Argentina - Capital Market Development Technical Assistance Project (CMTAP)

콘―.&1..-．·．&,.．·―．櫻∥…J，「·「 cm~ Unit peso Us$1.00 Peso $1.00 FISCAL YEAR January 1 to Dec~ 31 AFJP of Retir~ and Plension Funds BCR,A Banco Cie~ de la Republica fflentral Bank of the A~ ~lic) BICE Banco de ~ on y - Com~ E~ r (hwestuxent and Fö~ 'Tmft Bank) BNA Banco de la Nacion A~ (National Bank of BOCON Consolidation CMTAP Capital h" Tw~ M~= Project Comision, Nacioual de Våfores (Någonal Sg~ Comfnision) Finmcial Se~ Loan IDB hm-Am~ Develop~t- Bank ICB Cou~ve Bi~ Sho~ Lfl3 U~ huru~ w~ L$ Lom Shwing LCB Local Competitive Bk~ ME Ministry of EcomW MIS 11 Inkr~OU. sy~ NPS N" Pension System MYG Pky As You Go PERAL - Public Fa~ Adjust~ Lom PEM Public En~ P~ Ex~on Låan SNPS National System of Social Se~ SSS Sea~ of Social Se~ SAFJP ta de ikdmini~ lrcs de Fondos de Axbilaciones y p~ nes Of ~ 00 Funds Man~ TOR. 1~ of Rdemw FOR OFFICIAL USE ONLY TECHNICAL ASSISTANCEPJEC (CMP LOAN AND PROEC SUMMR The Argentine Republic Ministry of Economy (ME), Secretariat of Social Security (SSS), Comision Nacional de Valores (CNV), and Banco do Inversion y Comercio Exterior (BICE). US$8.5 million equivalent, with retroactive financing of up to US$850,000 from November 1, 1993 onward. 3k= Fifteen years, including a five-year grace period at the Bank's standard variable interest rate. Government US$ 1.7 million IBRD) TSS8.5milion TO1AL US$10.2 million Qb e and.i The proposed operation would facilitate the implementation of the proposed Capital Market Development Project. In particular, it would support* (a) the institutional strengthening of the securities market regulatory agency and reinforcement of securities market regulations; (b) the implemunation of the new pension reform legislation and creation of supervisory agency for pension funds; and (c) the early establishment of advanced programs to improve local banking skills for term financing of investment projects. Economic Rat of etr:n.a. Staff Aorasa0R2ot n.a. P lat r n.a. This document has a restricted distribution and may be used by recipients only In the pebrmance or their offcil duties. Its contents may not otherwise be disclosed without World Bank authoristion. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 'ITO THE EXECUTIVE DIRECTORS ON A PROPOSED CAPITAL hM DEVELOPMENT CNICAL ASSISTANCE PROJECT (CMTAPO TDTHE ARGENTINE REPUBLIC 1. 1 submit the following memorandum and recommendation on a proposed loan to the Argentine Republic for the equivalent of US$8.5 million to help finance a Capital Market Development Technical Assistance Project (CMTAP). The loan would be on standard IBRD terms repayable over 15 years, including five years grace, at the Bank's standard variable interest rate. This CMTAP will assist the Argentine Government in its efforts to accelerate capital market development by providing technical assistance to strengthen regulations and supervision in the securities market, implement the recently approved pension funds legislation, and improve the capabilities of financial intermediaries. It also would support a proposed Capital Market Development Project. 2. Rkund. Poor economic policies and a weak regulatory environment in the past four decades, when high inffation and macroeconomic instability were the norm, undermined financial and capital market development in Argentina and resulted in a steep decline in domestic resource mobiliztion. Currency and deposits (as measured by M2) decreased from the equivalent of 40 percent of GDP in the early 1940s to 20 percent in the mid-1970s and almost to 5 percent in 1990. The sharp drop in financial savings had an impact on the volume of bank credit which decreased from around 40 percent of GDP in the early 1940s to 10 percent in 1989. The private sector was particularly deprived of access to domestic financial resources due to crowding out by the public sactor, which until recently maintained a virtual monopoly on the bond market and captured about half of available bank credit. Furthermore, recurring periods of high ination resulted in highly uncertain real yields on financial assets, which led investors to prefr almost exclusively very short-term maturities for their domestic deposits. At the same time, there was a virtual disappearance of term paper issued by private corporations. Confronted with this reality, and supported by recent macroeconomic stability, the Government has been taking decisive steps to expand domestic sources of long-term fmncing, and create a regulatory environment more favorable for improving prospects for financial markets in general, and those of the private capital market i partisular.1 1. For futhor inuation on the Argentine econony and the evolution of the floancial sacims se the propoed Capial Market Delopmet Loan Reports No P-6161-AR & 12328 daed January 15, 1994. -2- 3. Go nme Sat . The improved macroeconomic climate of recent years together with a diminished tax burden on issuers and holders of private securities has resulted in renewed activity in the equity and bond markets; in the latter the leading new issuers have been private banks and some large corporations. Current monetary policy, mainly the 1991 Convertibility Law-whereby the monetary base cannot exceed the level of international reserves-and the legal prohibition of the Central Bank to extend credit to the Goverment aid to financial institutions other than short-term liquidity loans, have sought to increase discipline and the financial soundness of the banking system. Also, the closing of some state banks and the downsizing of the rest, together with strengthened prudential banking regulations, have brought about a sharp reduction in the state exposure to potential credit losses. On the other hand, the privatization of public enterprises such as, the state telecommunications company and the state petroleum company has fostered a dramatic increase in stock holdigs by the private sector and promoted an expansion in the level of transactions in the stock market, which currently shows a capitalization equivalent to roughly 30 percent of GDP. Other capital market reforms include the elimination of taxes on securities trading, the liberalization of securities trading fees, the equalization of capital gains taxes for foreign and domestic investors, the improvement of mutual funds legislation and the recently approved private pension funds system. Key remaining reforms being considered include: legislation to improve market transparency; the issuance of regulations to tighln controls on brokers, brokerage houses and the Buenos Aires Stock Exchange; new rules for a better coordination among regulatory agencies covering financial markets; and the passage of improved regulations for the supervision of financi conglomerates. 4. Paionale for Bank Ilmen. Since 1990, the Bank has supported Government policies through adjustment and technical assistance loans destined to finance reforms of the public sector, state banks, banking regulations and privatization of public enterprises. The Bank's Country Assistance Strategy is to consolidate the macroeconomic rforms, strengthening Argentina's institutions and fostering the development of the private sector, calling for strong support of the Governmet's efforts to reinvigorate the capital market. Financial sector reforms have been fostered by the 1993 Financial Sector Adjustment Loan (PSAL). The proposed Capital Market Development Project and this companion operation for technical assistance would assist in continued implementation of these reforms, promoting the development of an orderly and efficient market for debt securities of Argentine commercial banks and thus helping to accelerate capital market development. 5. Pt O t . This project would facilitate the implementation of the proposed capital market development project in an effcient and sustainable manner by supporting the creation of tew institutions and the strengthening of others, and by ensuring the development of more effective capital market regulations. In particular, the proposed technal assistance loan would Support* (a) the institutional stethngof the securities market -3- reguatnry agency-Comisin Nacional de Valores (CNV)-and the reinforcement Of securides markt regulations; (b) the implemenhton of the pension reform legislation that reforms the social security system which promotes the development of independent pension funds and creates a new supervisory agency; and (c) the early establishment by private training institutions of advanced programs to improve local skilms in the area of term financing for invest.ent projecs. 6, The proposed project is fuly described in the Ibchnical Annex (Annex 1). Detailed cost estimates are shown m Schedule A. The matrix of project activities (Attachment 1 of Annex 1) provides information on the expected output, its impact, and the timing of covered activities. In particular, the project would finance expenditures.mainly for hiring consultants--o assist the Government in the following activities: (a) Devlp L O Ssmrket. A first set of activities covers the strengthening of CNV's organiation and manag thrugh: (i) evaluation of its current capabilities and design of a restructuring program (US$400000); (ii) implementation of the restructuring program (US$950,000); (iii) development and implementation of a training program for CNV's staff (US$1.2 million); (iv) preparation of the firt business plan for CNV (US$50,000); and (v) installation of a computerized management information system for the new organizatnna m strture of CNV (government counterpart, US$1 million). The second set of activities covers the upgrading of the securities market regulations through: (1) evaluation of current securities market trends and preparation of proposals to satisfy new regulatory needs (US$650,000); and (il) installation of computer systems which would allow CNV to be permanently informed about securities market behavior (government counterpart, US$300,000). (b) Ipm ai of th s R m ad Nw S m. (1) Development of norms and regulations required by the pension reform legislation (US$360,000); (ii) creation of the new supervisory agency covering pension fnds and th~ir administrators, as well as initial support to the m m of this new agency (consultants US$1.9 million and computers US$1 million); and (iii) consolidation into one body of all norms, regulations and procedures that will remain active from previous legislation (US$140,000). Government counterpart finding will be provided for these activities (US$400,000). (c) ' Binn EPo~a for Log-äkm FLnacilägemedato. (i) Funding of a tMo-tier training facility at BICE to finance the estaIshment by the private sector of training pgrams for -4- marketplace (US$1.1 million); (ii) financing of fees and related expenditres of public sector employees who attend training courses that are part of the training program (US$150,000); and (ii1) financing of the development of specific course modules by private training institutions, at the Government's request (US$250,000). (d) Instiltoa Fau=zak fot Imlmaato.