Argentina - Small and Medium-scale Industry Credit Project

Dosmmnt of The World Bank FOR OMCIAL USE ONLY Report No. 6547-AR STAFF APPRAISAL REPORT ARGENTINA SMALL AND MEDIUM-SCALE INDUSTRY (SMI) CREDIT PROJECT March 12, 1987 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Austral (A) Exchange Rate Effective Deeember 4, 1986 US$1.00 (sale) - 1.165 Austral 1.00 Austral - US$0.858 US$1.00 (buy) - 1.185 Austral 1.00 Austral - US$0.844 Glossasy of Abbreviations ARGEX - Argentina's Export Program BANADE - National Development Bank BCRA - Central Bank of Argentina CEDE/ACDE - Centro de Desarrollo Empresarial/Asoc.Cristiana de Empresarios (Center for Entrepreneurial Development/Christian Association of Entrepreneurs) CEPADE - Centro de Perfeccionamiento en Administracion de Enpresas (Business Administration Development Center) CID - Research Documentation Center CIME - Center for Research of Methods and Techniques for SMIs CITSAFE - Technological Research Center of Santa Fe CU - Central Unit (at SSME) EPP - Export Promotion Project EPPs - Export Promotion Programs ERR - Economic Rate of Return FOPYME - Development Fund for SMIs FRR - Financial Rate of Return FSWC - Free-Standing Working Capital TCB - International Competitive Bidding IFC - International Finance Corporation INTI - National Institute of Industrial Technology LCB - Local Competitive Bidding MAP - Management Advisory Program NDPD - National Director of Promotion and Development (at INTI) PBs - Participating Commercial and Regional Banks PRT - Project Related Training RPRs - Regional Promotion Regimes RTACs - Regional Technical Assistance Centers SIT - Secretariat of Industry and Trade SMI - Small and Medium-Scale Industry SPRs - Sectoral Promotion Regimes SSME - Sub-Secretariat for Small and Medium-Scale Enterprises (at SIT) TA - Technical Assistance TPL - Trade Policy and Export Diversification Loan VAT - Value-added tax Fiscal Year: January 1 to December 31.  FOR OMCL41 USE ONLY ARGENTINA STAFF APPRAISAL REPORT SMALL AND MEDIUM SCALE INDUSTRY (SMI) CREDIT PROJECT TABLE OF CONTENTS Page No. I. LOAN AND PROJECT SUMMARY ................................ I II. INDUSTRIAL AND FINANCIAL SECTORS .. 1 A. Industrial Sector ................... , .1 (i) Sectoral Context ...............1....,., ...... l - Background .1...... l - Industrial policies ............................. 1 (ii) SMIs' Structure and Development ................... 2 - Background .......... I . ........................... 2 - SMIs' investment and credit demand ..... ......... 2 - Technical assistance (TA) ....................... 3 - SMIs' prospects and longer-term development constraints ............ ......................... 3 B. Financial Sector ...................................... 3 C. Bank Involvement in the Industrial Sector .......... ... 4 III. PROPOSED PROJECT ...................................... . 6 A. Project Preparation ........ ............... 6 B. Project Objectives and Description . . 6 (i) Project Objectives ................................ 6 (ii) Project Description .......................,,,.,., 6 - Financial assistance component ..... ............. 6 - TA component .............,,., 6 This report is based upon the findings of a mission which visited Argentina in October 1986. The mission comprised Messrs. M. Alonso (from the Bank) and R. Hommes, F. Ibanez and I. Rizo (Consultants). Ms. Virginia Foster assisted in editing the report. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  C. Project Execution . ..................................... 7 (i) Participating Institutions ........................ 7 - Development Fund for SMIs (FOPYME) .... .......... 7 - Intermediary institutions ........... I ........... 7 BANADE ........... ............................... 7 - TA institutions ................................. 8 (ii) Executing Agencies ................................ 9 D. Project Cost and Financing Arrangements ................ 9 (i) Project Cost and Financing ........................ 9 (ii) Onlending Arrangements ............................ 9 (iii) Terms and Conditions of Financing . . 10 - Nature of enterprises ........................... 10 - Limits and terms ................................ 10 - Interest rates .................................. 10 (iv) Procurement ....................................... 11 (v) Disbursements ..................................... 12 (vi) Accounting, Auditing and Reporting ..... ........... 12 E. Benefits and Risks ................... .................. 13 IV. RECOMMENDATIONS .......................................... 13 LIST OF ANNEXES Annex 1 Industrial Policy - Summary Annsx 2 Expected SMI Investment Annex 3 Technical Assistance (TA) Annex 4 Development Fund for SMIs (FOPYME) Annex 5 National Development Bank (BANADE) Annex 6 Key Indicators for Project Implementation and Reporting Requirements Annex 7 TI Development Fund for SMIs (FOPYME) T2 National Development Bank (BANADE): Balance Sheets T3 National Development Bank (BANADE): Income Statements T4 Estimated Schedule of Disbursements Annex 8 Documents Available in Project File MAP  ARGENTINA STAFF APPRAISAL REPORT SMALL AND MEDIUM SCALE INDUSTRY (SMI) CREDIT PROJECT T. LOAN AND PROJECT SUMMARY BORROWER: The Argentine Republic EXECUTING National Development Bank (BANADE)/Development Fund for SMI (FOPYME), AGENCIES: Subsecretariat for Small and Medium-Sized Enterprises (SSME) and National Institute of Industrial Technology (INTI). LOAN: US$125 million equivalent to be repaid in 15 years, including three years of grace, at the Bank standard variable interest rate. RELENDING The Borr,wer would transfer to the Central Bank (BCRA), under the same TERMSt terms as those of the Bank loan, US$124.2 million equivalent of loan resource.s. BCRA would relend those resources to BANADE/FOPYME to finance ';MIs (through participating banks (PBs) and BANADE as a direct lender, and BANADE/FOPYME's technical assistance (TA) program. The lerding to BANADE would be in 'Australes' adjusted by the combined (wholesale and consumer) price index, applying an initial financial charge of 5.5% real per annum (weighted average -- to be reviewed every six months in consultation with the Bank) and the same repayment period of the Bank loan. As requested by BCRAIBANADE, the former would assume the foreign exchange risk. PBs and BANADE as a direct lender would bear the credit risk. The Government would transfer US$0.4 million equivalent of loan resources to SSME for the Regional Technical Assistance Centers (RTACs) and, on a grant basis, US$0.4 million to INTI, in both cases for the TA program to SMIs. SMIs would pay initial interest rates of 8% real per annum for fixed assets and TA subloans, and 12% ftr related and free standing incremental permanent working capital (FSWC), upon 'Australes'-denominated subloans adjusted as mentioned before. Since subloans would be adjusted according to the inflation rate, and SMIs would be charged real rates, SMIs, in practice, would be covering the direct foreign exchange risk, to the extent that BCRA exchange rate policy reflects inflationary conditions. Onlending rates would be reviewed every six months to ensure that they remain adequate and that rates to SMIs are not lower than deposit rates , including a mid-term review also to determine the need and possibility of adjusting the basis of lending (subloan currency, type of adjustment to principal, subloan repayment system), as appropriate. Subloan repayment periods would be for a maximum of ten years, including up to three years of grace for investment subprojects (fixed assets and related working capital); up to three years, including up to six months of grace for FSWC; and up to five years, including one year of grace for TA subloans. PROJECT The proposed project would be the first Bank SMI project in Argentina. DESCRIPTION:It would support the Government's industrial sector strategy by increasing production, employment and indirect exports, as well as its efforts to gradually start revitalizing the economy. The project would seek to encourage modernization and increases in production and  productivity of SMIs, enabling them to become more competitive, as well as to assist in developing SMIs outside the major urban areas. It would establish a medium to long-term lending system, operating through a second-tier mechauism --FOPYME-- within BANADE, helping to gradually convert the latter into a rediscount institution regarding SMI lending by participating banks (PBs). To help to achieve the preceding objectives, the project would offer: (a) credit for investment subprolects, FSWC and TA needs; and (b) assistance to establish a focussed TA program for SMIs and strengthen the institutional capabilities of organizations providing credit and TA to SMIs under the project. No more than 25% of loan resources would be disbursed for FSWC. Small and medium-scale industries are defined as those firms with fixed assets, excluding land and buildings, not exceeding US$350,000 and US$3 million equivalent, respectively. PROJECT The project is expected to finance some 1,400 subprojects, many of RISKS: them for modernization, replacement of equipment and increase of productivity, It would create and help to maintain some 12,500 jobs. Since most of the institutional arrangements are new, possible risks include a slower-than-expected pace of PBs' participation, and some initial operational soft-spots of the second-tier mechanism and the TA program to SMIs. To minimize these risks, the project would provide for appropriate conditions to financial intermediaries, as well as TA and project-related training to participating organizations, and it would concentrate upon five RTACs. High frequency of Bank supervision missions during the initial stages of project implementation should contribute to reducing such risks. ESTIMATED Local Foreign Total COSTS: (US$ million) Investment/Credit 114.9 130.0 244.9 TA 3.5 1.6 5.1 Total 118.4 131.6 250.0 FINANCING Local Foreign Total PLAN: (US$ million) Bank - 125.0 125.0 BANADEIBCRAIFOPYME 49.3 3.3 52.6 Government/INTI 0.6 0.2 0.8 PBs 9.3 9.3 SMIs 59.2 3.1 62.3 Total 118.4 131.6 250.0 ESTIMATED (Based upon disbursement profile for IDF operations in the LAC BANK Region) DISBURSEMENTS: FY 1988 1989 1990 1991 1992 1993 1994 (US$ Million) Annual 3.75 21.25 28.75 28.75 21.25 13.75 7.50 Cumulative 3.75 25.00 53.75 82.50 103.75 117.50 125.00 RATE OF RETURN: FRR and ERR minimum of 12% for subprojects.  II. INDUSTRIAL AND FINANCIAL SECTORS A. Industrial Sector (i) Sjctoral Context 2.01 Background. Argentina's industrial sector is relatively sophisticated and diversified by Latin American standards; however, its industrial development has been unstable and elusive. In the 1940s, the country's industrial sector be-an a quarter century of sustained, albeit irregular, growth, induced first by shortages of industrial goods during World War II and suonorted later by protective trade policies. Although its import-substituting strategy of industrial development began to show some weakness during the 1960s, Argentina entered the decade of the 1970s as an acknowledged industrial leader in Latin America, and the stage seemed to be set for a phase of rapid industrial growth, supported by indigenous technological development. Instead, Argentina slipped into economic and industrial stagnation during 1973-1985. The causes of such stagnation can be traced mainly to a decline of internal demand that was not offset by increases of industrial exports, to declining terms of trade, to financial and trade policy changes, to lhyper-inflation and to the overvaluation of the currency. In 1985, in order to control inflation, stabilize the economy and establish the appropriate conditions for longer term growth, the Government took a series of corrective measures (the "Plan Austral"). Beginning in September 1985 and continuing through the third quarter of 1986, the sector experienced a slow, but relatively steady, recovery. 