reforestationschemes undertaken by (or on the behalf of) pig iron industries -- and improvednatural resource management in the area, together with the institutionalstrengthening of state and local agencies responsible for environmentalprotection in the region.

10.52 In the case of CVRD, the proposed contributions for regionaldevelopment would essentially mirror a similar mechanism established by thecompany in Minas Gerais and Espirito Santo through which proceeds derived fromforeign iron ore sales exported by its southern system are utilized to supportlocal development activities in the yunicipalities situated along the route ofthe Itabira-Tubarao railway in the Rio Doce River valley. In the case ofCarajas, more specifically -- in addition to a share of the revenues from ironore export sales, which could, perhaps, best be destined to support rural andurban development activities through the proposed regional development fund -- industrial consumers of Carajas iron ore and transport services could beassessed, through the iron ore and freight prices over which CVRD has directcontrol, an additional amount per ton of ore purchased and/or pig irontransported to help finance environmental inspection, control, recuperation and

I In its comments on an earlier version of this report, the Department ofPlanning and Evaluation of the Hinistry of Economy, Finance and Planning endorsedthe idea of creating an environmental protection fund with resources from CVRD,the Grande Carajas Program and possibly the Bank. DNPA/MEPP further observedthat any such fund should necessarily be able to count on counterpart resourcesfrom productive enterprises that are required to complv with national forestrylegislation.

48 This would be highly appropriate since both iron ore and pig Iron, Infact, originate in the area, while their extraction and production have directlyor indirectly contributed to its continuing environmental degradation.

4' A clear precedent exists for this in Brazil through the allocation of50% of the fiscal incentive funds previously reserved for the exclusive use ofprivate enterprises willing to locate industrial and other productive sectorprojects in Amazonia or the Northeast to the PIN and PROTERRA Programs createdin 1970-71 to finance construction of the Transamazon and Cuisba-Santaremhighways and implementation of the Northeast Irrigation Program.

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institutional strengthening efforts in the Carajas corridor through the proposedenvironmental protection fund. "

10.53 The proposed environmental protection fund could be administeredjointly by CVRD, under the orientation of GEAMAM, and the federal and stateplanning and environmental protection agencies mentioned above. Administrationof the regional development fund, in turn, should also involve both federal andstate government entities, possibly including PGC, SUDAM and the Para andMaranhao state planning secretariats, as well as CVRD, and one or more officialbanks (eg. BASA, BNDES and/or the Bank of Brazil), and could perhaps best beorganized along the lines of the revolving municipal development funds supportedby the Bank in southern Brazil. S While much of the activities financed throughthe environmental protection fund may have to take the form of grants, thosesponsored under the regional development fund should involve a mixture of grants(eg. most rural development support other than credit, public health care) andloans (eg. urban-municipal services), with the loan element representing as higha portion of the total as economically feasible. Some of the specific activitiesthat might be supported through these funds are briefly described in thefollowing paragraphs.

3. Sustainable Rural De elopment

10.54 Considerable potentiallexists along the Carajas railway corridor forthe establishment of comparatively modest integrated agricultural and/or ruraldevelopment projects to assist existing populations of small farmers and otherproducers. Such initiatives should seek to support and retain smallholderfarming activities with emphasis on the production of staple foods for localconsumption, complemented, where feasible, by export crops. The Grande CarajasProgram has apparently already made initial plans for community-basedagricultural production and support service schemes in two areas of small farmerconcentration along the Carajas railway (Alto Alegre, near Santa Ines, andSororo, near Maraba). If appropriate inputs to strengthen subsistence food andcash crop production such as land titling, rural extension services, credit andseeds are provided -- possibly coupled with the expanded use of rail transportfor marketing purposes -- it is likely that these areas will permitestablishment of sustainable small-scale agriculture. Although these two areascontain only a small fraction of the total population in need of assistance inthe region, successful pilot projects, carried out in parallel to detailedecological zoning and foreat management programs, could provide the basis forfuture larger-scale rural development efforts throughout the Carajas corridor.

