Argentina - Structural Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.P7479-AR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ONA PROPOSED STRUCTURAL ADJUSTMENT LOAN IN THE AMOUNT OF $400 MILLION TO THE ARGENTINE REPUBLIC AUGUST 6, 2001 Poverty Reduction and Economic Management Human Development Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Argentine Peso (ARG$) ARG$ 1= US$ I (Since March 1991) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ANSeS Social Security Administration PBU Basic Minimum Pension AFIP National Tax Administration PFCC Federal Council on Public Administration AFJP Private Capitalized Pension Fund PMA Medical Assistance Plan APE Administrator of Special (Health) Programs PMO Obligatory Medical Program ATN National Treasury Grants PNC Non-contributive Pensions BU Universal (Pension) Benefit PP Proportional Payment (pensions) CAMEL Capital Assets Management Earnings & Liquidity PPF Project Preparation Facility CAS Country Assistance Strategy PRES Higher Education Project CODE Committee on Development Effectiveness PRL Provincial Reform Loan DNU Special Decrees by the Executive Branch PRODYMES Secondary Education Project DOSMIL Special Large Tax-Payer Monitoring System PROINDER Project'for Small-scale Farmers EMBI Emerging Market Bond Index PROST Pension Reform Options Simulation Toolkit EPH Permanent Household Survey PSAL Programmatic Structural Adjustment Loan FEDEI Federal Rural Electrification Fund RRP Public Pay-as-you-go Regime FONAVI National Housing Fund SAFJP Superintendent for Capitalized Pension Funds FOPAR Social Fund SAL Structural Adjustment Loan FREPASO National Solidarity Front (political party) SCL Single Currency Loan FSR Solidarity Redistribution Fund SDR Standard Drawing Rights GDP Gross Domestic Product SIDIF Integrated Financial Management System ICR Implementation Completion Report STEMPRO System for Monitoring and Evaluating Social Programs ICT Information and Communications Technologies SlIP Integrated System for Retirement Benefits and Pensions IDB Inter-American Development Bank SINTyS National Social and Taxpayer Identification System IMF International Monetary Fund SISFAM Census of Social Program Beneficiaries INSSJP National Heath Institute for Retirees and Pensioners SNSS National Health Insurance System LIL Learning and Innovation Loan SRF Supplemental Reserve Facility NGO Non-governmental Organization SSAL Special Structural Adjustment Loan OECD Organization for Economic Cooperation SSS Health Services Superintendency and Development OED Operations Evaluation Department TAL Technical Assistance Loan ONC National Procurement Office TRABAJAR Temporary Employment Program OSPO National Managers' Health Plan VAT Value Added Tax OSS Union-administered Health Plans PAMI Integrated Program of Medical Care for Retirees and Pensioners Vice President: David de Ferranti Country Director: Myrna Alexander PREM Director: Ernesto May HDD Director: Xavier Coll Lead Economist: Paul Levy HD Sector Leader: Ariel Fiszbein Task Tearm Leaders: Ronald Myers, David Rosenblatt and Juan Pablo Uribe  FOR OFFICIAL USE ONLY THE ARGENTINE REPUBLIC Programmatic Reform Loan Table of Contents LOAN AND PROGRAM SUMMARY ..............................................I A. INTRODUCTION .............................................1 THE ECONOMIC SETTING IN ARGENTINA ..............................................3 B. THE GOVERNMENT'S REFORM PROGRAM .................................... 13 ADMINISTERING SOCIAL PROGRAMS IN A FEDERAL SYSTEM ......................................... 13 FISCAL SUSTAINABILITY AND THE SOCIAL SECTORS ...................................................... 17 FEDERAL-PROVINCIAL FISCAL RELATIONS ........................................................ 18 HEALTH SECTOR REFORMS ........................................................ 21 THE REFORM OF SOCIAL PROTECTION PROGRAMS ........................................................ 27 MODERNIZATION OF THE STATE ........................................................ 34 REFORM OF TAX ADMINISTRATION ............................................. 39 C. THE PROPOSED LOAN ............................................ 42 LINK TO CAS ........................................................ 42 RELATIONSHIP TO OTHER BANK OPERATIONS ........................................................ 43 REFORM PROGRAM OBJECTIVES ......................................................... 45 PROGRAM DESCRIPTION ........................................................ 46 DESCRIPTION OF FINANCIAL ASSISTANCE ........................................................ 49 PROGRAM IMPLEMENTATION AND SUPERVISION ........................................................ 49 DISBURSEMENT AND AUDITING ........................................................ 53 PROGRAM BENEFITS AND IMPACTS ........................................................ 53 MAINSTREAMING GENDER ISSUES ........................................................ 54 ENVIRONMENTAL CONCERNS .................................... 55 SOCIAL IMPACTS .................................... 56 COLLABORATION WITH THE IMF AND IDB ................................... 57 LESSONS LEARNED ................................... 58 RiSKS AND RISK MITIGATION ............................ 59 D. RECOMMENDATION .................... 60 This Report is based on the findings of a team composed of David Rosenblatt (Team Leader - Provincial Issues and General Coordination), Ron Myers (Team Leader - State Modemization), Juan Pablo Uribe (Team Leader - Human Development), Milka Casanegra (Consultant), Daniel Cotlear, Enrique Fanta (Consultant), Ariel Fiszbein, Gillette Hall, Olympia Icochea (Consultant), Charlie Leonard (Consultant), and Enrique Zuleta Puceiro (Consultant). 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.  ANNEXES Annex A: Letter of Development Policy Annex B: Matrix of Medium-Term Reforms Annex C: SAL Matrix of Reforms Annex D: The Federal Agreement and Federal-Provincial Fiscal Arrangements Annex E: Mainstreaming Gender Considerations Annex F: Argentina At a Glance Map - IBRD 29348  ARGENTINE REPUBLIC Structural Adjustment Loan Loan and Program Summary Borrower: Argentine Republic Implementing Ministry of Economy, Chief of Cabinet's Office, and Social Sector Agencies: Ministries Amount: US$400 million (including financing of the front-end fee). Terms: A Fixed-Spread Loan, repaid in 15 years, including three years of grace, at the Bank's Fixed-Spread Loan variable interest rate. Commitment Fee: 0.85 percent on undisbursed loan balances, beginning 60 days after signing, during the first four years following signing; thereafter the rate falls to 0.75 percent. Objectives: To improve the quality, equity and efficiency of social services and to reduce fiscal instability in the federal-provincial public sector. Such reforms are needed to secure sustainability of the economy. Description: This loan is intended to support the Argentine government's structural reform program within a coherent medium-term framework over the 2001-2003 period. One or two follow-up adjustment operations are planned within the medium-term framework, depending upon progress in implementing the continuing reform agenda. Despite a relatively high income per capita and GDP growth that averaged 4.8 percent per year during the 1990s, persistent poverty and macroeconomic shocks have led to social problems that the government is intent on addressing. The shocks themselves are, partly, a function of fiscal vulnerability due to imbalances at the federal and provincial levels. Thus, attaining fiscal balance is essential as efforts to assist vulnerable groups throughout the economic cycle depend upon the public sector's ability to deliver a steady stream of services. In terms of social services, the central government's role is focused on the national health insurance system, the national public pension system, income transfers, health care for the elderly and a wide range of targeted social protection programs. The provinces are responsible for primary and secondary education, public hospitals and clinics, housing and a variety of social protection i  programs. Social expenditures comprise about 53 percent of provincial budgets. Financing of recurrent expenditures in the social sectors for both levels of government depends on tax revenues that are largely collected by the federal government. The federal government has launched an ambitious program to improve the public administration, in general, and specifically of those social programs under its own responsibility, improve the structure and regulatory environment of the national health insurance system, and improve the administration of the tax system that finances social expenditures at all levels of government. The federal government is also leading efforts to stabilize provincial transfers and provincial finances, and coordinate activities in the provinces to lead to improved transparency, budgeting and planning at that level of government. This program comes at a time when the government is facing a difficult fiscal and financial situation. Thus, the structural reforms under the Bank's proposed SAL accompany wider efforts, being supported by the international financial community, to secure adequate financing, stimulate investment, and enhance productivity as the underpinnings for restoring growth and reducing poverty. Benefits: Expected benefits include: (a) improved fiscal stability across levels of government; (b) improved stability in the level of social services provided by the public sector especially those targeted to the poor; (c) improved efficiency, equity and quality of health insurance services; (d) improved effectiveness of federal and provincial social protection programs in reaching the poor; (e) improved equity and financial sustainability of the national public pension system; and (f) improved efficiency of tax administration. Risks: The reform program faces high risks. First, Argentina's macroeconomic environment continues to be highly fragile. The current macro-economic framework may not be sustained, and growth may not recover at the pace expected by external markets, and required for fiscal sustainability. The present IMF-led program of international financial support is intended to reduce these risks, as are other actions by the government to reduce liquidity needs for the 2001-2003 period through debt swaps. Second, the complexity, the number of actors, and the medium- term institutional nature of many of the reforms pose a challenge for the implementation of the program. This risk is reduced by the completion of a strong set of prior actions before Board presentation, the tranching of the proposed operation, and the performance-based phasing of follow-up operations. A third important risk pertains to the strength of vested economic and ii  political interest groups, which could slow down, inhibit, or stall reforms. The fourth major risk is deteriorating social conditions and, if the resulting social tensions rise further, the possible erosion of broad-based support for the overall program. The proposed operation and the envisaged follow-up operations are specifically designed to focus on establishing effectively targeted poverty interventions in the health and social protection areas. As they are implemented, these interventions will help protect the incomes and well-being of the poorest and most vulnerable segments of the population. The use of information and communications tools to explain the program costs and benefits to the people is critical to addressing the substantial political economy and social risks. Poverty Category: Program of Targeted Intervention Financing Plan: Not applicable Net Present Value: Not applicable Project ID Number: P073591 iii   REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN TO THE ARGENTINE REPUBLIC A. INTRODUCTION 1. I submit for your approval the following Report and recommendation on a proposed Structural Adjustment Loan to the Republic of Argentina for US$400 million to support an on-going program of reforms in the administration and financing of social programs in a federal system. The loan will be a $400 million dollar-denominated fixed- spread loan with a maturity of 15 years and a grace period of three years. 