Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, March 22, 1988 : Argentina - Municipal Development Project

1 STRICTLY CONFIDENTIAL nml INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Tuesday, March 22, 1988 Washington, D.C. The meeting of the Executive Directors was convened at 10:09 a.m. in the Board Room, 1818 H Street, N.W., Washington, D.C., Me ssrs. w. David Hopper and Moeen Qureshi, Chairme n, presiding. MILLER REPORTING CO., INC. )07 C Succt, N .E. Washington, D .C. 20002 ( 202) )46-6666  2 STRICTLY nm2 CONFIDENTIAL C O N T E N T S ITEM PAGE 3 Proposed Loan - Argentina (Municipal Devel oprne 11 t P 1:0 j ec t ) 57 Mr. Dor[ 59 Mr. Ruliianes 60 Mr. Faint 61 Mr. Shecwin 71 Mr. Smi Lh 74 MILLER REPORTING CO., INC. )07 C Street, N.E. Washington, D.C. 20002 (202) )46-6666 STRICTLY nm57 CONFIDENTIAL 57 Let's turn to the next item which is a proposed loan to Argentina in the amount of $120 million for a Municipal Development Project, and Mr. Hicks will introduce it to you. Go ahead, Mr. Hicks. MR. HICKS: Mr- Chairman, Members of the Board: The Argentine Federal Authorities have an explicit policy to promote decentralization of the public sector and to streng- then sub-national governments. The Bank has supported this generaJ. policy. After de c ades of increased centralization of political power and fiscal authority, both provincial and municipal governments face great uncertainties in the volume and timing of the revenues. This makes financing of municipal investments precarious. Further, local borrowing does not fill the gap. It is generally very expensive and available only for short-term MILLER REPORTING CO., INC. ,01 C Street. N.E. Washington. D.C. 20002 ( 202) ,46-6666 STRICTLY run58 CONFIDENTIAL 58 financing. This enviromnent has resulted in municipal works that are piecemeal, slow paced and generally not affordable to the poor. The project seeks to reverse this trend. It provides for works that may be rapidly implemented, affordable to the poor and financed in a replicable way. This replica- bility would be achieved by participating municipalities through full cost recovery. Replicability within participating provinces would be attained through municipal development funds. Finally, the project's general design would be potentially replicable in all provinces, not only for further municipal development projects but also for other projects at the provincial level. We believe, Mr. Chairman, that the project before the Board represents an innovative approach to resource mobilization and improved efficiency of public sector management. It also supports cooperative relationships between federal, provincial and municipal governments. We believe, furthermore, that the project represents an important step in strengthening sub-national governments and in better matching by leve l of government e xpenditure responsibility and revenue authority. Thank you. MR. QURESHI: Tha nk yo u, Mr. Hicks. MILLER REPORTING CO., INC. )07 C Succt, N .E. W25hington, D.C . 20002 (202) H6-6666 STRICTLY nm59 CONFIDENTIAL 59 Are there any comments or questions? Mr. Dorf. MR. DORF: Thank you, Mr. Chairman. I would like to express our support for this project, which is a very interesting, and I quote, "first effort in the areas uf municipal development and more effective inter-governmental financial management in Argen- tina". That is from paragraph 3 of the President's memorandum. I recognize the importance of this project for supporting the gover nme nt's decentrali zation policy and for mobilizJ.ng resources for municipalities in a non-deficit and non-inflationary way. As one of the key objectives of this project is to develop a replicable mode l for other provinces, I am very much interested in its results and I would be grateful to receive a brief report as soon as implementation has advanced and allows to draw some conclusions. I do not wa11.t t o hide a certain skepticism on my side which is based on the consideration that the task of full cost recovery for investme nts like str ee t curbing and paving, water supply and sewers, stree t lighting, social and cultural centers, cl1ild and hea lth care ce nters , et cetera is a v ery difficult one if the beneficiaries are others than MILLER REPORTING CO., INC. 507 C Street. N.E. Washingcon. D .C. 20002 (202) )46-6666 STRICTLY nm60 CONFIDENTIAL 60 high-income families and these beneficiaries finally have to pay the high effective financing cost including a foreign exchange risk. Thank you. MR. QURESHI: Thank you, Mr. Dorf. Those are very perceptive comments and I share to some ext.ent the feeling that this is indeed an ambitious objective, but we shall keep in mind the fact that there is an inte r e st in finding out about implementation. M1.