2.02 Industrial Dolicies, Argentina's goals for the near future are concentrated upor, revitalizing the economy within a relatively stable fiscal and monetary framework. Major policy actions which the Government should pursue are maintaining price stability (requiring continued control of public sector deficit) and a competitive exchange rate, among other things, to encourage industrial export expansion. The Government is pursuing this expansion, not only for increasing the availability of foreign exchange but also because domestic demand is bound to remain somewhat weak in the short to medium term. Overall increases in production and a strengthening of the induistrial sector would also set the stage for increasirg employment, which is another major objective of Government policy. In this regard, the Government has increased its interest in small and medium-scale industry (SMI) development, also indicating its intention to reverse the 1970s policy of favoring investments in very large capital-intensive state-owned enterprises. While there is no specific SMI policy framework, the Subsecretariat for Small and Medium-scale Enterprises (SSME) has been established within the Secretariat of Industry and Trade (SIT), mainly to coordinate actions toward SMI sector development within the overall industrial policy, representing the Government's new interest in the SMIs. 2.03 Currently, industrial policies are dominated by restrictions upon import of goods which would compete with local manufactures, by the price and wage controls established under the "Plan Austral", and by industrial promotion regimes (Annex 1) intended to foster particular industrial subsectors, and promote geographical dispersion of industry and exports. To encourage long-lasting industrial development, distortions introduced by import restrictions, price control and the above-mentioned regimes should be corrected. The Government shares these views and has already initiated policy changes  -2- (para. 2.13). However, it must proceed cautiously in view of the need to retain political support. The process of reform must, therefore, be phased carefully to minimize social and economic disruption, while maintaining the momentum generated by the initial success of the "Plan Austral". The Government has requested Bank support to analyze and carry out required changes. (ii) SMIs' Structure and Development 2.04 Background, The financial sector reform of 1977, coupled with the rapid inflation and crowding out of industrial investment, reduced SKIs' access to the banking system disproportionately; and the uneven pattern of trade liberalization protected some producers while exposing others to increased external competition. Facing internal demand cuts and unable to enter export markets, many firms ceased to produce, while others reduced their operations or moved into the informal economy. The number of SMI plants declined by 13%, between 1974 and 1984, to about 32,000 units with more than five employees; physical production fell 15%; and employment decreased 34%. In 1984, SMIs accounted for 97% of all industrial establishments, employed 55% of industrial labor and produced 44% of the value of industrial output. The sector, however, has been recovering since 1985 (paras. 2.06 and 2.08). In April 1985, utilization of industrial productive capacity was 53.3% for small enterprises and 61.7% for medium-sized firms, compared with 65.7% for large firms. These levels of capacity utilization increased in the second and third quarters of 1986 to above 70% for the manufacturing sector as a whole. 2.05 Exports increased in nine out of 14 of the predominantly SMI subsectors (those with more than 50% of production and employment *.y SKIs) during 1974-1984, showing an effort to counteract shrinking local demand. Although predominantly SMI subsectors showed export growth, SMIs are not, as a rule, strong direct exporters; nevertheless, their contribution as indirect exporters is important (para. 2.08). Exports of the manufacturing sector represent about 9% of production. About 20 large, mainly state or multinational firms account for more than 40% of exports. 2.06 SMIs' investment and credit demand. At present, estimated SMI investment needs amount to US$150 million - US$250 million equivalent per year during the next three years (Annex 2). Over the past decade, demand for productive credit by the private industrial sector was constrained by instability and inconsistent economic policy. Results of a 1984 survey show that only 30% of the SMIs made new investments during 1977-1983. Currently, restrictive credit policy, levels of reserve requirements, and high deposit rates and operating costs of the banking system have fuelad high, short-term real lending interest rates on the order of 3% to 4% per month and have reduced lending activities considerably. With resources available to finance working capital or local equipment on reasonable terms basically restricted to limited amounts channeled through the National Develeopment Bank (BANADE), most SMIs with plans for modernization or expansion have been unable to carry them out. Additionally, in the absence of venture capital firms and of an effective capital market, entrepreneurs have had to depend almost entirely upon their own resources to cover financial needs of the enterprises. (The first venture capital firm was established in August 1986, with IFC participation, which also approved early this year a pilot US$10 million line of credit for SMIs to be administered by an Argentine commercial bank). A survey conducted by BANADE in mid-1986 and the results of several mission meetings with different SMI associations, show that SMIs have obsolete equipment, are now willing to invest,  -3- and have concrete investment plans, but, also, that scarcity of appropriate credit is a bindirg constraint for investment. There is, therefore, an urgent need to promote zredit on reasonable terms and conditions to modernize and develop the SMI sector. 2.07 Technical assistance (TA). At present, there is no active and coordinated TA program for SMIs, but the need is recognized by industrialists, financing institutions and Government officials. This matter is especially important in the context of the industrial development objectives of modernization, of increases in efficiency and of exports. In the past, several public and private sector organizations have provided some TA, with a limited scope and coverage. In May 1986, as a first outcome of the identification of the TA needs for SMIs during project preparation, the Government approved the legal framework to establish a system of Regional Technical Assistance Centers (RTACs). If successful, this initiative could make an important contribution to SMI development. In addition, the National Institute of Industrial Technology (INTI) is preparing some programs to assist SMIs (Annex 3). 2.08 SMIs' Drospects and longer-term develoRment cotrnt. The outlook for SMI growth is reasonably satisfactory. Lately, the sector is experiencing a modest revival as a result of the Government's new economic policies and interest for SMI development (para. 2.02), coupled with some SMI advantages, such as operating flexibility, a capacity to cope better with uncertainties of the economy, and the current low SMI indebtedness. Currently, the local market offers moderate possibilities for further growth based upon these advantages, provided that adequate credit and TA are available. The external markets for direct and indirect exports, and the possible partial market integration between Argentina and Brazil, present additional opportunities to SMIs in the medium to longer run, mainly in those subsectors in which they have clear comparative advantages, such as natural resource-based manufactures, machinery and equipment, metalmechanics, and chemicals. Subcontracting is also opening new development options for SMIs in Argentina. Since subcontracting is mainly a market process, a promising alternative for its development might be to encourage mechanisms for SMI subcontractors to obtain certain services, such as credit glarantees from the large firms, and to facilitate the retooling of subcontractors, as well as the establishment of incentives or services for indirect exporters (partially contemplated in the proposed policy changes --para. 2.03). The Government could also encourage large multinational exporters to set up procurement offices in Argentina to increase exports of SMIs (e.g., IBM, in the last four to five years, has built a US$130 million p.a. export business based 85% upon Argentine SMI suppliers). Exploitation of the above-mentioned opportunities in the medium-to long-term would require far-reaching reforms, for which the Government has requested Bank support (para.2.13). Currently, the main constraint for SMI development is the shortage of credit on suitable terms, with SMIs outside the major urban areas facing even more difficulties to have access to credit and TA. B. Financial Sector 2.09 Argentina's financial system consists of BCRA, the central bank; four specialized national banks: the country's largest commercial bank; BANADE, the industrial development bank; the national housing bank; and the national savings bank; and 189 banks, of which 31 (including 24 provincial banks) are public and 158 are private (31 foreign and 127 nationally owned), as of March 1986. The balance of the system includes 68 finance companies and 45 savings and loans  -4- associations and credit unions. The public banks, excluding BCRA, have about 57% of total deposits and grant about 66% of the total volume of loans. Private banks control about 41% of total deposits and grant about 32% of the credit. The equity base of the financial system, excluding BCRA, was equivalent to US$3.7 billion by year-end 1985. While the number of commercial banks in operation has declined significantly, the system is still substantially over-dimensioned, given its large number of branches (about 5,000) and institutions, its relatively low resource base and its portfolio size. 2.10 Argentina's recent economic crisis has had a substantial impact upon the status and structure of the financial sector. Hyper-inflation, imposing a heavy "inflation tax" upon holders of nominal liquid financial assets, demonetized the economy, while highly negative interest rates during the early 1980s causad a significant disintermediation process. As a result of the disintermediation process, the banks' leverage dropped to a low 6:1 at the end of 1985. In addition, the average maturities of lending and deposit operations declined to as little as seven days, leading to a high number of operations and to higher administrative costs. Lately, lending interest rates became excessively high in real terms (about 3% to 4% per month --p.m.-- during 1986), and the value of operations channeled through the intermediation system declined. As a result, non-intermediated lending between companies increased. Moreover, erratic financial sector policies, ranging from complete liberalization in the late 1970s to today's excessive regulation of intermediation, resulted in serious market distortions and contributed, to some extent, to the poor financial condition of many banks. The overall status of the financial system, the lack of adequate credit to the private sector, and distorted high real market rates, are constraints for investment. 