Argentina - Second Agricultural Credit Project

Document of The World Bank FOR OmCIAL USE ONLY Repwt No. P-4817-AR MEMORANDUM AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$106.5 MILLION TO BANCO DE LA NACION ARGENTINA FOR A SECOND AGRICULTURAL CREDIT PROJECT May 17, 1988 This document has a rstricted distibuion and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizaton.  Currency And Equivalent Units Argentine Austral (A) - 100 centavos USS 1.00 at appraisal (December 1, 1987) - A 3.50 (Coumercial Fixed Rate (Official)) - A 4.19 (Free Market Rate) ABBREVIATIONS BNA Bank of the Argentine Nation (Banco de la Nacion Arientina) IDB - Inter-American Development Bank S3GyP - Secretariat of Agriculture, Livestock, and Fisheries (Secretaria de Agricultura. Ganaderia v Pesca) Fiscal Year January 1 - December 31  FOR OMCLIL USE ONLY ARGENTINA AGRICULTURAL CREDIT PROJECT II Loan and Proiect Summary Borrower: Banco de la Nacion Argentina (WNA) Beneficiaries: Participating Financial Intermediary Banks and Sectoral Sub-borrowers. Amount: US$106.5 million equivalent. Terms: Fifteen years, including five years of grace, at the standard variable interest rate. On-lendina The Borrower would make available loan funds to Terms: participating financial intermediaries in US dollar- denominated australes and would charge a spread to cover the cross-currency exchange risk on IDB and IBRD loans. BNA, in a second-tier capacity, would rediscount 822 of all subloans approved by first-tier banks (to be financed equally by IBRD and IDB). Sub-borrowers would contribute at least 152 of investment cost financing. Interest rates to sub-borrowers would be variable and positive in real terms. Principal would be adjusted by agreed indices to maintain value. Subloan-specific terms and conditions, consistent with agreed credit regulations, would be negotiated between participating financial intermediaries and their clients. The Government would compensate DNA for any deficiency in cross-currency risk provisions during amortization of the IBRD and IDB loans. Financina Plan: IBRD US$106.5 million IDB US$105.0 million Participating Financial Intermediaries US$ 45.0 million Sub-borrowers USS 99.0 million Total US$355.5 million Economic Rate of Return: Not Applicable Staff Appraisal Report: Report No. 7261-AR Map: IBRD 20837 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 aio .o: tion.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PR'JPOSED LOAN TO BANCO DE LA NACION ARGENTINA FOR A SECOND AGRICULTURAL CREDIT PROJECT 1. The following memorandum and recommendation on a proposed development loan to Argentina for US$106.5 million equivalent is submitted for approval. The proposed loan would be on standard Bank terms with 15 years maturity, a five-year grace period and variable interest rate, and would help finance an agricultural credit project. The project would be cofinanced by the Inter-American Development Bank (IDB) for US$105.0 million equivalent. 2. Background: Argentina's agricultural sector contributes about 70t of foreign exchange earnings, 16Z of GDP, and 172 of employment. The country's diverse agroclimatic base permits production of a wide range of agricultural commodities that enable the country to be self-sufficient in most foodstuffs and agro-industrial raw materials. In the recent past, the sector has performed better than the general economy and in fact has acted as a brake to a general decline. While overall GDP fell by an annual average of 2.1Z over the 1980-85 period, agricultural GDP rose at an average of 2.32. Crop production fell in 1986, however, and cattle herd liquidation continued to bolster farmer cash flows. While 1987 was expected to be another year of low output, better weather and stronger prices appear to have had a favorable impact on the spring planted area of some crops, in particular soybeans. Agriculture's performance, even in years of growth, has been below potential. This has been due largely to low world prices for Argentina's major exports, a shortage of medium- and long- term credit, high real interest rates, export taxes and macroeconomic uncertainty. As a result, adoption of modern technology has been restrained and farmers have not replaced or modernized their machinery pool. The cost of this has been high in terms of foregone productivity and depleted soils. In addition, recent price declines of Argentina's principal exports--cereals, oilseeds and beef--have revealed a serious vulnerability and reemphasized the need both to diversify production and to increase the efficiency of production. 