30 At the time of the OED/SEPLAN mission in April 1989, CVRD was apparentlytransporting and selling iron ore to pig iron industries in the region at a pricesome 30-40% below the export price. Resources for the proposed environmentalprotection fund could thus be derived from a reduction in the difference betweenthese two prices.

51 See the recently approved projects for municipal development in Parana(Loan 3100-BR; SAR Report No. 7715-BR dated May 22, 1989) and Rio Grande do Sul(Loan 3129-BR; SAR Report No. 7714-BR dated October 3, 1989) for details.

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In any event, soil studies commissioned by CVRD along the rail corridor haveidentified beveral fertile areas with such development potential.

10.55 Any such rural development efforts, however, should be based on moredetailed evaluations of the consequences of the Carajas Project on rural landownership, land and other natural resource use patterns, productivity,occupational structures and community mobilization, among other variables, inthe specific subareas involved with a view to identifying ways in which therural population can best be supported in their attempts to strengthen bothsubsistence and commercial farming -- together with extractive (eg. babacu orBrazilnut collection) activities -- in an environmentally sustainable manner.Two geographic subareas in particular should be given initial priority in thiseffort:

(i) The Brazilnut polygon, near Maraba, where 200,000 of a totalone million hectares were expropriated in 1988 under theNational Agrarian Reform Plan (PNRA) discussed in Chapter IVabove. The population in this area including over 2,000agrarian reform beneficiaries and their families will requireassistance in terms of rural credit, marketing and othersupport services in order to strengthen small-scaleproduction. Specific studies are required to ascertain jointlywith the population how the agrarian economy functions, whatcommunity and social structures exist and, consequently, whatform any such future rural development activities should take.

(ii) Other concentrations of small farmers along the railwaycorridor, such as the areas around Maraba and Santa Ines,where fertile soils exist and the local population has thusfar resisted the prevailing process of land concentration andexpulsion.

10.56 In short, specific studies of small farmer development potential,followed by concrete interventions to support rural producers, should be pursuedin parallel to ecological zoning and forestry development activities along theCarajas railway corridor. For this purpose, the collaboration of non-governmental organizations which have already accumulated considerable knowledgeof local conditions and contacts with the rural communities concerned should besought. State universities and planning institutes, such as the Nucleus ofAmazonian Studies (NAEA) at the Federal University of Para and the Economic andSocial Development Institute of Para (IDESP), among others, should also beinvolved in any such exercise.

4. Urban Infrastructure and Services

10.57 In view of the rapid growth experienced as a direct result of theCarajas Project by Parauapebas and Rio Verde and -- in part as an indirectresult of this operation -- by Maraba, Acailandia, Santa Ines and Sao Luis,among other towns located along the railway corridor, these urban centerspresently face significant deficits of basic infrastructure and services, aswell as of adequate housing. Given future prospects of continuing rapid growthin these and other urban areas due to the expansion of industrial and related

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activities, among other factors, the pressures on state and municipalgovernments to meet the growing demand for urban services will undoubtedlyincrease. Any effective development program for the Carajas corridor,accordingly, must address itself to the emerging urban, as well as rural,development needs of its rapidly expanding population and economic base.

10.58 As in the case of rural development, however, the first step willnecessarily have to be to obtain a better idea of the present extent and likelyfuture rate of growth of urban infrastructure and service deficits along theCarajas corridor. In short, as part of the regional planning-related diagnosticstudies mentioned earlier in this section, research specifically directed atdetermining the nature, pace and socio-economic impacts of urban expansion alongthe Carajas railroad should also be undertaken. This would entail examining thechanging urban economy, social structures and living standards of thepopulations in question since 1980. Here also, CVRD's environmental impact andsocio-economic development study for the Carajas corridor and the NATRONregional industrialization study, cited in para. 10.47 above, would provide agood starting point. Once in possession of this information, it would then bepossible to assess in detail how -- and how well -- municipal administrationsare currently coping with rapidly growing demands for local infrastructure andservices and to define the public investments and other measures required tocompensate for past deficiencies and meet Projected future needs.