2.11 While the demonetization issue is being addressed principally through the Government's macroeconomic stabilization program, financial market distortions and structural imbalances require a sector-specific reform program. Currently, the Government, in consultation with the Bank, is designing and partly beginning to implement the first stage of such a program, consisting of policy adjustments (aimed at reducing forced investment and rediscounts, and deregulating lending and deposits operations), measures to initiate the restructuring of financial intermediaries (reviewing accounting practices, raising minimum equity requirements, providing restructuring assistance to individual banks), improvements in the supervision and control process of financial intermediaries, and broadening of the deposit insurance coverage. C. Bank Involvement in the Industrial Sector 2.12 To date, the Bank has approved two industrial loans, both for US$100 million equivalont, to BANADE (Loans 1463-AR and 2063-AR) used mainly for fixed capital financing of medium-to large-sized enterprises. The first loan is fully disbursed and the second one is about 65% committed at BANADE level. It expects to fully commit this loan by mid-year 1987. About 334 subprojects have been financed (with IFC participating in some of them), with a total cost of about US$500 million equivalent. A sample of subprojects show ex-ante economic and financial rates of return over 25% on average and creation of about 3,000 jobs, in line with expectations during appraisal. These figures exclude subprojects, under BANADE's analysis, requiring about US$25 million from loan 2063-AR. Overall, implementation of the loans had not been smooth, mainly as a result of political uncertainties, economic recession, BANADE's operational weaknesses as a direct lender (most of them being addressed by the current management -- para. 3.07), and  delays in loans signing. In addition, high onlending interest rates have affected implementation of the second loan, although after modification of the onlending rate in late 1985 committments increased substantially. 2.13 Bank strategy for the industrial sector development in Argentina during FY87-89 would support required long-term policy reform and the prompt revitalization of the economy. The Bank's agenda would focus upon: (a) a Trade Policy and Export Diversification Loan (TPL -- which has already been appraised and for which Board presentation has been scheduled for the fourth quarter of FY87) and an Export Promotion Project (EPP) to increase the le-;el of international competitiveness of Argentine industry and exports, respectively (Annex 1); (b) Industrial Sector Work to assess the impact of industrial policy and industrial promotion regimes on the organization of industrial markets, the conduct of firms and their economic performance, aimed at helping to revise, design and implement required industrial policy measures; and (c) lines of credit for Industrial Restructuring and SMI Development. It also includes support for Financial Sector Reform (Financial Sector Work already completed and a Banking Sector Adjustment Loan, for which the Bank recently approved a Project Preparation Facility and has scheduled appraisal for FY87) for improving the ability of the financial system to serve the industrial and other sectors (para. 2.11). In addition, the Bank has advised the Government on the policy framework for privatization and restructuring of major parastatal industries, and is providing assistance to the Government to stregthen public sector administration (through the Publ:ie Sector Management Project --Loan 2712-AR-- which is progressing satisfactorily). The Government has already initiated trade and financial sector reforms, abolished export taxes on manufactures (which were levied mainly upon predominantly SMI subsectors and represented the major sector issue of particular relevance to SMI), taken a series of measures to encourage exports and prepared a draft law to initiate reforms of the industrial promotion regimes. It has also, through BCRA, started to strengthen supervision to the banks and gradually reduce reserve requirements. Since adequate progress is being achieved on the trade and financial sector reform operations, and SMIs are relatively less affected by the policies to be modified (para 2.08), an operation to support them would make a useful and needed contribution to economic reactivation and employment while longer-term reforms are being introduced. In this context, the trade and financial sector reform operations as currently scheduled, would be sufficient in time to provide the long-term policy environment for SMI growth. Moreover, the proposed project would enable SMIs to start preparing themselves to cope better with the changes to be produced by trade liberalization. 2.14 Bank involvement in the proposed project would support the Government's efforts to provide scarce long-term resources and TA for the needs of a sector that for many years has been neglected, but that is vital to the recovery of the economy and to help achieve expected results of trade reform and the export expansion. Currently, no other international institution is specifically involved in the development of SMIs. The proposed project would also promote the strengthening of the private sector and make available to the Government Bank experience in other LAC countries. Bank involvement should continue to be instrumental in coordinating the efforts of different public and private sector institutions for appropriate project preparation and execution.  -6- III. PROPOSED PROJECT A. rojeact Prearation 3.01 A Bank report "Argentina: Strategies Toward Industrial and Export Development" dated September 1985, identified the need to assist SMIs as a major component for an industrial development strategy in Argentina. At that time, the Government stated its intention to support SMI development. In November, 1985 it expressed its interest to receive a Bank loan for such a purpose, loan that would also assist to start revitalizing the economy. Bank preparation missions visited Argentina in March and June 1986. The appraisal mission was carried out in October 1986. Negotiations were held in Washington, D.C. from February 24 to March 6, 1987. The Argentine delegation was led by Mr. R. da Bouza, Ministry of Economy, and included Messrs. J. Campbell, Under Secretary of Industry; Ch. Colombo, President of BANADE; P. Richards, Director, BANADE; 0O Meola, J. I. Rodriguez and E. Salvo, BANADE; and H. Amadeo, Ministry of Economy. B. Project Objectives and Description (i) Proiect Objectives 3.02 The proposed project would seek to encourage modernization and increases in production and productivity of SMIs, enabling them to become more competitive, as well as to foster employment and help develop SMIs outside the major urban areas. It would also establish a medium-to long-term lending system, operating through a second-tier mechanism --FOPYME, para. 3.05-- within BANADE, helping to gradually convert the latter into a rediscount institution regarding to SMI lending by participating banks (PBs); and a coordinated TA program for SMI development. (ii) Prolect DescriRtion 3.03 Financial assistance comDonent. The proposed project would finance: (a) fixed asset and related permanent working capital needs of SMIs (including machinery and equipment and their installation costs; building construction, handling and storage facilities; civil works; quality and pollution control equipment; replacement of obsolete machinery and equipment; investments for improvement of product, quality and design; and acquisition of new technologies); (b) free-standing working capital (FSWC) needs; and (c) TA needs of SMIs and for the establishment and operations of trading companies related to SMI activities. Under this category, SMIs might use credit to hire INTI services, or those of any technical institution or consulting firm providing services in the fields of management, technology, finance, production and marketing (including purchasing of technology abroad, setting up research and development or technical testing facilities, and carrying out market studies and export promotional activities for a single firm or group), as well as for subproject preparation or to assess TA needs. 3.04 A comonent. The thrust of project support for TA to SMIs would be, in addition to providing credit for the SMIs' TA needs, toward helping to: (a) initiate a focussed managerial and technological assistance program to SMIs, and coordinating such assistance with the lending provided under the project, as appropriate; and (b) support institutional strengthening of organizations  -7- providing technical and financial assistance to SMIs under the project (FOPYME/BANADE, PBs, SSME/RTACs and INTI). The TA component, which would finance consulting services and equipment, is detailed in Annex 3. It would also include subsectoral studies, study-trips and project-related training (PRT). The PRT would focus upon areas such as subproject preparation, appraisal and supervision, and industrial extension services. C. Project Executiogn (i) Particigatine Institutions 3.05 Development Fund for SHIs (POPYME). The main responsible organization for the project's credit component would be FOPYME, operating as a permanent second-tier development fund within BANADE, with its own objectives, organization and staff, and with its resources separated from other BANADE's resources (Annex 4). For FOPYME's operation, BANADE's Board of Directors would adopt a Statement of Policy and of Operating Regulations. Both draft documents, including FOPYME's organization and staffing and guidelines for subproject appraisal and supervision (all available in the project file), as discussed during appraisal and negotiations, are suitable for project implementation (Annex 4, paras. 2 to 5). BANADE has appointed FOPYME's director and staff as agreed with the Bank. BANADE's Board of Directors' approval of FOPYME's Statement of Policies and Operating Regulations and FOPYME's approval of the above-mentioned guidelines would be conditions for the effectiveness of the proposed loan. 3.06 Intermediarl institutlons. It is expected that some 40 PBs and BANADE as a first-tier lender, would initially participate under FOPYME. Only those PBs accepted by FOPYME/BANADE (in consultation with BCRA), based upon creditworthiness analysis made by FOPYME/BANADE, following procedures acceptable to the Bank, would be eligible to participate as FOPYME's financial intermediaries (Annex 4, para. 6). BANADE's participation as a direct lender , through its SMI department, would be necessary to ensure that smaller firms and those outside the major urban areas receive the benefits of FOPYME and that adequate rates of disbursements during the initial years of the project (as term lending to SMIs by PBs may be somewhat slow initially) are achieved. However, a follow-up loan would include a timetable for phasing out BANADE's first-tier operations with SMIs, depending upon, among other things, the PBs' capabilities for such type of lending. As a condition for the effectiveness of the proposed loan, BANADE/FOPYME would present to the Bank four or more participation agreements signed between BANADE/FOPYME and PBs, providing for onlending equivalent at least to 25% of the proposed loan amount. 