3. The Government has given priority to stimulating agricultural production and exports as an important element of economic recovery. Its medium-term agricultural development program is to pursue the following sectoral objectives: (a) expand agricultural exports; (b) increase production of cereals and oilseeds; (c) generate employment; and (d) encourage natural resource conservation. In addition, to compensate partially for slumping world prices, the Government has lovered most agricultural export taxes. This overall strategy has been supported by the policy package under the ongoing Agricultural Sector Loan (Ln. 2675-AR) which included a reduction in export taxes, the introduction of compensatory tax measures, and the removal of restrictions on imports of tractors and other agricultural machinery.  4. Previous Bank group support to the Argentine agricultural credit system has included an Agricultural Credit Project (Ln. 1564-AR) which was approved in May 1978 to provide medium- and long-term credit for on-farm investments. This loan was cancelled in 1980 without disbursements because of: (a) the unfavorable environment for investment due to high inflation and over-valuation of the local currency; and (b) large inflows of competing, low-cost credit from foreign commercial banks. Under the Grain Storage Project (Ln. 1521-AR), due to close shortly, the Bank is financing, inter alia, a private line of credit for investments in grain storage and handling. IFC is also financing a US$ 30.0 million credit line for agroindustrial investments. In addition to Bank-group support, the IDB is currently financing a four-year agricultural credit program implemented by the Bank of the Argentine Nation (BNA). Approved in December 1984, this loan (US$60 million) is already 752 disbursed. 5. Rationale for Bank Involvement: The proposed project would be consistent with the Bank's efforts to assist Argentina to boost economic growth, stimulate the agricultural sector and expand export earnings. It would increase the rate of growth in a vital sector with underutilized potential and substantial importance for foreign exchange earnings. Argentina, a world market price-taker, is forced to become more cost- effective and efficient to maintain competitiveness. In view of the lack of resources for investment lending in the financial system and the inability of the Government to provide these resources due to fiscal restraints and debt burden, the Bank and IDB would help remove an important constraint. Bank involvement is expected to draw private and provincial banks into agricultural investment lending through the apex lending operation proposed. This apex structure is consistent with reforms being advocated under the Banking Sector Adjustment Loan (Ln. 2923-AR) approved by the Board on March 29, 1988. 6. Proiect Obiectives: The primary objectives of the project would be to increase agricultural growth, farmer incomes, and exports by modernizing farm machinery and facilitating the adoption of cost-effective technology. The project would complement ongoing research and extension initiatives, seeking to introduce technology into the sector oriented towards soil conservation, for which there already exists a sound technical basis. The project would foster greater efficiency in sectoral lending through the proposed apex operation. 7. Project Description: The project would include a nationwide line of medium- and long-tenm credit to support sectoral investments of US$354.0 million over a four-year period. This credit line would finance such investments as modern agricultural machinery, on- and off-farm grain storage facilities, land improvements, orchard establishment, livestock development, small-scale agro-processing facilities, and working capital complementary to ti'pe investments. BNA. a government-owned commercial bank, would be tL, Borrower and would be the apex institution for the credit component. It would use Bank and IDB funds to rediscount 82X of subloans granted to its own retail clients and to clients of qualifying intermediary banks. Twenty percent of loan funds would be reserved for rediscounts from financial intermediaries other than BNA. Obligations to the apex unit would be in US dollar-denominated australes at a variable  - 3 - interest rate. Participating