-. Rubianes. MR. RUBIANES: Thank you, Mr. Chairman. We would l ike to e xpress our strong support to thi s initiative which wiJl provide 50 percent of the financial funds to some 400 municipalities, allowing them to undertake infrast r uctural wo rk in s oc ial projects, generating employ- me nt, r e sourc e mobilization and strengthening the manage rial capacity at the pro vinci a l and municipal levels. The inte rnal rate of return, estimated at 38 percent, sounds h i gh. '1.'he way in whi c h the risk of slower imple mentation will be overtaken by dividing the loan among the five p r ovinc es, l e tting the m compete for the loan in order to adjust the o r iginal a lloca tion among the mo s t e fficient MILLER REPORTING CO., INC. 507 C Sueet, N .E. Washington, D.C. 20002 (202) 546-6666 STRICTLY nm61 CONFIDENTIAL 61 appears to be fair. We expect good results from this first municipal program in Argentina, and we are very much interested in the replicability of tllis new approach to local project levels in other countries. 'l'hank you, Mr. Chairman. MR. QURESHI: Thank you, Mr. Rubianes. Mr. Faint. MR. FAINT: Thank you, Mr. Chairman. This seems to us an interesting and important project, and we support it. 1 should like to ask a couple of questions which are related to the risks to which this project might be exposed. First of all, it comes out in the paper that the financ i al position of the provinces is in general very weak, and the imme diate question that that brings to mind is whether there is some repayment risk on this project. Now I understa nd that there has recently b een a new move on the division of revenue between the provinces and the central government. The details of this are not actuall y reflected in the paper, which was probably prepared bef ore this change was made . MILLER REPORTING CO., INC. 507 C Str«c, N.E. Washington, D .C. 20002 (202) 546-6666 STRICTLY nm62 CONFIDENTIAL 62 On the whole, the effect is to shift a little more revenue in the direction of the provinces. What isn't terribly clear to me is whether there has been any . change inn the relationship between the provinces and the municipalities, and indeed whether some reform in this area ought to ap- propriately be made a condition of this loan in an attempt to strengthen our assurance on the financial viability of the project.That is the first question. The second question is about the overall economic environment and the bearing that it has or might have on this project, first of all, in the area of exchange rate risk. The basic system in this project is that project costs should be based on dollar prices adjusted for U.S. inflation. And if there are significant real exchange rate changes, that could have a significant impact on the local currency availability for the municipalities from the project. So I would welcome a comment on that. And the second overall economic aspect of course relates to inflation and nominal interest rates. We did wonder actually -- there is a project on the banking sector which has got some quite far-reaching reforms, which is coming up in a week's time. It might have been quite interesting to take these two projects together. But in the MILLER REPORTING CO., INC. ,01 C Succt, N .E. Washington, D.C. 20002 (202) ,46-6666 STRICTLY nm63 CONFIDENTIAL 63 meantime, the position in Argentina is that real interest rates are extremely high and will presumably continue to be so for some time. And we wonder whether quite a lot of municipalities might not run into the 15 percent limit on the relationship betwRPn debt service and revenues, which is laid down in this project. So I would welcome a little bit more comment on the sort of risks that ~he project might be exposed to from the overall economic environment. By the way, we also had some sympathy with Mr. Dorf's point that some of the activities in the project may not lend themselves too well to the extent of cost recovery that is envisaged under the project. Thank you. MR. QURESHI: Thank you, Mr. Faint. Mr. Hicks, would you start off first and take some of the points that have been mentioned, the risks that Mr. Faint has mentioned into account, and make some comments about it? The first issue that he had raised was the relation- : ' ship basically between the municipalities and the provinces and whether there are any shifts in that, any changes in that, and the extent to which that would affect in a certain MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 5-46-6666 STRICTLY nm64 CONFIDENTIAL 64 sense the repayment of these loans. The second issue -- so that you may jot that down - - is the impact of the economic environment and in particular the exchange rate changes, to the extent to which that might affect the capability of the municipalities to service these loans. And the third was the issue of the debt service