Argentina - Oil and Gas Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY VILE COPY Report No. P-3092-AR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE DESARROLLO WITH THE GUARANTEE OF THE ARGENTINE REPUBLIC FOR AN OIL AND GAS CREDIT PROJECT June 17, 1981 This document hs a restricted distribution and may be used by recipients only In the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of May 1, 1981) Currency Unit Argentine Peso ($a) US$1 = $a 3,190 US$1 million = $a 3,190 million $a 1 million = US$313 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS B - Barrel (= 0.159 Cubic Meter) BANADE - Banco Nacional de Desarrollo BD - Barrels per Day CF - Cubic Feet (ICF = 0.0228 Cubic Meter) CFD - Cubic Feet per Day GdE - Gas del Estado (State Gas Company) LIBOR - London Inter Bank Offer Rate TOE - Tons of Oil Equivalent YCF - Yacimientos Carboniferos Fiscales (State Coal Company) YPF - Yacimientos Petroliferos Fiscales (State Oil Company) FISCAL YEAR January 1 to December 31  ARGENTINA FOR OFFICIAL USE ONLY OIL AND GAS CREDIT PROJECT Loan and Project Summary Borrower: Banco Nacional de Desarrollo (BANADE). Guarantor: The Argentine Republic. Amount: US$100.0 million equivalent. Terms: 15 years, including 3 years of grace, at 9.6% per annum. The amortization schedule would conform to the aggregate of the following two amortization schedules: (a) for the US$99.0 million portion for financing oil and gas subprojects, the aggregate amortization schedule of the subloans fixed at the time when funds have been fully committed; and (b) for the US$1.0 million for technical assistance, standard Bank amortization schedule. Relending Terms: Subloans would have maturities of up to 15 years and up to four years of grace with interest at not less than 13.5% p.a. in US$ with BANADE bearing the cross currency risk. Project Description: The project would support the Government's policy of increasing private sector participation in oil and gas development to improve sector efficiency. It would provide long-term financing for exploration and develop- ment projects, including pipelines and gas treatment plants. The project would include technical assistance to BANADE to build up its appraisal and supervision capability of petroleum projects. Estimated Costs and Financing Plan: The estimated total costs of the subprojects would be US$500 million. The estimated financing plan would be: equity contributions (US$125 million), IBRD (US$99 million), with the remainder from commercial sources and BANADE. Estimated Disbursements: Bank FY 82 83 84 85 86 ---------US$ Million---------- Annual 14 24 31 27 4 Cumulative 14 38 69 96 100 Rate of Return: Economic rates of return of subprojects are expected to exceed 20%. Appraisal Report: Report No. 3321-AR, dated May 26, 1981 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE DESARROLLO WITH THE GUARANTEE OF THE ARGENTINE REPUBLIC FOR AN OIL AND GAS CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to Banco Nacional de Desarrollo (BANADE) with the guarantee of Argentine Republic for the equivalent of US$100.0 million to help finance an Oil and Gas Credit Project. The loan would have a term of 15 years, including 3 years of grace, with interest at 9.6% per annum. The amortization schedule would conform to the aggregate of the following two amortization schedules: (a) for the US$99.0 million portion for financing oil and gas subprojects, the aggregate amortization schedule of the subloans and investments fixed at the time when funds have been fully committed; and (b) for the US$1.0 million for technical assistance, standard Bank amortization schedule. PART I - THE ECONOMY Introduction 2. The most recent Economic Memorandum (No. 2988-AR) was distributed to the Executive Directors in August 1980. An economic mission visited Argentina in November 1980; its findings have been incorporated in this report. Country data sheets are attached as Annex I. A special report on the impact of the Government's stabilization and reform policies on the private sector is under preparation. Background 3. Argentina is a semi-industrialized country with a per capita income in 1979 of US$2,280, a sizeable middle class and a fairly even distribution of income. Postwar GDP growth has averaged 3.5% in an economy which has been subject to strong cyclical fluctuations. Sharp swings from expansionary fiscal, monetary and wage policies to restrictive stabilization progranis have occurred five times since 1950. During the early 1970s, when Argentina's external situation was favorable, the Government pursued an ambitious public investment program. Large increases in public expenditures, nominal wages and credit resulted in strong growth of domestic output, while maintenance of fixed exchange rates led to rapidly increasing imports. In mid-1974, poor weather, falling world grain prices, and an EEC ban on beef imports halted export growth. Deterioration of the foreign sector coincided with an intensi- fication of domestic social and political conflict. Acceleration of the wage-price spiral propelled inflation to over 300% in 1975 and an annual rate of about 800% in early 1976. A rapidly increasing foreign debt and a drastic fall in foreign exchange reserves brought the country close to defaulting on its external obligations. Stabilization Efforts 1976-1978 4. The new administration, which took office in March 1976, had, as its initial objectives, strengthening the balance of payments, restructuring the external debt and preventing hyper-inflation. The balance of payments improved as soon as export taxes were reduced and capital flows were freed.  -2- Monetary and fiscal policies, supported by wage controls, succeeded in bringing down the rate of inflation from 780% during the year ending in April 1976 to 150% a year later. No further progress was made, however, in reducing inflation during the remainder of 1977 and 1978. At the same time output fluctuated greatly. After recovering rapidly from the 1975-1976 recession, growth came to a halt in late 1977 when credit restrictions and record high interest rates resulted in a drop in investment. 5. External sector policies introduced in 1976 immediately produced favorable export results, while imports were held down by two recessions. As a consequence, resource surpluses of US$1.9 billion and US$2.8 billion were registered in 1977 and 1978, respectively. Surpluses on current account were accompanied by substantial capital inflows. At the beginning, the public sector was the primary borrower, but starting in 1977 high domestic interest rates induced the private sector to borrow abroad on an increasing scale. Although the authorities introduced some controls in 1978, long-term capital continued to flow into Argentina, and by the end of that year gross foreign exchange reserves stood at US$5.8 billion, equivalent to 14 months of imports. Net reserves amounted to US$5.0 billion. This reserve growth permitted a new approach to inflation control in the framework of an open economy. The 1979/1980 Program 6. In late December 1978 the Government announced a stabilization program with predetermined schedules for adjustment of (i) exchange rates, (ii) prices of fuels and public sector services, (iii) wages, and (iv) the monetary base of internal origin; combined with a five-year import tariff reduction schedule and the formal reopening of the capital market to inter- national transactions. Most of the adjustments were to follow a declining trend, designed to dampen inflationary expectations and to limit price increases of domestic producers. Foreign competition was to reduce the rate of price increases of domestic tradeable goods to the level determined by the rate of price increases abroad, and the rate of depreciation of the peso. It was recognized, however, that possible tariff redundancy and lags in the adjustment of imports could delay this "convergence" of domestic and foreign inflation rates. 7. The new 1979-84 tariff liberalization schedule provided for major reductions in tariffs on goods produced in Argentina. Shortly after its announcement, the Government instituted a supplementary program of temporary tariff reductions for goods whose domestic price increases substantially exceeded increases in international prices and the rate of devaluation. In addition, tariffs for all capital goods were eliminated temporarily in order to facilitate the re-equipment and modernization of Argentine industry. 8. One notable feature of the stabilization strategy was the secondary role attributed to monetary policy. The pre-fixing of the peso/dollar rate, along with the elimination of capital controls, allowed the monetary authori- ties to influence only the monetary resources originating from domestic sources. By setting quarterly targets for this variable, the monetary authorities sought to limit internal public sector borrowing and ensure an adequate supply of credit to borrowers who had no access to foreign credit sources. Fiscal  -3- policy was also viewed to be of secondary importance insofar as short-term stabilization objectives were concerned. To mitigate inflationary expectations, however, and to reach the long-run goal of decreased state intervention, the authorities were able to decrease the central government's deficit from 2.1% of GDP in 1978 to 1.5% in 1979. The overall public sector deficit was reduced from its 1978 level of 5.0% of GDP to 3.5% in 1979. Results of the Program 9. Most of the policies outlined above were implemented during the course of 1979. The exchange rate was moved according to plan, the tariff reform was applied, public sector prices and tariffs were adjusted as envisaged, and monetary resources of internal origin expanded only slightly more than projected. However, total money supply expanded rapidly, because the elimina- tion of capital controls and the maintenance of the schedule for exchange rate devaluation, despite high internal inflation, led to heavy capital inflows amounting to over US$1.5 billion in the first nine months. With a tight labor market prevailing throughout 1979, nominal wages increased more rapidly than scheduled, and the Government eliminated the legal limitations on wage increases in September. 10. After some adjustment lag, inflation did decelerate. The general wholesale price index, which rose at an average rate of 8.3% per month from January to August 1979, increased by an average of only 3.5% per month from September 1979 to December 1980, the lowest monthly rates since early 1974. The deceleration in inflation led to a real depreciation of the exchange rate, higher real wages and positive real interest- rates during the last three months of 1979. Initially, domestic price increases were dampened by falling prices of primary products, but the industrial sector's exposure to interna- tional competition became the primary factor in late 1979 and 1980. As expected, the branches most exposed to foreign competition were those which showed price deceleration most clearly. 11. With prices of traded goods decelerating, it was expected that the wage transmission mechanism would cause the prices of non-tradeables to decelerate as well. However, this did not happen and internal terms of trade have turned against tradeable goods. In order to survive, exporting and import-competing firms have been under considerable competitive pressure to raise productivity and lower costs. While the measures adopted augur well for increased growth and productivity in the longer term, in the short term, many of the firms affected face serious profit squeeze and cash-flow problems. 