Argentina - Second Provincial Development Project

Document of The World Bank Report No. 14035-AR STAFF APPRAISAL REPORT ARGENTINA SECOND PROVINCIAL DEVELOPMENT PROJECT APRIL 5, 1995 Public Sector Modernization and Private Sector Development Division Country Department I Latin America and the Caribbean Regional Office  CURRENCY UNIT - Peso (Arg$) Since April 1, 1991, the exchange rate has been, by law, Peso 1.00 = US$1.00 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CAS - Country Assistance Study CEU - Central Executing Unit FAIP - Financial Action and Investment Plan GPP - Gross Provincial Product ICB - International Competitive Bidding IDB - Inter-American Development Bank IERR - Internal Economic Rate of Return LCB - Local Competitive Bidding MCBA - Municipality of Buenos Aires MDP - Municipal Development Project PDP - Provincial Development Project PEU - Provincial Executing Unit PFMIS - Provincial Finance Management Information System POM - Project Operations Manual PRL - Provincial Reform Loan SAREP - Secretariat for Assistance to the Provincial Economic Reform SOE - Statements of Expenditure TOR - Terms of Reference  ARGENTINA SECOND PROVINCIAL DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. I. THE SECTOR ...................1..................... A. Background ....................................... 1 B. Government Structure for the Provision of Public Services ........... 2 C. Public Sector Financing and Intergovernmental Fiscal Relations ... ..... 3 D. Lessons Learned from Previous Bank Involvement ............... 4 E. Rationale for Bank Involvement ........................... 4 II. THE PROJECT ......................... 7 A. Project Origins ..................................... 7 B. Project Objectives ................................... 7 C. Project Description ................................... 8 D. Eligibility Criteria ................................... 8 E. Project Costs ...................................... 10 F Allocation of Loan Proceeds by Province ..................... 11 G. Financing Plan ..................................... 14 H. Implementation Arrangements ............................ 16 I. Procurement ....................................... 20 J. Disbursements ...................................... 23 K. Accounts and Audits .................................. 24 L. Project Benefits ..................................... 25 M. Financial Impact .................................... 25 N. Economic Impact .................................... 25 0. Poverty Impact ..................................... 25 P. Environmental Impact ................................. 26 Q. Program Risks and Safeguards ............................ 26 This report is based on the findings of the project evaluation process initiated in a mission by representatives of the Argentine Republic to the Bank from August 22-26, 1994. This report was prepared by Messrs/Mmes. David Vetter (Task Manager, LAIPS); Miguel Mercado-Diaz (LAIPS); William Mayville (LA1DR); Rita Hilton (T1WURD); Ben Darsche, Beth Hoffman, Craig Leisher, and Cecilia Zanetta (Consultants). Messrs/Mmes. Constance Bernard, Orville Grimes, and Gobind T. Nankani are, respectively, the managing Division Chief, Projects Adviser, and Department Director. The peer reviewer is Vincent Gouarne (EMTIN).  III. AGREEMENTS REACHED AND RECOMMENDATION .... ........ 27 List of Annexes ......................................... 30 Annex A: Lessons Learned and Previous Bank Experience in the Sector . .. .. ... .. .. .. .. .. .. .. .. . . .. . .. .. .. . 31 Annex B: Spatial Distribution of Population, Poverty, and Product .39 Annex C: Provincial Financial Indicators .45 Annex D: Initial Allocation and Commitment Fees by Province .56 Annex E: Economic Analysis .59 Annex F: Brief Description of the Main Elements of the Project Operations Manual .62 Annex G: Supervision Plan .67 Annex H: Organization and Responsibilities of the Central and Provincial Executing Units .76 Annex I: Institutional Development Subprojects to be Carried Out by the Central Executing Unit (CEU) .83 Annex J: Estimated Schedule of Disbursements .84 Annex K: Selected Documents and Data Available in the Project File .85 List of Tables Table 2.1 Estimated Project Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Table 2.2 Initial Allocation of the Bank Loan Among the Provinces .13 Table 2.3 Financing Plan .14 Table 2.4 Procurement Method by Category .21 Table 2.5 Summary of Procurement Review Procedures .22 Map No: IBRD No. 25587  ARGENTINA SECOND PROVINCIAL DEVELOPMENT PROJECT I. THE SECTOR A. Background 1.1 Argentine provinces spent US$27.1 billion in 1993 (10.6% of Gross Domestic Product and 40% of total public expenditure), and are fast becoming the main providers of core public infrastructure and services. Thus, the efficiency, equity, and fiscal discipline of the provincial public sector are urgent and important issues. 1.2 The First Provincial Development Project (PDP-I, Ln. 3280-AR, US$200 million, FY91, with cofinancing by the Inter-American Development Bank (IDB) for the same amount), is playing a key role in the Government's provincial reform effort. Subprojects that contribute to institutional development were funded as the essential step to raise income and reduce public expenditure. For example, the provincial tax improvement subprojects of PDP-I provided the foundation for the Federal Agreement (Pacto Fiscal) of 1993, an agreement of the provinces with the national government to reform the provincial tax systems. About 45 % of total subproject cost in PDP-I is for institutional development subprojects (e.g., cadastres, revenue administration, management control, and subproject evaluation systems) which contribute directly to the project's main objective of improving provincial fiscal performance. Bank resources for PDP-I are fully committed and US$56 million has been disbursed as of January 31, 1995. Projections show that disbursements are expected to reach US$120 million by the end of FY95, with full disbursement by December 31, 1996. The Government has requested that a Second Provincial Development Project (PDP-II) be prepared to maintain the momentum of PDP-I. PDP-II would continue to assist in the transfer of fiscal and administrative reforms from the national level to the provinces. This would involve deepening reforms in some provinces and initiating them in others that have lagged behind in the process. Population Growth and Distribution 1.3 Although Argentina's population and product are highly concentrated in five jurisdictions (Buenos Aires, C6rdoba, Mendoza, Santa Fe, and the Municipality of Buenos Aires), the rates of growth of population and Gross Provincial Product (GPP) of some of the other provinces (especially those with gas and oil resources) began to exceed those of the "big five" during the 1970s and 1980s (see Tables 1 and 3 in Annex B). Thus, even though the general economic malaise of the 1980s retarded both growth and spatial decentralization of economic activities, the total concentration of GPP in these "big five" jurisdictions declined from 82.5 % to 73.1 % between 1970 and 1989. Although  less dramatic, the same trend was observed for the population concentrated in these jurisdictions, which declined from 72.4% to 69.1 % between 1970 and 1991. 1.4 The provinces of Argentina are quite diverse in size and population concentrations, as illustrated by Buenos Aires, the most populated province, and Santa Cruz, one of the least populated ones. The population of Buenos Aires Province (12.6 million in 1991) is about equal to that of Chile, and inhabits an area about the size of Italy with a density of 41 people per square kilometer. On the other hand, Santa Cruz Province has 160,000 inhabitants who live in an area the size of the United Kingdom, with a density of less than one person per square kilometer. Almost half of the total number of poor households (i.e., households with unsatisfied basic needs) live in the three provinces of Buenos Aires, C6rdoba and Santa Fe, with 42% of the total population living in their capital cities. On the other hand, the percentage of households with unsatisfied basic needs as a proportion of the total population is higher in provinces with smaller populations. B. Government Structure for the Provision of Public Services 1.5 Argentina has a federal system of government with three levels: national, provincial, and municipal. Until the adoption of the Federal Constitution of 1853, provinces were sovereign in their own right. Under this Constitution, provinces surrendered wide-ranging powers to the national government; however, all powers not explicitly relinquished to the center remained with the provinces. The recent revision of the Constitution in August 1994 did not introduce fundamental changes in Argentina's federal system. Argentina's 23 provinces are autonomous entities governed by their own constitutions (the Municipality of Buenos Aires is a separate entity). 1.6 In 1978, the national government began decentralization by assigning responsibility for the provision of some additional services to provincial governments (e.g., primary and secondary education, health care, water, electricity, provincial roads). However, many of these services continued to be provided centrally until 1991, when a major effort to complete the decentralization process was initiated by the national government. In some cases, the provinces have turned over these and other responsibilities to municipalities. Although some assignments between provinces and municipalities are still not definite, responsibilities for service provision are basically as follows: exclusively national government--defense, foreign affairs, interprovincial transportation and trade regulation, mail, and telecommunications; national and provincial governments--higher education, preventive health, justice, security, economic development, major passenger and cargo terminals, housing, electric and gas energy; provincial and municipal  - 3 - governments--elementary and secondary education, health care, water and sewerage, regional and local roads, fire control; and predominantly municipal governments--solid waste collection and disposal, local streets and drainage, parks, water, markets, cemeteries, and land use planning and control. The division of responsibilities between the national and the provincial governments is relatively clearly delineated in Argentina, but the provincial/municipal assignments are evolving rapidly as the provinces themselves decentralize. C. Public Sector Financing and Intergovernmental Fiscal Relations 1.7 As provided in the National Constitution, the national government has the following sources of revenues: (a) resources allocated to it exclusively and on a permanent basis (taxes on foreign trade and profits from the postal service); (b) resources allocated permanently in conjunction with the provinces (domestic taxes); and (c) resources allocated temporarily and on a shared basis with the provinces (direct taxes in cases of national emergency). Categories (b) and (c) have contributed approximately 80% of total national government tax revenues, and have been the basis for the national/provincial governments' revenue-sharing system. Before the Pacto Fiscal, the most important provincial revenues were the turnover tax (gross sales tax), real estate tax, vehicle tax and transfer tax (sellos), as well as the revenue transfers received from the national government, as described below. The Pacto Fiscal established the real estate tax and a final sales tax as the foundation for a modern provincial tax system. 