banks would finance 18Z of subloans made. Sub-borrowers would contribute at least 152 toward investment cost financing and are expected to contribute on average 28Z. Subloan principal would be adjusted to maintain value in accordance with agreed indices, and final sub-borrowers would pay interest rates sufficient to cover the cost of funds, intermediation costs, the credit risk, and a spread for BNA's cross-currency exchange risk. Specific terms and conditions, consistent with agreed credit regulations, would be negotiated between participating financial intermediaries and their clients. Sub-borrowers are expected to pay about 142 p.a. real interest, which is considered to be a sustainable rate based on estimated financial returns to representative investments. The project would also include a monitoring and evaluation comnonent (US$1.5 million) to review project progress with a view to assisting further sectoral development and planning. The Secretariat of Agriculture (SAGyP) would implement this component. 8. The total cost of the project, net of taxes and duties, is estimated at US$355.5 million equivalent, with a foreign exchange component of US$71.6 million (20?). A breakdown of costs and the financing plan are shown in Schedule A. A description of the proposed procurement is presented in Schedule B. A timetable of key project processing events and the status cf Bank Group operations in Argentina are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 7261-AR dated May .7, 1988, is also attached. 9. Agreed Actions: Agreement has been reached with BNA and the Government on the following: (a) credit regulations; (b) functions of BNA's apex unit; (c) indicators to be used by BNA apex to evaluate prospective participating intermediaries; (d) a participation agreement for financial intermediaries; (e) a draft subsidiary loan agreement between BNA and SAGyP to implement the monitoring and evaluation component; and (f) establishment of a currency risk fund by May 31, 1989 operated according to a currency risk regulation to be finalized by February 28, 1989. The Government as Guarantor has agreed to cover any deficiency between the Borrower's loan repayment obligations, US dollar vis-a-vis the basket of currencies, that cannot be met from the proceeds of the Currency Risk Fund. The Government's obligation to compensate BNA for any such deficiency in cross-currency risk provisions would also be set forth in an agreed Currency Risk Agreement to be signed by Government and BNA, the Borrower, by May 31, 1989. Conditions of loan effectiveness would be: confirmation that BNA's apex unit has been established and the reciprocal effectiveness of the IDB loan. 10. Benefits: The principal project benefits would include: (a) increased cost effectiveness in production from machinery modernization and technological changes; (b) greater product diversification; (c) higher efficiency in product handling and storage; and (d) improved soil conservation. These would result in higher incomes and export earnings. Institution-building would take place through apex lending and through the involvement of private and provincial banks in agricultural investment financing.  - 4 - 11. Risks: (a) Demand Risk: The demand for credit could be adversely affected by the relatively expensive, non-subsidized credit offered through the project, especially if existing difficult macroeconomic conditions do not improve. However, the recently more stable world prices for key exports, the advanced age of the sector's capital stock, the need to act on soil conservation, and the limited availability of alternative sources of investment credit increase opportunities for success. Project design has attempted to mitigate this risk through flexible credit terms that provide the sub-borrower with a choice of index for maintenance of principal value. Demand surveys support the proposed project size and illustrative investment models indicate that the credit would be financially attractive; and (b) Participating Banks' Liquidity Risks: Participating retail banks are expected to finance 182 of all subloans or about 132 of total project costs. In the past, legal reserve requirements and forced investments by the Central Bank have undermined liquidity levels of participating banks. However, the Central Bank has recently lowered reserve requirements on incremental deposits to only 32. If recent policy changes succeed in remonetizing the economy, there should be a corresponding reduction in average reserve requirements and additional liquidity for the banking system. 