Argentina - Cordoba : public sector assessment - proposals for reform (Vol. 1 of 2) : Main report

Report No. 15132-AR Argentina Cordoba - Public Sector Assessment: Proposals for Reform (In Two Volumes) Volume l: The Main Report May 15, 1996 Country Operations Unit 11 Country Department I Latin America and the Caribbean Regional Office '' ''. . ' ',. ' ."' " " . '' "' 'S S 5 f ' : v '*; ; , 'w ; ,.I % t. Sy z *,, 6 * ;' g w X, F , r ?--54' zi4' Do 'u 2 :St {E tzfl: i*, f.; ff t000n :. ;X0'0n'1~~~~~~~~~~B. * * t t fi ' j t ' < s ' ; - ~ ~ t. - ! W- Z  CURRENCY EQUIVALENTS Currency Unit: Peso $ (As of May 15, 1996) US$1.00 = $1.00 Fiscal Year January I - December 31 GLOSSARY OF ACRONYMS BNA Banco de la Nacion Argentina CECOR Certificate of Cancellation of Debt CPPM Provincial Council for the Protection of Minors DIPAS Provincial Department for Water and Sanitation DPH Provincial Department Hydraulic Co DVP Provincial Roads Department EPEC Electricity Company EPOS Water and Sanitation Provincial Co. FOFINDES Decentralization Fund FONAVI National Housing Fund FOVICOR C6rdoba Housing Fund GDP Gross Domestic Product GPP Gross Provincial Product IPV Provincial Housing Institute MDS Ministry of Health MCBA Municipality of Buenos Aires M_EC Ministry of Education and Culture MSD Ministry of Social Development NGO Non-Governmental Organization PAICOR Cordoba's Integral Assistance Program PROSOCO Federal Social Welfare Program PROSONU Federal Child Nutrition Program SDS Secretariat of Social Development VAT Value Added Tax  TABLE OF CONTENTS CORDOBA PUBLIC SECTOR ASSESSMENT: PROPOSALS FOR REFORM Preface Executive Summary .....................................................i Addendum .................................................... iii I. Background ....................................................1 A. Overview of Cordoba's Economy ......................................1 B. Structural Causes of the Financial Crisis: A Comparative Analysis ............2 C. Federal-Provincial Fiscal Relations and the Pacto Fiscal ........................... 4 II. Fiscal Evaluation and Prospects ............................................... ..6 A. The 1995 Fiscal Crisis ................................................... 6 B. Fiscal Prospects .................................................... 8 III. Assessing Fiscal Efficiency ........................................... 10 A. Revenue Review ................................................... 10 B. Public Expenditure Review ..11....................................... 1 An Overview ...................................... .1........... I A diagnosis of Cordoba's Public Expenditure . .1.......................... I Sectoral Review ................................................... 13 Health ................................................... 13 Education ................................................... 15 Social Welfare Programs .......................................... 14 Roads .................................................... 16 Water, Sewerage and Irrigation ........... ........................ 16 Housing ................................................... 17 Expenditure Review by Economic Categories ........................................ 17 Personnel Expenditures ................................................... 17 Municipal Transfers ................................................... 18 Social Security System ............................................ 20 C. Public Enterprises ................................................... 21 Provincial Banks ................................................... 21 Banco de la Provincia de Cordoba ................................................. .. 22 Banco Social de Cordoba ................................................... 24 EPEC .................................................... 25  IV. Recommendations: A Vision for Cordoba ............................................. 25 A. Goals for Cordoba's Public Sector ................................................... 25 B. Recommendations for Public Sector Reform ......................................... 28 Budgetary Reform ................................................... 28 Civil Service Reform ................................................... 29 Measures to Ease the Adjustment ................................................... 3 1 Illustrative Workout of Public Finances with Adjustment ........... ........... 34 Timing Reforms ................................................... 36 Short-Term Sectoral Adjustments for the Workout ............................... 37 Health ................................................... 37 Education ................................................... 38 Social Welfare Programs ................................................... 39 Roads ................................................... 39 Water, Sewerage and Irrigation ................................................... 40 H o u sing ................................................... 4 0 Expenditure Allocations ................................................... 41 C. Medium-Term Reforms for Improved Public Sector Efficiency .............. 43 R evenues ................................................... 43 Expenditures ................................................... 43  PREFACE This report was prepared at the request of the Government of Cordoba. It is based on findings of a Bank mission to Cordoba on October, 1995. This document was presented to, and its contents discussed with, the Government of Cordoba in December 1995. The document was also shared with the Federal Government. Following a three month period of intensive efforts by the Government of Cordoba to address the crisis of the state, the Bank revisited the province, briefly, on April 1996. The Addendum in this report, presents the main measures implemented by the Government since the October 1995 mission.   Executive Summary i. C6rdoba has a special place in Argentina, geographically because of its size and central location, economically by being the second (virtually tied with Santa Fe) largest provincial economy (excluding the municipality of B.A.), and politically for marching to a different drummer. Because of that position, it has the capacity to influence events and set positive trends that affect the whole country. Public sector management over the past few years has tarnished that image. The current national and local crises are weighing heavily on C6rdoba. C6rdoba is facing a unique chance to transform this crisis into an opportunity, that will not only set its economy in the right path for future sustainable development, but also regain its leadership role at the national level. 2. Cordoba's public sector is in deep financial crisis. This crisis, superimposed on the national economic difficulties, is affecting detrimentally the level of economic activity in the province. The financial situation of the Government of C6rdoba deteriorated in the early nineties, despite significant increases in coparticipated revenues and own tax revenues resulting from the stabilization and recovery of the national and local economies. Sharp increases in expenditures across the board, led to overall deficits averaging 19.5 percent of current expenditures in both 1993 and 1994. 3. The recent Latin American crisis severely weakened the province's financial position, and in the midst of social unrest, the previous administration left office in July, 1995, five months earlier than anticipated. The new administration was forced to engage immediately in crisis management, taking strong measures to curtail fiscal spending through the implementation of an Emergency Law. 4. Five months have passed since the new Administration took over the reigns of management of the Province of C6rdoba. The situation continues to remain problematic despite valiant efforts to implement emergency measures. The absence of a meaningful national economic recovery has been one contributor to the continuing crisis. At the same time, however, it has to be recognized that the causes of C6rdoba's economic crisis go deeper, and are the result of locally grown imbalances. The time has come to face the need for a fundamental reform of the public sector, not only to address the current continuing crisis, but strengthen future economic prospects as well. 5. The role of the public sector needs to be recast from an inhibitor to overall economic growth, to a legitimate provider of affordable social goods, and supporter of economic growth. There is a need for a profound reallocation of resources from the public to the private sectors, that will strengthen both sectors. As a consequence of this reallocation, Cordoba will be able to attain the goal of financial creditworthiness, primarily by strengthening public finances, fulfilling in that process conditions for sustained development. A second, equally important goal would be to increase the efficiency of public expenditures, allowing for the improved delivery of social services in the context of fiscal balance. A leaner and more efficient public sector would be to the benefit of Cordoba's economy.  - ii - 6. This report evaluates the nature of the crisis, current financial conditions and prospects, and recommends a set of short-term and long-term reforms which could facilitate the restructuring of the public sector, making it a positive contributor to C6rdoba's economic development. While the transition costs of the adjustment could be important, it is recommended that this transition takes place immediately, to benefit from the current window of opportunity to implement such reforms, and mitigate its costs through various options currently open to the new Administration. Here are the main recommendations of this report (these recommendations do not cover important areas that the mission did not review, such as judicial expenditures): Reforms for the Short Term Replace the Emergency Law in 1996 with a sustainable fiscal savings plan. Present a new balanced budget for 1996; Cease the use of CECOR as a means of payment, in the context of a fiscal and debt workout; Cut personnel expenditures by $270 million in 1996, with selective personnel and wage cuts (from 1994 levels), to balance the budget; To facilitate the adjustment and increase efficiency, privatize Banco de la Provincia, EPEC, and DIPAS, and close Banco Social; Sign the Pacto Fiscal, to access the minimum coparticipation guarantee, and Transfer the Social Security System to the National Government (if legally feasible, before 1999). Create a more effective Social Safety Net. Reformsfor the Medium Term Implement health reform, by providing health insurance rather than free care in public hospitals; Implement education reform through effective control over personnel expenditures, increased student/teacher ratio, reoriented expenditures to educational services, improved equity with richer students paying more for education, and modernized carricula, Implement Social Welfare reform by significantly improving targetting, Implement Civil Service Reform, by creating merit based mechanisms, such as a competitive selection process and a results-oriented assessment process, by decentralizing managerial responsibility, and introducing technological innovations that reduce labor requirements. Streamline municipal coparticipation by simplifying the transfer formula, further decentralizing functions, and eliminating distrortive incentives; Increase revenues by amplifying the tax base and improving tax collections, while decreasing tax rates to support private sector development and employment; Increase capital expenditures to support the growth of the private sector, Establish an economic, statistical, and financial data base for the public sector and the province. December 1995  - iii - ADDENDUM Measures implemented since the October 1995 World Bank Mission to C6rdoba Since the Bank's Mission to Cordoba in October of 1995, the Government of C6rdoba has implemented policies that begin to address its serious fiscal imbalances and reform needs. The measures listed below, in addition to those implemented during the first five months of this administration, constitute a serious initial effort in the difficult and complex process of adjustment. Fiscal Reforms In an effort to address the fiscal situation, the Government of the Province of C6rdoba has modified its original 1996 budget and presented a new budget proposal to the legislature, which is near balance (includes planned savings of $83 million, and excludes financial support for the banks). * Public Employment. The government has implemented ; reduction of 6,929 permanent positions (4,731 in 1995 and 2,198 in early 1996). This represents a reduction of 8.7 percent of the total number of positions (based on 80,010 official positions in the 1995 budget). Part of this reduction was achieved through the transfer of primary health service delivery, and associated public employment positions, to the municipal level of government (see health sector below). In addition, the government reduced the number of contracted, temporary personnel by 7,272 (4,672 in 1995 and 2,600 in early 1996). X Public Salaries and Employment Conditions. Steps have been taken to normalize public salaries and employment conditions. The Emergency Law of last year had reduced the normal workweek hours by 40 percent and cut salaries by 30 percent. The new policy, implemented in April 1996, lifted the Emergency Law on public employment matters, and established a six hour workday with a 10 percent reduction in salaries from their pre-crisis levels. * Provincial Pension System. The provincial government has taken measures to close the deficit of the provincial pensions system, by permanently reducing pension benefits by 18 percent, and increasing payroll contributions between 3.5 to 5 percentage points (for the duration of the Emergency Law). * Debt Reconfiguration. During the last two months of 1995, the Federal Government canceled old debts with the province of Cordoba amounting to $182 million (of which $115 million in cash, $27 million in BOCON, and the rest in the form of a future obligation). This extraordinary transfer facilitated the full recognition and partial cancellation of provincial government debt, in the form of a real estate tax receivables portfolio with Banco de la Provincia, amounting to $202.7 million. As a result of these extraordinary transactions, at the end of 1995, outstanding debt to the Banco de la  - iv - Provincia was likely lower than originally projected (by $156.3 million from the effective cancellation of the tax receivables portfolio). In addition, the government has significantly reduced its arrears in salary and pension payments. "Structural" Reforms * Health Sector. The government has transferred the responsibility for primary health services to the municipal governments, signing 425 agreements with municipalities and towns, transferring 386 health posts and 1,145 permanent positions -- thus removing them from the provincial payroll. Additionally, 734 Provincial hospital workers were reassigned. * Revenue-sharing with the Municipalities. The government took measures to restructure the coparticipation law with the municipalities, simplifying the secondary distribution formula and shifting more resources from discretionary grants (FOF[NDES) to formula-based coparticipation. The additional automatically distributed resources, which were previously tied to specific FOFINDES grants, should be used by municipalities to finance their additional health sector responsibilities (as described above). * Tax Reforms. The province has returned to compliance with the specific provisions of the Pacto Fiscal which called for the elimination of the "gross receipts" tax on production-level primary and manufacturing activities, and financial services. * Provincial Banks. The province has presented, and the Central Bank has agreed to, a plan for restructuring and recapitalization of the Banco Social. The government has also presented to the Central Bank a restructuring and recapitalization plan for the Banco de la Provincia de C6rdoba. * The Energy Company. EPEC. The government has concessioned some of EPEC's thermal units. * Water and Sanitation. The province has transferred responsibility for water and sanitation services to two municipalities (Villa Maria and Rio Cuarto) as part of a general policy to decentralize this sector. * Judiciary. The provincial government has sent to the Assembly a law to eliminate Provincial Courts in the interior of the province. April 1996  CORDOBA PUBLIC SECTOR ASSESSMENT PROPOSALS FOR REFORM L. BACKGROUND A. Overview of C6rdoba's Economy 1. The Province of C6rdoba has the fourth largest population in Argentina, after Buenos Aires' province and municipality, and slightly less than Santa Fe. Its estimated $21 billion gross provincial product in 1994 makes C6rdoba the second largest provincial economy, following Buenos Aires, and virtually tied to Santa Fe. Cordoba is a major center for industry, in particular the automotive industry. It is also an agricultural center, producing 12 percent of the nation's wheat, 28 percent of the nation's corn, 27 percent of the nation's soybean crop. It also leads the nation in the production of dairy products. The National University of Cordoba is the oldest university in the country and continues to be considered one of the best universities in the country. In particular, the medical school is know as the nation's best, attracting students from across the country; and the teaching hospital attracts patients from across the country. 2. The most recent year for which data on Gross Provincial Product (GPP) exist is for 1992. The numbers reveal a highly diverse economy, roughly 1/3 in goods production and 2/3 in services, with the goods sectors divided between agriculture (10.5 percent of GPP) and industry (19. 