ratios. And finally was the point that Mr. Dorf also raised about cost recovery, and whether we are aiming too high here. And perhaps after you finish, Mr. Bottelier, you might wish to add something about the overall situation and how you see this project fitting into it. MR. HICKS: Thank you, Mr. Chairman. On the first point in terms of the financial risks to the various leveJs of government, we have already agreed with all of the provinces that the municipalities would use as guarantees for their debt services to the provinces their legally-mandated revenue sharing; so there will be basically zero risk, financial risk to the provinces. And now that we do have a new revenue-sharing system which has been legislated, but as I understand not fully reyulated, betwee11 the central government and the provinces, I think it would be reasonable to explore the MILLER REPORTING CO., INC. )07 C Str«t. N .E. Washington, D.C. 20002 { 202) )46-6666 STRICTLY nm65 CONFIDENTIAL 65 feasibility of also having the provinces place as guarantee of repayment to the central government their revenue-sharing. This had not been possible at the time of project preparation because the revenue-sharing system had been suspended. The formal revenue-sharing system in Argentina had been suspended at the end of 1984, and it has been an object of great political debate. But now that this is coming to fruition, we think this would be a very prudent addition to the subsidiary loan agreements between central and provincial governments for the provinces to guarantee through the revenue-sharing system their repayment to the local government or to t he central government. In terms of the revenue-sharing system between the provinces and municipalities, in fact this was a condition that we examined for participation by the provinces. We felt ; i as a minimum condition of financial feasibility to participate j in this project, the provinces should have a revenue-sharing system in place so that the municipalities that had a reasonable local fiscal effort, together with the revenue- sharing they should be able to at least maintain their local level of services, so that incremental borrowing would be available t o expand the capital stock. So that would be the response to the first ques tion MILLER REPORTING CO., INC. )07 C Screec, N.E. Washington, D.C. 20002 ( 202) )46-6666 STRICTLY 1111166 CONFIDENTIAL 66 about financial guarantees and the appropriateness of the revenue-sharing system at the two tiers. The second question in terms of the economic envirornnent and more specifically, as I understood, the indexation of costs, I think there are perhaps two separate issues here, if I understood correctly. The first one in terms of presentation of project cost, they are in fact in U.S. dollar equivalent more as a convenience in a sense recognizing that the inflation is at a very high level and to have projected out our costs in local currencies perhaps would have been less than fully meaningful. So in terms of cost tables, we have done that in U.S. equivalent as a convenience to improve our monitoring during supervision. Now I think perhaps a more serious issue is the one of indexation of debt to the municipalities. In fact, we recognize this as a very thorny issue, where you have triple digit inflation. Probably any method of indexation will be less than satisfactory. Recognizing that, we have tried to choose the least unsatisfactory of all in the sense that some indexation is required if in fact we maintain our project objective of replicability within the provinces and the capitalization of the municipal development funds in order to continue the project after the proceeds of the Bank loan have MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666 STRICTLY nm67 CONFIDENTIAL 67 been withdrawn. For indexation to municipalities, we have basically left that as an option within each province. The only condition that we have stated is that the principal must be maintained in real terms, and the indexation should result in a positive real interest rate compatible with the opportunity cost of capital in Argentina. At negotiations, we have agreed with the proposals that we received from all the provinces, of which four of the provinces proposed to index municipal debt service to the provinces i11 dollar denomination, and one province, namely the Province of Bue11us Aires, to index a local measure of inflation . The third question in terms of nominal interest rates, more specifically on the debt service limit in terms of creditworthine ss, we do in fact have the 15 percent limit for new borrowing among municipalities. In the short-run, we do not believe this will be a serious constr~int because in fact the municipalities have very little, if any, longer term debt. Almost all borrowing at the