2. This loan is intended to support the Argentine government's structural reform program within a coherent medium-term framework over the 2001-2003 period. One or two follow-up adjustment operations are planned within the medium-term framework, depending upon progress in implementing the continuing reform agenda. This series of fast-disbursing loans, as requested by the government, would form the centerpiece of the World Bank's contribution to an international financial support package of $39.7 billion that was coordinated in late 2000, during a period of deteriorating macroeconomic conditions.' The international support package includes a significant private sector contribution (roughly half of the pledged funding). The package, led by the IMF, also includes contributions from the Inter-American Development Bank and the Government of Spain. This broader joint effort provides Argentina with the support to address its financing needs and to restore market confidence. 3. The current macroeconomic situation continues to be highly fragile. Current indications are that the fiscal deficit remains within the Government's program targets and overall macroeconomic policies remain broadly on track at this time. However, uncertainty remains high, and staff continue to monitor the macroeconomic framework carefully, taking into account the ongoing IMF Review that is expected to be completed shortly. The social consequences of the ongoing recession generate serious concern. The proposed loan supports measures aimed specifically at assuring an enhanced government response to poverty alleviation, via improved targeting and efficiency of social programs, while also addressing the fiscal instability that has contributed to economic recession and increased poverty. I Other components of the Bank's support would include a proposed loan for the government's temporary public employment program (Trabajar) and continued efforts to work directly with individual provinces in their reform programs. The CAS FY01 Progress Report presented to Board in July 2001 provided more details on the revised program of assistance. 1  4. Despite a relatively high income per capita of about $7,500 and GDP growth that averaged 4.8 percent during the 1990s, the Argentine economy is presently facing problems of competitiveness, fiscal vulnerability and uncertainty, along with the related social consequences. It has been in recession since the latter part of 1998 and recovery is still not evident as it adjusts to external and internal shocks. The unemployment rate stands at about 16 percent and poverty is estimated to be about 30 percent. The poor have suffered the most during the economic downturn and efforts to assist vulnerable groups are dependent upon the public sector's ability to deliver a steady stream of social services. Meanwhile, the Argentine public sector is highly decentralized, with nearly half of all public expenditures administered by sub-national governments. Financing of recurrent expenditures in the social sectors for both levels of government depends on tax revenues that are largely collected by the federal government and redistributed to the provinces. In addition to ameliorating the social impact of economic shocks, the govermnent recognizes that the shocks themselves are, partly, a function of fiscal instability. This instability has been the result of fiscal imbalances at both the federal and provincial levels. 5. The federal government has launched an ambitious program to restore growth and to attain fiscal equilibrium. A main component of this effort focuses on the quality and efficiency of social services in the federal system, and the fiscal instability in the consolidated federal-provincial public sector. Restoring growth is a sine qua non for reducing poverty. The government intends to improve the administration of those social programs that are under its own responsibility, improve the regulatory environment of the national health insurance system, and to improve the administration of the federal taxes that finance much of social expenditures at all levels of government. In addition, the federal government has begun to coordinate activities in the provinces that will lead to increased transparency, and improved budgeting and planning by that level of government. These efforts complement other measures to: (1) secure adequate domestic and foreign financing to meet its needs through 2001 and into 2002; (2) improve the debt profile and smooth external debt amortization over the coming years; (3) reduce distortions in the tax system; (4) reduce transaction costs in transport; (5) expand access to credit; (6) improve productivity; and (7) reduce tax evasion. These measures, taken together, are aimed at restoring growth which will lead to reduce poverty over the medium term. 6. The FYOI-04 CAS, presented in June 2000, allows for expanded lending beyond the base case of $ 3 billion for the period in response to government efforts to expand and accelerate reforms particularly in the administration of social programs and federal- provincial fiscal relations as long as criteria for the high lending case scenario are met. This proposed structural adjustment loan, under the base lending scenario, would comprise the first step of the Bank's response to support these reforrn efforts. The 2 As part of the government's economic recovery program, the government will be adopting a series of measures to increase competitiveness, deregulate and reduce "red-tape", and make the investor climate more attractive. These measures are an essential complement to the reforms being introduced under the proposed series of structural adjustment loans, as outlined in the CASA FY0 1 Progress Report, which focus mainly on fiscal stability and social sectors. 2  government's reform program, if successfully completed, will secure an enhanced government capacity to respond effectively to the needs of vulnerable groups. By improving fiscal stability, the govermment will be able to better respond to these needs during those periods when deteriorating economic conditions provoke increased demand for social services, while laying the basis for renewed confidence and investment. THE ECONOMIC SETTING IN ARGENTINA Economic Reform and Growth 7. The Argentine economy is facing its most serious challenge since the hyper- inflation of the late 1980s. Since the launch of the Convertibility Plan in 1991, the Argentine economy had been transformed through a sweeping set of reforms that altered the monetary system (establishing a currency board arrangement), liberalized trade, and redefined the role of the state. The latter was achieved through a broad privatization program, increased decentralization to the provinces, and reform of the social security system. All of this was intended to reverse the long-term trend of slow growth, low labor productivity, state domination, low domestic savings, weak investment, high volatility, and chronic inflation, which the country had suffered for the previous 25 years. When hyperinflation broke out in 1989, the rate of poverty in the country had climbed to over 40 percent of the population. 8. The economic results of these earlier reform efforts have been dramatic. Argentina has experienced average economic growth of 4.8 percent over the 1991-1999 period, despite being hit by two severe external shocks, the first the Tequila crisis in 1994-95, and more recently the accumulative effects of the Asian crisis, followed by the Russian default and the devaluation of the Brazilian Real in early 1999. Instead of experiencing hyperinflation, Argentina has experienced one of the world's lowest rates of inflation since the mid 1990s. The federal government's fiscal deficit receded from an average of about 6 to 8 percent of GDP for most of the 1980s to 1.4 percent in 1998. At the provincial level, deficits averaged 0.9 percent of GDP during the 1990s, fluctuating between 0.5 percent and 1.6 percent of GDP. Still, Argentina remains vulnerable and highly dependent on international capital markets: even though foreign debt is moderate as a share of GDP (53 percent), the country's export base is small. As a result, total external debt represents more than four times the annual base of exports of goods and services, and debt service represented more than 85 percent of exports in recent years. 9. The accumulative impact of past external shocks and Argentina's continuing dependence on the international capital markets confound Argentina's ability to adjust to the impact of the most recent shock-the devaluation of the Brazilian Real in early 1999.3 The economy declined by 3.4 percent in 1999, followed by 0.5 percent decline in 2000, with no growth seen thus far in 2001. A number of factors, both internal and external, worked against Argentina's recovery: notably, low commodity prices, the realignment of critical currencies (US dollar, Euro), the structural shift in risk perceptions 3 Further devaluation of the real could perpetuate the adjustment needed on the side of Argentina to remain competitive. 3  of international markets towards emerging markets, plus deteriorating fiscal performance. The latter was, in part, due to the economic cycle; however, the fiscal situation was exacerbated by election year spending, and the difficulty of the governing coalition to present a cohesive and forceful stance to resolve the fiscal and economic problems. Additional political factors included the coalition's lack of a majority in Congress, and the fact that opposition parties controlled most of the provinces. Argentina's macro- economic framework, anchored in the parity of the Argentine peso to the US dollar, means that economic adjustment must occur via productivity increases, thus, limiting the kinds of policies that the govermnent could implement. Moreover, this had to be done in the context of relatively high poverty. The Bank's latest estimates put poverty at about 29 percent of the urban population.4 It is likely much higher in the rural areas. This situation is compounded by rising income inequality and high unemployment, especially for the unskilled, indicating that the benefits of growth have not been widely shared. Reactions to Past External Shocks 10. By the mid-1990s, poverty rates had been reduced almost to half the 1989 level. Argentina then suffered the consequences of two serious external shocks. The first came in late 1994-1995 after the devaluation of the Mexican peso. The Tequila produced a serious dislocation of the economy, the economy shrank by 2.8 percent in 1995, and unemployment rose to an all time high of more than 18 percent. Following the crisis, strong investment-led growth returned. Real GDP growth was 5.5 percent in 1996 and an impressive 8.1 percent in 1997. The federal government and many of the provinces used the crisis as an opportunity to advance on pending reforms, most notably in the area of banking restructuring, consolidation, supervision, and provincial bank privatization. It was also the opportunity to begin other reforms in the social sectors, namely health insurance, and the introduction of new targeted social programs. The reforms resulted in a stronger banking sector and the beginnings of more fundamental changes in social policies. Support from the Bank Group, IDB and IMF was critical in helping Argentina to recover from the external shock, implement continuing reforms, launch important targeted social programs-with a view to, over time, putting in place an effective social safety net and protecting the poor. 11. The second test began in late 1998 as a result of the combined effects of the downturn in East Asia, the devaluation of the Russian ruble, and deterioration of commodity prices. After 6.6 percent growth in the first half of 1998, a recession began in the fourth quarter of 1998. For that year as a whole, GDP growth was 3.9 percent. Despite the start of the recession, Argentina's commitment to prudent macroeconomic management, the new strength in the banking system, and the discipline inherent in its currency board arrangement generated confidence. Indeed, that was initially to be the case: Argentina was among the first emerging economies to regain access to international capital markets, following the Russia crisis. The Bank's special support late in 1998 played a significant role in this reentry and the continuation of structural reforms. 