Argentina - Public Enterprise Reform Execution Loan (PEREL) Project

Documt of The World Bank FOR OMCIAL USE ONLY A*~ 32 92 Rg Report No. P-5454-AR EIORlDUM AND RECOMMNDTION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPME TO THE EXECUTIVE DIRECTORS ON A PtOPOSED PUBLIC ENTERRSE REFORM EXECUTION LOAN (PERzL) IN AN AMOUNT EQUIVALENT TO US$23 MILLION TO THE ARGENTINE REPUBLIC January 14, 1991 This document has a resticted distrbution and may be wsed by redpiets only in the performance of their oMchl duties. Its contents may not othrwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Austral (A$) The austral floats freely against other currencies; on December 12, 1990, the exchange rate was A$5,000 - US$1.00. Fiscal Year January 1 - December 31 Principal Abbreviations and Acronyms AA Aerolineas Argentinas Argentine Airlines AGP Asociaci6n General de Puertos The National Ports System AyE Agua y Energia Electrica The National Water and Power Company BANADE Banco Nacional de Desarrollo National Development Bank CNT Comisi6n Nacional de National Telecommunications Telecomunicaciones Commission DNV Direcci6n Nacional de Vialidad National Highway Authority ELMA Empresa de Lineas Maritimas National Shipping Co. Argentinas ENTel Empresa Nacional de National Telephone Company Telecomunicaciones FA Ferrocarriles Argentinos Argentine Railways FM Ferrocarriles Metropolitanos Metropolitan Railways GdE Gas del Estado National Gas Company HIDRONOR Hidroelectrica Norpatagonica The Power Generating Company of Argentina CB -- International Competitive Bidding LCB -- Local Competitive Bidding LS -- Local or International Shopping hE Ministerio de Economia Ministry of Economy MIS -- Management Information Systems MOSP Ministerio de Obras y Ministry of Public Works Servicios P(blicos and Services PE Empresa P(blica Public Enterprise PERAL -- Public Enterprise Reform Adjustment Loan PPF -- Project Preparation Facility PSMTAL -- Public Sector Management Technical Assistance Loan SEGBA Servicios Electricos del Gran Buenos Aires Power Company Buenos Aires SIGEP Sindicatura General de State PE Comptroller Empresas PCiblicas SOMISA Sociedad Mixta Sidertirgica Steel Company of Argentina Argentina TOR -- Terms of Reference YCF Yacimientos Carboniferos Fiscales State Coal Company YPF Yacimientos Petroliferos Fiscales State Petroleum Company  FOR OFFICIAL USE ONLY ARGENTINA PUBLIC ENTERPRISE REFORM EXECUTION PROJECT (PEREL) Loan and Project Summary Borrower: The Argentine Republic Beneficiaries: Ministry of Economy, Federal Telecommunications Commission, Ferrocarriles Argentinos, Yacimientos Petroliferos Fiscales, Other Public Enterprises and Sindicatura General de Empresas Publicas. Amount: US$23 million equivalent. Terms: Repayable in 17 years, including a 5-year grace period, at the Bank's standard variable interest rate. FinancinR Plan: Government US$ 9.85 million IBRD US$23.00 million Total US$32.85 million Economic Rate of Return: Not applicable. A companion Public Enterprise Reform Adjustment Loan is presented in a Memorandum of the President dated January 14, 1991. This document has a restricted distribution and may be used by recipients only in the performancj of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED PUBLIC ENTERPRISE REFORM EXECUTION LOAN (PEREL) TO THE ARGENTINE REPUBLIC 1. I submit the following memorandum and recommendation on a proposed loan to the Argentine Republic for the equivalent of US$23 million to help finance a Public Enterprise Reform Execution Loan (PEREL). The loan, which supports a proposed Public Enterprise Reform Adjustment Loan (PERAL), would be on standard IBRD terms repayable over 17 years, including 5 years grace, at the Bank's standard variable interest rate. 2. Background. In Argentina, the absolute size of public enterprises (PEs) is not the central issue considering that their participation in the economy--about 10 percent of GDP--is similar to that in industrial countries and other Latin American countries. The main problem is exceedingly poor financial performance accompanied by an inadequate provision of goods and services. In Argentina, the PE's share of the total public 4eficit has remained fairly consistent at about 50 percent since 1971. 'rlier attempts at improving PEs (supported in some cases by Bank loans) have failed to help them retain satisfactory performance standards, but the modernization of the Argentine economy now depends critically on tangible success in reforming the sectors in which PEs now operate. 