municipal level is limited to very short-term borrowing primarily from suppliers, equipment suppliers. And finally, the question raised on affordability MILLER REPORTING CO., INC. 507 C Strert, N.E. Washington , D.C. 20002 (202) 546-66&S STRICTLY nm68 CONFIDENTIAL 68 and cost recovery, once again we share the concern that the revenue instrument which has been most used at the local level in the face of a general economic and financial crisis has been the betterment levy in which the direct beneficiary pays for the services. In fact, when the repayment period for the better- ment levy is very short, we do find a very serious afford- ability problem and the tendency is to concentrate those investments in middle-income neighborhoods. That is the current situation which we are hoping to ameliorate, to providing longer-term credit with the possibility to have cross subsidies through the repayment period, of much longer periods for the lower- income areas, and maintain the shorter repayment period of the betterment levy for commercial areas and middle-income areas. And finally, we have recognized also that this is not an instrument that we feel can really solve all the problems of all the municipalities, and that is one of the reasons we have the limitations of indebtedness because we recognize that there are other things for which municipalities should seek credit u utsi.de the project. And we also have the 35 percent flexibility which would not have direct cost reco ve r y necessarily, and which MILLER REPORTING CO., INC. 507 C Strccc, N .E. Washington, D .C. 20002 (202) 546-6666 STRICTLY nm69 CONFIDENTIAL 69 municipalities could use to allocate resources which would have a more direct impact on the more needy families. MR. QURESHI: Thank you, Mr. Hicks. Mr. Bottelier, do you wish to answer? MR. BOT'l'ELIER: It may be useful, Mr. Chairman, to add a few comments of a more general nature to put this project in the context of what is happening in Argentina and our relationship with Argentina. As you know, at the heart of Argentina's economic adjustment programs lies a very big and intractable fiscal problent. And indirectly, this project will assist in resolving one part of that fiscal problem, or at least contribute towards that end. The fiscal and monetary relationships between the federal gove rnment and the provincial governments is a very important source of problems in Argentina. It certainly has been in the past, and the government is right now in the middle of very severe measures to correct those measures. As you may know, in the recent Letter of Intent to the IMF, the Argentina Government has announced that hence forward the revenue-sharing between the federal government and provinces will ~e done on a different basis, and a very strict basis, unlike it was in the past. MllLER REPORTING CO., INC. ~07 C Succt. N.E. Washington, D.C. 20002 (202) ~46-6666 STRICTLY nrn 7 0 CONFIDENTIAL 70 Simultaneously, as we will have a chance to discuss next week when the ~anking loan comes forward, there have already been introduced very significant changes in the monetary relationships between provincial banks and the central bank. Hence forward, provincial banks will not have unlimited access which was the practice in the past practi- cally to central bank rediscount facilities. The combination of the fiscal and monetary changes, both of which are supported by World Bank loans, will have significant salutary effects, we expect, on the fiscal health of the country as a whole. MR. QURESHI: Thank you very much. Yes, Mr. Faint. MR. FAINT: Can I just follow up on a couple of points quickly? On the relationship between the different levels, the provinces and the municipalities and so on, I thought that was an interesting statement we heard. I must say I really couldn't find the conditions that Mr. Hicks referred to in the statement of agreed actions in paragraph 9, but I suppose they are imbedded somewhere in some of these agreements that are supposed to be signed before loan effectiveness. MILLER REPORTING CO., INC. ~07 C S"eet, N.E. Washington, .O.C. 20002 ( 202) ~46-6666 STRICTLY CONFIDENTIAL nm7 1 71 On the exchange rate issue, I am not quite sure -- I am still not quite sure I understand the way this project is set up. I think. he said that the denomination in dollars is only a matter of convenience, as it were, for calculating and fore casting cost s . But when projects are approved, how are the y going to be denominated; in local currency. And the conversion ls going to take place from time to time on the basis of reimburseme nt claims. Is that the way it is going t o be d o ne ? MR. FAINT: Thank you. MR. QURESHI: That is correct, Mr. Hicks? With respe ct to the first point, those conditions are imbedded in the agreement, the r a t i os that