4 See the Bank's most recent Poverty Assessment for Argentina, Report No. 19992-AR; March 23, 2000. 4  12. The economic downturn in 1999 turned out to be deeper and longer than expected as the devaluation of the Brazilian Real in January 1999 provoked a serious adjustment process to regain competitiveness and to enter new export markets. This was coupled with less vigor in carrying out reforms, in contrast to what had happened in the aftermath of the Tequila crisis, and less fiscal discipline during an important election year. Overall, Argentina's GDP declined by 3.4 percent in 1999, a larger drop in output than experienced during the Tequila crisis of 1995. Unemployment, after falling to about 12 percent from the high of 18 percent reached in 1996, increased to 14 percent in late 1999. The volume of exports remained stable (although prices had fallen) as Argentina was able to find substitute markets for its exports. Because of the sharp contraction in domestic activity, the current account balance improved slightly to 4.3 percent of GDP, due to even larger declines for imports (particularly capital goods) than for export values. Inflation remained extremely low, with deflation occurring during most of 1999. 13. Slippage on the fiscal side emerged as a serious factor by the end of 1999. The fiscal program went off track in the latter part of the year, resulting in a deficit of about $7.4 billion, substantially higher than the target of $5 billion agreed with the IMF. The higher deficit was the result of higher interest costs, the duration of the recession, and a general weakening of fiscal discipline during the election year. Provincial governments encountered similar conditions and ended the year with a deficit of about $4.6 billion, almost twice the deficit in 1998. The consolidated public sector fiscal deficit (summing both the federal government and the provinces) amounted to approximately 4.2 percent of GDP, excluding privatization receipts. As a result, the new administration that took office in December 1999 faced the challenge of restoring order to the fiscal accounts, including those of the provinces. 5 Fig. 1: Quarterly GDP & Bi-Annual Unemployment 14. Despite the new government's best 1"3-20o1(proj.) efforts to spur the economy and to reform the 320 labor markets in early 2000, recovery was ______ elusive. Unemployment rose from 13.7 percent in October 1999 to 15.4 percent in 280 1_ May 2000. During the first half of the year, access to financial markets was relatively 2B0 _ _ - - I ___ l l 14 good, but with a high degree of volatility in spreads. Average spreads on foreign bond 240 - T T I I 1 l issues fell about 1 percentage point in the X first half of 2000, relative to average spreads 0 l l during 1999. Exports performed well, growing by almost 14 percent, year-on-year, 20 2.2 in the first six months of 2000. As described below, the already weak performance of the first half of 2000 deteriorated in the second I GDP $Billions,1993Pnces) half of the year. u Unemployment (%, lght-handscale) 5The federal govermnent deficit was the larger share: 2.6 percent of GDP versus 1.6 percent of GDP for the provinces. 5  Domestic Factors 15. The economic scene was complicated by increased uncertainty on the political front towards the end of 2000. The coalition government consisting of the Radical and FREPASO Parties, which defeated the Peronist Party in the October 1999 elections, pledged to continue the economic policies which had led to Argentina being able to master inflation and to see substantial economic growth for the first time in decades. The coalition's platform emphasized improved governance, reduced corruption, and increased social equity while retaining the essential features of the Convertibility Plan. It faced formidable challenges: not only was the economy in recession, the governing party itself was a coalition of two parties, one of which was last in power in 1989, and the other which never had an executive role. It had a working majority in the Congress but faced opposition in the Senate; it also faced a majority of provinces led by Peronist governors. In the midst of a painfully slow economic recovery, a political crisis emerged in September 2000 that resulted in the resignation of the Vice President, the leader of the FREPASO Party and a cabinet shuffle. These political developments raised doubts about the ability of the administration of President De la Riua to secure legislative approval of new measures in the future. 16. By early November 2000, these political developments, in the midst of a stagnant economy, created an internal crisis of confidence that led to a sharp rise in country risk. Over the October-November period, external debt markets were closed for Argentine govermnent borrowing, and domestic interest rates rose sharply. Foreign reserves of the financial system fell by about 5 percent during October 2000. Between the combined effects of the external and internal shocks, the economy shrank by 0.5 percent in 2000. The current account balance improved significantly to around 3.3 percent in 2000, with strong exports and slack import demand offsetting the rise in foreign interest payments. The federal fiscal deficit for 2000 was about 2.4 percent of GDP, and the provincial deficit 1.2 percent of GDP. The consolidated deficit of 3.6 percent of GDP represents an improvement over 1999, in spite of the ongoing economic slowdown. During the same period, unemployment rose to 14.7 percent in October 2000, significantly above the post- 1995 low just above 12 percent in October 1998, but well below the 18 percent peak in 1995. 17. During the year 2000, confidence in the banking system remained strong, as the monetary authorities have implemented prudent banking policies, strengthening the system since the Tequila crisis. The system maintained its deposit base in both pesos and dollars, exhibiting growth of 7 percent growth in the first half of the year.6 However, deposits declined in the face of the political uncertainty in October and November 2000. In addition, credit growth to the private sector has been negative, as banks have taken a cautious stance. The cutting off of domestic firms from credit has imposed a very strong limitation on new investment and a burden on firms attempting to adjust to the change in market conditions resulting from the devaluation of the Brazilian Real. The government's switch from external to domestic sources of financing further complicated this panorama. 6 In contrast, during the Tequila crisis, 18 percent of deposits were withdrawn from the system and a significant number of banks were forced to close, restructure and/or merge. 6  In addition, the continuing stagnation of the economy has led to an inevitable deterioration in the quality of bank portfolios. The Economic Response Program 18. In late 2000, the federal government initiated a new set of economic reforms to respond to the situation described above. These included a reduction in social security expenditures over the medium term via improved targeting, an agreement with the provinces limiting the growth of transfers, and an increase in employment creation programs. In addition, the government negotiated an international package of financial support totaling approximately $39.7 billion. The government reached agreement with the IMF on the economic parameters of the program. Commitments by the private sector comprise about half of the total package. The IMF augmented its stand-by arrangement to $13.7 billion, the World Bank and the IDB pledged approximately $2.5 billion each, largely consisting of already planned operations, and the Govemment of Spain committed $1 billion. In the case of the World Bank, the planned program was to include up to $ 900 million in support of the federal governnent's reform efforts, in addition to continuing support for the provinces and social programs. The intent of this package was to cover most of Argentina's external financing needs for 2001 and into 2002, thus, providing the space needed for structural reforms to be enacted. The expectation was that these reforms would restore growth and create a virtuous circle of increased revenues, reducing fiscal pressures. Box 1: The IMF Program and the Medium-Term Fiscal Strategy. The IMF expanded its three year, $7.4 billion Stand-By Arrangement (approved in March 2000). The expanded program, approved in January 2001, involves approximately $13.7 billion in support (SDR 10.6 billion), and approximately one-fifth of this amount will be provided by the IMF's Supplemental Reserve Facility (SRF). Approximately $2.1 billion were disbursed in late 2000, and another $2.9 in early 2001. Total disbursements of $6.7 billion are expected for the year 2001. The initial strategy of early 2000 was to seek a strong fiscal adjustment, leading to a decline in interest rates to spur growth. With the disappointing performance of the economy, the strategy now is to allow for a more gradual fiscal adjustment, lowering the negative fiscal impulse, so that growth can be established in the short-term. The target fiscal deficit for the Federal Government in 2001 is $6.5 billion (1.8 percent of GDP). There are also indicative targets for the consolidated provincial governments, including a deficit of $2.8 billion (I percent of GDP) in the year 2001. (Binding debt accumulation targets include both the federal and provincial levels.) In agreement with the IMF, the government has revised the fiscal sustainability law approved in 1999 that had set 2003 as a target date for achieving fiscal balance. Now the law sets 2005 as the date for reaching fiscal balance and it establishes intermediate steps for reaching that target. The provinces also agreed to this timetable. Recently, a majority of Governors expressed their commitment to accelerate this process along the lines of the federal zero-deficit plan. 19. With the announcement of these new reforms and the international financial package in place, financial variables improved substantially during the first two months of 2001, but these favorable tendencies suffered a reversal during March 2001. A variety of domestic and international events contributed to a worsening of the political environment. The Turkey devaluation negatively affected market perceptions. Domestic 7  issues also had a major impact. The government announced that the fiscal deficit for both January and February would be significantly higher than expected. At the end of the first week of March, the Minister of Economy resigned. His replacement announced a series of fiscal adjustment measures that were met with strong political resistance, leading to the resignation of Cabinet Ministers from the FREPASO Party. With little political support to advance on his measures, the new Minister of Economy resigned after a two-week tenure amidst tremendous political turmoil. At this point, EMBI+ spreads for Argentina had reached the 1000 basis point mark that had been breached in October 2000. 20. In mid-March 2001, the President appointed Domingo Cavallo as Minister of Economy. Mr. Cavallo is well-known for his earlier role in economic reforms as Minister of Economy during the 1991-1996 period and in the introduction of the Convertibility Plan. Faced with an extremely fragile fiscal and economic situation, the new economic team focused on reactivating the economy while maintaining the fiscal deficit within the original parameters of the program agreed with the IMF (see Box 1). The cornerstone of this program is improving Argentina's competitiveness. 