1 percent of GPP). In the services sectors, banking services accounted for almost 19.1 percent of GPP, commerce 14.2 percent, and other non-transportation services 28.2 percent of GPP. 3. In Table 1, we see that in every year, except 1994, the real rate of growth of government expenditures was well above the real growth rate of the provincial economy. From 1990 to 1994, the provincial economy grew by a total of 33 percent in real terms, while provincial government expenditures grew by 95 percent in real terms. This report, is based on findings of a Bank mission to Cordoba on October, 1995. The mission comprised Messrs./Mmes. P. Levy (mission leader); D. Rosenblatt (intergovernmental relations); L. Pritchett (health); J. Van Domelen (education, social programs); G. Menckhoff (roads, water/sewerage, housing); R. Klockner (electricity); S. Suthiwart (public expenditure review); B. Nunberg (civil service); C. Revoredo (fiscal, data management). Mr. R. Karaoglan and Mrs. A. de Leon from the IFC reviewed the banking situation in Cordoba. Mr. M. Teijeiro (consultant) reviewed fiscal relations with banks; FIEL (consultants) reviewed the social security system, fiscal revenues and tax administration.  -2- Table 1: Evolution of C6rdoba's Gross Provincial Product-1990 to 1994 (current thousand pesos) 1990 1991 1992 1993' 1994' Grow Provncil Product 4,894,342 13,369,983 17,375,160 19,518,712 20,962,406 Armual Real Growth 2.8 8.3 8.7 5.7 7.0 Govennnaent Expenditus Amual Real Growth2 26.9 23.1 26.2 19.8 4.6 Share ofGPP 8.9 9.4 10.7 12.1 12.1 Memo: C6rdoba Population 2,739,016 2,766,683 2,794,350 2,822,293 2,850,516 GPP per Capita3 1,787 4,832 6,218 6,916 7,354 Sources: Federal Council of Investments, C6rdoba govenment executed budgets. Staffcalculations. I/ Assuming that C6rdoba's economic growth is the same as the national growth rate. 2/ Percent Change from previous year. 3/ Stffesimate based on above estimates of GPP and population growth rate of I percent per annum during the 1990s. B. Structural Causes of the Financial Crisis: A Comparative Analysis 4. Deficit Spending Leading Up to the Crisis. The Government of C6rdoba experienced large overall deficits in the 1990s. The deficit1 totaled $440 million, or almost 20 percent of goverrnent revenues in 1994 after reaching a record $434 million in 1993, and averaging $216 million during the 1990 to 1994 period. Putting these numbers in perspective, the Government of C6rdoba achieved fiscal balance in 1989. Following the Convertibility Law of 1991, provincial revenues exploded, due to increased own-tax revenues and increased transfers from the federal level, resulting from the stabilization of the economy and resumption of economic growth. In the case of C6rdoba, total revenues almost doubled from 1991 to 1994; however, total expenditures grew at an even faster pace. 5. For the purpose of better understanding the evolution of C6rdoba's public accounts, it will be helpful to compare C6rdoba to other provinces in Argentina. 2 Table 2 below provides some basic comparative economic/demographic data on C6rdoba, Santa Fe and the Province of Buenos Aires. Table 2: Comparative Economic Data-1994 Province Population GDP GDP per Unemployment (S million) Capita Rate (S) (May 1995) Buenos Aires 13,095,965 36,746 2,806 22.6% Cordoba 2,870,230 11,919 4,153 15.2% Santa Fe 2,895,277 12,894 4,453 20.9% Source: Ministry of the Interior/ SAREP. Deficit of the General Administration of the Govermment of C6rdoba. The General Administration includes the Central Administration, decentralized agencies, special accounts, and transfers to both the Social Security administration and public enterprises. It does not include the accounts of these enterprises. 2 The problem with comparing to a national average or median across provinces is that Argentina's population of 34 million and economic base are geographically skewed towards three provinces and one municipality: the Provinces of Buenos Aires, C6rdoba, Santa Fe, and the separate Municipality of the Capital Buenos Aires (MCBA). The nation's Capital has almost 3 million people (similar to C6rdoba) and by far the highest GDP per capita in Argentina (USS 12,039); however, with its special status and special relationship with the federal government, the MCBA does not make for a very good comparator for examining C6rdoba's public finances.  -3- 6. Overall Deficit. The late eighties and early nineties were generally a period of moderate to large deficits in provincial finances across Argentina. C6rdoba and our comparator provinces, Buenos Aires and Santa Fe, were no exception. Table 3 below shows that both C6rdoba and the comparator provinces suffered from large deficits in two or more years during the 1989-1991 period. Then, in the post-stabilization period, Santa Fe and Buenos Aires used their increased revenues to either largely eradicate their deficits or maintain small surpluses. The lagging fiscal performance of Cordoba with respect to the other two provinces is predominantly due to its expenditure pattern and to a much lesser extent its revenue performance. Table 3: Overall Deficit as a Fraction of Total Revenues 1989 1990 1991 1992 1993 1994 Prov. of Buenos Aires 5.2% 27.0/o 15.6% -4.9% 0.6% 1.5% Cordoba -2.8% 18.8% 16.0% 7.5% 22.7% 19.6% Santa Fe 53.5% 13.6% 0.7% -8.0% -1.4% 0.1% Sources: C6rdoba budget exercises and Ministry of the Interior--S.A.R.E.P. 7. Expenditure Performance The extraordinary growth in total provincial expenditures, a total of 102 percent from 1991 to 1994, resulted in per capita expenditure levels in C6rdoba in 1994 that were about 17 percent higher than Santa Fe and about 50 percent higher than Buenos Aires. An examination of the economic classification of C6rdoba's government expenditures, suggests that all categories of expenditure have increased at approximately a similar pace. Comparing the structure of expenditures across the three provinces, reveals no dramatic differences. One noteworthy difference is Buenos Aires' lower share of personnel expenditures which declined from 50 percent as recently as 1991, to 42.5 percent in 1994. Also, Santa F's interest payments remained low due to their sustained fiscal balances in recent years. This brief overview of the economic classification of expenditures simply shows that there are no obvious categories that have expanded much faster than total expenditures. Table 4: Total Per Capita Expenditures (current pesos) 1991 1992 1993 1994 Prov. of Buenos Aires 325.6 444.6 533.0 591.6 C6rdoba 456.1 661.7 834.2 885.0 Santa Fe 458.8 595.6 704.0 759.1 Sources: C6rdoba budget exercises and Ministry of the Interior--S.A.R.E.P. 8. Revenue Performance The lagging fiscal performance of C6rdoba with respect to the other two comparator provinces is not predominantly on the revenue side. If we look at provincial tax revenues and total revenues in per capita terms over this period, C6rdoba does not fall much behind Santa Fe, and does relatively better than Buenos Aires. In explaining the circumstances leading up to C6rdoba's crisis, in comparison to the situation in other large provinces, revenue performance is at most only a few percenta.ge points of the problem of fiscal imbalance.  -4- Table 5: Per Capita Revenues (current pesos) 1991 1992 1993 1994 Revenues per CaDita Total Own Total Own Total Own Total Own Taxes Taxes Taxes Taxes Prov. of Buenos Aires 281.6 131.0 467.4 193.8 529.6 230.7 570.2 261.8 C6rdoba 393.3 136.5 615.3 241.4 680.9 264.6 740.2 314.9 SantaFe 455.6 158.7 647.2 271.0 714.1 306.9 756.0 337.3 Sources: C6rdoba budget exercises and Ministry of the Interior--S.A.R.E.P. 9. Evaluation of the Debt Situation. Examining the evolution of the stock of debt in recent years, one notices the exponential growth of debt since 1991, resulting in a 1994 debt stock of $1.3 billion -- a heavy burden inherited by the new provincial government administration. Since much of the financing is short-term (one year maximum), the fall in amortization as a share of expenditures in 1994 indicates the accumulation of arrears. It is interesting to note that debt service/(expenditure or revenue) ratios are about half as high for the Province of Buenos Aires, and considerably lower in the case of Santa Fe. Table 6: C6rdoba Stock of Debt, Indebtedness Indicators, 1991-1994 1991 1992 1993 1994 Debt (mill. pesos) 124.5 162.2 417.3 1277.9 Debt per Capita (pesos) 45.0 57.8 146.8 441.0 Debt/GDP 0.9 0.9 2.1 6.4 Debt/Revenues 11.5 9.6 21.6 60.8 Debt Service/ Total Revenues 6.5 5.3 8.8 7.0 Source: C6rdoba expenditure accounts, Bank staff calculations. 10. C6rdoba and Santa Fe: A Tale of Two Provinces. Persistent deficits in the early 1990s placed the Government of C6rdoba's finances in a fragile position for facing the Argentinean "credit crunch" of 1995. Improved tax revenues and increased federal transfers were used to increase expenditures, finally resulting in a large stock of inherited debt at the start of 1995. The government of Santa Fe -- a province of very similar size, income, and wealth -- used its revenue boom to balance its fiscal accounts. As a result, it has survived the financial turbulence of earlier this year without encountering the severe problems that C6rdoba is facing. In addition, by signing the Pacto Fiscal Federal, Santa Fe was entitled to the guaranteed minimum transfer provisions of the federal revenue-sharing programs. The Government of C6rdoba's use of short-term credits, largely from its provincial bank, to finance its deficits left the Government dangerously exposed to the financial market crisis of this year. C. Federal-Provincial Fiscal Relations and the Pacto Fiscal 11. Pactos Fiscales/Federales. In 1992 and 1993, two federal decrees set out a list of reforms for provincial governments and reforms in intergovernmental relations3. C6rdoba is the only province which did not sign this Pacto. Provincial reforms call for the elimination of the 3 The two decrees were Decree 1602 of August 31, 1992, and Decree 1807 of August 27, 1993.  -5- following provincial taxes by June 30, 1995 (now proposed to be extended to December 1996): the stamp tax; the tax on transfer of fuels, energy and sanitary services; the tax on interest from savings accounts; and all forms of payroll taxes. The Pacto also calls for the gradual transformation of the Gross Receipts Tax to a retail sales tax through a series of exemptions at the input production level, starting with primary production. The provinces have also the right to transfer their social security system to the national government. Provinces that sign the Pacto are also generally committed to the partial or total privatization of provincial state-owned enterprises. 12. The Pacto has a number of other provisions, including limits on the maximum tax rate for property taxes, the transfer of provincial pension programs to the national government, and deregulation of local markets. Despite the government's refusal to sign the Pacto, the government of C6rdoba has complied with many of the key fiscal provisions of the Pacto. Below is a table outlining the areas of compliance and non-compliance. The province does not disagree with the tax reform measures, in general, and has made reasonably good progress in complying with these measures. There was, however, some backtracking on the gradual elimination of the gross receipts tax, as some previously granted exemptions (on primary products and manufacturing goods) were revoked in order to enhance revenues during the current crisis. 13. Deregulation. The Pacto has provisions for removing regulatory burdens at the provincial level. Regulations, especially in terms of professional service fee-setting and professional licensing, take a heavy toll on C6rdoba's economy. For example, notary and other financial registry fees are much higher in C6rdoba than in Buenos Aires, and as a result, various transactions are routinely registered in Buenos Aires rather than locally. The Pacto calls for the removal of professional services price-setting laws, the liberalization of professional licensing procedures, the removal of restrictions on business commercial hours, the removal of restrictions on wholesale marketing of foodstuffs, the removal of restrictions on the location of pharmacies, the liberalization of the sale of medical specialties outside of pharmacies, the liberalization of freight transport, the recognition of out-of-province registration of passenger or freight transport services, and the loosening of restrictions on registration for public works' contracts. The province of C6rdoba has so far removed regulatory restrictions on legal fees, on the location of pharmacies, and on business hours. The province has made virtually no progress in the other areas, and this remains a major point of non-compliance with the Pacto and an impediment to economic growth.  -6- Table 7: C6rdoba's Compliance with the Pacto Fiscal of 1993 ' f~~~~.. .. ..... t.... .- ' ''t''l''!:''';'". '' ' -''';''... '" ............. ' '' .. '.''Q:':''"'....'t' '":-:'''' 1) Elimination of the Stamp Tax (on most activities) Yes 2) Elimination of specific excise taxes on the distribution of fuel, gas, electricity, and some Yes other excise taxes. 3) Elimination of the tax on interest on savings accounts, or other bank accounts, and the Yes radual elimination of payroll taxes Item (4) involves the gradual elimination of the turnover tax on non-retail-stage sales hrough a series of exemptions (to be replaced eventually with a form of retail sales tax) a) Primary products No* ) Exemption on loans from certain types of financial institutions (Law 21.526) No ) Exemption on insurance companies, mortgage banks, savings banks, pension funds, No utual funds for those activities related to their specific functions. ) Foreign Exchange Transactions Yes ) Manufacturing goods at all stages other than sales to final consumers No* l Distribution of: (I) Electricity, (2) Water, (3) Gas to private households. o, Yes, Yes T) Construction Yes ecree 476v eater decrees added that called for the elimination of the tuwover tax on: No, No oufOsm, scientific and technological research through 8) upper limit on tax rate for property; call for coordination in dealing with Agreement in pultijurisdictional taxpayersa call for eventual replacement of turnover tax with a general principle tonsumption tax; call for unifocmity among jurisdictions for automobile tax. 9) Privatization N 10) and I11) Deregulation Patal** 12) Agreement on workers' accident claims (Law 24.028) N These items the Cmrdoba govedment had complied with, but the exemptions were repealed as part of the r.evenue raising package of the 1995 Emergency Law. ti Only little progress: deregulation of store hours, location of phannacies, and legal fees. II. FISCAL EVALUATION AND PROSPECTS A. The 1995 Fiscal Crisis 14. The 1995 fiscal crisis was in the making for a number of years. In 1994, the province of C6rdoba generated a fiscal deficit equivalent to 20 percent of total revenues, raising the overall debt of the public sector rose to $1.3 billion, of which $319.7 rnmillion were arrears. In addition to the above mentioned debt of the general administration, there were contingent liabilities of $272 million, for pending lawsuits, goverrnment loan guarantees, and long-term credits to suppliers. 15. A large part of past fiscal deficits was financed by borrowing from Banco de la Provincia de C6rdoba. The national financial crisis of early 1995 caused a large decline in deposits of that bank, forcing it to cancel credits to the provincial government, and to elinminate any new credits to it. In addition, the government chose to assist the public provincial banks, at a high cost. Short of cash, the government began to run arrears in salaries and pension payments, leading to social unrest in the second quarter of 1995.  -7- 16. A number of factors contributed to a large fiscal imbalance and the financial crisis of 1995. Instead of an anticipated increase in revenues from coparticipated transfers, these transfers to C6rdoba are estimated to have declined from $802 million in 1994, to $751 million in 1995, on account of a slowdown in national economic activity, and C6rdoba's forfeiture to access to the "minimum guaranteed revenue" provision of the Pacto Fiscal Federal with the Federal Government. Debt consolidations with the Federal Government and other federal transfers raised total revenues from federal sources to the 1994 level, but still total transfers were significantly less than originally anticipated. 17. More importantly, since coparticipated transfers had been pledged as guarantees for a majority of the province's debt with the financial sector, the Federal Government is expected to withhold approximately $370 million during 1995 as automatic amortizations to financial debt, and transfer only $380 million to C6rdoba, i.e. only half the mandated coparticipated funds. 18. The other revenue shortfall experienced in 1995, is in own-generated revenues. This revenue shortfall was again related to the slowdown in overall economic activity, and the associated financial crisis. Provincial sources of revenue during 1995 are estimated to have declined to $943.2 million, down from $1,026 million in 1994 (including receipts in CECOR). 19. On the expenditure side, the newly elected government, taking office five months ahead of schedule in the middle of a financial crisis, implemented an emergency plan of action. This plan included the reduction in the number of ministries from 11 to 6, the elimination of 61 directorates and a large number of previously authorized government positions, and cuts in current and capital expenditures. The savings from this plan total $280 million in reductions from 1995 budgeted expenditures, all implemented during the last five months of 1995. Additionally, the Government implemented a selective 30 percent cut in the wage bill (with a parallel 40 percent reduction in hours of work) for the last five months of the year, excluding teachers and the police. As a result, the salary bill is estimated to have decreased from $1.28 billion in 1994, to an $1.16 billion in 1995, with nearly all of that decline concentrated in the last 5 months of 1995. 20. As part of the emergency plan, a moratoria was declared on tax debts to the provincial government with a cancellation of fines on late payments. In addition, the provincial legislature authorized the issuance of $800 million in "certificates of cancellation of debt"-- commonly referred to as CECORs4--to be used for past due and partial current payment of salary and pensions to public employees, payment of services and transfers to municipal governments (100 percent of provincial coparticipation transfers to municipalities were to be made in CECOR). Private businesses were encouraged to accept the CECOR as a means of payment, and taxpayers could use CECOR to pay off their old and new tax obligations at par value. By the last week of October there were 220 million CECOR in circulation. At that time, while CECOR were accepted at face value in retail stores, they were trading in the secondary market at approximately 80 percent of par value. 