3.07 BANADE: Was created as an autonomous Government-owned industrial development bank in December 1970, out of the reorganized "Banco Industrial." A new Charter was promulgated in August 1977. In addition to its primary development objectives, BANADE also provides commercial banking services, and has become practically the only term-lending domestic institution for industry. In the past, BANADE was a channel for Government subsidies to state-owned enterprises. Its role as provider of credit to the industrial private sector was limited during the 1970s, but it has been increased during the 1980s. In 1984, BANADE started a lending program to SMIs, with renewed efforts during 1986, with good results, turning away from its traditional policy of lending basically to the largest enterprises. For such a purpose, BANADE established an SMI credit department, which receives support from the Technical Department for subproject appraisal and supervision. Their capabilities, which would be strengthened under the proposed project, are suitable for project implementation (Annex 5). In addition, in 1986,  -8- BANADE began to operate also as an SMI second-tier institution, a function which would also be strengthened by the proposed project and which would allow BANADE to rely on creditworthiness assessments by PBs, which will bear the credit risk. Since the new government took office in late 1983, BANADE's management and the overall institutional situation have been improving. The current management, appointed in early 1985, recruited a young and dynamic group of executive directors and embarked upon a program to strengthening further the institution financially and operationally. BANADE's financial situation and performance, while still facing some weaknesses, including an inadequate spread on foreign currency operations, have also been improving since 1983. Currently, while its portfolio quality (most of it inherited from former Governments) is relatively acceptable, administrating and improving the quality of the portion associated to the largest enterprises (most of it guaranteed by the Government) is the major, and a long-term, task that the institution is facing and working with. Currently, BANADE relies mainly on BCRA resources. It would have to reduce this dependence as BCRA relaxes reserve requirements in the course of its moves toward a more market-oriented banking system. To further improve BANADE's standing as a first-tier lender and to help ensure smooth project implementation, BANADE has established a unit exclusively to analyze and supervise SMI subprojects, and approved the TA program for FOPYME/BANADE. As a condition of effectiveness, to strengthen itself financially, BANADE should (a) revise the policy and level of provisions for bad debts; (b) prepare a pilot plan for resource mobilization; and (c) revise the financial spread on foreign currency lending operations, in a manner satisfactory to the Bank. It will also present to the Bank prior to June 30, 1987, an analysis of the possibility to reduce lending interest periods in order to maximize its cash flow and an indicative plan for portfolio recovery focussing upon the 50 largest enterprises, which may include restructuring and sales of firms. This plan would also support preparatory work for a possible Industrial Restructuring Project, currently scheduled for FY88. BANADE's debt/equity ratios should be within the limits agreed with the Bank, for 1987 and onwards (Annex 3, paras. 13 to 16 and Annex 5, paras. 4, 5, 8, 9, 10, 11, 13 a.1d 14). 3.08 TA Institutions. SSME, which was established by the Government in October 1985, has taken an active role to create mechanisms to assist SMIs. In this context, SIT approved a scheme to create a network of RTACs throughout the country (Annex 3). RTACs' main function would be to provide information to SMIs and serve as a referral service for financial and technical assistance matters, under SSME coordination. To maximize the impact of resources available, the program would focus its assistance upon five pilot RTACs. INTI, which was established in 1957 as a Government autonomous institution, is the major technological source of assistance to industrial enterprises. INTI is a large institution, witb 22 technological centers and 11 research departments. Within INTI three centers/programs are particularly relevant to SMIs: Center for Research of Methods and Techniques for SMIs (CIME); Technological Research Center of Santa Fe (CITSAFE) and Research Documentation Center (CID). While INTI's impact upon industries and, in particular, upon SMIs has been below its possibilities, it has the capabilities to offer appropriate TA. In such context, INTI is currently undergoing a major structural reorganization and its SMI activities would be strengthened under the proposed project. The five RTACs to be supported by the project have been staffed. Approval by INTI's Board of Directors of CIME and Management Advisory Program (MAP)'s TA programs, as agreed with the Bank, would be a condition for disbursement of INTI's TA subcomponent (Annex 3, paras. 9 and 12).  -9- (ii)Executing Agencies 3.09 BANADE/FOPYME would be the executing agency for the project credit component and for the TA to themselves and PBs. FOPYME would coordinate the PRT under the project for subproject preparation, appraisal and supervision. SSME would be responsible for the SSME/RTACs TA subcomponent; however, to expedite procurement of goods and services to be financed with loan proceeds, INTI through its National Director of Promotion and Development (NDPD), would act as administrator, since it has more flexibility in procurement matters than SSME. INTI through NDPD would also be the executing agency for its correspondi-ig TA subcomponent. To help ensure a smooth implementation of each TA subcomponent and an appropriate coordination among them, and also between the executing agencies and the Bank, BANADE, SSME and INTI would appoint a high-level officer to be responsible for the TA activities within the respentive agency. D. Proiect Cost and Financing Arrangements (i) Project Cost and Financing 3.10 Project cost is estimated at US$250 million equivalent, of which about 53% represents foreign exchange costs. A Bank loan for US$125 million equivalent, to cover 50% of project cost, is proposed. Overall, SHIs would ccntribute about 25% of project cost, and BANADE/FOPYME (basically with BCRA resources), PBs, INTI and the Government, the balance. The credit component estimated cost amounts to US$244.9 million equivalent. The loan would finance US$123.1 million, SMIs about US$60.9mi.1lion, BANADE/FOPYME about US$51.5 million and the PBs about US$9.3 million. The estimated cost of the project's TA component would be about US$5.1 million equivalent, of which US$1.9 million would be provided by the proposed loan, about US$1.8 million by BANADE, INTI and the Government with own resources, and about US$1.4 million by SMIs' payments for services. (ii) Onlending Arrangements 3.11 The Government, as the proposed borrower, would transfer to BCRA, under the same terms as those of the Bank loan, US$124.2 million equivalent of loan resources. BCRA would relend those resources to BANADE to finance SMIs and the corresponding TA program. The lending to BANADE would be in "Australes" adjusted by the combined (wholesale and consumer) price index, applying an initial real interest rate of 7% per annum for working capital and 4% per annum for fixed assets (to be reviewed every siX months in consultation with the Bank --para. 3.14) with a weighted average of 5.5% and the same maturities of the Bank loan. As proposed by BCRA/BANADE, the former would assume the foreign exchange risk. According to BCRA/BANADE, the implicit fee that BCRA would receive --the difference between the Bank rate and the onlending rate - should be applied to absorb exchange and interest rate fluctuations.l/ The Government would transfer 1/ In 1986 the combined index increased by 64% and the exchange rate between the US dollar and the austral by 54%. A difference of 10% as in 1986, when added to the proposed BCRA's real onlending rate, should be adequate to cover the Bank's current interest rate and build up a reserve for future fluctuations in the different rates and for the cross currency risk.  -10- US$0.4million of loan resources to SSME for the RTACs and, on a grant basis, US$0.4 million to INTI, in both cases for the to TA program to SMIs. A signed agreement for transferring the funds from the Government through BCRA to BANADE would be presented to the Bank as a condition for the effectiveness of the loan. (iii) Terms and Conditions of Financing 3.12 Nature of enterprises. The proposed project would provide credit and TA for subprojects of SMIs involved in manufacturing (industry, agroindustry, wood processing and wood products, mining, and fishing and fish products) and in services related to such activities. While subprojects would normally entail the creation, expansion or modernization of enterprises, up to 25% of the loan could be used for free standing working capital subloans to expand capacity utilization of existing eligible firms. For project purposes, small firms would be defined as those private enterprises with fixed assets, excluding land and buildings, up to US$0.35 million equivalent before project financing and medium-sized, those up to US$3.0 million equivalent. The adequacy of these criteria would be analyzed during a mid-term review, based upon experience obtained under the project. 3.13 Limits and terms. Maximum financing from the loan, BANADE/FOPYKE end PB's would be 60% of subproject cost for new enterprises and 80% for existing ones and for TA. To avoid concentration of project resources upon a few firms, the overall maximum outstanding amount of a subloan to any individual firm or group of related enterprises, with loan resources, would be US$2 million equivalent. Maximun individual subloan with loan proceeds would be of $2 million equivalent for investment subprojects, US$1 million for FSWC, and US$0.2 million for TA. No more than 50% of a subloan amount could be used to finance related working capital. To finance FSWC needs with loan proceeds, they should be: incremental; resulting from a plan to increase the utilization of installed production capacity; and permanent, including only raw materials, spare parts and other physical production inputs. PBs and BANADE as a direct lender, would establish appropriate maturities for each subloan based upon the repayment capacity of the subprojects and enterprises. FOPYME would apply the same repayment period to the corresponding intermediary. The limit would be of ten years, including up to three years of grace for fixed investments and related working capital; up to three years, including up to six months of grace, for FSWC; and up to five years, including up to one year of grace, for TA. PBs and BANADE as a direct lender, would contribute 10% of the subloan amount and would bear the credit risk. PBs would be allowed to apply SMIs' initial repayments to such a portion, and would approve subloans up to US$0.1 million equivalent. All other PBs' proposals would require FOPYKE approval. BANADE's subloans with loan resources up to US$0.5 million as direct lender would be approved by BANADE. All subloans over US$0.5 million with loan resources and TA operations would require prior Bank approval. Under this procedure, it is expected that about 10% of the subprojects, representing about 40% of loan resources, would be subject to prior Bank approval (Annex 4, para. 4). PBs/BANADE would analyze the repayment capacity of the enterprises for all subprojects. In addition, they would calculate the financial rate of return (FER) for investment and FSWC subprojects requiring subloans with FOPYME's resources over US$0.1 million equivalent. FOPYME would calculate the economic rate of return (ERR) in cases of subloans using loan resources over US$1 million. FRR (after taxes) and ERR would have to be at least 12*. 