Argentina - Water Supply Project

Docant of The World Bank FOR OMCIAL USE ONLY Reiput Ne. P-4141-AR REPORT AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AM4OUNT EQUIVALENT TO US$60.0 MILLION TO TIHE ARGENTINE REPUBLIC FOR A WATER SUPPLY PROJECT November 18, 1985 lT dcumma h. s ruda ei diuLLism md oWm be used by redplmts my In The perd mmue ef tsdr WSa dull. ist emtm m- nwt idhwlmw be dbeulud witbs.t Wud Dak subdz adeu.  CURRENCY EQUIVALENTS Currency Unit = Austral (A) US$ 1 = A0.80 A 1 = US$1.25 (September 1985) WEIGETS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BH - Banco Hipotecario (National Mortgage Bank) DIPOS - Direccion Provincial de Obras SanItarias de Santa Fe (Santa Fe Water Utility) EPOS - Empresa Provincial de Obras Sanitarias de Cordoba (Cordoba Water Utility) MOSP - Ministerio de Obras y Servicios Publicos (Ministry of Public Works and Services) OSN - Obras Sanitarias de la Nacion (National Water Works) PNSB - Plan Nacional de Saneamiento Basico (National Water and Sanitation Development Plan) SIGEP - Sindicatura de Empresas Publicas (Comptroller of Public Enterprises) SNAP - Servicio Nacional de Agua Potable Rural (National Rural Water Service) SRH - Secretaria de Recursos Hidricos (Secretariat of Hydraulic Resources) UC - Unidad Coordinadora para el Financiamiento Programas Inversion en Saneamiento Urbano (Coordinating Unit for Sector Investment) UE - Unidad Ejecutora del Plan Nacional de Saneamiento (Executing Unit of the National Sanitation Plan)  FOR OFFICIAL USE ONLY ARGENTINA WATER SUPPLY PROJECT Loan and Project Summary Borrower: The Argentine Republic Beneficiaries: Ministry of Public Works and Services (MOSP), National Water Works (OSN) and the water utilities of the Provinces of Cordoba (EPOS) and Santa Fe (DIPOS). Amount: US$60.0 million equivalent (includes US$8.0 million for interest during project execution). Terms: Repayment in 15 years, including 3 years of grace, with interest at the Bank's standard variable rate. Relending The Borrower would make available the proceeds of the Loan Terms: to OSN, EPOS and DIPOS on the same terms as those of the l-an. Both foreign exchange and interest risk would be assumed by the project executing agencies. Project Description: The project would assist the Government to rehabilitate old, poorly maintained water and severage installations, extend water services to new urban areas, and strengthen sector planning, management and finances. The project would includes the following components: (a) national water and sanitation plan preparation; (b) operational improvements program in Metropolitan Buenos Aires and the cities of Cordoba and Rosario, consisting of the first stage of a national program including inter alia consumption and production metering, rehabilitation of distribution networks, and streng- thening of the water utilities' distribution management and commercial operations: (c) rehabilitation and extension of the city of Cordoba's water system consisting of the construction of a water treatment plant to replace a rundown plant, upgrading of another plant, and water mains and secondary pipes; and (d) technical assistance to improve the financial planning, accounting and purchasing systems of OSN and EPOS. The project will directly benefit about 1.4 million people. This document has a restricted dstnbuton and may be used by recpients only in the performancu of| their offici duties. Its conteast may not otherwise be disdosed without World Bank authorization.  - ii - Risks: The multiplicity of activities to be undertaken under the proposed project would require close cooperation of several entities. To some extent, the risk associated with the multi- plicity would be minimized by institutional arrangements for project implementation which include clearly defined responsibilities for project participants and the services of an international organization to undertake administration and contracting of the technical assistance program. The federal and provincial governments' commitment to ensure the funds required by the project and the strengthening of the utilities' management systems minimize any risks related to the availability of local counterpart funds. Project Costs: Local Foreign Total US$ Million National Water and Sanitation Plan 0.42 0.41 0.83 Technical Assistance Buenos Aires 0.52 0.52 1.04 Cordoba 0.10 0.11 0.21 Operational Improvements Buenos Aires 8.30 12.45 20.75 Cordoba 2.78 4.17 6.95 Rosario 3.03 4.54 7.57 Cordoba Water System Rehabilitation and Extension 'Los Molinos Channel'", 5.59 2.50 8.09 Water Production, and Distribution 25.35 12.49 37.84 Engineering and administration (7Z of USS45.93 Nillion) 2.16 1.06 3.22 Base Cost (09/85 Prices) 48.25 38.25 86.50 Technical Contingencies 10 4.83 3.82 8.65 Price Contingencies 15.36 9.93 25.29 Total Project Costs 68.44 52.00 120.44  - iii - Financing Plan: Local Foreign Total USS million- Bank - 52.00 52.00 Government 11.07 - 11.07 Domestic Loans 43.30 - 43.30 OSN 14.07 - 14.07 TOTAL 68.44 52.00 120.44 Bank (interest during project execution) - 8.00 8.00 Estimated Disbursements: 1986 1987 1988 1989 1990 1991 1992 1993 1994 Bank Fiscal Year - US$ ilon Annual 6.00 8.80 13.10 8.00 7.30 7.50 4.80 2.80 1.70 Cumulative 6.00 14.80 27.90 35.90 43.20 50.70 55.50 58.30 60.00 Rate of Return: About 15%. Appraisal Report: Report No. 5783-AR dated November 5, 1985. IBRD No. 19128  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN OF US$60.0 MILLION TO THE ARGENTINE REPUBLIC FOR A WATER SUPPLY PROJECT 1. I submit the following report and recommendatior. on a proposed loan to the Argentine Republic for the equivalent of US$60.0 million to help finance a Water Supply project. The loan would have a term of 15 years, including 3 years of grace, at the Bank standard variable interest rate. The Government would make available US$16.0 million, US$29.0 million and US$6.0 million to Obras Sanitarias de la Nacion (OSN), Empresa Provincial de Obras Sanitarias (EPOS), and Direccion Provincial de Obras Sanitarias (DIPOS), respectively, on the same terms and conditions as the Bank loan. PART I - THE ECONOMY 2. An economic mission visited Argentina in June/July 1983 and its report (4979-AR) was distributed to the Executive Directors in June 1984. This report reflects the major findings of that mission and subsequent updating missions. Country data sheets are presented in Annex I. Background 3. Argentina has rich natural resources, a highly literate population, an export-oriented and diversified agricultural sector, and a large industrial sector. The economic performance of the country has suffered, however, from policy instability and economic distortions introduced by the frequently changing governments. Except for agriculture, public sector participatior, in the economy is high, industrial production is largely domestic market-oriented, and available resources are not utilized efficiently. A large public sector deficit has contributed significantly to the country's recent very high inflation level. A. Economic Developmerts of the Last Decade 4. Over the last decade, abrupt shifts in economic policies weakened Argentina's productive capacity and exacerbated structural imbalances. Changes in policies prc,duced large and rapid fluctuations in the real exchange rate, reFl int:erest rates, and real salaries. The rate of inflation was over 4002' in 1976, fell to 100% in 1980 and accelerated again to about 600% in 1984; the external trade balance as a share of GDP has fluctuated between positive 4.8% and a negative 4.3%, while annual GDP growth has ranged from plus 6.7% to minus 6.2%.  N- -2- 5. High and rising inflation, physical and technological deterioration of the country's productive capacity, major dislocations in industrial production and huge external debt service requirements have resulted in general economic stagnation and recession, such that the real 1984 per capita GDP was 14% lower than its 1974 level. Heavy borrowing in the late 1970s multiplied the country's external debt as a share of GDP sevenfold (from 10% to 68%). Today, interest payments on the external debt absorb nearly half of gross domestic savings compared to less than 5% in the early 1970s. 6. The productive sectors, particularly manufacturing, are beset by thorny structural and financial problems. More than 40Z of capacity in the construction industry, artificially inflated during a brief construction boom of the late 1970s, now stands idle. Significant underutilization of capacity also exists in many manufacturing industries; and most firms also lack sufficient working capital. Financial intermediation is costly and inefficient, interest rates are high both in nominal and real terms, and oversized banking institutions are suffering severe difficulties. Argentina's self-sufficiency in oil has deteriorated as the ratio of oil reserves to annual output has declined. Prover reserves of gas have increased, but the processing and transport infrastructure to exploit them is deficient. 7. The public sector is simultaneously overstaffed and seriously short of managerial and technical expertise. Ineffective tax administration, together with inadequate budgeting and investment planning processes, contribute significantly to the large public sector deficit. Cuts in investment to curb the public sector deficit have led to a deterioration of social infrastructure and have jeopardized the reliability of power supply. B. Policies for Adjustment 8. Economic mismanagement and the consequences of the 1982 South Atlantic crisis hastened the departure of the military Government. A democratically elected Government took office at the: end of 1983, facing spiralling inflation and growing balance of payments difficulties. Also, the after-effects of the industrial recession were threatening the solvency of the financial system. 9. Toward the end of 1984, the Government ent:ered into a 15-month stand-by agreement with the IMF and rescheduled its external debt with official creditors, covering interest and principal up to 1985, and with the commercial banks, covering principal up to 1985. It also obtained the commitment of US$4.2 billion in fresh money to finarce the current account deficit and to eliminate arrears accumulated throughi 1983-85. The principal objectives of the stabilization program were to: (a) lower the rate of inflation from an average of about 20% per month in -the last quarter of 1984 to about 8% per month by the end of 1985; and (b) to achieve a balance of payments position that would enable Argentina to meet its external obligations while satisfying the needs of domestic recovery. 