Argentina - Second Public Enterprise Reform Adjustment Project

 Second public enterprise reform adjustment project Report No: ; Type: Report/Evaluation Memorandum ; Country: Argentina; Region: Latin America And Caribbean; Sector: Privatization; Major Sector: Private Sector Development; ProjectID: P006012 Argentina: Second Public Enterprise Reform Loan (Loan 3556-AR) The Implementation Completion Report (ICR) for the Argentina Second Public Enterprise Reform Adjustment Loan (PERAL II, Loan 3556-AR, US$300 million approved in FY93 and closed 18 months behind schedule in FY96), was prepared by the Latin America and the Caribbean Regional Office, with Part II contributed by the Borrower. PERAL II was a quick-disbursing, two-tranche sector adjustment loan. The Export-Import Bank of Japan (JEXIM) financed another US$200 million. The Bank and JEXIM set aside US$100 million each to finance part of a Debt and Debt Service Reduction operation. PERAL II supported the privatization of defense industries to achieve the following objectives: (a) end Government budget subsidies to these enterprises; and (b) improve private sector competition. The loan was complex and innovative. It was the first Bank loan ever to address the privatization of defense industries. The Government welcomed the Bank's involvement because of the Bank's prior knowledge of some sectors included for privatization (e.g. steel and petrochemical), its ability to help develop and implement anti-trust legislation to promote a competitive environment and to provide transparency and credibility to the privatization process. The ICR concluded that the project achieved a considerable part of its goals. The steel and petrochemical sectors are now entirely in the private sector. The sale of assets generated over US$1.0 billion for the Government, and privatization eliminated the need for further subsidies. The Government reduced public employment by about 15,000 and kept military expenditures below two percent of GDP. The project, however, was not successful in its objective of improving private sector competition. Asset concentration as a result of the privatization process could not be prevented because privatization took place before the enactment of anti-trust legislation and the statements of competitive principles in sales memoranda were not appropriately enforced. Also, the Bank's presence was not enough to ensure transparency and objectivity in the privatization process, since there were no legal barriers to insider trading among private groups in the existing legislation. The ICR rates the project outcome as satisfactory, sustainability as likely, institutional development impact as moderate and Bank performance as highly satisfactory. The Operations Evaluation Department (OED) agrees with these ratings. Although the project could not prevent asset concentration and ensure full transparency in the privatization process, OED agrees with the Region in rating Bank performance as highly satisfactory due to the Bank's role in helping the Government achieve one of the most far-reaching privatization programs carried out by a developing country. On lessons learned, the ICR emphasizes that: (a) strong institutions and effective enforcement of legislation to encourage competition are needed to prevent oligopolistic concentration and ensure transparency in privatizations; (b) international competitive bidding may not be adequate in privatizing defense industries because of few potential defense industry players; and (c) small, financially unattractive military industries might be better closed than privatized. The ICR is of satisfactory quality. No audit is planned.