() Addition of staff support to the existing Coordinating Unit in the Ministry of Economy to facilitate the efficient and timely implementation of project activities-it will also assist in the implementation of the Capital Market Development Project- (US$350,000). 7. Prim The Borrower would be the Argentine Republic, with the Ministry of Economy as coordinator and administrator. The Government will use an already-existing Coordinating Unit headed by a National Project Drector, assisted by a full-time Coordinator with powers to contract consultants and request disbursements. The executing agencies would be: (i) the CNV for the securities market component; (ii) the Secretariat of Social Security for the implementation of the pension fuds legislation component; and (iii) Banco de Inversion y Comercio Exterior (BICE) for the training program component. The total project cost is estimated at US$10.2 million equivalent, of which US$8.5 million equivalent would be financed by the Bank and US$1.7 million equivalent will be provided by the Government. Retroactive financing of up to US$850,000 would be provided from November 1, 1993, onward. Approximately 400 man-months of consultant work, preferably by companies, would be financed under the Project. Project completion has been targeted for December 31, 1997, and the Loan Closing Date for June 30, 1998. A special account of up to US$700,000 would be established at a commercial bank to facilitate payments under the Loan. Methods of procurement and disbursements are shown in Schedule B and explained in Annex 1 (paras. 34-36). Terms of Reference (TOR) for all activities and a detailed description of the content of the course modules of the core training program hae been submitted by the Government and agreed to by the Bank. Procurement of goods and selection of consultants would follow Bank guidelines. A Supplementary Loan Data Sheet and the Status of Bank Group Operations in Argentina are given in Schedules C and D respectively. Separate accounts, maintained at the Coordinating Unit would be kept of all expenditures financed by the project. The accounts and statements of expenditures will be audited each year by auditors satisfactory to the Bank. 8. Poect Sa. Following almost three years of stem and successful measures to stabilize the economy, the Government is now turaing attention to establishing adequate conditions for long-term growth, including the development of a strong capital market in Argentina. The Bank is supporting the Government efforts through a proposed Capital Market Development Ian, which would require an appropriate regulatory [.．·！,.!?―떼？雌‘＼·· -6. by banks and to capital market development in Argentina. In particular it will: (a) enhance the securities madmt_by improving CNNrs supervisory capacity aW by sector regulations; (b) support efforts to develop an independent, pension tdWS WSWM, properly supwAsed, that will increase the domesdc supply of long-aim savings in the economy; and (c) ensure an adequate supply Of OqPeM in term financing for itroestment projects by supporting ptiVate sector supply of high quality training programs for Middle and se'nior level management in the financial marketplace. 13. j1da. The main risits fiwed by-ft project am delWs in p1.=tion -due tomanagemm changes at the - I nenting agencies and to lack Of adequate These risks would be minimized by the use of the existing Project Cootdinaft Unit to coordinate the proposed project. which would provide continuity to the Project. The risk of not attaining enough demand for the training componm will be reduced by: (a) BROM's invoilivinent in the protnotionof die two-tier training facility-high level officiols in. conimercial banks and the secarkies industry, the GovernmM and training institutions-in the early phases of the training program; and (b) the option for the government to partially finance the developmew of course modules if necessary Close supervision by the Bank during project plus a mid-arm review also- would contribute to reduce these rWm The mid-term review will, Include an evaluation of the expected output for each Jed cempoum. 14. Lam, satisfied that the proposed I= would comply with the Articles of Agreement of the M94 and I recommend that the Faecutive Directors approve it. Lawis T Preston Preddew January 15, 1994 Washingtm D.C SCHEDULE . Pate 19of ARGENTINA CMTAP - PaOECT AcTivrI S JC;ANCIN4O U1SMO PROJECT COMPON*FMNNCIN U Bank omt (Casb Tmåa 1Contribudo1 1.1 S~ ~gtenn of CNV's Orga luda and Mun~na (a) Evaluaton of CNV's Structre and Design of Resu~ning Progra 400 400 (b)Implemen~ation of CNV's Action Plan 950 950 (c) Developmni t and I uplemenati of ,Taig Program for CNV 1,200 1,20 (d) Prepamio~ of Business Plan for CNV 50 50 (e) insaadon of MIS for CNV 1,0o 1,000 1.2 Upgrading of Securides Mark~t Regatin (a) Evaluad~n of Mar= e ds and Proposal for New Rgulatons 650 650 (b) jen~lainn of COmutWrimd Informadon Systems for CNV's Supervisory Funodn 300 300 Sunon 3,250 1,390 4,550 2.1 hm~ d ofte New L¥ ~daa (a) Developme of Norms and Rplation 360 275 635 (b) Creado of Regulatory Age~cy for Pension lunds 2,900 100 3,000 (c) Consolia of Noms and Procedures for Social Securiy Syste 140 25 165 Subotal 3,400 400 3,800 3.1 Upgrading of Financial unrermediaon Capabides of Midd~e and Senor Lvl MN in Banks and Räla=d Insti~ons (a) Two-ier 'iaining FacTiny to Finnce Taining Progras 1,100 1,100 b) aining of Rogulars 150 150 (c) Devlopment of Course Modules 250 250 Suba' 1,500 0 1,500 4.1 Str enting the Gover0nenfs Mminiraive Capacity to Impleme (a) Support to the Coordin~tng Uni 350 350 Subotal 350 0 350 AL 8,500 1,100 10.200 SCHEDUL A Pmas2 of 2 ARGENTDNA - CMTAP LOCAL FOREIGN TOTAL BANK 1,000 7,500 8,500 GOVERNMENT 1,000 700 1,700 TOTAL 2,000 8,200 10,200 Note: The costs of consultants have been estimated at US$30,O00/staff-month for international consultants, including an average of US$10,000/staff-month for airfare, lodging, and subsistence-expenditues; and at an average of US$11,000/staff-month for local experts (inciuding local law finns). -9- ARGENTINA - CMTAP PROCUREMENT ARRANOEMENT - (US$'000) PRO.C ELEM PROCUREMENT METHOD TU'AL Other N.B.E COSTS 1. Consultant Services 7,480 0 7,480 and 'ining (7,480) (7,480) 2. Equipment and 1,0201 1,300 2,320 Materials (1,020) (1,020) 3. Local Inputs 400 400 1tAL 8,50 1,700 10,200 (8,500) Notc: Figures in parenthesis are the respective amounts finance by thé Bank. a Contrct of consultants according to World Bank Guidelines: Use of Consultam s by World Bank Borrowers and by the World Bank as Executing Agency (August 1981). b Of whi US~, for com t equi n and rea rcing g LäMted International Bidding (LIB) among manufiLer~ with established service facities in Argentina, in packages of not less tban US$100,000, and US$120,000 for miscellaneous equipment thrugh local or international shopping. ..BR.MNT-($$'000...y... ä CATEGORY AMOUNT PERCENTAGE 1. Consultant Services and baining 7,480 100% net of taxes 2. Equipment and Materials 1,020 100% foreign expenditures and 85% local expenditures TUAL 8,500 FY94 FY95 FY96 FY97 ANNUAL 700 2,800 2,800 2,200 CUMULATIVE 700 3,00 6,300 8,500 - 10 - SCHEDULE C ARGENTINA - CMTAP TIMETABLE OF KEY PROCESSING EVENTS (a) TIme taken to prepare: seven months (b) Prpared by: ME, SSS, CNV, BICE with Bank assistance (c) First Bank mission: August 1993 (d) Appraisal mission departure: October 1993 (e) Negotiations: December 1993 (f) Board presentation: February 1994 (g) Planned date of efectiveness: April 1994 - 11 - SCHDULE D CAPITAL MARKET DEVELOPMENT TECHNICAL ASSISTANCE PROJECT STATUS OF BANK GROUP OPERATIONS IN ARGENTINA STATEMENT OF BANK LOANS (as of September 30, 1993j L.an or Fiscal Borrower Purpose Amount (less Undisbursed Credit Year cance1lations) Fully disbursed loans (37) 4346.6 0.0 2592 1985 YPF, Gas Utilization Tech. Assistance 180.0 14.6 2641 1986 Argentina Water Supply 44.8 14.4 2654 1987 Argentina Power Distribution 276.0 160.2 2920 1988 Argentina Municipal Development 120.0 62.9 2970 1988 BNA Agriculture Credit 106.5 0.0 2984 1989 Argentina Social Sector 28.0 6.0 3015 1989 Argentina Thx Admin. T.A. 6.5 0.2 3280 1991 Argentina Provincial Development 200.0 178.9 3281 1991 Argentina Water Supply 100.0 100.0 3292 1991 Argentina PEREL 23.0 10.5 3297 1991 Argentina Agricultural Services 33.5 23.6 3362 1991 Argentina Public Sector Reform T.A. 23.0 17.8 3416 1992 YPP Socied. Hydrocarbon Engr. 28.0 20.2 Anonima 3460 1992 Argentina Thx Administration II 20.0 12.2 3520 1993 Argentina Yacreta II 300.0 145.2 3521 1993 Argentina Flood Rehab 170.0 161.2 3556 1993 Argentina Pub. Enterprise Ref II 300.0 100.0 3558 1993 Argentina Financial Sector Adjust. 400.0 194.8 36111 1993 Argentina Road Maintenance & Rehab 340.0 340.0 36482 1994 Argentina Maternal & Child Health 100.0 100.0 TOTAL 7,145.8 of which has been repaid 1,995.0 TUTAL NOW OUTSTANDING 5,150.8 AMOUNT SOLD 12.8 of which has been repaid 12.8 TUTAL NOW HELD BY BANK AND IDA 5,138.0 TOTAL UNDISBURSED 1,662.7 1/Not yet signed 2/Not yet effetive 19-Oct-93 &(’눕‘---:&------------------------------［·！；· i . 擘 • ，卹陽甲絨細螂矗曄娥州m牌神•必飽爭•“眸“視”啊編•，購馴嗎戶蟻物閂寡磚戶 ·細喘騙p拱劉榭馴r磚p糾”．凶．自賺•綢甲卹謝寫中 洶目叫妒釗開戶磚•甲中頃p“•戶開口悶啊中戶祠馴禺•嗎臘榭跚“叫唱p戶H戶 ，印呻網神遞卜P•戶“•d由戶調馴萬．彎”叫劉團”b&o刁角 馴州緬J．馴m馴甲•a乍神•個戶•調馴撇啊華開•織乍啊門罐幼勺神調叫•悶叫騙網磚騙勾以點甲．叫日戶 鑼瓤鑼爨鑼礬擲礬攤讜癮驪癩無驪無 個馴總闐馴購個唱開個『磚一惆閑•卻瀾 O『0．參『O一馴喝開舉團興讓開劉哺劇騙 中『擊O亂O才開一闐唱忿•頗神詢擘馴叫口勵鵬馴陶•祖 中才爍一你才闢一劇悶開卹際馴個馴觔問網勵 闐，鑰亂O。飾奉O『•亂闐．購•州神馴甲馴州個•馴申細 口才開O中口魚才O亂O『•卜馴闢閱•，”戶虹人網嚀馴盼 O謬O露COt露－一向卹頃當鳥叩卹U仰勿啊絨朋州唱 參『•亂O『•號言O『•．戲神州購劇州一神目頃 儲）一00一細卻綢唱神p以州U網啊月調個叫淌屹唱州 闐•卹‘0『闐的•館卹．卹•州神馴中．馴矓魚州觔馴魷 馴酌歸O『計的．當闐唱一劇嗎開．離馴寫州細馱 寫細叫戶誠才開寧論q 爍藝鍊盞二遙礬鏖近亡竺一一亡 州馴州細婦。 