10. The Government moved to comply with tne cconditions under the stand-by agreement despite a deepening recession. The fiscal deficit was  - 3 - reduced to 13% of GDP during the last quarter of 1984 and the real exchange rate was improved by 17Z between September and December. Public utility prices were raised 9% in real terms. Inflation, however, continued at full speed after a brief pause in October and November. Output and employment and the value of real exports began declining. Monthly wage indexation was reduced to 90Z of the previous month's inflation from 100% earlier; real wages also fell 17% from July to December. By the end of 1984, shortfalls from the agreed targets of the program were observed; during the first quarter of 1985, the Government's adherence to the program became weaker. Therefore, the IMF suspended the first conditional draw-down under the stand-by agreement until the completion of the 1985 first quarter review of the program. 11. A new economic team took office in late February 1985 and began preparing a new package to deal with inflation which had already reached beyond 20% per month. By the second quarter of 1985, economic conditions had worsened significantly. The economy was facing spiralling inflation while the recession intensified. The Government then decided to abandon gradualism in favor of shock treatment and set about to prepare the country for a major change in economic policy necessary to break inflationary expectations. In June 1985, the Government devalued the peso by 18% to improve relative prices, raised the price of meat by almost 100%, and introduced a number of fiscal measures with the purpose of drastically reducing the overall fiscal deficit. It increased prices in petroleum and gas products, and tariffs on electricity, telephone, transport and postal services; a temporary 10% import surcharge and 9 percentage points increase in the export tax were approved; a 12% cut in the 1985 budget expenditure took place; and a hiring freeze was declared in the public sector. Following these measures, the Government announced a very strong adjustment program and initiated its implementation. The program was then supported by an agreement with the IMF on revised and more stringent targets under the ongoing stand-by agreement. 12. The Government's economic program was comprised of: (a) a drastic cut in the total public sector deficit (including Central Bank operating losses) from 12.5% of GDP in the first half of 1985 to an expected 2.5% on average in the second half of 1985 with the deficit to be financed by external borrowing, thus eliminating domestic credit expansion to the public sector. Further expenditure cuts were to follow the ones undertaken and achievement of lower inflation was to shorten revenue collection lags and allow for lower nominal interest rates, thus reducing interest service payments; (b) a reduction in the balance of payments' current account deficit from 3.5% of GDP in 1984 to 2.4% in 1985; (c) a monetary reform that included the introduction of a new currency unit pegged to tne US dollar and a system for de-indexing peso denominated contracts; and (d) a wage-price freeze. The program was supported by an agreement with commercial bank creditors to: (a) reschedule about US$13.9 billion in principal payments during the period of the stand-by (1985/86); (b) provide US$4.2 billion of new money of which US$2.2 billion were to be disbursed by September 1985; (c) establish a trade credit maintenance facility to maintain such financing at its 1lvel of September 30, 1984; and (d) establish a stand-by money market facility that maintains creditor banks' deposits with Argentine banks at their level of September 30, 1984.  - 4 - 13. The Government has been able to stabilize the economy in the short term, and meet the targets and draw down the first tranche under the IMF stand-by agreement. The monthly rate of inflation, as measured by the consumer price index has dropped from 30X in June to 2Z in September. The overall fiscal deficit has been reduced to about 2.5Z of GDP as a result of the revenue and expenditure measures and the sharp drop in inflation. So far, no credit expansion to the public sector has been required. The reserve position of the Central Bank hau also shown some improvement, reflecting increased confidence in the Government's policies. The Government has also received the first disbursement of new money under the agreement with the commercial banks. Almost all political and social groups have thus far supported the program despite its austere nature. Since cuts in public spending and high real interest rates will have a dampening effect on domestic demand, the Government has been careful not to raise expectations for a quick economic recovery. In this connection, the industrial and other nonagricultural sectors are experiencing a severe recession which began in late 1984 despite some increase in industrial output in September of 1985. Real GDP is estimated to decline by about 1% in 1985. Export response to the program has not yet been significantly positive although an expected good harvest is likely to facilitate the achievement of the balance of payments target of the program. 14. The program's risks relate to the possibility of a renewal of inflationary pressures once the wage and price freeze is relaxed. Thus, the Government has indicated that the freeze will continue into 1986 and then be phased out gradually. The Government's economic program has been far more successful than initially expected and augurs well for improved economic performance. A continued effort to maintain the overall fiscal deficit at current levels will be required to break longer-term inflationary expectations and ensure the program's success. Thus, the Government has indicated that it will continue to act in the fiscal area as needed. C. Development Prospects and Policy Bequirements 15. Argentina's growth performance in the next five years will depend heavily on the continued success of the present Government's policies. Restoring domestic and overseas confidence in economic management and renewing private sector investment will require maintaining the recent trends in price stability. Moreover, given the burden of external interest payments on Argentina's gross domestic savings, public investment will be limited largely to improving the efficiency of existing capacity and completing unfinished projects. The Government has stated its intention to give priority to those projects which alleviate immediate bottlenecks, have a high rate of return and can generate foreign exchange. 16. Argentina's key development objectives are to: (a) strengthen and expand the growth of exports in order to reduce the country's external debt relative to GDP and exports; and (b) resume medium-term growth as the stabilization program takes hold. The Government's economic program and policies are being designed to achieve these objectives. In particular, special emphasis is being given to the elimination of distortions in order to produce a rapid output and export response. Faster recovery of per capita consumption can take place only after medium-term growth has resumed.  - 5 - 17. The Government has formulated a medium-term strategy that links the stabilization and external adjustment programs to development goals. The strategy is based on an improvement of investment climate and the restoration of adequate export incentives. The proposed policy measures are closely in line with the recommendations of the 1984 Country Economic Memorandum (CEM), viz., (a) improvement in public sector finances and efficiency; (b) overhaul of the tax system and tax administration; (c) reduction in the number of public enterprises and reform of government-enterprise relationships; (d) improvements in incentives for private industry and agriculture; (e) reform of the financial system and active support for manufacturing exports; and (f) expansion of petroleum and gas exploration and development activities to increase oil exports through increased private sector participation. Since the strategy aims to promote productive fixed investments, real per capita consumption is projected to rise only slightly during 1985-90. Growth and Balance of Payments Prospects 18. Improving Argentina's growth prospects for the rest of the decade would require a successful implementation of the adjustment program during 1985/86, the rescheduling of the country's external debt by its creditors as it falls due, continued lending at the agreed amounts, and a continued expansion in exports. Under those assumptions, the current account deficit of the balance of payments is projected to average about US$1.6 billion per year during 1985/86, equivalent to 2.2% of GDP, to be financed largely by disbursements from the IMF stand-by agreement, increasing disbursements of existing and projected loans from public sources, and direct foreign investment. Although this is not likely to lead to a quick short-term economic recovery because of the eifects of stabilization on domestic demand, real GDP growth, beginning in 1987, could resume at about 3% per year on average. This growth depends on the projected expansion in exports, and of increasing agricultural production resulting from an intensified use of fertilizer and industrial production resulting from renewed private sector investment activities. Under these assumptions, the current account deficit would decline rapidly from 1987 on as a result of increasing proceeds from grain and manufacturing exports. Thus, the current account deficit of the balance of payments is projected to amount to only US$20 million by 1990. Debt Service and Creditworthiness 19. At the end of 1983, the total public sector external debt of Argentina was US$33.2 billion. From US$11.5 billion at the end of 1978, it had grown almost three-fold. The structure of the debt also had changed radically during the 1978-1983 period. At the end of 1978, the debt to commercial banks constituted 38% of the total, but this ratio rose to 60% by the end of 1980, and 87% by the end of 1983. By 1979, total debt service requirements already had gone beyond the reach of net exports, and since 1982, the trade surplus, although large, has not been sufficient to pay the accrued interest. Thus, when the South Atlantic crisis disrupted normal roll-overs and lending in 1982, Argentina began accumulating principal and interest arrears. The Government provided exchange rate guarantees for the rescheduled private external debt and eventually assumed a large part of the private sector's external obligations. Total external  - 6 - debt, including arrears and private sector obligations, reached US$46 billion by the end of 1983. Following the agreements with the IMF and its creditors, Argentina initiated a program to eliminate payment arrears, with commercial banks contributing US$4.2 billion to the effort. The banks subsequently released the first tranche of their additional financing in September 1985. zo. A continued effort by the