4 CECOR bonds have a two year maturity, a 12 percent annual yield, with debt service payable in the 15th, 21st and 24th months.  -8- 21. During 1995, the size of the overall public debt is projected to increase by $190 million, bringing the overall debt of the general administration at year-end 1995 to $1.5 billion (excluding contingent liabilities and financial support to provincial banks). This debt has been aggravated by the servicing of debt by the province of debts by Banco Social with Banco de la Nacion (BNA), which it could not service (paid through deductions from coparticipated funds), and unpaid interest payments by the province on its debts with Banco de la Provincia de C6rdoba. Importantly, there has been a significant restructuring of debt, with the weight of the debt increasingly shifting from the financial system to holders of CECORs or arrears. With the automatic amortization of financial debt via coparticipation withholdings, it is estimated that debt with the financial system will decline from $958.2 million at end-1994 to $ 546.0 million at end- 1995. In contrast, debt with the non-financial sector increased from $319.7 million at end 1994, to approximately $900 million at end-1995, that increase in that debt is either in the form of CECORs, or in arrears. If that debt is fully recognized through CECORs, the market value of CECORs will likely deteriorate, endangering the precarious fiscal tightrope act of the provincial financial authorities. B. Fiscal Prospects 22. On October 15, the government presented the mandated 1996 budget to the provincial Congress. The government, though, regards this budget as a preliminary one, put hastily together under the uncertainties of the acute financial crisis, and in order to meet the Congressional deadline for budget submission. The new budget is fairly similar in both revenues and expenditures to the 1994 and 1995 (estimate) executed budgets, generating a deficit of $479 million. The 1996 budget assumes that the Emergency Law expires at end-1995, and as a consequence, expenditures in salaries are 17.6 percent higher than the personnel expenditures projected for 1995. The government expects to draft a new 1996 budget and present it to the congress in February or March of 1996. 23. Taking the 1996 budget law as a base, and adjusting for higher interest payments on account of higher estimates of debt (consolidation with bank debt), and additional necessary transfers to the Banco de la Provincia, it has been estimated that the fiscal deficit for 1996 would likely rise to $685 million. The "aid to banks" item in the table above includes for 1995 higher interest spread charges to government debt which are not explicitly recognized in the budget, and transfers to Banco Social for the repayment of a BNA loan, for 1996 onwards, it includes transfers to cover projected losses in Banco de la Provincia. Adding amortizations for $522 million, the gross financing needs of C6rdoba for 1996 amount to $1.4 billion. As with our 1995 estimates, the 1996 budget projections take into consideration the servicing of consolidated debts and transfers to provincial banks, which the official budget excludes. If indeed the govemment executed the proposed 1996 budget, the general government's stock of debt by end- 1996 would rise by 40 percent to $2.1 billion, or $730 per person in the province.  -9- Table 8: C6rdoba General Government Accounts 1/ Million Pesos Projected 2/ 1994 1995 1996 3/ 1997 1998 1999 2000 Total Revenues 2,101.8 2,025.4 2,101.0 2,241.9 2,401.3 2,584.4 2,778. Current Revenues 2,083.8 2,001.6 2,080.4 2,219.9 2,377.8 2,559.1 2,751. Coparticipation 802.0 751.5 816.0 870.7 932.6 1,003.7 1,079. Prov. Own Taxes 1,026.0 943.2 938.6 1,001.5 1,072.8 1,154.6 1,241. Federal Transfers 255.8 306.9 325.8 347.6 372.4 400.8 430. Capital Revenues 18.0 23.8 20.6 22.0 23.5 25.3 27.2 Total Expenditure -2,542.2 -2,424.3 -2,785.7 -3,088.0 -3,373.2 -3,702.2 -4,065. Current Expenditures -2,236.6 -2,237.5 -2,488.7 -2,771.1 -3,033.7 -3,336.8 -3,672. Personnel -1,279.6 -1,158.0 -1,362.1 -1,453.4 -1,556.8 -1,675.5 -1,801. Goods and Services -252.1 -170.0 -213.8 -228.1 -244.4 -263.0 -282. Transfers -524.3 481.3 -552.0 -589.0 -630.9 -679.0 -730.1 Transfers to SS. -67.9 -90.4 -116.8 -117.1 -116.8 -117.8 -122. Interests -112.7 -128.3 -144.0 -283.4 -384.9 -501.5 -635 Aid to Banks 4/ 0.0 -209.5 -100.0 -100.0 -100.0 -100.0 -100. Capital Expenditures -305.6 -186.8 -255.0 -316.9 -339.5 -365.3 -392. DEFICIT (-) -440.4 -398.9 -684.7 -846.1 -971.9 -1,117.8 -1,286. Memo item Debt Stock(without aid to banks) 1,277.9 1,467.3 2,052.0 2,761.0 3,579.3 4,525.0 5,619.1 Debt Increment due to aid to Prov. banks .. 209.5 309.5 446.6 600.2 772.3 964. 1/ Scenario without structural measures. 2/ World Bankl Staff projections (October 1995). 3/ Based on the 1996 budget law. 4/ Includes for 1995 US$ 106.7 million in imputed interest 24. Should the government actually execute the 1996 budget, and continue to expand future revenues and expenditures at the rate of economic growth (4.5 percent) plus inflation (3 percent), the fiscal deficit will continued growing, resulting in an accelerated pattern of growth of interest obligations and debt. As a result, by 1999, the stock of public debt (including aid to banks) would triple in four years, from $1.7 billion to $5.3 billion, rising to approximately 200 percent of total revenues, up from 80 percent in 1995. Interest obligations would also rise much faster than revenues and the growth of economic activity, or at an average annual rate of 39.5 percent, increasing by approximately 3.5 times in real terms in a four year period, rising from 6.3 percent of revenues in 1995, to 19 percent in 1999. That is, were this scenario to materialize, by 1999 Cordoba would be spending significantly more on interest payments as a share of total expenditures than it is currently spending on health. Clearly, this pattern is unsustainable, since by 1999 gross financing needs would be double the province's entire revenue base, and exceed by far the borrowing capacity of the state.  -10- III. ASSESSING FISCAL EFFICIENCY 25. C6rdoba's creditworthiness could be achieved by establishing a record of balanced fiscal accounts. The sooner fiscal accounts are adjusted, the earliest the Province would be able to normalize its financial situation, and access again the financial markets, domestic and international, to facilitate the financing of its capital expenditures. Fiscal adjustment has to be consistent with the social contract of the public sector to the general population, and the promotion of overall economic development of the province. Therefore, both revenue collection and expenditures will be reviewed in order to explore options for improving their efficiency through the implementation of structural reforms. A. Revenue Review 26. Description of Own-Revenue Sources. The three main taxes collected by the provincial government are: the gross receipts tax (ingresos brutos), the (urban and rural) property tax, and the stamp tax. In 1994, of $903 million in total tax revenues, 56 percent were from gross receipts taxes, 30 percent from property taxes, and 10 percent the stamp tax. In addition, there was a small amount of revenues from the provincial automobile tax, with the rate and base of this tax set by the province, but the actual collection effected by the municipalities. Forty percent of these revenues are passed on to the provincial level. Finally, there are a number of non-tax revenues, user fees, which represent about 12 percent of current own source revenues. 27. Efficiency of Tax Instruments. The primary, well-known, problem with the gross receipts tax is that it is a "cascading" tax. The tax is levied at each stage of production on the total sales (not value added) of that stage. The resulting total incidence is cumulative over the stages of production. This cascading effect distorts relative prices against goods produced in multi-stage processes; it artificially encourages vertical integration of firms; it creates a bias against exports in that, even if the final sale is exempted from the tax, there is already an accumulated tax at earlier stages embedded in the price; it is impossible to apply the destiny principle in exports or imports, as is done with VAT taxes; it causes a disincentive against investment in capital goods, since purchases of capital goods are taxed at the time of purchase, and then capital costs are taxed again to the extent they are incorporated in the price of the consumer good for which they are used. The property tax is levied against both the value of the property and the value of the construction on that property; the former is neutral, while the latter implies a distortion against improvements in the buildings on property sites. The stamp tax is highly distortionary in that it inhibits simple transactions of goods, services, and property, and discourages financial intermediation. In addition, it is an additional tax levied against bases that are already taxed by less distortionary instruments. 