口騰A戶閑」 I―一∥ 中”煙開自馴， 馴鴻亂鴆•中闢州喝戶柑 亂L純汪州必齋馴飩I〕盧lao工凡田閱田驕焰名 VN紅派吁O甘y AMMI AROW MA: - nOMWAL ASSUAM _CAPIEAL MARKET 1. BACKGROUND 1. EMMA for Ed= Pnask As a result of a much improved business climate, private investment recoviered ftom the equivalent of 12.5 percent of GDP in 1990 to .16 perpent in 1992. Of this, close to 82 percent was finaticed by private domestic savings, with the rest coming mainly from fiftign, borrowing and direct forelp investment.' R=M Government projections show that overall invesiment m AqMW= is cqmted to go up-in constant vahies of 1992-ftom the equivalent of US$37.9 billion Ian year to US$54-8 billion in 1995. The growing importance of the private sector maims it W" IUMIY that most of the additional investment effort would be made ty private companies. The challenging task ahead would be easier if financial intermediaries-both in the banking rjstem. and the securities maftt-were to become more effective in the mobilization of financial savings to the corporate sector. Although information is scarce, available data suggest that domestic financial * i , mediation has played a limited role in the fivancing of private investment in past decades. Furthermore, banb have & w I on short-term lending to pfivate businesses, a mode of financing which is not ideally suited for investment projects. 2. The retum of In and price stability in die IM two years has bmu accompanied by a resurgence in resource mobilindon by the local banking system and Ole domestic securities nwitet. . 11me has been a doubling in real terms of the level of credit outstanding to the-private sector betw= 1990 and IM. Alsoj there has been grow activity in the securities market, with a significant increase in the of private stock companies and in the volume of private bonds placed locally. It is eq)ected that continued - - - - - - conomic stabft should reinforce the wndmw towards a growing rele-vanoe Of domestic financial intetmediatilon m meeting the needs of the investment effort. Also, pnce stability, should be conducive for investors to increase the volume and to lengthen the terms, of thtk Ammial savingL 3. Financial Sector Ingitutiom. Commercial banking has beeti dominated by 36 public banb, which provide the major dun of bank credit (about 61 percent), raise a significaut share of deposits (about 55 percent) and employ about half of all bank employees in the counvy All major international banh are present in Atgentina, and there is a umber of privately owned domestic bob. Private baub grew in, die -past encouraged by Central Bank credit, controlled interest nos on deposits, and pr6fits derived ftom inflation and pme and foreip exchange instability Nonetheless, during the 1980's thm number decreased from a maximum of 179 to 141, mainly due to bank failure and increased bank competition brought about by hNnfized interm rates, redaced credit subsidies. increased reserve , and a Ming demand for 1*9 assets. In 1992, the Goverment established Banco do Inversi6n y Comercio, Exterior (MCE), as a wholesale bank which is cq=W to provide medhm and long term ctWft to the private sector through I d 111; banks. BICE ba recently teceiwd loans f" a total of - US$6W million from &e hot Amierican Development Bank wd the E)"n-Impm Bank of JAW& On ft replaU" side, the Ceuttal Bank is entrusted with, aftting the L" of Financial EVities, and the Qnnavintandom imint ha a irimtml R2nir nirft*w uAth fidl juithnrimflm fW enfMing banking prudential regulations. Law 17.811 establishes the role of Comisifa Nacional de Valores (CNV) as the regulatory authority for the securities, futures and options markets; it also establishes the powers and responsibilities of the stock exchanges, with the Buenos Aires Stock Exchange as an entity with a high latitude to self-regulate itself and the brokerage industry in general. 4. 1UM. The critical capital market issue has been the limited mobilization of long term sources (size and instruments) from private investois. Poor mobilization of long-tam private resources was undermined by: (a) macroeconomic instability; (b) the lack of institutional investors with sources of contractual savings for long-term investments; (c) taxes on financial instruments, and (d) shor'comings in the regulatory framework for the capital markets 5. GoveraM Sa . The improved macroeconomic climate of recent years together with a diminished tax burden on issuers and holders of private securities has resulted in renewed activity in the equity and bond markets, where the leading new issuers have been private banks and some large corporations. Current monetary policy, mainly the Convertibility Law -whereby the monetary base cannot exceed the level of international reserves- and the legal prohibition of the Central Bank to extend credit to the Government and to financial institutions other than short-term liquidity loans, have sought to increase discipline and the financial soundness of the banking system. Also, the closing of some state banks and the downsizing of the rest, together with strengthened prudential banking regulations, have brought about a sharp reduction in the state exposure to potential credit losses. On the other hand, the privatization of public enterprises such as ENTEL -the state telecommunications company- and YPF --the state petroleum company-has fostered a dramatic increase in stock holdings by the private sector and promoted an expansion in the level of transactions in the stock market, which currently shows a capitalization equivalent to roughly 30 percent of GDP. Other capital market reforms include the elimination of taxes on securities trading, the liberalization of securities trading fees, the equalization of capital gains taxes for foreign and domestic investors, the improvement of mutual funds legislation and the recently approved private pension fund system. Key remaining reforms being considered include: legislation to improve market transparency; the issuance of regulations to tighten controls on brokers, brokerage houses and the Buenos Aires Stock Exchange; new rules for a better coordination among regulatory agencies covering financial markets; and the passage of improved regulations for the supervision of financial conglomerates. 6. Moderate inflation stemming from macroeconomic policies since 1991 began to reduce the uncertainty of real asset yields, and thereby reversing the decline in resource mobilization. Strong income growth has further increased the demand for financial assets. Following the removal of transaction taxes on securities, several banks and corporations began to issue corporate bonds, chiefly US dollar-denominated. The recently-approved pension fund reform will strengthen this recovery. In spite of these changes, financial deepening remains far below international standards and long-term lending for business investment is only beginning to emerge. 7. Poect Qbjcti. The proposed project would support the Governments efforts to address constraints in the capital market. Specifically, this project would assist the Government in improving the regulatory and supervisory framework needed for a developing manhat usedra.* Amadenha the. naraniv, annmund evnna ufnrm* and, knrnawitte 1 te anag4tV -16- ANE 1 of the banking system to undertake term iending. The following sections elaborate upon these thee areas. I. MAIN ISSUES IN THE SECURIES RKET 8. Tg Bhe R l Envrment. The primary law regulating the Argentine securities market is Law # 17811, which establishes the powers and responsibilities of both the CNV and the stock exchanges in the issuing and trading of securities. It also provides the legal framework for the supervisory functions of the CNV and the Buenos Aires Stock Exchange, and regulates the expected market behavior of participants in the securities market. The CNV is the supervisory authority in charge of issuing regulations for the securities market: these include intermediaries, the issuing of debt and equity instruments, primary and secondary trading in securities, and futures and options markets. CNV also has regulatory powers over mutual fund management companies. It has, however, limited authority over the operation of brokerage houses and licensed brokers associated with Buenos Aires Stock Exchange, which has its own regulatory board. The CNV has no authority over the adoption and enforcement of accounting and auditing standards, but through its approval rights over the public offering process and the listing rules of stock exchanges, it exercises a strong flAuence over financial reporting practices. 9. Recent Law # 17811 has been supplemented in recent years by several important new laws and by regulations issued by the CNV These are: (a) the removal of restrictions on foreign portfolio investments in September 1989, as part of the Economic Emergency Law; (b) the Negotiable Instruments Law of 1989, amended on July 1991, to provide a basis for the issuance and trading of corporate bonds; (c) a presidential decree of November 1991, which removed stamp and transfer taxes on securities investment, equalized taxation of capital gains for foreign and domestic investors, liberalized fees and brokerage commissions on securities transactions; (d) a mutual funds law of May 1992, which allowed open and closed-end funds, clarified powers and responsibilities of the fund management company, introduced greater portfolio diversity and improved regulations on investor protection; and (e) a new law on social security reform enacted in October 1993, which created an independent pension fund system with individual worker's capitalization accounts (see Section III). In addition, there is a law proposal pending in Congress on market transparency and inside trading. 10. Pen Issues. In order to build on its program of legislative amendment, which focusses on improving fairness and efficiency in the securities market and fully implement the policy intentions of the new laws, CNV would like to change some market practices through better market monitoring, more timely investigations of breaches of law, and a more effective administration of its penalty system and prosecution of law breakers in court. Despite significant advances in developing a regulatory framework for the securities market, there are still some areas of concern: (a) the weakness of prudential regulations pertaining to Argentine market intermediaries, particularly the lack of regulations on capital requirements of brokerage houses-the purchase of a seat in the stock exchange is presently the only requirement to act as a securities intermediary-and (b) the close inter-relationship that exists in the ownership of brokerage houses and other financial intermediaries such as banks, which own the most active and growth-oriented trading houses, giving rise to conflicts of interest in relation to clients and creating problems of inside trading and market manipulation. - 17 - ANNEX I III. IMPLEMENTATION OF THE PENSION REFORM 11. Scope of the Ptnsion Reform Law. The pension reform law (Law 24241) of October 1993, is intended to restore fairness and financial viability to Argentina's mandatory ansurance against the risks of old age, survivorship and disability. The reform may also generate pension fund savings on a large scale, which would secure a growing demand for capital market instruments. In addition, a successful reform would enable the authorities to substantially lower non-wage labor costs. A central element of the reform is the combination of pension funds and pay-as-you-go (PAYG) schemes in an integrated system of mandatory pension insurance. Private and public institutions (Administradoras do Fondos do Jubilaciones y Pensiones - AFJPs) will compete in the supply of such funds. The Government plans for the reform to take effect on July 1, 1994, but must until then issue detailed regulations and establish a superintendency for the AFJPs. 