1.8 Provincial governments in Argentina are highly dependent on transfers from higher governmental levels. In 1992, national/provincial automatic revenue sharing under the national law (hereafter, coparticipaci6n) reached US$10 billion (US$12 billion including all automatic transfers), while provincial own-source current revenues were US$8.4 billion. While of diminishing importance, discretionary transfers from the national government to finance provincial deficits and investments have been notorious in rewarding poor fiscal performers among the provinces and distorting resource allocation. Although the national government has explicitly sought to diminish the size of discretionary transfers, in 1992 they still represented about 8 % of total provincial revenues (compared with 19% in 1987) and remained vital revenue sources for many smaller provinces. National transfers financed on average 59% of total provincial spending in 1992, ranging from a high of 92% of total expenditures in the Province of La Rioja to a low of 50% in the Province of Buenos Aires. 1.9 The prevailing national coparticipaci6n law allocates 57% of the most important taxes collected to the provinces, such as the value-added tax, income and asset taxes, and excise and fuel taxes. In August 1993, a floor of US$745 million per month was established for these transfers. Distribution of  - 4 - coparticipaci6n revenues among provinces, codified by the coparticipacion law, favors sparsely populated, underdeveloped provinces at the expense of the more developed and densely populated provinces, the latter of which have a higher concentration of households with unsatisfied basic needs. 1.10 With regard to the impact of national/provincial transfers, a recent Bank study concluded that the regional redistribution of income probably has been excessive in Argentina.' Although data are not sufficient to evaluate the efficiency of provincial expenditure programs (e.g., education, health, and transport), there is enough evidence to suggest that serious inefficiencies exist regarding expenditure types, especially regarding salaries. Thus, the issue is not the level of provincial revenues but rather how efficiently these resources are allocated. D. Lessons Learned from Previous Bank Involvement 1.11 The principal lessons learned from PDP-I, the First Municipal Development Project (MDP-I, Ln. 2920-AR, US$120, FY88) and other Bank experience in lending for municipal development, include the importance of: (a) making the review of technical proposals and procurement documents more cost-effective; (b) contracting implementation specialists to assist the PEUs in subproject implementation; (c) continuing to improve the implementation capacity of the CEU and PEUs; and (d) developing a reasonable stock of fully prepared subprojects to facilitate project launch and overall execution. Overall, the process of subproject review by the CEU and PEUs in PDP-I has been quite satisfactory for those provinces participating actively in the project. The improvement of the provinces' capacity to identify, evaluate, procure, and supervise the completion of subprojects is an important accomplishment of PDP- I, although there is still much room for improvement, especially in those provinces that did not participate very actively in PDP-I. All of these lessons have been incorporated into the design of the implementation arrangements for PDP-II. (para. 2.21 to 2.35) E. Rationale for Bank Involvement 1.12 As stated in the current Country Assistance Strategy (CAS) report presently under discussion and the previous CAS (presented to the Board on March 1, 1994, Report P6161-AR), the Bank has been, and will remain, a strong supporter of the ambitious Argentine reform program. Extending fiscal and economic reforms to the provinces is now a vital element of this program, since the recent upsurge in the provinces' fiscal imbalances could endanger the Argentina: Reforms for Price Stability and Growth. Annex Chapter 11: Provincial Government Finance. 1990.  - 5 - country's macroeconomic stability. Furthermore, due to decentralization, the provinces now play an increasingly important role in the provision of key public goods and services. The Bank strategy for provincial government reform seeks to: (a) stabilize public finances and begin reforming provincial administrations, while providing for urgently needed investments which improve fiscal balance and are linked to sectoral reforms, and (b) improve the efficiency of delivering public goods and services through a series of proposed sector operations (e.g., education, public health, roads, water supply, and agriculture). PDP-I and PDP-II are umbrella operations covering all provinces and provide support for institutional strengthening and small investments aimed at improving their fiscal situations. In order to deepen the reform process, the Provincial Reform Loan (PRL, Ln. 3836, US$300 million, FY95) and most future sector operations will be targeted to support those provinces willing and able to implement major structural reforms. This selectivity would be fundamental for leveraging Bank resources to promote fiscal adjustment, while ensuring the success of these operations with adequate provincial counterpart financing. Under this strategy, the Bank would expect to be fully engaged in assisting five to seven of the provinces, while the remaining provinces would have access to PDP-I and PDP- II resources as a means to improve their overall fiscal performance, enabling them to become eligible for future Bank support. Thus, PDP-I and PDP-II are vital elements in the Bank's overall strategy as defined in the CAS. 1.13 PDP-II would also continue to complement other existing and proposed Bank operations in the provinces as in PDP-I by: (a) improving the overall institutional capacity of provincial governments, especially the ability to plan and execute institutional development and investment subprojects; (b) maintaining and further strengthening the Provincial Executing Units (PEUs); and (c) providing financial assistance for the preparation of other Bank operations, as well as for the evaluation of pilot subprojects in one or more provinces. PDP-II would complement PRL by providing additional incentives for improved fiscal performance and financing essential institutional development subprojects. However, PRL is an adjustment loan, and thus would not be an alternative window for PDP-I or PDP-II, both of which finance institutional development and discrete infrastructure investments. PDP-II would also complement MDP-I and MDP-II (Ln. 3860-AR, US$210 million, FY95) which seek to make municipalities more fiscally autonomous, thereby reducing pressures for provincial transfers. Transfers to municipal governments represent the second highest expenditure of provincial governments after personnel, and have more than doubled from US$1.4 billion in 1991 to US$2.9 billion in 1993. Thus, these municipal projects complement the main goal of the provincial operations (PRL and PDP-I and II), making provincial and municipal operations in Argentina parts of an integrated effort at strengthening subnational governments.  - 6 - 1.14 To maintain and continue the program of incentives for provincial fiscal reform initiated under PDP-I, the Argentine Republic wants to accelerate the implementation of PDP-II. This includes the financing of: (a) institutional development subprojects vital to the implementation of the Pacto Fiscal reforms and overall adjustment in the provinces; and (b) urgently needed infrastructure. PDP-I resources (both Bank and IDB) are not sufficient to finance institutional development and physical infrastructure subprojects (US$226 million) which the provinces already have included in their Financial Action and Investment Plans (FAIPs). Given this lack of resources, many provinces have not been able to implement subprojects already initiated in other provinces to improve fiscal performance (e.g., revenue administration, cadastres, financial administration).  - 7 - II. THE PROJECT A. Project Origins 2.1 The proposed operation would be the second of its kind in Argentina. It builds on the operational experience of PDP-I (Ln. 3280-AR) and would complement at the provincial level the fiscal objectives of MDP-I (Ln. 2920- AR) and MDP-II (Ln. 3860-AR). 2.2 The First Provincial Development Project has been widely accepted by Argentine provinces. From a total of 24 jurisdictions, only one (Santa Cruz) did not participate in PDP-I. In the Second Provincial Development Project all provinces would participate, as Santa Cruz has already submitted an initial agreement to be included in the program. The remaining 23 provinces not only have agreed to participate in PDP-II but are already preparing the necessary legal documents and have submitted subprojects costing US$85 million (26% of total project cost), which would be funded under the new project. This gives PDP-II a considerable advantage over PDP-I, since a stock of prepared subprojects did not exist when PDP-1 was formulated. B. Project Objectives 2.3 PDP-II's overall objective would be to continue to provide financial support and incentives for provinces to undertake their own public sector reform programs consistent with the national program. The specific objectives are to: (a) assist the provinces in implementing appropriate financial management reforms to: (i) generate current account surpluses (own-source revenue enhancement and expenditure control) that together with prudent borrowing may finance investment programs; and (ii) strengthen their capacity to plan, program, finance, execute, and monitor investment programs that are economically efficient, financially sustainable, institutionally manageable, and environmentally sound. (b) provide financing for institutional development and physical investments that will promote provincial economic development.  - 8 - C. Project Description 2.4 The proposed operation would continue to finance the preparation and implementation of Provincial Financial Action and Investrnent Plans (FAIPs), to be proposed by provinces and approved by the national government's Ministry of Interior and the Bank. 2.5 The project would finance a 'time-slice" of eligible provincial expenditures, including civil works, goods, and consultants. It would have the following main components: (a) Institutional Development: (approximately 35 % of total project cost) including technical assistance, training, and equipment to attain the project's objectives at both the national and provincial government levels (inter alia, improving systems for revenue administration, cadastres, integrated project evaluation, and overall financial management and control). At the national level, subprojects will include improving the coverage of the stock of provincial debt in the Provincial Financial Management Information System (PFMIS), training of provincial professional personnel in the identification, evaluation, preparation, and implementation of subprojects; and conducting studies on the desirability and feasibility of the privatization of provincial public entities (see para. 2.34 and Annex I for details). (b) Physical Investments: (approximately 57% of total project cost) with emphasis on maintenance programs, rehabilitation of existing works, and completion of unfinished works (as in PDP- I), but also encompassing public infrastructure and facilities (e.g., roads, drainage, water supply and sanitation, schools, health posts) not eligible for financing under other Bank sectoral projects. (c) Project Administration: (approximately 8 % of total project cost) for the recurrent costs of project implementation at the provincial level. These costs would not be financed under the loan. D. Eligibility Criteria 2.6 To implement the project's objectives in 23 provinces and the Municipality of Buenos Aires (hereafter, the "provinces"), each with unique demographic, economic, physical, and political characteristics, it is essential that the basic criteria necessary for effective implementation of project objectives be  -9- clear, easily determined, and fully accepted by all institutions involved in the project's implementation. Moreover, the eligibility criteria should ensure adequate incentives for improved provincial fiscal performance and financial management, especially modem budgeting and reporting systems. These basic criteria would be defined at two levels: (a) provincial eligibility; and (b) subproject eligibility. Provincial Eligibility Criteria 2.7 While all provinces would be potential candidates for the project, each participating province would have to meet the additional conditions of eligibility specified in the Project Operations Manual (POM--see para. 3.1(a) and Annex F). The POM would also provide detailed guidelines to the provinces for the preparation of their FAIPs. Each province's FAIP would determine if, and for what purposes, it would participate in the project. Approval by the CEU and the Bank of a province's FAIP would be required for any project support to the province. The FAIP would include the subproject's institutional arrangements (including the organization of the PEU) and a specific action plan for: (a) maintaining a current account surplus2; or (b) provincial revenue enhancement and/or expenditure reduction that would result in a current account surplus during the FAIP implementation period. 