5. Environmental Management. Protection and Research 52

10.59 The adequate use and protection of regional natural resources,including land, air, water and fauna, as well as vegetative cover, should be amajor priority in all future planning and development activities in the Carajascorridor. In 'addition to undertaking more detailed environmental impactevaluation exercises and establishing permanent environmental planning,monitoring and control mechanisms and capabilities for the Carajas corridor asproposed above, this will require considerable strengthening of existingplanning and environmental protection agencies in Maranhao, Para and the newstate of Tocantins under the orientation and with the assistance of federalinstitutions such as IBAMA and SEPLAN. Greatly improved land use and water andforest resource management, together with the preservation and, where necessary,improvement of air, water and soil quality, in the region should be among theprincipal concerns of any such efforts. 53

52 More specific suggestions with regard to additional environmentalprotection measures required in connection with the on-going operations of theCarajas Iron Ore Project were presented in the concluding section of Chapter VIIabove.

53 In its observations on the draft report, CVRD informed that, "concernedwith the rhythm of deforestation in the area, together with other federalgovernment entities, (the company] is proposing the creation of a Forestry PolesProgram for Eastern Amazonia. This program, which is based on forestry researchthat (CVRD has) developed over the past ten years in the region, proposes thereforestation of one million hectares for commercial purposes, linked to thepreservation or recuperation of native forests in the equivalent of at least 302

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10.60 These measures should be accompanied by the expansion of ecologicaland environmental research such as that initiated under the Carajas Project. Assuggeoted in Chapter VII above, these research activities should be carefullycoordinated and be utilized both to increase knowledge about the region'snatural resource endowments and its ecological characteristics on a subareabasis and to provide necessary base line information for on-going environmentalmonitoring activities. Both national and international research institutes andfunding sources should be mobilized to help define and implement a comprehensiveenvironmental management strategy and ecological research program for theCarajas region under the ccordination of CNPq with the collaboration of PGC,CVRD, SEPLAN, IBAMA and state planning and environmental protection authorities.Any such strategy, moreover, should give particular attention to the legal,organizational, staffing, training, equipment, logistical and fundingrequirements of the state and local agencies responsible for the definition andenforcement of environmental protection measures in the area.

6. Amerindian Protection

10.61 As indicated at the end of Chapter VII above, sustained and, in alllikelihood, expanded efforts will be required by the Brazilian Government, withCVRD's support, in order to afford adequate protection to Amerindian reservesIn and near the Carajas corridor as these areas come under increasing pressurefrom the continuing process of frontier expansion in the region. As under theCarajas Project itself, such future assistance should particularly emphasize thedemarcation, regularization, registration and, most importantly, physicalprotection of tribal lands and the provision of appropriate health care. Theseservices, furthermore, should be provided in a way which takes the needs of theindividual tribal communities clearly into account and that permits these groupsto take a more direct, active and effective role in the management of theiraffairs. This is an area, finally, where continued federal government and Bankassistance and vigilance is likely to be crucial. 54

7. Public Health and Environmental Sanitation

10.62 Rapid population growth, increasing rural and urban settlement andthe uncontrolled proliferation of prospecting activities, together withinadequate basic sanitation infrastructure and health services, have allcontributed to the emergence of significant and probably increasing public

of the total area involved. The program also proposes that part of thereforestation be undertaken by rural smallholders as a complement to their [otherproductive] activities. (The companyl believes, finally, that this project, eventhough on a small scale, could be the beginning of the reversal of the processof Amazonian deforestation."