12. The traditional agricultural sector has responded by intensifying production with emphasis on cereal crops and oilseed cultivation; as a conse- quence yields and exports have increased. Producers outside the Pampa (fruits, wool and cotton), however, are finding it more difficult to compete success- fully under present circumstances. In industry, success or failure seems related to the previous degree of protection and the quality of financial management. Firms have been cutting costs by providing fewer products, and many have sold subsidiaries to generate badly needed cash for purchasing new machinery and equiDment to modernize production. Some firms have been unable to cut costs in line with decreasing revenues, in large measure because of escalating financial costs and an apparent inability to control wages.  - 4 - 13. Following the elimination of marginal firms, consolidation of smaller entities and concentration on production in which Argentina has a comparative advantage, the financial situation of the private sector should eventually improve. Meanwhile, the weak financial situation of the industrial sector has affected the portfolios of banks, and several have been forced to declare bankruptcy. Increased support of the Central Bank and the major official banks has permitted debt-rescheduling arrangements to be negotiated for the more viable banks and firms. 14. During the second semester of 1980 several new measures were adopted affecting incentives for imports and exports. In addition to acceleration in the rate of devaluation, a change in the tax structure lowered payroll taxes and increased the rate of the value added tax. Industrial firms are now reimbursed the value added taxes when exporting, whereas before they did not receive reimbursement for labor taxes. That tax change was equivalent to a de facto devaluation for exports equivalent to between 5 and 15%, depending on the relative labor costs of each enterprise. As regards industrial imports, the substitution of domestic payroll taxes by value added taxes, which are paid by importers as well as by domestic producers, amounted to a devaluation equivalent to the increase in the value added tax. 15. Nevertheless, with imports booming and exports slowing down, the current account surplus of previous years turned into a deficit of about US$3.5 billion in 1980. Growing expectations that the peso would be devalued triggered heavy capital outflows. A 10-percent devaluation in early February 1981 was insufficient to calm foreign exchange markets. Capital outflows accelerated and rates of interest for short-term p-eso borrowing reached 80% in real terms, on an annualized basis during the first quarter of 1981. Recent Measures of the New Administration 16. A new administration took office on April 1, 1981. It moved swiftly to stabilize foreign exchange and domestic financial markets. The Argentine peso was devalued by 30% on April 2 and by 30% on June 1, 1981. Subse- quently, Government intends to adjust the exchange rate according to the difference between international and domestic inflation. A temporary export tax of 12% on agricultural exports was imposed, a number of special export incentives eliminated, export reimbursements for manufactured products were limited to a maximum of 25% and the maximum customs tariffs reduced to 43%. As a consequence, the reserve position of the Central Bank improved (estimated at US$7 billion end April 1981), and rates of interest declined. The Central Bank opened a special rediscount line to help consolidate the debt of structur- ally sound private firms in financial difficulties because of the earlier crises in the Argentine financial markets; it will also compensate private firms that have contracted external loans in 1981 with maturities of 18 months or longer against losses that would have resulted from the most recent devalua- tion of 30%. The policy to improve access of the private sector to credit is complemented by renewed efforts to reduce the fiscal deficit. Taxes on a number of luxury items have been increased, custom tariffs were raised again by 5% and the authorization for current expenditures limited. Wage policies adopted for the public sector imply a reduction of salaries in real terms; the investment budget is being analyzed to ascertain possibilities for further cuts.  17. These measures were initially effective in restoring tranquility in the private sector and are expected to strengthen export and investment incentives without reversing the trend toward trade liberalization. The Government is giving priority to consolidating the financial position of the industrial sector, which has been seriously eroded, as a consequence of an overvalued exchange rate and high real interest rates, while maintaining the momentum to increase efficiency and to concentrate in areas of comparative advantage. The Government is aware that it will take time and considerable effort to overcome the difficulties the private sector is facing. Temporarily inflationary pressures have been rekindled. Following the devaluation, wholesale prices increased by 11.7% and consumer prices by 7.9% in April compared to first quarter averages of 14.0% and 15.8% respectively. The Government though is confident that it will be able to bring down again the rates of inflation through tight monetary and fiscal policies. The treasury deficit for 1981 is projected at 2.3% of GDP compared to 2.7% of GDP in 1980. Medium- and Long-Term Development Prospects 18. With trade liberalization measures beginning to take effect, industrial and overall economic growth are expected to be relatively slow in 1981 and 1982. In addition, business failures of weak or overexpanded firms and unemployment could increase--albeit from extremely low levels. Availability of long-term credit for reequipment and modernization will be a crucial requirement for supporting the restructuring of industry. Since the private sector is also expected to take on a number of tasks previously undertaken by the public sector, considerable flexibility and efficiency will be required of the Argentine financial system. While agricultural production decreased in 1980 because of unfavorable weather conditions, the output is expected to reach record levels in 1981. Exports of agricultural products and investment incentives for agriculture should rise given the expected decelera- tion in domestic industrial price increases and favorable prices of Argentine products in international markets. 19. Export growth in current prices during 1976-79 averaged over 30% per year; it will probably not be possible to sustain this rate. Export prospects have weakened in the short term, but they appear to be excellent over the longer term with expected increases in both agricultural yields and international prices. Total export earnings are projected to increase by an average of 13% annually during 1982-1987 (6% in real terms). Most of that increase would be generated by agriculture and agro-industry, with the manufac- turing sector's share declining to about 12% of total exports by 1985. The ongoing import liberalization process, as well as the need for modernization of infrastructure and industry implies that imports in current prices could increase at about 14% per annum through 1985 (7% in real terms). 20. With the current account balance turning negative in 1979 and projected to remain in deficit through 1985, gross inflows of medium- and long-term capital, including direct foreign investment, are projected to increase from US$4.6 billion to US$9.4 billion over the same period. The bulk of these capital flows should be available from world capital markets, bilateral arrangements, export credits, and direct private investments.  - 6 - Official multilateral sources, however, may play an important role by provid- ing financial support combined with technical and organizational assistance and by stimulating capital flows from other sources. Argentina's medium- and long-term external public debt amounted to US$10.5 billion at the end of 1980 (US$8.1 billion 1979) and private external debt, US$6.5 billion (US$5.4 billion 1979). The external debt service ratio was 26% in 1979, and is estimated to have been 30% in 1980. The Bank's share of the external public debt was 5% and its share in debt service was 3%. Given the relatively modest anticipated external borrowing of the public sector, the public debt service ratio is expected to remain below 20%, with the Bank's share not expected to rise above 1979 levels. Private indebtedness will increase more rapidly, and the overall net debt service ratio is projected to rise to 30% in the mid-1980s. In view of these prospects; and assuming continued prudent economic policies, Argentina is considered creditworthy for loans on conventional terms. PART II - BANK GROUP OPERATIONS IN ARGENTINA Bank Operations 21. Past Bank lending to Argentina has been sporadic because of periodic macroeconomic difficulties and unsatisfactory sector policies, along with delays and problems in complying with specific project conditions. After a hiatus of five years, lending was resumed in September 1976. Since that date, the Bank has made loans for ten projects amounting to US$886.0 million. A US$60 million loan for an agricultural credit project was cancelled in 1979. 22. To assist Argentina through the initial stabilization effort, Bank lending has focused on major infrastucture projects and the provision of credit and training to productive sectors. A grain storage project was designed to enable Argentina to export agricultural products in a more orderly manner; a vocational training project would help improve vocational and skill training; an industrial credit project helped support modernization and expansion of export oriented industries, and the projects for power, highways and railways provided part of the infrastructure necessary to facilitate agricultural and industrial expansion. Recently, the Bank began lending to Argentina's hydrocarbon sector through a series of loans. The oil and gas engineering loan was the first step in helping Argentina improve its knowledge of hydrocarbon reserves through expanded auditing and seismic surveys; the coal exploration loan will improve the basis for a rational exploitation of Argentina's coal resources. 23. Disbursements of Bank loans have been slower than expected. Per- sistent high rates of inflation, the need for fiscal austerity and inertia of the private sector did not provide a conducive environment for progress of Bank financed projects. During the last twelve months, however, the pace of disbursements has picked up considerably. The marked slowdown in the rate of price increases and stricter budget procedures augur well for further progress. Annex II contains a summary statement of Bank loans and notes on the execution of ongoing projects.  -7- 24. Future Bank lending is expected to become more diversified now that the Government has broadened its policies beyond stabilization to address structural and institutional constraints. Future projects would support Government efforts to modernize the economy through: (i) upgrading public sector enterprises and rationalizing sector policies; (ii) restructuring the industrial sector to increase efficiency and improve export performance; and (iii) helping the Government in its efforts to transfer responsibilities to provincial authorities and promote private sector participation. Within the framework for proposed assistance, the oil and gas sector offers ample possibilities for continued Bank participation. Argentina's sizeable hydro- power potential, shared with riparian neighbors, represents another attractive field for Bank assistance. In the transport sector, the Bank is helping with the preparation of a highway sector project and plans to continue supporting other modes of transport. 