2.8 All provinces with an approved FAIP that have signed a subsidiary loan agreement would be eligible for institutional development subprojects. However, only those meeting the following additional financial performance criteria would be eligible for new physical investments or completion of unfinished works: (a) A current account surplus during the last executed budget period. (b) Total existing and proposed provincial debt must not result in a total debt service obligation (amortization, interest, and other financial charges) greater than 15% of total provincial current revenues (excluding discretionary grants). 2 Current account surplus/deficit is defined as CR - CE, where CR is Total Current Revenues excluding Discretionary Grants, and CE is Total Current Expenditures (See also Annex C).  - 10- Subproject Eligibility Criteria 2.9 The Government is implementing a significant decentralization of the public sector, with an increasing transfer of responsibilities from the national government to provincial governments. In this regard, the Government has requested Bank support in many sector-specific areas for which provinces would be the primary executing agencies. PDP-II should continue to be an "incubator" for sectoral projects by financing subprojects that would increase provincial capacity to identify, evaluate, and implement institutional development and physical investment subprojects. To serve as incubator and also provide overall incentives for provincial reform, PDP-II would finance subprojects in many sectors. Public investment subprojects would be potentially eligible provided that they are: (a) listed in the Project Operations Manual (POM) as eligible; (b) included in an approved FAIP; and (c) shown to be technically consistent, economically efficient, financially sustainable, and environmentally sound according to the criteria defined in the Manual. 2.10 To ensure proper coordination and policy consistency between the proposed operation and other sector-specific projects at the provincial level, the following definitions would apply and be agreed at negotiations for inclusion in the POM (para. 3.1 (j)): (a) When there exists an effective, sector-specific project with Bank financing (e.g., water, health, education, transport) with uncommitted funds for potentially eligible provinces, those provinces would not receive financing for that sector under the proposed project. (b) Procedures would be established to ensure consistency of investment subprojects with Bank sector strategies. (c) Financing would be provided only to provinces which have included all of their externally financed projects in an FAIP acceptable to the Secretariat for Assistance to the Provincial Economic Reform (SAREP) of the Ministry of the Interior and the Bank (para. 2.7). E. Project Costs 2.11 The total estimated project cost is US$321 million, of which US$225 million (approximately 70%) would be financed by the Bank. A summary of project costs is presented in Table 2.1.  - 11 - Table 2.1: Estimated Project Costs (US$ million, 1994) Foreign as % Component Local Foreign Total of Total of Total I. Institutional Development 76.8 36.5 113.3 32.2 35.3 Central Administration 8.8 4.2 13.0 32.3 4.1 Provinces 68.0 32.3 100.3 32.2 31.2 II. Physical Investments 96.4 85.3 181.7 46.9 56.6 Maintenance and Rehabilitation 62.7 62.9 125.6 50.1 39.1 New Works and Completion of 33.7 22.4 56.1 40.0 17.5 Unfinished Works m. Recurrent Administrative 26.0 0.0 26.0 0.0 8.1 Costs Total Project Costs 199.2 121.8 321.0 37.9 100.0 2.12 Project costs are expressed in US dollars due to the parity between the dollar and the peso. Since the proposed project would finance a "time-slice" of provincial investments, these cost estimates are projections based on the current subproject proposals for 26% of total project cost and PDP-I experience. As price and other contingencies are not pertinent for such projections, they have not been included. Project administration includes the recurrent costs of the PEUs in 24 provinces for 6 years (although they will not be eligible for financing). 2.13 For the total project, foreign exchange costs are estimated at US$121.8 million equivalent (37.9% of the total), of which approximately US$36.5 million is for institutional strengthening and US$85.3 million for public works. F. Allocation of Loan Proceeds by Province 2.14 PDP-II will continue to reward good performance with access to credit. However, without some initial allocation of loan funds among the provinces, a few very agile provinces might quickly commit the full amount of the loan. To avoid this problem and also provide more equitable access of all provinces to intemational assistance, loan funds will be allocated in two stages. In the first stage (lasting one year from the date of signing), 56% of the available funds would be assigned to each of the 24 provinces according to the quotas established in the distribution of revenue sharing from the national government to the provinces. The remaining 44% would go into a "pool". Provinces would have access to this pool on a first-come-first-served basis after they have fully  - 12 - committed the resources of their initial assignment, provided that they meet the other eligibility criteria. In the second stage, those funds not committed during stage one would revert to the fund pool, which, together with the initially unallocated funds, would be allocated on the basis of demand. Based on the above criteria, the initial allocation of loan proceeds would be as shown in Table 2.2 (See also Annex D).  - 13 - Table 2.2: Initial Allocation of the Bank Loan Among Provinces (US$, October 1994) IBRD Loan US$225 million Initial Assignment (56%) US$125 million a] Pool of Funds (44%) US$100 million Copartcipacion Irutial Distribution ' Assigmnent Provinces (Percent) (US$ '000) Total 100.00 125,000 Advanced 43.79 68,790 MCBA v 1.95 26.950 Buenos Aires 19.50 19,500 C6rdoba 9.02 9,020 Mendoza 4.24 4,240 Santa Fe 9.08 9,080 Intermediate 19.43 19,430 Entre Rfos 4.96 4,960 Salta 3.89 3.890 San Juan 3.43 3,430 San Luis 2.32 2,320 Tucumin 4.83 4,830 Low Density 8.88 8,880 Chubut 1.35 1,350 La Pampa 1.91 1,910 Neuquen 1.51 1.510 Rio Negro 2.56 2,560 Santa Cruz 1.35 1.350 Tierra del Fuego 0.20 200 Underdeveloped 27.90 27,900 Chaco 5.07 5.070 Catamarca 2.80 2,800 Comentes 3.78 3,780 Formosa 3.70 3,700 Jujuy 2.89 2,890 La Rioja 2.10 2.100 Misiones 3.36 3.360 Santiago del Estero 4.20 4,200 US$100,000 million are assigned based on coparticipation coefficients. b/ Based on National Revenue Sharing Distribution (Law 23548). C/ Initial assignment for the Municipality of Buenos Aires includes US$25 million for a flood protection subproject.  - 14 - 2.15 Although this initial allocation of available resources would take place irrespective of whether a province meets all of the eligibility criteria for new physical investments (para. 2.8), only those provinces meeting these criteria would be eligible for new physical investments or completion of unfinished works. G. Financing Plan 2.16 The total project cost of US$321 million equivalent would be financed according to the plan shown in Table 2.3. The proposed Bank loan of US$225 million equivalent would finance approximately 70% of total costs. The provincial governments would provide counterpart funding for a total of US$96 million equivalent, and assume the full cost of debt servicing, including the foreign exchange risk. Experience from PDP-I showed this plan to be fully satisfactory. The IDB may also finance a parallel operation as soon as its part of PDP-I is more fully disbursed. Table 2.3: Financing Plan Source Amount Percent (US$ million) IBRD 225 70 Provinces 96 30 Total 321 100 2.17 The aggregate level of external financing (70%) is justified because of: (a) the need to provide strong incentives to improve financial management performance to meet the project's objectives; (b) the strong long-term institutional development impact the project is expected to promote; and (c) the limited domestic financing alternatives. 2.18 The loan would be made at the Bank's standard variable rate, with repayment in 15 years, including a grace period of 5 years of grace with level repayments of principal. 2.19 All proceeds of the Bank loan would be onlent to provincial governments eligible under this loan with the same terms and conditions as Bank lending to the Argentine Republic (para. 2.18). Provinces would assume the cross- currency risk and would guarantee repayment with their shared funds (para. 3.1(d)). In addition, each province would pay a charge of up to 2% of the disbursed loan amount for recovery of the entire administrative cost of a  - 15 - financial intermediary and the cost of CEU consultants to ensure that provincial project components would not result in a fiscal burden for the national government. As the provinces are paying for the CEU, and depend on it for the review of their subprojects, they have a strong incentive to ensure that it is cost- effective, and have actively pursued this goal in PDP-I. The execution of Subsidiary Loan Agreements with one or more provinces, representing an initial allocation of loan proceeds equivalent to not less than 4% of the amount of the Bank's loan, would be a condition of effectiveness (para. 3.2(b)). Other conditions of effectiveness would be that the province(s) referred to in the preceding sentence have taken all actions necessary to (i) exempt all contracts for goods, works and services to be financed under the loan from all legal and regulatory provisions limiting the international procurement of goods, works, and services; and (ii) establish, provide funds and other resources for, and staff the PEU of each province in terms satisfactory to the Bank (para. 3.2(c)). Each participating province would pay loan commitment fees as defined in the POM. 2.20 The following would be conditions of disbursement for all participating provinces (para. 3.3): (a) establishment and adequate staffing of the PEU (see also para. 2.25); (b) execution of a satisfactory Subsidiary Loan Agreement; (c) exemption of all contracts for goods, works and services to be financed under the loan from all legal and regulatory provisions limiting the international procurement of goods, works, and services; (d) approval of the subproject by the Borrower through the CEU, as provided in the POM; (e) inclusion of the subproject in an FAIP that has been approved by the Bank as provided for in the POM; (f) that no financing for a subproject is available to the province under another signed Bank-financed sector-specific loan; (g) that the Bank has received a satisfactory plan of action to remedy any irregularities or deficiencies noted by any audit report; (h) satisfactory legal opinion on the validity of the Subsidiary Loan Agreement.  - 16 - H. Implementation Arrangements 2.21 Implementation arrangements would remain essentially the same as PDP- I, except for changes to incorporate lessons of experience and to better manage risk (para. 2.33 to 2.35). 