21. The Competitiveness Plan, which was quickly passed by Congress (via Laws 25.413 and 25.414) with bi-partisan support, established new tax instruments and provided the executive branch with authority to enact various fiscal and institutional measures. These measures have been deepened over the past two months with addition executive orders and decrees, addressing the following: Measures to close the Fiscal Gap while protecting the Vulnerable 22. The Government is implementing policies with the objective to establish fiscal sustainability, while protecting the most vulnerable segments of society. Expenditure reductions are tempered by excluding low-income pensioners, and they are also compensated by increased expenditures in targeted social programs, as outlined below. In addition the improved performance of the medium-term program described in later chapters of this report will provide the efficiency gains in social spending that will make poverty alleviation more sustainable once the initial fiscal adjustment is in place. * Increased taxation to cover the additional deficit which are emerged in the first semester of 2001. The government introduced a financial transactions tax to provide revenues in the short-term. The tax (with a rate of 6 per 1000) is expected to raise $2.5 to 3.0 billion in new revenues. As the corner-piece of a new tax policy, this financial transactions tax will be converted over time to a type of "withholding" tax against which VAT and income tax could be credited. * Requiring all transactions over $1000 to be done through the banking system. This together with the new tax assists in tracing financial transactions as a means of improving the administration of other taxes and reducing evasion. A new proposal is that all public pensions and salaries would also be paid through the banking system. * Reduced VAT exemptions. 8  * Selective cuts in program expenditures in 2001 totaling $ 860 million plus new measures announced in July 2001 to reach a zero deficit immediately. The zero deficit plan calls for across-the-board expenditure reductions of a pre-determined percentage so as to establish a monthly federal deficit of zero, starting in July 2000 and extending through the end-of-the-year. The impact of these policies is a reduction of about $ 1.6 billion from the projected annual deficit. * Exceptions to the rule are granted for low-income pensioners receiving less than $500 per month compensated by additional cuts in public spending, increases in employee contributions and deferral of tax reductions. In addition, additional budgetary support of $108 million per month for targeted programs will be provided through the end of the year. * Voluntary debt exchange with the private sector that delayed debt service on approximately $30 billion worth of public debt. With this innovation, the debt service burden will be reduced over the next five years by $16 billion, with $7.8 billion of these savings occurring at over the next 18 months. Measures to Boost Growth D For a number of industrial sectors, increased non-Mercosur tariffs to 27 percent on final consumer goods as a short term measure to last until end 2002. * Decreased tariffs to zero on capital goods. * Other changes in provincial and federal taxes and labor and other regulatory burdens, negotiated sector by sector, to reduce overall cost of doing business. The estimated impact of these measures are to reduce production costs by some 5 percent. v Reductions in income taxes for middle-income groups to stimulate consumption by a group whose purchasing power had been decreased by earlier tax increases. * Modification to the currency board arrangement, allowing for the use of the Euro in addition to the US Dollar (now approved as law). Once the Euro reaches 1:1 parity with the dollar, the peso would be based on the value of a 50-50 basket of dollars and euros. * A Conversion Factor, initially set at 7.5 percent, that would provide export subsidies and import taxes as a function of the hypothetical value the peso if the euro-dollar basket were already in place. The subsidy payments (replacing an existing export subsidy) and import duty collections would be effected via the customs office. All foreign exchange transactions would continue to be conducted at the 1:1 peso-dollar parity. Since the subsidy/tariff will be paid outside the exchange system, on the basis of trade documentation, this policy has been interpreted as not implying a dual exchange rate. In addition, the increased import tax is offset by a reduction in tariffs. Whether the mechanism constitutes and intensification of import restrictions is currently being reviewed by the IMF. In addition, no Argentine trading partner to date has raised a complaint before the WTO regarding these policies. Hence, no 9  WTO ruling has been issued. The government has designed the policy, including other tariff and duty drawback adjustments, with the intention to maintain consistency with WTO policies. The government's view is that the Conversion Factor itself is expected to converge towards zero over the medium-term. Executive Powers to Restructure the Federal Government * The Modernization of the State program, with focus on the main spending agencies, along with systemic reforms to business processes. * Introduction of e-government, a new procurement law and revisions to procurement regulations, and increased transparency and accountability via citizens' charters. * Ability to merge or eliminate public institutions and to place the redundant personnel on "call" for two years, after which period they could be permanently separated from the public service. 23. These new measures are incremental to those announced in November 2000, elaborated in subsequent sections, and now in various stages of implementation. The November 2000 measures addressed the following: (1) modifications to federal- provincial transfer and fiscal management at the provincial level as part of the Federal- Provincial Fiscal Pact; (2) increased competition and choice for participants in the national health insurance system, operated by union run insurance providers, obras sociales; and (3) changes in the private and public pillars of the national pension system, to make it more equitable and to increase efficiency in the system. In the case of these reforms, the first has been adopted by the provinces and is being implemented; the second was challenged by the courts and has not been put into effect; and the third was also challenged by the courts but the legal opinion was in favor of the executive and there are plans to proceed with its implementation.7 In addition, the government announced measures to consolidate social programs and to reorient federal level assistance to vulnerable groups. Thus, there is still a pending agenda of reforms, as well as new measures, which need to be designed, adopted, and implemented.8 Many of these are 7 In the case of health insurance reforms, the government decided to work with the current legal framework while preparing a more comprehensive health sector reforms to be submitted to Congress. In the case of pension reforms, the Court of first instance ruled in favor of the government by dismissing the lawsuit; however this ruling has been appealed again. In case of unfavorable ruling against the government or the plaintiffs, any of said parties can appeal to the Supreme Court. In case of a negative ruling against the decree, the Government intends to submit legislation to Congress to effect the reform. 8 As noted earlier and outlined in the CAS FY01 Progress Report, there are also an array of structural measures which Argentina could consider to enhance the growth prospects of small and medium enterprises and to increase the efficiency of its transport system, to name two areas. Both of these are currently being addressed by ESW which could lay the basis for future support. In addition, the government has just begun the implementation of the new Labor Law, passed in early 2000, which effectively decentralized labor agreements to the firm level and requires that out-dated labor agreements be replaced over the new two years. Implementation of these requirements will be a major step forward in modernizing Argentina's labor markets. 10  critical for the stabilizing the financing and delivery of social services, and form the essential elements of the proposed World Bank's support, as described subsequently. Prospects 24. Argentina has reached a critical juncture in macroeconomic management and implementation of poverty-focused structural reforms. Macroeconomic uncertainty likely will continue during the implementation of the program over the coming months. Taken as a whole, the measures presently being implemented are designed to simultaneously address fiscal solvency and restore growth, while remaining within the parameters of the Convertibility Plan. Renewed economic stability will be essential to progress in poverty alleviation, as will completion of the overall social sector reform agenda, including in particular the improved targeting of social benefits, over time. * Ensuring fiscal solvency: ending the year 2000 with a deficit of $7.4 billion at the federal level, the government has restored revenues through new taxes that largely offset the decline in existing tax revenues caused by the ongoing recession. On the expenditure side, the government has announced expenditure reduction of approximately $2.4 billion. Similar efforts are being made by the provinces. With the new measures in place, the government may meet the 2001 deficit target of the IMF program with a significant margin. During the first half the year, the Government has reported that it has met the program target for the first semester by a margin of $195 million. * Improving debt servicing capacity: the profile of the federal external debt was improved via the voluntary debt exchange of $30 billion reducing debt servicing by about 16 billion in 2001-05. * Completing the financing plan for 2001: via the international financial package, and access to local markets, combined with the above fiscal measures, the financing plan for the year is largely covered, with the exception of the regularly scheduled rollover of short-term bonds. * Key tax reforms are underway to reduce evasion, restore incentives to investors, and to stimulate competition. * Other measures, such as rationalizing road tolls, are underway to reduce transaction costs and improve productivity. * The government is in the process of implementing the labor reform legislation approved by Congress last year. * A variety of institutional measures to modernize the State are well advanced in terms of design and are already being implemented. . Investment in human capital continues to have priority in federal and provincial budgets, along with measures to protect vulnerable groups during the downturn while 11  putting in place programs which will provide a more cohesive and inclusive social policy framework extending coverage for critical vulnerable groups. 25. As discussed below, these are necessary conditions for Argentina's medium-term solvency and poverty reduction. So far, the initial reactions by investors and consumers remain mixed. The heterodox nature of some of these measures has created concern about their long-term impact on productivity, while others have created uncertainty as to the impact on the fundamental features of the Convertibility plan, or Argentina's commitment to free trade and liberal market policies. In most cases, these measures will expire and/or be replaced by end 2002. Market reactions have also been complicated by the difficulties in securing cohesion within the governing coalition and the opposition to approve and implement structural measures. Markets continue to view Argentina with considerable skepticism, as reflected in country risk perceptions and borrowing access and costs. Thus, macroeconomic fragility continues to be high, and the coming months remain critical for Argentina to demonstrate its ability to carry through with its program. 26. With the measures falling into place, and if confidence is restored, a recovery in investment and consumer demand could lead to a return to economic growth by the last quarter of 2001. In addition, renewed access to foreign capital would assist in this process, further lowering domestic interest rates. InfMation is expected to continue to remain extremely low, or even negative. A recovery during the latter part of the year could result in real GDP remaining flat or slightly negative, following declines in the first half of the year on the order of 2 percent. Without more rapid growth, however, job creation is not expected to rebound significantly over the short term, and the unemployment rate may remain at relatively high levels (15-16 percent range). In the short-term, it will be difficult to lower poverty rates until more robust growth and job creation can be established. Social safety nets will play a critical role during this period. As a result, the efforts to better allocate social sector resources, via the actions supported by this loan, take on a greater urgency. 