5' This concern ie especially great for those tribal areas affected by theCarajas operation that are located in the states of Para and Tocantins, sinceadditiqnal Amerindian protection and support measures are presently beingprovided under the second Bank-financed Maranhao Rural Development Project (Loan2862-BR approved in June 1987).

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health problems in the Carajas corridor, as elsewhere in Amazonia. 55 Malariais particularly serious in the area, as is the growing risk of mercurycontamination, both of which are directly associated with placer miningactivities, but many other health problems -- including the high number ofinjuries resulting from interpersonal violence in prospecting camps andelsewhere and the high incidence of gastro-intestinal diseases, especially amongchildren, due to poor urban sanitation -- also exist in the region. While therecently approved Bank-supported Amazon Basin Malaria Control Project shouldcontribute to a reduction in the incidence of this particular disease throughoutAmazonia, including the Carajas corridor, specific interventions, necessarilyincluding the expansion and improvement of basic urban sanitationinfrastructure, the provision of solid waste collection and disposal andexpanded and upgraded preventive and other health care services, still need tobe designed and executed in order to adequately confront the other significantpublic health problems in the region. Diagnostic studies should, thus, beundertaken to properly dimension and determine the causes and effects of theprincipal health problems presently existing along the Carajas corridor, as wellas to define the necessary mitigative actions which should be subsequentlyimplemented utilizing resources from the proposed regional development fund andfrom other sources.

8. Railway Transport

iG.63 The demand on CVRD by the regional population to provide additionalrailway transport services has been far greater than originally anticipated. Inthis regard, the railroad clearly performs a valuable service, especially forlow-income urban and rural inhabitants of the Carajas corridor (including goldprospectors) who would otherwise have to depend on less reliable and moreexpensive road transport. Expansion and improvement of rail transportation,therefore, is a key area in which some of the social costs of the CarajasProject could be offset by the very railway itself, further integrating thisrecently established form of transport into the local economy and providing adirect benefit to those affected by the iron ore operation. Accordingly,relatively simple studies should be conducted to determine how rail servicecould be upgraded and amplified to carry both passengers and non-ore freight,particularly agricultural produce, and the appropriate measures should be taken.

9. Pig Iron and Charcoal Production

10.64 Finally, pig iron-related charcoal production -- which presentlyrepresents the greatest potential threat to the physical environment in theCarajas corridor -- is a relatively recent phenomenon in the region that shouldbe more systematically researched both in order to determine its impacts onlocal ecosystems and the local population and to identify possible supportmeasures for those adversely affected. Although several studies have already

55 See the recent draft paper by John Wilson and Adelaida Alicbusanentitled "Development Policies and Health: Farmers, Goldminers and Slums in theBrazilian Amazon," (World Bank, Washington, D.C., mimeo, February 7, 1990) foran excellent description of the principal linkages involved in the specific caseof malaria in southeastern Para and Rondonia.

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been undertaken in this area, particularly by IDESP in Belem, these are largelydescriptive and of a preliminary nature and need to be complemented by moredetailed research. Specific areas of future investigation should include:

(i) the economics of pig iron and charcoal production and thefeasibility of using alternative sources of fuel; the fullenvironmental and social costs of present pig iron and charcoalmanufacturing arrangements should be considered in suchcalculations; and,

(ii) the economic, social and environmental impacts of charcoalproduction on local rural and arban communities and possibilitiesfor introducing alternative income-generating activities; the healthimpacts of charcoal production on these communities and on charcoalproducers in particular should be one specific focus of thisresearch.

D. Summary of Principal Lessons Learned and Imnlications for Bank Procedures

1. Lessons Learned

10.65 The above discussion, together with the review of the human andphysical environmental aspects and consequences of the Carajas Iron Ore Projectin the preceding chapters, has identified a number of lessons of more generalrelevance to future Bank operations involving major infrastructure and/orproductive sector investments. In conclusion, these lessons can be brieflysummarized or recapitulated as follows:

(i) The inclusion and proper implementation of environmental (and, whereappropriate, tribal peoples') protection measures in connection withthe construction and physical operation and maintenance of project-supported transport infrastructure and productive (in the case ofCarajas, mining) activities, while unquestionably necessary, are,in and of themselves, insufficient to prevent or mitigate thepotential adverse human and physical environmental impacts of theseinvestments in their larger areas of influence.