3. Government Strategy. The Government has developed an ambitious PE reform program to improve their efficiency and service quality. It focusses on: (a) privatizing PEs whenever possible; (b) strengthening the government's oversight as a shareholder and restructuring those PEs that would not be subject to privatization; (c) setting clear rules of the game and transparency of control by establishing regulatory processes and agencies; and (d) rationalizing labor management by reducing employment commensurate with efficient operations, eliminating a-:ciproductivity provisions in contracts and practices, and limiting the role of labor unions in PE management. 4. To implement its program, the Government has enacted legislation that empowers it to privatize and restructure PEs. In accordance with this legislation, the Government has completed the privatization of telecommunications operations and has issued a decree establishing a regulatory authority; has sold the national airlines, Aerolineas Argentinas; has issued decrees deregulating the hydrocarbons sector, sold 38 of the minor oil producing areas and prequalified 16 international oil companies for a tender to participate in joint ventures in 4 of the central oil producing areas; and has awarded concessions to the private sector for the operation of railway cargo lines and closed one-fourth of those unprofitable intercity railway passenger services.  -2- 5. Rationale for Bank Involvement. The Bank has played an active role in promoting public enterprise reform in Argentina over the last three years and has approved an aggregate of about US$7 million in funding for project preparation drawn from various current loans and project preparation facilities. The proposed PERAL and PEREL would provide further Bank technical support as well as vital financial assistance. Without this catalytic support, the critical reforms would be less likely to proceed. Complementing the public enterprise reform, a major reform of the Federal Government and Central Bank would be supported by a Public Sector Reform Loan, likely to be presented to the Board about April 1991. 6. Project Objectives. The proposed loan would strengthen the Government's administrative and technical capability to carry out its PE reform program. It would finance the costs of contracting services and equipment necessary to implement the reform program that relate mainly to policy conditions contemplated under PERAL as well as extend the program to additional sectors/enterprises. Specifically, the proposed PEREL would support: (a) total or partial privatization of four major PEs in Argentina as well as improvement of the financial viability and service quality in nonprivatized business units; (b) preparation of further privatization programs; and (c) strengthening the institutional and regulatory framework for the sectors in which PEs operate. The project is also intended to engender competition within a large segment of the private sector, which has thrived financially under the protective shield of government regulations that encouraged PE inefficiency. 7. Proiect Description. The proposed project would be coordinated and administered by the Ministry of Economy (ME). It would finance expenditures (mostly payments to consultants) for the following activities: Ca) General PE Framework. (i) Strengthen the Government's administrative capacity to plan, execute and monitor the PE reform program through the establishment of a Project Coordinating Unit in ME (US$1.2 million); (ii) Develop a strategic plan for ME to continue the Government's program of restructuring/privatization of PEs, including upgrading of the management information systems, and the establishment of performance evaluation systems for PEs (US$1.8 million); (iii) develop and implement a labor management strategy to improve labor productivity through revision of labor contracts and design of labor reduction mechanisms (US$0.425 million, in addition to US$0.46 million under a PPF for PERAL); and (iv) assist in strengthening the capabilities of the Government to reduce environmental damage caused by PEs and private companies in sectors covered under the project (US$0.6 million). (b) Telecommunications Sector. (i) Provision of retroactive financing to the Government to pay an investment bank for its participation in the sale of ENTel (retainer fees to investment bank - US$0.1 million in addition to US$l million