2.22 The borrower would be the Argentine Republic, and its Ministry of Economy, through SAREP. The Central Executing Unit (CEU) would remain located in SAREP, and would be the national executing agency. The CEU would retain its responsibility for overall project management, including orientation and technical assistance to the provinces (directly and through the POM) in the preparation, approval, and monitoring of FAIPs, as well as for all financial and reporting transactions with the Bank. The CEU would also retain its responsibility for all aspects concerning subproject evaluation, approval, and procurement (para. 2.35), as well as reporting and obtaining Bank approval of acquisitions and disbursements. The CEU would also continue to provide proper coordination and policy consistency between the proposed operation and other sector-specific projects proposed by the provinces (see Annex H for a detailed description of the CEU's organization, human resources, and responsibilities). 2.23 The CEU would continue to be subordinated to SAREP, and its Secretary would be the CEU's General Coordinator. The General Coordinator would be assisted by an Executive Coordinator, who will be fully dedicated to project implementation. The General Coordinator would discuss all relevant project aspects with the Credit Committee, which would be comprised of three provincial ministers of finance, as in PDP-I. 2.24 The CEU would implement the national government's component of the project, and also review subprojects. As the organizational structure of the CEU under PDP-I has proved to serve adequately the functions described above, the same general structure would be maintained for PDP-I1--although there would be some fine-tuning to increase cost-effectiveness. 2.25 The PEUs would be responsible for formulation, implementation, and supervision of their FAIPs. Actual execution of physical investments would be undertaken by provincial government agencies according to procedures established in the POM (para. 3.1(a) and Annex F). As the objectives and implementation procedures of the provincial subprojects are the same as in PDP- I, the overall structure of the PEUs would remain unchanged (see para. 2.20 (a) and Annex H for PEU's organization and staffing). They would be subordinated to the provincial Ministers of Finance who would also serve as the PEU General Coordinators. They would be assisted by a full-time Executive Committee in the formulation and implementation of FAIPs. The General  - 17 - Coordinator would provide the necessary political, technical, and administrative support for the implementation of the project. 2.26 The PEUs would perform the following key functions: (a) promotion of provincial institutional development; (b) proposal, evaluation, and monitoring of financial reforms and investment programs (including environmental screening and analysis); and (c) administrative control (including Bank reporting requirements). 2.27 There are important distinctions between the CEU and PEUs regarding their objectives and functions. The PEUs would have a permanent function within provincial governments, providing improved planning, budgeting, and supervision of financial management for the provinces as an overall institution. Furthermore, the PEUs would continue to provide support for preparation and implementation of projects for the Bank and other lenders. Therefore, the project would seek to strengthen PEUs as part of the project's objectives to implement provincial financial management reforms and to strengthen financial management capacity. Although the CEU would have some permanent functions (e.g., information system for monitoring provincial financial management performance), most of the short-term functions of the CEU's operation would be transitory, lasting only as long as the project. As in PDP-1, the CEU would contract with other entities to review specific types of technical proposals requiring specialized expertise. For example, in PDP-I, the CEU contracted with the national tax collection service to review the proposals for provincial tax collection systems for the 2,000 largest taxpayers which was adopted by 15 provinces, since it was this entity that had adapted the provincial system from one implemented at the national level. 2.28 Under PDP-I, the provinces have preferred to keep the size of their permanent staffs relatively small (usually less than 10) and to use other entities of the provincial government or short-term consultants to perform some of the more specialized tasks. For example, a well coordinated province could use the technical support of existing ministries (e.g., environment or public works) to carry out many of the functions, leaving only basic core functions with the PEU. Each province would submit an organizational structure to the CEU for its approval. In cases in which consultants would have to be contracted, Bank review and approval would also be necessary (see para. 2.27, 2.31, 19, Annex H). 2.29 Adequate Bank supervision of the proposed project would require review of all provincial FAIPs. These FAIPs would include investment proposals in many sectors, and their adequate review would entail evaluation of their consistency with general and sectoral development policies in discussion with or agreed to by the Bank. Efforts would be made to decentralize project  - 18 - supervision as much as possible by using consultants in Argentina to review technical proposals and procurement documents when feasible. The project's supervision plan is summarized in Annex G. 2.30 Successful implementation of project objectives also will require intense monitoring of actual performance by both the CEU and the Bank. To facilitate this supervision, the CEU will prepare and furnish to the Bank a progress report on project execution of such scope and detail as the Bank shall reasonably request not later than March 31 and September 30 of each year (para. 3.1(c)). The terms of reference for a revised format of these reports will be discussed at negotiations. The Government already has made substantial progress in implementing its Provincial Financial Management Information System (PFMIS), and it would continue to monitor provincial financial performance and to evaluate compliance with FAIP agreements on a quarterly basis, as in PDP-I. The Information System would be expanded to permit adequate monitoring of provincial indebtedness. The Bank would also monitor the implementation of the FAIPs through its supervision missions. In addition, the Government and the Bank have agreed to exchange views annually on the status of project implementation, particularly regarding (a) the CEU and PEUs performance in project implementation procedures agreed with the Bank, and (b) adjustments in the POM that may be required to improve implementation of project objectives (para. 3.1(e)). 2.31 The Central Executing Unit (CEU) recommended the following strategy for ensuring adequate environrmental management and analysis by the provinces, based on its preliminary survey of the provinces' capacities and "felt needs." The environmental analysis of eligible subprojects would continue to be done as specified in the POM in accordance with Bank procedures. As part of their FAIPs, provinces would be required to indicate: (a) the nature and extent of the environmental analysis that would be conducted; (b) the provincial entity responsible for such analysis (e.g., ministry, secretariat, PEU, etc.); and (c) the technical capacity of such a provincial entity. If this capacity is not fully adequate, the province could be required to include as part of its FAIP a subproject aimed at strengthening the enviromnental analysis capacity of the designated provincial entity. The CEU would continue to evaluate the environmental management and analytical capacity of the provincial entities responsible for analyzing the environmental impact of eligible subprojects. The CEU would also continue to be responsible for supervising the environmental analysis of subprojects submitted by the provinces, either using in-house expertise or contracting consultants as required. 2.32 The POM would provide specific criteria for determining the type of environmental analyses required. Only, those subprojects with considerable environmental impact, as specified in the POM, would undergo detailed  - 19 - environmental impact analysis, for which Terms of Reference (TORs) would be prepared by the PEU and approved by the CEU. The CEU would supervise the execution of these studies and approve their conclusions. The CEU would also ensure that all measures leading to mitigation of the environmental impact recommended by these studies are adequately incorporated in the subprojects. Individual consultants or consulting firms could be hired as needed to conduct these environmental studies (para. 3.1(i)). 2.33 Several lessons of experience from PDP-I, MDP-I, and other Bank experience in lending for municipal development (see para. 1.11 and Annex A for details) would be incorporated to streamline project execution. To increase the cost-effectiveness of review of technical proposals and procurement documents, thresholds for prior review by the CEU and the Bank will be carefully reviewed in the development of the POM so as to balance cost with risk. In addition, procedures for review of procurement documents will be streamlined, and all provinces will be required to use printed and bound standard procurement documents approved by the Bank (para. 2.36), copies of which will be included in the POM. To improve subproject management, the POM will require that all subprojects present a timetable for all main stages of subproject execution in a specified format. These timetables are expected to provide the subproject tracking system developed in PDP-I with more reliable information, thereby permitting more adequate projections needed to plan subproject review by the CEU. A significant stock of subprojects (26% of the total amount of the loan) has already been identified. Contracting implementation specialists to assist the PEUs in subproject implementation will be facilitated by expanding and updating the consultant roster developed in PDP- I. 2.34 In addition, the CEU will design the following subprojects to improve its implementation capacity and that of the PEUs (for short descriptions, see Annex I). TORs have been prepared for each of these subprojects and were discussed at negotiations. One such subproject will involve improving the coverage on the stock of provincial debt in PFMIS, not only for macroeconomic management but also for the calculation of creditworthiness (para. 2.8) and project performance indicators (See Annex G). Another subproject will involve training of both national government and provincial professional personnel in the identification, evaluation, preparation, and implementation of subprojects with special emphasis on areas shown to need improvement in PDP-I (e.g., tracking performance in meeting implementation schedules and cost estimation). Bank approval of the technical proposal for a subproject to provide project management training to provincial professional personnel will be a condition of effectiveness (para. 3.2(d)). This training will cover the following topics: project identification, evaluation, preparation (including costing), implementation, and monitoring.  - 20 - 2.35 These centrally managed subprojects normally would be financed in the same way as the CEU, i.e., by the provinces. In addition, the CEU may submit other subproject proposals for approval by the Bank for institutional development subprojects benefitting all or the majority of the provinces. For example, PDP-I financed the policy work for the reform of the provincial tax and pension systems and the preparation of PDP-II. The POM will specify the procedures for identifying, screening, approving, and executing these subprojects, including cost-sharing among the provinces. I. Procurement 2.36 Procurement would be undertaken by the CEU and up to 24 provinces. International Competitive Bidding (ICB) would use the Bank issued Standard Bidding Documents for the procurement of works and goods, and Local Competitive Bidding (LCB) would be based on agreed standard bidding documents for the procurement of works and goods. For complex, time-based assignments, the standard form contract issued by the Bank would be used. All of these documents would be included in the POM, and approval of the POM by the Borrower in terms satisfactory to the Bank would be a condition of effectiveness (para. 3.2(e)). In addition, for large or complex works above US$10.0 million, such as cadastre works, prequalification of the bidders would be a requirement. 