Mr. Faint was referring to? MR. HICKS: (No dding in the affirmative.) Yes, and these are incorporated within the Project Operations Manual agreed with e ach p rovince. MR. QURESHI: Thank you. Mr. Sherwi n. MR. SHERW I N: I think I am g e tting confu s ed on this point now. The provinces a r e carrying U.S. dollar risk, right? Why is it convenie nt for them to carry U.S. dollar risk ra t her t han the r isk o f t he b a sket that we oper ate in g enera l ? MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666 STRICTLY nm72 CONFIDENTIAL 72 MR. QURESHI: Mr. Hicks, perhaps you might divide this question into two aspects. First, 1 thought that you referred to the fact that there is an ease ot monitoring when you referred to the issue of capital costs, and that is one reason why you have used dollar equivalents for that. The second is the issue of indexing these particular ! costs. It is particularly the second one that I think Mr. Sherwin would like for you to conunent on. Why is it more easy for them to denominate this in dollars rather than in the basket of currencies which they obtain? Are they looking for clarity ? Are they looking for stability? What is it that they are looking for? MR. HICKS: This is a result of a negotiation process between the central and provincial governments, and I think it's important to understand an overall philosophy of the project from th e very beginning, that the central government would assume minimum financial responsibility for the project. This is e ssentially a provincial project. On the other hand, because of the very irregular system of revenue-sharing between the central and provincial governments, particularly since in the post-1984 period the central governmen t agreed to assume the cross-c urrency MILLER REPORTING CO., INC. )07 C Strcct. N .E. Washington. D.C. 20002 (202) 546-6666 STRICTLY nm73 CONFIDENTIAL 73 exchange risk, the dollar vis-a-vis the basket of currencies. Now I think your question is why did the central government agree to do that and then pass on the dollar to Austral risk to the provinces. The provinces agreed to assume this risk because they felt it was a more predictable risk and that in fact financial predictability is one of the project objectives which we are seeking to attain through the project, not only at the municipal level but also at the province level in order to improve the dialogue between provincial and municipal governments and establishing and maintaining capital improvement programs over a substantially longer period than is currently possible. MR. QURESHI: Of course, you realize, Mr. Sherwin, we are not passing any judgments on the correctness of their expectation that this is a more predictable risk. Go ahead, Mr. Sherwin. Do you wish to comment further? MR. SHERWIN: Well, I was just going to say I think I should follow up on a couple of points outside the meeting, where I am still a little confused also about the operation of the indexation. But I admire anyone who feels that one set of exchange risks is more predictable than the other.x MR. QURESHI: Have you finished, Mr. Sherwin? MILLER REPORTING CO., INC. ~07 C Street, N .E. Washington, D.C. 20002 (202) ~46-6666 STRICTLY nm74 CONFIDENTIAL 74 MR. SHERWIN: Yes. MR. QURESHI: Thank you. Mr. Smith. MR. SMITH: Thank you, Mr. Chairman. I want to say at the outset that I am not opposed to this loan. I think it is a very interesting and novel proposal. But I can't say that I have heard anything in the discussion today which makes me any more enthusiastic about it than I was when I first read it. I find it quite complex and difficult to follow, and it seems to me that it has the potential to be either very successful or very unsuccessful. It has all the contingent difficulties, I think, of any loan which is onlent to sub-borrowers, and I am not too sure that the Argentinean provinces -- I don't know just how well versed the Argentinean provinces are in this kind of operation. I am also not too sure how this loan will ultimately ! contribute to the long-term development of municipal funding in Argentina, if it has the capacity to put in motion some kind of self-operating mechanism for the future. On the exchange risk, like Mr. Sherwin, I think I remain quite confused and muddled about what is happening. I would like to discuss that with the staff separately. MILLER REPORTING CO., INC. 507 C Sueet, N.E. Washington, D.C. 20002 ( 202) 146-6666 STRICTLY nm75 CONFIDENTIAL 75 I must confess to a basic unease about pass~ng any form of exchange risk to provincial authorities or to official authorities who do not have a capacity to generate any kind of foreign exchange revenue and who may be to an extent a captive of central government. That may also relate to an unease I have about in fact putting external financing