Government in implementing domestic policy reform, including a reduction in protectionism, combined with external support from financial sources, should enhance Argentina's export potential and thus, improve its prospects of reducing its debt servicing ratio and also its total debt as a percentage of GDP during the 1990s. Provided that the arrears are eliminated by the end of March 1986, as the current program calls for, and that the debt amortization payments due in 1986 are restructured with a modest increase in the commercial banks' exposure, Argentina should be able to meet the servicing requirements of its external debt, including new borrowing for high-yielding projects which would support increased foreign exchange generation, efficient import substitution and increased domestic resource mobilization. At the end of 1983 the Bank's share of Argentina's total debt outstanding and disbursed was 2.1Z and its share of external debt service payments was 2.1Z. PART II - BANK GROUP OPERATIONS IN ARGENTINA A. Bank Operations 21. Past Bank lending to Argentina has been sporadic because of periodic macroeconomic and sectoral difficulties. In the period 1980-June 1985, the Bank made loans for nine projects totalling US$985 million. Bank lending since 1980 has focused on major infrastructure projects and provision of credit for development of the industrial and hydrocarbon sectors. The Yacyreta Hydroelectric Project is intended to channel the enormous potential of the Parana River to provide base-load electric energy for Argentina in the 1990s. The Second Industrial Credit project supports the modernization andf expansion of export-oriented industries. A highway sector project is helping to augment and maintain the road network. In parallel to the above projects, the Bank has supported the Government's efforts to exploit Argentina's energy resources; for this purpose five loans were approved during the above-mentioned period to: (a) help Argentina assess its hydrocarbon reserves; (b) improve the basis for rational exploitation of coal resources; (c) facilitate private sector participation in exploration and production of oil and gas; (d) alter the country's two major refineries in order to meet changing demand patterns; and (e) expand Argentina's capacity to make effective use of its hydrocarbon resources and increase the utilization of natural gas and its by-products. 22. Execution of Bank-assisted projects in Argentina has suffered in recent years from policy reversals, cumbersome bureaucratic procedures, curbs on public investments stemming from the need for fiscal austerity, and from the private sector's reluctance to invest in an uncertain  - 7 - environment. The authorities share the Bank's concern about this situation, which has resulted in unexpectedly slow disbursements and consequent negative resource transfers. In response, several existing projects have been restructured to improve their execution, such as the Grain Storage Project first approvsd for Bank financing in 1978. The Bank also has instituted procedures for monitoring monthly disbursements and for periodic project implementation reviews with the Government. Disbursements of Bank loans in 1985 were more than double the 1984 cate. 23. Promising prospects for political stability and serious efforts by this Government to tackle Argentina's thorny economic problems provide the Bank with an opportunity to play a key role in the country's economic recovery and future development. The Government has requested the Bank's help in implementing a stabilization program and in preparing the way for renewed long-term economic growth. Over the short-term, the Government is seeking help with economic analyses and expanded lending operations designed to enhance domestic resource mobilization and increase the availability of foreign exchange. Economic and sector work include a major public sector investment review and comprehensive export-oriented agricultural and industrial studies which are being completed. The Bank has appraised an Agricultural Sector Loan which would assist the Government in improving the incentives necessary for a more intensive use of agricultural resources to increase production and exports; policy reforms included under the proposed loan would contribute to both short- and long-term sectoral development. The Bank has also appraised a proposed Bahia Blanca Port project, which would reduce shipping costs for grain exports. The Bank is also processing a technical assistance loan for reforming public sector management and strengthening the international competitiveness of the economy. Preparations are underway for further support of the industrial sector to assist in the economic recovery of Argentina; of the energy sector directed at distribution and transmission requirements and supporting the substitution of abundant natural gas for oil; and of policy-based lending to support structural reform. B. IFC Operations 24. IFC has made 25 investments in Argentina, totalling US$236 million, of which US$126 million has been repaid, cancelled or sold. A summary of its investments is shown in Annex II. Promotional efforts are geared to export or import substitution-oriented projects with emphasis on oil, petro-chemicals, and related sectors. IFC will also continue to seek investments in projects where its presence would facilitate the formation of joint ventures with foreign participation, and act as a catalyst to attract higher levels of commercial financing. PART III - THE SECTOR Sector Organization 25. Until 1980, national responsibilities for most of the water and sewerage systems in urban areas were concentrated in the National Water Works Company (Obras Sanitarias de la Nacion - OSN). The Government then began to decentralize most of these responsibilities to the  - 8 - provinces. The Goverument's action was part of an overall strategy to improve quality of services by inducing efficiency and dynamism in a stagnated and overcentralized sector. 26. The Secretariat of Hydraulic Resources (SRH) of the Ministry of Public Works and Services (MOSP) was made responsible for planning, and overall supervision of sector activities. All other responsibilities were divided among: (a) OSN for water and sewerage services in the Buenos Aires Metropolitan Area; (b) a water utility in each of the 23 provinces; and (c) the National Rural Water Services (Servicio Nacional de Agua Potable Rural - SNAP) for services in rural areas and urban communities with less than 10,000 inhabitants. Other agencies active in the sector include the Ministry of Health and Social Welfare (Ministerio de Salud Publica y Accion Social - MSAS) and the National Mortgage Bank (Banco Hipotecario - BH). 27. SRH oversees the operations of the sectoral agencies and is responsible for making the decentralized arrangements operative, in addition to coordinating water resources management. SRH created in 1980 the Executing Unit (UE) of the National Sanitatior. Plan for developing sector technical, financial, and managerial policies and assisting the provincial utilities develop their capabilities; and in 1985, a unit (UC) for coordinating Government funds and external financing for investment projects. 28. OSN, although being a national government enterprise, provides water and sewerage services to fourteen municipalities of the Buenos Aires Metropol-itac Area with ar. aggregate population of 10 million. It also gives technical assistance to the provincial entities in coordination with UE. 29. The provincial entities created, under the decentralization process, received from OSN the existing infrastructure in their areas and the current financial assets. These entities vary from provincial enterprises to departments of provincial governments. The responsibility for setting tariffs rests with provincial governments. The provincial utilities under the proposed project are: Cordoba Provincial Water Works (Empresa Provincial de Obras Sanitarias - EPOS) and Santa Fe Provincial Water Works (Direccion Provincial de Obras Sanitarias - DIPOS). Population, Service Levels, and Quality 30. During the 1970s, Argentina's total population grew at 1.6X per annum, from 24 to 28 million, while the urban population grew at a rate of 2.5% per annum, from 18 to 23 million. In 1980, 83% of the population lived in urban areas, 75% lived in 198 communities with populations greater than 10,000, and 35Z was concentrated in the Buenos Aires Metropolitan Area. 31. The percentage of total population connected to public water supply systems increased from 45Z in 1970 to 60% in 1980. In urban areas, the increase was from 56% to 69X. Population service coverage for sewerage in urban areas is lower than that for water supply: 31% in 1970 and 37% in 1980. In rural areas, 71Z of the population living in communities between 100 to 2000 inhabitants received water services through house connections. About 38Z of the rural population had excreta disposal systems. Water  - 9 - supply and sewerage service coverage is not in line with the per capita income rank of Argentina (6th) in Latin America. The country ranks 9th in service levels. 32. Public water supplies throughout the country are chlorinated and quality is adequate. A large portion of the population not connected to public systems, however, relies on individual water sources which often are contaminated. In parts of the Buenos Aires Metropolitan Area and in provinces (especially in the northeast and north) where services have not been extended and bad sanitary conditions are prevalent, infant mortality rates are more than twice the national average. 33. Population and service coverage in the proposed project area are as follows: (a) Metropolitan Buenos Aires has a population of 10 million and water and sewerage service coverages of 64% and 40%, respectively (this low coverage results from some distant municipalities lacking connections to the public systems); (b) the city of Cordoba has 1 million inhabitants and service coverages of 78% and 25%; and (c) the city of Rosario has 1 million population and service coverages of 89% and 45Z. Sector Perfcrmance, Policies, and Constraints 34. JSN led the development of the water supply and sewerage sector in Argentina for more than a century, building and operating systems which the Government mostly financed. The sector grew rapidly in this period and Argentina attained a leading position with regard to sector activities in Latin America. Installed water production and main distribution capacity were often over-designed. As long as the real cost of capital was low, OSN chose to build large infrastructure rather than operate sophisticated systems which could reduce demand. In time, however, the deterioration of the national economic conditions prevented the Government from continuing to provide large subsidies for sector activities and OSN was unable to adjust to the resulting financial constraints. Until 1976, OSN was not generating enough revenues to cover even operating expenses. In 1977, the Government pressed public enterprises toward greater financial self-reliance and required OSN to generate its first operating surplus. Government subsidies were curtailed, and OSN was directed to borrow on the internal and external credit markets. Grant financing of investment was reduced to limited funds obtained from provincial and municipal budgets. The result was a sharp reduction in investment and an increasing inability to satisfy services demand and to maintain existing installations adequately. 