2.37 Contracts for civil works expected to cost US$5 million or more (to account for approximately US$91.2 million, or 28% of total project costs) and for goods expected to cost US$350,000 or more (to account for approximately US$25.8 million, or 8% of total project costs) would be awarded on the basis of ICB procedures in accordance with Bank guidelines. Contracts for works expected to cost US$350,000 or more, but less than US$5 million (to account for approximately US$73.4 million, or 23 % of total project costs), and contracts for goods expected to cost more than US$100,000, but less than US$350,000 (approximately US$30.6 million, or 10% of total project costs), would be awarded on the basis of LCB procedures acceptable to the Bank. Procurement for works costing less that US$350,000 (approximately US$5.2 million, or 2% of total project costs) and goods costing less that US$100,000 (approximately US$3.2 million, or 1% of total project costs) would be carried out through international or local shopping involving at least three price quotations. Consultant services, expected to cost approximately US$60.6 million, or 19% of total project costs, would be procured in accordance with Bank's Guidelines for the use of Consultants by the World Bank Borrowers. Training expenditures would be approximately US$5 million or 2% of the total project costs. These arrangements are summarized in Table 2.4.  - 21 - Table 2.4: Procurement Method by Category (US$ million, October 1994) Category Procurement Method' N.B.F Total Cost ICB LCB Other bI Civil Works 91.2 73.4 5.2 --- 169.8 (62.2) (49.9) (3.5) --- (115.6) Goods 25.8 30.6 3.2 --- 59.6 (20.8) (20.7) (2.3) --- (43.8) Consulting Services Central Administration --- --- 10.0 --- 10.0 --- -- (10.0) --- (10.0) Provinces --- --- 50.6 --- 50.6 --- --- (50.6) --- (50.6) Training --- --- 5.0 --- 5.0 (5.0) --- (5.0) Recurrent Administrative Costs --- --- --- 26.0 26.0 --- --- (0.0) (0.0) Total Project Cost 117.0 104.0 74.0 26.0 321.0 Bank Total (83.0) (70.6) (71.4) (0.0) (225.0) &' Figures in parentheses are the respective amounts financed by the Bank. b/International and local shopping, hiring of consultants in accordance with Bank guidelines. CN Not Bank financed. 2.38 It is expected that rehabilitation, completion of works, and new investments would be undertaken through contracts with private firms, in accordance with Bank guidelines. To ensure that the agreed procurement procedures are properly carried out, the CEU and the Bank would review ex- ante all procurement procedures, documents, bid evaluations and contract awards for ICB procurement of goods and works during the entire project implementation period. In addition, the CEU would review ex-ante the procedures for all other procurement of goods, works and consulting services in each province. The Bank would review ex-ante all terms of reference for consulting assignments (regardless of their estimated cost), as well as all single- source contracts and consultancies of a critical nature. However, the Bank would review ex-ante only the TORs of those contracts: in which (i) individual consultants are hired on a competitive basis for amounts less than US$50,000 or (ii) consulting firms are hired on a competitive basis for amounts less than US$100,000. In all other cases (including all single-source contracts and consultancies of a critical nature), the Bank would review ex-ante all documents of each contract. Prior Bank and CEU review of procurement procedures of work, goods and consulting services is summarized in Table 2.5. Following the  - 22 - procedures defined in this table, the Bank would review e.x-ante about 64% of the total cost of all procurement done under the project. 2.39 In all cases, however, the Bank would review contracts awarded under LCB, international and local shopping procedures, and consultant selections on an ex-post basis by sampling. If it were determined that procurement was not carried out following agreed procedures, no expenditures for such items would be financed from the proceeds of the loan, the Bank would cancel the corresponding loan amount, and the Special Account would be reimbursed accordingly by the Borrower. This effort should not only streamline project execution but also reduce the Bank's supervision burden. However, if a particular province fails to comply with the agreed procedures, they could be required to return to ex-ante review. 2.40 The capacity of the CEU and PEUs for effective implementation review of procurement documents has improved greatly during the execution of PDP-I, and there is now a strong core of professionals in the CEU. The experience of PDP-I showed procurement procedures to be antiquated and cumbersome in most provinces. To help the provinces modernize and streamline their procurement procedures and laws, PDP-II will finance studies to identify the chief sources of delay in the procurement process and efforts to adopt measures to reduce them. Table 2.5: Summary of Procurement Review Procedures Category Procedure Prior CEU Prior Bank I I Review Review Works Less than US$350,000 Shopping All N.A US$350,000-US$5 million LCB All IS two/year US$5 million or more ICB All All Goods Less than US$100,000 Shopping All N.A. US$100,000-US$350,000 LCB All 1St two/year US$350,000 or more ICB All All Consulting Services a) Individual Less than US$50,000 Contract All Only TORs US$50,000 or more Contract All All b) Firms Less than US$100,000 Contract All Only TORs US$100,000 or more All All Training All N.A.  - 23 - J. Disbursements 2.41 The POM will specify that the CEU would continue to monitor financing over the life of the project to assure that overall 70:30 Bank-provincial financing is maintained as in PDP-I. As part of its annual project implementation review, the Bank would evaluate its participation in total project financing. 2.42 To withdraw the proceeds of the proposed Bank loan, the following categories and disbursement percentages are proposed: (a) 100% of total expenditures for consultant services, training, and audits, including travel expenses related to these services; (b) 100% of foreign expenditures for works and goods under all categories; and (c) 75% of local expenditures for works and goods purchased locally. 2.43 A Special Account in US dollars, and with an authorized allocation of US$7 million, would be established in the Banco de la Naci6n Argentina. An initial deposit of up to US$3.5 million will be made and the full amount of the authorized allocation will be released when disbursements reach a level of US$25 million. The Special Account would be managed by the CEU. All disbursements against contracts for less than US$5 million for works, for less than US$350,000 for goods and services, for less than US$100,000 for consultant firms, and for less than US$50,000 for individual consultants, and for all training expenditures would be made on the basis of certified Statements of Expenditure (SOEs). The documentation for SOEs would not be sent to the Bank but would be retained by the CEU and made available for inspection by Bank staff. All other disbursements would be made against standard documentation. 2.44 Retroactive financing for expenditures incurred after August 26, 1994 (but not earlier than 12 months before loan signing) in an amount not to exceed US$20.0 million (9% of the Loan amount) is recommended. 2.45 Formal agreement by the national government and a participating province for implementation of the province's FAIP would be made through a Subsidiary Loan Agreement, satisfactory to the Bank. The FAIP would include specific subprojects that would be potentially eligible for project financing. However, at the time of FAIP approval and the signing of the Subsidiary Loan Agreement, detailed appraisal of each subproject may not be completed and approved. Therefore, each subproject would have specific Bank approval (based  - 24 - on its full technical, economic, financial, and environmental appraisal) before it would be eligible for disbursements from the Loan Account. 2.46 Based on experience from PDP-I, a disbursement period of six years is proposed (see Annex J), the same as the regional disbursement profile. The expected completion date would be December 31, 2001, and the closing date would be June 30, 2002. The time required to commit and disburse the loan will depend on the provinces' financial capacity to provide counterpart funding and institutional capacity to propose, appraise, and execute subprojects that are economically efficient, financially sustainable, and environmentally sound. Counterpart funds should not pose a problem since the proposed project's financing for real investments by the provinces would represent Bank financing for only about 1 % of the total real investment program of the provinces for six years (assuming 1993 investment levels--see also Annex C). Rather, the key to implementation success and timely disbursements would depend on the institutional capacity to design, implement, and supervise investments which are consistent with Bank guidelines. Especially important in this regard is the supervision of the CEU to assure that the provinces follow the procedures established in the POM. 2.47 Regarding provincial institutional capacity to generate timely disbursements, approximately 36% (US$66.1 million) of total physical investments (US$181.7 million) are expected to be allocated for provincial maintenance programs and rehabilitation investments implemented under LCB procedures. These would have less demanding appraisal requirements than larger, new investments. It may be expected, therefore, that relatively small maintenance and rehabilitation investments may be implemented quickly while larger subprojects are still under preparation. Based on a six-year disbursement profile, and assuming that the loan would become effective on June 15, 1995, the project's completion date would be December 31, 2001, and the proposed closing date June 30, 2002. If the project were executed more rapidly than the six-year profile, the shorter execution period would increase the benefits of the project, and indicate that the provinces have the potential to mobilize more resources for investments efficiently. K. Accounts and Audits 2.48 An audit of the financial status of the program would take place once a year for the CEU components and for each participant province. The audit would be carried out by an independent auditor acceptable to the Bank, under TORs similiar to those used in PDP-I. The audit reports would be sent to the Bank not more than four months after the end of the calendar year. The report would include, inter alia, specific opinions on: (a) sources of proceeds and their use; (b) SOEs; and (c) implementation of contracting clauses, including the  - 25 - application of eligibility criteria, and compliance with procurement procedures and other financing conditions included in the POM (para. 3. l(h)). The Special Account would also be similiarly audited. L. Project Benefits 2.49 There are four main benefits: (a) fiscal, by maintaining incentives for provincial fiscal reform initiated under PDP-I and financing institutional development subprojects that are vital for overall provincial adjustment; (b) financial, by improving provincial creditworthiness; (c) institutional, by enhancing the capacity of provinces to plan, program, implement, and monitor efficiently resource mobilization and allocation; and (d) socio-economic, by improving infrastructure and service delivery. In summary, the project would contribute to the Government's overall macroeconomic goals of efficiency, equity, and stability, since it would improve the efficiency of the increasingly important provincial public sector. M. Financial Impact 2.50 Beneficial financial impacts are at the very core of the project's objectives. By conditioning access to project financing on strict creditworthiness criteria, the project would provide an incentive for improved provincial financial performance. The institutional development subproject will provide an effective means for the provinces to respond to this incentive. N. Economic Impact 2.51 The internal economic rate of return (IERR) for the project's investment components was estimated based on the estimated rates of return for five approved PDP-I subprojects and on estimates for a preliminary sample of 18 subprojects proposed for PDP-II (Annex E). The results show an economic rate of return of 20. 