12. Since 1968, old-age, survivorship and disability insurance in Argentina has been mandatory for all dependent and independent workers. Close to 90 percent of workers are covered by the National Pension System (NPS), the remainder by separate schemes for the armed forces, the police, and provincial and municipal public employees. All schemes are based on PAYG principles. Despite substantial revenues from earmarked taxes, however, NPS finances became unviable during the 1980s due to over-generous benefit promises and an increasing evasion of contributions. The dependency ratio (pensioners/contributors) soared from 39 percent in 1980 to 62 percent in 1990; in that year, financing of mandated benefits through current contributions would have required a contribution rate of 53 percent of gross salary. Lacking revenues, the NPS severely underpayed the indexed pensions of dependent workers and delayed inflation adjustment of the non-indexed pensions of independent workers. 13. In 1991, the Goverment concluded that adequate benefits and financial viability could only be restored through a radical reform that would address the evasion problem. Congress passed the reform law in September 1993. In the interim, the Government took measures which enabled the NPS to gradually raise benefits to their mandated level. These included earmarking of coparticipated tax revenues, reform of the collection function, and an increase in the minimum years of contributions from 15 to 22, which slowed the increase in the number of pensioners. In addition, the Government issued consolidation bonds (BOCONs) to pensioners in recognition of about US$10 billion of arrears. 14. A drastic reduction in the dependency ratio is essential for making the transition from a PAYG system to a partially funded system financially feasible. To that end, the reform law gradually raises the minimum retirement age by 5 years to 60 years for women and 65 years for men; increases the minimum years of contribution to 35 years; toughens requirements for disability claims; and establishes strong links between contributions and expected benefits. Revenue and expenditure projections indicate that the current allocation of tax revenues to social security will be sufficient. Provided mandated benefits for existing pensioners under the old law are not increased, the authorities would be able to progressively reduce either tax allocations or the contribution rate. 15. The reform will replace the NPS with a so-called Integrated Pension System which includes PAYG and funded schemes. Pre-reform contributions will be recognized thrOugh a -18- ANE 1 base-the indexed average individual wage over the last 10 years prior to retirement-for each year of contribution, i.e., 45 percent after 30 years. 16. Post-reform contributions will establish claims on two pensions: (a) A basic, uniform pension from the PAYG scheme. The law promises about 28 percent of average economy-wide salary after 30 years of affiliation, increasing with additional years. Employers and independent workers will contribute 16 percent of salary or income, although the Government intends to reduce this rate subject to fscal performance. The uniform pension provides for a transparent redistribution within the system. (b) An additional, proportional pension from either the PANG or the funded scheme. Workers must choose between the two schemes, and in either case contribute 11 percent of their salary or income (independent workers). The PAYG scheme promises benefts of 0.85 percent of individual pension base for each year of coitribution, i.e., 25.5 percent after 30 years. Pension fund affiliates will draw benefits in proportion to contributions and their fund's investment performance. However, AFJPs will deduct a management fee which will also cover the premium for mandatory disability insurance. The Government expects competition between AFJPs to hold the fee down to about 3 percentage points leaving 8 percentage points for addition to the individual capitalization accounts. Workers can at any time transfer from the PAYG to the funded scheme, but not vice versa. Twice a year, they may also shift their accounts without penalties between fmds. 17. The relative attractiveness of (i) the PAYG over the funded scheme with regard to the additional pension and (ii) publi over private pension funds are issues still to be resolved. The management fee, which may be higher than 3 percentage poinits after the costs of disability insurance become known, tends to weaken the pension fund option. Since the PANG scheme also has to provide for disability insurance, the Government is studying the possibility of charging costs against benefits. 18. The law requires Banco de la Nacion (BNA) to establish a pension fund and allows provinces and municipalities do the same. The law boosts the attractiveness of the BNA fund by obligating BNA to guarantee returns in both pesos (at the BNA savings rate) and dollars (at 3-months Libor), and to forgo the management fee ecept for covering the disability insurance preMum. The Government has submitted to Congress a draft correction law which would remove the dollar guarantee and the management fee prohibition. To avoid any bias against private funds, BNA will need to reflect the cost of the remaining peso guarantee in the management fee. 19. Implications of the Reform for the Capital Market. The reform's impact on the supply of long-term savings will obviously depend on the choice between the PAYG scheme and the pension funds. Since the PAYG scheme is relatively more attractive to older workers, it would initially take a significant sham,, That share would tend toward zero as now-young workers reach retirement age. The Government expects the PAYG scheme to be attractive to workers above age 45 in 1994. On that basis, contributions would initially split 70/30 between pension funds and the PAMG scheme. The funds would inidally grow by aboumt I A nrentf GfMD a26nnual ' the eaV 0A0. mi n .- -nnians Anute mI - 19- ANNEX I be about 10 percent of GDP; by 2025 they would amount to more than 70 percent of GDP. This will be a dramatic development for Argentina's capital market, where demand for medium- and long-term debt instruments is still incipient. 20. The New Superintendency of Pension Funds. One of the principal risks facing the reform could be lack of confidence by workers in the investment performance of the new pension funds. Continued macroeconomic stability and freely determined market inrest rates are essential to maintain workers' confidence in the pension fund option, and to reinforce the longer term success of the reform. It is also essential to put in place a sound AFJP's supervisory system that effectively prevents undesirable events, and that if they occur are dealt with in a timely and decisive manner -to remedy the wrongdoing and penalize the wrongdoer. The law creates a superintendency of pension fund managers--Superinteadecia de Administradoras de Fondos de Jubilaciones y Pensiones (SAJP)-a fiancially and functionally independent public entity under the jurisdiction of the Ministry of Labor and Social Security. The SAFJP will be under the management of a Superintendent who will be appointed by the Government. This new agency has broad powers to supervise the APJPs and punish those who violate the new social security legislation and related regulations. The SAFJP will have to coordinate with other supervisory bodies, such as the BCRA and the CNV on financial issues pertaining the new pension funds, but its rulings on social security will take precedence over other agencies' rulings. The law provides that the existing social security administration finance the necessary expenses of putting SAFJP in operation, until the latter generates its own revenues. It also states that the government should provide SAFJP with the necessary assets. 21. Igag=. The law gives SAFJP a great deal of latitude to hire its required staff and emunerate it according to market realities. One concern, however, is that it does not provide a measure of to the superintendent and directors of SAFJP by establishing minimum terms in office. This issue needs to be addressed in the enabling regulations. Since the budget of the new superintendency will not be part of the fiscal budget, the law establishes that its revenues will come mainly from AFJPs contributions, in a manner proportional to each AFJP's monthly pension fund receipts. Although this is desirable, the enabling regulations should consider a provision for periodic reviews of the contribution rate; otherwise, as pension fund assets gro, SAFJP may experience excessively large revenues. IV. TRAINING REQUREMORM FOR LONG-TERM FINANCIAL INT IIEDIATION 22. Assessment of ning ds. The chronic absence of medium and long-term financing in the past has left the Argentine banking industry particularly dearth of human capital in the area of project lending. Thus, a special and concerted effort is required if the number of qualified lending officers in this area is to increase rapidly, and if medium and long-tern financing of business is to be developed by local banks. If the Argentine market is to be successful in supplying medium and long-term financing for investment projects, a much. greater knowledge of modern capital market concepts and products will be required by all players in the financial marketplace.. In particular, bankers must dramatically improve -20- ANN appropriately structure the financing of investment projects. The absence of such,capabilities would result in higher levels of risk associated with project financing. Thus, adequate expertise in this area would contribute to lowering lending spreads and better resource allocation, particularly in connection with investment projects of medium and small-sized private enterprises with limited access to foreign financial markets. 