LEASE AND CONCESSIONS

(a) ALL Brasil
As parcelas de arrendamento e concessão da controlada ALL do Brasil são apropriadas linearmente no passivo e resultado, pelo prazo dos respectivos contratos, acrescidas de variação do IGP–DI e juros às taxas pactuadas. As parcelas referentes ao período de carência (1997 a 1999) estão sendo pagas de forma corrigida durante o período restante de concessão.

(b) ALL Intermodal
On July 23, 2001, the subsidiary ALL Intermodal and Delara Brasil Ltda. executed a lease agreement regarding the assets and rights of Delara, including real estate, facilities, machinery, equipment and vehicles, expired in July 2006. At the end of the agreement, the Company still has the obligation of tendering to Delara Brasil Ltda. 18,625,800 shares, of which 7,006,800 are common shares and 11,619,000 are preferred shares, issued by the Company at R$0.1043 per unit. On July 31, 2006, the parties executed a term extending the performance of this obligation to July 2007. On December 31, 2006, the share quotation at market value is R$4.28.

This capital dilution event is disclosed in the prospectuses of public issuance of debentures and shares of the Company.

(c) Ferroban
Partial spin-off to Ferrovia Centro Atlântica (FCA).
On August 29, 2005, the partial spin-off between Ferroban and Ferrovia Centro Atlântica S.A. (FCA) was carried out, and FCA started being responsible for 35.6% of the total concession and lease amounts.

Payments of the concession and lease agreements
The indirect subsidiary Ferroban cancelled the payment of the amounts related to the lease agreement to RFFSA - in settlement, judicially protected, by an injunction granted on April 7, 2005 and subsequently postponed on July 8, 2005. On September 28, 2005, these injunctions were cancelled by judicial decision pronounced by the Federal Regional Court (TRF) of Rio de Janeiro, becoming not postponable, thus, that Ferroban made the judicial deposit of the outstanding lease amounts, as a way to guarantee the Court and ensure the continuity of the judicial discussion, as well as the regularity and payment of its concession before ANTT and before the National Treasury Secretariat (STN).

The payments are being made by means of judicial deposits at the amount of the debt. Considering that Ferronorte depends on Ferroban’s lines, to the continuity of its transportation operations, started in the States of Mato Grosso and Mato Grosso do Sul and ended in Santos (SP), Ferronorte entered with Ferroban, on January 10, 2006, into a Private Instrument of Guarantee Agreement, by which it made the judicial deposit in favor of Ferroban, at the amount of R$22,177.

Considering that Brasil Ferrovias holds 83.66% of Ferroban’s capital, directly and indirectly, Brasil Ferrovias entered, on January 10, 2006, into a Private Instrument of Guarantee Agreement, by which it made the judicial deposit in favor of Ferroban, at the amount of R$184,517.

Thus the quarterly installments are being paid by means of judicial deposits made by Ferronorte and comprised by the Private Instruments of Guarantee Agreement with Ferroban.
The term of the guarantee rendered both by Brasil Ferrovias and Ferronorte in favor of Ferroban started on the date on which the judicial deposit was made and will be ended on the date on which the Federal Court decides its destination. For the rendering of this guarantee, Ferroban will pay Brasil Ferrovias and Ferronorte the equivalent to the positive difference between the 100% CDI rate and the 100% TR rate.

In case the judicial decision determines the conversion into income of the Federal Government, total or partial, of the judicial deposit, Ferroban will become, as from this date, debtor of Brasil Ferrovias and Ferronorte, respectively, of the exact amount of the judicial deposit, with all the additions it receives. Ferroban must pay its overdue debits to Brasil Ferrovias and Ferronorte, in the maximum term of 90 days, counted from the finding of the judicial deposits, Ferronorte may use, also, any time, and as long as resolved at the Extraordinary General Meeting of the Companies, the guarantee amount for capital payment in Ferroban, or give it away so that its parent company, Brasil Ferrovias, does it. Thus, Brasil Ferrovias may use the amounts rather as capital payment in Ferroban.

Desincorporation of the operations of the Bauru-Mairinque segment
To comply with the Investment Agreement, entered into on May 5, 2005, which aims at the conduction of the restructuring, the desincorporation of the operations of the Bauru-Mairinque segment was set forth in the 2005 and 2006 Business Plan of the subsidiary, and this operation starts being made by Novoeste as from October 1, 2005, in view of the Memorandum of Understanding dated September 23, 2005. ANTT approved the desincorporation of the operations by means of Resolution #1,010, published in the Official Gazette of the Federal Government on July 28, 2005. The final implementation of this operation will be ratified by ANTT.

