Statement by Whitney Debevoise at the Meeting of June 28, 2007

CONFIDENTIAL EDS2007-1053 June 27, 2007 07:19:30 PM Statement by Whitney Debevoise Date of Meeting: June 28, 2007 Argentina - Buenos Aires Infrastructure Sustainable Investment APL & National Highway Asset Management APL We thank Bank staff for meeting with us in advance of today’s Board discussion and we want to register our support for both projects, which are designed to address critical infrastructure needs in Buenos Aires Province and the national road network. Buenos Aires Infrastructure Adaptable Program Loan (APL) This APL is designed to improve the provision of infrastructure and services in the Province within a framework of fiscal responsibility. It will support urgent road rehabilitation and safety improvements, expand coverage in the provision of basic water and sanitation, expand and optimize drainage requirements and design and implement a strategic framework for provincial infrastructure development. Although the trigger for this second phase of this APL program related to the Fiscal Framework has not been met, it was the result of structural changes in Argentina’s fiscal federalism that are outside the control of the Province. We also note that the Province has made progress in increasing its own revenues, and that it has reduced its debt stock and debt service as a portion of net current revenues. We can support the increased size of the second phase of the APL from $150 million to $270 million. The additional funding will help accelerate the expansion of basic services and reflects the higher costs associated with the road rehabilitation component. We note that Management concludes that the Province has adequate fiscal space to undertake this additional financing. We also welcome measures included in the program to strengthen institutional capabilities in designing and costing road works, and the creation of a monitoring system to evaluate changes in bid prices for road works to ensure procurements bids accurately reflect market conditions. We compliment the authorities on the targeting of the water and sanitation component of the program to low-income people. In particular, the project is expected to provide basic sanitation services to 450,000 people. We are encouraged to hear from staff that recent tariff increases on commercial and industrial users have been sufficient to cover the costs of operation for most local water companies, but underscore that, in cases where the local regulatory regime does not permit the recovery of operations and maintenance expenses, the Bank should continue to avoid financial engagement. We would also note that the long-term expansion of water services in Argentina will probably require private capital resources, and  2 that substantial enhancements in the predictability of the regulatory regime will be necessary to make that outcome likely. Other components of the program, including design and implementation of a strategic framework for infrastructure development, including development of a pipeline of eligible investments, and technical assistance to strengthen agencies involved in program execution will hopefully produce long-term operational efficiencies in the Province’s management of its infrastructure. We recognize that the overall deterioration in the Province’s fiscal situation poses a substantial risk to this program. We encourage Provincial authorities to continue to exercise fiscal prudence and undertake reforms to improve the revenue base. It is also important that the Bank closely monitor the Province’s fiscal, financing and debt indicators during scheduled semi-annual reviews. National Highway Asset Management Adaptable Program Loan We support the objectives of the second phase of this APL, which aims to assist Argentina in developing a more efficient road network management strategy, including performance-based rehabilitation and maintenance contracts (CREMA), bridge restorations and road safety measures. Road conditions have substantially improved under the first phase of this APL. However, the pace of progress in the areas of rehabilitation of bridges, road safety measures and building up the institutional capacity of the National Highways Directorate (DNV) fell short of expectations. These shortfalls were largely related to implementation issues, which the Bank and the authorities seem to have addressed satisfactorily. Although triggers for the second phase of this APL related to design of a Human Resources Action Plan and an analysis of a sustainable road sector financing program were not met, we understand that the former trigger will be met in the near future. Moreover, we understand that the original objective related to the latter trigger has been modified to reflect higher-than-anticipated budget allocations for the road network. Therefore failure to meet these triggers at this time does not seem to be posing significant risk to the investment program. In view of the increased costs of rehabilitation and maintenance contracts due to higher costs of inputs, the decision to increase the average overlay thickness on road pavement to extend the life of improvements, and the consistently high cost effectiveness of these investments, we support the increase in the size of the second phase from $200 million to $400 million. Further advancements in the quality of the road network system will further reduce transport costs enabling Argentina to become a more competitive exporter. We particularly compliment the Argentine authorities on the introduction of the CREMA system, which has proven to be very successful in preventing cost overruns. The system has also helped prevent the stop-and-go type implementation process due to CREMA contracts having higher priority in budget allocations. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.  3 As in the case of the Buenos Aires Infrastructure Sustainable Investment Development Project, one of the key risks is implementation delays due to insufficient provincial and federal funding. We encourage the GOA to pursue a cautious fiscal policy to ensure there is adequate fiscal space in the future for infrastructure needs. We note that staff rates procurement risks as high. However, the Bank will review a price monitoring mechanism being developed by the Argentine authorities, and that the DNV will use enhanced standard bidding documents that will be more transparent and should promote more competition. We compliment the Argentine authorities and the Bank for the special procurement provisions designed to mitigate risks, including electronic publication of procurement notices, bidding documents, requests of expressions of interest, contract awards and procurement plans which will be available for civil society monitoring. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without the consent of the Executive Director concerned.