35. The 1980 decentralization reflected the Government's belief that the sector could be more effectively managed by the provinces. The decision to decentralize was taken, however, without adequate consideration of the limited institutional capabilities at the provincial level. The Government failed to provide the necessary assistance to prepare the provinces for their new responsibilities. It is now attempting to overcome these deficiencies by defining and implementing a set of policies and assistance programs which would be included in a national water and sanitation development plan, to be prepared under the proposed project.  - 10 - Sector Objectives and Strategy 36. The Government has established as service goals, to provide by 1990, 80% of the population with water supply and 70% with sewerage or alternative excreta disposal systems. This would entail serving an additional 6.1 million inhabitants with public water supplies at a cost estimated at about US$1.6 billion, and 10.4 million inhabitants with sewerage at a cost of about US$2.4 billion. The annual investment required (US$700 million) would be several times the annual investment levels of the 1970s and the 1980s (US$114 million and US$78 million in current prices). However, it is unlikely that this level of investment will be achieved since: (a) the country's public investment programs is being sharply curtailed; (b) the financial intermediaries and resources for the sector have yet to be determined; and (c) the water entities would need sufficient lead time to implement operational and financial policies which allow them to internally generate sufficient funds for investment and for servicing debts. Argentina's sector development will have, therefore, to stress maximizing service coverage and quality under a severely limited investment budget. This approach entails the rehabilitation and expanded use of existing infrastructure, reduction of per capita investment costs, water conservation and improvement of operational and commercial practices. 37. The Government has agreed to this approach. The National Water and Sanitation Development Plan (PNSB) to be developed under the proposed project would update the demand for services and evaluate the required investments. It would define sources of and intermediaries for financing for the sector and propose a tariff policy to reflect the economic cost of services, the users' capacity to pay, and enhance the water utilities' self-financing capacity. The plan would also provide for the least cost analysis of projects, which takes into account rehabilitation of existing infrastructure, and the promotion of water conservation measures consistent with the efficient use of sector resources. The plan would also support the Government's domestic resource mobilization efforts which call for a financial strengthening of government enterprises and improvements in public sector management. 38. The Bank's strategy calls for the Bank to act as a catalyst to speed the formulation and implementation of new sector policies and practices conducive to more cost-effective and less capital-intensive investments. An important element of this strategy is to assist the authorities in the preparation of the PNSB plan. At the same time the Bank would focus its assistance on the rehabilitation of existing installations to prevent a collapse of service in major cities and improvement of the operational, managerial, and financial capabilities of the provincial utilities. With this assistance the provincial utilities would be prepared to introduce improved cost recovery policies and to undertake the necessary expansion of the systems.  - It - PART IV - THE PROJECT Background 39. In late 1983, the Government requested Bank assistance to assess progress made in sector reorganization and assist with project preparation. The project was appraised in February-March 1985 and negotiations were held in Washington in October 1985. The Argentine delegation was led by Mr. Carlos Rivas Roche, Undersecretary of Hydraulic Resources, MOSP. A Staff Appraisal Report entitled Argentina - Water Supply Project (No. 5783-AR, dated November 5, 1985) is being distributed separately to the Executive Directors. Special conditions of the project are listed in Section III of Annex III. Project Objectives and Rationale for Bank Involvement 40. The proposed project would be the first Bank-financed project in the sector. Its main objectives are to: (a) rehabilitate deteriorating infrastructure, replace rundown facilities, and extend water services to new urban areas; (b) prepare a national plan to provide the necessary institutional framework to permit the newly decentralized system to function in a more efficient manner; and (c) initiate a national operational improvements program which promotes water conservation through physical rehabilitation of water systems, production and consumption metering, and institutional strengthening of the water utilities. The operational improvements program would cover in this first stage the Buenos Aires Metropolitan Area, and the cities of Cordoba and Rosario de Santa Fe that represent 60X of the urban population of the country. The water utilities of these cities intend to introduce new technologies which could be replicated in other area of Argentina. 41. The above objectives are consistent with the Bank's strategy to assist the Government in the improvement of public sector management both at the national and provincial levels; the inducement of greater efficiency in the use of resources; and the rehabilitation of the nation's valuable social infrastructure. Project Description 42. The proposed project includes the preparation of a national water supply and sanitation plan (US$1.1 million or 1% of the project cost), an operational improvements component (US$47.0 million or 39%), and rehabilitation and extension of the water system in the city of Cordoba (US$70.7 million or 59Z). The proposed project would be complemented by technical assistance to OSN and EPOS (US$1.6 million or 1% of the project cost). 43. The preparation of the national water supply and sanitation plan would include: (a) formulation of Government objectives in the sector, service targets and investment alternatives for the decade; (b) development of project evaluation criteria to foster adequate technical standards for project design with special emphasis on least cost analysis; (c) preparation of financial policies, including definition of financial  - 12 - criteria for setting investment priorities; Cd) definition of tariff structures and levels to achieve acceptable rates of return on sector assets and enable the sector to contribute significantly to new investments; (e) evaluation of the existing organizational framework and responsibilities at federal and provincial levels; (f) recommendations for the establishment of the organizational and institutional structures to effectively implement the sanitation plan; (g) recommendations on strategies directed at improving the efficiency of the present sector organization; (h) definition of responsibilities in sector financing and alternative funding; Ci) identification of manpower resources and staff training needs; and, (j) evaluation of existing research facilities and their funding and recommendations for further development. 44. The operational improvements component would be carried out in the Metropolitan Buenos Aires and the cities of Cordoba and Rosario de Santa Fe, and would include : (a) water consumption metering; (b) production and main distribution metering; (c) water distribution flow survey; (d) mapping of the water distribution and sewerage systems; (e) water distribution network rehabilitation; (f) distribution system management; and (g) upgrading of commercial systems. The component, mostly equipment, is designed to cut water wastage, in order to cut operating costs and defer new investments. 45. The rehabilitation and extension of the Cordoba water system would include the following: (a) construction of "Los Molinos- water treatment plant (2 m3/s); (b) upgrading of 'Suquia' water treatment plant; (c) completion of the multi-purpose -Los Molinos- raw water channel; (d) installation of four booster pumping stations; and (e) construction of mains and distribution pipelines. 46. Finally, the proposed project would include: (a) studies and technical assistance for the improvement of financial planning, accounting, and purchasing systems for OSN and EPOS; and (b, preparatioa by OSN, EPOS and DIPOS of investment, operational and financial recovery plans including annual targets in the areas of water production and sales, service levels and quality as well as financial improvements. Project Implementation 47. MOSP would act as technical agent for the project, being responsible for overall project supervision and coordination, serving through SRH, as the liaison among the Bank, the Government and the project beneficiaries. MOSP, with assistance of consultants, would prepare the national water and sanitation plan (para. 43 above). OSN, EPOS, and DIPOS would be responsible for the execution of works and institutional programs in their respective areas. Each of these agencies have appointed a coordinator for the project. The project would be completed at the end of 1993. 