3.14 Interest rates. The project would offer to SMIs credit in local currency, adjusted by the combined price index prepared by BCRA, with initial interest rates  -11- of 8% real p.a. to finance fixed assets, and TA; and 12% for related working capital and FSWC. These rates are currently higher than average deposit rates. Taking into account the experience with foreign exchange rates during the 1980s, SMIs would be loath to take foreign-exchange-denominated obligations. In this regard, however, since local currency subloans would be adjusted according to the inflation rate and subborrowers would be charged real interest rates, SMIs, in practice, would be covering the direct foreign exchange risk, to the extent that BCRA exchange rate policy reflects true inflationary conditions. During the last 12 months, short-term lending interest rates were unsustainably high, about 3% real p.m. on average, mainly as a result of high reserve requirements and distorted market deposit rates, which --in turn-- has made SMIs resort to borrowing only in exceptional cases, maintaining a low leverage ratio. Thus, at present, it would be impossible to tie subproject lending rates to any representative domestic "market" rate. The Government has, however, within its restrictive monetary program, established some limited term-credit facilities to gradually start revitalizing the economy, e.g., through BANADE, for industrial term financing, with rates of 8% and 12% p.a. upon indexed "Australes"-denominated subloans. The proposed rates would be in line with such approach. As part of the proposed onlending rates financial intermediaries would keep a spread of 3.75 percentage points. Financial intermediaries would pay to FOPYME a commitment charge of no more than 1% upon their corresponding loan resources allocation, which might be transferred to the subborrowers. BANADE/BCRA would present to the Bank every six months a review of onlending rates and spreads to ensure that they remain adequate and that rates to enterprises are not lower than deposit rates (provided that such rates are conducive to resource mobilization and do not represent significant distortions). They would also carry out a mid-tertn review, in consultation with the Bank, to determine the need and possibility of adjusting the basis of lending (i.e., subloan currency, type of adjustment to principal, subloan repayment system), as appropriate. The Bank would be entitled to cease subloan commitments if agreement is not reached on any of the rates with BANADE/BCRA within 60 days of the start of each semester. (iv) Procurement 3.15 Procurement procedures for goods and services financed under the project would follow standard practice for Bank IDF-type projects. FOPYME and its participating institutions would be responsible for ensuring the competitiveness, in price and quality, of items procured and their suitability for the purpose intended. While international competitive bidding (ICB) would not be required regarding SMI subprojects, items would be procured upon the basis of at least three different quotations, which in the case of equipment should include items produced in at least two countries. Since it might be difficult or relatively costly to obtain quotations from several suppliers for small orders, the three offers would be mandatory for items or single orders exceeding US$0.3 million equivalent. For lesser values, the corresponding institutions would assure themselves that the main sources of supply have been canvassed and that the purchasing is from the most advantageous sources. Consulting services financed with loan proceeds would be open to international recruitment selected in accordance with the Bank's Guidelines for the use of consultants. Procurement of goods under the TA component would be made according to Bank Procurement Guidelines, applying ICB for purchases with value of US$0.2 million equivalent or more; and local competitive bidding (LCB), for lesser values. In the case of ICB and LCB, prior Bank approval would be required for bidding documents. As part of subproject approval, review would be made to assure procurement is from eligible sources and for eligible goods and works. All  -12- subproject appraisals and TA operations would include a discussion of procurement procedures used, responses received, prices quoted and criteria for selection of suppliers of goods and services. (v) Disbursements 3.16 The final date for submission of subloan proposals would be December 31, 1990 and the closing date, June 30, 1994 according to the average disbursement profile for IDF loans in the region, even though BANADE expects shorter periods (Annex 7, Table 4). The Bank would finance 50% of subproject cost on average, however, disbursement of Bank funds would be made using an accelerated scheme as follows: (a) 60% of the cost of each subproject approved or authorized regarding conmitments up to the equivalent of the first one-half of the loan amount; and (b) 40% for the balance; provided that, in any case, the corresponding amounts are not higher than the FOPYME disbursement. This would reduce BANADE's/FOPYME's share of project financing during the initial stage of project implementation to help ease counterpart funding constraints (and would speed up loan disbursement). During the later project-stage, project counterpart funds would be available to BANADE/FOPYME from repayments of principal and interest on subloans previously made. For the TA component, the Bank would disburse 100% of total expenditures (for the purposes, and along the lines, stated in Annex 3). To facilitate project execution, a Special Account would be established to finance the Bank's share of operations made by the project. The account would be established and maintained in US dollars, into which the Bank would make an initial deposit of US$8 million equivalent, based upon four months of expected disbursements. Withdrawal applications submitted under the project would be made on the basis of statements of expenditures (SOE). Supporting documentation requesting SOE would be maintained by FOPYME and made available for review upon request by the Bank. Only expenditures made no more than 180 days prior to the day of recr.e.pt by the Bank of the corresponding financing request would be eligible for reimbursements under the proposed loan. This extension of the Bank's normal 90-day limit under IDF projects would be justified in view of the arrangements involving participating banks, BANADE and FOPYME. (vi) Accounting. Auditing and Regorting 3.17 BANADE would maintain separate accounts for FOPYME and adequate records to reflect the project's operations and financial situation, in accordance with sound accounting principles consistently applied. The Government (SSME) and INTI would maintain also separate accounts and adequate results, in accordance with sound accounting practices, to reflect their operations in respect of the project. BANADE's accounts, FOPYME and the Project's Account, SSME/INTI's accounts in respect of the project, and the Special Account would be audited annually by independent auditors acceptable to the Bank. The audit report, with scope and format satisfactory to the Bank, including opinion regarding the supporting documentation for disbursements based upon SOE, would be submitted to the Bank no later than six months after the end of each fiscal year. BANADE's audit reports for 1984 and 1985 were prepared by "Sindicatura General de Empresas Publicas" (a Government auditing office), which expressed minor reservations only. BANADE/FOPYME would submit to the Bank monthly reports upon the transactions of the Special Account; semi-annual reports upon the overall status of the project, including credit and TA matters; upon the project financial situation and portfolio quality; and upon the operations (statistical information) and their expected impact. BANADE would also submit to the Bank indicators upon its flow of funds, financial situation and portfolio quality. In  -13- addition, SSME and INTI would submit to the Bank prior to November 2 of each year, the expected TA program for SMIs to be implemented by the RTACs and INTI, under the project, during the following year, respectively; and semi-annually, combined with FOPYME's report, the results of the project TA to SSME/RTACs and INTI, and of the TA program to SMIs, during the previous six months (Annex 6). E. Benefits and Risks 3.18 The proposed project , in addition to assisting in the recovery of the economy and complementing efforts with other Government/Bank operations, is expected to provide financing for some 1,400 subprojects, many of them for modernization, replacement of equipment and increase of productivity, generating and helping to maintain about 12,500 jobs. Indirect employment impact is also expected to be significant because of domestic forward and backward linkages. Both the expected employment impact and the emphasis upon promoting investments by small-scale entrepreneurs would contribute to poverty alleviation. The project would also constitute a pioneering effort in Argentina to set up a specialized SMI second-tier subloan delivery system in coordination with TA, coordinating also public and private sector institutions. It would have strong institution-building impact, not only upon FOPYME, but also upon BANADE, PBs, and TA organizations, including training for about 250 professionals from such institutions. This would result in improved and more efficient provision of technical and financial services to SMIs, as well as in improved credit administration. 3.19 Specially because most of the institutional arrangements would be new, possible risks include a slower-than-expected pace of PBs' participation and some operational soft-spots regarding the second-tier mechanism and the TA program to SMIs. To minimize these risks, the project would provide for appropriate conditions to financial intermediaries, and TA and PRT to participating organizations; and it would concentrate upon five RTACs. High frequency of Bank supervision missions during the initial stages of project implementation should contribute to reducing such risks. IV. RECOMMENDATIONS 4.01 During negotiations, agreement was confirmed upon: (a) the proposed project's objectives and description (paras. 3.02 to 3.04); (b) the participating institutions and corresponding conditions and arrangements, including agreement with BANADE to maintain debt/equity ratios within new limits for 1987 and onwards (paras. 3.05 to 3.09). (c) the proposed project cost and financing, loan amount, onlending arrangements and counterpart resources (paras. 3.10 and 3.11); (d) the terms and conditions of financing (paras. 3.12 to 3.14); and  -14- (e) the proposed project's procurement, disbursement, accounting, auditing and reporting matters (paras. 3.15 to 3.17). 4.02 As conditions for the effectiveness of the loan, the following matters should be presented in form and substance satisfactory to the Bank: (a) approval by BAUADE's Board of Directors of FOPYME's Statement of Policy and of Operating Regulations, and approval by FOPYME of subproject appraisal and supervision guidelines (para. 3.05); (b) presentation to the Bank of four or more signed participation agreements between BANADE and PBs, covering at least 250 of the proposed loan amount (para. 3.06); (c) compliance by BANADE with: revising loan provisions, as appropriate; preparing a pilot plan for resource mobilization; and revising and carrying out recommendations upon spreads for foreign currency lending, as appropriate (para. 3.07); and (d) signing of an agreement for transferring the loan proceeds from the Government to BANADE through BCRA (para. 3.11). 4.03 As a condition for disbursement of INTI TA subcomponent, INTI should present, in form and substance satisfactory to the Bank, approval by its Board of Directors of CIME and MAP programs (para. 3.08). 4.04 The proposed project constitutes a suitable basis for a Bank Loan of US$125 million equivalent on the terms and conditions outlined in Chapters III and IV.  -15- ARGENTINA STAFF APPRAISAL REPORT SMALL AND MEDIUM SCALE INDUSTRY (SMI) CREDIT PROJECT Industrial Policy - Summarv I. Promotion Regimes The Law of industrial promotion of 1977 revised and set the framework of industrial policy, which is based primarily upon the following regimes: 1. The Sectoral Promotion Regimes (SPRs). The essence of SPRs is to develop specific subsectors through quantitative protection; they also grant import tariff waivers, import licenses for goods on the restricted import lists and incentives for investment. There are several SPRs in operation (e.g., paper, steel, petrochemical, shipbuilding and electronics). Some of these regimes reduce the competitive advantages of other industrial subsectors since they increase their cost of inputs and investments. The Government has taken steps to prevent this problem, e.g., the program to secure supplies for exporters at international prices. The Government is also revising downward the existing tariffs for imported advanced technological equipment protected under the electronics SPR and is proposing a further revision of these regimes, including the elimination of double benefits under different SPRs and costs or constraints that those regimes may create for exporters. 