27. Over the medium-term, if the government's fiscal program is fully implemented, Argentina should experience the growth rates required to secure fiscal and external sustainability.9. This is a goal of the new zero deficit program adopted by the federal government and the provinces. Argentina's substantial external indebtedness implies that they will remain susceptible to temporary disruptions in international capital flows. Past and ongoing reforms are expected to reduce the adverse impact of these disruptions. The financial markets will continue to monitor economic developments carefully in Argentina, and fragility is likely to remain high. The poverty implications of macroeconomic disturbances need to addressed by ambitious reforns in the delivery and financing of social services, as outlined below. 9 A summary of the fiscal and external sustainability exercise is provided in the CAS FY01 Progress Report presented in July 2001. 12  B. THE GOVERNMENT'S REFORM PROGRAM ADMINISTERING SOCIAL PROGRAMS IN A FEDERAL SYSTEM 28. Poverty alleviation in Argentina is a function of the effectiveness of Argentina's social programs, and social programs in Argentina are affected by the country's federal structure. Like many geographically large nations, the Argentine public sector spans multiple layers of government -- federal, provincial and municipal --and each layer has its own legal autonomy and independent budget and planning. Historically, the provinces precede the Nation; that is, the founding of the country was based on a union of colonial jurisdictions. Each province's constitution determines the division and roles of municipalities within the province. 29. Table I below provides a general breakdown of the division of expenditure responsibilities across the levels of government. Argentina has become more decentralized, at least to the provincial level, over the last few decades. For example, the decentralization of secondary education in 1993 led to the transfer of physical infrastructure and public employees from the federal level to the provinces. There has been less decentralization to the municipal level. Overall, provinces are responsible for about 40 percent of public sector expenditures, the municipalities about 8 percent, and the federal government accounts for a little over half of expenditures (mostly pensions). It is also noteworthy that all levels of government have advanced significantly in re-focusing the role of government, via privatization of public enterprises, outsourcing of particular functions, concessions and infrastructure maintenance contracts with the private sector.1I 30. On the revenue side, responsibilities are more centralized. The central government collects about 80 percent of all tax revenues and has exclusive jurisdiction over trade duties, VAT, fuel excise taxes and income taxes. Provinces have exclusive jurisdiction over royalty payments on natural resources and a gross receipts (turnover) tax, real estate taxes, a stamp tax and automobile taxes are their main tax bases; however, some of the latter also are implemented at the municipal level. A complicated mix of revenue-sharing/tax-sharing arrangements, called co-participation, provides the main revenue sources for most provinces. Similarly, most provinces have revenue-sharing arrangements with their municipalities. 10 The Bank supported this first generation of reformns through a variety of operations during the 1990s. In particular, the First Provincial Reform Loan established reforn actions that a set of provinces could meet to trigger disbursement. With the Second Provincial Reform Loans, the Bank focussed on four provinces that had completed the privatization agenda and focussed on improving the efficiency and effectiveness of social expenditures while maintaining fiscal balance. Successor loans have now been approved for other provinces and new Provincial Reform Loans are in the pipeline. 13  Table 1: Division of Responsibilities in the Argentine Federal System Exclusively Central and Provincial Provincial and Municipal Central Governments Municipal Governments Governments Government (C=Mostly Central, (P=Mostly Provincial, _P-Mostly Provincial) M=Mostly Municipal) Spendin .. Defense Social Security, C Primary Education, P Markets, cemeteries Foreign Affaires Social Assistance, C Secondary Education, P Solid Waste Trade regulation Higher Education, C Health Care, P Local streets, drainage Mail and telex Preventive Health, C Social Assistance Inter-provincial Health Care, P Water and Sewerage, P transport Economic development Regional and local roads Infrastructure (e.g. Environmental Protection Land Use, M port Justice and Security, P Fire Control, M concessions, Housing toll roads, Passenger and cargo railway) Terminals Regional Infrastructure Electricity and gas energy, P I Regulation of public utilities Taxation Value Added Tax Gross Receipts Services charges for Income (Turnover) Tax, P street cleaning, solid Fuel Property, P waste disposal, and Trade tariffs Stamp, P cemeteries Personal Goods Automobiles, P Betterment fees Consumer Goods Royalties for natural Social Security Resource extraction*, P Contributions *Provinces receive these royalties directly from the companies involved in production; however, they do not have the power to set tax rates on natural resource extraction. 31. The specific institutional structures and processes governing the social programs listed in Table 1 substantially affect their role in poverty reduction: O Health: The health care system in Argentina is a complex mix of public and private insurance and service providers. The federal government operates an agency that provides health insurance for the elderly (known by the acronym "PAMI" and covering 3.5 million citizens). The Federal Ministry of Health provides for public health functions, in terms of sanitary controls and disease surveillance and controls. The federal government is also responsible, through the Superintendencia de Servicios de Salud, for the regulation and control of a national-level mandatory health insurance system that serves, through union-run health plans, roughly 12 million people. Provinces operate health insurance plans for their own (active and retired) public sector employees, totaling 6 million people (often municipal employees subscribe as well). Finally, provinces own and operate public hospitals that provide health care to the 13 million (mostly poor) uninsured individuals (representing 37 percent of the population). In addition, they often provide health care services to insured individuals who opt to use the public facilities. Some municipalities operate 14  local primary care clinics. Finally, there is an additional, unregulated private sector -- profit--seeking insurance companies that offer health services for an estimated 3 million people who can afford their services. > Education: Primary and secondary education is provided generally by the provinces and private schools. The latter also can receive subsidies from the provinces, and these subsidies are generally based on the number of teachers. In some instances, municipalities have contributed funds to provincial schools, or even established some municipally operated schools; however, the responsibility predominantly is with the provinces. After decentralizing secondary education in the mid 1990s, the federal government is left with public universities that are treated as autonomous (off-budget) institutions. The universities receive a budgetary transfer to cover most of their operating costs. The Federal Ministry of Education has a role in setting national education priorities and objectives, providing technical assistance the provinces, and monitoring and evaluating national education performance. A major reform effort has been underway in the sector since the mid-1990s to improve quality, update the curriculum, evaluate results, and improve resource allocation and spending efficiency. Efforts are also underway to improve the quality of infrastructure available to high risk schools, introduce computers, and expand the educational services offered to students. This included additional education opportunities under full-day school programs. The Bank's support for education is concentrated on basic education where the provinces are the most critical implementing agencies (Box 2). ) Public Pensions: The provincial role here is limited to pension plans for provincial public employees although eleven provinces and the City of Buenos Aires have transferred their pension plans to the federal government (as discussed in more detail below). The federal social security system underwent a dramatic reform in 1994, with the creation of a three-pillar system. Employees over 45 years of age then had the choice of allocating their payroll contributions to private social security accounts (know by the acronym "AFJPs") or continue to contribute to the public pillar. Meanwhile, all workers subsequently entering the formal labor force must join the private system. Anyone can also make voluntary contributions to private retirement plans. A basic minimum pension (PBU) is also guaranteed by the public pillar. Meanwhile, the government continues to pay benefits to those already retired or about to retire under the public pillar. Given that a majority of the currently employed chose to migrate (along with their tax base) to the private system, there is a significant transition cost to this reform, amounting to about 1-1.5 percent of GDP. In addition, the federal govermment finances pension plans for special cases of need and for extraordinary service to the nation. Other Social Protection Programs: The federal government currently plays a dual role in social assistance, directly administering one set of targeted programs ( 60 nutrition, income support. training, unemployment, and other programs targeted to specific vulnerable groups) and providing funding for an additional set of programs (e.g., housing, employment programs) administered by the provinces. In addition, the provinces are able to finance their own programs, often very comparable to the federally funded ones. The government's current reform program focuses on 15  improving the effectiveness (coverage, targeting) of their own programs along with efforts to coordinate better with similar provincial programs. The reforms involve: (a) changes in the content, size and delivery mechanisms of federally administered programs; (b) improved transparency of targeting mechanisms (supported by a well- functioning beneficiary registration system); and (c) changes in the institutional structure governing program administration, both at the federal level and between federal and provincial authorities. Box 2: The Bank's Program of Support for Education in Argentina Argentina's education system offers universal access to primary schooling and demonstrates many strong features, most notably low literacy rates, few gender-based differences and relatively high years of schooling. Importantly, the years of schooling for the children of poor parents show a significant increase as compared to their parents. However, the system has been increasingly under strain, stemming from the economic difficulties over the past 25 years and the urgent need to modernize the system. There are particular issues of repetition and dropout rates among poor students and notable differences in attainment in basic education between those who attend private schools (predominantly those from upper income families) and those who attend public schools (predominantly from lower income families). Attendance at universities, even public ones, by children from poor families is notoriously low. The secondary education graduation rate in Argentina is 52 percent as compared to and average of 80 percent for OECD countries. Out of 100 students entering primary school, only seven