The Innovative Sourcing Program is implementing new strategies

The Innovative Sourcing Program is implementing new strategies to leverage savings of US$ 22 to 41 m/year Fiduciary Forum presentation Washington, March 10, 2004 SAO-0180 -05855001 -01 -22 1

Who is presenting the Innovative Sourcing Program (ISP) today Foto • Mr. Mauro Benevides Filho – Administration State Secretary of Ceará State • Mr. Ocione Mendonça – Innovative Sourcing Program Coordinator – Ceará State Foto • Ingo Weiland Managing Partner Roland Berger Strategy Consultants Brazil • Guilherme Junqueira – Partner in charge of the Innovative Sourcing Program – Roland Berger Strategy Consultants Brazil SAO-0180 -05855001 -01 -22 2

A joint team of more than 165 professionals – one of the cornerstones of the ISP Executive Committee • Mr. Lúcio Alcântara - State Governor • Ingo Weiland – Managing partner South America • State secretaries • Guilherme Junqueira-Partner Project Coordination • Mr. Alex Araújo – Secretary of Water Resources • Guilherme Junqueira • Leônidas Herndl – project manager • Mr. Mauro Filho – Secretary of Administration Experts • Strategic purchase experts • Public Sector Competence Center • Specific Industries Competence Centers • Mrs. Mônica Clark – Secretary of Controlling Project Teams 1 - Medical items 2 - Outsourced Services 3 - Telecom 4 - Fuel • 60 public • 2 consulservants tants • 50 public • 2 consulservants tants • 25 public • 1 consulservants tant • 30 public • 1 consulservants tant Source: Roland Berger Strategy Consultants SAO-0180 -05855001 -01 -22 3

Content 1. Context of the Innovative Sourcing Program (ISP) at the State of Ceará 2. A comprehensive yet pragmatic approach to implement the ISP 3. Converting theory into practice – implementation examples at 2 purchasing categories 4. Latest project results estimation – beating the initial targets 5. What‘s yet to be done – process revision and more savings Q&A - Questions & Answers SAO-0180 -05855001 -01 -22 4

1. Context of the Innovative Sourcing Program at the State of Ceará SAO-0180 -05855001 -01 -22 5

A brief profile of the State of Ceará - Brazil § 148, 800 km 2 representing Globe State Division Northeast region 1. 7% of Brazil and 9. 6% of the Northeastern region § 7. 4 m inhabitants Brazil Regional Division representing 4. 4% of Brazil and 15. 6% of the Northeastern region § Dry weather with annual precipitation volume of 775 mm, average temperature of 26 o. C (79 o. F) and 2, 800 hours of sunlight per year SAO-0180 -05855001 -01 -22 6

With a CAGR of its GDP of 3. 2% Ceará has outperformed the Brazilian economy since 1985 § 13 th largest economy of Brazil and 3 rd of the Northeastern region § GDP of US$ 8. 5 billion (PPP) in 2002 § CAGR of Ceará’s GDP of 3. 2% vis-à-vis 2. 5% for Brazil over this period § Distribution of Ceará GDP: Brazil Source: IBGE, Banco Central do Brasil and IPLANCE Ceará à Services 58% à Industry 37% à Agriculture 5% SAO-0180 -05855001 -01 -22 7

Also on the human development perspective Ceará is outperforming Brazil and the Northeastern region + 155% 0. 787 0. 814 0. 483 0. 477 Ceará n Ceará reached in 2000 91% of Brazil’s HDI coming for 55% in 1970 n The Human Development Index (HDI) measures life quality comparing education, longevitivity and income 0. 766 0. 700 0. 557 0. 537 0. 596 0. 576 0. 608 0. 590 0. 608 0. 299 0. 275 1970 Ceará’s HDI has grown 155% vis-à-vis 55% for Brazil over the 3 decades 0. 830 0. 734 0. 494 n 1980 Northeast 1991 1995 1996 2000 Brazil Source: PNUD/IPEA/Fundação João Pinheiro/IBGE SAO-0180 -05855001 -01 -22 8

Purchase costs represent a significant share of the State expenses – 21% of the total State of Ceará expenses – 2002 [US$ m] 1, 726 641 37% 369 21% 100% 369 21% 347 20% Total expenditure Personnel Source: Roland Berger Strategy Consultants Purchases Transfers of funds Debt service and amortization SAO-0180 -05855001 -01 -22 9