into local government. But that is a much bigger question. Finally, J would like to say that I share a lot of the concerns and skepticisms that Mr. Dorf has expressed about cost recovery, but I am somewhat concerned as to how in fact cost recovery is likely to impact on the poor. The only major point that seems to be highlighted here is the extension, I think, of repayment periods. I think 1 would like, if it is possible, to have some more specific information on what can be done to make sure that the ordinary vehicle can afford these services when they are eventually put in place. Thank you. MR. QURESHI: Thank you, Mr. Smith. Mr. Hicks, would you perhaps add some further clarification on the repayment periods and why you think that these are in the ball-park, so to speak, of feasibility? And Mr. Bottelier, I would also you to perhaps add MILLER REPORTING CO., INC. )07 C Street. N.E. Wa.shington, D.C . 20002 ( 202) )46-6666 STRICTLY nm76 CONFIDENTIAL 76 some comment, because it does seem to me that there is a contradiction involved here, given the present environment and fiscal problems of Argentina. The authorities are trying to walk a very fine line here in terms of trying to decide how to pursue investment without undertaking additional commitments and liabilities which the present system, the financial system cannot really support, at least not consis- tently with stability, and perhaps you might in a sense wish to add some further comments on that point? MR. BOTTELIER: Perhaps the general point raised by Mr. Smith and I think reflected by other speakers also, the sense of unease, can this really work, and haven't we gone out on a limb and haven't made it too complicated by passing all the risks down Lu the ultimate borrowers? I think we are very conscious of that. In our internal discussions, we have had long and hard discussions on whether this actually could be done or whether we should do it. In the end we decided to recommend, to proceed in this way essentially because we have no viable alternative. At the municipal level and to a lesser extent at the provin- cial level, almost no long-term investment capital is available in Argentina today, and we don't know of a way of MILLER REPORTING CO., INC. 507 C Suttc, N.E. Washington. D.C. 20002 ( 202) 546-6666 STRICTLY CONFIDENTIAL nm77 77 getting it there except through vehicles such as this one. Many of the municipal facilities are deteriorating precisely because of the lack of long-term capital availabi- lity. This would be, once established, the only source of long-term capital available for municipal level of invest- ments. What price do they have to pay to get it there? The price is essentially the assumption, (a) the cost recovery obligation, and (b) the assumption of exchange risks which are normally not assumed at that level in a country. But again, there is no alternative. The Government of Argentina is at this moment unwilling to accept exchange risks and has negotiated with the lower level governments at the provincial level and the municipalities that the systems will be put in plac e to effectively pass on all of these risks down to the ultimate beneficiary, which implies in a sense a kind of dollarization of the economy down to the municipal l eve l, which is from some point of view undesirable but to which we don't really have a viable alternative under the present situation. I will pass t he floor to my colleague, Mr. Hicks, on the impact of the p our and the cost r ecovery there , but let me conclude by saying that the way we have set up the projects in con s ul ta ti o n with the Arge ntine s, I t hink, MILLER REPORTING CO., INC. ~07 C Street, N.E. Washington, D.C. 20002 ( 202) ~46-6666 STRICTLY nm78 CONFIDENTIAL 78 virtually assures a decent cost recovery because unless cost recovery through the betterment levy which is the basic system is in place, municipalities are not eligible to draw on funds for this. But the other issue I think I would like to ask my colleague to addres s . MR. HICKS: Perhaps in terms of apparently a complicated operation, it is easiest to begin at the begin- ning, at where we are trying to go, at the final beneficiary. If you go and talk to the mayors in Argentina, which we did in all the provinces, the response is, you know, they can't pass the buck anywhere and they have no palace guards b e hind whicl1 to hide; that, in fact, there is very strong popular pressure on the local governments; that if their water system has deteriorated and a substantial amount of the city is no longer r eceiving water, if the storm drainage is backing up so that you are having more com- munic~ble diseases, the mayors are the first line of political responsibility and authority to most people. And there is a tremendous pressure at this l e vel. Now