12. Recommendation: I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proDosed loan. Barber B. Conable President Attachments Washington, D.C. May 17, 1988  Schedule A ARGENTINA AGRICULTURAL CREDIT PROJECT II ESTIMATED COSTS AND FINANCING PLAN Estimated Costs: Local Forein Total --------- (US$ million) --------- Investment Credit 283.20 70.80 354.0 Monitoring and Evaluation 0.75 0.75 1.5 Total 283.95 71.55 355.5 Financ ing Plan: ('U$ million) IBRD 106.5 IDB 105.0 Participating Financial Intermediaries a/ 45.0 Sub-borrowers b/ 99.0 Total 3S5.5 a/ IZ8 of subloans. bl 282 of investment financing on average, as observed under the IDB- assisted agricultural credit project currently being implemented by BNA.  Schedule B ARGENTINA AGRICULTURAL CREDIT PROJECT II PROCUREMENT AND DISBURSEMENTS Procurement: Goods, services, and civil works financed with project credit would be diverse and procured by a large number of sub-borrowers. Most of these are expected to be supplied locally. Sub-borrowers would purchase items in the local market according to established cozmercial practices acceptable to the Bank. For goods and services costing US$3.0 million or more, ICB procurement would be -arried out in accordance with Bank guidelines. BNA and participating banks would be responsible for ensuring the competitiveness in price and quality of goods and services procured and their suitability for purposes intended. Goods and materials for monitoring and evaluation would be purchased under local procedures acceptable to the Bank in view of their relatively small cost (US$83,000). Consulting services for monitoring- and evaluation, estimated at 14 man-months over four years, would be procured according to Bank guidelines. All ICB procurement and procurement of goods for the monitoring and evaluation component would be subject to the Bank's prior review. Disbursements: Category US$ Equivalent Investment Credit a/ 105,000,000 412 of subloans rediscounted Monitoring and Evaluation 1,500,000 1002 of expenditures a/ 202 of category loan funds reserved for rediscounts of subloans granted by financial intermediaries other than BNA. Estimated Bank Disbursements: IBRD FY: 89 90 91 92 93 94 95 96 Annual a/ 16.5 15.4 19.3 20.2 16.5 10.9 5.6 1.8 Cumulative 16.5 31.9 51.2 71.4 88.2 99.1 104.7 106.5 a/ Projections consistent with the standard disbursement profile for credit projects in the Latin America and Caribbean Region.  Schedule C ARGENTINA AGRICULTURAL CREDIT PROJECT II Timetable for Key Project Processing Events (a) Time taken to prepare: 13 months (b) Prepared by: Secretariat of Agriculture, Livestock and Fisheries with assistance from the Inter- American Institute of Cooperation for Agriculture (c) First $BRD mission: February 1987 (d) Appraisal mission departure: November 1987 (e) Negotiations: February 16-19. 1988 (f) Planned Date of Effectiveness: September 30, 1988 (g) List of relevant P;ARs: Agricultural Credit Project (Ln. 1564-AR) PPAR No. 3699  SCHEDULE D Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of March 31, 1988) ARGENTINA Loan No. Year Borrower Purpose Cancellations Undisbursed (US$ million) Fully disbursed loans (18) 901.6 1521 1978 Argentina Grain Storage 87.0 25.3 1761 1979 Argentina Yacyreta Power 210.0 12.9 2031 1981 Banco Nacional Oil and 'was 100.0 55.2 de Desarrollo Credit 2032 1981 Yacimientos Refinery 200.0 3.1 Petroliferos Conversion Fiscales 2063 1981 Banco Nacional Industrial 100.0 36.4 deDesarrollo Credit II 2296 1983 Argentina Highway 100.0 30.2 2592 1985 Yacimientos Gas Utilization 180.0 166.6 Petroliferos and Technical Fiscales Assistance 2032-1 1986 Yacimientos Refinery 116.0 30.9 Petroliferos Conversion Fiscales 2641 1986 Argentina Water Supply 60.0 59.7 2675 1986 Argentina Agricultural 350.0 173.1 Sector Loan 2712 1986 Argentina Public Sector Mgmt. 18.5 13.6 2751 1986 Argentina Power 14.0 14.0 Engineering 2793 a/ 1987 Argentina Small and Medium 125.0 125.0 Scale Industry Credit 2805 b/ 1987 Argentina Port 50.0 50.0 2815 1987 Agrentina Trade Policy 500.0 4.0 2854 b/ 1987 Servicios Power 276.0 276.0 Electricos Distribution Gran B.A. 2920 cl 1988 Argentina Municipal Dev. 120.0 120.0 2923 c/ 1988 Argentina Banking Sector 400.0 400.0 TOTAL 3,395.7 Of vhich has been repaid 713.9 3,181.8 Amount Sold 12.8 Of which has been repaid 12.8 