48. Project execution would require extensive use of consultants estimated to total 410 man-months of foreign consultants and 300 man-months of local consultants. MOSP and OSN would enter into master contracts with consultants for the preparation of the National Water and Sanitation Plan,  - 13 - and for the operational improvement program in Buenos Aires. EPOS and DIPOS would retain consultants for their project activities. Project Executing Agencies 49. OSN, the executing agency for the Metropolitan Buenos Aires project subcomponent, is managed by an administrator appointed by MOSP. The administrator d'rects the operations, engineering, and finances and administration departments and their second-level units. With 9,400 employees, OSN, provides water and sewerage services through 1.0 million and 0.5 million house connections respectively. OSN's annual budget is approved by the Congress; charges for services are approved by an interministerial committee comprising Public Works, Economy and Labour. OSN is required to get prior approval from the Ministry of Economy and the Planning Secretariat for major multi-year investment projects. OSN's planning and budgeting have been weak. Accounting reports are not issued on time and are often based on unreliable and poorly coordinated data. OSN staff prepares most engineering designs and supervises most works and operations. Its operation of systems needs substantial improvements. With the exception of limited areas of Buenos Aires for which services were partially financed by the Inter-American Development Bank, systems lack production and consumption metering. Most of the instrumentation in the old production and distribution systems are in disrepair. In addition to these physical deficiencies of the system, water distribution management needs upgrading. The commercial system needs to be strengthened in the areas of installations, mapping, customer register, tariff structure, and billing and collection (see para. 59). 50. EPOS, the executing agency for the Cordoba project subcomponent, is governed by a board composed of a president and four directors. There are departments for planning, engineering, operations, finances and administration, and small communities administration. With 2,030 employees, EPOS, provides water and sewerage services through 260,000 and 92,000 house connections respectively. Its budget is approved by the provincial congress and tariffs by the provincial government. Engineering planning is quite adequate to needs and financial planning has improved recently. Engineering design and project supervision are carried out in most cases by EPOS' staff. Its problems in operations, commercial and accounting are similar to OSN's (para. 59). 51. DIPOS, the executing agency for the Rosario project subcomponent, is managed by an administrator appointed by the provincial Governor. Activities are carried out by five departments: planning, operations, commercial, finances, and administration. With 1,400 employees, DIPOS provides water and sewerage services through 299,000 and 148,000 house connections respectively. Accounting is satisfactory. Engineering is mostly carried out by DIPOS's staff. Problems in operational and commercial areas are similar to those of OSN and EPOS (para. 59). 52. SRH, the executing agency for the national sanitation plan, is responsible for overseeing the activities of UC and UE. SRE staff comprises about 30 professionals. For its increased activities under the project, SRH would rely heavily on the consultants assisting UE and UC.  - 14 - Project Monitoring 53. Agreement on the monitoring indicators as well as on a plan for project progress reporting was reached during loan negotiations. Two project implementation reviews will be carried out by June 30, 1987 and December 31, 1989, respectively. These reviews, which would include discussions with the Bank of the findings and recommendations of the water and sanitation plan, operational improvement program, and technical assistance for OSN and EPOS, would also provide the basis for the corrective measures which may be required on project execution. Project Cost 54. The total cost of the project excluding interest during construction is estimated at US$120.4 million equivalent. The foreign exchange component is estimated at US$52.0 million or 432 of the project cost. Costs are based on September 1985 prices and include physical contingencies of 10%. Price contingencies of US$25.3 million or 27Z of 1985 project cost are based on estimated international inflation of 5% in 1985, 7.5% in 1986, and 8%, thereafter. Technical assistance and consultant costs (US$5.7 million) are based on those of similar internationally and locally recruited experts in Argentina. Construction costs are based on unit costs developed by OSN and EPOS during implementation of ongoing projects. Costs do not include direct taxes from the provincial governments. Project Financing Plan 55. The Bank loan of US$60.0 million to the Government of Argentina would finance total foreign costs and USS8.0 million to finance interest during the grace period to help reduce the financial pressures on the Government and on the executing agencies. The local counterpart of US$68.4 million is expected to be financed by a combination of domestic loans to EPOS and DIPOS (US$39.5 and USM3.8 million respectivelv), OSN internal cash generation (US$14.0 million), and a federal government contribution to the province of Cordoba for the multipurpose 'Los Molinos' channel (US$11.1 million). Assurances from the federal and provincial governments were obtained during loan negotiations on the timely availability of local counterpart funds. Both Bank loan proceeds and counterpart financing would be on-lent to OSN, EPOS and DIPOS, at the same interest as the Bank loan, and with similar grace and repayment periods. The Borrower would onlend US$16.0 milliou, US$29.0 and US$6.0 million to OSN, EPOS and DIPOS, respectively. Foreign exchange and interest risk would be assumed by the project executing agencies. The signing of at least two subsidiary loan agreements between the Government, the executing agencies and the respective provincial governments would be a condition of effectiveness of the proposed loan. Past and Current Financial Performance 56. OSN's financial situation was highly satisfactory in 1980. In both 1981 and 1982 the company experienced substantial operating surpluses (income before depreciation amounted to US$154 and US$67 million respectively) which resulted in a high liquidity position. OSN's favorable  - 15 - condition deteriorated rapidly, however, mostly as a result of declining tariffs which, by the end of 1982 through 1984, were equivalent to 34-40% of early 1981 tariffs in real terms. OSN revenues in 1983-84 were only sufficient to finance operation and maintenance budgets which lacked programs of preventive maintenance and of replacement and improvement of worn out or deficient facilities. There was an operating deficit in 1984. OSN's investment which in 1981 and 1982 amounted to US$68 million and US$85 million, respectively, declined to US$28/38 million in 1983/84. OSN's financial performance in 1985 is improving as a result of substantial tariff increases during the first semester (22Z cumulative in real terms). These increases were approved before the present temporary freeze imposed on prices and wages. The Government has indicated its willingness to consider further tariff increases when the wage and price freeze is relaxed (paras. 12-14). 57. EPOS and DIPOS started operations with sufficient funds to support gradually improved service coverage and quality. They received from OSN a large asset base and had no debt. Their tariffs generated enough revenues to cover operation and maintenance budgets and to finance some investments. Since then, their financial conditions, especially EPOS's have deteriorated. DIPOS' revenues continued being sufficient to cover its limited operation and maintenance budget and to finance a modest average annual investment of US$6.0 million during 1982-84. This was mainly the result of the periodic tariff adjustments implemented in 1983 based on a formula which takes into consideration cost increases. This policy allowed the company to rapidly recover its 1981 tariff level in real terms after the sharp decline of 1982. EPOS, which also experienced a tariff deterioration delayed the recovery process until mid-1984. Tariffs during 1982-84 were equivalent to 31-39Z of early 1981 tariffs, in real terms. As a result, EPOS' revenues were barely sufficient to finance the already inadequate operations and maintenance budget. EPOS' investments since its creation have therefore been negligible: US$2.0 million in 1983 and US$2.7 million in 1984. This trend is however, being reversed by a recent provincial government and EPOS' management decision to implement a tariff recovery plan. Tariffs were increased by 45% in real terms between June 1984 and April 1985. Further tariff increases scheduled for 1985 were postponed in compliance with the Government's austerity plan. The net result of the current tariff freeze would be a 1985 real average tariff 8% above the 1984 tariff level. This would provide EPOS with a posi':ive inceme before depreciation despite excessive maintenance expenditures for the water plant to be replaced under the proposed project. In addition, the Government and EPOS have agreed to continue gradually i-creasing tariffs during the propob.i project execution period as soon as the price freeze is lifted. This policy is consistent with EPOS' charter which provides that tariff levels should be sufficient to generate enough revenues to cover current expenditures and debt service, and also to contribute with an unspecified amount to finance investments in system expansion and improvement. Future Financial Performance and Financial Covenants 58. There is an increasing awareness at federal and provincial levels in Argentina of the need to improve the self-financing capabilities of the water and sewerage companies. The provisions in the project which involve  - 16 - the revision and updating of ingrained institutional, financial, and engineering policies and practices will help the project beneficiaries in this endeavor. These revisions combined with the results of the technical assistauce, metering and other operational improvements to be financed under the loan, would provide the basis for financial recovery, investment and managerial improvement of the agencies participating in the project. These programs would be expected, inter alia, to set specific targets for future financial improvements in the forms of rates of return or internal contribution to investment, which the Bank would review in detail in conjunction with the preparation of further operations in the sector. During negotiations: (a) agreement was reached on the terms of reference for the above financial recovery plans for OSN, EPOS, and DIPOS, and (b) assurances were obtained that these plans and schedules for their implementation would be completed by June 30, 1987, and that the Bank will be given an opportunity to comment on the provisions of the plans. Assurances were also obtained during negotiations that: (a) beginning in 1986, OSN, EPOS, and DIPOS will generate sufficient revenues to cover their operating expenses, adequate maintenance, taxes, and debt service requirements; (b) OSN, EPOS and DIPOS will submit to the Bank by September of each fiscal year an update of the financial projections for the current and the following three years, specifying the measures to be taken to meet the aforementioned requirement. Future Operational Performance and Covenants 59. The operational improvements project component is designed to dramatically c-ange the operations of the three water utilities involved, by addressing, inter alia, their major weaknesses discussed above (paras. 