what d oes a mayor do in the light of this? There is no credit available in the system. The inflation is very hi g h. The revenue-sharing i s highl y irre gular be c au se MILLER REPORTING CO., INC. 507 C Street, N .E. Washington , D .C. 20002 (202) 546-6666 STRICTLY nm79 CONFIDENTIAL 79 it's based on a taxation system which is highly volatile and depending upon general economic activity. It is practically impossible for a responsible mayor to develop a capital improvements' program beyond a few months' horizon. In the face of that, we found highly innovative responses at the local level bred out of desperation within a very difficult macroeconomic and financial and fiscal environment. One of the very innovative mechanisms that they have used is the betterment levy, which has direct cost recovery from the direct beneficiaries. Now under the present circumstances, in order to finance these works, generally the repayment period to the final l>enef j_ciary ls of necessity a very short period, in many cases we find where full cost recovery will have to be achieved before the mu11icipality will agree to break ground, in other words will have to receive frequently, most commonly over 50 percent, and frequently we have found cases of 100 p e rcent previous cost recovery. Well, under those circumstances, there are very few poor-income neighbvrhuuus which can have access or which this revenue instrument will be relevant. What the credit will permit is a muc h longer-term financing of these capital MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY nm80 CONFIDENTIAL 80 improvements. Also it will permit cross subsidies at the local level, and we find a very high degree of sophistication at the local level. And in terms of the foreign exchange risks and other instruments, frankly we are treating local or sub- n~tional governments as adults. They are no longer being treated as adolescents that need special treatment from the central yovernmenL who in fact will know much more what they need and want. So the l.Jetterrnent levy will permit -- to give you a simple example, which I think is somewhat typical, we have certainly many years and in cases decades of periods in which municipal investments which have been in place have not been properly maintained, and certainly they have not been able to expand the capital stock to attend to new demand. We will have for example a commercial area which has evolved over the past 18 to 24 months with some middle-income residents, which did not have some basic municipal infrastructure -- storm drainage, water, sewerage, et cetera -- and the same in a middle-income area. The credit will permit these two to have cross subsidies and, let's say, cost recovery of 12 to 18 months in one area and a much longer period in the low-income area. MILLER REPORTING CO., INC. )07 C Succt, N.E. Washington. D .C . 20002 (202) )46-6666 STRICTLY mn81 CONFIDENTIAL 81 This is only possible if you have access to credit, which the 1 project makes possible. MR. QURESHI: Thank you, Mr. Hicks. Yes, Mr. Smith. MR. SMITH: Sorry to come back again, Mr. Chairman, but Mr. Hicks gave very interesting remarks and, given the novelty and innovative nature of watching this operation, I wonder whether there was any thought given to a smaller project both in money terms and in the number of centers to be covered? MR. QURESHI: Yes. Mr. Bottelier, why this size project? MR. BOT'l'ELIER: Well, as you may have seen, Mr. Smith, the project amount of $120 million is divided over five provinces. The smallest of the five amounts allocated is only of the orde r of $2 million or $3 million, which in relative terms is comparable to the largest allocation, I believe, for the Province of Buenos Aires of -- I don't know the exact amount. But relative to the size of these provinces, · and relative also to the needs of the municipal investment requirements, these are really quite modest amounts. In fact, we have scaled down the project in the course of our work. We have originally hoped to be able to MILLER REPORTING CO., INC. l07 C Screot, N.E. Washington, D.C. 20002 ( 202) )46-6666 STRICTLY nm8 2 CONFIDENTIAL 82 justify a larger amount. And, in fact, we hope that things go well and that before long we can begin the preparation of a follow-up project. MR. QURESHI: And an equal amount is to be con- tributed by the provinces and municipalities in this par- ticular project. MR. BOTTELIER: 50/50. MR. QURESHI: So it is very much a project in which there is a very strung, in other words, sense of commitment on the other side to try to move in this particular area. Any other comments? (No respunse.) MR. QURESHI: Thank you. The minutes will show that you have approved this project. MILLER REPORTING CO., INC. 507 C Street , N.E. Washington , D.C. 20002 (202) 546-6666