(ii) Accordingly, there is a need to view such interventions, even (and,perhaps, especially) when their objectives are primarily sectoralor macroeconomic in nature, in terms of their potential spatial orregional impacts; potential direct and indirect project impacts onthe existing human and physical environments in its area ofinfluence -- together with its likely consequences in terms offuture population growth, rural and urban settlement and productive(including extractive) activities and of these tendencies, in turn,on regional land, water, forest and other natural resource use andquality -- should, therefore, be carefully assessed and subsequentlymonitored and evaluated.

(iii) Furthermore, there is a need to take the internal ecologicalheterogeneity, historical development tendencies and other publicsector or public policy-induced environmental impacts in the

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project's area of influence clearly into account and to consider thelikely effects of the interaction of project and non-projectintervention* on the future course of the region's development, ingeneral, and on its natural and human environments, in particular.With regard to the latter, more concretely, the interaction ofCarajas Project road and rail improvements and existing federalgovernment fiscal, credit and other Incentives -- which togetherstimulated the rapid expansion of large-scale, generallyunproductive and (in the absence of official subsidies) uneconomicand probably unsustainable, but environmentally damaging, cattleranches in much of the area between Maraba and tne iron ore minesite and elsewhere along the Carajas corridor -- provides a clearcase in point.

(iv) This example also illustrates the importance of assessing thebroader regional development policy context in which Bank-supportedinfrastructure and/or productive sector investments are undertakeneven (and, perhaps, especially) when the objectives of theseinterventions are not specifically or primarily regional in nature.More generally, the impact of macroeconomic and sectoral policieson natural resource utilization and, hence, on the physicalenvironment in the project'e area of influence should also beconsidered.

(v) These concerns are even more important when territorially large,onvironmentally diverse and/or sensitive and demographically andsocio-economically dynamic areas are involved; greate.t cautionshould probably be taken in large tropical frontler areas, such asthat (ie. Eastern Amazonia) where the Carajas Project wasimplemented, and a special effort should be made to understand asfully as possible the frequently complex processes of occupatlon andsettlement and their equally complex interactions with, and impactson, the physical environment in these areas.

(vi) It is likewise important that the Institutional and politicaldimensions of these processes be given adequate attention,especially considering the general weakness of most officialplanning and development -- not to mention environmental protection-- agencies in frontier areas where, perhaps to an even greaterextant than in less dynamic regions, immediate economic andpolitical considerations strongly predominate in local resourceallocation and other public sector decisions.

(vii) It is similarly necessary to consider the longer-term environmentalimplications of Infrastructure and/or productive sector projects,including the potential environmental Impacts of future activitiesdlrectly linked to the outputs generated or services provlded as aresult of these operations, pig iron smelting and other mineral-based metallurgical activities in the Carajas corridor being a clearcase in point.

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(viii) Beyond the need to anticipate and assess the potential direct andindirect physical and human environmental impacts of largeinfrastructure and productive sector projects on their areas ofinfluence, there is an associated and even more important need toidentify, design and implement solutions to the environmentalproblems likely to be generated by these impacts at the regionallevel; this will necessarily reqtire the active participation and,in all likelihood, considerable strengthening of state and municipal-- as well as federal -- planning, natural resource management andenvironmental protection agencies, together with the effectiveinvolvement of local non-governmental organizations and the affectedcommunities themselves.