will graduate from university. These problems are more pronounced in the poorest provinces. The Bank has been heavily involved in the education sector in Argentina, particularly in financing the expansion of secondary education coverage and secondary education curriculum reform through the series of Secondary Education Quality Improvement Projects (PRODYMES I, II and III) and two Secondary Education Projects in the Province of Buenos Aires which has 40 percent of the student population. These efforts have also involved a curricular reform at the upper secondary level that provides for a better link with the labor market. These projects complement the government's own program of targeted assistance to the provinces to expand facilities to cope with the added three years of education now mandated nationally to bring the total to 10 years. As a result of these programs, secondary schools in Argentina now have significantly better infrastructure and access to educational inputs (computer and science labs, multimedia centers, etc.) that have helped revitalizing schools and students in a system that had been dormant from many years without innovations. These programs have had an important equity effect by concentrating on poor schools (see the Bank's Poverty Assessment). In particular, the Second Secondary Education Project in Buenos Aires supports a pilot full-day school experience in schools located in areas of the highest urban poverty in the country. Through PRODYMES I and, more recently, through a series of multi-sector Provincial Reform Loans, the Bank has supported administrative and management reform in the education sector addressing issues such as rational assignment of teachers, control over payroll, teacher attendance, medical leave, subsidies to private schools, teacher training and the balance between salary and non-salary spending. These reforms are difficult to bring about because of linkages with the organizational culture in shifting political situations, but the Bank and clients have gone through a successful process of learning which is reflected in the changing content of such loans. The introduction of evaluation and management systems are the key areas in which the Bank has focused. Other reforms to budget processes and school autonomy are being piloted as part of a continuing effort to modernize the system. 16  Box 2 (Education Sector) continued These efforts are beginning to pay off. The most recent results from the standardized testing of students in mathematics and Spanish language show that the gap between the poorest provinces and the national average is being closed, albeit slowly. An example of what can be done is demonstrated in the case of the Province of Salta, a relatively poor province in the North-east (see Implementation Completion Report for the Second Provincial Reform Loan, Report number 20698, dated June 30, 2000). The Province was able to consolidate administrative regimes, implement a new payroll system, and outsource control of sick leave and absenteeism. The time taken to appoint a teacher has been reduced from one year to 10 days; the savings on irregular payments are estimated at about $ 19 million or 10 percent of payroll. Absenteeism has been reduced to 5 percent in 1999, down from 17 percent for an annual saving of $ 11 million. The student teacher ratio has been reduced to 19:1 for basic education. Overall spending for education is up from $ 180 million in 1996 to $ 230 million in 1999 while system capacity increased from 70,000 students in 1996 to 150,000 in 1999. Meanwhile, the change in absolute grade 7 test scores for mathematics and Spanish language was almost 9 percent between 1993 and 1999, twice the national average. Overall, there continues being a role for the Bank to support the transformation of Argentine schools focusing on expanding learning opportunities for all students. Administrative reform will continue being an important challenge to be addressed both at the provincial level through the PRLs and accompanying investment loans, and at the national level through the ongoing work on modernization of the Ministry of Education as part of the federal government's State Modernization Program. An important challenge for Argentina is the upgrading of teacher quality and addressing the issues at one end of the spectrum of higher education, adult education and life long learning and at the other end, pre-school especially for poor children. The issues of equity, quality and efficiency in higher education are critical-equity because so few from poor families attend even the public universities, while tuition is free and favors the upper income groups; quality because a globalized economy demands increased skills; and efficiency because the cost per graduate in Argentina reaches $ 50,000. In higher education, the Bank has made an important contribution by supporting a major reform since the mid-1990s with the establishment of a national accreditation system and a quality improvement competitive fund. Progress has been less satisfactory in the area of university financing and budget allocation mechanisms for public universities given the high political sensitivity of the issues involved. Through the building of capacity for monitoring and evaluation and performance based funding at the level of the Ministry and the public universities there is, nevertheless, the potential for qualitative change in this area which the Bank will continue exploring and supporting. IFC is also active in the area of higher education where it set new precedents with lending to several private universities -a trend now being replicated in other countries including Uruguay. FISCAL SUSTAINABILITY AND THE SOCIAL SECTORS 32. The relationship between fiscal sustainability and social sector performance works in both directions. Social expenditures (including pensions) comprise 65-70 percent of federal government expenditures (net of transfers to the provinces). At the provincial level, social sector expenditures comprise 53 percent of total expenditures. In brief, the efficiency and effectiveness of social spending plays a large role in over public sector efficiency. Spending each peso well will be critical for long-run fiscal stability. 17  33. Fiscal stability is critical for a sustained poverty alleviation strategy. Indeed crises hurt the poor the most. Fiscal instability--due to macroeconomic shocks, poor tax administration, or expenditure inefficiency-- has been common in Argentina and disrupts the quality and scope of social programs. These shocks themselves, since they are often transmitted through the economy via adjustments in wages and employment levels, aggravate the need for social protection. Thus, it is when the economy is facing a crisis that social programs are most vulnerable to cuts and when they are most in need. Evidence for Latin America shows that Argentina has been one of the region's most volatile economies over the long-term.'" Most damaging for the poor has been the pro- cyclical nature of public social spending, combined with the fewer means that they have to protect themselves from the impact of shocks.12 During the recent recession, the federal government faced stringent financing constraints and was unable to expand most social programs to meet the growing social demands. At the provincial level, in particular jurisdictions, periodic financial crises occasionally have led to the inability to pay public employees or purchase needed medical supplies, resulting in lost school days and disruptions in health care in the public hospitals. 34. On the revenue side, a superior tax administration would help provide the required fiscal stability discussed above. It is the federal level that collects approximately eighty percent of taxes. There has been a tendency for tax evasion to increase during downturns in the economic cycle. Although the provinces collect a smaller share of taxes, there are a number of areas where coordination between the levels of government could improve revenue generation at both levels, as discussed in more detail below. In addition, there is a direct link between tax administration and the social sectors. Employee and employer contributions for health and old-age pensions are collected by the national tax agency. FEDERAL-PROVINCIAL FISCAL RELATIONS13 35. Both levels of government in Argentina are critical to overall public sector performance, human capital development and sustained poverty alleviation. As described above, the provinces are the main providers of a variety of social services in Argentina while the federal level has primary responsibility for tax collection. The provinces also have a role to play in determining Argentina's long-term fiscal and external solvency. The consolidated provincial governments fiscal deficit averaged 0.9 percent of GDP over the 1991-2000 period. Their debt stock is estimated to be about 9 percent of GDP. After registering a primary deficit in 2000 of 0.6 percent of GDP, it is estimated that a further adjustment of 1 percent of GDP is required to assure fiscal solvency at the provincial level. 4 11 See the Latin America and Caribbean Studies: View Points: Securing our Future in a Global Economy, 2000. 12 See two forth coming Bank studies: Coping with Economic Crises and Social Capital in Argentina 13 More details on federal-provincial fiscal arrangements are provided in Annex D. 14 See Bank Report, Argentina: Provincial Finances Update IV, February 12, 2001. 18  36. The Federal-Provincial Fiscal Agreement of November 2000 represents a consensual approach by the two levels of government to address the fiscal deficit and cooperate in measures that would improve medium-term fiscal stability.'5 This has been enhanced by the July 2001 agreement which commits the provinces to join the federal government in realizing a zero deficit. The November 2000 Federal Agreement also establishes the consensus for essential features of the future reformed system of inter- governmental transfers--an issue that affects both the efficiency and equity of provincial spending. 37. Simple Fiscal Rules. The Provinces and the Municipality of Buenos Aires first pledged to freeze primary expenditures over the 2001-2005 period. This pledge has been augmented by the July 2001 agreement to reach a zero deficit, by a combination of across-the-board cuts, selective reductions and improvements in tax collection. To support these commitments, the provinces also agreed that they should adjust local public employment rules so as to eliminate or limit automatic wage increases. 38. In the past, increases in federal tax revenues via economic growth, federal tax rate changes, or a rise in a particular revenue source (e.g., oil price impacts on fuel taxes) would translate immediately into a revenue windfall for the provinces, as they were entitled to a particular share of revenues from each federal tax source.16 Under the November 2000 Federal Agreement, the provinces accepted receiving a fixed amount of federal automatic transfers in 2001 and 2002. One advantage for the provinces is that they would receive no less than those amounts even if the recession were to deepen or if a new recession were to occur in the future. Over the medium-term, the fixed amounts would be transformed into a moving average of previous years' percentage shares of revenues. 39. Administrative and Budgeting Measures to Support Fiscal Adjustment and Improve Resource Allocation. Each province is to establish a medium-term fiscal plan, as one of the first steps for initiating the fiscal adjustment and improving provincial governments' resource allocation. A fiscal solvency or fiscal responsibility law, similar to the national law, is to establish annual fiscal targets along the path to fiscal balance, and indebtedness levels consistent with those targets. The annual budget process would support this initiative by including a multi-year budget plan, starting with the 2002 budget year. Enactment of improved financial administration laws would be another instrument in the process, allowing the provinces to better manage their expenditures. The general public would play a role in monitoring the process, with additional fiscal and financial information from the provinces published regularly on provincial government websites. 