2. The Regional Promotion Regimes (RPRs). The purpose of RPRs is to promote employment, investment and production outside the industrial belt formed by Buenos Aires, Rosario and Cordoba. Most RPRs are controlled by the Secretariat of Industry and Trade (SIT), except for the cases of Tierra del Fuego, San Luis and La Rioja, in which the authority has been vested in the provincial governments. These regimes exonerate firms from the difference between the value added tax (VAT) of sales and a tax credit accrued from the purchase of inputs subject to VAT (resulting in a net average of about 9% of VAT). In the case of Tierra del Fuego, producers are exonerated for the whole value added tax which amounts to 18%. RPRs also grant tariff waivers for imported capital goods and import licenses for goods on the prohibited import lists. The combination of the protection under the SPRs and the incentives under the RPRs encourages the establishment of last stage assembly plants ("maquila"). Most of the value added generated by such plants is profits, aside from employment and transportation costs. Large enterprises have apparently taken more advantage of the benefits offered by RPRs than have other firms. Controls of RPRs are ineffective, making it possible for firms to create quasi-factories in the regions for the last steps of the manufacturing process . RPRs' actual contribution to regional employment and production has been somewhat limited, although vital for the outlying regions such as Tierra del Fuego. The fiscal cost of RPRs has been estimated at about 2% of GDP. The Government expects to review them, reducing the maximum fiscal exemption to 50% of the difference between VAT sales and VAT purchases (resulting in about 4.5% on average), mainly to compensate for higher transportation costs; keeping the RPR administration regarding larger investment projects, and provincial governments being responsible for the medium-size and smaller projects; and fostering the distribution of benefits among a larger number of enterprises.  -16- 3. The Export Promotion Programs (EPPs). At the beginning of 1986, EPPs included limited temporary admissions of inputs by qualified exporters; a program to supply exporters with local inputs at international prices; pre- and post-export credit lines (without adequate funding); some tax incentives; and an Export Promotion Fund (with very modest operations), with an ear-marked income of 0.5% upon imports, to assist Small and Medium-Scale Industries (SMIs) and regional producers with export promotion activities. Additionally, there was a specific program to foster the creation of export consortia of SMIs, and export incentives for individual firms or consortia with incremental exports of at least US$2 million per annum, for a minimum period of two years. During the third quarter of 1986, the Goverr1ment adopted a new set of measures called "la apertura exportadora." It includes a tax reimbursement of 10-15% of the FOB value of exports, the elimination of export taxes for manufactured goods (many SMIs benefit from this decision), and a temporary admission regime to allow the duty-free import of inputs for exporters and their suppliers (a direct benefit for SMIs also). There is a special export promotion program known as ARGEX that grants subscribers the automatic duty-free import of all tariff positions if they commit themselveg to a multi-year export contract. Another incenrive is a program that allows exporters of capital goods, with a large production lead time, to lock their costs in the currency in which they have made their bids ("ajuste exportador"). The Government also has sharply reduced and simplified procedures for the temporary admission regime and for the import of goods. In this context, the import permit for goods which enter the country automatically has been eliminated. The already existing export promotion programs were kept alive. While the Government has taken several steps in the right direction, there is room to strengthen the EPR's impact and coverage, as well as for further revision of export procedures. B. Bank Sungort to Government's Export Strategy 4. It is now widely recognized that a vigorous export drive is the main available option of the resumption of industrial growth. The Government's industrial strategy, therefore, focuses, among other things, upon the promotion and development of non-traditional exports. The Bank intends to support directly these efforts through a Trade Policy and Export Diversification Loan (TPL) and an Export Promotion Project --EPP. (SAR, para. 2.13). 5. The proposed TPL would support the country's efforts to redress the strong anti-export bias built into the present complex system of tariff and non-tariff protection, linked to the maintenance of an adequate exchange rate. Its underlying objective is to support the Government's adoption of an outward-looking growth strategy directed toward improving the export competitiveness and increasing the productive efficiency of Argentine industry. To achieve this objective, the loan would seek to: (a) introduce automaticity and uniformity in the temporary admission regime; (b) simplify import and export administrative procedures; (c) rationalize the protection system through the reduction of non-tariff barriers to trade; (d) formulate an Action Program of trade reform for the longer term; and (e) eliminate export taxes (para. 3) . The loan would also support an increase in imports necessary for the growth and export orientation of the economy and, at the same time, improve the country's capacity to service its debt. The Argentine authorities, after consultation with the Bank, have announced and are introducing changes in key policy areas which the loan would support.  -17- 6. The EPP would complement TPL efforts by creating an institutional framework to meet the financing needs of exporters. The project, would consist of the following: (a) credit to complement the Central Bank (BCRA) existing pre-shipment financing scheme, possibly including resources to finance limited fixed investment requirements of exporters; (b) support to strengthen and modify the existing lending policies and mechanism; (c) a study of the requirements of pre-shipment financing to trading companies and indirect exporters and design of an appropriate mechanism, including the development of a domestic letter of credit scheme; and (d) measures to: provide appropriate technical assistance to exporters and participating institutions under the proposed project.  -18- Ann!tx ARGENTINA STAFF APPRAISAL REPORT SMALL AND MEDIUM SCALE INDUSTRY (SMI) CREDIT PROJECT Expected SMI Investment 1. Estimated Small and Medium-Scale Industries (SMIs) investment during the next three years could vary from about US$150 million to US$250 million per year. While future SMI investment levels would depend upon the effectiveness of current economic and monetary policies in containing inflation and stimulating growth, and upon the prevailing level of term interest rates, at present there are indications (two surveys, mission findings and National Development Bank's (BANADE) SMI lending since 1985) that investment possibilities and credit demand are high. As part of project preparation, BANADE carried out a survey among 629 SMIs (a very small fraction of the SMI universe of about 111,000 establishments, out of which 32,000 have five or more employees), identified current investment plans for US$160 million to be implemented over a period of one to one-and-a-half years, and a potential credit demand of US$107 million. It is noteworthy that the survey shows that 91% of the firms havi, concrete investment plans. Also, that they can implement their plans only if credit on appropriate terms is available. Only 10% of the equipment in operation of those firms was purchased during the last five years, the balance being of older vintage and likely to be obsolete. If these firms are representative of the universe of SMIs, and if the economy shows even a moderate recovery, the obsolescence by itself would be a factor stimulating demand well above the present capacity of the financial system. Moreover, a substantial backlog of non-funded SMI investment projects exists, mainly as a result of lack/shortage of appropriate term credit. In addition, another survey among 16 private banks which may participate under the project shows that they could grant some US$115 million per year, to about 650 enterprises, under appropriate terms and conditions. The results of the above limited surveys and the obsolescence factor, coupled with the current low indebtedness arLd improved outlook for SMIs (SAR, pars. 2.08), including possible additional investment needs to be produced by the expected export expansion, support the view that SMI investment levels are likely to be at the upper end of the range mentioned above. 2. BANADE's lending to SMIs during the last two years also supports the SMIs' expected investment demand, even taking into account that BANADE had been lending basically to large firms. During 1985, BANADE granted about US$300 million equivalent in credits to industrial enterprises, including SMIs, with a low average subloan size of US$125,000. Mainly because of limited available resources on adequate terms, BANADE subloans in local currency to SMIs only amounted to about US$46.0 million equivalent, on a short-to medium-term basis. During the first seven months of 1986 BANADE's SMI lending increased considerably. It disbursed about US$150 million equivalent, mainly to SMIs, using local sources. The 1986 figures for SMIs mainly represent a BCRA rediscount line to BANADE (operating both as a first- and second-tier facility) to finance locally produced equipment and goods, with repayment terms of up to five years, and with lending rates of 8% and 12% per annum on indexed "australes"- denominated subloans. From March (when this lending started) to September 1986, BANADE committed about US$90 million equivalent under such line, which depends entirely upon uncertain availability of funds from BCRA. BANADE's  -19- second-tier operations under that facility currently represent about 50% of total comitments. BANADE has informed that lending under the BCRA line amounted to about US$130 million by year-end 1986 (representing the first nine months of operations). Aside from these resources, BANADZ's funds to provide adequate term financing for 8KI investment subprojects are limited,  -20- ANN"EX 3 ARGENTINA STAFF APPRAISAL REPORT SMALL AND MEDIUM SCALE INDUSTRY (SMI) CREDIT PROJECT Technical Assistance (TA) A. Background 1. Recent studies and mission interviews revealed SMI needs for assistance, mainly in the areas of management, marketing, finance and accounting, product design and technological innovation, to improve productivity and efficiency. Although basic specific technical knowledge of some of the existing small entrepreneurs seems appropriate at their present level of production, their managerial skills leave room for improvement. Even at the upper end of the segment (enterprises with 50-100 employees and US$l-2 million in investments) accounting information is often perceived more as a fiscal obligation than as a managerial tool. Moreover, lack of appropriate financial data has often been mentioned by banks as an important obstacle in providing financial assistance to SMIs. Having grown in a highly protected economy followed by a "survival" period (in the late 1970s and early 1980s) marketing, particularly export marketing, seems to be a widespread weakness among SKI entrepeneurs. The failure, over the past decade, to invest in product development and innovation has also left a majority of the smaller firms far behind in recent technological developments, such as numerically controlled machinery and computer-aided design techniques, and in new product lines such as medical instrumentation and microelectronics. Finally, an important problem reported by small entrepreneurs is entrepreneurial succession. The proposed project will assist in addressing some of the above-mentioned constraints. Institutional Setup For Assiting SNI" 2. Several public and private sector organizations have been providing some TA to SMIs during the last decade. However, assistance has been too sporadic or restricted in coverage, and results have been rather meager because of lack of specific programs or insufficient financial resources to support those activities. The creation, in October 1985, of the Subsecretariat for Small and Medium-Scale Enterprises (SSME) at the Secretariat of Industry and Trade (SIT) and recent developments during project preparation (para. 3 ) have created the potential for a coordinated assistance to SMIs among, at least, the organizations described in the following paragraphs. 