(ix) While there can be no doubt that projects such as the Carajas ironore operation that are expected to have significant direct and/orindirect impacts on tribal peoples need to incorporate specificmeasures to support and protect these populations, it is alsonecessary that possible adverse project impacts on other vulnerablesocial groups (eg. small subsistence farmers, Brazilnut and babacunut gatherers, urban displacees, among others, in the case ofCarajas) be anticipated and that appropriate remedial orcompensatory actions be designed for implementation either prior orin parallel to the infrastructure and/or productive investments soas to help these populations to deal more adequately with the socio-economic and other transformations caused, reinforced or acceleratedby the project.

(x) The Carajas experience also demonstrates that direct and,especially, indirect adverse project impacts on the physicalenvironment and on vulnerable social groups such as tribalpopulations are likely to persist well beyond the period of physicalconstruction of project facilities and the aesociated disbursementof Bank loan funds. Indeed, it is entirely possible that theseimpacts may become even more serious and/or affect an even wldergeographic area after project completion, as the prospective ironore-based industrialization of the Carajas railway corridorillustrates. This means that both environmental and tribal peoples'protection measures are likely to continue to be necessary wellafter the original Dank-financed project has been formallycompleted. Greater consideration, accordingly, needs to be given ininitial project design as to how to ensure the long-runsustainability of such protection and support efforts, while theBank needs to be willing to assume a longer-term commitment toaosist such activities.

(xi) Given the above mentioned dynamism and lnstitutional fragility thattend to characterize frontier region development &I.tuations, suchas that providing the broader socio-economic context of the Carajasoperation, greater attention also needs to be given to thesystematic monitorinc and evaluation of project-related end othertransformations at the regional level, as well as to the evolving

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impacts of these changes on the human and natural environments inthe areas affected.

(xii) Finally, large-scale infrastructure and/or productive sectorinterventions, especially those in large, environmentally sensitiveand dynamic tropical frontier regions, should (ideally) be precededor (at worst) accompanied by the installation of -- and adequatetechnical, financial, institutional and political sutpport for --some kind of permanent environmental protection/natural resourceplanning and management mechanism, of which the above mentionedmonitoring/evaluation process should be a part. This is particularlyimportant in the case of major transport infrastructure Improvementssince, as the Brazilian Amazonian experience over the past severaldecades has clearly shown, these investments have played, and arelikely to continue to play, a leading and catalytic role in openingup new areas for rural and urban settlement, productive occupation,the extraction of minera,. and forest resources and, if adequatecontrols are lacking, significant environmental degradation.

2. Implications for Bank Procedures

10.66 The above review of the environmental aspects and consequences ofthe Carajas Project also contains several significant implications for Bankprocedures with respect to the identification, preparation, appraisal,supervision, monitoring and evaluation of (particularly large-scale)infrastructure and productive sector operations. These include the following;

(i) As suggested in the previous section, an analysis of the direct and,especially, indirect environmental impacts of the Carajas Projectclearly reveals the need for the Bank to more adequately assess andtake into account in project preparation and appraisal the broaderecological, historical and regional policy and development contextin which any such undertaking will be implemented and subsequentlyput into operation.

(it) In order, moreover, for the Bank to properly assess and influence',asic project design alternatives having potentially Importantenvironmental repercussions, it needs to be involved as early aspossible In the project preparation process. Early Bank involvementwould also help the Borrower to more adequately define andincorporate within the project, or in programs parallel to it,measures capable of effectively minimizing or mitigating the likelyadverse environmental consequences of the design alternative adoptedin its area of influence. A specific case in point where earlierBank participation could have made a significant difference from anenvironmental standpoint is the selection of alternative transportsolutions, rail and road routings and port locations for the Carajasiron ore operation.

(ift) In evaluating basic design alternatives, as well as in appraisingthe solution finally selected, moreover, the Bank should identifyand carefully assess the potential environmental and social, as well

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as the financial and economic, benefits and costs of thealternatives and solutions in question. Wherever and to the extentpossible, these benefits and costs should be quantified, monetarilyand/or physically, but when this can not be done, there should atleast be a systematic effort to make qualitative judgments as to therelative importance of the various types of costs and benefitsinvolved. Environmental, as well as other types of, risks associatedwith project implementation, moreover, should also be carefullyidentified and realistically evaluated.