(d) Ferronorte
On May 19, 1989 the indirect subsidiary Ferronorte entered with the Federal Government into a Concession Agreement for the establishment of a cargo rail transportation system, comprising the construction, operation, exploration and conservation of a railroad between Cuiabá (MT) and: a) Uberaba/Uberlândia (MG), b) Santa Fé do Sul (SP), c) Porto Velho (RO) and d) Santarém (PA). The term of this concession lasts 90 years, renewable for the same period and 10 years may be granted before the end of the contractual term.

The Agreement does not provide for payment obligations on the account of the Concession, however, it sets forth certain responsibilities on the account of the Company, such as: a) not to make sub-concession, b) to submit to the permanent inspection of the Federal Government, c) compliance with rules, technical specifications and national standards of the Ministry of Transportation and d) to comply with all the legal provisions applicable to the granted services, specially those related to environment protection.

The concession extinguishment and the consequent termination of the Concession Agreement may take place due to the following factors: a) amicable covenant of the parties, antedated of negotiations and financial adjustments due by one party to another; b) end of the contractual term; c) expropriation or redemption, by public interest in connection with the Concession, by means of the proper indemnification; d) annulment for illegality of the Concession or agreement; e) severe and continued infractions made by one of the parties, which cause damages to the quality and efficiency of the services; f) by expropriation by the Federal Government of the granted services or by a Law that makes the agreement, formally or materially, impossible. In the event of expropriation the Company’s shareholders will be indemnified by the fair amount of the assets linked to the concession, determined at the time of the expropriation.

(e) Novoeste
Due to a judicial discussion, this indirect subsidiary cancelled the concession and lease payment.

As described in note 11, the indirect subsidiary acquired Treasury Financial Bills (LFTs) and National Treasury Bills (LNTs) as guarantee to pledge the concession and lease amounts due to RFFSA – in settlement and to the Federal Government, resulting from a judicial pleading related to the economic unbalance process of Novoeste which is under judicial discussion. Thus, for the amounts referring to the quarterly installments of the concession and lease agreements new additional LFTs are being acquired at sufficient amounts for the coverage of those amounts.

JUDICIAL DEPOSITS AND PROVISIONS FOR CONTINGENCIES

The subsidiaries are involved in various proceedings incurred in the normal course of their businesses. The Company’s management believes that the solution of such issues shall not produce an effect significantly different from the amount provisioned, which corresponds to the amounts of shares considered “probable”.

(a) Labor contingencies
The subsidiaries discuss various labor claims, and on December 31, 2006 the Company recorded a provision of R$356,625, in the consolidated, to deal with those cases in which its attorneys deem as probable losses. Among the subject-matters of the labor claims, there are: salary parity, overtime, additional payment for hazardous conditions, additional payment for unhealthy conditions, transfer additional, among others.

(b) Civil and regulatory contingencies
The subsidiaries are parties in various civil actions involving petitions, action for damages in general: such as collisions in level crossings, rail running over, traffic accident, possessory actions in general, execution suit of extrajudicial bonds and others. Based on the opinion of its legal advisers and the courts standing, they keep records for the probable losses at the amount of R$37,220.

Among the relevant actions, although with a remote chance of loss, on behalf of ALL Brasil, there is an indemnification action being handled in the State of Rio de Janeiro, under the number 2003.51.01.023238-1, in which RFFSA pleads abandonment of public property and rail segments, requiring the restoration of various stations and the maintenance of the right of way. It is worth pointing out that ALL, in strict compliance with the Concession and Lease Agreements, is performing the maintenance of many rail segments and also the restoration of stations which are being returned to RFFSA in perfect condition of conservation and use.

The civil liabilities classified as possible or remote in Brasil Ferrovias are mainly caused by judicial actions resulting from popular action, questioning the voluntary redundancy plans promoted by Ferroban, which require the payment of indemnifying differences, calculated as the difference between the amount effectively paid by PABI’s and the amount due for the utilization of the unilateral indemnification criterion, established in Clause 4.49 of the Collective Bargaining Agreement, under penalty of invalidation of the privatization process and actions related to indemnification for accidents and expropriations of the right of way of the railway bed.

Currently, both Ferroban and Novoeste question in court the economic and financial unbalance of the Lease and Concession Agreements. In July 2000, Ferroban filed a Declaratory Action in the 20th Federal District Court of Rio de Janeiro questioning the economic and financial unbalance of the Lease and Concession Agreements, due to the high disbursement incurred by the Company for the payment of labor judicial proceedings and other expenses involved.