23. Presently, there are no local organizations that offer rigorous training to middle and senior level bank executives on project lending, long-term funding or capital markets. For some banks-mainly foreign-these training requirements are partially fulfilled by sending key personnel abroad, although due to its high cost it will continue to be an option of very limited scope. Moreover, local financial training institutions may only be able to offer the type of programs required after a substantial upgrading of present training capabilities. In order for them to achieve international standards in a timely manner, new training programs would be required to cover a broader set of financial skills and count on expertise with extensive capital market and project lending exposure in more mature financial markets. In this context, the aim of this component of the project is two-fold: (a) to rapidly develop enough project financing capabilities in the domestic financial market to cover the demand for local funding expected to be generated by the private sector's investment efort in the next few years; and (b) to give the initial support required by the local training industry to improve the coverage and quality of the financial training it offers on a permanent basis. 24. The Role of the Government. In the area of bank training, the Government sees its role only as supportive of private sector activity. In particular, it is willing to assist in areas where private initiative is unlikely to respond in a timely fashion, commensurate with the country's needs. Areas already covered by established training organizations, as is the case with short-term seminars, university courses and basic training programs, do not require further Government support. In other areas, such as upgrading local project financig capabilities, the Government considers that there is a justification for selective action on its. part, but only in order to trigger a longer term response by private sector training institutions. Given the increase sought in investment levels, it is important to make sure that there is a more eicient and timely utilization of the financial resources that are being made available for project financing. V. PROJECT DESIGN 25. Aproah. Argentina's growing private investment requirements are expected to bring about an increase in the demand for domestic term financing in the country. Continued macroeconomic stability and capital market reform are necessary ingredients for the required expansion in the volume and the terms of financial savings. Although important measures have already being taken by the Government with respect to capital market reform, much remains to be done before local financial markets are capable of intermdiating a more substantial volume of resources towards investment projects. In particular, long-term financing is still inhibited by: (a) high spreads and lending rates charged by domestic banks, which will require a special effort to improve bank intermediation in the fmture; (b) shortage of long-term financial savings, which demands further institutional development geared to increase the supply of long-term loanable funds; and (c) lack of adequate capital market regulation and sunervision. which translates into a netcention nf hiah risk liel lw finincia -21- ivestors which effectively shortens the maturity of financial papers and steepens the yield curve. A 1993 Financial Sector Adjustment Loan (FSAL) is supporting the down-sizing of public banks, a srghg of bank supervision and the enforcement of regulations. The proposed Capital Market Development Loan, which this project complements, is designed to provide prime-rated banks with a backstop facility for their bond issues which would effectively extend the term of their financing. At the same time, IDB and other official credit institutions are providing BICE with long-term credits to finance private investment and imports through first-tier banks. This technical assistance project will complement previous efforts to improve the capital market outlook by supporting activities oriented towards: (a) improving the regulatory framework of the securities market; (b) developing an independent pension fund system; and (c) improving institutional capabilities in the financial markets for the intermediation of resources to support the domestic investment effort. 26. Eiet Flog. This project has three components. The fl= one concentrates on assisting in the improvement of the regulatory framework of the securities market by supporting a srgtIng of CNV's institutional capabilities-in particular its enforcemnt functions. There is also an effort to improve its staffs skill levels through the implementation of an appropriate human resources policy and an in-house training program. Furthermore, this component aims at improving prudential regulations in the securities market and the information systems of CNV. The 1WMa component focusses on supporting the institutional development and regulations required by the newly reformed pension fund system. The main effort will be in assisting in the creation and early operation of the superintendency in charge of pension funds and their associated administrators Assistance will be provided also to develop the norms and regulations required for implementig the new pension fund legislation. The didd component gives support to the development of a high level training program oriented to provide the banking and securities industries and their regulators with better term financing skills and capabilities for private sector project financing. The Bank would support the Government's objective of creating a self-sustainable training program offered by t!p private sector. VI. PRJEC*r DESCRIPTION a.) Delopmenta of the Secritiesmare 27. SUtfethen of CN's O aion and Manaomet. CNVs institutional will be achieved by: (i) evaluation of its current capabilities and definition of new mission and functions, and the proposed new organizational structure, human resources policy, legal framework and information systems, followed by preparation of a detailed action plan for CNV's restructuring, including timetable and terms of reference for contracting the development of policies and their implementation (consulting company for 10 staff-months, US$400,000); (ii) assistance in the initial phase of CNV's restructuring, covering its organizantion- including organizational chart and operation manuals and procedures- legal framework - includime blas and a a~tions-andI human resomces ole **WnluV ataffihe of first -22- ANE 1 thee levels of the new organization, approval of compensation structure and adoption of a policy for redeployment, recruitment and retention of professional staff-- (consulting company for 28 staff-months, US$950,000); (iii) development and implementation of a training program for CNV's professional staff including evaluation of training requirements, development and provision of courses, and supervised on-the job-training (outside consultants, 60 staff-months, US$1.2 million); and (iv) preparation of guidelines and assistance in preparation of the first 12-month business plan of CNV (consulting company, 2 staff-months, US$50,000). The government will provide as counterpart computer hardware and software to establish a management information system for the new organizational structure of CNV (Cost: US$1 million). CNV will also provide counterpart in kind (about US$460,000) since a significant portion of CNV's staff time and assets would be dedicated to the reform process. 28. Upgradin of the Securities Market Regulations. Assistance will be provided to CNV to: (i) conduct an analysis of current securities market tremds and new regulatory requirements and prepare a proposal for capital adequacy rules for securities market intermediaries in accordance with their risk profiles; (ii) design and implement supervisory systems to ensure compliance with new capital adequacy rules, including record keeping specifications for intermediaries and design and implementation of CNVs systems for monitoring the financial position of intermediaries; and (iii) prepare a study with recommendations to streamline and improve coordination among the different regulatory agencies supervising financial conglomerates, including specific arrangement proposals between CNV, BCRA and the Superintendency of Insurance. These tasks will be performed as an integrated assignment (consulting company, 20 staff- months, US$650,000). The government will provide computer systems as counterpart, which would allow CNV to be permanently informed of securities market behavior (cost: US$300,000). CNV also will provide counterpart in kind (estimated at US$100,000), consisting of staff, office space and equipment. b.) Imlementation of the Pnsion Reform Law and New Pension.Ends SsteA 29. Implementatian of the New lWgislation. Assistance will be provided to SSS to implement the new pension fund legislation, including: (i) preparation of norms and regulations required by the new law (consulting company, 30 staff-months, US$360,000); (ii) creation of the new superinadency of pension funds and their associated administrators, including by-laws, development. of organizational structure with an action plan for its implementation and detailed job descriptions for all positions, establishment of -23- ANNEX 1 training needs for its staff, determination of informational needs -including computer systems configuration-, and management support during its initial phase of operation - including collection issues- (consulting company and twinning arrangement, 135 staff- months, US$1.9 million; computer hardware and software for US$1 million); and (iii) Consolidation of previous norms and regulations that will remain active from the former system, so that a unified system is achieved. (consulting company, 13 staff- months, US$140,000). The government will provide US$400,000 as counterpart funds for the hiring of consultants and the purchase of computers. In addition, it will provide counterpart in kind (estimated US$400,000) through use of staff, office space and equipment. c.) Mat Porm fecd 30. Uparading of the Canabilities of Middle and Senior Level Management in the Fintancial B M la. A