under a PPF for PERAL); and (ii) assistance to the Government in setting up a National  Telecommunications Commission (CNT) and bringing it to full operational efficiency to ensure competitive behavior and compliance with service obligations of private operators (US$3 million). (c) Railways. (i) Assistance to Ferrocarriles Argentinos (PA) through international and local consultants to strengthen its capabilities for further development and implementation of the railway reform program (US$1.67 million); (ii) analysis and identification of additional cargo concession options followed by development and implementation of action plans (US$0.63 million); (iii) development of an action plan for restructuring interurban passenger services to achieve a reduced and more efficient level of operations (US$0.33 million); (iv) development of privatization options for FA service activities (US$0.45 million); (v) development of an action plan for franchising FA rolling stock (US$0.4 million); (vi) establishment of and support for an asset management unit within FA to dispose of excess assets (US$0.5 million); (vii) assistance to a railwr4y employee management unit that will be created in PA to reorganize the labor force and develop a program for labor reduztion to facilitate restructuring/privatization of the railways (US$0.61 million); (viii) assistance in restructuring FA's metropolitan railway services into an independent operation under local government control and financing (US$0.98 million); (ix) development of accounting and insurance systems for the new railway organization (US$0.35 million); (x) development of new rules for operating practices and safety of railway operations (US$0.2 million); and (xi) development of new regulatory frameworks, one for the national railway system and another for the Buenos Aires metropolitan transport system, to prevent monopolistic behavior by operators and ensure efficient interconnection of transport services (US$0.98 million). (d) Hydrocarbons. (i) Development of a strategic plan to define long-term objectives of the new State Petroleum Company (YPF) after restructuring/privatization of some of its components (US$0.36 million); (ii) implementation of new business units for YPF according to a strategic plan (US$0.98 million); (iii) assistance for the privatization and/or establishment of joint ventures of selected YPP's upstream and downstream operations and transport services (US$0.92 million); (iv) assistance in privatization of natural gas transport and distribution networks of the State Gas Company (GdE) (US$0.84 million); and (v) strengthening the Government's regulatory capabilities (US$0.4 million). (e) Other Assistance. Assistance to prepare and carry out additional privatization/restructuring activities in other PEs including: (i) Empresa de Lineas Maritimas Argentinas (ELMA, the Shipping company); (ii) Asociaci6n General de Puertos (AGP, the national  port system); (iii) Empresa Nacional de Correos y Telecomunicaciones (ENCOTEL, the postal services); (iv) Obras Sanitarias de la Naci6n (OSN, the water supply and sanitation services); (v) Servicios Electricos del Gran Buenos Aires (SEGBA, the power distribution system for Buenos Aires); (vi) Agua y Energia Electrica (AyEE, the national power generation and transmission company); and (vii) Other PEs (US$5.275 million). 8. The matrix of project activities (Attachment 1) includes information on objectives, activities, outputs, impact, and timing targets. The total project cost is estimated at US$32.85 million, of which US$23 million would be financed by the Bark. The project would be completed by December 31, 1994, with the closing date of the loan June 30, 1995. Retroactive financing of US$500,000 from July 1, 1990 would be provided to: (a) continue payments to consultants in the Project Coordinating Unit (initiated under a PPF); (b) upgrade SIGEP's MIS; (c) continue implementation of the labor management strategy for PEs; (d) finalize payments to consultants that assisted in ENTel's sale; (e) provide consulting services for the development of CNT; and (f) initiate the preparation for divestiture of selected YPF operations. The amounts outstanding from a PPF for US$750,000 will be paid out of the loan. A Special Account for US$250,000 would be established, to be activated in case the procurement agent (see para. 9b) employed for the project would not cover all activities. The government will onlend the proceeds of the loan