28. Efficiency of Tax Administration. To the extent that per capita tax revenues and own source revenues (as a share of total revenues) are high in C6rdoba, compared to other provinces, the provincial tax administration is effective in raising revenues. A more complex question is whether the provincial tax administration is efficient, in terms of the cost of raising these revenues. One general indicator is the ratio of the tax collection agency's (Direcci6n de  -1 1- Rentas) budget to the total own source tax revenues of the province. For C6rdoba, this ratio is 1.8 percent, which is somewhat below the national government's ratio of 2 percent; however, international standards show that the ratio should be around I percent. 29. There are a number of problems inhibiting the efficiency of tax administration: (1) inadequate computer systems imply inadequacy in detecting tax evasion and difficulty in quickly determining who owes how much; (2) frequent "special payment regimes", tax moratoria, and lax enforcement lower voluntary tax compliance; (3) there is a lack of knowledge of the potential list of gross receipts contributors; (4) there is a lack of control of the taxpayers' declared withholdings of taxes with the payments actually made by the agencies doing the withholding; (5) enforcement does not take advantage of the possibility of cross-checking information from other sources (national tax agency, electricity consumption, etc.) to detect evasion; (6) information is not adequately organized on the history of tax payers or the history of tax evasion inspections; (7) there is no handbook or manual for orienting the activities of tax inspectors; (8) there are no border checks on inflows or outflows of products for checking on gross receipts tax revenues; (9) there is a lack of control of the history of actual property tax payments for a particular property and tax payer; (I0) with respect to payments made through the Bank of Cordoba, there is a lack of control over the agreed time limits on deposited funds and a lack of control on actual deposits that enter the provincial treasury; and (I I) the general "CUIT" identification number is not used and cross-checks of information with other entities are not undertaken. B. Public Expenditure Review 1. An overview 30. Cordoba spent 2.5 billion pesos in 1994. Over half went towards the social sectors (education and culture 28 percent; health 16 percent; social welfare 7 percent). Security and justice together accounted for almost 20 percent of total expenditures; and transfers to municipalities for 13 percent of total expenditures. In terms of an economic classification, personnel accounted for fully half of total expenditures. Total transfers, composed largely of transfers to municipalities under coparticipation agreements and subsidies to private education, accounted for another 23 percent. By contrast, capital expenditures were only 12 percent of total spending. With the fiscal crisis, new investments have largely been limited to projects financed by multilateral agencies. 31. Gross provincial budgetary expenditures increased in real terms by about 1,015 million (in 1991 pesos) or 95 percent between 1990-1994. Netting out expenditures which were transferred to the provincial budget lowers the increase to 89 percent.3 On a functional basis, If we net out the federal education transfer (servicios nacionales transferidos) of 111.8 million and the 51.6 million FONAVI transfer from 1994 expenditures (see below), the increase drops to 89 percent. Water supply (EPOS) was also transferred to the provincial budget as part of DIPAS, the merger of EPOS with DPH (irrigation), starting in 1993. At the time of the transfer, EPOS accounted for 64.4 million pesos. However, what was previously EPOS has substantially shrunk since then. Indeed, total 1994 expenditures for DIPAS as a whole was 57.9 million. The percentage split in recurrent expenditures between EPOS and DPH in 1993 was 77 percent:23 percent. Assuming the same percentage split in 1994 implies that ex-EPOS expenditures  -12- expenditures from 1990-94 increased most rapidly in social welfare6 (218 percent), justice (188 percent), fiscal administration (131 percent), and health (115 percent). Interestingly, total public resources devoted to the education sector have not increased rapidly. While provincial educational expenditures increased 75 percent over this period, part of this increase reflects the transfer of federal education to the provincial budget. Once the federal transfer for servicios nacionales transferidos is netted out, the increase falls to 48 percent. On an economic basis, personnel expenditures increased by 74 percent, while capital expenditures increased by over 170 percent. 32. The above percentage changes, however, do not provide a clear indication of where the increase in expenditures went since they are obviously starting from wholly different bases which could already be distorted. A more revealing picture can be obtained from a breakdown of the distribution of where the provincial expenditure increase went by ministry and category. In terms of economic classification, the bulk of the 1015 million increase went towards personnel (44 percent), and transfers (26 percent). Most of the increase in personnel expenses was on permanent (33 percent) rather than non-permanent staff (9 percent). Where the funds unfortunately did not go was towards non-wage operations. Real expenditures on bienes de consumo hardly increased during this period of rapid overall expenditure growth. For example, while overall spending by the Ministries of Education and Health increased by 231 and 109 million from 1990-94, spending on bienes de consumo only rose by 0.1 and 2.3 million, respectively. This expenditure imbalance has manifested itself in the current situation of hospitals without medicine and technical schools with no training equipment. 33. In terms of ministerial classification, the bulk went to Economy and Finance (28 percent) for interest and transfer payments (to municipalities), followed by Education and Culture (23 percent), which spent it largely on salaries and transfers (subsidies to private education). However, as mentioned earlier, much of the latter was funded from federal sources. Desarollo Social accounted for about 10 percent of the expenditure increase, which it spent largely on Irabajospublicos (e.g., housing programs) and transfers. By contrast, Justice received roughly the same amount (9 percent), but spent it all on salaries. The above figures indicate where significant increases in inputs to the public sector occurred. In many cases, it is not clear what Cordoba obtained from these increased expenditures by way of outcomes. For example, while real health expenditures (excluding saneamiento ambiental) increased by 72 percent from 1990- 93, the number of patients treated changed very little. were 44.6 million in 1994. Netting this last figure out of total 1994 expenditures would further lower the 1990-1994 expenditure increase to 85 percent. 6 The growth in provincial expenditures on social welfare is actually 353 percent. However, the transfer of FONAVI to the provincial budget must be netted out to obtain the real increase in resources flowing to that sector.  -13- 2. A diagnosis of Cordoba's Public Expenditures 34. At all times, and particularly at times of financial crisis, it is crucial that expenditures: (a) not substitute for or crowd out private provision; (b) directly benefit the poorest segments of society; and (c) be evaluated with regard to the sectoral outcomes that they generate. 35. Broadly speaking, Cordoba appears to be spending largely on public rather than private goods. With the notable exception of the provincial banks, there is no large public enterprise sector which receives significant transfers from the provincial budget. In infrastructure, there has been a significant devolvement of responsibility away from provincial authorities (e.g., private contracting of maintenance in roads; municipal and private participation in water). In education, the high proportion of private school students and the provision of subsidies to private schools translate into a reasonable approximation of a system of private provision with public financing. One possible exception is in health, where much is spent on hospitals, a largely private good. 36. However, the equity impact of public expendituires needs to be improved The ex- Ministry of Social Development has over 100 social welfare programs which lack clear selection criteria of beneficiaries and at best have an uncertain incidence on poverty. The FONAVI and FOVICOR housing programs are heavily subsidized but are not oriented towards the poor. Health expenditures are oriented towards free curative care in hospitals, including expensive alta complejidad services not primarily used by the poor. However, some programs, such as PAICOR, appear to be well targeted. 