Argentina - Municipal Development Project

Document of The World Bank FOR OFFICIAL USE ONLY asA/ 2 Report No. P-4727-AR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSLD LOAN IN AN AMOUNT EQUIVALENT TO USg 120.0 MILLION TO THE ARGENTINE REPUBLIC FOR A MUNICIPAL DEVELOPMENT PROJECT February 26, 1988 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 AND EQUIVALENT UNITS Argentine Austral (A) - 100 centavos USS 1.00 at Appraisal (November 14, 1987) - A 3.50 (Official Rate*) - A 4.03 (Free Market Rate) *Also known as "commercial, fixed rate'. WEIGHTS AND MEASURES The Metric System has been used throughout this report. Fiscal Year January 1 - December 31  FOR OWICIAL US O4T ARGENTINA MUNICIPAL DEVELOPMENT PROJECT Loan a*.a Proiect Sumary Borrower: Argentine Republic Beneficiaries: Provinces of Buenos Aires, Cordoba, La Pampa, Neuquen, and Santa Fe; and eligible municipalities of these provinces. Amount: US$ 120.0 million equivalent Terms: Repayment in 15 years, including three years of grace, with interest at the Bank'e standard variable rate. Relending Terms: All proceeds of the loan would be onlent from the Central to Provincial Governments under the same terms and conditions as the Bank loan, except that the Central Government would assume the cross- currency exchange risk and pass on the US dollar exchange risk to provinces, with the condition that if the periodic, dollar-indexed debt service adjustments exceed a "band' of plus or minus 10% deviation from the official inflation rate, then the difference would be credited to (or capitalized in) outstanding provincial debt. In addition, provinces would pay a service charge of up to 1% of loan amounts disbursed. Proceeds of the Bank loan would be onlent from provinces to municipalities on "harder" terms (maximum of 10 years repayment, including up to one year of grace, with spread of at least 1.5 percentage points over interest rate paid by provinces to Central Government) necessary to capitalize a Municipal Development Fund for project replication in each province. Financing Plan: Provinces US$ 32.0 million Municipalities USS 88.0 million IBRD US$ 120.0 million TOTAL US$ 240.0 million Economic Rate of Return: 38% Staff Appraisal Report: Report No. 7093-AR Map: IBRD 20486 This document has a restricted distribution and may be used by recipients only in the performaice of their official duties. Its contents may not otherwise be disclosed without World Bar. _ r. -ization.  MEMORANDUH AND RECOCIENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THz ExECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR A MUNIClPAL DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed loan to the Argentine Republic for the equivalent of USS 120.0 million is submitted for approval. The proposed loan would have a term of 15 years, including three years of grace, with interest at the Bank's standard variafle rate. Proceeds of the loan would be onlent from the Central Government to the Provinces of Buenos Aires (UJS$ 55.0 millior, equivalent), Cordoba (USS 21.0 million), La Pampa (US$ 3.5 million), Neuquen (US$ 9.5 million) and Santa Fe (US$ 31.0 million), under the same terms and conditions as the Bank loan, except that the Central Government would assume the cross-currency exchange risk and pass on, within stated limits, the US dollar exchange risk to the provinces. Provi.ices also would pay a charge, for services of the financial intermediary and the National Liaison Unit, of up to 1% of loan amounts disbursed. 2. Background. Although the Argentine Government seeks to decentralize and improve public sector management at the sub-national level, municipalities face practically insurmountable barriers to carrying out effective capital investment programs. First, fiscal transfers from the provinces to municipalities (both formula-driven revenue sharing and discretionary grants) are v*iry irregular, and even well managed municipalities that make a strong fiscal effort under existing legislation are nct assured of sufficient provincial transfers to support capital improvements. Further, local borrowing does not fill this gap. It is very expensive and is limited, in practice, to equipment financing by suppliers. Thus, almost all Argentine municipalities resort to innovative financing mechanisms, particularly the betterment levy, through which direct beneficiaries voluntarily agree to pay all of the capital cost. Without the availability of credit, however, municipal works financed in this manner tend to be very small, financed over a short period (generally a maximum of 24 months), with a large proportion (frequently 50x) of beneficiary payments made before construction starts. These factors result in piecemeal works, implemented at a slow pace, ehat benefit middle income families and businesses that can afford them. 3. R_tionale for Bank Involvement. As the Bank's first effort in the areas of municipal development atnd more effective intergovernmental financial management in Argentina, the project would directly support two of the broad Bank oblectives for Argentina: increased public sector efficiency and resource mobilization. The project would provide external resources in support of locally mobilized resources (municipal own-source revenues and fiscally sound, lega.ly established revenue sharing with municipalities), to finance iustified municipal capital imiprovement programs. With the resource mobilization and cost recovery design of the project, the Bank would support . fisLaliy responsible alternative to ad hoc, discretionary grants to m-: ,a irIes, which generally result in inefflcient resource allocation, -ecescEsrces directed to the most needy, and budgetary deficit pressures.  Pro1ect Obiectives. The main purpose of the proposod project is eontribute to more effective public sector management at the Provincial ..d Municipal levels through improved financing mechanisms for municipal westments. The specific objectives of the project would be to: (a) -'bilize external and internal resources in a non-deficit and non- .