(iv) The above considerations imply the need to take a multi-sectoral andmulti-disciplinary approach to the identification, preparation,appraisal, supervision, monitoring and evaluation of (particularlylarge-scale) investments in such areas. In general, the Bank shouldpay greater attention to how the projects and programs it supportsin different sectors affect their particular areas of influence(whether these are defined ecologically or administratively), theirinhabitants and their physical environments. Adequate environmental,social science and planning expertise, iuoreover, should be mobilizedby the Bank from the outset as parr of the multi-disciplinaryproject preparation, app-hisal and supervision efforts.

(v) The experience under the Carajas operation also clearly reveals thatenvironmental covenants need to be more explicitly specified in Loanand, where they exist, Guarantee and/or Project Agreements if theseare to be meaningfully understood and complied with by Borrowers,Guarantors and Executors and adequately monitored and supervised bythe Bank. Furthermore, to the extent that such effects can beanticipated, the relevant covenants need to take likely indirect,as well an long-term, envlronmental impacts of project investmentsexplicitly into account, while some continuing mechanism should bedefined in order to more adequately deal with possible unanticipatedadverse environmental impacts occurring during the course of andafter project implementation.

(vi) The Carajas Project experience, similarly, demonstrates that a needexists for more intensive and qualitatively different (le. moremulti-disciplinary) Bank supervision than, in fact, occurred andthan normally tends to occur even in large-scale infrastructureoperations. In the specific case of iron ore operation, morespecifically, Bank supervision of the project's environmentalprotection and urban development components was clearlyinsufficient, even though poor project design muet ultimately beheld primarily responsible for the inadequacies of these componentsin relation to the project's broader physical environmental andurban impacts. The Carajas Project teveals, moreover, that thedelegation of environmental supervision functions to the Borrowerand/or executing agency -- while of definite interest in terms ofdeveloping or strengthening internal capabilities in this regard -- also potentially has clear limitations.

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(vii) Projects such as the Carajas operation which are likely to havesignificant environmental impacts outside the areas immediatelyunder the control of the Borrower or executing agency, moreover,should include a specific environmental monitoring and evaluationcomponent to be carried out by parties other than those directlyresponsible for project implementation. In the Carajas operation,this, in fact, was done in part with respect to the AmerindianSpecial Project through CVRD's hiring of a group of independentanthropologists, lawyers and public health specialists in order tomonitor FUNAI's activities. The broader -- and especially indirect -- human and physical environmental repercussions of the project,however, were neither effectively anticipated, nor effectivelymonitored by either CVRD or the Bank.

(viii) The experience under the iron ore operation, finally, clearlyattests to the need for improved internal coordination acrosssectoral divisions within the Bank when investment projects arebeing prepared, appraised or implemented in the same geographicareas within a particular country. While the 1987 reorganization hasundoubtedly reduced the possibility of the Bank's "right hand" notknowing what its "left hand" is doing, especially in the case oflarge countries such as Brazil, it might still be desirable toaosign regional (or subregional) coordination responsibilities tospecific staff members within the Country Operations Divisions ofthe various Country Departments in order to ensure that thoseinvolved in the preparation, evaluation and/or supervision ofindividual projects in different sectors are fully aware of theterritorial coverage, objectives, components and status of otheroperations involving and/or affecting the same areas.