Savings from US$ 22 to 41 m/year can be achieved through the full implementation of the Innovative Sourcing Program Base of purchasing expenses and savings estimation [US$ m/year] 369 - 6% - 11% 22 41 Purchases – Base cost for the complete ISP Source: Roland Berger Strategy Consultants Conservative Aggressive ISP savings potential SAO-0180 -05855001 -01 -22 10

2. A comprehensive yet pragmatic approach to implement the ISP SAO-0180 -05855001 -01 -22 13

The Innovative Sourcing methodology is divided in 2 main phases Phase 2 Process Improvements Phase 1 Savings Implementation Wave 1 Aug/03 to Feb/04 Wave 2 ü Source: Roland Berger Strategy Consultants 20 to 24 weeks Wave 3 20 to 24 weeks 16 to 20 weeks SAO-0180 -05855001 -01 -22 14

Phase 1 – Savings Implementation is further divided into 5 steps 1 3 Internal Analysis 2 External Analysis Source: Roland Berger Strategy Consultants 4 Cost reductio n strategie s definitio n Preparati on of bidding documen ts and Definition of internal measures for cost reduction 5 Implement ing cost reduction measures and bidding processes SAO-0180 -05855001 -01 -22 15

1 INTERNAL ANALYSIS The internal analysis details 9 key dimensions for each category Category 1 1. Volumes 2. Price SEINFRA Total 4. Specifications • • • Price variation • Historical • Differences between suppliers • . . 5. Restrictions • • Technical Quality Service. . 7. Competitiveness of current suppliers Commercial Technical Source: Roland Berger Strategy Consultants Suppliers selection process Intern users requirements Governmental barriers. . 8. Evaluation criteria • • Quality Guarantee Flexibility. . . 3. Current and future demand • Demand variation • Growth rate • . . 6. Total cost of ownership Price Maintenance Storage Total cost 9. Specs simplification Current Alternative Potential SAO-0180 -05855001 -01 -22 16

2 EXTERNAL ANALYSIS Curr The external. Forc analysis ensures a deep understanding ent es of the supplier market opportunities to besitu leveraged from 1 Competitors threat Government requirements the sup plier poin t of view 2 Substitute product/service threat Supplying market Customers 3 bargaining power 5 Suppliers bargaining power 4 Source: Roland Berger Strategy Consultants atio n of • Market – Is thesup market expanding? What is the market share evolution? plyi How is our image in the supplier ng market? mar • Competitors –ket Is there strong competitors in the market? What are our competitive advantages and disadvantages of each one? • Costs – How is the cost composition of the suppliers? What is the relation between fixed and variable costs? • Technology – What is the technology that we use and what is the “state of art” technology? • Competitors diversity – What are our company core businesses by industry and by market SAO-0180 -05855001 -01 -22 17

3 COST REDUCTION STRATEGIES Specific cost reduction strategies are developed for each purchase category Process restrictions 4. Optimization of suppliers relationship • Consolidation of suppliers number • Redistribute the volume between suppliers • Combine the volume of several families • Product value analysis • Materials substitution • Buy alternative systems • Optimize the product lifecycle cost 2. Price negotiation Cost reduction strategies • Compare total costs • Model “goal-cost” • Renegotiate prices • Create price transparence • Leverage current suppliers 5. Purchase process improvement • Suppliers process redesign • Share productivity gains • Integrate logistics • Support suppliers improvements 3. Supplier base increase 6. Changes in specification • Expand geographical base • Develop new suppliers • Use global demand/offer inequality advantages • Establish, develop key suppliers • Materialize strategic alliances • Make or buy • Develop an integrated supplier base Planning 1. Volume concentration Projections feasibility Categories profile Legal restrictions Supplying market profile Projects prioritization Strategic factors Source: Roland Berger Strategy Consultants SAO-0180 -05855001 -01 -22 18

4 PREPARATION OF BIDDING DOCUMENTS AND MEASURES The best cost reduction strategies are selected for implementation either by bidding or internal measures Category n Category 2 Category 1 Cost reduction strategies Preparation of bidding documents 1) • Technical specification • Quotation format • Evaluation criteria • Contract model (supported by government legal assessorship) • Potential suppliers list Focus • Price reduction Internal measures detailing 1) • Specification simplification • Rationalization of volume consumed • Processes revision • Quantity reduction 1) Bidding documents and measures will be approved by Project Coordination (SECON and SEAD) • Quantity reduction • Specification cost/benefit relation improvement SAO-0180 -05855001 -01 -22 19