25. To help modernize the industrial sector, the Government has reduced import duties to encourage adoption of measures to increase efficiency. Discussions between Bank and Government to strengthen financial and human resources for industrial development are expected to result in the formulation of projects to support industrial training as well as industrial expansion. In addition, the present administration has taken long strides toward opening up areas for private sector or joint ventures which traditionally have been the exclusive domain of the public sector. New mining legislation has cleared the way for the development of Argentina's substantial mineral reserves by the private sector. Possible Bank participation could help rationalize sector policies, attract foreign investors and promote domestic private sector participation. 26. The Government has embarked on a major revision of the revenue sharing system and the distribution of Government responsibilities/expenditures to reduce bureaucracy, synchronize the supply of services more closely with demand and provide services more effectively at lower cost. In support of these policies, a proposed project in the water supply and sewerage sector would help develop provincial institutions, consolidate sector finances and effectively expand service coverage. Bank participation in energy conservation, pollution control, regional water development and flood control are additional possibilities that are under study. IFC Operations 27. As of April 30, 1981, IFC had made 14 loans to borrowers in Argentina totalling US$99.4 million and two equity investments of US$2.5 million, of which US$50.2 million have been repaid, cancelled or sold. A summary of IFC's investments is shown in Annex II. PART III - THE OIL AND GAS SECTOR Energy Resources 28. Argentina has a substantial and diversified energy base. The exploitable hydroelectric power potential over 50 years is estimated at 2.5 billion tons of oil equivalent (Toe) although much of this potential  - 8 - is located far from load centers and require relatively high costs to develop. Proven reserves of crude oil at end-1979 totalled 330 million tons (2.4 billion barrels (B)); natural gas reserves amounted to 21.2 trillion cubic feet (520 million Toe), equivalent to 15 years and 50 years of current output, respectively. There are also deposits of low quality thermal coal, and potential for vegetable fuels (firewood, bagasse), geothermal, wind and solar energy. 29. During 1970-75, primary energy output grew less than domestic demand because oil production declined. As a result, Argentina had to in- crease petroleum imports. Since 1976, however, the trend has been reversed; primary energy output has risen 4.5% per annum, while hydroelectric generating capacity doubled. In 1978, energy demand totalled 42.3 million Toe, comparable to countries with a similar level of development. 30. While energy resources are diversified, energy consumption depends largely on hydrocarbons. Petroleum and natural gas, accounting for only 14% of reserves, meet 86% of domestic energy demand. The hydropower poten- tial, on the other hand, represents some 50% of energy resources but contrib- utes only about 6% to domestic consumption. To balance reserves and consump- tion, the Government is agressively expanding hydroelectric power generation. At the same time, the Government intends to attain petroleum self-sufficiency by 1985. Additional efforts in coal exploration and a gradual expansion of nuclear power generation complement the petroleum and hydroelectric programs. The Oil and Gas Sector 31. Exploration. Hydrocarbon-bearing areas cover about 1.2 million sq km onshore and 0.6 million sq km offshore. Cumulative crude discoveries from the early 1900's amount to 5.55 billion B, of which 3.1 billion B have already been produced. Since 1976, after the Government began to encourage private firms to participate in petroleum development to complement YPF's efforts, exploration has surged and the earlier decline in reserves was reversed. Since 1980, both YPF and the private companies have stepped up their explora- tion efforts. Good prospects exist for additional discoveries especially in the extreme Southern and Northern basins where private companies have acquired acreage (Map IBRD 15312). 32. Production. Argentina's oil and gas sector ranks third in output and fourth in refining capacity in Latin America. After several years of decline, crude output increased 5-6% per annum since 1976, approaching 173 million B in 1979, the highest ever. Natural gas output increased 3.8% per year during 1976-79, reaching 1.2 billion cubic feet per day (CFD) in 1979. Today Argentina has attained a relatively high degree of hydrocarbon self- sufficiency; in 1979, net imports accounted for just 12.0% of domestic petro- leum demand, down from 15% in 1975, while net imports accounted for 20% of natural gas demand. However, because of substantial price increases, the import bill for hydrocarbons reached US$1,050 million, equivalent to 18% of merchandise imports, up from about US$400 million in 1978. Imports of natural gas from Bolivia are based on a 20-year contract extending to 1992; the volume was increased from 160 million CFD to 230 million CFD in mid-1980, while price increased from US$0.23 per thousand cu ft (CF) in 1972 to US$3.50/MCF in end-1980.  -9- 33. Refining and Transport. Total capacity of the country's 12 refineries amounts to some 0.7 million barrels per day (BD). Capacities have been ample to meet domestic demand for most products, except medium and light distillates. Because of the small size of most units (only four are larger than 0.1 million BD) and low capacity utilization of about 76% for the industry as a whole, refining costs are high. Until recently, the Government allocated domestic crude primarily to YPF's refineries; now, however, domestic crude is allocated according to individual refineries' share of the market for petroleum products. 34. About 45% of crude and about one-third of products are moved by pipeline, and the rest is transported by coastal tankers, rail and road. Trunk pipelines for natural gas, extending along the length of the country, are sufficient to meet summer demand, but fall short of potential winter peak demand by about 20%, thus restricting gas use. An expansion program, to be completed in 1982, will ease supply bottlenecks and allow better utilization of gas resources. Storage capacity for crude oil and petroleum products is about 35-40 days' supply which is adequate in light of Argentina's relatively high degree of self-sufficiency. For natural gas, very little storage is available. 35. Domestic Demand. In 1979, domestic demand for petroleum fuels including field and refinery consumption amounted to about 193 million B. In 1978, transport accounted for 54%; power generation, 20%; industry, 15%; and the commercial and residential sectors combined, 11% of consumption. Estimates of consumption in 1979 indicate a similar pattern. Increase in sales of final products during 1971-79 averaged nearly 3.9% per annum. Gasoline consumption fell in 1974-75 when its relative price increased substantially, but resumed afterwards its historic growth of 5.5-6% per annum. Consumption of industrial diesel and fuel oil declined, reflecting increased use of natural gas in industry and of hydropower in electricity generation. Little has been achieved thus far in energy conservation, although in industry alone, estimates place potential savings at 40% of consumption. First attempts to develop an energy conservation program are now underway with Bank assistance under the Refinery Conversion Project. 36. Natural gas has become increasingly important for meeting Argentina's energy requirements. Industry accounts for nearly one-half of natural gas use, followed by power generation (20%) and residential, commercial and Government sectors (about 30% combined). Consumption of liquefied petroleum gas replacing kerosene has been growing fairly rapidly. However, some 30% of output, net of reinjection, is flared principally because of the unfavorable hydrocarbon price structure, and inadequate transport, storage and reinjection facilities. 37. Projected Future Investments. The Government's plan is to discover and to develop at least 2.3 billion barrels in additional crude reserves which would maintain the reserves/production ratio at 15 years throughout the 1980's. To achieve this target, investment in the sector over the period 1980-89 would have to total about US$16 billion for the public sector and up to US$10 billion for the private sector (in 1979 prices); exploration and field development would require nearly 80% of total investment.  - 10 - 38. The Public Sector. The state-owned Yacimientos Petroliferos Fiscales (YPF), established in 1922, is the main petroleum company. It operates in virtually every branch of the petroleum and natural gas sector except marketing of natural and liquefied petroleum gas (LPG). In 1979, YPF accounted for about 50% of exploration, over two-thirds of crude output, 85% of natural gas output and 73% of petroleum refining. It operates six of the 12 refineries and all of the petroleum pipelines. YPF is also charged with negotiating and monitoring exploration and production contracts with private companies. Gas del Estado (GdE), a state enterprise established in 1957, is responsible for importing, processing and marketing of natural gas. 39. Private Companies. There are about 45 locally-owned firms operating in hydrocarbon exploration and production; of these about 30 companies are exploring or producing oil and gas on a contract basis with YPF, while others provide specialized services. Among foreign firms, Exxon and Shell are active in exploration, refining and marketing; Cities Service and Amoco, in production; and Total, Occidental and Union of Texas, in exploration. Several of the private domestic oil companies started as pure service companies to YPF, then expanded into secondary recovery, production and, finally, exploration on a risk basis. Other companies are subsidiaries of formerly non-oil groups, such as industrial or engineering service companies. Only three of the domestic companies have assets over US$100 million equivalent. Several of the firms have solid financial structures capable of supporting additional debt with no immediate requirement for additional capitalization. 40. To attain petroleum self-sufficiency, the Government has given top priority to further enhancing participation of the private sector in explora- tion and production. Private capital and the technical expertise of inter- national and domestic petroleum companies represent an important complement to YPF's activities in the sector. As the Government's representative, YPF plays an important role in administering the necessary contractual arrange- ments with participating companies. Since Argentine law provides that oil and gas belong to the state and not to the owner of the land, private firms have to enter into contracts with YPF. 41. Exploration and development contracts are regulated by the 1967 Hydrocarbons Law (No. 17,319) and the 1978 Risk Contracts Law (No. 21,778). The initial exploration period is five years for onshore and seven years for offshore areas. The development/production period is 25 years from the date of a commercial discovery and cannot exceed 30 years for exploration and production combined. In the case of offshore natural gas discoveries, the operator is permitted to postpone exploitation for up to 10 years to allow for development of markets and construction of necessary infrastructure. The entire production has to be sold to YPF at a price normally set at the time of bidding for exploration areas. Prices incorporated in recent awards have been slightly above half the current international crude prices, adjustable according to a formula related to output and domestic inflation, but in most cases, subject to a ceiling of 60% of international prices. So far, this has not been a constraint to bids. The Government has informed the Bank that YPF's bidding policy for both risk and production contracts, including the price of oil  - 11 - delivered to YPF, would be adjusted from time to time so as to provide suffi- cient incentives to prospective bidders. Furthermore, the Government would ensure that YPF will continue to award contracts with due regard to economy and efficiency in the execution of the projects. 