49, 50 and 51). There would be a tightened control of water produced and sold. Clandestine connections and leakages would be minimized. Metering the largest water consumers (the top 10-25%) which account for the bulk of water consumed C40-60Z), would permit the introduction of tariffs structures related to the marginal cost of water and would promote water conservation. Thus, as water demand decreases, investments could be postponed. The increased efficiency in the water utilities would be closely monitored by the monitoring indicators and project implementation reviews (para. 53); and through investment, operational and financial recovery plans (paras. 57 and 58). In addition, agreement has been reached with OSN, EPOS, and DIPOS on the following: (a) metered connections as percentage of total connections would increase in Buenos Aires from 10% in 1986 to 22% in 1991; in Cordoba, from 6% to 24%; and in Rosario, from 5% to 8%; and (b) revenues collected to amounts billed by OSN, EPOS and DIPOS would increase from 86% in 1986 to 96% in 1991 and thereafter. Audit 60. Audit of the project executing agencies is carried out as follows: (a) MOSP, by the Comptroller General; (b) OSN, by the Comptroller of Public Enterprises (Sindicatura General de Empresas Publicas - SIGEP); (c) EPOS by the Contaduria General de la Provincia; and (d) DIPOS, by the Tribunal de Cuentas de Santa Fe. In addition, assurances were obtained that OSN, EPOS, and DIPOS would have their financial statements for each fiscal year starting with fiscal year 1985 and statement of expenditures, audited by independent auditors satisfactory to the Bank, and in accordance  - 17 - with generally accepted accounting principles; MOSP would have the accounts of its project component and the project's operating account audited by independent auditors satisfactory to the Bank and in accordance with generally accepted accounting principles; and starting in June 30, 1986, but not later than April 30 of each following years, the project executing agencies would submit to the Bank certified copies of the audited financial statement and reports. Procurement 61. Procurement under the proposed project would be carried out following Bank guidelines. Assurance of an exemption for project-financed procurement from legislation mandating the use of domestic goods and services would be a condition of effectiveness. All contracts for equipment and materials exceeding US$100,000 and for civil works exceeding US$1,000,000 would be awarded on the basis of international competitive bidding. Equipment and materials would be grouped to obtain packages in excess of US$100,000 with the exception of contracts amounting to Less than US$130,000 under the MOSP water supply and sanitation plan component, US$1,000,000 for OSN's component, US$2,800,000 for EPOS' components, and US$370,000 for DIPOS' components. The nature for works under the operational improvements components precludes the efficient packaging of services to be bid as works will be carrried out in operating installations spread over the project cities. These works, amounting to approximately US$9.0 million or 11% of the project cost, will be carried out under procedures satisfactory to the Bank by: (i) local contractors: US$2,600,000 under OSN's subproject, US$900,000 under EPOS' subproject, and US$1,000,000 under DIPOS' subproject; and (ii) by force account: US$2,600,000 unde- OSN's subproject, US$900,000 under EPOS' subproject, and US$1,000,000 under DIPOS' subproject. Standard bidding documents and a purchase program for 1986 were agreed to during loan negotiations together with assurances of an updating of the purchase program by October 31, of each year starting in 1986. 62. Technical assistance and consultants' services will be procured in accordance with Bank's Guidelines for the Use of Consultants. A contract with the Pan American Health Organization (PAHO) under terms and conditions satisfactory to the Bank would be awarded to ease the administrative burden on MOSP for the preparation of the water supply and sanitation plan. Disbursements 63. The Bank would disburse as follows: (a) 100% of foreign expenditures for direct imports; (b) 44% of local expenditures for imported equipment and materials procured locally and ex-factory cost of locally manufactured goods; (c) 44% of total expenditures of civil works; (d) 100% of total expenditures for consulting services and training; and (e) against amounts due for interest and other charges on the Bank's loan until the date of the first principal payment to the Bank up to a maximum of US$8 million. A special account for the project in the amount of US$5.0 million (estimated four month's peak disbursements) would be established in the Central or other bank acceptable to the IBRD.  - 18 - Status of Project Preparation 64. Project preparation conforms to the agreed implementation schedule. The project coordinating unit in MOSP (UC) has been created and staffed. UC has prepared and submitted to the Bank model onlending contracts between MOSP, and OSN, EPOS, and DIPOS. UC has also prepared draft terms of reference for a master contract for consulting services under the preparation of the national plan. "Los Molinos" treatment plant design preparation is completed. The land for the plant is already in the expropriation process and the law allows EPOS to take immediate possession of it. OSN, EPOS, and DIPOS, have created and staffed units for the execution of the operational improvements components. Agreements were reached during loan negotiations between the Bank and MOSP and the executing agencies on on-lending contracts; and between the Bank and MOSP on terms of reference for a master contract for the preparation of a national water and sanitation plan. Project Justification and Economic Benefits 65. The project would enable OSN and DIPOS to satisfy short-term demand from existing facilities and to prepare them to adequately undertake system expansions which will be needed in the future. The project yields satisfactory returns and has a high social i pact. In Cordoba, nearly 30Z of the beneficiazies are urban poor who would be provided a dependable water supply at affordable rates. Failure to execute the project would mean that: (a) in the near future EPOS would become incapable of providing even a minimal level of services to Cordoba's population; and (b) OSN, EPOS and DIPOS would experience increasing losses with the consequent need for larger subsidies and investments. Furthermore, the project would be instrumental for assuring the necessary sector-wide institutional, financial and operational policy adjustments. 66. Least Cost Solution. The project finances only items of high priority and immediate impact which are consistent with long-term objectives. Project components represent the least-cost solution for achieving the project's objectives and do not involve the use of unusual or unproven technologies. The investment in most significant physical component (Cordoba) which was selected on the basis of the analyses of eight alternatives and is consistent with the future reorientation of Cordoba's water system. 67. Economic Analysis. Internal rates of return (IRRs) have been calculated for the two key components of the Cordoba sub-project (65% of total project cost). The estimated IRR for the plant construction and expansion component is 10, and for the operational improvement component is 44Z, yielding a weighted IRR of 152. The Buenos Aires operational improvement component (24Z of total project cost) and the Rosario operational improvement component (9% of total project cost) could be expected to yield similar high results. An IRR was not computed for the Cordoba technical assistance component because benefits of the component cannot be quantified reliably. 68. The IRRs were calculated using revenues from consumer charges as the minimum measure for economic benefits of the project. Many benefits  - 19 - such as improvement of public health and hygiene, enhanced property values, employment generation, greater well-being of the population, etc., cannot be quantified reliably and therefore, are excluded from the calculations. The consumer surplus is also excluded. As a result, the IRRs are understated. Revenues were calculated using 1987 projected tariffs held constant in September 1985 prices. The IRRs indicate that the project is fully justified. 69. Long-run marginal costs for the Cordoba subproject were calculated using the Average Incremental Cost (AIC) method with an 12% discount rate. All costs are expressed in September 1985 prices. The AIC for the subproject is US$0.17/m3 which is higher than present (1985) tariff expressed in September 1985 prices of about US$0.14/m3. (The US$0.17/m3 represents the weighted average of the components: US$0.25/m3 for plant and US$0.06/m3 for the operational improvements). 70. Beneficiaries, Urban Poverty Impact and Affordability. Benefits of the Cordoba subproject would accrue to virtually the entire population served by EPOS as a result of the replacement of rundown production facilities which break down with increasing frequency and that could become inoperative. Direct beneficiaries of Cordoba construction and expansion component would include about 0.4 million people by the end of 1993 who would have either lost or had the volume of their water supply curtailed if the new facilities were not constructed. The operational improvement component would directly benefit 0.35 million new users by 1993 through more reliable services. This component would also benefit the entire population presently served by EPOS through more reliable and fair billings and safer and less expensive supply. The operational improvements in Buenos Aires would generate considerable water savings through the prometion of conservation and reduction of leakages, which should permit OSN to serve an additional 0.8 million consumers by 1990. The Rosario component would benefit about 0.25 million people whose services would be upgraded in quality and quantity. In addition, the entire population served by DIPOS would benefit through more accurate and timely billing. The operational improvements in the three cities would benefit 1.4 million people by the end of 1990. 