to all participating entities, which have their own patrimony and juridical personality, in US dollar equivalent under the same terms and conditions of the loan agreement. Selection of consultants and procurement of equipment would follow Bank guidelines. The detailed cost estimates and methods of procurement and disbursements are shown in Schedules A and B. A Supplementary Loan Data Sheet and the Status of Bank Group Operations in Argentina are given in Schedules C and D, respectively. A detailed project description is given in Annex 1. Detailed Terms of Reference (TOR) for all major activities and general TOR for all other activities have been agreed during appraisal and revised during negotiations. TORs are available in the project file. 9. Actions Agreed. During negotiations, agreements were reached with the Government on measurement criteria according to a detailed timetable for each activity (Attachment 2). It was also agreed that the Project Coordinating Unit would be headed by the Subsecretary of Public Enterprises in ME as National Project Director and assisted by a full-time Deputy Director with powers to contract consultants ar.d request disbursements. The following actions were also agreed with tha Government during negotiations: (a) effectiveness of the proposed PEREL wosuld: (i) be contingent on effectiveness of the proposed PERAL and vice versa; and (ii) require that the Project Coordinating Unit be staffed in a manner satisfactory to the Bank; (b) not later than April 30, 1991, the Borrower would enter into contractual arrangements with a procurement agent satisfactory to the Bank; (c) starting approximately six months after loan effectiveness, the Bank would receive semiannual reports on actual project implementation; (d) failure to implement the project as per the timetables  agreed during negotiations may cause reallocation or cancellation of fur.ds; (e) if either the railway or the hydrocarbon tranche under PERAL remain undisbursed by the PERAL Closing Date (December 31, 1993), then funds allocated under the PEREL to the sectors related to those tranches shall become ineligible for disbursement. 10. Benefits. The project is expected to contribute to economic growth from productivity gains by transforming a large sector of the Argentine economy from a condition of control and protection to one of competition, and by increased investment of the private sector, which would become active in the previously monopolistic domain of public enterprises. More specifically, the benefits would include increased production and service quality by reversing the declining trend in petroleum production, lowering overall transport costs, and improving the quality of telephone service. Improvements in PE productivity would occur as managers are allowed to run operations commercially under performance evaluation contracts and through changes in labor regulations and practices. Specific benefits of the project include: (a) improved coordination among ME, MOSP, and enterprise management; (b) decision-making based on timely information and substantiated analysis of PE performance, options and cost/benefits; (c) greater access to information, transparency of decisions, and ex-post accountability. 11. Ri -'s. The major risks are that during implementation key activities may not be implemented as originally planned due to technical difficulties, political opposition, and pressures by private parties. Moreover, rapid turnover in key public managers may reduce the value of studies or plans developed by the project. The Government's strong commitment, as reflected by progress achieved to date in its reform/privatization program indicates these risks seem acceptable. To reduce risks of a technical nature, the Bank has discussed extensively with the Government all major components of its reform program and has provided international expertise and in-house assistance during project preparation. In addition, technical capabilities at the Government and PE levels would be ensured through the recently established Project Coordinating Unit in ME and technical units in major PEs. 12. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and I recommend that the Executive Directors approve it. Barber B. Conable President Attachments January 14, 1991 Washington, D.C.  6 SCHEDULE A Page 1 of 3 ARGENTINA PEREL - PROJECT ACTIVITIES Man-Months Financing Project Components Consultants Counterparts Bank Government (US$'000) I. PE REFORM FRAMEWORK 1. Establish Coordinating Unit in ME 401 270 1,200 864 2. (a) Development of Strategic Plans and Performance Evaluation Systems for PEs 360 288 1.600 350 (b) Upgrade SIGEP's MIS 56 60 200 146 3. (a) Labor Management Strategy 11 (60) (100) (460) (240) (b) Extend labor Task Force in ME2/ 9 10 25 20 (c) Renegotiate Labor Agreements and Monitor Retirement 84 680 400 1,680 4. Strengthen Environmental Capabilities 120 100 600 192 Subtotal 1,030 1,408 4,025 3,252 II. TELECOMMUNICATIONS SECTOR REFORM 1. Management of ENTel's Sale31 (n.a.) (200) 100 41 (480) 2. Establish National Telecommunications Commission 200 660 3,000 2,240 51 Subtotal 200 660 3,100 2,240 III. RAILWAYS SECTOR REFORM 1. (a) Technical Unit in PA 180 216 1,010 61 540 (b) Assistance to Unit 30 45 660 110 2. Analyze Future Cargo Concessions 42 63 630 160 3. Restructure Interurban Passenger Service 28 42 330 100 4. Privatize Other FA Facilities 30 45 450 110 5. Franchise FA Rolling Stock 40 60 400 150 6. Form Excess Asset Unit and Identify Excess Assets 25 74 500 190 7. Establish Employee Management Unit 35 50 610 130 8. Restructure Metropolitan Line 50 75 980 71 190 9. Analyze Accounting Costs and Insurance 30 45 350 110 10.Change Operating Practices 10 20 200 50 1l.(a) Establish National Railway Authority 8/ 40 60 600 150 (b) Establish Metropolitan Railway Authority 81 so 45 380 110 Subtotal 570 840 7,100 2,100  7- SCHEDULE A Page 2 of 3 Man-Months Financing Project Components Consultants Counterparts Bank Government (US$'000) IV. OIL AND GAS SECTOR REFORM 1. Develop New Strategic Plan of YPF 33 100 360 9/ 400 2. Implement New Business Units for YPF 80 90 980 360 3. Divest Selected YPP Operations 119 112 920 260 4. Privatize Natural Gas Transport and Distribution 56 56 840 140 5. Strengthen Policy and Regulatory Capability 12 12 400 30 Subtotal 300 370 3,500 1,190 V. OTHER ASSISTANCE 1. ELMA 40 60 600 150 2. AGP 50 75 925 190 3. Encotel 20 30 300 80 4. OSN 50 80 1,000 200 5. SEGBA 30 90 750 180 6. DNV 10 25 250 80 7. AyEE 25 74 500 190 8. Other -.- -.- 950 - Subtotal 225 434 5.275 1,070 TOTAL 2,325 3,712 23,000 9,852 ~mr 1/ Financed under PPFs for PERAL 2/ Initially financed under Public Sector Management Technical Assistance Loan 2712-AR. 3/ Corresponds to commitment fee to ENTel's privatization advisors. 4/ Total cost US$1,100,000; US$1,000,000 financed under PPPs for PERAL. 5/ Includes Us$500,000 for equipment and its maintenance, US$600,000 for training, and US$160,000 for local consultants; the remainder is salaries for new staff. 6/ Includes US$20,000 for computers. 7/ Includes US$300,000 for computers and software. 8/ Includes funds for computers. 9/ Includes provision for US$140,000 in training for managers to implement restructuring.  -8- SCHEDULE A Page 3 of 3 ARGENTINA PEREL - PROJECT ACTIVITIES Financing Plan (US$1000) Local Foreign Total Bank 3,235 19,765 23,000 Government 9,850 9,850 TOTAL 13,085 19,765 32,850  -9- SCHEDULE B ARGENTINA PEREL Procurement Arrangements (USS thousands) Proiect Element Procurement method Total Costs LS a/ LCB b/ ICB Others c/ N.A. 1. Consultant Services and Training 22,200 -- 22,200 (22,200) 2. Equipment 100 700 -- -- -- 800 (100) (700) 3. Local Inputs -- -- -- -- 9,850 d/ 9,850 TOTAL 100 700 -- 22,200 9,850 32,850 (1O0) (700) (22,200) (23,000) al Local or international shopping (LS) if estimated contract value falls below US$25,000. bI Local competitive bidding if estimated contract value lies between US$25,000 and US$250,000. e/ Includes contracting of consultants in accordance with Bank Guidelines. Al The Government's contribution of approximately US$9.85 million consists largely of counterpart staff, local consultants, computers and their maintenance, secretarial services and supplies. Note: Figures in parenthesis are the respective amounts financed by the Bank. Disbursements (US$ '000) Category Amount Percentage 1. Consultant Services and Training 21,450 10O net of taxes 2. Equipment 800 1002 foreign expenditures and 85? ex-factory local expenditures. 