5 BIDDING PROCESS AND MEASURES IMPLEMENTATION Bidding and internal measures monitoring are fundamental to assure project success Bidding process • Bidding process monitoring with: – State General Attorney Internal measures • Internal measures implementation by: – Administration and Controlling Secretaries where initiatives are related – Government bidding process to several Secretariats commissions – Administration Secretary and specific – Administration Secretary and Secretaries to specific measures government bidding process commissions in the case of electronic bidding SAO-0180 -05855001 -01 -22 21

3. Converting theory into practice – 3. 1 Category Fuel SAO-0180 -05855001 -01 -22 22

1 INTERNAL ANALYSIS Cost reduction strategies were defined according to the cost structure identified in Ceará State Government Purchase cost structure Fuels and lubricants US$ 8. 3 m/year Fuels US$ 8. 0 m/year Lubricants US$ 0. 3 m/year Gas Diesel Alcohol Natural gas Source: SIC 2002 data; Secretariats data; Roland Berger Strategy Consultants analysis SAO-0180 -05855001 -01 -22 23

1 INTERNAL ANALYSIS Fuel prices in third-party stations are up to 24% higher than own-base prices Fuel prices [US$/L] Gas Diesel + 24% + 18% 0. 73 0. 59 Capital 1) Own base CAMBEBA JMF Automotivo station Own base CAMBEBA + 14% 0. 83 0. 51 Countryside 2) Own base DERT Crateús PF Neto station + 9% 0. 73 1) August 2003 prices 2) July 2003 prices 0. 56 0. 47 Irmãos Leitão Crateús station Source: Secretariats data; Roland Berger Strategy Consultants analysis Own base DERT Iguatu 0. 56 Joaquim Ailton Filho Iguatu station SAO-0180 -05855001 -01 -22 24

2 EXTERNAL ANALYSIS In Ceará, 34% of all gas stations are controlled by BR and the next biggest competitor is SP with 13% of the total Ceará State gas stations – 2003 [%] Others 29 34 Total of 1, 224 gas stations 18% 4 5 6 13 9 SP Source: ANP (Petroleum National Agency); Roland Berger Strategy Consultants analysis SAO-0180 -05855001 -01 -22 26

2 EXTERNAL ANALYSIS BR has the broadest presence in capital and in the countryside of Ceará State gas stations by regions – 2003 Capital 394 Countryside Total 100% 143 100% 36% 33% 27 7% SP 41 10% 62 273 132 16% 9% 74 49 12% 2% 21 40 10% 3% 23 32 8% 3% 24 17% 830 Others Source: ANP (Petroleum National Agency); Roland Berger Strategy Consultants analysis 34% 283 SAO-0180 -05855001 -01 -22 27

2 EXTERNAL ANALYSIS Gas station margin represents 9% the consumer price breakdown Gas consumer price 1) breakdown 9% 8% 3% 100% 1% 32% 14% 33% Cost+ refinery margin PPE, ICMS PIS/PASEP and COFINS Anhydrous alcohol 1) Price paid by final consumer Source: ANP (Petroleum National Agency); Roland Berger Strategy Consultants analysis Distributor margin+ CPMF Transpor -tation costs Gas Total station margin+ CPMF SAO-0180 -05855001 -01 -22 28

3 COST REDUCTION STRATEGIES Proximity was selected as the new major driver for defining an improved operational model Criterion Example • Base ownership 1 km Base PC Current situation 1 km Base SEFAZ Base PCCE Police office Base SEFAZ NEXAT • Proximity to the base (distance) 1 km Base 1 Proposed situation Base 1 Source: Roland Berger Strategy Consultants analysis Others Police office Base 2 NEXAT 1 km Others SAO-0180 -05855001 -01 -22 29

3 COST REDUCTION STRATEGIES Fuel volume consolidation by regions is feasible for cities in a maximum distance of 15 km Cost comparison own base x third party station [US$/L] Own base supply is cheaper up to 15 km displacements Own base cost Gas station cost Distance [km] 1) Considering a light vehicle supply of 30 liters and average gas consumption of 8 km/l Source: Roland Berger Strategy Consultants analysis; Secretariats data SAO-0180 -05855001 -01 -22 30

FUEL – SAVINGS POTENTIAL The implementation of selected strategies results in annual savings of US$ 1. 4 million to the Government [US$ m/year] ISP objectives 8. 3 0. 4 5% ISP selected strategies 0. 8 10% 1. 4 17% 31% 0. 7 9% 8% 100% Scope of ISP 2003 Conservative Aggressive Total savings Pricing savings Volume savings Savings potential Source: Telemar; Roland Berger Strategy Consultants analysis SAO-0180 -05855001 -01 -22 31

