Argentina - Agricultural Services and Institutional Development Project

Docment of The World Bank FOR OmFIAL USE ONLY AJi 32Q7- A2 Repot No. P-5428-AR MEMORANDUM AND RECOMMENDATION 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$33.5 MILLION TO THE ARGENTINE REPUBLIC FOR THE AGRICULTURAL SERVICES AND INSTITUTIONAL DEVELOPMENT PROJECT JANUARY 29, 1991 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.  gURRENCY EQUIVALENTS Currency Unit - Austral (A) EXCHANG- RATE (as at January 10, 1991) US$1.00 * A 5,800 A 1.00 - U8$0.0002 FISCAL YEAR January 1 to December 31 WEIGHTS AND HEASURES The metric system has been used throughout the report. ABBREVIATIONS AND ACRONYMS EC European Community FAO/WB CP Food and Agriculture Organization/World Bank Cooperative Program FMD Foot- and-Mouth Disease IDS Inter-American Development Bank ZICA Inter-American Institute for Agricultural Cooperation NEC Ministry of Economy SSAgyP Subsecretariat of Agriculture, Livestock and Fisheries  FOR OMCIL USE ONLY AROBSTt AGRICULTURAL SERVICES AND INSTTUTIONAL - DPUM PROJECT 1. LOAN AND PROJBCT fUMf ART Borrower: The Argentine Republic Executing Aaencv: Subsecretariat of Agriculture, Livestock and Fisheries (SSAGyP). Seneficiariess Public institutions providing services to the agricultural sector, farmers and agroindustrialists. Loan Anuoutt US$33.5 million. Terms: Seventeen years, including five years of grace, at the standard variable interest rate. Financina Plan: IBRD US$33.5 million J IDB US$30.0 million Government of Japan US$ 1.0 million Local Counterpart USS18.7 million Total US$83.2 million Economic Rate of Return: Not applicable. Staff Amoraisal Reoort: Report No. 9138-AR. M2:s IBRD No. 22436. I/ Includes US$O.5 million to refinance PPF 119-AR used to prepare project. This document has a restricted distribution and may be used by recipients orn.y in the performance of their official duties. Its contents may not otherwise be disclosed witk...:t 'World Bank authorization.  -2- MEMORANDUM AND RECOI n OF T RSIDNT or TME INTERNTIONAL MmN FrOR RUOSRCION AIND DEVEOPUMEN TO TSE ZEXECUTE DIREORS ONl A PROPOSE LOAN TO TIM AtGENTIU REPUBLIC FOR THE AGRICULTURAL SERVICLS AND INST DIONAL 2EVEM PRJC 1. The following memorandum and recommendation on a proposed development loan to Argentina for US$33.S million equivalent is submitted for approval. The proposed loan would be on standard Bank terms with seventeen years' maturity, a five-year grace period and variable interest rate, and would help to finance an agricultural services and institutional development project. The project would be cofinanced with the Inter-American Development Bank (1DB) and the Government of Japan. 2. Background. It is well known that Argentina has a significant comparative advantage in agricultural and agroindustrial production. The c_^ntry's rich soils and varied agro-climatic conditions permit the production o3. - wide range of commodities. This ensures self-sufficiency in most foodstuffs, provides low-cost zaw material for a developing agroindustrial complex, and allows the country to be a significant factor in world markets for a number of products, especially cereals and oilseeds. 3. Agriculture contributes about 15% to GDP and is a major contributor to export revenues. Crops represent about 65% and livestock about 35% of sector GDP. Agricultural products and manufactured goods of agricultural origin provide about 7S% of total exports. Historically, however, domestic policy has been oriented towards using the agricultural surplus to finance industrial development. During the last decade, agriculture transferred an average of 45% of its gross product to other sectors of the economy and to the Government. The long-term consequence of these discriminatory policies, which have also included export taxation and an overvalued exchange rate, has been to decapitalize the agricultural sector. A low-cost, extensive form of agriculture has resulted, with little capital stock or debt, and a lack of incentive to improve technology. Of all the major agricultural producers, Argentina's agriculture is by far the least protected and yet has continued to grow. The implication is that with stronger positive signals, the potential for new investment and growth is good. In this context, recent initiatives on trade liberalization, reduction of export taxes and freeing of the exchange rate are important steps in the direction of creating confidence at the farm level. 4. The Government is also currently in the midst of a public sector reform process which aims tos reduce the size of the public sector apparatus where approprLates establish mechanisms to reduce costs by charging the end-user for certain services which to date have been provided free; delegate more responsibility to provincial authorities; and increase the role of the private sector. As part of these reform initiatives, the 8ubsecretariat of Agriculture,  -3- Livestock and Fisheries (SSAGyP) was one of the first institutions to present its proposal for restructuring to the Ministry of Economy (MEC). As such it is seen as a model for other institutions. The proposal relied heavily on the guidelines set out during preparation of this project. 5. tationale for 8ank Involveaent. The economic and structural reforms now under way, which are aimed at creating a more open and competitive economy, will undoubtedly benefit agriculture, a sector which relies heavily on external trade. Long-term sustainable growth, however, will not occur without major Investments, even if an appropriate economic and structural framework is in place. Years of neglect in the public sector and disinvestment by the private sector have left serious bottlenecks in: (a) physical infrastructure (irrigation, drainage, flood control and rehabilitation of rural roads)) (b) capital for primary production, processing and marketing; and (c) agricultural services. The Bank's lending strategy for the sector over the next five years will aim therefore to stimulate growth by targeting resources to each of these areas. 