training credit facility will be established at BICE to finance the establishment of a core training program by private training institutions, aimed at upgrading the financial intermediation capabilities of middle and high level staff of financial institutions. Financing will be channeled through a two-tier system by which a training institution will request funds through a commercial bank, which will act as intermediary while assuming full responsibility for loan recovery. BICE, in its capacity as second-tier institution, will provide norms regulating the use of the credit facility by first-tier banks. These will be incorporated into a "Reglamento de Cr6dito". The core training program would aim at providing high level training in the following subjects: (i) Project Finance -with emphasis on non-recourse financing- (ii) Medium and Long-Thrm Bank Funding -including bond financing, BICEs two-tier lines of credit and the backstop facility- (iii) Securities Markets in Argentina and abroad; and (iv) Long-Uhrm Bank Planning - with emphasis on asset and liability management and control procedures. Basic courses would also be offered in order to bring all participants to appropriate levels required for the core program. BICE would consult with the banking associations on course priorities. The Bank will provide US$1.1 million for the credit facility and will review all applications submitted to BICE. In addition, and separate from the credit facility, the project considers up to US$150,000 to finance fees and other related expenditures of middle and senior level staff from financial sector regulatory agencies, who may want to attend any of the training programs financed under this facility. The project would also provide financing to the Government for up to US$250,000, in case it decides to develop specific course modules to accelerate the provision of training in certain other priority areas. d.) Poect Cordinat 31. Establisnt of AW ie inaij Unit. An existing Project Coordinating Unit at the Ministry of Economy will be expanded to coordinate and facilitate the effcient and timely implementation of activities. The unit will assist the beneficiary agencies-CNV, BICE, Secretariat of Social Security and Ministry of Economy-in all stages of contracting consultants and acquiring equipment and materials under the project. Also, it will supervise implementation of the project components and ensure compliance with the Loan Agreement by the government. It will also assist in the contracting of consultants tequired under the -24- ANNE I and processing requirements under that loan, including the use of the Special Account. As part of its functions, the Coodinating Unit will provide adequate and timely processing of the required documents for implementation of the project components. This project will fmnance the unit expansion (one administrator/economist and part-time staffs for a total of 90 staff-months, US$330,000; computers and office equipment, US$20,000). The government will provide office space as counterpart (estimated at US$40,000). VII. PROJECT ADMINISTRATION AND IMPLEMENTATION 32. Project Organization and Implementation. The Borrower will be the Argentine Republic. The Ministry of Economy (ME) will be the Executing Agency. A Government official appointed by ME would head a Project Coordinating Unit as National Project Director, which will be responsible for overall project implementation. He will be assisted by a full time Coordinator with power to hire consultants and request disbursements from the Bank. The same Project Coordinating Unit for Loans 3291-AR (PERAL) and 3292-AR (PEREL), which has proved to be very. successful, will be employed for the proposed project. The functions of the Project Coordinating Unit will be to: (a) manage Bank fnancing and technical support to CNV, BICE and SSS, which will be the implementing agencies, and monitor compliance with the Bank's legal agreement; and (b) assist implementing agencies in all phases of contracting consultants following Bank guidelines. 33. ActionsAgced. The Capital Market Development Project, which the proposed operation supports, includes agreements concerning CNV's restructuring, its continued application of Resolution 227 to investigate breaches and ensure that the Board of the Buenos Aires Stock Exchange imposes appropriate penalties, and its enactment of a comprehensive scheme of prudential regulations. For the proposed CMTAP, the Government agreed on the following during the negotiations: (a) to maintain the Project Coordinating Unit headed by a National Director, who should be a Secretary or Undersecretary of the Ministry of the Economy, assisted by a full-time Coordinator who should be university gmduate, at least 35 years of age and with prior experience working with the Bank or a similar institution; (b) the 1brms of Reference for the three components including a detailed description of the content of the course modules of the core training program; (c) to carry out the project in accordance with the main components and timetable of the Matrix of Project Activities; (d) to commit itself to provision of the required counterpart funding, and to include it in its annual budget when necessary; (e) that the issuance of the norms and regulations of BICE's credit facility to finance the training component should be a condition of disbursement for such facility and should be acceptable to the Bank; (f) that starting approxmately six months after loan effectiveness, the Bank would receive semi-annual reports on actual project implementation, as well as monthly summary reports. Furthermore, it was agreed during negotiations that the norms and regulations of BICE's credit facility would be made available on a first-come, first-serve basis to all banks in its list of eligible first-tier institutions, that the interest rate charged by BICE to first tier institutions should be the same for all and that it should reflect the cost of funds plus a spread to cover administrative costs. Normal eporting requirements including a mid-term review (Third quarter of 1995) have been included as loan covenants. 34. Procurement. Consultants employed under the Project will be retained using terms of Vefree 0"Mviousiev aOn0ed by the D.nk C.1m1- e-a-ia 1omn. I oeesn-w - 25 - ANNEX 1 the August 1981 Bank Guidelines, and under employment conditions satisfactory to the Bank. Whenever possible, companies, rather than individual consultants will be the preferred approach. Unless the Bank otherwise agrees, the selection procedures will include the use of short lists of firms with qualifcations and experience found satisfactory to the Bank, and a letter of invitation describing the selection procedure and the evaluation criteria to be used, which should be acceptable to the Bank. Computer equipment and related maintenance would be groped in packages of not less than the equivalent of US$100,000 and would be procured through limited international bidding (LIB) following the Bank's guidelines for procurement dated May 199' and using the Bank's standard bidding documents. Miscellaneous equipment valued below the equivalent of US$100,000 up to an aggregate amount the equivalent of US$120,000 would be procured through local or international shopping by requesting quotations from at least three eligible suppliers. With respect to the use of BICE's credit facility to finance the training component, private training institutions, as beneficiaries, would follow selection procedures acceptable to the Bank, which would be incorporated into the credit facility's norms and regulations. 35. Prior Review by the Bank. The Bank's review of procurement procedures would be as follows: (a) euipm.and materials - the Bank would review ex-ante procurement documentation under LIB procedures, and ex-post, during field supervision, supporting documents relevant to shopping procedures; (b) training credit facility - all applications by first-tier banks to BICE for the training credit facility would be subject to prior review; contracts with consulting companies for the equivalent of US$100,000 or more would be subject to prior review, with all others subject to prior review of terms of reference and ex- post review of all other relevant documentation during field supervision; and (c) -olin contracts - all other consultant contracts would be subject to prior review. 36. Prot ts,=adin Total project costs are estimated at US$10.2 million, of which US$8.2 million (80 percent) represents foreign exchange costs. The proposed Loan is for US$8.5 million (83 percent of total costs), of which US$7.48 million are to finance consultant services and training related to institutional and regulatory development, and US$1.02 million to purchase equipment, supplies and maintenance items. The Governments contribution in cash is estimated at US$1.7 million, consisting of consulting services and computer equipment and software. The counterpart contribution for the securities market component has already been secured in CNV's budget and the pension fund component has been agreed to and is in the process of being incorporated in the budget. The Government also will contribute in kind by providing staff time and office space and furnishings--this contribution is estimated at US$1 million, not included in the project financing plan. Retroactive financing of up to US$850,000 would be provided for outlays contracted from November 1, 1993, onward. This is justified since both the Securities Market component and the Pension System Fund component need to be initiated at the beginning of 1994 in order to provide continuity to actions already under execution by the Government. Ib facilitate payments under the Loan, a special account will be established in BCRA for an amount of up to US$ 700,000. The Ioan would be completed by December 31, 1997 with a Closing Date of June 30, 1998. Documentation for disbursements would be as follows: (a) equipment and materials - expenditures for computers and related intenance procured under LB procedures would be fully documented, and those for miscellaneous equipment procured under shopping procedures would require a statement of expenditures certifed by ME; (b) comlan contractsifor.t trinU-cWditha - contracts with consultina comnanies for the eauivalent of US$100,O00 or minre and all contracts with -26- ANNEXIL individual consultants would be fully documented, while those below these amounts would require a statement of expenditures certified by ME; and (c) other clam conracts - al other consultant contracts would be fully documented. 