3. Converting theory into practice – 3. 2 Category Telecom SAO-0180 -05855001 -01 -22 32

1 INTERNAL ANALYSIS Ceará’s expenditures with fixed communication services represent 89% of the total telecom costs Purchase cost structure Telecommunication US$ 6. 8 m/year Fixed communication services US$ 6. 1 m/year [89%] Mobile communication services US$ 0. 7 m/year [11%] Source: SIC 2002 e 2003; Telemar, Embratel; TIM; Análises Roland Berger Strategy Consultants SAO-0180 -05855001 -01 -22 33

1 INTERNAL ANALYSIS Local and long distance calls and subscriptions represents 81% of fixed communication services costs Purchase volume by item – fixed communication services [US$ m/year] 9% = 81% 5. 6 1. 7 29% 100% = 7% 1. 3 21% 91% 0. 9 15% 0. 7 11% 0. 3 5% 0. 3 4% 0. 2 Source: SIC 2002 e 2003; Telemar, Embratel; Análises Roland Berger Strategy Consultants Collect calls received 3 digit calls and others Fixed-fixed long distance calls Fixed-mobile long distance calls Fixed-fixed local calls Subscriptions Fixed-mobile local costs VC 1 Voice services Data services Total 3% 0. 1 1, 5% Fines 0. 5 0800 calls received 6. 1 SAO-0180 -05855001 -01 -22 34

1 INTERNAL ANALYSIS There is optimization potential for fixed communication infra-structure Voice Net between Secretariats not integrated Secretaria 1 Secretariat 2 Existence of THT 8, 678 No cost call External call Fixed Secretaria phone 1 GOV Mobile 100% Current situation of fixed communication infra-structure Total 5, 232 60% 3, 432 Voice Net 40% 14 THT Digitronco Direct Line Fixedfixed call Ordinary mobile Fixedmobile call Fixed and mobile communication not integrated Source: Secretariats; Telemar; Roland Berger Strategy Consultants analysis Direct Line Existence of direct lines SAO-0180 -05855001 -01 -22 35

2 EXTERNAL ANALYSIS Currently 4 fixed communication operators can work in Ceará State and compete for local and long distance calls Type of call 1999 2000 2001 2002 2003 Permission to operate Concession Authorization (16/08/2002) Local Authorization (13/12/2002) Authorization (26/04/2003) Concession Long distance Authorization (20/01/2002) Authorization (20/07/2002) Authorization (06/05/2003) Not operating yet Source: Anatel; Roland Berger Strategy Consultants analysis SAO-0180 -05855001 -01 -22 36

3 COST REDUCTION STRATEGIES A definition and unification of use polices and user profiles were defined according to hierarchical level Internal Local - fixed Local - mobile Long distance Ceará According to the user hierarchical level and its needs, restrictions for allowed calls must be implemented Long distance Brasil Access level 1) International calls Cost reduction politics for fixed communication – Rationalization 1 Secretaries and equivalents 2 Coordinator and equivalents 3 Supervisors and equivalents 4 Servant A 2) (60%) 5 Servant B 2) (40%) Free access Blocked Source: Roland Berger Strategy Consultants analysis; workshops with experts; SEFAZ; interviews with Secretariats SAO-0180 -05855001 -01 -22 37

3 COST REDUCTION STRATEGIES Conventional central desks are installed in locations with concentration and virtual desks used for other locations Current fixed communication model redesign – PABX models adjustment Current situation Proposed situation HGF CAMBEBA SEFAZ DERT/DETRAN Voice Net Conventional PABX Source: Roland Berger Strategy Consultants analysis External call Internal call SAO-0180 -05855001 -01 -22 38

3 COST REDUCTION STRATEGIES The optimum number of extensions was identified to define where to implement conventional central desks 70 Virtual desk 50 Conventional desk 30 10 0 Telecommunication costs [US$ mil] Telecommunication costs comparison according to the PABX model used Number of extensions 145 extensions 1) Considering Government extensions standard profile, with fixed-fixed local calls traffic of 350 pulses and fixed-mobile of 105 min, of which 4% are internal calls (between Government phones) Source: Roland Berger Strategy Consultants Analysis SAO-0180 -05855001 -01 -22 39

TELECOM – SAVINGS POTENTIAL The implementation of selected strategies results in annual savings of US$ 2. 1 millions to the Government [US$ m/year] ISP objectives 6. 8 ISP strategies 0. 8 12% 1. 4 2. 1 1. 8 20% 31% 27% 0. 3 4% 100% Scope of ISP 2003 Conservative Aggressive Savings potential Source: Telemar; Roland Berger Strategy Consultants analysis Total savings Fixed communication savings Mobile communication savings SAO-0180 -05855001 -01 -22 40