42. The award of contracts for production follows a similar pattern, with bidding based, among others, on the sales price to YPF, production volume, and/or size of investment. In all cases, investment is financed by the contractor, with installations to be handed over to YPF at the end of the exploitation period without further compensation. Contracting companies are subject to standard corporate income taxation, with provisions to take account of the specific requirements of the petroleum industry. 43. The Government's policy of attracting private investment to hydro- carbon development has been quite successful. There is keen interest among foreign and domestic companies to participate in hydrocarbon exploration because of their favorable assessment of Argentina's hydrocarbon potential. In response to the improved investment climate, private companies have concluded with YPF during 1976-79 12 exploration contracts covering nearly 85,000 sq. km and 18 production contracts for 5,100 sq. km, entailing minimum investment commitments of about US$1.06 billion. As a result, oil production by private firms increased from 6.0 million cubic meters in 1977 (24% of total domestic production) to 9.6 million cubic meters in 1979 (35% of total domestic produc- tion). The most significant participations of multinational oil companies in YPF's contracts have been concentrated in the largest and riskiest explora- tion projects with only minor participation by local firms. Smaller foreign firms have preferred to participate with domestic firms in smaller scale on- shore exploration and field development projects. Consortia made up exclu- sively of Argentine firms have been awarded the bulk of the less risky onshore field development and secondary recovery contracts. The companies have been operating efficiently and their average lifting costs are, on average, lower than that of YPF. 44. During 1980, YPF offered for bidding seven exploration and six development and secondary recovery contracts requiring minimum investment commitments of about US$460 million. Actual investments which these contracts will require are likely to exceed this amount by a substantial margin. Exploration projects, if successful, will require large sums for field devel- opment, while production and secondary recovery projects are likely to justify additional investments significantly above the minima specified in the con- tracts. It is estimated that the private sector would have to invest a minimum of US$5.0 billion over the next five years just barely to maintain its current share of Argentina's oil production, and significantly more if the present plans of the private sector and YPF's bidding program are taken into account. The bulk of these investments are expected to come from multinational il companies. However, given the legal requirement that foreign investors associate themselves with Argentine firms, the added security against future nationalizations represented by the participation of Argentine capital, and the lack of interest of foreign companies in the smaller field development and secondary recovery projects, Argentine firms are likely to contribute between 20 and 30% of the total private investments. The feasibility of such invest- ment plans being carried out within the planned timeframe will depend to a large extent on the availability of appropriate financing.  - 12 - Financial Sources 45. Inadequate access to fresh capital and to bank credit presents major constraints to greater participation of Argentine private firms in petroleum exploration and development. Argentina's capital market is of moderate depth; the oil industry is considered fairly risky, and firms find it difficult to mobilize fresh equity from the market. Although several Argentine oil companies have solid financial structures, many of them are considered to be at the limits of their borrowing capacity since local banks possess little expertise in petroleum and, being in no position to evaluate projects, base their deci- sions almost exclusively on balance sheet positions. Furthermore, almost all local currency loans are available only on a short-term basis. The only source of long-term local currency financing for petroleum projects is BANADE. To date, BANADE has made eight loans for oil and gas projects using its own resources. In evaluating the technical aspects and risks of these projects, BANADE relied almost exclusively on YPF's decision to award a contract and financed up to 15% of the gross value of the guaranteed minimum production curve specified in the contracts between YPF and the companies. However, when YPF changed its contractual procedures in 1979, BANADE decided to suspend lending to the sector because it felt incapable of appropriately evaluating the new and more complex applications. Thus, no loans were made during the last two years. Aside from BANADE loans, the only other source of term financing has been the Euro-currency market, through both foreign and local banks at interest rates of about 1% to 2-1/2% above LIBOR. These loans are restricted in amount and are available only to the strongest local firms, for field development and secondary recovery projects, and not for exploration. Their maturity is generally limited to five years with no more than one year grace, hardly suitable to the needs of several kinds of petroleum projects, particularly initial field development which require gestation periods of several years. Sector Issues and Bank Assistance 46. Two principal issues affect further sector development: (i) the inadequacy of energy planning, particularly regarding natural gas; and (ii) the inappropriate pricing of energy resources. These problems, which are partly interrelated, are being addressed by the Government. The Govern- ment is in the process of preparing a comprehensive energy plan, to which the Bank is providing significant contributions in a number of ways. As part of the Bank-financed Oil and Gas Engineering Project (Loan 1880-AR), the Govern- ment is carrying out a study that will analyze the optimum development and utilization of natural gas on a regional and national basis, together with an assessment of alternative uses for fuels to be replaced by gas and of related investment requirements. An audit of hydrocarbon reserves is also being undertaken in connection with the above-mentioned project. A study on a least-cost power expansion program was funded under a Power Transmission and Distribution Project (Loan 1330-AR) approved in September 1977. The country's coal potential will be assessed in connection with the recently approved Coal Exploration Project (Loan S-020-AR). The Government is also developing an energy conservation program and as an initial step, an energy audit of major energy-consuming industries would be carried out partly financed under the proposed Refinery Conversion Project.  - 13 - 47. Fuel pricing in Argentina is complex, and relates both to the ab- solute level of fuel prices and to the relative pricing of various energy sources at different stages from production to consumption. From early 1976 until mid-1978, the Government enacted substantial price increases at all levels. However, in an attempt to slow down inflation, the Government kept these price increases significantly below those of the overall price level and fuel import costs in late 1978 and 1979. Consequently, by the end of 1979, prices of petroleum products were below international levels. Considerable progress to modify this situation was made during 1980, partly as a result of the dialogue with the Bank, especially in the context of the Oil and Gas Engineering Project and more recently during the preparation of the proposed Refinery Conversion Project. The Government is implementing a policy of gradually increasing prices of crude oil, petroleum products and natural gas to a level which would generate sufficient funds for YPF and GdE to meet their operating costs, service their debts and fund a significant part of their investments. 48. Retail prices for petroleum products are now satisfactory and on average reflect international crude prices, ranging, as of May 1, 1981, from about US$1.26/gallon for gasoil to about US$2.09/gallon for premium gasoline. A large percentage of final products prices is accounted for by taxes and does not accrue to crude producers or refiners. Needed changes in the relative prices of natural gas and other fuels are being analyzed in the context of the gas optimization study under the Oil and Gas Engineering Project (Loan 1880-AR). The study is expected to be completed by the end of 1982. The Government of Argentina has informed the Bank that it intends to continue adjusting petroleum product prices periodically to reflect adequately changes in internal price levels and international petroleum prices, taking into account the results of the natural gas optimization study financed under Loan 1880-AR. Furthermore, the Government has represented to the Bank that final consumer prices of petroleum would, at the minimum, be maintained in real terms at May 1, 1981 levels as measured by changes in the non-agricultural wholesale price index. 49. The Bank's strategy in the petroleum sector includes four main elements. The first, which was initiated under the Oil and Gas Engineering Project, consists of assisting in the planning of oil and gas development. This project is expected to give rise to a number of other projects with YPF and GdE, including exploration/development, gas recycling, secondary recovery, and oil and gas transport infrastructure, which could be considered for future Bank financing. Assistance in overall energy planning is provided through different studies addressing specific subsectoral issues to help assemble the building blocks necessary for an integrated energy plan. The second element in the strategy consists of institutional improvement in the public sector; both the Oil and Gas Engineering Project and the proposed Refinery Conversion Project would contribute to the institution-building of YPF, while the proposed project would strengthen the operational capability of BANADE to channel medium and long-term funds to the oil and gas sector. The third element, which is the main objective of the proposed project, consists of supporting the Government's policy of increasing the role of private firms in the sector to improve sector efficiency. The fourth element involves engaging in a pricing/sector policy dialogue with the Government.  - 14 - Previous Bank Lending 50. The first Bank loan in support of Argentina's hydrocarbon sector was the Oil and Gas Engineering Project (Loan 1880-AR) approved in June 1980. The project will (i) provide increased auditing of reserves and seismic surveys and (ii) fund a natural gas optimization study (para. 48). Good progress has been made in project implementation. The second loan, US$10 million for Coal Exploration (Ln. S-020-AR), was approved in December 1980. The project will help evaluate coal reserves in Argentina's most promising areas. PART IV - THE PROJECT Background and Objectives 51. The Government of Argentina and BANADE have requested a Bank loan to help finance an Oil and Gas Credit Project. The project was appraised by a Bank mission which visited Argentina in November 1980. A report, entitled "Staff Appraisal Report - Oil and Gas Credit Project," dated May 26, 1981 is being circulated separately to the Executive Directors. A supplemen- tary data sheet is presented in Annex III. Negotiations took place in Buenos Aires from May 5 to 8, 1981. The Government of Argentina was represented by Mr. Blanco, Director of Economic Policy, Ministry of Economy; BANADE was represented by Mr. Aguirre, Deputy General Manager for External Borrowing. 52. The proposed project would be aimed at overcoming the financial and institutional constraints that are inhibiting increased participation by the Argentine private sector in the development of Argentina's promising hydrocar- bon resources. The project would provide long term financing for sound primary and secondary recovery and exploration projects and develop BANADE's institutional capacity to appraise and supervise oil and gas projects. Furthermore, the project would act as a catalyst in attracting commercial banks to provide financing for subprojects and thus increase their lending for the oil and gas sector. Project Description 53. Petroleum Financing. The project would provide US$99 million of long term funds to finance subprojects in oil and gas development. Subloans would help finance the foreign exchange component of eligible subprojects comprised of activities in oil and gas exploration, primary and secondary recovery projects, pipelines and gas treatment plants, to be undertaken by private Argentine companies which have been awarded an exploration or develop- ment contract by YPF. Taking into account the need for equity funds by otherwise sound private petroleum companies, equity investments of BANADE in oil and gas firms in connection with specific subprojects will also be financed. This is consistent with established procedures for industrial credit projects. Given that the average subproject involves investments in the order of US$80-100 million, it is expected that one or two exploration, and five to seven development subprojects would receive funds under the proposed loan.  - 15 - 54. Technical Assistance. The proposed loan would include US$1.0 million to help strengthen BANADE's appraisal and supervision capacity for petroleum lending. US$650,000 would help finance 48 man-months of full time consultant services (para. 59) at about US$15,000 per man month, including travel, subsistence and overhead. The amount is reasonable considering the high level of expertise required and the salaries prevailing in the petroleum industry. An additional US$350,000 would be available to finance an overseas training program of BANADE professionals in oil and gas lending and supplemen- tary consultant services for specific subprojects. The Borrower 55. BANADE was created in 1970 as an autonomous government-owned develop- ment bank. Because of highly negative interest rates and inefficient manage- ment, lending operations came to a virtual halt by early 1976. The Government that took over in 1976 recapitalized the institution, brought in new manage- ment and adopted a new charter which provides for the maintenance of opera- tional autonomy, satisfactory evaluation standards and financial viability. To support industrial restructuring and institution building, the Bank made a US$100 million loan to BANADE in 1977. The loan is now almost fully com- mitted and a follow-up loan is under preparation. Although some improvements would still be required, BANADE's efficiency has improved significantly and it is now the fourth largest bank in Argentina. 56. BANADE's board consists of a chairman, two vice chairmen, and nine directors, all appointed by the Government for terms of four years. Prior to joining BANADE, the present chairman, vice chairmen and directors had several years of experience with banking, industry and the Government. BANADE is administered through its general manager and six assistant general managers. Lending operations are conducted through four departments: (i) investment and development credit (industrial project financing); (ii) mining credit which includes the oil and gas lending unit; (iii) ordinary credit (commercial banking operations and development credit for small and medium industries); and (iv) external financing (import/export financing). Resource mobilization activities are carried out by the domestic finance department and the external finance department. BANADE has 33 branches throughout the country and some 3,600 full-time employees. 57. While the quality of BANADE's professional staff has improved over the years, progress in this regard has been somewhat slower than expected for several reasons. The management has devoted more time to day-to-day operations, and has not been able to mount effective staff training and development programs. BANADE's salary levels, which are fixed on a Government- wide basis outside of management's control, are not fully competitive with private banking institutions. Hence, BANADE allows its staff, especially those in the technical field, to supplement their salaries with part-time work. While this situation is not ideal, it is a long-established practice in BANADE and other Argentine state enterprises. The Bank is addressing these issues through the supervision of the Industrial Credit Project (Loan 1463-AR) and the preparation of the proposed Second Industrial Credit project. The present project concentrates on helping BANADE to reestablish and strengthen its oil and gas lending unit.  - 16 - 58. While BANADE's policy statement allows a debt-equity ratio of 10:1, the actual ratio at year-end 1980 was about 5.5:1. Hence, the proposed loan would not require additional capitalization. Total assets amounted to almost US$4.6 billion equivalent (1980). About 39% of BANADE's liabilities were deposits; 42% foreign obligations; and the remainder, miscellaneous liabilities. Doubtful loans are estimated to be about 6.4% of the total portfolio at year-end 1980, and are covered adequately by reserves. Although the inflation rate has been quite high over the past few years, profits have been sufficient to prevent a massive erosion of equity as had occurred in 1975. 59. Under the ongoing Industrial Credit Project (Loan 1463-AR) BANADE was to be audited by a special unit of the Central Bank (BC). The liberaliza- tion of the banking system and the 1980 financial crisis placed competing demands on BC's staff and BC was unable to assign personnel to audit BANADE's accounts. As a result, only unaudited reports for 1979 and 1980 were available. BANADE has contracted a qualified external auditing firm to assist the Sindico, a representative of the National Executive Authority in BANADE's board of directors, to undertake the 1980 audit. This arrangement will be replaced by a system involving the same external auditing firm which would then undertake the future audits on its own. To ensure the implementation of an external auditing system suitable to the Bank, satisfactory completion and submission to the Bank of the audit report for 1980 with comparative figures for 1979 done by a private qualified independent auditing firm under the supervision of the Sindico and contracting of auditors acceptable to the Bank for the 1981 audit will be a condition of effectiveness of the proposed loan (section 6.01.(b)) of the Draft Loan Agreement). Subborrowers 60. Subborrowers would be selected from private Argentine companies which have been awarded (or are part of a consortium which has been awarded) an exploration (risk) or a production contract by YPF. Of the thirty or so Argentine companies operating in hydrocarbon exploration and production, about seven are likely to become subborrowers under the proposed project because of their prominent position in the sector, and their technical expertise. Only three of the seven have assets in excess of US$100 million. All seven com- panies have acquired considerable experience in oil and gas development and are currently involved in a number of contracts with YPF. The companies operate efficiently; on average, their oil lifting costs are lower than that of YPF. The overall financial situation of the seven companies is generally satisfactory. The balance sheets of five of them show a significantly positive net working capital, although two have a current ratio of 0.6:1. Their total debt to equity ratio varies between 1:1 and 4:1. The total indebtedness of these companies towards banks and financial institutions ranges from 0.3 times equity to 2.3 times equity, the average being around one times equity. Implementation 61. BANADE's Board has approved a satisfactory statement of policy on oil and gas lending which emphasized project appraisal as the principal basis for lending decisions. The experience and technical capability of the operator and of the sponsoring company would be considered in the evaluation, together with the conditions of contract with YPF and the operating agreement  among the partners involved in the project joint venture. BANADE will be required to submit the first 3 subprojects for Bank approval irrespective of subloan amounts, after which a free limit of US$6 million would apply. These arrangements would result in the review by the Bank of a representative sample of subprojects covering approximately 75% of the proposed loan amount. Only subprojects with projected economic rates of return of at least 12.0 percent (the estimated opportunity cost of capital for Argentina) will be eligible for Bank financing (Section 2.02 (c) of the Draft Loan Agreement). For subloans of more than $10.0 million, the Bank's review of BANADE's appraisals, to the extent necessary, would be supplemented with field visits by Bank staff. BANADE's supervision of subprojects would include frequent field visits during implementation and submission by the borrowing firms of audited annual reports and periodic reports on the subprojects. 