Argentina - Provincial Development Project

 ICRR 10529 Report Number : ICRR10529 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: L3280 Project ID : P006005 Project Name : Provincial Development Project Country : Argentina Sector : Other Non-sector Specific L/C Number : L3280 Partners involved : Inter-American Development Bank (IDB) Prepared by : Navin Girishankar, OEDCR Reviewed by : Hernan Levy Group Manager : Ruben Lamdany Date Posted : 10/14/1999 2. Project Objectives, Financing, Costs and Components : Objectives : The Provincial Development Project (PDP-I) sought to provide financial support and incentives for provinces to implement their own adjustment programs, focused on own-source revenue enhancement and expenditure control. Specifically, the operation aimed to (i) improve financial management so provinces can convert deficits to surpluses, (ii) build provincial capacity for expenditure programming, and (iii) finance institutional development and physical investments. Components : PDP-I financed sub-projects in 23 provinces under two components. The institutional development component financed technical assistance, training, and the purchase of equipment needed to enhance own-source revenues. The physical investment component financed . Costs and Financing : Total rehabilitation and completion of existing and unfinished works in public infrastructure and facilities project costs amounted to $629.4 million equivalent. IBRD commitments of $200 million were fully disbursed by project completion, while the IBD disbursed $203.6 million. The remainder was covered by counterpart financing provided by participating provinces, which amounted to $225.8 million. This multisectoral loan was approved December 18, 1990, became effective on July 5, 1991 and closed on December 21, 1998. While the national government was the borrower for the PDP-I, funds for sub-projects were on-lent to provinces on the same terms and conditions as the Bank loan. Provincial governments had to meet criteria related to creditworthiness, fiscal performance, and implementation progress in order to be eligible for the on-lent funds. This demand-driven approach meant that actual allocations between institutional development and physical investment components of the PDP-I were not determined ex ante,but rather evolved based on the types of sub-projects proposed and approved. It revealed significantly higher demand for institutional development activities (and less for physical investment) than anticipated at appraisal. 3. Achievement of Relevant Objectives : The PDP-I contributed to Argentina's overall macroeconomic objective of fiscal deficit reduction. The fiscal and expenditure management measures of the PDP-I were partly responsible for the drop in the primary deficit of all provinces from 1.6% of GDP in 1990 to 0.1% in 1997. In addition, the PDP-I laid the foundation for 'changing the rules of the game' governing provincial fiscal management by introducing notions such as credit-worthiness, etc. Specifically, the operation supported 318 sub-projects directed towards short-term technical assistance as well as 'strategic' objectives (e.g., tax administration, cadastres, property registries). These helped provinces make important strides towards own-source resource mobilization, which increased 13% in real terms between 1994 and 1997. The physical investment component financed 55 sub-projects with an average weighted ERR of 39%. These included the rehabilitation of 1200 km of provincial roads, 84 hospitals (servicing 130,000 in-patients annually), and 214 school buildings (serving 80,000 students). Monitoring as part of the eligibility requirements of the PDP-I led to the development of one of Latin America's best information systems on provincial finance. 4. Significant Achievements : Aside from those listed above, three other achievements of the PDP-I are noteworthy. Innovative design : The first multisectoral project that on-lent funds to provincial governments, the PDP-I introduced concepts of demand-orientation and flexibility in center-province relations in Argentina. Changing the rules of the game : Embedded within the PDP-I were incentive mechanisms such as the creditworthiness and fiscal performance eligibility criteria that introduced new processes and rules based on principles of prudent financial management. As the ICR indicates, follow up projects including PDP-II and the PRLs would further develop an incentive framework for provincial fiscal management based on these principles. Building knowledge and trust : During preparation, the Bank solicited the input and participation of representatives from the provinces. On the 14 supervision missions undertaken during PDP-I implementation, visits to the provinces helped establish personal and institutional contacts with provincial authorities, which were then formalized through interactions between the Central Executing Unit (CEU) in the Ministry of the Interior and the Provincial Executing Units (PEUs) in the provinces. This emphasis on building trust and knowledge, if continued in follow-up projects, will likely promote the types of learning as well as cultural change necessary for public sector reform to become a reality at the provincial level. 5. Significant Shortcomings : First, the cadastre and property registry sub-projects--despite helping increase the tax base of provinces--did not lead automatically to increased revenue. A more deliberate strategy for tax collection and compliance is required if that objective is to materialize. Second, the Bank underestimated the demands in terms of coordination that this type of operation placed on the center as well as the provinces, thereby leading to delays in implementation. Third, an important aspect of coordination and enforcement of minimum standards is rigorous monitoring and evaluation of sub-projects. The Bank's assistance did not include a methodology or toolkit for monitoring the institutional development impact of sub-projects, which accounted for nearly $30 million. Without such a framework, assessment of institutional development impact tends to be largely qualitative and based on inputs (e.g., numbers trained or number of consultants hired) rather than results. Fourth, the project supported a variety of capacity building inputs, but did not explicitly diagnose and rectify disincentives in the pay and employment systems of provincial governments (e.g., real wage level, decompression levels, opportunities for decision-making, and the autonomy to innovate). Finally, the project did not contain any measures to limit regional inequalities that would have been reinforced by a demand-driven approach (since richer provinces were more likely to have met creditworthiness criteria than poorer ones, etc.). 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Highly Satisfactory Highly Satisfactory Borrower Perf .: Highly Satisfactory Highly Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : This innovative project offers five lessons that could be applicable in other countries and regions. First, the success of national fiscal adjustment programs depends on the ability of states/provinces to carry out similar reforms to encourage prudent fiscal behavior and operational efficiency in service delivery. Second, when possible, changes in the rules of game for intergovernmental relations such as strict eligibility criteria used in private markets (e.g., creditworthiness) or demand-driven sub-project identification should be embedded upstream, in the design of projects. Third, operations that support on-lending for multisectoral sub-projects place significant demands on central and provincial authorities as well as the Bank and its partners in terms of coordination capacity and enforcement of minimum standards. Finally, multisectoral loans involving cadastre, property registry and tax administration projects should be implemented in an integrated manner with a special focus on sequencing. 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR is well-argued. The annexes contain relevant information on the type and location of sub-projects, numbers of beneficiaries, IERR, etc. Detailed evaluations of different types of sub-projects -- cadastre, tax administration, physical investment, and financial management -- are also provided. The links between the PDP-I and its follow-up projects are also explained. The lessons section, however, was not very clear. The seventeen lessons listed in the executive summary could have been consolidated and articulated more cogently. Finally, ICR should have commented on the influence (if any) that sub-projects had on how social and infrastructure services were delivered.