37. Acon ad Adi. Separate accounts will be kept for all expenditures made under the project. The Project Coordinating Unit at ME will maintain records and accounts for all project activities. The accounts and statements of expenditures will be audited each year by auditors acceptable to the Bank in accordance with appropriate auditing principles consistently applied, and the audit reports will be submitted to the Bank not later than four months after the close of its fiscal year. -27- ANNEX 1 Attame I MATRIX OF PROJECT ACIWVTIES MAN OBJECTIVES PROJECT COMPONENT EXPECTED OUTPUTIMPACT TIMING TARGETS ACTVITME (START/COMPITON) 1.1 Streod f Evaluation of CNVs curren * Output: (a) Report on CNV's uren * Start: CNT' capabilities as a regulary capabilities, new miin and functions, outlining Second quarr 1994 Orpnia n and agncy, deflnian of new the proposed new: organinda structure, Macneet mision and elabouion of action h Øman resources polcy, legal framework and * Completlon: plan to guide the bplenmentation informaton syste~s; and (b) detailed action plan Fourt quarær 1994 of CNVs resructurng program for CNV's restruc~trig, including timetable and (Bank nancig: consulting trs of refrnce for contracting the arm; 10 smf-moths (s.); dee~opment of policies and their implementation. US$400,000) Impact: It provides he blueprint for carryLng out a comprehensive and complex resrucuring of CNV. Also, it provides policy mak~r with a tool to valu different options and select the mos convenient or feasible among teæm. Impleme~dan of CNV's acuion Otput: Assisance in the inidal pha of th æ Start: pian for ts rstructurig (Bank restructuring of CNV in the foilowng fleids: (a) Second quar=r 1995 Inancing: consulting firm; 28 orgnimtion including the oraiional chart s.m.; US$950,000 milion) and opertion manuals and procedures; (b) legal 9 Completion: framen~rk, including by-laws and reguladons Second quarer 1996 required by the new mission of CNV; and (c) human resources policy, including the completion of ailng of te first 3 levels of the new orpnadn. te app~al of die compensaton structue for the whole organimtianal srucure, and adption of the policy for redepyment, recrutment and rMention of the professional staff -including opdons regaring salary aud incendves. b ~Ipact: Improved capacity of CNV to efectvely superviae the securides marnet and to develop appropriat regulaory responses in ine with evol__i g marke needs -28- AN I Anacimint 1 MATRX OF PROJECT AC1VrTIES MAIN OBJECTIVS PROJECT COMPONENT EXPECTED OUTPUT/IMPACT TåMINO TARGEIS _ACTVMES (STARrICOMPLETION) • Deml~opent and • Output: (a) Report evaluating CNV's in-house *(a) Start: iniplenention of arning and exernal training requi~mes; (b) vario s Second quar r 1995 program for CNs pwfessional com modues coverng prioriy mmeas, sa ~~(Bank m . utside identifcadon of cose providem and acMal ó Completon: COns,ani 60 s.m.; US$1.2 ofeing øf the co^gæ to selected staffmembes; Ti quarer 1995 mlion") and (c) supervised m-the-job trainiøg in priority areas. *(b) Start: f hrth quarer 1995 Imbpact: Imeproved knowledge and technical experdise of CNVs staf. * Completion: Third quarr 1997 (<c) Start: Fourth quar~r 1995 • Completon: Thid quarter 1996 Prepa don of a 12-month Outp The gu=delines for the preparaon of • Start: busies plan for CNV (Bank CNV's business plan and assistance in the Fourth quarer 1995 n: consulting company; preparaton of frat 12-monh business plan of 2 s.m.; US$5,ooo) CNV. • Cmpledon- Fomth quarr 1996 * Imipact: It allows CNV to relne its mission staement and set priorides and performance critria for the next 12 months. * Installation of mna emen Output: Provision f computtts and softwa for * Start: Information syslems of CNV - new Organiaoal structue of CNV. ourh quartr 1993 hadware and software- (government counerpart: US$1 • Impact: Comprehensive and reliable informaton * Compledon- milion) for decision-ma Second quarer 1996 uI~ i'I ~ I ~i 1:1 IiIiIIi~ "i 0% isillil litt iii iii * Q I liii fl 111112 iii 1111! 11111 * ~ ~ - *iii* ei-E - -30- ANNEX I Attachment 1 MATRIX OF PROJECT ACTIVITIES MAIN OBJECTIVES PROJECT COMPONENT EXPECTED OUTPUT/IMPACT TIMING TARGETS ACTIVriES (STAW&/COMPLETiON) 2.1 Implementation of ~ Support in the development of * Output: ulff st of norms and reguiauions * Start the Now norms and regulations rquimd needed by the pension reform legislaon Second quaer 1994 Legislation by the nw pension refrm legislaton (Bank nancly • Impact: It is essential stop In the impleme~ation * Compled~n: pre=ence to consultg of the pension system refom. Fourth quarter 1995 companies over Individuals when appropriam - 30 s.m.; US$360,000. Govt. counterpart. $275,000) * Support in the creadon of the * Output: (a) Report with the blueprint for the 9 Start: new supervisory agency new SAFJP, including: (1) By-laws; (ii) Second quarr 1994 covering pension funds and their or chart and action plan for its amieles , (iii) detaed job descripdons at * Completon: support to the managment of all levels of the organi~ation- (iv) establim nt Fourth quater 1995 this new agency (Bank of the staf training policy; and (v) proposal for ånancing: (1) preference to the agencys Information systems. (b) Advisory consu~ing companies over support to managenpnt during the agency's intial individuals when appropriate & phase of opemtion (firt year). twinning arrangement; 135 sm.; US$1.9 milion; and (i) • kmpact: (a) The new independent pension funds cofpuer hardware and softwae am properly supervised and the workers' for US$1 milion. Govt. ~ ~dividual accou am efectively proeced by counerpart: US$100,000) SAFJP; and (b) by increasng con~dence in the new pension fund system, the presence of a ang Superintendency support in accelemting the development of Argentina's capim maret. -31 - Atachment 1 MATR= OF PR JCT ACTIVITlES MAIN OBJECTIVES PROJECT COMPONENT EXPECTED OvTPUT/IMPACT TIMIN TARETS ACVITIES ~(STARICOMPIETION) o Cosolidation int one body of b Output: A consolidted set of norms, regulations Start: an previous noris reguationa : and procedures for the social security system - Fourth quarter 1994 and procedures that will remain which also will remain active. active from prevlous social Completion: securty legisladon (Bank Impact: It will allow the eficient execution of Fourth 4uarter 1995 Fnancing: prefbrence to procedures for the old social security system. conent~ngÄom~pies over hndividaat $hen appropriale; 13 s.m.; US$140,000. Govt. counterpart: $25,000) 3.1 Upgrading of F unding of a two-tier tralning • Output: Provision by private training institutions Start: Financial facility at BICE to fnance the of core training program geared to middle and Second quarter 1994 intekmedlation establiinent of training senlor level managemen in the banking and Cabilities of programs by the private secor securities industries, regulators and inancial stai * Completon: leiddle and Senior -(Bnk financing: US$1.1 of corporations on the following subjeca: (a) Fourth quarter 1997 Lvel Managemen million). Project Finance -with emphasis on non-recourse in the Finni fnancing; (b) Medium and Long-term Bank Mar~tplace Fuding; (c) Securities Markets in Argentina and Abroad; and (d) Long-term Bank Planning -with emphasis on asset and liability management and connl pro ~ . * Impac. (a) It generates a pool of knowIedgeable bank o~icer and improves the abilty of ~nancial Instions to structure and manae the risk associated with term credit and with capi! market transactions and producs; (b) it improves the supervisory and camnniention abilities of ~nancial sector regulatous by increasing their underanding of bank operations and capita market activity; and (c) It triggers self-sustalning and complex tralning capabilites at financial sector trainig instituioms. 》折＇f ，他 訕～ 〕 卜 一阿’，一’- 個 ANNEX 2 R=3 MA2M MCA= TD RMANCE M -CORE IRADWO PROGRAM 1. The upgrading of medium and long-tam financing skills is a.necessaty condition for a more timely use of die resources the would become amiable. Thus, the Government is ready to provide limited financial sWorf to private learning institutions that Wish to SUWY the advanced training required for the optimal nigm of such resources. In this coma, the government has requested the Bank to include a term financing training component in this teftical assistance loan. The finids allmaud to it will be used to offer a two-tier bwowmg tacft at BICE, the newly created second-tier state bank, which will . . 1 1 ediate the resources to the local training industry through the commercial banks with whom it operates (W* 18 commercial banb). 2. The Sources of BMeMW Tlainees. 'IU potential trainees for this component ate going to come from basically three sourceir. a) middle and senior level management in commercial and investment banks and in the securities industryt b) senior financial stag of companies with potential. investment projects; and c) middle and senior.level goverurnent regulators of agencies supervising the financial and capital markets. 3. Lack of basic h0cmation mabs it hard to get a precise estimate on do number of po=W candi0afts for the type of training being _proposed. Nevertheless, senior m the bantang industry vkxdd place the universe of potential. candidates in private cowmetcW banks WOW at roughly 3, to 5 percent of the total number of employees. This would give today'i minimum,universeliof roughly 2,000 banking -executives for the training component, a number dw increases sommhat U exec from the securities industry and the corporate world vere to be included. Preliminary estimates also ' indicate that roughly 200 regulators could qua* for the proposed training. AAiaps MOW unportantly, the need for,tramed personnel would become more urgent as am and the bub try to take advantage of the new business created by'mow readily aveMble long-term. fwxft brought- about by the recent Government initiatives. an these &MM MtO consideration, there is reasonable confidence that sufficient, demand will exist in Argentina . roughly 500 trainees in thive years-for the type of training being pwposed. 4. Ile Cm Maiming, ftM= The'objective is that private training institutions in AWWm start to offer training courses on an international lad- for middle and senior anWinent: in die fitiancial sector Following inianational. Istandards of the Wairmig kdustry around the world, it is cqected that the program being pt" would offer a to two.;week training courses based an speciaHy prepared must modules. The courses should be similar -in content to those wrinally dhnd by well established fti , M , pit* ;""t" ;,if 1OPWW"" .6-04. 