62. Close coordination would be required between BANADE and YPF at the policy and operating levels to enable BANADE to program its oil and gas lending on the basis of YPF's plan to award contracts, and to give BANADE access to bidding and technical information necessary in the appraisal of specific subprojects. The Government gave assurances that YPF will facilitate provision of relevant information to BANADE (Section 3.02 of the draft Guarantee Agreement). Recognizing the large demand for and the complicated nature of petroleum projects, BANADE has established a separate division to deal with energy projects, particularly oil and gas projects. To strengthen this division, BANADE would hire several petroleum geologists and engineers. Under the technical assistance component of the proposed loan, BANADE would contract from a consulting firm, under terms and conditions satisfactory to the Bank, the full-time services of an experienced geologist and petroleum engineer for a minimum period of two years as senior staff of the division to help appraise projects and to train BANADE's staff on the technical aspects of oil and gas lending. Assurances were obtained that BANADE would maintain an adequate technical staff, including consultants, for oil and gas lending (Sections 3.01(b) and 3.02 of the draft Loan Agreement). Financing and Cofinancing 63. The Bank loan would finance the foreign exchange component of eligible subprojects, up to a maximum of US$20 million for any one subproject. The subproject's-sponsors would be expected to contribute about 25% of costs in equity. Given an average subproject size of US$100 million, additional financing would be necessary. The expected sources would be: (i) subproject cofinancing through local and foreign banks; (ii) cofinancing in association with the Bank loan; and (iii) BANADE's resources (pesos or Eurodollar lines of credit). BANADE would utilize its appraisal capability as a catalyst to mobilize funds from local and foreign banks for properly screened subprojects. Several private banks have already indicated their intention to finance subprojects with BANADE. In addition, BANADE is discussing cofinancing arrangements for about US$100 million with several banks. Once BANADE accepts a firm cofinancing offer, the Bank would enter into the usual Memorandum of Understanding with the commercial bank or banks. To attract cofinancing, BANADE would be prepared: (a) to share project information with other lenders; (b) to include a cross-default clause in its subloan agreements, and (c) to skew its subloan amortization schedules towards later maturities. Finally, if a gap remained in the subproject's financing plan, BANADE would provide the necessary resources either through peso loans or drawing down its external lines of credit.  - 18 - 64. The Bank loan would have a term of 15 years, including three years of grace with interest at 9.6% per annum. The amortization schedule would conform to the aggregate of the following two amortization schedules: (a) for the US$99.0 million portion for the subloans and investments, the aggregate amortization schedule of the subloans and investments fixed at the time when the funds have been fully committed; and (b) for the US$1 million for technical assistance, standard Bank amortization schedule. Any loan funds that were prepaid as funds from investments sold would be retained by BANADE and be used for similar subprojects (Section 2.08 (d) of the draft Loan Agreement). Relending Terms 65. Subloans would have terms of up to 15 years, including a grace period of up to four years. BANADE's onlending rate would be 13.5% at a minimum. BANADE would onlend in US dollars only and assume the cross-currency risk. Provision would be made for accelerated repayments based on a percentage of production payments by YPF arising from development subprojects. Subloans would be secured to the satisfaction of BANADE, including through an assignment of production payments and contract rights. When ad hoc firms are established to implement a project, completion agreements would be obtained from the parent companies. In the case of exploration subprojects, sponsoring compa- nies should be capable of servicing their debts in the event the subproject is not successful. Procurement 66. Subprojects would be based on exploration and development contracts awarded by YPF through international competitive bidding. Argentine firms winning these contracts have met YPF's prequalification requirements and are technically experienced. Companies normally form ad hoc consortia to bid on YPF's contracts, and procurement decisions of the operating partner in the consortium are subject to scrutiny from the other partners. Procurement under the loan would therefore be undertaken by contract award winners in accordance with established commercial practices in the petroleum sector which are accept- able to the Bank. For purchases of goods and services over US$1.0 million, three quotations would be presented by subborrowers. Foreign manufacturers, suppliers and service firms are well represented in Argentina. Where sub- sidiaries of the parent company will provide the services required (e.g., drilling), their fees would be subject to more detailed scrutiny by BANADE. Disbursement 67. Disbursement for petroleum projects financed by subloans would cover 100% of the foreign exchange cost of direct imports; 60% of the cost of imported off-the-shelf items, and 45% of the cost of locally supplied goods and services. These percentages represent the estimated foreign exchange components of these items. For the technical assistance component, the Bank would disburse 90% of total expenditures for consulting services and 100% of foreign expenditures for staff training abroad.  - 19 - 68. The proposed loan is expected to be committed by December 31, 1983 and disbursed by December 31, 1985. In order to accelerate the hiring of consultants, advance contracting would be permitted to the full amount of the technical assistance component (US$1.0 million) including retroactive financing of US$200,000 for expenditures made after April 1, 1981. BANADE would like to resume lending to the oil and gas sector as soon as possible with Bank financial and technical support. Hence, retroactive financing of up to US$5 million to finance subproject expenditures from April 1, 1981 is proposed. Benefits 69. The proposed project, the first Bank project involving private oil and gas firms, would contribute to the development of vital Argentine resources in an effective and timely fashion. By providing long-term funds directly and acting as a catalyst to attract parallel financing from other sources, the project would contribute to the timely implementation of sound development and exploration projects, and help the country move towards petroleum self- sufficiency. Economic rates of return of subprojects are expected to exceed 20 percent, based on the experience with projects financed by BANADE in the past. Total investments in these subprojects would be in the order of US$500 million and total incremental petroleum production resulting from this investment would be in the order of 50 million BD over the life of the subprojects. 70. The project would develop BANADE's capacity to identify, appraise and supervise oil and gas projects. This would help lift one of the critical institutional constraints which has prevented the local banks from financing oil and gas projects to be undertaken by the Argentine private companies. BANADE would also help develop access by borrowers to international capital markets by arranging for foreign banks to provide parallel financing for subprojects. At the sectoral level, the proposed project would support the Government's efforts to improve sector efficiency by strengthening the role of private sector firms in oil and gas exploration and development. Risks 71. Taking into account the technical assistance component and the comprehensive subproject review process involved, the project presents no special risk in respect of the soundness and efficiency of the petroleum development subprojects financed. The exploration subprojects would present a higher degree of risk as to success in finding petroleum in commercial quantities, but would involve only financially strong firms capable of repaying the subloan irrespective of subproject success.  - 20 - 72. On the sectoral side, should the Government depart from its present policy of encouraging private sector firms to participate in oil and gas sector development, or not be flexible enough in adjusting the terms for YPF's bidding program to continue to attract the interest of the private sector, not enough subprojects may be forthcoming for financing. However, these and other policy matters such as petroleum pricing, and their implications for achieving desired sector goals, have been discussed regularly between the Argentine Government and the Bank and will continue to be followed closely. On the whole, the project presents a moderate level of risk. PART V - LEGAL INSTRUMENTS AND AUTHORITY 73. The draft Guarantee Agreement between The Argentine Republic and the Bank, the draft Loan Agreement between the Bank and Banco Nacional de Desarrollo (BANADE) and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreements are being distributed to the Executive Directors separately. 74. Special conditions of the proposed loan are listed in Section III of Annex III. 75. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 76. I recommend that the Executive Directors approved the proposed loan. Robert S. McNamara President Attachment June 17, 1981 Washington, D.C.  -21 - ANNEX I Page 1 of 5 TABLE 3A ARGENTINA, - SOCIAL INDICATORS DATA SHEERT ARGENTINA REFERENCE GROUPS (WEIGHTED AVERjACES LAND AREA (THOUSAND SQ. KHM.) - MDST RECENT ESTIMATE)- TOTAL 2766.9 AGRICULTURAL 1786.0 MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 lb 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (IS$) 640.0 1120.0 2280.0 1562.9 2749.5 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 1129.0 1703.0 1873.0 1055.9 1641.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 20.6 23.7 26.4 URBAN POPULATION (PERCENT OF TOTAL) 73.6 78.4 81.6 63.4 53.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 33.0 STATIONARY POPULATION (MILLIONS) 41.0 YEAR STATIONARY POPULATION IS REACNED 2065 POPULATION DENS ITY PER SQ. KH. 7.4 9.0 9.5 28. 1 77.2 PER SQ. EM. AGRICULTURAL LAND 12.0 13.0 15.0 81.7 129.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 30.7 29.3 28.9 41.4 30.6 15-64 YRS. 63.7 63.7 62.8 54.7 61.1 65 YRS. AND ABOVE 5.6 7.0 8.3 3.9 8. 2 POPULATION GROWTH RATE (PERCENT) TOTAL 1.8 1.4 1.3 2.7 1.6 URBAN 2.6 2.0 1.9 4.1 3.3 CRUDE BIRTH RATE (PER THOUSAND) 24.0 22.0 21.0 34.8 22.8 CRUDE DEATH RATE (PER THOUSAND) 9.0 9.0 8.0 8.9 8. 9 GROSS REPRODUCTION RATE 1.5 1.5 1.4 2.5 1.5 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. USERS (PERCENT OF MARRIED W011EN) .. .. FOOD AND NUTRITION INDEX OF POOD PRODUCTION PER CAPITA (1969-71-100) 96.0 101.0 122.0 106.9 113.1 PER CAPITA SUPPLY OP CALORIES (PERCENT OF REQUIREMENTS) 122.0 130.0 126.0 107.4 125.3 PROTEINS (GRAMS PER DAY) 104.0 109.0 109.5 65.6 91.0 OF WHICH ANIMAL AND PULSE 65.0 69. 0 71.2 33.7 39.6 CHILD (ACES 1-4) MORTALITY RATE 6.0 4.0 3.0 8.4 4.3 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 65.0 67.4 71.0 63.1 67.8 INFANT MORTALITY RATE (PER THOUSAND) .. 59.0 .. 66.5 55.9 ACCESS TO SAFE WATER (PERCENT OF POPULAIION) TOTAL .. 56.0 66.0 65.9 URBAN .. 69.0 76.0 80.4 RURAL .. 12.0 26.0 44.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OP POPULATION) TOTAL .. 85.0 97.0 62. 3 URBAN .. 87.0 100.0 79.4 RURAL .. 79.0 83.0 29.6 POPULATION PER PHYSICIAN 660.0 500.0 530.0 1849.2 1030.1 POPULATION PER NURSING PERSON .. 980.0 .. 1227.5 929.4 POPULATION PER HOSPITAL BED TOTAL 160.0 179.0 .. 480.3 289.7 URBAN .. 144.0 RURAL .. 989.0 ADMISSIONS PER HOSPITAL BED .. .. .. .. 17.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 3.7 3.8 URBAN 3.5 .. . RURAL 4. 3 .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 1. 4 1.4 URBAN 1.3 1.4 RURAL 1.7 ..7 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 69.0 76.0 79.O/c URBAN 84.7 .. RSTRAL 19.0 ..  - 22 - ANNEX I Page 2 of 5 TABLE 3A ARGENTINA - SOCIAL INDICATORS DATA SHEET ARGENTINA REFERENCE GROUPS (WEIGHTED AVE9AGES - MOST RECENT ESTIMATE) MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 Lb 1970 /b ESTIMATE Lb LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 98.0 106.0 110.0 99. 7 105.9 MALE 98.0 106.0 110.0 101.0 109.3 FEMALE 99.0 107.0 111.0 99.4 103.0 SECONDARY: TOTAL 23.0 32.0 41.0 34.4 64.0 MALE 23.0 30.0 38.0 33.5 71.1 FEMALE 24.0 35.0 44.0 34.7 56.9 VOCATIONAL ENROL. (B OF SECONDARY) 50.0 59.0 63.0 38.2 28.8 PUPIL-TEACHER RATIO PRIMARY 22.0 19.0 18.0 30.5 29.4 SECONDARY 7. 