3. SSME - Network of Regional TA Centers (RTACsW. SSME has taken, as part of project preparation, an active role in setting up a mechanism (RTACs) to provide some TA services to SMIs. In June 1986, a SIT resolution created the scheme to establish a network of RTACs in all provinces. RTACs are expected to: (a) assist SMIs regarding the mechanics to obtain financial assistance; (b) provide information apon investment oD>ortunities, promotional regimes, tax benefits and requirements to establish or operate a SMI; (c) provide industrial extension materials to SMIs in managerial and technical matters ; (d) help  -21- entrepreneurs to identify technical assistance needs and refer them to specialized organizations; and (e) promote organization of common-interest groups for bulk purchasing, exporting and investment activities. RTACs would be staffed through a joint effort by SIT, National Development Bank (BANADE), National Institute of Industrial Technology (INTI), and the corresponding provincial Government. Each organization would basically provide one professional, by reallocating members of their current staff. The RTACs' activities would be coordinated by a unit in SSME (the Central Unit--CU), assisted by an Advisory Board already created, which includes representatives of the public and private sectors , upon invitation from SSME. As of October 1986, ten provincial governments had already signed, or were close to signing, an agreement with SIT, which is required to establish the corresponding RTAC. 4. Instituto Nacional de Tecnologia Industrial (INTI). INTI was established in 1957, as an autonomous institution reporting to SIT, to assist the manufacturing sector through R & D and technological services. Throughout the years, INTI has grown into a large institution, covering areas as diverse as meat processing, telecommunications, metallurgy, fishing, plastics and microelectronics. Its present staff (about 1,600, of whom nearly 1,000 are professionals) is highly qualified in different technologies. INTI's technological centers and laboratories offer over 3,000 types of industrial and quality control tests. However, the impact of INTI upon industries and, in particular, upon SMIs, has been below its possibilities. INTI's activities have become bureaucratized and are perceived, by a number of entrepreneurs, as somewhat isolated from the every-day technical needs of enterprises. Very little has been done in industrial extension services or in taking the initiative to identify SMIs' problems, and/or to diffuse state-of-the-art technologies of common use in more advanced countries. Until 1980, INTI enjoyed a sort of financial autonomy because its financial resources were provided by a 0.25% tax upon all industrial loans by the banking system. Since that year, its operations are financed through fiscal budgetary allocations and service fees (18% of total needs in 1985). 5. INTI has the equipment and facilities, as well as the staff, to offer a meaningful technical assistance program to SMIs, provided that policy reorientation and structural reorganization is made. Under the guidance of the Subsecretary of SMEs who, at the time of appraisal, was simultaneously occupying t'.le position of President of INTI, this institution is undergoing a major policy and structure review. As a result, a working plan is currently being prepared by INTI which, among other things, is expected to foster an opening of INTI tc,,ard industry, to retrain some of its professionals in direct services to 6,iterprises, and to increase production-oriented technological and managerial assistance, with particular emphasis upon SMIs. While such a plan is independent of the proposed TA component, it would, if carried forward along the lines currently being discussed, help project execution. 6. Within INTI, three centers/programs are of particular interest to SMIs and would be reinforced under the proposed project: (a) CIME (Center for Research of Methods and Techniques for SMIs), established in 1958 as a joint venture between INTI and the Chamber of Metalurgical SMIs. Although its results in the past have been rather weak and its resources very limited, it has been the "keeper of the flame" for SMIs within INTI. Its main activity, in recent years, has been to organize a modest number of self-financed training seminars for entrepreneurs in the areas of general management and production control.  -22- Through an expansion of its activities, CIME could become INTI's link with the network of RTACs, could increase Its training programs, and could prepare extension materials in entrepreneurial training to be distributed by INTI's centers and by RTACs; (b) CITSAFE (Technolog cal Research Center of Santa Fe). Through this center, in Rosario, INTI has developed a methodology ("Programa de Asistencia Tecnica Integral" - PATI), which is similar to the "cluster" approach developed under Bank projects in other countries and which serves the dual purpose of: (i) retraining and assisting groups of small entrepreneurs/enterprises in solving managerial/production problems through a program of discussions, group work and in-plant assistance throughout 18 calendar months of intermitent but sequential work; and (ii) providing additional direct and on-the-job training to a corps of management advisory agents to assist SMIs. The methodology has already been modestly, but successfully, tested in Argentina. The program, properly updated and expanded, could be the basis for a pilot Management Advisory Program (MAP) to SMIs; and (c) CID (Research Docum,ntation Center), intended to be a technological information facility to industrial enterprises. While it has gathered a sizeable amount of technological information, it has, according to its users, failed in delivering such information. A review of its procedures and additional equipment seems necessary to help it to a^hieve its goals. 7. Private organizations and banks assisting SMIs. Amor.g private institutions, assistance to SMIs has been mainly in the area of general training, with the focus being more upon the entrepreneur than upon the enterprise. Training for SMI entrepreneurs and managers has seen an increase lately, following a growing demand from SMIs. Two particularly active centers have been CEPADE ("Centro de Perfeccionamiento en Administracion de Empresas") of the Catholic University in Cordoba and CEDE/ACDE (Centro de Desarrollo Empresarial/Asoc. Cristiana de Empresarios") in Buenos Aires. CEPADE's training short-term seminars cater to entrepreneurs and executives of all sizes of enterprises; however, about one-third of the participants were SMIs in the last ten years. Recently, in 1985, CEPADE established an advisory group integrated by SMI entrepreneurs and a specialized Center for SMI management assistance. CEDE/ACDE started an SMI entrepreneurial training program in 1981. The program, built through group training and self-diagnosis of enterprises, covers mainly areas of organization and management in small firms. CEDE delivers about 30 short-term courses each year. In the banking community, there are also institutions providing some type of TA to SMIs: (a) BANADE, which provides limited assistance to its SMI clients during subproject preparation and supervision; (b) " Fundacion Banco de Boston" and "Fundacion Banco de la Ciudad de Buenos Aires," which provide mainly some export-promotion-oriented training and direct assistance; (c)"Banco de la Provincia de Buenos Aires," which has a department specialized in financial and technical assistance for technological innovation subprojects; and (d) "Banco Espanol del Rio de la Plata,' which offers an integrated package of services to SNIs, inciuding enterprise diagnosis, assistance in loan applications and specialized SMI publications. All of these programs, which have a limited coverage, are financed either through fees charged to the enterprises or contributions by the sponsoring institutions. B. The Proposed Project's TA Component 8. The main objectives of the TA component would be to: (a) support the modernization and increase the efficiency and productivity of SMIs; (b) support the starting of a coordinated TA program for SMIs and the strengthening of the  -23- institutional mechanism to provide such assistance; and (c) increase the effectiveness of BANADE (as a second- and first-tier financial supplier) and participating banks (PBs) in providing financial assistance to SMIs. The project would use three main TA delivering channels to SMIs: (a) SSME/RTACs; (b) INTI, through its specialized and technological centers; and (c) BANADE/FOPYME/PBs. Each of these institutiot,s would, in turn, receive TA and project-related training (PRT). A summary description of the TA component's main activities, is showed in the following paragraphs, and details are presented in Attachment 1. 9. Assistance to SMIs through SSME/RTACs The project would assist in the installation and initial operation of the RTAC's network. The estimated subcomponent total cost amounts to US$526,000 equivalent, of which the proposed loan would provide up to US$400,000 equivalent. The subcomponent would: (a) provide initial training for the RTACs and CU's personnel; (b) assist CU in analyzing information and procedures required to establish SMI firms, including the recommendations, as well as preparation of an informative manual upon the above; (c) assist RTACs in the preparation of project-oriented studies to identify market possibilities and potential opportunities for the establishment or expansion of SMIs; and (d) help to provide some of the equipment required for the initial operation of five RTACs and CU (e.g., vehicles, microcomputers and software, and other office equipment). Part (a) would be financed entirely with Government resources. The proposed loan would make available resources to finance consultancy costs, equipment, and study trips abroad included in the rest of the program. To maximize the impact of financial and human resources available, the proposed loan would concentrate its support upon five pilot centers selected by the Government, to represent different realities in terms of SMIs' potential growth, subsectors, and the degree of interest by provincial governments. The proposed regions are: Santa Fe, Rio Negro, Tucuman, Mendoza, and Chaco. CU would monitor the results and derive experiences for the rest of the centers. 10. The initial training program for the staff of the five RTACs and CU would consist of 18 days of training through successive three-day seminar-type meetings at each of the selected locations and in Buenos Aires. The training would focus upon areas such as: orientation to the overall SMI policies and programs; basic elements of project preparation and appraisal; basic concepts of enterprise management; industrial extensionism including techniques of group work; general aspects regarding taxes, trade, technology; and study-visits to institutions dealing with SMIs. SSME would be responsible for this training, using as instructors senior officers from SIT and institutions dealing with SMIs. As part of the training, four senior staff members of the initial group would take two-weeks visits to other countries operating successful extension services. The initial training of the five pilot centers' staff is expected to be completed by April 1987. 