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Annex I

Agricultural. Agroindustrial and Livestock ProjectsAroved by the Grande CaraJas Program through March 1989

Project/Company Products Jobs Location

DENDE-Mendes Junior Oil Palm Plantation 800 ParaAgricultura do Para Oil Extraction

Tucuma Colonization Private Colonization 1,000 ParaProject - CONSAG

AGRIMA-Agricola Babacu Nut Processing 1,400 MaranhaoIndustrial do Maranhao

CIT-Companhia Industria Babac/ Nut Processing NA MaranhaoTecnica Charc al, Cellulose

METALTEC Limitada Charcoal Production 100 Maranhao

Agropecuaria Ceres S.A. Cattle, Lumbering 400 MaranhaoBabacu Nuts, Charcoal

Carajas S.A. Meat Processing 240 MaranhaoIce Production

CIPASA-Castanha Industrial Lumbering, Charcoal 100 Parado Para Limitada Brazil Nuts

MIAME-Madeira Italia Lumbering, Railway Ties 350 ParaAmericana Limitada

AGROPER-Agropecuaria Cattle 63 MaranhaoRodominas Limitada

PACAJA-Queiroz Galvao Cattle 20 Parado Carajas S.A.

Companhia de Terras da Land parcelling, Cattle 215 ParaMata GLral

AGISA-A.O. Gaspar Margarine, Soap 150 MaranhaoIndustria S.A. Glycerine

Companhia Agropecuaria Ethanol 850 ParaSanta Maria de Canarana

DENAM-Dende de Amazonia Brazil Nuts, Cashew 290 ParaS.A. Nuts, Charcoal

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Meape Limitada Lumbering, Charcoal 200 Para

Agropecuaria Rio Dezoito Cattle 50 ParaS.A.

A.O. Gaspar Industria e Babacu Oil Extraction 46 MaranhaoComercio S.A. Soybean Production

Companhia Avicola Poultry 138 Maranhaoda Amazonia

Agropecuaria Tratex Cattle, Cereals 50 Maranhaodo Maranhao S.A.

CODENPA-Companhia Dende Dende Oil, Groundnut 40 ParaNorte Paraense Oil

G.D. Carajas Industria, Plywood 270 ParaComercio e Exportacao deMadeiras Limitada

CRAI-Companhia Real Palm Oil 700 ParaAgroindustrial

Source: Grande Carajas Program (March 1989)

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Annex II

Pig Iron Smelters and Ferrous Alloy PlantsProjected for Early 1990's along Carajas Railway Corridor

A. Pig Iron Smelters

Company Location State of Origin Jobs* Production*(tons/year)

Viena Siderurgica Acailandia Minas Gerais 180 54,000do Maranhao

Construtora Beter Maraba Sao Paulo 148 50,000

Companhia Siderurgica Acailandia Parana 147 55,000Vale do Pindare(Construtora Brasil)

Siderurgica Servang Acailandia Minas Gerais 129 120,000Civilsan

Companhia Siderurgica Acailandia Minas Gerais 490 350,000do Maranhao (ItaminasSiderurgica do Carajas-SICAR)

Maranhao Gusa SA Santa Ines Haranhao 367 54,000MARGUSA

Gusa Nordeste Acailandia Minas Gerais 148 53,000(Florice)

Siderurgica de Acailandia Para 320 12,000Maraba-SIHARA

Companhia Vale do Santa Ines Maranhao 465 50,000Rio Pindare-COVAP

Companhia Siderurgica Santa Ines Pernambuco 1,300 15,000do Haranhao-COSIMA

SIDERSISA Santa Ines Minas Gerais 470 84,000

FEMASA-Ferro do Santa Ines Minas Gerais 360 54,000Maranhao

230

B. Ferrou_ Alloy and Other Plants

Irmaos Ayres Rosario Minas Gerais 180 NA

Metalman Rosario Sao Paulo 321 17,000(Grupo Metalur)

Ferro-Ligas do Maraba Sao Paulo 320 49,000Norte

PROMETAL Parauapebas Sao Paulo 434 60,000

Cojan Engenharia Parauapebas Minas Gerais 132 150,000

Silicio Metalico Tucurui Minas Gerais 2,000 32,000Camargo Correa

v Refers to initial production capacity to be installed

Source: Grande Carajas Program (March 1989)

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