0 7.0 8.0 14.5 26.1 ADULT LITERACY RATE (PERCENT) 91.0 93.0 94.0 76.3 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 24.0 61.0 81.0 43.0 84.6 RADIO RECEIVERS PER THOUSAND POPULATION 170.0 379.0 838.0 245.3 192.2 TV RECEIVERS PER THOUSAND POPULATION 22.0 147.0 177.0 84.2 118.5 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 155.0 179.0 147.0 63.3 93.0 CINEMA ANNUAL ATTENDANCE PER CAPITA 7.0 2.0 3.2 .. 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 8131. 7 9213.2 10140.9 FEMALE (PERCENT) 21.4 24. 7 26.0 22.2 30.4 AGRICULTURE (PERCENT) 20.0 16.0 14.0 37.1 37.0 INDUSTRY (PERCENT) 36.0 32.0 29.0 23.5 29.3 PARTICIPATION RATE (PERCENT) TOTAL 39.5 38.8 38.6 31.5 40.9 MALE 61.0 58.1 57.3 48.9 55.9 FEMALE 17.2 19.3 19.8 14.0 26.2 ECONOMIC DEPENDENCY RATIO 0.9 0.9 1.0 1.4 1.0 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 27.5 HIGHEST 20 PERCENT OF HOUSENOLDS 50.9 50.3 LOWEST 20 PERCENT OF HOUSENOLDS 6.9 4.4 LOWEST 40 PERCENT OF HOUSEHOLDS 16.6 14.1 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. RURAL .. .. .. 190.8 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 653.0 474.0 RURAL .. .. 577.0 332.5 385.8 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. RURAL .. .Not available Not applicable. NOTES La The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c Percent of population. Most recent estimate of GNP per capita is for 1979, all otber data are as of April, 1980. October, 1980  - 23 - ANNEX I Page 3 of 5 DtFINITIONS OF SOCIAL INDIICATORS Hate. Allhh-uhth daa t drantrtsore g.eneraly judged the most -ahori1ttat- and reliable. it ahatd alma be -t"d th.i they ay sot he inite- oatiaoly oo.yr. be. be. as ofaelako tandar dised detiritirts and o...eyt use.d by dotif ert-fnastte isbi rrlesig b data. The data see, seas- nhelees . __. 'sa odsrb oeeo antd I* tdi-ate teerde, ard ohar-teine oentct ajur d iftrnoeh... noott Theennrnr g.r.p. are Ill ahe same oarirY gnry at the subj it -ronlyan(2oonrynoywscetwt tersnigicmesnthratygou at ti suheot ounty (arept ot "apItl o-pias oil Enp..ters" atoOhr 'Middle 'norms toeth Atatos and Middls - tact ts ..o.e horace of atnoset otorahelodiairathe a aanteorradcnnrng g iroap th lago riCd (thonodII a. traio a I'irdi--ith - tuputatto tnas byha- o hp..ira py ToaIf otlao snao o hyisa Isod rea ,d totandoatet . atin oliidta ein tb_ la eoembytnt Aiidlt-ri- tatat tnrolooioe sitsour_ rpronol ....rola.t t to.. yth Tarmio Penmen-. Papalettad dIn. by sami,ben at pncIf i OPhiCiTa-101- hay.. yeo'ayit otinas a. roet ar pIiebdoo anen.an raet(dacdedbydheR n id.pnieobn at hPceatil- hc ye ittoi Cltntii'Iat ri Talf -9 annual -cocoaptid athancalaogy(oa ar .te .nrne. bard beptt.hwre,ioashalhmdmdcl an loa.P--oc atrlgs a yr-,-tol-an adgeohemaleli-henoreno pe Iaenb snatd by Itphy irim(bnbt amdra aitai data, limited neage of sedarsi tartitnise.; -P-1111,d- I ban sta besita papse orbtmhept GNP FER C,P Pt tit., .... I. dntsnaloe iospnsiipi snna sd potStedbapi..,. ndros encgoocre;190 90 _and_197 faa.leaI is..Puchl ie m ear hostabdi-toa.as.sds a- ~Ry_ CONSUMTIc ONi yEaR 20 urn ouaiopnetos nbsda 90 adteesl el,ahsdno de a on way--t-l. not,I be talded totoli, p -put-o by -ag sod nead theIy mn- lip o fertliyrae. a..oPhadfr tnsita pabhnpoans." t Prjatitorastrntcnciatrrtnocyrseatrheeenlseon Asraaa ert enoa E'troos-ica. urbani. adanl foraeda laglie apeomryat irh ncrasngnit ounot a ttta at tcom hrit rctsi pe -to- toalH hs n aalocpecasna lne .sd eae ae n_ tso athliian7. 9ear.the- p1om- daltg.nerrol.~linsooe-ton-ernsotl.hIh -ndnae end rotor to mii a rt alsoI.. ban tre -entls s1s60io decline i bMEcpedyet._.byI-f yIpyj btb d.l.it coo onto. hsi ohneda ttnmtIiytam elie0 djaied.. Ptoolnt rathIos Inosyar11 0sa hot ofdcln.o aSi..niscspae years Ih a .adjustedtoitemt lathe of primar -dbs-on ton onnlcl.cotlcon oiosldoei-nnlsnwaecsll ecn ma inasr oaaAh senoe .hey..be tioan oooto ic som pup_ic t blw rehn ohe ibi of-i.ia . moli ageq..t torolatlon r200-C ..I l t Iotysoniorroi ieAt b-sdt Iua years at apIndprmrtsercb -il-ya ryltinpt;qarbyosnr(11haars)o poIesgnra,tsaiss,ontahe rinn istcnaetdnpa i tota are.P. usalh f1.c1 mr fae onepnsotascn esai lntScr; 1960, 1970. and 1078 data.~~~h yao-h-otera oI_riat an onodarn . ~ _ -1 Tonal d studnsmtoi -ooailio Inrt aslnoeo oa- Idig_ fnoal goat rate of-1 O- ptmr a scnardees otn by -pen -_ftecrsish Eat-c -Oar 95-I, lObI-ta, sod _970-78. -sPiede-tao i aalaa pouaio gd yar n 0000 CrdIithtt.nnoosrd h os l:os irh E50-ct-ssod-riaid-yea popolatrlo 11IBb1971.n and 197 daa.toab ty Crd ni ae(rttosn)-bnuldab e hosn tsdya PsegrCr_os hosdrnlnitl-Psegroascmrs oO poyalacon; ThA, tOTO,and 197 data,cots betirg tes than ight peanom; oolodenamholsnsa, beaams an los bmooaotn.t-aeae ubratdoh asomn il eri nil teey ebile.d .1d.lig therara erdctn ohdihe oetttrrs g -spcthl Oar- tai toioo (c thousand nonoaI-tlot) i- Alli. typs t.mac pore-ortadb nilyrtc sal hero nrae oigi_90 91 r 97. tcuattgorlpba e hcst fpplnu;srae at Laio lnin-tscas. oul usds rna ume t cetos casdooeor i ctniaas nyer he eleotoca itda athrn-aorldelsoudr uyln a aloc fml paalgprgaita i icc;daart oetyar ainnbecmprbettcsma raalhyaonog-Aoo . Iaontonatot.oteI erotono martindocoitsaoihdioaig prdcto i l_ fo otodlts P ui--O -icosladoss- an teed end Pliosit denoted,, primaiyt modo eea ne ti ....idrmdie te r Iiad(. grnaerootnatnhocnrinasdt cic:araiddaia teIea, n had . adetesonto dronstcieswasI ra.ltionlaeanpooo rieoih,16-I 97,sd17 aa r sculls ualts.b, h fi P 'Yuct apl cScloresdporeotof etoremrta - owdtedgro tct deoisln o t P fard -t knpeaaiale it.. hountt pn ca ita loloVOP per. Ta.acialsupIsoeosdoetopdoin. ( 000000,e. les Tcncl i-b Poeim e (ntoo ...( tofonos.toni acIon.p.mo.s inl dio set ao sotisa.d Op rtthtse.00 ph.,oiogiiigasn for...matiati- 198 dais houetldk enl 191-by, 1070,a ed 1877 -- ,_l_ I. dais. tlyh If as pretagIo cit toaI aoIoo;1t0 9iadi as 4YRoitucyly of foodpe dy:.tenspl cifo adue taoE. (15_lorrt. eo o s speonse0 oa lhnfre 90 II Icr,11D al coresetbibedyCl prond...Idftrci 1970ande i97 i dt.1 h a-cp.pl-poenasa oraefrth rl, rpsd ptoIateTIr 9V 1971,-nd t97idata Thos ars .e t -i Tatni1i-ani...scIIc..sIII uar- Pcdtony;lhik, V 971ad, 1970-dit. age-ens LZ strnan ot the . pouaion,d end -bag tinetedfsa rle Ic 195isoDs an1 ule9n6 rn0prda,191h,090ar 97 aa. Oonmrpdedno an1-9atatp70ainnn 17adhEad0c i 196tato 197 girth 7drmons t tio te 1 boosdbahlt P-Itest and hai -_ isaod b ih C-d- D-h R.t.(!" th-:~~~~~~~~~~101 perent,sichna 2 persot..oaeasI0fyedan,andpeoraf tl pecen attrh 1t.t7 o,d170 data.pi.- Intct Iirtli i as Abe e hu Indl-E hoacf d"inette . at -iloct uner onIeo C aIltyoe e _ hoso h:tte births. lt-nty uhioonPnsn oseCnl(01ercmta ubnad oa eate suh s tht tam rotcte honhoca,sprI ga ne dsonrynls9atmta elt Paerflem lni- lintAre sp. pIns r a... end~ ta.d - ooonhderndaa Osig nithOn reasusied scans - Pt he h tue In rural~ o.en (noeloar adjusmen fort .. bigger- -Ys of liin to t.l ara s.- croat - Oushet at people (nasal, orhen, sad TVree-ieerrmd-hysoanete 'e., b..i7ld._d tie~~~~~~~~~~~~~~~~~~cibo tM ot human turrets cod scais-aster byfneder-borte...ct-me or the usenat iaPr-nds sd smilr ics-lanohs  - 24 - ANNEX I Page 4 of 5 E C O N OM I C D E V E L 0 P M E N T D A T A NATIONAL ACCOUNTS Actual Estimated Projected 1970- 1979- 1976 1977 1979 b/ 1980 1985 1976 1985 1976 1979 1985 Annual Growth Millions of US$ at 1978 Prices and Exchange Rate Rates As Percent of GDY Gross Domestic Product 53.484 56,240 59,886 60,906 77,004 3.3 4.3 100 7 99.3 98.8 Gains from Terms of Trade (+) -385 -293 400 720 923 .. .. -.7 .7 1.2 Gross Domestic Income 53,099 55,947 60,286 61,626 77,927 3.3 4.3 100.0 100.0 100.0 Import Goods and NFS 3,837 4,456 7,922 9,854 13,213 13.1 8.9 7.2 13.1 17.0 Export Goods and NFS -4.996 -6,841 7.871 -8,209 10.812 9.7 5.4 -9.4 -13.1 -13.9 Resource Gap -1,159 -2,385 51 1,645 2,401 - -2.2 0.0 3.1 Consumption Expenditures 41,157 41,847 46,491 49.248 62,557 3.3 5.1 77.7 77.1 80.3 Investment Expenditures 10,685 11,720 13,846 14,023 17,770 5.0 4.3 20.2 23.0 22.8 Domestic Savings 11,844 14,022 13,795 13,378 15,370 4.5 1.8 22.3 22.9 19.7 National Savings 11,440 13,535 13,300 12,072 14,157 3.6 1.0 21.4 22.1 18.2 MERCHANDISE TRADE Annual Data at Current US$ As Percent of Total Imports Capital Goods 500 874 2,241 2,922 6,433 - - 18 33.6 33.7 Intermediate Goods 1,870 2,402 3,418 4,292 9,159 - _ 61.3 51.2 48.0 Petroleum & Products 560 584 617 868 1,466 - - 18.4 9.2 7. 7 Consumption Goods 70 98 398 1,103 2.030 - - 2.3 6.0 10.5 Total Merch. Imports (c.i.f.) 3,050 3,958 6,674 9,186 19,068 - 100.0 100.0 100.0 Exports Primary products 2,807 3,842 6,778 6,754 15,560 - - 74.6 86.8 87.9 Manufactured goods 956 1 495 1 027 909 2,136 - - 25.4 13.2 12.1 Total Merch.Exports (f.o.b.) 3,763 5,337 7,805 7,663 17,696 - - 100.0 100.0 100.0 Merchandise Trade Indices Average 1978 = 100 Export Price Index 83 91 127 145 213 Import Price Index 83 97 118 130 192 Terms of Trade Indez 95 99 109 111 111 VALUE-ADDED BY SECTOR Annual Data at 1978 Prices and Exchange Rate Agriculture 6,365 6,769 7,235 7,452 9,512 3.0 4.7 11.9 12.1 12.4 Industry and Mining 20,805 23,621 27,677 28,230 36,363 6.9 4.7 38.9 46.2 47.2 Services and others 26.314 25.870 24,974 25,224 31.129 .5 3.7 49.2 41.7 40.4 Total 53,484 56,240 59,886 60,906 77,004 3.4 4.3 t0o00 100.0 100.0 PUBLIC FINANCE Annual Data at Current Prices As Percent of GDP (Central Government) billions of $a Current Receipts ,984 3,040 18,319 - 12.3 13.1 Current Expenditures 903 2,183 15,089 - 11.3 10.8 Budgetary Savings 81 857 3,230 1.0 2.3 Transfers (net) -483 -724 -1,641 - 6.1 1.1 Investment 343 920 3,840 - 4.3 2.7 SELECTED INDICATORS 1965- 1970- 1975- 1980- (Calculated from 3-yr. av. data) 1970 1975 1980 1985 Average ICOR 4.4 6.9 6.8 3.7 Import Elasticity 1.1 0.9 1.4 1.3 Marginal DomestSaiiuga.Rate,(%) 26.7 10.6 43.7 24.5 Marginal Nat'l Savings Rate (%) 23.2 16.2 44.5 24.9 LABOR FORCE AND OUTPUT PER LABOR FORCE VALUE-ADDED PER WORKER IN 1975 PRICES WORXER I AND EXCHANGE RATE In millions In % of Total Annual Growth Net In lUS$ Percent of Av. Growth 1970 1975 1970 1975 1970/75 1970 1975 1970 1975 1970/75 Agriculture 1,474 1.420 16 14 - 0.7 3,357 3,575 81 79 1.2 Industry 2,948 2,941 32 29 0.0 5,407 6,842 131 150 4.5 Services 4.790 5 779 52 57 3.8 4,140 3,618 100 80 -2.4 TOTAL 9,213 10,140 100 100 1.0 4,133 4,551 100 T70 1.9 ROMEY AND PRICES 1975 1976 1977 1978 1979 (billions of $a) Money Supply (Ml) 330.6 1,259.9 3,080.0 7,742.9 18,545.0 M1+ time deposits (M2) 409.7 1,538.4 6,254.2 17,169.3 49,604.0 Mi % of GDP 23.3 15.8 14.5 14.8 15.0 K2 as % of GDP 28.9 23.0 29.4 32.8 37.0 CPI Index (1974=0OO) 270.6 1,472.2 4,o63.7 11,873.8 29,474.5 % change CPI index 619.6 444- 176 192 148 a/ The Argentine Central Bank has undertaken a major revision of the national accounts. Data in this table are based preliminary estimates and are not fully comparable to those presented in Report 2988-AR, dated July 10, 1980. b/ The 1977-1979 changes reflect to a large extent the. real appreciation of the exchange rate during 1978/79. December 29, 1980  -25 - ANNgEX51fI - 25 - ~~~~~~~~~~~~~~~Page 5 of 5 BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT (amounts in millions of U.S. dollars at current prices) SUMMARY BALANCEtOF PAYMENTSa1972 1973 Estimated Projected SUMKARY bALANCE OF PAYMENTS 1972 1973 1974 1975 1976 1977 1978 1979 1980 1985 Exports (incl. NFS) 2,389 3,799 4,761 3,669 4,668 6,769 7,689 9,555 10,722 20,536 Imports (incl. N#S) -2,222 -2,633 -4,218 -4,517 -3,584 -4,892 -4,901 -9,059 -13,689 -24,071 Resource Balance 167 1,166 1,543 -848 1,084 1,877 , 496 -2,967 -3.535 Net Intprest Payments -323 -382 -388 -425 -464 -370 -387 -493 -956 -1,935 