71. The direct impact of the project on the poverty group, defined as families with a monthly monetary income of less than US$160 in September 1985 prices (on an annual basis, this corresponds to approximately one fourth of the national per capita income) was estimated for the Cordoba subproject by calculating the proportion of urban poor in the projected (1993) incremental population served by each project component. About 22Z of the direct beneficiaries of the construction and expansion component and 37% of the direct beneficiaries of the operational improvements component will be the urban poor. An estimated 23% of the subproject investments will directly benefit the poor. An evaluation of the affordability of services was made based on 1985 tariffs. In 1985, a family with a monthly income at the poverty threshold would pay about an acceptable 2.6% of its income for a 'lifeline water supply of 12m3. Project Sensitivity, Risks and Safeguards 72. There is a high degree of certainty that the project will provide the desired benefits. The effect of variations in costs, benefits and  - 20 - implementation delays on the project's rates of returns has been analyzed and the IRRs are not highly sensitive to changes in costs and benefits. The construction components of the project as the works are of conventional design and well within the capability of local civil works contractors and consultants. The multiplicity of activities to be undertaken under the project, including the introduction of new technologies in Argentina, would require the close cooperation of the utilities. To some extent the risk associated with the multiple activities would be minimized by the institutional arrangements for project implementation and the retention of an experienced organization to undertake the administration and contracting for the technical assistance and studies. These measures would be supplemented by intensive supervision by Bank staff and by reporting and monitoring provisions which will allow the Bank to regularly check on project progress. 73. The federal and provincial governments have committed themselves to ensure the funds required for the project. Moreover, by strengthening the utilities' management systems and improving the quality and efficiency of its services, the project would enhance the utilities' finances, their acceptance in the communities and thus their ability to implement tariff increases when necessary. These project features minimize any possible risk related to the availability of local counterpart funds. PART V - RECOMMENDATION 74. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments November 18, 1985 Washington, D.C.  - 21 - TAJILk IA AN E I AmnICI=HA - bCAcL INdICATORS DTWA gst Page 1 of 6 M g",13 WSW=jj GRO's iWRaGWmD AVERAGE) La MST O1ST RUINS LSWIAIL) lb mcgw momL trCO. nouuz IiiC-z I196 197aLb _ IA T. MMUA 4 C UILP ADJUSn ENROLJENT RALTIOS PRDIA TOTAL 9S.0 lub.' 119.0 106.7 101.9 WALZ 93.0 104.0 120.0 104.5 106.2 rFNALE 99.0 107.0 119.0 1u4.6 97.5 SECONDAT: TOTAL 23.0 45.0 59.0 44.2 57.5 mLE 23.0 42.0 56.9 42.7 64.9 FiNALE 24.0 48.0 63.0 ".9 50.0 VOCA,ISAL CZ OV SECONDARY) 50.3 58.6 61.3 13.3 21.0 C ~~~PUPIL-TEACRZRL RATO PRDWM 22.0 19.0 20.0 29.9 25.1 SECONDhr 7.0 7.0 7.0 /f 16.7 19.1 amu PASSENIUR CASITUSIND POP 23.0 60.1 .. 46.0 54.2 RADIO RECEIVERSITUOUSAB0 POP 169.3 375.6 727.1 328.3 17u.7 TV MCEIVERS/T0USAUD POP 21.3 146.1 202.3 112.4 149.3 VSPAPU ("DAILT GENUAL TEREST") CfLOCLAXION PER TUOUSMID POPUlNATI 154.5 177.2 114.7 nl.1 97.0 CIRAU A1NUAL ,.TTNDACCAPTA 7.0 2.2 1.5 2. 2.7 TOTAL LaROR FORCE (TOUS) 11133.0 12700.0 14539.0 10A3Z (PERCENT) 21.6 26.7 27.1 23A 36.3 AG!5ILTIM (PERCET) 20.0 16.4 13.1 /d 31.4 40.8 IzLuuT (PERCENT) 35.9 32.1 34.0 7 24.3 23.3 PAtICOPATION RATE (PERCENT) TOTAL 54.0 53.0 47.7 33.5 43.1 ALE 86.0 81.0 75.0 /d 51.3 55.1 FiNLC 23.0 27.0 27.0 Id 15.9 3L.6 CONOMIC DUEPUSD1t RATIO 0.7 0.7 1.0 1.3 0.9 :1CN DISTIBUIO PrE1 or F ?VATE INCON RISES 5S 0F ROUSCROLDS 27.5 .. .. .. BlEaT Z2C OF OUSEN1oLIS 50.9 .3 LOWEST 2Z0 OOUSFUIOLDS a.9 4.4 -WEST 4*o0 OIOUSr OLDS 16.6 14.L ESTIXATD ABS- POVER EICUS LEVEL (CSS PS CAPITA) U .. .. .. 206.3 DUAL .. .. .. 185.3 ESTINAM RElXATVE POvER!? INCU LEVEL CUSS PER CAPITA) URN .. . .. 519.3 RURAL .. . .. 359.7 ESTIMATD POP. BELOW ABSOLUTE POVERTY INa LEVEL (I) Uxas .. .. . .. URL .. ... NOr AVAILABL Mr APPLICAUE NOT TS /a The grnup evre for each laicator are populatiou.el*ted arltatc _cns. Avarere of councris o rg the tudLatore depend. - avallability of data ad I not miforu. /b Unles otbanDwse noted, "Da for 1960" refer to aqy year betuea 1959 and 1961; "Dta for 197?F beaen 1969 ad 1971; ed data far "fot Eacet Eitiate' baea 1981 sd 1983. /c 1977; /d 1980; /a 1962; If 1979. JUNE. 1985  - 22 - ANNE I TABLE C 34 Page 2 of 6 AErTNA - SOCIAL lbuICATIAh ODATA slIEr A;vIIINrSlA ReftAbNG; GIS CUEICITW AVE MAR) I- 15 CST wsC UuT SrL'A) lb ReCENT 1110ULC IWAM tiDuLS INCE I,t..I 197.Lk. EISrIMATlb LAI. 415LRtC8 A GMt * oft An (THOUSAND Sl. m) TOTAL 27bb.9 i7...9 27b6.9 ACRICULT0RAL 17411.2 1777.0 1788.0 my n CAPIrA CUSO) .. .. 207U.0 0715. 9 214.3 eUrr wmeuflu MR CAPIrA (KRLOORAIS uF OIL EQUIVILF.UT) 608.0 1211.0 t41s.0 993.6 1119.8 POPUIATEOII AD AL SnTsTCS POPULATION 'ED-YYEAR (THNOSANDS) 2061h.0 23962.0 29b27.0 URUS POPULATION (Z OF TWrAL) 73.6 7.4 S3.8 67.7 47.5 POPULATINM PRCrIONS POPUIATUON 1I YEAR 2000 jflLL) .. .. b.5 STATIONARY POPULATION (OLL) .. .. 54.0 POPUATION NOENT .. .. 1.5 POPULATION OENSIn PER SQ. It. 7.5 8.7 10.7 48.0 84.7 PER Sq. MS. AGRI. LAbiD 11.8 13.5 10.3 91.1 166.1 POFULATION AGE STrUCTUE (X) 0-14 IRS 30.7 29.1 3U.6 38.5 31.2 15-4 YRS b3.0 03.0 01.1 57.1 61.5 6s D AI AE S5S 7.1 8.2 4.2 7.2 PopuLAT101 CR011w RATE (l) TOTAL 1.8 1.5 1.6 2.4 1.0 URBAN 3.0 2.1 2.1 3.0 3.7 CRUDE 3NM RSATE (PER nUS) 23.0 22.9 24.3 30.9 23.4 CUDE DEAt RATE (PER THOtS) 8.7 9.4 9.0 6.0 8.9 CROSS REPROCUCTM RATE 1.5 1.5 1.6 2.0 1.5 FAMILt PLANING ACCEPTORS. ANNUAL (T11101) USERS C OF FAARRED Ul1) .. .. .. 4S.3 WMAND0 - D mnia IbDEX OF FOD PROD. MRI CAPITA (1969-71-100) 96.0 101.0 116.0 1e9.s 109.1 PER CAPITA SUPPLY OF CALORIES CZ OF HRUIWINTS) 124.0 128.0 121.0 113.2 131.5 PROTEINS (CAMS PER DAY) 110.D 107.0 106.0 194 92.4 OF UIOI ANIMAL AND PULSE o6.0 08.0 69.0 Ic 34.2 34.5 CHILD (ACES 1-4) AMAH RATE 4.B 3.2 1.0 4.8 4.7 MALI LIFE EXPECr. AT 51X111 (YTEAR) 65.1 06.b b9.5 64.b 87.2 IMPFAur miRr. RATE (PER Tfl'OS) 60.0 53.0 36.u 59.7 53.3 ACCESS TO SAFE MATER (%PD7P TOTAL 47.3 5b.0 57.0 /4 65.3 70.2 URBAFN 58.9 69.0 65.0 Id 76.5 59.4 RURAL 9.6 12.0 17.0 IC 44.2 57.u ACCESS TO ERCRErA DISPOSAL (2 OF POPULATION) TOTAL 62.0 S5.0 79.0 Id 56.3 S9.6 URBAIN , 87.0 59.0 7i 73.4 65.9 RURAL .. 79.0 32.0 Ii 25.5 47.8 POPULATION PER PHYStClA!t 740.0 520.0 430.0 Ic 1909.7 1070.6 POP. PER NLRISLItC PERSON 760.0 Ie 590.0 .. 08.2 769.5 POP. PER HOSPITAL BED TOTAL 160.0 180.0 _. 302.0 325.3 URBAN 190.0 le 200.0 .. 422.0 201.9 RUMA 4490.0 7; 1010.0 ,, 2716.7 0519.7 ADUISSIONS PER HOSPITAL BE .. . .. 27.5 20.0 -ISIS AVERaGE SIZE OF UhOUSEHOLD TOTAL 3_7 3.8 Ulta 3.5 RURAL 4.3 AVERSE NO. OF FERSONS/IOPIR TOTAL 1.4 1.4 URBAN 1.3 RURAL 1.7 PERCENTACE OF DIELLINCS WITH LECT. TOTAL h9.2 76.0 87.0 Id URSBA 54.7 RURAL I..6  - 23 - ANNEX I Page 3 of 6 DEFINITIONS OF SOCIAL INDICATORS Notes Although the data are drawn from sources genemlly judged the most authoritative and reliable. it should also be noted thai they may not be intentionally comparable because of the lack of standardized deintiuons and concepts used by different countries in collecting the data. The data am nonethekss useful to describe ordes Of mougnitude. indicate trends. and characterize cerutin major differences between countries. The reference groups are (1) the same country group of the subject country and (21 a country group with sormcwhat higher average income than the country group of the subjec country lecept for -High Income Oi Exporers- group whre -Middle Income North Afria and Middle East- is chosen because of stronger socio-cultural affinitiel. In the reference group data the averages are population waighted arithmentc seam for each indicator and shown only wben majority or the countries in s group has data for that indicator. Since the coverage of countries among the indicators depends on the availability of data and is not uniform. caution must be excrixd in elating averages of one indicator to another. Thse averages are only useful in comparing the value ofone indicator at a time among the country and reference groups AREA (thousand sq.km.) Crude Birth Rate (per thousmad)-Number of live births in the ycar Total-Total surface area comprising land area and inland watcrs' per thousand of mid-year population; 1960, 1970. and 1983 data. 1960. 1970 and 1983 data. Cude Death Rate (per thoand)-Number of dcaths in the year Agriculnral-Estimate of agricultural area uscd temporarily or per thousand or mid-year population; 1960. 1970. and 1983 data. permanently for crops, pasture market and kitchen gardens or to Gross Reprodection Rate-Average number of daughters a woman lie fallow. 1960. 1970 and 1982 data, will bear in her normal reproductivc period if she experences present age-specific fertility rates; usually five-year averages ending GNP PER CAPITA (USS)-GNP per capita estimates at current in 1960. 1970. and 1983. market prices, calculated by same conversion method as World Fedy Pfrlani-Acceporsn Annal (th_ rads,-Annual naun- Rank Arkas (19B81-83 basis): 1983 data. herofacceptors of birth-control devices under auspices of national ENERGY CONSUMPTION PER CAPITA-Annual apparent family plaraing program. consumption of commercial primary energy (coal and lignite. Fail Phlanig-Users (perenw ofamwff munmen)-The percen- petroleum. natural gas and hydro-. nuclear and geothermal edec- tapc of married women of child-beaing age who are practicing or tricity) in kilograms of oil equivalent per capita: 1960. 1970. and whose husbands are praeticing any form of contraception Women 1982 data. of child-bearing age are genly women aged 1549, although for some countries contraceptive usage is measured. for other age POPULATlON AND VffAL STATISTCS groups. Torta Populaio, Mid-Year (thowesnds-As of July 1: 1960. 1970. FOOD AND NUlltRlON and 1983 data. Urban Popultion (percent of total) Ratio LO' urban to total Index ofaFed Prodwtion Per Capita (1969-71 = lt0)-ndex of per population: different definitions of urban areas may affect compar- ecaude aniual feeduand seed foood commoditie s ability of dtau among countries. 1960. 1970. and 1983 data. excludes animnal feed and seed for agricultumc Food comnmodities include primary commodities (e.g. sugarcane instead of sugar) Poplation f4ojecrios which are edible and contain nutrients (eg. coffee and tea are Population in year 2000-The projection of population for 2000. excluded): they comprise creals, root crops. puls, oil seeds, made for each economy separately. Starting with information on vegetables. fruits. nuts. sugarcane and sugar b, livestock, and total population by age and sex. fertility rates. mortality rates, and livestock products. Aggregate production of each country is based international migration in the base year 1980. these parameters on national average producer price weights; 1961-65. 