6*1,1" -34- with techniques easily applicable later on in teal lift situations. lb this purpose, the courses should try to simulate on-the-job situations through the use of computer simulations and games as well as include the use of real life cases and plenty of interaction between the instructor and the students. Each module should be accompanied by a set of printed material for use by the student during the course and later on as a source of reference. 5. The training program would comprise two levels of learning. The first level would give all students a similar knowledge of basic tools which are a pmrequisite for courses of the second level. This second level would cover different aspects of term financing of investment projects. Modules of the first level should cover subjects such as: accounting, corporate finance, prudential regulations, marketing techniques for Imancial products, risk asset acceptance criteria, real estate lending, treasury management techniques, money and capital markets concepts/products, and the use of collateral in lending. Courses of the second level should include at least the four basic modules: a) Project Finance-with emphasis on non-recourse financing; b) Medium and Long-term Bank Funding-including bond financing, BICE's two- tier lines of credit and the backstop facility; c) Securities Markets in Argentina and Abroad; and d) Long-term Commercial Bank Planning-with emphasis on asset-liability management and control procedures. 6. Normally, each student should be required to take only some of the courses at the first level and most of the second. As a general rule, no trainee should require more tban 8 weeks of training, to be spread out over the course of one or two years. The price of a two- week training course is likely to be in the range of the equivalent of US$2,000 to US$3,000 per student (based on rates for comparable courses/seminars in Argentina). 7. Eiuancialhinnma Ameni. There are several training institutions that currently offer financial training in Argentina. All four banking associations, for example, offer seminars and training courses to bank employees. .Nonetheless, the level of the training is quite basic and far from reaching the levels required by the courses being proposed for the core training program described in the previous paragraph. Courses are mostly for entry- level employees and massive in nature. Also, there are training institutions, such as the "Instituto Argentino del Mercado de Capitales", which service the securities market with seminars and short-term courses. A few universities also offer post-graduate degrees with emphasis on financial matters. At the other extreme, there are several private companies that specialize in the supply of highly-visible, expensive short-term seminars on financial and other business-related matters. 8. The Need for a Credit Facility. While practically all institutions in the training industry recognize the pressing need to provide the type of training outlined in the core training program, they feel that it would be practically impossible for them to offer such courses in the short-term without first receiving strong support from the banking industry. The high level of resources involved, including a significant volume of fixed costs in the development of the courses, makes it hivhly likely that a joint effort by different tMining -35- - institutions, on the one hand, and banks and brokerage houses, on the othem will be required to make a reality of the proposed training program. While a strong commitment by commercial banks to such a training program is son as essential to secure its profitability, the medium-term financing to be offered by BICE is necessary to balance the demanding cash flow requirements of a training program with high developmental costs that requires at least a couple of years of operation before it can recover fully the initial investment. Budget projections for the core training program indicate that total development costs of the coumses are about US$500,000 and that recuring expenditures for the first year are of the order of US$1.1 million. Given expected tuition income, the amortization of capital costs can be reasonably completed by year 3. These projections also show that the core training program could be quite a profitable business if projected demand for the courses actually materialzes.2 As an additional incentive to the training industry, the proposed US$1.1 million credit facility at BICE should be sufficient to cover the cash How deficiencies that those institutions that offer the training program are expected to have, particularly in the first year of operation of the program. 9. B E Cre Fagilt. The credit facility at BICE would be designed to offer to financial training institutions, through eligible commercial banks acting as financial intermediaries, up to five-year financing for the preparation of course modules and the initial working capital requirements associated with periodic course offerings. Thaining institutions interested in offering courses that are part of the core training program could access this term financing thiwugh one of the local commercial banks qualified to refinance loan operations at BICE. The credit tisk would reside in the first-tier bank granting the loan to the training institution and the responsibility of evaluating the feasibility of the training proW:u being financed also should be of the bank. The latter should be made easier to evaluate ma bank willing to give a loan would be able to judge directly the attractiveness of the training program being proposed and whether it or other banks have an interest in utilizing the program for their employees. Given that the Government sees this credit facility as serving as a sort of triggering mechanism for the private training industry, BICE would accept commitments of funds from this facility only for three years after loan approval. Afterwards, thr attractiveness of offering the core training program should be clearly appreciated by the industry and there should be enough market incentives in place to guarantee the continuation of such a program by the private sector on a more permanent basis. 10. Creit PaiyReuli. The rules and regulations that would govern BICB's credit facility financed by the Bank loan would be contained in a "feglamento de Credito" satisfactory to the Bank. Consultants experienced in high level bank training would prepare an annex to the regulations describing in detail the minimum content of courses that would be part of the core training program, which would be ready before negotiations. Only courses complying with the terms of inlbrence contained in that annex, satisfactory to the Bank, would be able to get financing from BICE's credit facility. Training institutions could eventually request the addition of new courses relevant to term financing in the annex. .11. The "Reglamento de Credito" should at least contain the following basic principles: 2.. For a wn detailMt maals of the qdt Fquinnent asoaiwith the coM truilg progm see PAgna - Pwoposd Caphat Market Ianing DeveWlopmenm Loan ainig 'CoSUpono , a t in the A1O. -36- ANNEX2 a) BICE should make the credit facility available on a first-come first-served basis to all banks in its list of eligible first-tier institutions. Funds are committed to specific training projects when the application is approved by BICE, based exclusively on the eligibility of the training program being proposed for financing. BICE might decide to charge a commitment fee. b) The interest rate charged by BICE to first-tier institutions should be the same for all and reflect the cost of funds plus a spread that reflects administrative costs. c) Rates charged by commercial banks to training institutions should be set by mutual agreement and should reflect market conditions and the degree of risk involved in each specific credit operation. d) The credit facility can finance up to 100 percent of course developmental costs and of fixed costs associated with the training program being financed. The facility can also finance up to 50 percent of the associated working capital requirements of operating the course for the first year of the program. e) Procurement of goods and services fimanced with the credit facility will have to follow Bank's guidelines and will have to be acceptable to the Bank, and will be incorporated to the 'Reglamento". f) Loans discounted by the facility can have up to a five-year term, including up to one year of grace. g) BICE would keep the credit facility available for new comitments for three years after Board approval and for disbursements for one additional year. 12. Ote Activties Iuded in the Tkina Cmpe. The project includes two additional activities that can be financed with the training component. One is the financing of course fees and related expenditures necessary to facilitate participation in the core training program by middle and senior staff of regulatory agencies. It is important to have reasonable participation of supervisors in the training program so that they are able to carry out their function with a similar level of technical knowledge than those being supervised. A higher degree of efficiency is expected from regulators that are able to speak the same language as the rest of banking and securities industries and understand the whole set of complex issues involved in term financing. 13. TI. ber activity that is being proposed for financing by the Bank loan are Government expenses associated with the preparation of specific course modules conacted out by the Government with the private sector following Bank competitive procedures. The purpose of including the fmancing of this activity is to make sure that courses considered essential for the training of intermediaries in the financial marketplace are offered in a timely fashion. The maximum Bank financing allowed for this activity is expected to finance at most 50 percent of all course modules expected to be included in the core training program. The course modules to be financed under this modality would be at the Goverments sole discretion. MAP SECTION |- - BRD 2N45 BOLIVIA PARAG AY TA B R A Z l t a.i CUMAN HAC .'&d ATAMARCA TUCMMN SANTAGO! i sT DEL ORR ENTES EST - SANTA FE ýSAN J RIO ENDOZ LUIS - v 'UE Os SAM~o~ A lES PAMPA e onf^TA E QUEN- RIO NEGRO SuCa.ss.a.a. Q.g Til~ b, ~CHUBUT ~ V y . ~~ SANTA ~ MILESS WO a CO I. at