Direct Investment Income -60 -77 -35 -16 -28 -208 -292 -427 -546 -220 Other Factor Service Income -3 4 7 1 2 -40 -136 -148 -250 -85 Net Factor Service Income -386 -455 -416 -440 -490 -618 -85 -1,068 -1,752 2 2,240 Current Transfers (net) -4 10 - 5 18 31 48 35 30 68 Bolnas on Current Account -223 721 127 -1,283 611 1,290 2,021 -537 -4,690 -5,70' Private Direct Investment 10 10 10 - - 146 290 265 739 805 Official Capital Grants 10 26 17 9 8 - - -13 - Public M&LT Loans (net) 205 364 228 -68 1,319 356 1 1,297 2,435 260-- Disbursements 522 832 776 448 1,908 1,064 2,910 2,284 3,081 610 Amortization -317 -468 -548 -516 -590 -708 -1,560 - 987 - 646 -350 Other M&LT Loans (net) 51 -29 28 -3 -159 519 309 1,607 1,126 5,688 Disbursements 101 71 244 405 268 1,059 1,328 1,988 2,089 8,013 Amortization -50 -100 -216 -408 -427 -540 -1,019 - 381 - 964 -2,325 Short-term Capital and Transactions n.e.i 82 -444 -339 275 -1,814 31 -1,558 1,823 -2,406 - Change in Reserves - increase) 135 648 - 71 1,7Q0 17 -2 Q: 2 .2!U -4,442 2,796 -1,046 Level of Gross Reserves 465 1,330 1,286 432 1,589 3,816 5,814 10,256 7,460 8,959 GRANT AND LOAN COMMITMENTS Offi'cial Grants & Grant-Like - - - - - - - - - Public M&LT Loans 18RD 115 205 165 306 Other Multilateral 92 57 1 177 165 148 230 323 Bilateral 82 42 519 42 146 117 74 41 Suppliers 118 116 535 307 196 363 339 542 Financial Institutions 390 156 488 126 970 754 1,445 1,770 Bonds 120 65 290 200 207 93 146 104 Total Public M6LT Loans 802 436 1,833 852 1.803 1,680 2,399 3,086 DEBT AND DEBT SERVICE Public Debt Outstanding & Disbursed 2,368 2,792 3,046 2,901 4,251 4,836 6,791 8,088 Interest on Public Debt 156 199 233 250 258 308 512 915 Repayments on Public Debt 317 468 548 516 589 708 1,576 987 Total Public Debt Service 473 667 781 766 847 1,016 2,088 1,902 Other Debt Service 174 244 408 626 659 602 1,369 544 Total Debt Service 647 911 1,189 1,392 1,506 1,618 3,457 2,446 BURDEN ON EXPORT EARNTNr-P (7) Public Debt Service 19.8 17.6 16.4 20.9 18.1 15.0 27.2 19.9 Total Debt Service 27.1 24.0 25.0 37.9 32.3 24.0 45.0 25.6 TDS + Dir. Inv. Income 29.6 26.0 25.7 38.4 32.9 27.0 48.8 30.1 AVERAGE TERMS OF PUBLIC DEBT It. as 7. Prior Year DO&D 8.3 8.4 8.3 8.2 8.9 11.6 11.8 9.9 Amort. as 7. Prior Year DO&D 16.9 19.8 19.6 16.9 20.3 36.7 19.7 14.5 IBRD Debt Outst. & Disbursed 256 302 340 341 342 342 352 363 IBRD as % of Public Debt O&D 10.8 10.8 11.2 11.8 8.0 7.1 5.7 4.5 IBRD Debt Service as % of Public Debt Service 5.1 4.6 4.5 5.6 5.1 2.2 3.2 3.1 EXTERNAL DEST (Disbursed Only) Actual Debt Outstanding on Dec. 31, 1978 Esti.ated Deat OustandinE on Dec. 31. 1979 Disbhrsed Only Percent ued uni Percent IBRD 5 5.2 363 4.5 Other Multilateral 552 8.1 619 7.7 Bilateral 728 10.7 796 9.8 Suppliers 1,575 23.2 1,55S 19.2 Financial Institutions 2,o18 38.5 3,858 47.7 Bonds 966 14.3 897 11.1 Total Public M&LT Debt 6,791 100.0 8,088 100.0 1/ Public M+LT includes only loans to the Treasury. June 1, 1981  - 26 - ANNEX II Page 1 of 4 THE STATUS OF BANK GROUP OPERATIONS IN ARGENTINA A. STATEMENT OF BANK LOANS (As of April 30, 1981) Amount less Undis- Loan No. Year Borrower Purpose Cancellations bursed (US$ million) Fully disbursed loans 481.0 1330 1977 SEGBA, S.A. Power 115.0 50.1 1384 1977 Argentina Highways 105.0 74.9 1463 1978 Banco Nacional Industrial de Desarrollo Credit 100.0 53.7 1521 1978 Argentina Grain Storage 105.0 103.7 1677 1979 Ferrocarriles Railways Argentinos S.A. 96.0 96.0 1761 1979 Argentina 1/ Yacyreta Power 210.0 210.0 1880 1980 Yacimientos Petroliferos Oil and Gas Fiscales Engineering 27.0 20.3 1905 1980 Argentina 2/ Vocational Training 58.0 58.0 S-020 1980 Argentina 3/ Coal Exploration 10.0 10.0 Total 1,307.0 Of which has been repaid 212.6 1,094.4 Amount sold 12.8 Of which has been repaid 11.2 1.5 Total now held by Bank 1,092.9 Total undisbursed 626.7 1/ Not yet effective. 2/ Not yet signed. 3/ Signed on May 13, 1981.  - 27 - ANNEX II Page 2 of 4 B. STATEMENT OF IFC INVESTMENTS (As of April 30, 1981) Fiscal Amount in US$ million Year Obligor Type of Business Loans Equity Total (US$ million) 1960 Acindar Industria Steel Products 3.7 - 3.7 Argentina de Aceros, S.A. 1960 Papelera Rio Parana, S.A. Pulp and Paper 3.0 - 3.0 1961 Fabrica Argentina de Automotive 1.5 - 1.5 Engranajes, S.A.I.C. Transmission 1962 PASA, Petroquimica Petrochemicals 3.0 - 3.0 Argentina, S.A.I.C. 1965/ 1972 Celulosa Argentina, S.A. Pulp and Paper 12.5 - 12.5 1969/ 1975 Dalmine Siderca, S.A. Steel Products 17.0 - 17.0 1969 Editorial Codex, S.A. Printing and 5.0 2.0 7.0 Publishing 1971/ 1973 Calera Avellaneda, S.A. Cement 5.5 - 5.5 1977 Alpargatas S.A.I.C. Textiles & Fibers 7.0 - 7.0 1977 Soyex S.A. Soybean Processing 9.0 - 9.0 Plant 1978 Massuh, S.A. Pulp and paper 8.0 - 8.0 1978 Juan Minetti, S.A. Cement and Construction materials 9.0 - 9.0 1978 Ipako-Industrias Chemicals and Petroquimicas Petrochemicals Argentinas S.A. 10.0 - 10.0 1979 Alpesca S.A. Fisheries 5.2 0.5 5.7 Total Gross Commitments 99.4 2.5 101.9 Less Cancellations, Terminations Repayments and Sales 48.2 2.0 50.2 Total Commitments Now Held by IFC 51.2 0.5 51.7 Total Undisbursed 12.3 _ 12.3  - 28 - ANNEX II Page 3 of 4 C. PROJECTS IN EXECUTION (As of April 30, 1981) Loan 1330-AR Electric Transmission and Distribution Program, US$115.0 million loan of November 1, 1976; Effective Date: January 10, 1977, Closing Date: December 31, 1981. Mainly because of budgetary constraints on the funding of local cost requirements during 1978 and 1979, the overall execution of the project has been delayed by about 20 months. This delay, however, does not signifi- cantly affect the economic viability of the project. The project is proceed- ing according to a revised schedule prepared in March 1980. Loan 1384-AR Fourth Highway Project; US$105.0 million loan of May 16, 1977; Effective Date: December 13, 1977; Closing Date: June 30, 1981. After a delay of about 2 years because of the Government's efforts in 1978 and 1979 to reduce public expenditures, the civil works component is in full execution. All 48 civil works contracts have been tendered and all awards have been approved by the Bank. About 20% of the works were completed by the end 1980 and 60% are expected to be finished by end 1981. Other project components are being implemented satisfactorily. Loan 1463-AR Industrial Credit Project; US$100.0 million loan of September 23, 1977; Effective Date: November 28, 1977; Closing Date: December 31, 1982. The US$99.5 million of loan funds available for onlending has been 92% committed by BANADE. Projects for the remaining amount are under study and funds for them should be committed in the near future. About one third of the loan has been disbursed and disbursements should be completed by mid-1982, about six months beyond the date originally forecast. Loan 1521-AR Grain Storage Project; US$105.0 million loan of June 29, 1978, Effective Date: November 28, 1978; Closing Date: June 30, 1983. The Government has decided that the Grain Storage Project should be redesigned to provide a line of credit to the private sector through the Banco de la Nacion or another designated commercial bank for: (a) construc- tion of new grain storage facilities; and (b) expansion and modernization of existing facilities. The Grain Board prepared a proposal to discuss with Banco de la Nacion and the Argentine Railways. The Government also reviewed the proposals and recently presented them to the Bank for discussion.  - 29 - ANNEX II Page 4 of 4 Loan 1677-AR Second Railway Project, US$96.0 million of November 8, 1979; Effective Date: May 6, 1980; Closing Date: June 30, 1983. The project is about one year behind schedule; it is now being implemented in accordance with the revised investment plan agreed by the Bank and the Government. Orders for US$48 million of Bank financed equipment have been placed; orders for another US$25 million are expected to be placed within the next month. Progress in line closures, rationalization of services, staff reductions and operating improvements are in line with or above appraisal targets. Financial targets have not been met, mainly because of low agricultural traffic following unusually adverse weather condition in 1980. Loan 1761-AR Yacyreta Hydroelectric Project; US$210.0 million loan of November 6, 1979; not yet effective; Closing Date: June 30, 1987. Project execution is proceeding about six months behind schedule due to delays in the evaluation of bids. The loan is expected to be made effective soon pending finalizing of changes to be made in the finan- cial covenants included in the Loan Agreement. Loan 1880-AR Oil and Gas Engineering Project; US$27.0 million loan of October 3, 1980; Effective Date: December 2, 1980; Closing Date: June 30, 1983. Project implementation is satisfactory with initial work having commenced on all the major components. Contracts have been awarded for auditing of reserves and conducting seismic surveys, and proposals are being prepared for carrying out the gas optimization study. Loan 1905-AR Vocational Training and Technical Education Project; US$58.0 million loan (not signed); not yet effective; Closing Date: June 30, 1985. Loan signing has been delayed pending resolution of budget issues between the Ministries of Education and Economy. Officials of the new Government, which took office in March, are reviewing all budget allocations and are expected to resolve the impasse shortly. Meanwhile a project manage- ment team has moved efficiently to put into place the mechanisms required for project implementation. Loan S-020-AR Coal Exploration Project; US$10.0 million loan of May 13, 1981 not yet effective; Closing Date: December 31, 1985. Project implementation is underway and bids have been received for consultant services and drilling equipment. Contracts are expected to be awarded by August 1981.  - 30 - ANNEX III Page 1 of 1 ARGENTINA HYDROCARBON CREDIT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare project: One year (November 1979/1980) (b) Agency which prepared project: Banco National de Desarrollo (c) First presentation to Bank: November 1979 (d) First mission to prepare the project: July 1980 (e) Departure of appraisal mission: November 1980 (f) Completion of negotiations: May 1981 (g) Planned date of effectiveness: September 1981 Section II: Special Bank Implementation Actions None Section III: Special Conditions 1. The Government has given assurances that YPF would provide information as necessary to BANADE (para. 62). 2. BANADE has given assurances that: (a) it would hire additional staff whose qualifications, experience, and terms and condition of employment shall be satisfactory to the Bank (para. 62); and (b) any loan funds that were prepaid by subborrowers would be retained by BANADE to be used for similar subprojects (para. 64). 3. Fullfillment of condition 2(a) above and satisfactory completion and submission to the Bank of the audit report for 1980 with comparative figures for 1979 done by a private qualified independent auditing firm under the supervision of the Sindico and contracting of auditors accept- able to the Bank for the 1981 audit (para. 59) would be conditions of effectiveness.  IBRD 15312 OCTOBER 1980 z~~~~~ 'K' - s I~- 4p is A S I r; ' I e:r z; 1;: ' 1;02lt % 0 4 0I a4 . '- . 7 C II Af~~~~~~~~~~i s~~U i~ t "s- = o | | 1 :1 5 : f 0: 450 tD iA F tt fj -30 s 5 2~ ~ ~~~~~~~~~~~4 4' IANWte r \ !t2>< < < iF<|00 0 CAA<. . .<-t .!9;1 E' ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~4 f~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~h If > IXt CO== 3 r g ::.,<:g' ;:::; W;' 0 , 0 000 : j 0 C = tk ;V7;St;: 59;055EX; 7 0 a4 t2;30: 00ia:C;X0 E;;0; 2 E :: 2 X5t0it}tfl~~~~~~~~~~~~~~~~~~~~~~~~~~~'