1970, and were projected at five-year intervals on the basis of generalized 1982 data. assumptions until the populatioa became stationary. Per Capit Supply ofCalries (pet efreq remem)j-Comnput- Stationary population-Is one in which age- a n - sexspecific mor- ed from calorie equivalent of net food supplies available in country tality rates have not changed over 3 long period. while age-specific per capita per day. Available suppLies comprise domestic produc- fertility rates have simultaneously -emained at reptacement level tion. imports less exports. and changes in stock. Net supplies (net reproduction rate= I . In such a population. the birth rate is exclude animal feed. seeds for use in agriculture, quantities used in constant and equal to the death rate. the age structure is also food p-'oessing. and losses in distribution. Requirements were constanL and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for normal activity size was estimated on the basis of the projected characteristics of and health considering environmental temperature, body weights, the population in the year 20W00 and the rate of dedine of fertility age and sex distribution of population. and allowing 10 peaet for rate to replacement level. waste at household level: 1961. 1970 and 1982 data. Population Momentus-ls the tendency for population growth to Per Capta Supply of Proten (grs per day)-Protein content of continue beyond the time that replacement-level fertility has been per capita net supply of food per day. Net supply of food is defined achieved. that is. even after the net reproduction rate has reached as above. Requirements for all countries established by USDA unity. The momentum of a population in the year r is measured as provide for minimum allowances of 60 grams of total protein per a ratio of the ultimate stationary population to the population in day and 20 grams of animal and pulse protein. of which 10 grams the year t. given the assumption that fertility remains at replace- should be animal protein. These standards.are lower tham those of ment level from year t onward. 1985 data. 75 grams of total protein and 23 grams of animal protein as an Pbpul_tion De& -j average for the world. proposed by FAO in the Third World Food Per sqJa.m-Mid-year population per square kilometer (100 hec- Supply: 1961. 1970 and 1982 data. tares) of total area: 1960. 1970. and 1983 data. Per Capita hnoel Supply fom Aimal and Pe-Protein supply Per sqJbn. agricultural land-Computed as above for agricultural of food derived from animals and pulses in grams per day, 1961-65, land only. 1960. 1970. and 1982 data. 1970 and 1977 data. Popation Age Structure (percent)-Children (0-14 years). work- Chil (ages I-4) Death Rate (per thousand)-Number of deaths of ing age (15-64 years) and retired (65 years and over) as percentage children aged 1-4 years per thousand children in the same age of mid-year population; 1960. 1970. and 1983 data. group in a given year. For most developing countries data derived Popation Growth Rate (percentt-toral-Annual growth rates of from life tables: 1960. 1970 and 1983 data. total mid-year population for 1950-60. 1960-70. and 1970-83. HEALTH Populwian CGrowth Rare (percent)-urban-Annual growth rates Life Expecrany at irth (yearrs)-Number of years a newborn of urban population for 1950-60. 1960-70. and 1970-83 data. infant wvould live if prevailing pattsns of mortality for all people  - 24 - ANNEX I Page 4 of 6 at the time of of its birth were to stay the sme throughout its life. Pipd-reacher Ratio - primary. acd secotidry-Total students en- 1960. 1970 and 1983 data. rolled in primry and secondary levds divided by numbers of /4f_a Metuisy RE (per shesmd)-Nunmber of infants who die teachers in the corresponding levds. before reaching one year of age per thousand live births in a given year; 1960. 1970 and 1983 data. CONSUMPTION Accem oSo WSf er (pe ef c pp.futou)-tetal, mhm. End Pauagr Curs (per thesad pe Passgr can comn- rmsIl-Number of people (total, urba and rual) with eiotible prise motor cars seating less than eight persons excludes armbul- aoss to safe water supply (indudes treated surface waters or ances hearses and military vehides. untreated but uncontaminated water such as that from protected Rai& Rwemt (per teh.uaadpoepuhi)-AI types of receivers borchoks, springs and sanitary wels) as pe=ntages of their respec- for radio broadcasts to genl public per thousand of population. tive populations. In an urban area a public fountain or smndpost excudes un-licensed receivers in countries and in years when lcated not more than 200 meters from a house may b considered registration of radio sets was in fect dau for ct yers may as being within reasonable access of that bouse. In mrAl areas ritrtion ofpradio sets was inteic; ator recsnt r masonabc acoass would imply that the housewife or members of the not be comparable sicc most counties abolshed lnsing. housdibold do not have to spcnd a disproportionate part of the day TVReceRs (pgr t_Mul'paps n)-TV receivers for bmadcast in fetching the family's water needs. to genl public per thousand population exludes unlicensed TV Acens to Er Dispal (pereeut ofh recrs in con and in yeas when retation of T sets was ad rmrl-Number of people (total. urba and rural) served by cxcrcta disposal as percentages of their respective populations. Akp- CGcaftm (per rhomudpop.oiu-Shows the aver- Excreta disposal may include the collecion and disposaL with or age cirulation of -daily general interest newspaper.- dcfined as a without treatment. of human excreta and waste-water by water- pcnodEn publication devoted primarily to recordig geal news. borne systems or the use of pit privies and similar instadlations. It is consiered w be dadir if it appears at least four imres a week. Popularic per Phjwkuu-Fbpulation divided by number of prac- CG Aumnl Ane,auce pff Caipb per Yew-Based on the tsing physicians qualified from a medical school at university kvel. number of tickets sold during the year. including admissions to Pepufatieu per NV_rsn P_rse.-FPopulation divided by number of drive-in cinanas and mobile units. 2racitcing mak and fanale graduate nurses, assistant nunesF prcacical nurses and nursing auxiLaries. LABR FORCE PepusA- pe Hespal Bed-totl . and rmnl-Ptpulation Tel Labor Force (thairs mus-Economically active persons. in- (total urban, and nrual) divided by their respective number of duding armed forces and unemployed but exduding housewives. beds available in public and private. general students. etc.. coverng population of all ages. Definitions in hospitals and rehabilitation enters. Hospitals arestblishmets various countries are not comparable 1960. 1970 and 1983 data pen ently staffed by at least one physician, Establshments prov- Feaigl (percar)--Ftmale labor forxe as percentage of total Labor iding principally custodial care are not included. Rural hospitak. force. however. include health and metical centers not penanenly staffed Asrwa:brr (perFeent-Labor force in famung. forestry, hunting by a physician (but by a medical assistant, nurse, midwife. etc.) and fishing as percentage of total labor force; 1960. 1970 and 1980 which offer in-patient accommodation and provide a limited range data. of medical facilit3es. Induitry (percmu)-Labor force in mining, construction. manu- Adxrssion per H ospitl Red-Total number of admissions to or facturing and elecricity. water and gas as percentage of total labor discharges from hospitals divided by the number of beds. orce; 1960. 1970 and 1980 data. Pmirwasiou RAt (p )-wal, met. anemeli-Participation HOUSING or activity rates ar computed as total, male and female labor force Average 5re of H Aewehil (p- per A-ebf-di-toal. whim. as percentags of total, male and female population of al ages aadiral-A housebold consists of a group of individuals who share respecively. 1960. 1970. and 1933 data. These are based on ILO's vnng quartcrs and their main meals A boarder or lodger may or participation rates relecting age-sex structure of the popultion, and may nor be included in the household for statistical purposes long time trend. A few estimates are from national sourcs. Average Nawhier of Perwis per Rume-oteal, wham, and r1ura- memic Dependec Ride-Ratio of population under 15. and Average ncmber of person' per room in all urban. and rural 65 and over. to the working age population Ithose aged 15-64). occupied conventional dwellings. respectdvely. Dwellings exclude non-permanent structures and unoccupied parts. INCOME DISIRIBUTION Percenae of Duelibgs -irt ElcbiciV--4otal. am. and rural- Pffcete of Trod Dsposablc 1mm (had in cMh ad kinds- Conventional dwellings with electricity in living quarters as percen- Accning to percentile groups of households ranked by total house- tage of total. urban, and rural dwellings respectively, hold income. EDUCATION POVERTY TARGET GROUPS A4sted Ewollrnext Rats The folowing estimates are very approximate measures of poverty Jrv sdwol - toml mk af Gss total. male and keves and should be interpreted with considerable caution. female enroUlmen of all ages at the primary kevl as pcntages of Est fed Ahstle Povety luerne Lene (S$ per capita)-arban respective primary school-age populations. Wbile many countries d rul-Absolute poverty income lvd is that income level consider primary school age to be 6-11 years, others do not. The below which a minimal nutritionaly adequate diet plus essential differeners in country practices in the ages and duration of school non-food requirements is not affordable. are reflected in the ratios given. For some countries with universal FEin.faed Relte Pfbty Incame Lev (1U1 pr p pir c -wh education, gross cnrodlmcnt may exceed 100 percent since some and rural-Rural relative poverty income kvd is one-third of pupils are below or above the country's standard primary-school averag per capita personal income of the country. Urban level is age- dcrived from the rural level with adjustment for higher cost of Secondary school - otal, male andfenml-Computed as above; living in urban areas. secondary education requires at least four years of approved pri- Emirpmtde Popsaua Rebw Absolnee Poverty luceiw Level (per- mary instrcion provides generaL vocationaL or teacher training ceme)-uran and rurl - Paecent of population (urban and rural insructions for pupils usually of 12 to 17 years of age: corrcspond- who are -absolute poor. cnce courses are generaly exduded. Vocancoal Eraro&lmnri (percent of secondary)-Vocadional institu- Comparative Analysis and Data Division tion include technical industriaL or other programs which operate Economic Analysis and Projections Department independently or as departments of secondary institutions. June 1985  - 25 - UlEEU I la. 3 of 6 mis SSO 373 am Ae. ut frS trtus Is Prce d mIlt Oulasti 4ceb IS 170w74 1 3