4. Latest project results estimation – beating the initial targets SAO-0180 -05855001 -01 -22 41

Saving potential latest estimation for the 4 categories of the 1 st Wave is from US$ 7 to 12 m/year Purchase base volume and savings potential – 4 categories [US$ m/year] 69 - 7% - 15% - 16% 7 4 9 Purchases – Base cost 1 st Wave - 10% 12 Conservative Aggressive Initial target Latest estimation Source: RB Proposal; SIC 2002; Secretariats data; Roland Berger Strategy Consultants analysis SAO-0180 -05855001 -01 -22 42

5. What‘s yet to be done – process revision and other waves SAO-0180 -05855001 -01 -22 43

Wave 2 to realize more savings and Process Revision to guarantee long term sustainability are the next steps Phase 2 Process Improvements Phase 1 Savings Implementation Wave 1 Aug/03 to Feb/04 Wave 2 20 to 24 weeks Wave 3 20 to 24 weeks 16 to 20 weeks SAO-0180 -05855001 -01 -22 44

A new purchase organization must be developed and implemented in order to sustain ISP savings Implementation of a continuous improvement process New organization and concepts • Strategic Orientation • Processes and organization optimization • Know-how transfer ISP savings Traditional • Innovative Sourcing Program (ISP) cost reduction project • Conservative behavior • Managers commitment decrease • Return to old habits tempo Source: Roland Berger Strategy Consultants SAO-0180 -05855001 -01 -22 45

Today each Secretary has its own purchasing structure - decentralized buying impacts costs and personnel Price taking Public bidding Purchase structure of Ceará State Government State General Attorney (PGE) Central bidding process commission 3 – 4 Secretariats Health 3– 4 Infraestructure 3– 4 Water resources 3– 4 Education 3– 4 Security 3– 4 Culture 3– 4 Science& Tech 3 – 4 Treasury 3– 4 Administration 3– 4 Other 63 – 84 Entailed entities 1) Invitation letter 14 public hospitals 28 – 42 Road Department 3– 4 Traffic Department 3– 4 SOHIDRA 3– 4 799 primary schools 799 23 day-care centers 23 Public employees directly involved with the purchase process (estimative) 3 public universities 9 – 12 ~1, 000 servants on buying functions x less than 100 employees in a private organization with similar purchasing volume 1) Excluding companies with private capital participation Source: Interviews with secretariats; Roland Berger Strategy Consultants analysis SAO-0180 -05855001 -01 -22 46

Savings potential of US$ 15 to 27 m/year can be additionally implemented by new waves of ISP Purchase volume and potential savings – base 2002 [US$ m/year] Government total purchase volume 369 1 st Wave – 4 categories Next waves – 20 categories 69 -6% -10% -11% -16% -5% 7 12 22 41 Total Conservative Aggressive base Savings potential Source: Roland Berger Strategy Consultants 300 ü Cons. Aggr. 1 st Wave Savings potential -9% 15 27 Aggr. Additional Cons. base Savings potential SAO-0180 -05855001 -01 -22 48

Besides the ISP Ceará undertakes other joint initiatives with World Bank to improve efficiency and citizen service Initiatives with World Bank – US$ millions ACCESS TO BASIC SERVICES Total State Union IBRD 103. 2 17. 5 30. 4 55. 3 201. 6 70. 6 6. 4 124. 6 60. 1 13. 4 4. 5 42. 2 - Urban development Management Program (PROURB-URBANO) - Fortaleza Metropolitan Region Train Program - 2 a. Etapa - Reinforce of Health Unique System (REFORSUS) NATURE & ENVIRONMENT - Combat of Rural Poverty Program (São José) - Combat of Rural Poverty Program (São José - II) - Combat of Rural Poverty Program and Credit National Program - Hydro Resources Integration and Management Program (PROGERIRH) - Sustainable Development of Hydro Resources Program (PROÁGUA) - Hydro Resources Management Program (PROURB-Hídrico) SOCIAL DEVELOPMENT - Northeast Basic Education Program II - Qualification of Basic Education Program SAO-0180 -05855001 -01 -22 49

Q&A – Questions & Answers SAO-0180 -05855001 -01 -22 50

We are open to your questions. Thank you for your attention! SAO-0180 -05855001 -01 -22 51