3. Refunding of PPF 750 TOTAL 23,000 Estimated IBRD Disbursements (US$ '000) FISCAL YEAR 1991 1992 1993 1994 1995 Annual 1,920 5,380 5,500 6,000 4,200 Cumulative 1,920 7,300 12,800 18,800 23,000  - 10 - SCHEDULE C ARGENTINA PEREL SUIDRementarY Loan Data Sheet Section I - Timetable of Key Processing Events (a) Time taken to prepare s 3 years, initially part of PERAL (b) Prepared by Government of Argentina with Bank assistance (c) First IBRD Mission July 1987 (d) Appraisal Mission Departure June 1990 (Post-Appraisal October 1990) (e) Negotiations December 10-14, 1990 (f) Planned Date of Effectiveness February 1991 Section II - Special Bank Implementation Actions None Section III - Special Conditions 1. Effectiveness. It would be subject to: (a) effectiveness of the proposed PERAL and vice ver3a; and (b) staffing of the Project Coordinating Unit in a manner satisfactory to the Bank. 2. Other. (a) Not later than April 30, 1991, the Borrower shall enter into contractual arrangements with a procurement agent satisfactory to the bank; (b) starting approximately six months after loan effectiveness the Bank will receive semiannual reports on actual project implementation; (c) failure to implement the project as per the agreed timetable may result in a reallocation or cancellation of funds; (d) if the Railway Tranche or the Hydrocarbon Tranche ur.atr PERAL remain undisbursed by the PERAL Closing Date of December 31, 1993, then loan funds allocated under the PEREL to the sectors related to those tranches shall become ineligible for disbursements.  - 11 - SCHEDULE D ARGENTINA PEREL Statement of Bank Loans (As of September 30, 1990) Flscl Amount Less Loan No. Year Borrower PurDose Cancellations Und7sbursed (USS millIon) Fully disbursed loans (25) 2,111.12 2032 1982 yacim;entos Refinery 200.0 0.2 Petroliferos Fiscal** Conversion 2298 1983 Argentina Highway 100.0 9.8 Sector 2592 1986 Yacimientos Go* Utilization 180.0 97.9 Petrolifiroe Fiscal., A Tech. A".;wt. 2841 1986 Argentina Water Supply e0.0 47.3 2712 1916 Argentina Public Secti 18. 5 4.1 Mgt. 2751 1987 Argentina Power Engineering 14.0 2.1 2793 1987 Argentina Smell and Medium 125.0 81.4 Scale Ind. Credit 2805 1987 Argentina Port S0.0 43.4 2815 19e7 Argentina Trade Policy 496.3 0.4 2864 1987 Servicios Electricos Powor Dist. 276.0 240.3 2920 1988 Argentina Municipal Oov. 120.0 115.0 2970 1988 Banco do la Nacion Agric. Credit 106.6 16.2 2984 1989 Argentina Social Sector 28.0 22.8 2997 19e9 Argentina Housing Sector 300.0 284.1 2998 1989 Argentina Electric Power 252.0 3.8 3016 1989 Argentina Tax Admin. T.A. 6.s 6.2 TOTAL 4,444.0 of which has been repaid 1,141.0 Total now outstanding 3,303.0 Amount Sold 12.8 of which has been repaid 12.8 Total now held by Bank 3,290.2 Total Undisbursed 973.8 10/24/90  - 12 - ANNEX 1 Page 1 of 14 ARGENTINA PUBLIC ENTERPRISE REFORM EXECUTION LOAN TECHNICAL ANNEX A. Background 1. Overview of PEs. As of July 1, 1990, there were 230 PEs in Argentina, with about 29Z under the Federal Government and the rest under provincial governments (62Z) and municipal authorities (9Z). The PEs under the Federal Government accounted for nearly one-third of total public expenditures and about 102 of GDP. Reliable information on provincial and municipal enterprises is not available; however, while large in number, they are not significant in aggregate economic and financial terms. In September 1990, control over all national PEs, previously under the Ministry of Public Works (MOSP) and the Ministry of Defense (MD) (excluding those for military purposes), was transferred to the Ministry of Economy (ME). There were then 67 enterprises (two were recently privatized) under the ownership of the Federal Government. These enterprises were mainly concentrated in three major sectors: (a) combustibles and energy (principally YPF, GdE, YCF, SEGBA, AyEE, and Hidronor); (b) transport and communications (principally FA, AA, Elma, AGP, ENTel, and ENCOTEL); and (c) industrial and services (principally in the petrochemical and steel sectors). The seven largest PEs in terms of aggregate revenues were ENTel (telecommunications), FA (railways), YPF (oil and gas production and refining), GdE (gas transmission and distribution) and SEGBA, AyEE and Hidronor (power generation, transmission and distribution). These companies represented over 50? of national PE revenues in 1989 and were representative of the PE sector. These were characterized by weak financial performance and unsatisfactory service quality an4 output volume. Their frequent losses and/or unsatisfactory internal cash generation have resulted in a heavy drain on the Treasury (transfers to the seven PEs between 1984 and 1988 are estimated at about US$3 billion, although taxes and royalties paid by YPF to the Central and Regional Governments result in much lower net transfers), a build up of large arrears among themselves and with suppliers, and investment programs inadequate to deal with output and quality requirements. 