15 So far 21 of 23 provincial legislatures ratified the Agreement, establishing both the political will and formal obligation of the local authorities to enact the various clauses of the Agreement. The only Governor who did not sign the Federal Agreement was the Governor of Santa Cruz, an oil-rich province of approximately 200,000 people in the far south. 16 With the exception of trade taxes and federal payroll taxes. 19  40. The path towards fiscal balance is to be facilitated by improved tax performance at the provincial level. The November 2000 Federal Agreement calls for enhanced cooperation between the levels of government on tax administration, including the implementation of compatible software systems for registering tax payments (similar or identical to the OSIRIS system used at the federal level). In addition, the implementation of a common taxpayer identification number is planned, and information cross-checks will assist tax officials at both the federal and provincial levels. 41. Future Revenue-Sharing Reform. The Federal Agreement, on a temporary basis, simplifies the array of fiscal transfers by fixing the amounts but a long-term solution still needs to be found. It is noteworthy that intergovernmental transfers in Argentina are largely based on automatic rules. Only about 10 percent of federal to provincial transfers are discretionary, and even some of these discretionary transfers finance social programs that follow objective criteria for the distribution of funds. The automatic transfers, however, are based on a complex maze of rules. The general revenue-sharing pool is fed by federal VAT and income taxes while there are a variety of tax-sharing arrangements for fuels taxes. Some special programs siphon off funds from the income tax before reaching the general revenue-sharing pool. Annex D provides more details on these arrangements. The fact that particular tax instruments are shared to a greater or lesser extent with the provinces limits federal tax policy discretion. In addition, the excessive complexity inhibits the public's understanding of the flow of public sector resources. The system of transfers fails to provide an appropriate degree of redistribution from resource-rich provinces to resource-poor provinces. Changing the rules on the distribution across provinces (the "secondary" distribution) is a particularly complex political problem, as no individual province wishes to relinquish resources. 42. The November 2000 Federal Agreement moves that process one step ahead and establishes some principles for the permanent reform of revenue-sharing, namely that: (1) there should be a single pool of revenue-sharing incorporating all federal taxes (except trade taxes); (2) there should be a moving average of previous years' provincial shares of the total to determine the current year's provincial share, thus stabilizing total provincial transfers; (3) funds (from VAT and income taxes) currently earmarked to cover part of the transition costs of national pension reform, as they are released from declining transition costs at a future date, should be shared between the federal and provincial levels; and (4) the new "secondary distribution" rule will be applied only to the incremental growth in shared tax revenues, as a transition system for allowing provinces that lose shares to adjust gradually to the new rules. With these principles established among the parties, the prospects for change to the Co-participation Law in the 2002-03 time frame have been increased although remain uncertain as unanimity is required to change the law. 43. In addition to the above clauses, the federal government is committed to using a variety of instruments for securing provincial compliance with the actions agreed to under the Federal Agreement. First, in terms of fiscal discipline, the Federal Ministry of Economy has the power to approve or deny provincial requests to secure financing from the domestic banking system (according to Central Bank norms), or financing from overseas, if the latter involves the pledging of federal transfers (the only way that most 20  provinces can borrow from overseas). Secondly, the federal government has entered into bilateral fiscal and financial restructuring agreements with 11 provinces-those with relatively higher debt and worse fiscal performance-which include compliance with particular actions of the Federal Agreement as conditionality for receiving funding. Finally, the federal government is using the power of public opinion by publishing provinces' performance in complying with the provisions of the Federal Agreement. HEALTH SECTOR REFORMS 44. Since the late 1980s, successive Argentine governments have attempted to improve health care and to address the fiscal pressures arising from the health sector at the national level by: (i) reducing the fragmentation created by monopolistic union-run insurance schemes (obras sociales) of the National Health Insurance System (SNSS); (ii) increasing solidarity in this insurance system; (iii) strengthening regulation to promote consumer rights and increase competition and accountability; and (iv) improving the services and controlling the fiscal transfers needed by the insurance fund for retirees and pensioners (INSSJP, also known as PAMI for the acronym of its main health services program). Important pieces of legislation were approved between 1988 and 1993. Among these were: the regrouping of all national insurer funds under a unique health insurance law (Law 23.660, 1988); the centralization of all payroll contributions by the federal tax agency; and the creation of the Fondo Solidario de Redistribuci6n (FSR).'7 More changes were introduced in the 1996 - 2000 period with support from the Bank, through Loans 4002, 4003, 4004 and the SSAL. Significant steps taken by the government since 1996 include: - Opening up competition among national obras sociales by allowing formal sector workers to choose their insurer within each one of the two existing tiers of obras. Until then, workers were captive in the obra social operated by the labor union of their industrial branch. Now, blue-collar workers are free to choose among all existing Obras Sociales Sindicales (OSS) while white-collar workers can choose among the Obras Sociales de Personal de Direcci6n (OSPD). By September 2000, over half a million workers (about 14 percent of all formal sector workers enrolled to the SNSS) had exercised their right to switch insurer fund - two thirds of these workers had incomes of less than $1,000 per month. * Introducing an automatic redistribution mechanism (the FSR) to ensure a minimum monthly financing of $40 for each worker enrolled in an obra social. This change was to provide minimum funding for the basic health care package for low income workers, off-set by a levy on the contributions made by high income workers. This measure was implemented using an enrollment database created as part of the unification of social security. 17 The FSR was to be financed with a fixed percentage of payroll contributions going to insurer funds. Its resources were intended to: (i) ensure the ability of all insurers to finance a standard package of benefits to its affiliates; (ii) provide financial support to insurers in the form of unconditioned loans and subsidies; and (iii) finance special health care programs, including costly high-complexity events. Functions (ii) and (iii) are managed by the Administradora de Programas Especiales, APE. 21  * Publishing the first standard health benefits package (Programa Medico Obligatorio, PMO) to make explicit the rights of consumers and the obligations of insurers. * Creating a unified regulatory agency (the Superintendencia de Servicios de Salud, SSS) and issuing basic prudential and consumer protection regulations. * Instituting a system of beneficiary survey and feedback and other mechanisms to monitor the level of satisfaction with health care services provided by the obras. 45. Encouraging progress has been made, given the complexity of the system, but these efforts so far have been necessary but not sufficient. In the case of the health insurance system for the elderly, PAMI, such efforts have not been effective. The government is now attempting to further improve the SNSS by building on the previous reforms. Specifically, it seeks to: (1) increase equity and solidarity in the system by extending coverage typically to low income workers; (2) increase consumer choice and insurer competition; (3) improve consumer rights and the financial sustainability of the insurers; (4) enhance transparency and accountability as an essential complement to increased choice and competition; and (5) change the incentive structure for PAMI. During the year 2000, the executive pursued these objectives by issuing various decrees (Decretos de Necesidad y Urgencia, DNUs) that modified previous laws. However, these decrees were challenged in the courts by numerous obras, impeding their implementation. In light of this, the government has decided a new two-fold strategy to effect these changes: on the one hand, it will advance as far as possible in the short-term, working within the current legal framework; and on the other hand, it will begin the preparation of more comprehensive health sector reforms to be presented to Congress in the medium-term. 46. Increasing equity and solidarity in the system. The first steps taken in 1996 went part of the way in ensuring that low income workers could have access to the basic package of health care based on $40 per contributor although without regard for the number of family members or other health risk characteristics. An attempt was made to adjust to these other factors but it proved to be unfeasible in the way that the FSR was then structured. Thus, insurers still face incentives that make them discriminate against low income workers. As the basic premium is a fixed percent of their salary, low income workers bring lower premium payments and usually have larger family sizes. Under current rules, the FSR does not sufficiently compensate insurers for coverage of low income workers because: (i) it is too small (subsidies for 1999 were on the order of $230 million, representing only 8 percent of the total operating costs of the obras sociales); (ii) it assigns a significant fraction of its resources to the provision of arbitrary subsidies for selected obras (roughly 15 percent during 1999); and (iii) it does not compensate for the number of dependents in these larger families. 47. The proposed policy changes will: Increase progressiveness of the redistribution of funds by providing a minimum (to be defined) monthly subsidy per beneficiary. This is designed to increase the premiums obras sociales will receive for workers with larger families (modifying the provision 22  of providing a minimum of $40 per worker) and contributes to reduce disparities of available per capita resources among insurers. In order to put this into effect, a complete, updated enrollee database (including all contributors and beneficiaries and basic information such as gender, age and address) must be developed. The government has arranged the necessary actions to have this database completed before the end of 2001; and Expand, via new legislation, the amount of resources channeled through the FSR.18 This will imply increasing the fraction of social security taxes assigned to the fund, making it more progressive by requiring larger shares from higher paid workers' contributions to go into the FSR. The payroll tax itself would be unchanged - 8 percent - but its distribution between the "premium" paid directly to the obra and the payment going to the FSR would be modified, increasing the latter. 48. Increasing consumer choice and insurer competition. The reforms to date allow workers to choose among the obras of their tier (blue-collar or white-collar) but this right to choose only becomes effective after completing the first year of employment and still does not include moving between tiers or to private insurers. Even more, the entrance of new insurers to the SNSS has been prohibited. Meanwhile, private insurers remain unregulated, as legislation to regulate them has been in Congress since 1998. 