Total now held by Bank 3,169.0 Total undisbursed 1,524.4 a/ Declared effective on April 8, 1988. b/ Not yet effective c/ Not yet signed. LA4CO 5124/88  .Schedu1e 0 STATUS OF BANK PROJICTS IN ALGERIA A. STATEMENT OF RANK LOANS AND 10A CREDITS las of March 31 lOapl Loan or uss ill on Amount Credit fLess CancellationsI Number r. anrrMwer PuraalS R*Dt MS Undisbursed Twenty-two Loans and Credits Fully Disbursed 556.10 154S 1978 The Democratic and Popular ReDublic of Algeria Water Supply & Sewrage 82.00 8.20 1892 1981 The Oemocratic and Popular Republic of Algeria Highways IV 110.00 35.90 2370 1984 The Oemocratic and Popular Republic of Algaria Telecoumnications 104.00 67.61 2461 1984 The Oemocratic and Popular Republic of Algeria water Supply & Sewrage 290.00 95.S9 2S91 198S The Democratic and Popular Republic of Algeria water Supply a Sewerage 262.00 199.32 2808 1987 The Oemocratic and Popular Republic of Algeria Highways V 120.00 105.00 2809 1987 The Democratic and Popular Republic of Algeria Agriculture 94.00 86.00 2821 1987 The Oemocratic and Popular Republic of Algeria Water Supply 8 Sewerage 2S0.00 2S0.00 8023 1988 Banque de l'Agriculture et du DOveloppement See. #at. Water Supply Ia 20.00 20,00 TOTAL 1.S68.40 847.64 of which has been repaid 3S8.01 Total Now Outstanding 1516.33 Amount Sold 36.37 of wnich has been repaid 2IJ1 1.19 Total now held by lank .LJJ014 Total undisbursed L47.64 S. STATEMET OPf IFC INVEtSTHENTS None (Algeria is not a mmber of IFC) /1 Are not included in original principal, because of cofinancing arrangements; and not yet effective. Source: Statement of Loans. March 31. 1988. 72738/pl OS/19/88  - 9 - SCHEDULE D Page 2of 2 B. STATEMENT OF IFC INVESTMENTS (AS of January 31, 1987) ARCESTINA Amount in USS Million Year Obligor Type of Business Equity Loans 1960 Acindar industria Steel Products 3.7 - 3.7 Argentin de Acetos, S.A. 1960 Papelera Rio Parana, S.A. Pulp and Paper 3.0 - 3.0 En4ranejes. S.A.I.C. 1961 Fabrics ArgentinA de Automotlve 1.5 - 1.5 1962 PASA, Petroquisica Petrochemicals 3.0 - 3.0 Argentina, S.A.I.C. 1965/ 72 Celulosa Argentina, S.A. Pulp and Paper 12.5 - 12.5 1969/ 75 Delaino Siderca, S.A. Steel Products 17.0 - 17.3 1969 Editorial Codex, S.A. Printing and Publishing 7.0 2.0 5.0 1971/ Calera Avellaneda, S.A. Cemenc 5.5 - 5.5 73 1977/ Alpargstas S.A.I.C. Textiles 6 Fibers 30.4 2.0 28.4 84 1977 Soyex S.A. Soybean Processing 25.0 - 25.0 Plant 1978 Massuh, S.A. Pulp and Paper 15.8 2.3 13.5 1978/ Juan Minetti, S.A. Cement and _onstruction 103.0 - 103.0 1978/ Ipako-Industrias Chemicals and 20.3 2.0 18.3 79/82 Petroquimicas Petrochemicals 87 Argentinas S.A. 1979/ Alpesca S.A. Fisheries 6.8 1.6 5.2 83/84 1984/ Petroquimica Cuyo SAIC Chemicals and 46.6 4.0 42.6 86 Petrochemicals 1986 Inversiones Industriales Money and Capital 1.3 1.3 - S.A. and Roberts Markets Participaciones, S.A. 1986 Atanor S.A.M. Chemicals antd 8.0 1.0 7.0 fttrochemIcals 1986 BRSA Money and Capital 10.0 - 10.0 Market 1987 Hidra Oil Chemicals and 80.0 - 80.0 Petrochemicals 1987 Garovaglio Food 6 Food Proc. 13.0 - 13.0 1987 Terminal 6 Port, Storage 5.5 - 5.5 1988 Sunge y Born Food & Food Proc. 40.0 - 40.0 1988 Arcor Food 6 Food Proc. 12.0 - 12.0 1988 BRLP Dev. Finance 30.0 - 30.0 1988 Astra Chemicals and 24.4 - 12.4 Petrochemicals 1988 Chireto Chemicals and 5.2 5.2 - Petrochemicals 1988 Bridas Chemicals and 20.6 - 20.6 Petrochemicals 1988 3ran^o General do Development Finance 10.0 - 10.0 de Negocios Total Gross Commitments 549.2 21.4 527.8 Lees Cancellations, Termina-ions Repayments and Sales 223.0 2.0 221.0 Total Commitments Now Held by IFC 326.2 19.4 306.8 Total Undisbursed (IFC only) 164.20 8.8 155.4 February 22, 1987  IBRD 20837 BOLIVIA / L.*JUY , Ki Pooiow cetu>yvI ~, w> "- PARAGUAYB , . LTA 4 ALTA1 ORMOSA-- B R A Z I L _-. CIorin TA,% Ak'C MtUAC?- ' 'ed tArAgAej A , StUCUMSAN O ' RESISTENC _ Pd NES i / /' SANrAG) tf. 4e y I5ION v 'JQ U;L r . l'ORA4fENTE5 ' tSA JUA URUGUAY C H I L E gs N AIRES MENOZA tA,A 4/ RIO NEIGRO ) 401 ARGENTINA AGRICULTURAL CREDIT 11 Tekw \ Area of the Pampa C R-*- Pmoflonc kowdamri . _ Fik Ro: SANTA s CRUZ I rt i e st TIERRA DEL f UEGO iihewhe.~~~~~PheueCtesuhe~~~~~~ KILOMETERS 0 200 400 600 So .~~~~~~~~~~~~~~~~~~~NVME 1987v A1'appe.t.i*e* - ..^-t3't N7 tii \,n#n MILES 0- 100 200 30 40 0 eIs.- ... se- ;-V;..mw-.;.ei nsmir.f, t,,eeIEv.r,l- ~~ i,z*" C ' ' 1> TIERRA DEl~~~~~~~~~~ .SdEllSl8S ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~OEE 1987- FEG