11. Assistance to SMIs through INTI. Under the proposed project, the TA subcomponent to be channeled through INTI would have a total cost of about US$ 2.5 million, of which US$0.4 million (only for MAP) would be financed with loan proceeds, US$1.4 million approximately by the end-users of the assistance and the balance by INTI. INTI's program would be executed through different centers and programs, all under the coordination of INTI's National Director of Promotion and Development (NDPD). 12. The content of each of the INTI programs can be summarized as follows:  -24- CIME. This center would carry out the entrepreneurial training subcomponent, (which is modular and could be modified depending upon the demand from the enterprises), which is intended to build up the managerial skills of existing entrepeneurs. The subcomponent total cost would reach to about US$0.7 million during three years and would not require project financing. Its cost would be basically financed by fees paid by trainees, expected to be mainly SMIs, and by a small INTI contribution. Training would consist of 30-40-hour seminars, at times accessible to enterprises. Subjects to be covered would be related to the operational areas of the enterprises and general managerial matters. Detailed contents of some of the seminars were discussed during project appraisal and are available in project files; others would be developed according to the prevailing SMI needs and experience obtained from the implementation of the previous seminars. It is expected that some 24 courses per year would be delivered throughout three years. In addition, self-learning guides and audio-visual training aids, covering the essentials of some of the subjects mentioned above, would be prepared to reach entrepreneurs unable to attend formal seminars. CIME would also prepare, assisted by other INTI centers, extension materials dealing with basic technical and managerial topics, to be distributed through RTACs. The execution of CIME's program includes staffing reinforcement of some four professionals. Management Advisory Program (MAP). This program would provide in-plant managerial assistance, group assistance, and in-plant entrepreneurial training. It would build up upon the CITSAFE experience, applying the PATI methodoloy. As an outcome of the process, junior advisory agents would get trained to become senior agents. It is expected that MAP, through the PATI methodology, would reach about 480 enterprises in three years. The execution of the program would start with eight senior agents and is expected to finish with a corps of 32, ready to begin a new phase. (The training program for junior advisory agents would consist of seminar-type meetings for a total of eight weeks and on-the-job training for about 24 months. The whole training is provided by senior agents and consultants, as appropriate. The seminars will cover two major aspects: (a) managerial and technical matters related to the operational areas of SMIs; and (b) human relations, characteristics of the SMI entrepreneurs in Argentina, and the relationship between the technical adviser and the entrepreneurs. About 80% of the time would be used for the first set of topics; and 20% for the other. The case system would be applied, using, as teaching materials, cases based upon Argentine experiences and technical notes regarding the corresponding subjects. A limited number of lectures would also be included). In addition to the "cluster" work, MAP would provide direct in-plant managerial assistance to about 690 SMIs during project implementation. Assistance would be limited to managerial matters; technological requests would be referred to the appropriate INTI specialized centers. The program would also develop, test and apply computer models, which would facilitate SMIs' diagnosis and problem identification. NDPD would be responsible for the execution of this subcomponent. MAP's total cost is expected to be about US$1.8 million. INTI's authorities have estimated that, based upon CITSAFE experience, nearly US$1.1 million would be covered by the fees paid by participating beneficiaries and that only US$0.7 million would need to be financed by the TA component of the proposed project, of which the proposed loan would make available up to US$400,000. Loan resources would help to finance: (a) consultancy costs for training the agents providing assistance to SMIs (both as group and in-plant), and developing the computer model above-mentioned; (b) three-weeks study trips abroad for two senior officers to visit similar successful MAP programs in other  -25- countries; and (c) vehicles, microcomputers and software. CID. This subcomponent would basically address the deficiencies detected by INTI authorities and by entrepreneurs, in the delivery system of technical information. As part of the proposed project, rasources would be available to finance: (a) costs to hire foreign consultants, as appropriate, with practical in-depth experience in the operation of technological information systems; (b) a two-week visit by one CID's staff to a successful foreign experience; and (c) the acquisition of supplementary equipmXent. Although the CID subcomponent is considered a part of the TA component of the project, INTI's authorities have expressed the desire to finance this subcomponent (US$ 206,000 equivalent), including the foreign costs, with own resources. 13. Assistance to BANADE/FOPYME/PBs. BANADE's current management is embarked upon a plan to increase institutional efficiency, streamline operating procedures, and upgrade staff's managerial and technical capabilities. The proposed project would provide support for such plan, as well as for strengthening BANADE's second-tier SMI operations --FOPYKE system (Annexes 4 and 5), In this regard, the TA subcomponent would focus upon assistance to BANADE to: (a) strengthen its training program regarding first and second-tier SKI operations, including PBs'staff; (b) prepare subsectoral studies to assist with subproject appraisal and credit decisions; and (c) complete and improve its management information and portfolio monitoring systems, including the processing of information at the regional branch level and the linkage between branches and headquarters. The estimated subcomponent cost amounts to about US$2.1 million equivalent, of which the loan would provide US$1.1 million. Specifically, loan resources would be available to finance: (a) consultancy and seminars costs included in the preceding activities ; (b) short study trips abroad; and (c) computer and software costs for the information and data processing system. 14. BANADE/FOPYME would carry out the training program under its technical assistance component, essentially through seminars to be implemented by BANADE's Training Institute, which has the organization to perform the required tasks. While most of the instructors for this program would be available locally and even some within the institution, it was considered desirable to reinforce the training staff by external consultants, who could contribute with an outside view and a different operational experience. The seminars would focus upon subproject preparation, appraisal and supervision, with special emphasis upon: assessing market potential, analyzing the justification of the new investment, discussing the implications of technical choices in comparison with state-of-the-art technology, assessment of managerial capabilities, analyzing repayment capacity, evaluating the incremental impact of new investments upon the overall enterprise, and discussing the practical objectives of the supervision. For each group of trainees (20-25 for each seminar), there would be two types of training: (a) the initial six-day seminars aimed at providing the general tools upon all aspects of subproject preparation, appraisal and supervision, and focussing upon the above-mentioned specific matters, basically through technical notes and case discussions; and (b) the follow up six-day seminars, to be carried out four to six months after the initial ones. These seminars would be implemented through the case system, reviewing the experience of the preceding months and based upon subprojects prepared under the FOPYME scheme, as appropriate. The last part of these seminars would be devoted to subproject supervision, discussing, among other things, supervision objectives, basic procedures for subproject follow up and indicators to measure subloan  -26- impact assessment, and technical notes and real experience under FOPYME. About 200 professionals would be trained. The seminars for BANADE's staff to be assigned to RTACs would be of a more general nature, focusing upon four major topics: credit available SMIs, general aspects of subproject preparation and specific requirements from BANADE/FOPYME, extension services and human relations (the latter along the corresponding lines described for training the RTACs staff --tara. 10 ). The training material would be the terms and conditions and requirements established by the credit sources, complemented by conferences and some case discussions. The overall training program would also include two-week study visits, by three FOPYME staff and three BANADE first-tier staff, to successful second-tier and SMI operations in other Latin American countries. 15. SMI subsector studies would be financed to assist financial intermediaries in the selection of viable industrial subproject proposals. BANADE, through its Economic Studies Department, would carry out about 15 branch studies covering, among other things: data upon subsector organization; installed capacity; age and technological obsolescence of machinery; market possibilities; cost competitiveness; development potential and constraints; financial situation and investment potential. In carrying out these studies, BANADE would need assistance from external consultants, for which the project/loan would provide funding. An initial list of branches to be studied includes: food processing, and in particular, those with potential for integration with Brazil; leather garments and apparel; agricultural machinery; and automotive parts. Other subsectors would be defined jointly and reviewed periodically by BANADE and the Bank, depending upon the needs prevailing during project implementation. 16. The project would also help BANADE to complement its data processing needs aimed at establishing a management information system. In this regard, loan resources would be available to finance computer equipment (microcomputers, terminals and linkage modems, as appropriate) and software for: (a) FOPYME's operations, including statistical information and subproject analysis; (b) BANADE's first-tier activities under FOPYME and for purposes similar to those stated in (a); (c) the Economic Department, to monitor, among other things, industrial subsectoral information; (d) integration of the preceding activities to the Centra'l Processing Unit (CPU); and (e) regional offices, including their linkage to the central system. BANADE expects to finance under ongoing loan 2063-AR the strengthening of CPU (through increasing storage capacity, upgrading the main frame computers and purchasing additional software) to complete some of the information sub-systems currently under implementation (Annex 5, para. 5). Other sub-systems to be completed are: (a) portfolio, including total portfolio and arrears, with breakdown by small, medium and large firms; age; principal and interests; repayments and restructurings; subsectors and provinces; and amounts corresponding to the previous and current year; and (b) comparative monthly financial indicators.  sex~~~~~~~~~~~~~~~~M 3, Atebt1 aKL a)UD3 - OMIT Wr btrted Cmts d P1zoIzF fr '1cdcal AvsW- Prxq (1967-1989) Bwk local Txm It_ to be F I I/ <ot iatuti1 te 4cf A. Pr 1 , - G tit SW /0m 3 a) Pzwli 19itai h Is 18 oe trnim4 dwaoh Itf1 tlm1 - 40.0 40.0 S9