49. The situation of a specific category of Argentine workers also deserves attention. Close to 2 million small businesses under a special tax regime ("monotributistas")'9 and domestic service workers ("trabajadores de servicio domestico") are to be covered through a special and complex regulation (Law 25.239, 2000), whereby they are charged a fee for health coverage and must register to any one of ten authorized obras (additionally, this special regime cannot be subject to subsidies from the FSR). However, currently only 16 percent of the roughly 700,000 who are paying this social security fee know where they are registered. The remaining 84 percent keep contributing without being aware of their right to demand health care from an obra. It is noteworthy that domestic service workers tend to be poor women. 50. Aware of this situation, the government is committed to: * Inform "monotributistas" and domestic service workers of their rights, in the short- run, while preparing a legislative proposal that would incorporate them to the core SNSS. This effort also includes an active monitoring of health services utilization rates for this group; Is This percentage is not defined yet. Based on the estimated impact of the unimplemented DNUs, it is expected that an increase in FSR's resources should be at least equal to 40 percent. For achieving this figure, the DNUs also intended to incorporate an annual amount equivalent to the VAT of existing private insurers, estimated at approximately $50 million. 19 The name derives from a program initiated several years ago that simplified the tax regime for small and medium enterprises with an annual turnover of less than $144,000. These firms would pay a single "mono- tax" as a substitute for the variety of payroll, corporate income and VAT taxes owed to the federal government. The idea was that this simplification would induce some tax evading small companies to enter "into the system" and effectively pay their reduced tax burden. 23  * Re-enforce consumer choice through a set of immediate activities that include public information campaigns, simplification of transfer procedures for those insured willing to transfer and guaranteeing the option to choose insurer (within the corresponding tier) since the first day of employment, regardless of the worker's income level; and * Expand the options open to workers, through future legislation, by allowing blue- collar workers to choose white-collar obras (and vice versa) and by allowing all formal sector workers to choose also among eligible private insurers which would be authorized to join the system. 51. Improve consumer rights and the financial sustainability of health insurance. While a PMO was issued in 1995 to reduce notorious differences in the depth of health care offered among insurers, it suffered from significant shortcomings. In terms of services provided, it did not sufficiently address primary care interventions (including health promotion and disease prevention) nor did it provide guidelines regarding the health care delivery model. Additions to the original PMO were the result of lobbying by suppliers of specific services and were not subject to public or technical scrutiny. Also, there was no detailed study to ensure that the available revenues of the obras were sufficient to confront the expected actuarial cost of the PMO (in aggregate, the authorities then estimated that revenues of the obras would cover costs). Subsequently, any financial deficit was blamed on special benefits added to the PMO. These deficits were then transformed by the insurers into requests for reimbursements by the FSR through APE. 52. The federal government approved a redefined PMO in October 2000 (Resolution No. 939/00 from the Ministry of Health), which corrects some of the deficiencies by emphasizing preventive and primary health care and defining a specific delivery model (the "Plan Medico Asistenciar', PMA). Complementary reforms will establish a transparent process of periodic review of additions and changes in the PMO, including reproductive health care, based on: (i) technical principles of cost-efficiency and burden of disease, and (ii) actuarial equilibrium between revenues and costs. 53. Improve transparency and accountability. Reforms of the SNSS in the 1990s improved transparency in the regulation of obras sociales and in the management of the segment of the FSR used for automatic distributions (the $40 per worker compensation). There remain, however, significant challenges to further improve accountability and transparency in the system. The segment of the FSR that was not automatically distributed (and is administered through APE) has been subject to political pressures in its two functions: discretionary financial subsidies to obras and reimbursement for special health-care services. In addition to costing the FSR over $145 million over the last two years, APE has created an unofficial debt of unknown magnitude to a large number of obras due to the accumulation of thousands of unprocessed claims for reimbursements, many of which eventually will be rejected. 54. Simultaneously, the SSS has issued regulations to monitor and control insurers and is acting to enforce some of them (for example, collecting and monitoring on a monthly basis insurers' financial and economic indicators, monitoring consumer 24  complaints and improving the processing of claims for health care reimbursements from the FSR). Other key regulations, however, continue without enforcement, including resolutions that require the SSS to order the restructuring, intervention and/or closure of those obras sociales that persistently display unacceptable indicators. This regulation was adopted under the SSAL but is yet to be fully enforced. So far, no truly active obras have been closed.20 It is estimated that the number of individual obras needs to be brought down from over 270 to about 150, through mergers, consolidations, and/or closings. This does not mean that all small obras need to merge with others but that they enter into alliances so that they gain the benefits from risk pooling or otherwise reinsure their risks. 55. The new reforms will: * Eliminate the discretionary use of FSR's resources (through APE) going to funding "loans and subsidies" to insurers, hence expanding the fraction of the contributions used to paying a minimum insurance premium for low income workers and their families. This will be done in two phases: initially, subsidies to insurers with chronic deficits (defined as non-compliance with a given minimum acceptable set of economic and financial indicators) will be prohibited; then, an automatic per capita compensation mechanism will be put into place to assure insurers a minimum flow of resources in those situations in which contributions have been jeopardized, eliminating all remaining types of discretionary subsidies funded through the FSR; * Enforce existing rules requiring actions from the SSS on those insurers in financial crisis (Resolutions 109 and 177 of 2000, and Resolution 232 of 2001)21, and develop new regulations that will allow the SSS to exclude from the SNSS's registry of eligible insurers all those obras not complying with these indicators (this includes specifying a maximum acceptable period of time for the SSS to act, as well as an explicit procedure for transferring affected enrollees to other insurers); and * Transform APE's residual role of reimbursing for selected health-services claims, over the medium-term, by better redefining the menu of eligible health care events and developing water-tight rules for the management of a reinsurance scheme for high-cost/low-frequency interventions. 56. Reforming INSSJP (PAMI). By far the largest single health insurer in Argentina, PAMI covers more than 90 percent of the nation's population 65 years and older and their dependents, representing an estimated 4 million beneficiaries. Financed through payroll taxes and taxes on retirees' pensions, PAMI contracts with private provider groups under prospective payment mechanisms for health services throughout the country for its captive clientele. 57. Among the most serious weaknesses in PAMI's structure and functioning are the following: 20 In the past, closure has been done of obras which really had no affiliates. 21 This implies immediately sending crisis notifications to 77 obras sociales and requesting from them restructuring programs. 25  * Lack of Beneficiary Choice. Beneficiaries have no choice of insurer other than PAMI and, within it, cannot select their provider; thus, there are weak incentives to improve the quality of services and under-service has become a chronic problem, aggravated by the use of capitation payments with weak monitoring systems; * Chronic Operating Deficits. Financial equilibrium has never been reached despite past efforts to contain expenditures. Instead, there has been a repeated cycle of temporary cuts followed by large operating deficits that lead to a chronic combination of service stoppages and bailouts (for the year 2000, despite various administrative and financial measures, the annual operating deficit was an estimated $301 million on expenditures of $2,619 million, bringing the Institute's overall debt above $2.5 billion); * Lack of Focus. Other social programs, not related to its core mission ($362 million, or 15 percent of 2001 total expenditures), are also operated through the INSSJP, reinforcing inefficiencies and lack of focus (e.g., Probienestar, a food assistance program); and E Hil-h Administrative Costs. Administrative costs are an estimated 15 percent of total operation costs (including the payroll for its 11,500 employees), and there are serious flaws in the contracting and information systems, lack of transparency, political manipulation, and allegations of corruption. 58. PAMI has been subject to various restructuring attempts. Between 1996 and 1998, and given the similarities of the issues it faced to those of the national obras sociales, it was included in the World Bank's Health Insurance Reforn Program (Loans 4002/3-AR). Specific objectives pursued through this support included debt restructuring, improving internal efficiency (mainly through reduction of personnel), and developing a new organizational structure with better monitoring and information systems. This latter objective included renegotiating contracts with providers and outsourcing services. Unfortunately, the results of this effort were mixed. Although various savings were achieved initially reducing its monthly operating deficit, PAMI did not carry out most of the institutional development activities originally contemplated (for example, the outsourcing of two inefficient clinics directly operated in Rosario), and the savings effort quickly dissipated. Whatever improvements achieved were short-lived, as the fundamental incentives and structure were unchanged. As a result, the Institute still has not secured financial and technical sustainability, requiring further extraordinary financial support from the government, while poorly serving its beneficiaries. 59. The government has expressed its desire to reform PAMI once-and-for-all and effectively solve its increasing financial deficit, frequent corruption scandals, and chronic tendency to under provide services. The proposed strategy, which reflects previous recommendations by the Bank and the results of technical assistance financed under the Health Insurance TAL and by UNDP, focuses on: (i) achieving operation equilibrium by the end of this year, mainly through tight management and multiple cuts in expenditures (including a 15 percent reduction in its personnel); (ii) further changing provider 26  contracting mechanisms; and (iii) reviewing other social, non-health, programs, including PROBIENESTAR, in a first step towards modifying and/or transferring them. 60. Core features of the changes sought in health-care contracting mechanisms include: * Creating (and periodically updating) regional registries with multiple, certified, health care providers which then form certified networks (replacing current monopolies); * Setting a unique capita (per beneficiary)and including in it as many health services as possible;