1 % for approximately 38% of the total project cost represented in the PDP-II sample. 0. Poverty Impact 2.52 Successful implementation of the proposed project would have the following social benefits: (a) employment generation in the construction sector and (b) improved physical and social infrastructure. Using the estimate of 30% as the cost of labor in the total cost of civil works (US$169.8 million) and the average monthly wage of construction workers at roughly US$200 equivalent, project implementation would generate about 21,000 person-years of construction employment. The physical rehabilitation of provincial hospitals  - 26 - and schools, which was in great demand in PDP-I and is expected to continue in PDP-II, would benefit mostly lower-income segments of the population. P. Environmental Impact 2.53 The proposed project is classified as category B. For most subprojects, the environmental impact is expected to be neutral or positive which is due to the fact that a large proportion would either be maintenance and rehabilitation or completion of existing or unfinished works. However, regardless of their nature, all investments would need to comply fully and be consistent with Bank environmental policies and conditions, including the preparation of environmental impact statements when required. Explicit conditions would be defined in the POM. Q. Program Risks and Safeguards 2.54 The experience gained in risk management during the first project should prove quite useful in the second operation. The risks identified in the previous project were: lack of interest by the provinces in carrying out the required fiscal reforms, discontinuity in political commitment to the project, unfavorable macroeconomic conditions during its execution (including significant increases in national/provincial transfers), and implementation delays. The safeguard against these risks is a competitive system of access to loan resources based on performance. Those provinces that enter earlier and perform better (i.e., develop the institutions and generate current account surpluses) would receive more resources. This safeguard proved effective in the project under implementation. In addition, steps taken to further strengthen the CEU and PEUs to incorporate the lessons of experience of PDP-I in the design of implementation arrangements of PDP-II should reduce the likelihood of implementation delays. Also, subprojects representing 26% of the total loan amount have been prepared. Although program risks are similar to the ones in PDP-I, the institutional and macroeconomic environment for PDP-II is more favorable.  - 27 - III. AGREEMENTS REACHED AND RECOMMENDATION 3.1 - During negotiations, the following agreements were reached: (a) the project would be implemented accordance with the Project Operations Manual (POM), satisfactory to the Bank, which would not be amended without the Bank's prior consent (para. 2.7, 2.25); (b) the Central Execution Unit (CEU) would continue to be adequately staffed and otherwise supported in the implementation of its responsibility under the project (para. 2.22); (c) the CEU will prepare and furnish to the Bank a progress report on project execution of such scope and detail as the Bank shall reasonably request not later than March 31 and September 30 of each year (para. 2.30). (d) all proceeds of the Bank loan would be onlent to eligible provinces under the same terms and conditions as the Bank loan, with each participating province's revenue sharing serving as a guarantee for repayment of subloans (para. 2.19); (e) the national government and the Bank would exchange views annually on the status of project implementation (para. 2.30); (f) procurement would be carried out in accordance with Bank guidelines (para. 2.37-2.40); (g) the national government would open and maintain, in US dollars, a Special Account (para. 2.43); (h) audit arrangements acceptable to the Bank (para. 2.48); (i) the CEU and PEUs would carry out environmental analysis studies, as specified in the POM, in a manner consistent with the Bank's environmental policies and procedures (para. 2.32); and (j) the national government would provide proper coordination and policy consistency between the proposed operation and other sector-specific projects proposed by the provinces, as defined in the POM (para. 2.10).  - 28 - 3.2 The following would be Conditions of Effectiveness: (a) the establishment and adequate staffing (including civil servants and consultants) of the PEUs in the provinces referred to in 3.2(b) below (para. 2.22, 2.25); (b) the execution of Subsidiary Loan Agreements with one or more provinces, representing an initial allocation of loan proceeds equivalent to not less than 4% of the amount of the Bank's loan (para. 2.19); (c) that the province(s) referred to in para. 3.2(b) have taken all actions necessary to (i) exempt all contracts for goods, works and services to be financed under the loan from all legal and regulatory provisions limiting the international procurement of goods, works, and services; and (ii) establish, provide funds, and other resources for, and staff, the PEU of each province on terms satisfactory to the Bank (para. 2.19, 3.2(b)). (d) approval by the Bank of the technical proposal for the subproject to provide subproject management training will be a condition of effectiveness (para. 2.34). (e) approval of the POM by the Borrower in terms satisfactory to the Bank (para. 2.36); and 3.3 Conditions of Disbursement with respect to each province would be (para. 2.20): (a) establishment and adequate staffing of the PEU; (b) execution of a satisfactory Subsidiary Loan Agreement; (c) exemption of all contracts for goods, works and services to be financed under the loan from all legal and regulatory provisions limiting the international procurement of goods, works, and services; (d) approval of the subproject by the Borrower through the CEU, as provided in the POM; (e) inclusion of the subproject in an FAIP that has been approved by the Bank as provided in the POM; (f) that no financing for a subproject is available to the province under another signed Bank-financed sector-specific loan;  - 29 - (g) the Bank has received a satisfactory plan of action to remedy any irregularities or deficiencies noted by any audit report; and (h) satisfactory legal opinion on the validity of the Subsidiary Loan Agreement. 3.4 Reconunendation. With the above assurances and conditions, the proposed project would be suitable for a Bank loan of US$225 million equivalent, to be repaid over a period of 15 years, including a grace period of 5 years of grace with level repayments of principal, at the Bank's standard variable interest rate and fees. Retroactive financing for expenditures incurred after August 26, 1994 (but not earlier than 12 months before loan signing) in an amount not to exceed US$20.0 million (9% of the Loan amount) is recommended.  ANNEXES  - 31 - Annex A LESSONS LEARNED AND PREVIOUS BANK EXPERIENCE IN THE SECTOR 1. This annex draws on the lessons of the First Provincial Development Project (PDP-I, Ln. 3280-AR) and the First Municipal Development Project (MDP-I, Ln. 2920-AR), as well as the Bank-wide municipal development and technical assistance projects. Brief Description of the Subprojects Financed by PDP-I 2. Including subprojects financed by both the IDB and the Bank, the total cost of Institutional Development subprojects under PDP-I is US$257 million (44.7%), compared with US$318 million (55.3%) for physical investments. Of the total amount of the Institutional Development component, slightly over half (54.1%) went to the cadastre subprojects in 18 of the 23 provinces to improve returns from the real estate tax (Table 1). The estimated internal financial rate of return for cadastre subprojects is 72.3% (Table 3). In addition, the PDP-I is financing other revenue administration subprojects in 16 provinces, including the provinces' adaptation of the national tax administration's successful system for the 2,000 largest taxpayers (Table 2). These tax administration subprojects, together with provincial tax policy papers, also financed by PDP-I, provided the basis for the modernization of the provincial tax system under the Pacto Fiscal of August 1993, which is now being implemented in all but one of the provinces. In addition, PDP-1 financed the development of guidelines for provincial financial management reform reflecting recent national legislative initiatives. Subprojects to implement these reforms are currently being formulated or executed in eight provinces (four under execution). No new major physical works have been financed by PDP-I, since the main emphasis has been on rehabilitation and the maintenance of roads, schools, health facilities, drainage, and irrigation. Lessons from PDP-I and MDP-I 3. The implementation of PDP-I and MDP-I in Argentina has yielded many valuable lessons of experience. 4. The Country Department's Infrastructure Strategy Note (1994) analyzes managerial and technical weaknesses of executing agencies for all Bank projects with the provinces in developing its portfolio management strategy. These weaknesses are reflected in: (a) loan covenant noncompliance, especially those related to audit reporting; (b) procurement delays; and consequently, (c) disbursement delays. 5. With respect to audits, PDP-I has been in full compliance from the beginning, principally because one private auditing firm was contracted to audit all accounts of the CEU and the PEUs. Procurement delays have recurred more  - 32 - Annex A often in PDP-I than in other projects because of the large number of sub- borrowers, as well as the administrative problems encountered by the CEU in ensuring acceptable quality of bidding documents and adherence to Bank procedures. Lastly, disbursement delays can be attributed generally to the fact that under PDP-I insufficient preparatory work was done by the time of effectiveness to ensure a sufficient number of subprojects for financing. The Bank has also underestimated both the difficulties that the subborrowers (provinces in PDP-I) would have in meeting eligibility criteria and the time required to take actions that would enable them to be eligible for Bank loans. Lessons from Other Bank Municipal Development and Technical Assistance Projects 6. The proposed project will benefit from the many lessons learned over more than a decade of Bank experience with municipal development, both in the LAC region and worldwide. From the earliest Bank-financed municipal development projects,' the Operations Evaluation Department (OED) found that strong national government commitment to the principles of financially sound municipal development and to ongoing reforms is essential for project success. Intensive supervision during project start-up and throughout project implementation was also found to increase the likelihood of success. 7. From the Parana Market Towns Project (Brazil) (Ln. 2343-BR), the OED identified several key factors contributing to project success, including: (a) local government support for the operation; (b) small subprojects of relatively simple design, for which local communities themselves had expressed a desire; (c) a competent, motivated team in charge of project management at the local level; and (d) risk management by simultaneous initiation of subprojects in a number of towns, thus reducing the overall average risk of delayed project execution, plus providing additional political support. 