The Senate Appropriations Committee's foreign operations subcommittee threatened to suspend funding for the Inter-American Development Bank if borrowing nations neglected ecological concerns. A Business section article yesterday misidentified the committee. (Published 8/19/87)

SAO PAULO, BRAZIL -- Brazil faces a second cutoff of funding from multilateral lending agencies for its failure to meet contractual commitments to protect the Amazon rain forest and its tribal dwellers from environmental threats.

A new highway in the extreme western Amazon state of Acre threatens to extend the rapid destruction of forests and Indian communities that occurred to the south as a result of migration along a similar road.

In the eastern Amazon, a railroad partly financed by the World Bank, Japan and the European Coal and Steel Community has opened up the region to dozens of charcoal-fired pig-iron plants that experts say will devastate the natural forest for fuel.

American environmental groups have asked World Bank President Barber Conable to halt the foundries because they say the presence of such plants close to the railroad violates contractual agreements with the bank.

Two weeks ago the Inter-American Development Bank (IADB) in Washington said it was asking Brazil for further information during the next 60 days before "determining whether it should suspend disbursements" for the highway, which the IADB is financing. Some $40 million of the $58.5 million loan could be frozen.

The decision follows pressure from the Senate Foreign Relations Committee, which had informed the IADB and Treasury Department that U.S. appropriations for the bank would be suspended unless borrowers showed progress on ecological matters.

In April 1985 the World Bank cut off disbursements for a $425 million development project in the Amazon frontier states of Rondonia and Matto Grosso because Brazil's then-military government had failed to apply an earmarked $26 million to protect Indian lands and forest reserves. That unprecedented step also followed pressure from U.S. environmental groups, who charged that Brazil's 200,000 surviving Indians would soon succumb to "progress."

After a 900-mile road from Cuiaba to Porto Velho opened in 1984, 200,000 land-hungry settlers began pouring into the region annually, devastating 10,000 square miles of forests and clashing with 10,000 Indians living in some 60 primitive groups. The government had said it was planning "the world's largest land reform project" in the area, but it is now paying to send migrants back south.

After legal guarantees were hurriedly provided for four tribes, World Bank loans resumed. But the bank refused to finance a 300-mile, $150 million extension of the highway northwest to Rio Branco in Acre State.

Conable recently described the Northwest Development Pole as "a solemn example of an environmental effort that went wrong," because the human, institutional and physical realities of the forest had been ignored. Disasters in Brazil had helped prompt the bank to set up an ecological studies division.

In 1985, the IADB agreed to provide financing for the road extension. To provide safeguards, the IADB and World Bank set up a $10 million environmental and tribal peoples' survey that would create legal barriers around an estimated 60 Indian reserves before settlers could come up the highway, which was to be finished next year. Already, migrants who find no land in Matto Grosso state are spilling northwards.

The Brazilian effort was called the Protection of Environment and Indian Communities Project. It delineated six Indian reserves before coming to a halt last year. Although teams visited 27 Indian areas, only two of 17 Indian areas to be delineated this year have passed the complex bureaucratic process called demarcation that sets legal barriers around Indian land. But construction groups have pushed on rapidly with the highway, using their own funding. The road eventually is to link Brazil to Peru and the Pacific.

"In practice, the government is boycotting {the project} and failing in its commitment to respect the environment," said an official from the program, who blames business interests and construction companies who she said would be prepared to build the road with their own funding and so be free of any IADB constraints.

The official of the protection project, who requested that her name be withheld, said politicians from the region had visited Washington to request the Inter-American Bank to transfer money directly to the state governments, thus cutting out concerned officials at federal level.

Inter-American Bank "officials in the U.S. are irritated with the slowness and inefficiency, but really there's no political will to recognize Indian lands. The {Brazilian} National Security Council is holding up the paper work because of big business interests," said Carmen Junqueira, a local anthropologist consulting with the IDB and coordinating the protection project.

"Indian policy today is far worse than during the military dictatorship," said anthropologist Betty Mindlin, who prepared reports for the World Bank. "The government has stopped providing any guarantees of land in frontier areas, saying these minority groups are a threat to national security. Now they want to permit logging and mining in Indian areas."

Because of pressure in Washington from the Environmental Defense Fund, the State Department reportedly encouraged the Inter-American Bank to consider cutting off funding to Brazil. But Junqueira said stopping the protection survey "would only hurt the Indians, as the road will be ready next year anyway. What the {banks} should do is cut off all other loans to Brazil. That's the only way to show funding for Indian protection isn't just to salve their conscience."

Ecologist Philip Fearnside, an authority on Amazonia, said the banks are now victims of a process that is colonizing Amazonia with the outcasts from more developed southern Brazil.

"Roads facilitate the rapid entry of migrants. This sets up a vicious circle as settlers walk out beyond the ends of the road network and their presence justifies building new roads that bring still more people. This process is facilitated by loans from the World Bank and the IDB," said Fearnside, a Michigan University ecologist working at an Amazon research institute in Manaus.

Fearnside also expressed concern over government approval for a string of pig-iron plants in the eastern Amazon as part of a program expected to require millions of tons of charcoal fuel and to devastate natural forest there.

Fearnside said that if the projects, which enjoy tax exemption and subsidized loans, were to use charcoal from industrially planted forests of eucalyptus or pine, they would require an area 35 times the size of plantations at the Jari Project -- American entrepreneur Daniel Ludwig's $1 billion effort, now nationalized, that covers an area half the size of Belgium.

But the plants, which will receive iron ore from the nearby Carajas mines by way of a railway line owned by the state mining company Companhia do Vale do Rio Doce, will burn down the Amazon forest to make pig iron for export to Japan, where it is turned into steel.

Eleven projects requiring as least 1.1 million tons of charcoal yearly have been approved near the railway line, and another 15 are under consideration. A government brochure woos foreign investors with promises of "less stringent antipollution legislation" and speaks of "exploiting existing forests," extending over 5.7 million acres, for charcoal. Ecologists argue that 35 million acres could be destroyed by 1990.

Brazil is already the world's third largest producer of pig iron, and huge ore reserves at Carajas mean production will rise.

The mine and railway were built with $1.4 billion funding from the World Bank, the European Coal and Steel Community and Japan's trade bank. The state mining company is not directly responsible for pig-iron production and has treated ecological issues carefully -- replanting mine areas and setting aside $13 million from the World Bank to protect the Gaviao Indian tribe, whose reserve was cut by the 500 miles of railway.

Now the company's reputation -- and the World Bank's -- is threatened by Brazilian government development plans and an influx of small smelting companies that apparently are as interested in tax incentives as in production.

A recently leaked internal memorandum from the head of the mining company's Environmental Studies department, Francisco de Assis Fonseca, warned of imminent "devastation of tropical forest" by plants springing up beside the railway.

The memo cited a viability study by West German consultants that showed high costs would prevent pig-iron plants using charcoal from undertaking reforestation. Instead, they would rapidly lay waste the natural forest and abandon the wholly deforested area in 20 years.

"The price of pig iron is falling and the price of charcoal is about the same per ton, so reforestation doesn't make sense," said a Rio Doce official. "Economic viability only exists in the short term, using the natural forest."

"International banks who financed Carajas may be worried about their image and so are we. But while there's a market for timber, pig iron or meat from cattle ranches in the Amazon there's no solution. Demand is encouraging devastation," the official said.