37. Fuirthermore, Cordoba has been spending very inefficiently. This suggests that substantial expenditure redtuctions can be achieved without significant loss of outcomes in certaini areas. Examples of gross technical inefficiency abound. In health, productivity levels in the public hospitals (as measured by monthly consultations per doctor) were about a quarter of those in private hospitals. In education, the use of substitute teachers (because of absenteeism and other reasons) is about five times higher in public than private schools. 38. Expenditures on non-wage operations and maintenance, however, have been inadequate and will need to be increased Personnel expenditures have crowded out non-wage current expenditures, which typically have a far higher impact on outcomes. This expenditure imbalance has led to problems in all the sectors reviewed: hospitals lack medicine with which to treat patients; schools have outdated and inadequate materials; roads, water, and electricity have had inadequate maintenance. 3. Sectoral Review a. Health 39. The Ministerio de Salud (MdS; 1994 expenditures $301.9 million) maintains a province-wide, vertically linked network of health care facilities which includes health posts and dispensaries, "neighborhood" hospitals, sub-regional hospitals, and regional general and  -14- specialized hospitals. These facilities provide a wide range of preventive, outpatient, and inpatient curative services free of charge. While sector indicators compare favorably to other provinces and countries, health services are lower quality, inefficient and with a poorer equity incidence than necessary. 40. The mixing of the role of the government as both provider and financier of health has led to structural problems in the sector. Expenditures have been extremely technically inefficient because it is difficult for the public sector to efficiently manage health care facilities. As an example, the provision of services is 2.4 per person per day in the public hospital examined versus 2.4 per person per hour in the private hospital examined. The true productivity is almost certainly worse than the above production numbers indicate because health professionals may be overproviding certain services: the length of stay in the public system is three times as long as in the private sector. Furthermore, expenditures have had a poor equity impact because (i) the poor are segregated into low quality care with no other options; and (ii) in its role as the supplier of last resort, the government ends up providing expensive alia complejidad services for free. The latter have low effectiveness in promoting health, are not primarily used by the poor, and should be paid for through insurance mechanisms. The poor equity impact has been exacerbated as a result of the fiscal crisis. The imbalance between wage and non-wage operating expenditures has meant that patients who cannot afford to bring their own drugs for treatment have been turned away because the public hospitals lack drugs. b. Education 41. Education falls under the purview of the Ministry of Education and Culture (MEC; 1994 expenditures $637.1 million). While the federal Government is responsible for universities, Cordoba has an extensive educational system of pre-primary to higher and secondary schools which includes participation by the Federal, provincial, and municipal governments as well as a very significant subsidized private school sector. Cordoba's student-teacher ratios are 17 and 12 at the primary and secondary levels compare well with national averages (18 and 7) but remain far below in international comparators (26 and 19 in Latin America; 27 and 19 in East Asia; 22 and 15 in the U.K.). While Cordoba's sectoral indicators--in terms of coverage and enrollment rates, national achievement test scores, and primary repetition rates--compare favorably with national figures, there remains significant scope to increase the efficiency and quality of educational services. 42. Technical efficiency has declined. Overall cost per student (total spending on education divided by the number of students enrolled) increased at an annual average of 12 percent since 1990. This outpaced the increase in each of the education sub-sectors (primary 9.7 percent; secondary -1.0 percent; higher 8.6 percent) suggesting that the largest growth occurred in areas not directly related to the delivery of education (e.g., cultural activities, ministerial overhead). Increases in real wages probably accounted for some of this increase. While the number of personnel increased by an annual average of 4 percent between 1993 and 1995, the  -15- wage bill has risen much faster. Average wages rose 19 percent in real terms between 1994 and 1995.7 43. The substantial imbalance between personnel and non-wage operating expenses is likely to have eroded the quality of education. Of the Ministry of Education and Culture (MEC) budget, effectively 95 percent goes to personnel expenses (73 percent are own personnel expenses and 22 percent are transfers to private institutions to finance teacher and administrative salaries). Of the scant 3 percent going towards non-personnel operating expenses, almost all goes to non- personnel services--e.g., transportation and utilities--resulting in virtually no financing of equipment, educational materials, and other inputs. However, most studies indicate that it is precisely these types of expenditures--rather than personnel and class size--which are the most effective determinants of effective leaming.8 By comparison, OECD countries spend 55 percent on personnel and 36 percent on non-personnel operating expenditures. 44. Cordoba has in place a private educational system which approximates public financing with private provision. About 90 percent of private schools receive public subsidies and account for over 20 percent and 40 percent of primary and secondary students. A total of $150 million pesos was budgeted in 1995 for subsidies to private schools. While the subsidy is currently tied to the number of school personnel rather than students and therefore is distortionary, it is worth noting that the subsidy per student in private schools is lower than the cost per student in public schools ($463 v. $618 in primary; $1,088-$1,292 vs. $928-$1,367 in secondary). Public provision has a worse fiscal impact than public financing. However, once private school fees are added, the total per student cost is higher in the private than public sector. c. Social Welfare Programs 45. The ex-Ministry of Social Development (MSD; 1994 expenditures $165 million) accounts for the lion's share of government spending in social welfare programs. Almost half of the ministry's budget is financed from transfers from federal programs, e.g., PROSONU (child nutrition) and PROSOCO (social welfare). At the end of 1994, the MSD had over 100 programs largely carried out under the broad categories of general social assistance (about 30 percent of the budget; transfers to individuals and institutions for a broad range of purposes, e.g., food aid, purchase of medicines, rental assistance) and community and family promotion (20 percent; support for the Provincial Council for the Protection of Minors, CPPM, and assistance programs for the elderly, handicapped, etc.).9 About half of the funds went to institutions and about 44 percent of transfers went to individuals. The average individual subsidy was $1,414, which However, the budget figures may understate the number of people hired, and hence inflate increases in real wages. 8 See, for example, World Bank (1995). Priorities and Strategiesfor Education and Hanushek, E. (1995) "Interpreting Recent Research on Schooling in Developing Countries." World Bank Research Observer, vol. 10, no. 2. 9 Housing programs previously accounted for the remaining 50 percent, but have been transferred elsewhere and discussed below.  -16- represents about 18 percent of per capita GPP. The program of individual subsidies was unmonitored in terms of the discretion in choosing recipients and benefit levels. Institutional subsidies (to NGOs and municipalities) were also unmonitored. 46. While many of the MSD programs appear to address legitimate social needs, the equity impact of expenditures is at best uncertain because of (i) the absence of clear criteria for beneficiary selection; (ii) the lack of reliable information on the type and number of beneficiaries and the level and impact of benefits delivered; and (iii) the dispersion of programs. 