8. The ongoing Municipal Development Projects in Parari and Rio Grande do Sul States (Brazil) (Ln. 3100-BR and Ln. 3129-BR, respectively) have shown I Jordan: Cities and Villages Development Bank Project (Ln. 1826-JO), approved in 1981, and Jordan: Second Cities and Villages Development Bank Project (Ln. 2614- JO), approved in 1985. 2 Operations Evaluation Department, Annual Review of EvaluaIion Results. World Bank: Washington, DC. 1991.  - 33 - Annex A that eligibility criteria (such as the preparation of detailed financial anid institutional action plans) for participation in municipal development projects should be clear and not excessively rigid. Clear and flexible eligibility criteria foster increased participation and, at the same time, prevent delays in project start-up and disbursements. 9. With regard to Technical Assistance projects, experience indicates that: (a) projects should be limited in scope to permit adequate preparation, focused implementation, and effective supervision; (b) borrower commitment is essential to develop a sense of ownership of project activities in affected institutions to foster effective implementation; (c) provision for greater continuity in project management is necessary; and (d) terms of reference for consultants and studies should be spelled out prior to negotiation. The Strategy 10. The following are the elements of a strategy that was derived from the lessons of experience from PDP-I and MDP-I in Argentina, as well as other Bank municipal development and technical assistance projects. This strategy would improve the agility of project execution, reduce the Bank's burden of supervision, and better manage risks by: (a) Making the review of subproject technical proposals and procurement documents more cost-effective by: (i) Restricting the range of eligible subprojects to sectors with fully defined processing procedures (especially eligibility criteria). Nevertheless, the CEU would be able to request the Bank's approval for inclusion of subprojects that it considers of high priority for attainment of the project's objectives, but for which processing procedures have not been fully defined. (ii) Standardizing as much as possible procurement documents and procedures, as well as all other procedures. (iii) Raising the thresholds for ex-ante review as high as feasible. Use a systematic review of carefully selected samples as a way to monitor the quality of subprojects below the thresholds. (iv) Contracting out as much as feasible CEU review functions to private finns and other entities, as was successfully  - 34 - Annex A carried out with auditing under PDP-I.3 For example, review of the FAIPs, technical proposals for subprojects, and procurement documents could be contracted out. While it is feasible to delegate the supervision of works to consultants paid under Bank loans, it would be crucial that Bank staff focus closely on Technical Assistance components in support of the project's development objectives. (v) increasing the efficiency and transparency of the procurement process in the provinces is particularly important, since slow and cumbersome procurement procedures have many times been major impediments to project implementation in the provinces. (b) Contracting by a retainer of unspecified length (e.g., indefinite quantity contracts) implementation specialists (charged back to the provinces using their services) to assist the PEUs in subproject implementation. This would speed the contracting of these specialists and would also reduce the Bank's burden of reviewing hundreds of individual consultant contracts. (c) Continuing to improve the capacity of the CEU and PEUs to comply with Bank procedures by: (i) Establishing a training program on subproject identification, evaluation, preparation, and implementation for national government and provincial staff. (ii) Reinforcing subproject management "culture" and capacity in the CEU and PEUs. In this type of project, project management at the national level consists of managing subproject portfolios that are, in turn, being managed by the PEUs. Subproject management software that shows where subprojects are in the project execution cycle compared with where they "should be" is essential. 3 For several decades, this has been an established practice with Chile's Ministry of Public Works where the cost of supervising road works has been financed under the Bank's successive road projects. These consultants report to the Ministry and supervise all works under the Ministry's jurisdiction. As far as Bank loans are concerned, consultants prepare quarterly reports, participate actively in discussions during supervision missions, and also draft aide-memoires. The consultant firn is contracted for a designated period, with the Ministry renewing contracts with the same firm to ensure continuity. Supervision by the Ministry can be supplemented through annual on- site inspections by Bank staff. This practice has contributed significantly to the reduction of Bank staff inputs in supervising Chile's highway projects.  - 35 - Annex A (d) Preparing a substantial stock of technical proposals and bidding documents for subprojects before effectiveness to avoid delays in project execution.  - 36- Annex A Table 1 Institutional Development Subprojects Cadastre Subprojects Funded Under PDP-I (US$'000, 1994) Total Cost of Institutional Development Subprojects = 257,025.00 Total Cost of Cadastre Subprojects = 138,771.20 Cadastre Subprojects as % of Total Project Cost = 53.99% Avg. IRR for Cadastre Subprojects = 72.29%' Provinces Execution State | Project Area Project Scope Subproject Executed In Total Partial Urban rban Rural Cost Total 138771.2 Buenos Aires X X X 21576 Catamarca X X X X 1,114.6 Chaco X X X 1,172.8 Chubut X X X X X 5,048.2 Cordoba X X X X X 25,726.9 Corrientes X X X X X 5,849.4 Entre Rios X X X X 12,539.7 Formosa X X X X 3,574.0 Jujuy La Pampa La Rioja X X X X X 3,387.5 MCBA Mendoza Misiones X X X X 3,891.0 Neuquen X X X X X 3,122.4 Rio Negro X X X X X 9,000.0 Salta San Juan X X X X 3,542.0 San Luis X X X 1,519.0 Santa F X X X X X 23,791.0 Santiago del Estero X X X X 3,437.1 Tierra del Fuego X X X 724.5 Tucuman X X X X X 9,755.1 Average IRR is estimated based on a sample of projects as shown in Annex E.  - 37 - Annex A Table 2 Institutional Development Subprojects Revenue Administration Subprojects (US$'000, 1994) Total Cost of Institutional Development Subprojects = 257,025.00 Total Cost of Revenue Administration Subprojects = 37,297.90 Cadastre Subprojects as % of Total Project Cost = 14.51 % Provinces DGI 2000 Execution State Integral Execution State AU Largest Taxpayers Revenue Revenue Adm. Subprojects Executed I In Execution Admn. Executed I In Execution Subprojects - Total 4,986.2 314.0 37,297.9 Buenos Aires 0.0 Catamarca 477.0 X 314.0 Under Approval 791.0 Chaco 406.2 X 2,192.6 X 2,598.8 Chubut 0.0 C6rdoba 12,630.8 X 12,630.8 Corrientes 571.4 X 571.4 Entre Rios 3,000.0 In Evaluation (BID) 3,000.0 Formosa 434.5 X 962.7 X 1,397.2 Jujuy 700.0 X 700.0 La Pampa 82.1 X 82.1 La Rioja 0.0 MCBA" 0.0 Mendoza 1,649.2 X 1,649.2 Misiones 3,412.4 In Evaluation 3,412.4 (CEU) Neuquen 388.5 Approved 388.5 Rio Negro 0.0 Salta 1,114.7 X 1,114.7 San Juan 698.0 X 2nd Stage 698.0 San Luis 0.0 Santa Fe 0.0 Santiago del Estero 441.6 X 441.6 Tierra del Fuego 392.0 Approved 1,511.9 X 1,903.9 Tucuman 477.0 Approved 5,441.3 X 5,918.3  Table 3 Financial Rates of Return for Sample of Institutional Strengthening Subprojects Average Rate of Return Weighted by Investment Cost = 72.29% Estimated Demand as % of Sectors Covered = 28.02% Ave. R. of R. Sector as Investment Financial Weighted by % of Type of Institutional Cost Rate of nv. Cost of Potential Strengthening Subproject Description Province (USS'000) Return Sample Demand' Total 62.057.60 72.29% 28.02% 1. Cadastre Updating of provincial cadastre C6rdoba 25,726.90 106.00% 2. Cadastre Assessment of urban and suburban cadastres Entre Rios 12,539.70 61.00% 3. Cadastre Reformulation of cadastre systems Santa Fe 23,791.00 41.80% wj a/ Based on a preliminary sample of subprojects to be financed under PDP-II accounting for US$144 million. Sourcc: SAREP  -39- Annex B SPATIAL DISTRIBUTION OF POPULATION, POVERTY, AND PRODUCT Demographic Profile 1. The 23 provinces and the Municipality of Buenos Aires (MCBA) (hereafter, the provinces) participating in the project can be stratified in four groups as defined by the Federal Investment Council (CFI)': Advanced: Buenos Aires, C6rdoba, Mendoza, Santa Fe, and the Municipality of Buenos Aires. Intermediate: Entre Rios, Salta, San Juan, San Luis, and Tucuman. Low Density: Chubut, La Pampa, Neuquen, Rio Negro, and Santa Cruz. Underdeveloped: Catamarca, Chaco, Corrientes, Formosa, Jujuy, La Rioja, Misiones, and Santiago del Estero. 2. These groups are defined in terms of population size, economic product, and poverty levels as follows: Advanced: High population and per capita Gross Provincial Product (GPP). Intermediate: Intermediate population and per capita GPP. Low Density: Small Population and high per capita GPP. These are provinces on the "Resource Frontier," such as Chubut, and Neuquen. Underdeveloped:2 Low per capita GPP and high poverty. 3. Argentina is also one of the Latin American countries where the population is more heavily concentrated. The five provinces in the Advanced group comprise over 69% of the total population. Alternatively, the six provinces in the Low-Density group comprise less than 6% of the total population. This uneven population distribution is reflected in the high density 1 CFI (Consejo Federal de Inversiones) is a rather unique public institution that is financed by a percentage of total provincial revenue sharing. Its Board of Governors is comprised of all the Governors of all the provinces. Thus, it is national in scope, but provincial in focus. 2 Note that the last category uses slightly different criteria than the others, in that it includes all provinces with low per capita product and high relative poverty levels, even those with populations of small and intermediate size. One manner of describing this process of classification, then, is that the poorest provinces are first grouped into one group, and the rest are, in turn, classified by population and per capita product. The provinces of the Intermediate Group had populations ranging from 500,000 to 1.1 million in 1985 and per capita GPP in the middle third of the distribution.  - 40 - Annex B disparities among provinces, ranging from 41 inhabitants per km2 in Buenos Aires to 0.7 inhabitants per km2 in Santa Cruz (see Table 1). Unsatisfied Basic Needs 4. Although the percentage of households with unsatisfied basic needs tends to be relatively higher in provinces with smaller populations and lower per capita products, such as Formosa (31.8%) and Santiago del Estero (30.6%), the concentration in absoiute terms is highest within jurisdictions in the Advanced group. For example, of the 1.2 million households with unsatisfied basic needs living in Argentina in 1991, nearly 57% lived in provinces in the Advanced group, with over 35 % concentrated in Buenos Aires alone. Alternatively, less than 23 % of all households with unsatisfied needs lived in provinces within the Underdeveloped group. Thus, efforts to redistribute resources among the provinces through revenue sharing can run counter to the objectives of relative equity and need distribution, since they tend to distribute away from areas where the absolute concentrations of poor households are the highest (see Table 2). Gross Provincial Product 5. Gross Provincial Product (GPP) is highly concentrated in provinces in the Advanced Group, which accounted for over 73% of total GPP in 1989. Alternatively, all eight provinces of the Underdeveloped group accounted for less than 9% of the total GPP. On the other hand, provinces in the Advanced group have experienced the lowest growth rates in GPP over the 1970-89 period, while those with the fastest growth rates have been on the "resource frontier," such as Neuquen, mostly due to the increase in gas and oil production. Overall, stagnation set in for most provinces during the 1980s, with Buenos Aires being the biggest loser, with the rate of growth in GPP dropping to about 0.6% per year between 1970 and 1989 (see Table 3). 