6. The proposed project addresses the third of these areas. The capacity of the agricultural sector to exploit its comparative advantage is contingent on the strength of the institutions which serve it. The need for improvement covers a wide range. Many of the problems are familiar--related to poor funding and lack of direction. The total resources needed on an annual basis are not particularly large, but they are fundamental to the long-term productive and marketing potential of the sector. They deserve high priority and, since agricultural technology is advancing rapidly on an international level, they are particularly suitable for external financial and technical assistance. 7. The proposed project would be consistent with the findings of the 1989 Agricultural Sector Review which has been endorsed by the Government and the Bank. In that review, it was stated that the principal components of a strategy to develop agricultural services would be: (a) strengthening of animal health and plant protection services; (b) provision of market research, varietal development and export promotion for fruits and vegetables; (c) setting of clear priorities for agricultural research; (d) development of a more autonomous meat marketing board; (e) strengthening of forest management services; (f) support to the fishing industry; and (g) increased emphasis on the control of soil erosion and on pasture improvement. 8. Through involvement in the preparation and appraisal o' the project, the Bank has already had an important impact on the structure and organization of the agencies involved, and this impact would be deepened during project implementation. In preparation for the project, each agency had to define its strategy, role in the sector, priorities, competence and ability to develop effective cost recovery mechanisms. This has led to a keener awareness of skill gaps, which have been critical constraints to the management of public sector institutions. Great emphasis has been placed on sustainability through cost recovery and, as a result, the fiscal impact of providing these services would decline over the life of project. Furthermore, priority incremental staffing  4 needs would be offset by reductions in SSAGyP's overall personnel quota through elimination of low priority activities. The project focuses heavily on field- level staff, given the weakness of the federal bureaucracy and the need for. service infrastructure to become more ccm.rcially-oriented, with greater involvement of producers and provincial agencies. 9. fPolect Obieotives. The project's aim would be to improve Argentina I a capability to produce, certify and maintain high quality agricultural products for export. It woulds (a) strengthen the effectiveness of public sector institutions responsible for quality control services while reduclng their dependency on budgetary allocations by charging user fees for services renderedt and (b) diversify agrLcultural exports by strengthening support servLces, export promotion and technical and research services through joint public and private sector efforts. Purthermore, lt would bulld on the ongoing Public Sector Management Technical AssLstance Loan (Ln. 2712-AR) whlch is attempting to strengthen the planning and policy-making function ln publlc lnstltutions, ineluding SSAGyP. The proposed project would extend thls support to agrlcultural servLces with an important focus on exports. 10. Proiect Descroltion. The project would strengthen the agricultural services managed by SSAGyP through investment ln physLcal facilitLes, institutional development, tralning and technical assistance activities. Specifically it would: (a) strengthen animal disease control, primarily for foot- and-mouth disease (PMD), brucellosis, mange and tick-borne diseases through construction of a reference laboratory, a quarantine station and promotion of intenslve vaccination programs; (b) strengthen phytosanitary programs to create and maintain plant disease- and insect pest-free zones, and establlsh quarantine and reference laboratory facilitles to certlfy levels of chemical resLdues and phytosanitary standards in agrlcultural produce; (C) improve wool grading and classifLcation to provide improved market transparency; (d) strengthen analysis and monitoring of maximum sustainable fish catches; (e) promote export of higher value-added meat products jointly with the private sector (f) improve research on wool, biotechnology, post-harvest physiology of fruits and vegetables, and forest plantatlon management; (g) provlde specialized training and assistance to strengthen technical and marketing skills ln the Meat Board and Fisheries Institute; and (h) assist the private sector to venture into new export markets by partly flnanclng marketing studies, technical assistance, and overseas visLts and export promotlons. 11. The efficiency and impact of SSAGyP's agricultural services would be considerably improved by developing greater managerLal and flnancial autonomy for key implementing agencies. The institutional analysis already carried out has also identified improvements needed in admLnistration and accounting. Furthermore, cost-recovery mechanisms whlch are to be put in place would aim to recover up to 80% of total project costs. Specific implementing agencies would also be responsible for debt service on their respectlve parts of the Bank and IDB loans.  -5- 12. The total cost of the project is estimated at US$82.7 million equivalent (net of taxes excluding US$0.5 million to refinance PPF 119-AR which was used to prepare the project), of which about 38% would be foreign exchange (US$31.6 million). The Bank would finance US$33.0 million of project-related costs (about 40% of total project costs) plus US$O.S million to refinance PPF 119-AR. The ID8 would co-finance the project (US$30.0 million, 36% of total costs), and the Government of Japan would finance technical assistance, training and studies in the project's forestry and fisheries subsectors (grant of USS1.0 million). Project costs and the proposed financing plan are shown in Schedule A. 13. Amounts and methods of procurement and disbursement and the proposed disbursement schedule are shown in schedule B. A timetable of key project processing events and the status of Bank-group operations on Argentina are given in Schedules C and D, respectively. The Staff Appraisal Report No. 9138-AR dated January 16, 1991 is attached. 14. Key Actions Aareed Durtina Neaoutitons: (a) the final draft agreement on the Export Promotion Component was agreed; (b) all agencies presented revised draft Statements of Policy outlining their strategy for future development which will become integral parts of subsidiary agreementsl and (c) key indicators of performance were agreed as part of the Loan Agreement. 15. Conditions of Effectiveness and Disbursement. For effectiveness of the loans (a) the project coordinating unit would be established and staffed; (b) the Export Promotion Component documents would be signed, the Export Promotion Fund would be established, and the Executive and Technical Directors hired; (c) the IDB loan has been approved; and (d) SSAGyP would have signed subsidiary agreements with autonomous agencies and the National Meat Board would have adopted a Statement of Policy satisfactory to the Bank. As key conditions of disbursement of the respective componentes (i) cost-recovery mechanisms, including tariffs to be charged, and 8ank-approved cost accounting procedures would be put in place; (ii) establishment and staffing of the project component management units would be completed; and (iii) tender documents for all first- year contracts (by component) would be prepared. 16. Benefits. Project benefits would be derived from: (a) improved services provided by participating institutions; (b) increased quality and quantity of product available for export by the private sector; and (c) greater export diversification. The overall strengthening of key SSAGyP services would contribute to maintaining Argentina's comparative advantage as an agricultural producer. A stronger SSAGyP would also be in a better position to help formulate sound public policies. 17. An economic rate of return has not been calculated since precise quantitative estimates of benefits are difficult to make in an institutional development project. However, animal disease control campaigns would bring direct benefits in terms of reduced losses, improved productivity and increased access to export markets. The impact of phytosanitary control is especially  -6- difficult to estimate, since statistics on potential losses due to crop pests and/or rejected products (pesticide contamination) are not available in Argentina. The magnitude of the potential problem can, however, be estimated on the basis of experiences elsewhere. ror examples (a) the potential direct losses from the Introduction of fruit fly to the Rio Negro valley (70,000 ha of apples and pears) would be about US$30 million per year in direct losseat. and (b) the introduction of cotton weevil into northeastern Argentina would increase pesticide costs by raising the number of applications from three to about eight per growing cycle. In addition, yields could decline by about 30%, as demonstrated when the weevil appeared irs previously uninfested areas of Brazil. 18. Without the project, Argentina would Incur serious losses in agricultural export markets. Failure to comply with the increasingly strict requirements of most importing countries on pesticides and other residues would have a strong negative impact on exports. In addition, phytosanitary standards in the European Community (SC) will become even stricter after 1992 when Spanish regulations banning fresh fruit imports from regions with fruit fly or citrus canker become the standard for the entire EC. The opening of markets in Eastern Europe could also be threatened if SC standards are adopted throughout Europe. Regarding meat exports, as the EC moves towards eradication of FMD, Argentina will have to move towards FMD-free status. The objective during project implementation would be to create gradually certified FMD-free zones within Argentina, with the longer term objective of total eradication. As regards wool, the International Wool Secretariat establishes the industry certification standard and, unless Argentina can meet this standard, its wool will continue to fetch low prices in world markets. 19. Risks. In addition to Argentina' general macroeconomic uncertainty, the most important risks could stem from the availability of counterpart funds, the level of managerial capacity and the low level of commitment by public servants due to low salaries. The local funding risks, which affect all proposed Bank investment operations in Argentina, would be mitigated to a large extent by the project's proposed cost recovery mechanisms. The lack of managerial capacity in public institutions w'ould be mitigated by the project's strongly focussed institutional strengthening programs. The issue of inadequate compensation in the public sector is being tackled by Government through public sector reform measures which would also be assisted by the Bank in a proposed new loan. Since project design encourages financial autonomy, this should also provide means to support competitive staff salaries over time. 20. Environment. The project would have a positive environmental impact. The animal health and phytosanitary components would provide mechanism to control disease, pests and levels of chemical residues in all foodstuffs, not only those for export. The fisheries component would prevent over-exploitation of maritime resources.  -7- 21. R*gg c^stion. I am satisf ed that tho proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it. Barber B. Conable President Attachments Washington, D.C. January 29, 1991