47. PAICOR (Programa de ,4sislencia Integral de Cordoba; $55 million 1994 budget), a provincial school lunch program under the Ministry of Coordination, currently reaches 130,000 children or about 1/3 of the primary school population. Beneficiaries are selected at the school level. Parents decide whether to register their children in the program, and teachers determine which children are enrolled. While PAICOR appears to have a reasonable equity impact based upon geographical targeting (poorer departments have a higher share of students enrolled in PAICOR), it appears to be run rather inefficiently. While 48 percent of its budget went to food rations, almost the same amount (46 percent) went to personnel expenses, although under the new administration personnel expenses are on a decline. d. Roads 48. The Direccion Provincial de Vialidad (DPV; 1994 expenditures 64 million) administers, maintains, and improves nearly 60,000 km of provincial road. Of these, the vast majority (82 percent) are earth roads with less than 100 vehicles per day; 12 percent are unpaved roads with between 100-500 vehicles per day; and 6 percent are paved with generally more than 300 vehicles per day. While conditions of Cordoba's paved road system are only slightly inferior to those of other provinces, the situation of the unpaved network is somewhat less satisfactory. 49. Compared to the road directorates of Buenos Aires, Misiones, and Santa Fe, Cordoba ranks best on virtually all performance indicators, e.g., spending per km of provincial road, length of network, staffing efficiency (staff per 1000 km is 7, compared to 54 and 1 11 for Buenos Aires and Santa Fe). DPV had 402 employees as of October 1995, down 30 percent from a year earlier, and intends to reduce staffing further to 340. 50. The road system closely approximates public financing with private provision. One of the reasons for Cordoba's efficiency is its high use of private contractors for construction and maintenance. Most maintenance on the unpaved network is carried out by 220 consorcios camineros managed by the residents of the area served. e. Water, Sewerage, and Irrigation 51. The Direccion Provincial de Aguay Saneamiento (DIPAS; 1994 expenditures $57.9 million; net deficit $15.5 million) is responsible for water management, including the operation of the provincial water supply, sewerage, and irrigation systems. While access to piped water supply is above the national average (84 percent of Cordoba's population in built-up areas  -17- in 1991 had water supplied through house connections, compared to a national average of 72 percent), sewerage connections are particularly deficient (18 percent in Cordoba, compared to an already very low national average of 38 percent and a Latin American average of 53 percent). Virtually all public sewerage has already been transferred to the municipal level. 52. Cordoba's staffing per 1,000 water customers in 1992 was near the average of comparable Argentine provinces. Despite abysmal cost recovery (a collection rate in water of 60 percent, compared to over 90 percent for Buenos Aires, Mendoza, and Santa Fe; and less than 10 percent cost recovery in irrigation), DIPAS' operating deficit has now been virtually eliminated, apparently at the cost of inadequate maintenance and depreciation. The estimated backlog of rehabilitation and similar works is estimated at $120 million pesos. f. Housing 53. The Instituto Provincial de la Vivienda (IPV; 1994 expenditures $76.3 million) administers several housing programs in Cordoba, which are funded primarily through the federal FONAVI program ($51.5 million). The housing programs are heavily subsidized and charge a uniform interest rate of 8.7 percent, compared to commercial mortgage interest rates of about 18 percent.'0 Despite their high subsidy component, the housing programs have terrible incidence and primarily benefit the middle class: 79 percent of the loans go to households with a monthly income of over $560. The outstanding loan portfolio is $721 million pesos. 4. Expenditure Review by Economic Categories 54. Another way of looking at expenditures, is by economic classification. For that purpose three expenditure categories were reviewed: personnel expenditures, transfers to municipalities, and transfers to the social security system, which together account for 74.6 percent of current expenditures (57.2 percent, 14.3 percent, and 3.0 percent respectively). a. Personnel Expenditures 55. By various measures, C6rdoba's personnel expenditures are seriously out of balance. The provincial wage bill has climbed steadily in real terms since 1989, increasing by 141 percent by 1994, accounting for 50.2 percent of total expenditures. Employment figures are subject to considerable uncertainty. The General Directorate for Personnel estimates the total number of public servants to number 87,205, bringing average remuneration to 1,128 pesos per month. Permanent employees account for 91 percent of this total. 56. It would appear that government estimates are low. For example, where the official number of education appears to include only official slots (assessed at 27,975), we calculate the number to be significantly higher (44,666), mainly by distinguishing between actual teachers and full-time teacher-equivalents. This revision alone would bring the total number of '0 IPV has an annual construction program of over 60 million. Taking this as the annual "steady state" flow of new loans suggests implicit annual subsidies of 5.6 million.  -18- administration employees up to 103,896, bringing average remuneration to 947 pesos per month. Even by provincial Argentine standards, where little adjustment has taken place, C6rdoba's public employment appears over-dimensioned. While considerably more work remains to be done on a sector-by-sector basis to assess the nature and degree of staffing surplus, initial estimates can be gleaned from anecdotal reports: for example, redundancy levels in the state enterprises EPEC and DIPAS, and the health sector reviewed in this report could range between 40-50 percent . 57. Average remuneration for public administration employees (both the $1,128 and $947 peso figures) exceed private sector averages for selected industries in C6rdoba--$658 pesos per month. That public sector wage averages exceed those of the private sector may be a significant factor in determining the correct level for public sector wages. The national government's recent call for a downward adjustment (of between 10-15 percent) in wages may have been heeded faster in the private rather than the public sector. C6rdoba's emergency measures to cut average wages (and even more working hours) by 30 percent, may turn out to have constituted the first step toward this downward correction, although maintaining wages at this low level may prove unsustainable and unwise. Based on a comparison with the private sector, it might be appropriate to cut wages at the bottom echelons of the public administration; cutting managerial wages might hinder the government's ability to compete with the private sector for professional talent. Such cuts would correct the currently compressed and distorted pay structure. b. Municipal Transfers 58. Most intergovernmental transfers (79 percent) from the province to municipalities are in the form of formula-based, automatic revenue sharing (coparticipaci6n). In most fiscal systems, these types of transfers are used to correct for a mismatch between expenditure shares and own revenue shares across levels of government. Table 9 below displays the fairly stable division of expenditures across levels of government in C6rdoba over the 1989-1994 period. Table 9: C6rdoba --Expenditures by Level of Government 1989 1990 1991 1992 1993 1994 Provincial 707 895 1082 1523 2084 2222 Municipal 247 325 447 666 862 988 Total 954 1220 1529 2190 2946 3210 Provincial/Municipal shares of general government expenditures: Provincial 74% 73% 71% 70% 71% 69% Municipal 26% 27% 29% 30% 29% 31% Sources: Municipal data through 1992 from Secretaria de Hacienda (National); Provincial data from Budgetary exercises; Staff Estimates for 1993, 1994 municipal figures. 59. Table 10 presents the division of own-source revenues, and the federal inflow of resources, both with and without transfers. The cumulative balance across levels of government is calculated both with and without transfers. The data is for 1992, the most recent year for which we have good data for the aggregate municipal level. We see below that, in terms of vertical  -19- balance (matching of revenues and expenditures across levels), transfers are needed only to divide up the pie of resources that comes from the federal level. By allowing own source revenues to stay with each level of government, one would enhance the correspondence between taxes and expenditures; that is, tax payers would know that each peso paid to the provincial government would be used by that government in fulfilling its responsibilities, and likewise at the municipal level. In this way, both transparency and accountability would be enhanced. Table 10: C6rdoba--Shares of Revenues in 1992 (million pesos) Transfer- of Provincial Own Own Current Capital Federal Transfers Federal-Prov'l Tax CopartL- Revenues Revenues to Province* copart. to Muni's to Munsicipios Net Revenues Municipal 351 31 10 174 113 Provincial 702 17 1020 -174 -113 Cumulative Municipal 351 382 392 566 679 679 Provincial 702 719 1739 1565 1452 1452 Total 1053 1101 2131 2131 2131 2131 uuative percent Shares as We Add Across Categories Municipal 33%. 35% 18% 27% 32% 32%/o Provincial 67