Ferroban required an expert inspection for determination of the new value of the lease and concession installments, as well as discontinuance of the payment of due and falling due installments until the effective expert inspection for determination of the adequate value. In July 2005, the injunction was granted, but in September 2005, it was reversed by the Regional Federal Court of Rio de Janeiro. The proceeding still has no judgment and awaits for the realization of expert report. The total value related to the lease installments, in the amount of R$284,690, is being deposited in court.

The aforementioned situation is also applicable to Novoeste, however, its proceeding is in progress in the 16th Federal District Court of Rio de Janeiro. The amount related to the due installments represents R$208,903 and Novoeste is posting bond through the issue of government bonds (Treasury Financial Bills – LFT). This LFT is recorded under long-term investments.

(c) Tax contingencies
Main tax issues under discussion are those derived from lawsuits having as plaintiff or defendant, ALL group and to which chances of losses are deemed as possible or remote. Therefore, no provision was made for such issues.

In April 2005, ALL Brasil obtained a favorable decision at the Court of Justice of the State of Rio Grande do Sul in relation to the tax deficiency notice of Rio Grande do Sul State Department, which charged the Company as a result of use of ICMS credit over the acquisition of assets and equipment destined to the recovery and renovation of fixed assets. The assessment amount under discussion is approximately R$16,800, and ALL has already collected the amount of R$11,192 to the State of Rio Grande do Sul’s public coffers, and it interrupted the payment of the remaining balance of R$5,670, due to a favorable decision of the Court of Justice of the State of Rio Grande do Sul, already confirmed by the Superior Court of Justice – STJ. Currently, the proceeding is awaiting for court decision in the Supreme Federal Court – STF. The Company’s chance of loss in the proceeding under discussion is remote, according to understanding already rendered by the courts (annulment action 110660892). In addition, the Supplementary Law 87/96 authorized the full use of right to the credit in the acquisition of assets destined to the permanent assets.

The State Treasury Department of Paraná and São Paulo drawn up tax deficiency notices against ALL Brasil, current amounts of which amount to approximately R$38,000, due to non-payment of ICMS referring to the rendering of goods freight transportation services destined to exports and use of ICMS credits supposedly not authorized by laws. ALL already has favorable decisions as the matter under discussion and courts already positioned about the non-levy of ICMS over goods exports. In April 2006, ALL Brasil obtained a favorable decision at the Taxpayers Council of Paraná, confirmed by the Public Finance Court of the State of Paraná in relation to the tax assessments existing in the State of Paraná (administrative proceedings 6146502-2 and 6146495-6), establishing that in operations destined to exports there is immunity, as mentioned in Article 155, Paragraph 2, X, “a” of CF/88. In view of this, there was a decrease in liabilities exposed to risk related to ICMS exports at approximately R$18,000, recorded as extemporaneous credits under the item “taxes recoverable”.

ALL Brasil has approximately R$6,500 and Ferroban approximately R$2,900 in IPTU (building and territorial urban tax) debts in relation to the real properties over which rail passes through, owned by the federal government, which, in view of concession granted, are under the possession of the federal government for the execution of rail transportation public services. Nevertheless, the Brazilian Federal Constitution provides that there is no levy of taxes over assets owned by the federal government; reason that the possibility of loss in such proceedings is remote.

Ferroban was sued for not paying PIS and COFINS in relation to the mutual traffic and right of way revenues, at the amount of R$21,000, in the period from 1999 to 2002 (cumulative PIS and COFINS). The company understands that the chance of loss is remote, once the amounts under discussion have already been paid, previously, by the concessionaries responsible for the transportation in the origin.

Ferronorte filed an Action for Annulment of tax debit, taking into consideration that the company was sued for not paying ICSM in the transportation of goods destined abroad. Amount involved: R$9,800 thousand. Change of success: probable.

(d) Environmental contingencies
Considering the notices of infraction with imposition of fine penalty, the environmental contingencies of ALL Brasil amount to R$3,547; Ferroban, R$10,265; Ferronorte, R$3,188; Novoeste, R$282; and Portofer, R$20.8, totaling R$17,330.

Such values result from notices from FEPAM (RS), CETESB (SP) and IBAMA, in great majority due to the implementation/extension of marshalling yards without the respective environmental license, contamination of the soil and water due to the overflow of products and non-compliance with the conditions imposed by such operating license. In all the situations, the companies involved are executing Terms of Conduct Adjustment, with a view to reducing the applied penalties by 90%, pursuant to legal disposition, as well as adopting all the prevention and reparation
actions regarding the environment. The provision for the environmental area is recorded along with the civil provision of concessionaires, in an amount equivalent to 10% of the value of the notices of infraction.