6. In terms of per capita GPP, the Province of Buenos Aires ranks twelfth, with a per capita GPP of US$1,607 in 1991, about half that of the Provinces of Santa Cruz, Chubut or Neuquen. The two poorest provinces (Formosa and Santiago del Estero) had a per capita GPP of less than US$800 (see Table 4).  - 41 - Annex B Table 1 Population, Density & Growth by Province (1970-1991) Population ('000) Annual j % Total Area Density per Provinces 1970 I 1991 Growth Rate Pop. (1991) (sq. km.) sq. km. (1991) Total 23,288 32,607 1.62% 100.00% 2,780,400 11.73 Advanced 16,856 22,518 1.39% 69.06% 758,371 29.69 Buenos Aires 8,775 12,582 1.73 % 38.59% 307,571 40.91 C6rdoba 2,000 2,764 1.55 % 8.48% 168,768 16.38 MCBA 2,972 2,961 -0.02% 9.08% 200 14,805.00 Mendoza 973 1,414 1.80% 4.34% 148,827 9.50 Santa Fe 2,136 2,797 1.29% 8.58% 133,007 21.03 Intermediate 2,655 3,846 1.78% 11.80% 422,479 9.10 EntreRios 812 1,023 1.11% 3.14% 78,781 12.99 Salta 510 865 2.55% 2.65% 154,775 5.59 San Juan 384 530 1.55% 1.63% 89,651 5.91 San Luis 183 286 2.15% 0.88% 76,748 3.73 Tucuman 766 1,142 1.92% 3.50% 22,524 50.70 Low Density 864 1,742 3.40% 5.34% 930,731 1.87 Chubut 190 357 3.05% 1.09% 224,686 1.59 La Pampa 172 260 1.99% 0.80% 143,440 1.81 Neuquen 155 389 4.48% 1.19% 94,078 4.13 Rio Negro 263 507 3.17% 1.55% 203,013 2.50 Santa Cruz 84 160 3.12% 0.49% 243,943 0.66 Tierra del Fuego S/D 69 S/D 0.21% 21,571 3.20 Underdeveloped 2,913 4,501 2.09% 13.80% 668,819 6.73 Chaco 172 838 7.83% 2.57% 99,633 8.41 Catamarca 567 266 -3.54% 0.82% 100,967 2.63 Corrientes 564 795 1.65% 2.44% 88,199 9.01 Formosa 234 404 2.63% 1.24% 72,066 5.61 lujuy 302 514 2.56% 1.58% 53,219 9.66 La Rioja 136 221 2.34% 0.68% 89,680 2.46 Misiones 443 790 2.79% 2.42% 29,801 26.51 Santiago del Estero 495 673 1.47% 2.06% 135,254 4.98 Source: INDEC Census of Population 1970 and 1991.  - 42 - Annex B Table 2 Households with Unsatisfied Basic Needs (191) I Households With Unsatisfied Basic Needs Provinces Count | Relative % a/ I Absolute % b/ Total 1,245,424 100.00% Advanced 709,390 11.34% 56.96% Buenos Aires 440,736 12.93% 35.39% C6rdoba 77,406 10.50% 6.22% MCBA 56,034 5.64% 4.50% Mendoza 45,655 13.49% 3.67% Santa Ft 89,559 11.52% 7.19% Intermediate 177,445 20.51% 14.25% Entre Rios 35,977 13.85% 2.89% Salta 57,987 32.56% 4.66% San Juan 17,901 15.56% 1.44% San Luis 12,144 17.39% 0.98% Tucuman 53,436 22.05% 4.29% Low Density 75,691 16.87% 6.08% Chubut 16,606 18.05% 1.33% La Pampa 6,989 9.43% 0.56% Neuqutn 17,227 18.48% 1.38% Rio Negro 24,325 18.70% 1.95% Santa Cruz 5,827 14.34% 0.47% Tierra del Fuego 4,717 25.26% 0.38% Underdeveloped 282,898 28.45% 22.71% Chaco 58,219 30.71% 4.67% Catamarca 13,258 23.19% 1.06% Comentes 43,417 24.25% 3.49% Formosa 28,225 31.83% 2.27% Jujuy 33,978 31.81% 2.73% La Rioja 10,757 22.51% 0.86% Misiones 50,968 28.07% 4.09% Santiago del Estero 44,076 30.69% 3.54% As % of total households in each province. b/ As % of total households with unsatisfied basic needs in the country. Source: INDEC Census of Population 1991.  - 43 - Annex B Table 3 Gross Provincial Product, 1970-1989 (US$ million, 1988) I Gross Provincial Product I % Distribution Annual Growth Provinces 1970 I 19X9 (1989) Rate (1970-89) Total 46,521 61,156 100.00% 1.45% Advanced 38,390 44,706 73.10% 0.80% Buenos Aires 15,750 19,646 32.12% 1.17% C6rdoba 3,025 4,546 7.43% 2.17% MCBA 13,222 14,693 24.03% 0.56% Mendoza 2,279 N.A. N.A. N.A. Santa Fe 4,114 5,821 9.52% 1.84% Intermnediate 3,404 6,325 10.34% 3.31% Entre Rios 1,183 1,836 3.00% 2.34% Salta 627 1,046 1.71 % 2.73 % San Juan 389 596 0.97% 2.27% San Luis 238 1,274 2.08% 9.23% Tucuman 967 1,573 2.57% 2.59% Low Density 2,098 4,792 7.84% 4.44% Chubut 560 1,119 1.83% 3.71% La Pampa 370 573 0.94% 2.33% Neuquen 331 1,449 2.37% 8.08% Rio Negro 562 1,088 1.78% 3.54% Santa Cruz 275 563 0.92% 3.84% Tierra del Fuego N.A. N.A. N.A. N.A. Underdeveloped 2,629 5,333 8.72% 3.79% Chaco 130 260 0.43% 3.72% Catamarca 466 1,173 1.92% 4.98% Corrientes 638 1,234 2.02% 3.53% Formosa 196 299 0.49% 2.25% Jujuy 355 715 1.17% 3.75% La Rioja 104 352 0.58% 6.63% Misiones 336 803 1.31% 4.69% Santiago del Estero 404 497 0.81% 1.10% Source: SAREP.  - 44 - Annex B Table 4 Gross Provincial Product Per Capita (US$, 1988) GPP Per Capita I Annual Growth Rate Provinces 1970 I 1991 | 1970-1991 Total 1,992 1,966 -0.06% Advanced 2,270 2,235 -0.07% Buenos Aires 1,795 1,607 -0.53% C6rdoba 1,468 1,685 -0.66% MCBA 4,448 4,973 0.53% Mendoza 2,343 N.A. N.A. Santa Fe 1,927 2,130 0.48% Intermediate 1,282 1,706 1.37% Entre Rios 1.458 1,833 1.10% Salta 1.230 1,264 0.13% SanJuan 1,011 1,148 0.61% San Luis 1,298 4,670 6.29% Tucuman 1,263 1,420 0.56% Low Density 2,429 1,514 -2.28% Chubut 2,948 3,314 0.56% La Pampa 2,151 2,302 0.32% Neuquen 2,139 N.A. N.A. Rio Negro 2,139 N.A. N.A. Santa Cruz 3,258 3,756 0.68% Tierra del Fuego Underdeveloped 902 1,005 0.52% Catamarca 752 N.A. N.A. Chaco 823 1,401 2.56% Corrientes 1,130 1,605 1.69% Formosa 839 778 -0.36% Jujuy 1,175 1,453 1.02% La Rioja 760 1,664 3.80% Misiones 759 1,074 1.67% Santiago del Estero 815 757 -0.35%  - 45 - Annex C PROVINCIAL FINANCIAL INDICATORS 1. Table 1 shows Total Current Revenue, Total Current Expenditures, and Current Account Surplus for all provinces for 1991, 1992 and 1993. While 11 provinces held a Current Account Surplus in 1991, only eight did in 1993. All but one province in the Advanced Group had a current account surplus in 1993, while none of the provinces in the Underdeveloped group did. 2. Based on 1993 provincial executed budgets of all the provinces, the following indicators were estimated for each province: (a) Current Account Equilibrium: Estimated as Current Revenues (excluding discretionary transfers)/Current Expenditures. Table 2 shows the percentage of provinces that fall within each range. Overall, current revenues exceed current expenditures in over one-third of all 24 provinces. However, current expenditures exceed current revenues in the remaining 67% of the provinces by up to 47%. By this criteria, only 33 % of provinces would be eligible for investments in new physical works under the project. (b) Debt Service (Interest + Amortization)/Current Revenues (excluding discretionary transfers): This indicator shows that current debt service does not represent a significant burden for the majority of provinces. Only 25% of all provinces pay more than 15% of their current revenues to service current debts. Thus, 75% of provinces would have sufficient debt capacity to participate in the project using this indicator. 3. Based on the same provincial financial data described above, the following indicators were estimated for each province: (a) Automatic Revenue-Sharing Transfers (coparticipaci6n)lCurrent Revenues (excluding discretionary transfers): This indicator reflects the proportion of provincial revenues that are relatively predictable for being automatically transferred to the provinces based on percentages established by the national coparticipaci6n law. Overall, Table 3 shows the that provinces are heavily dependent on their coparticipaci6n transfers, with over 83% of provinces receiving over 40% from these sources. (b) Discretionary Transfers (both grants and loans)/Total Revenues (excluding discretionary transfers): Alternatively, this indicator reflects the dependency of individual provinces on discretionary  - 46 - Annex C funds, which are unpredictable in amount and timing. These transfers represent less than 10% of current revenues for 25 % of all provinces; other provinces, such as La Rioja, have a pervasive dependence on this type of source--up to 58% of current resources are discretionary transfers. Financial Capacity of the Provinces 4. Data on the financial capacity of the provinces suggest that provincial counterpart funding does not present a large risk for project implementation. In 1993, one-third of all provinces reported current account surpluses, excluding discretionary grants, for a total of US$578.2 million (see Table 1). Although, of course, not all of this amount should be considered as available for meeting the provincial counterpart requirement (US$96 million), it provides an indicator of the provinces' capacity to invest and to service debt. The sum of the real investments (works and goods) in the provinces with current account surpluses was US$1,215 million in 1993, up from US$485 million in the provinces with current account surplus in 1989. Considering a six-year program implementation period, the proposed project's financing for real investments (US$229.5 million would represent the project's financing for about 3% of the total real investment program, assuming that only a third of all provinces were eligible for investment financing, and no improvement in current account surpluses. Table 5 shows the capital expenditures of the provinces from 1983 to 1993.  Table 1 Provincial Public Accounts (1991-1993) (in '000, Nominal Pesos) 1991 1992 1993 Total Total Current Total Total Current Total Total Current Current Current Account Current Current Account Current Current Account Provinces Revenue Expenditures Surplus ' Revenue Expenditures Surplusi| Revenue Expenditures Surplus ' total 13Y,476-,81 14,058,416 -5819,605 -20,396,899 19,973,58;2 423,372,697 23,654,393 -8,9 Advanced 7,712,503 8,097,826 -385,323 12,185,992 11,627,806 558,185 13,956,052 13,792,336 163,716 Buenos Aires 3,405,343 3,815,785 -410,442 5,841,074 5,248,233 592,841 6,521,369 6,270,946 250,423 C6rdoba 1,063,482 1,153,550 -90,068 1,645,953 1,643,667 2,286 1,849,451 2,108,514 -259,063 MCBA 1,459,974 1,448,607 11,367 2,104,189 2,357,942 -253,754 2,692,136 2,581,534 110,602 Mendoza 574,721 512,834 61,887 840,481 784,985 55,496 964,337 953,365 10,972 Santa F6 1,208,983 1,167,049 41,934 1,754,295 1,592,979 161,317 1,928,759 1.877,977 50,782 Intermediate 1,895,323 1,921,438 -26,115 2,693,967 2,689,467 4,500 2,961,132 3,028,969 -67,837 Entre Rios 496,630 515,062 -18,432 733,910 762,233 -28,322 821,509 839,433 -17,924 Salta 420,817 486,331 -65,514 581,227 634,378 -53,150 634,910 703,542 -68,632 San Juan 298,525 317,288 -18,764 424,327 426,892 -2,565 460,527 543,199 -82,672 San Luis 209,827 151,688 58,139 300,027 234,620 65,407 333,861 259,877 73,984 TucumAn 469,524 451,068 18,456 654,476 631,345 23,130 710,325 682,918 27,407 Low Density 1,491,800 1,519,360 -27,560 2,191,953 2,147,357 44,595 2,369,175 2,731,132 -361,957 Chubut 225,778 249,442 -23,664 324,305 360,122 -35,817 349,403 448,022 -98,619 La Pampa 231,553 186,449 45,104 322,399 282,506 39,893 367,283 344,615 22,668 Neuqu6n 409,690 384,455 25,235 590,374 554,806 35,568 604,246 707,671 -103,425 Rio Negro 307,844 316,255 -8,411 448,231 459,485 -11,254 499,237 668,429 -169,192 Santa Cruz 220,772 244,451 -23,679 321,802 283,438 38,364 357,901 326,602 31,299 Tierra del Fuego 96,163 138,307 -42,145 184,841 207,001 -22,160 191,105 235,793 -44,688 Underveloped 2,377,185 2,519,791 -142,606 3,324,988 3,508,951 -183,964 3,579,638 4,101,956 -522,318 Chaco 417,315 402,553 14,762 566,647 591,942 -25,296 590,972 648,742 -57,770 Catamarca 231,373 245,866 -14,493 308,821 322,406 -13,585 333,207 405,693 -72,486 Corrientes 326,457 321,395 5,063 455,773 493,035 -37,262 491.197 533,611 -42,414 Formosa 295,793 371,414 -75,622 400,070 422,586 -22,516 423,356 492.717 -69,361 Jujuy 291.651 309,230 -17,580 415,802 369,376 46,426 452,471 464,947 -12,476 La Rioja 186,368 280,269 -93,901 252,520 379,876 -127,356 293,294 432,182 -138,888 Misiones 295,304 272,402 22.902 443,180 443,181 -2 478,041 544,064 -66.023 Santiago del Estero 332,924 316,662 16,262 482,175 486,549 -4,374 517,100 580,000 -62,900 Current Account Surplus is calculated as Total Current Revenues (excluding Discretionary Grants) Minus Total Current Expenditures  - 48 - Annex C Table 2: Financial Indicators for Provinces (1993) Financial Indicators |Percentage of |