2. Institutional Framework. The Government controls those PEs under Federal authority as follows: (a) sector policies and overall sectoral planning are carried out by the corresponding secretariat under MOSP (except for the Secretariat of Energy which was transferred in September 1990 to ME) in consultation with the Secretariat of Planning (SP) in the Presidency; (b) overview, management and financial administration of PEs has recently been transferred from MOSP and MD to ME; (c) investments above a certain amount must be authorized by the SP and ME; (d) annual budgets must be approved by a multiplicity of Government authorities (MOSP, ME, the Legal and Technical Secretariats of the Presidency, SIGEP, and ultimately the President); (e) monthly budgets must be approved by ME (starting in October 1990); (f) MOSP  - 13 - ANNEX 1 Page 2 of 14 and MD are in charge of the privatization programs for the PEs under their jurisdiction; (g) price and tariff changes must be approved by MOSP according to directives given by ME; and (h) auditing of PEs is undertaken by SIGEP, the State PE comptroller. 3. Overall Problems/Constraints. The main problems causing weak PE performance arise from government controls over sector policies and PE management, influence from private sector groups that enjoy privileges in the form of protected markets or subsidized input prices, and labor unions that have extracted special privileges from PEs that go far beyond common practice in the private sector. The Government's control over most PE prices and tariffs has resulted in pricing policies that do not reflect considerations of economic efficiency but rather are oriented towards income policies, private sector promotion and enhancing Government revenues. The central government's distrust of PE managers has led to most decision-making taking place at ministerial levels, eliminating incentives and responsibilities for managers. Furthermore, political considerations in the appointment of PE managers and frequent turnover have led to inappropriate leadership of PEs. PEs in Argentina are obligated under the 'Compre Argentino" law to give preference to local suppliers in their purchases of goods and services, although this law has been temporarily suspended under the Economic Emergency Law. Low labor productivity characterizes all PEs and is caused by: (a) overstaffing, most acute in FA, which could operate with about one-third its labor force; and (b) antiproductive provisions in labor contracts and work rules, examples of which are guaranteed employment security, prohibitions for wage incentives, and labor union control of corporate structure and personnel mobility. 4. Telecommunications. Until very recently Argentina's telecommunications system was dominated by ENTel, a state-owned company that had a legal monopoly to supply telecommunications services to approximately 90? of all public network subscribers. As of December 1988, ENTel had an installed capacity of about 3.2 million telephone lines and operated 1,300 switching centers, making it the third largest telephone system in Latin America. The services provided by ENTel have been inadequate: unmet demand for new telephone lines is estimated at over one million, and the existing system is neither large enough nor modern enough to handle the volume of calls being placed (with completed calls at about 50? of those for well developed systems). The poor performance of ENTel resulted from a combination of factors, including: (a) inefficient management of the company; (b) low labor productivity; (c) uncompetitive procurement practices; (d) tariff policies determined by political factors with little regard for company profitability; (e) inadequate financing for capital expansion; and (f) ineffective Government regulation and supervision. 5. Railways. Ferrocarriles Argentinos (FA) was formed as a confederation of six railroads (later consolidated) after the Government nationalized all private railway companies during the second half of the 1940s. Two lines (Belgrano and Urquiza) are operationally separate because of their different gauges, while the other four (Roca, Mitre, San Martin and Sarmiento) are physically interconnected. FA serves three distinct markets: freight, intercity passenger, and suburban passenger. In each of these markets, FA's role has been reduced over time because of unreliable and poor services.  - 14 - ANNEX 1 Page 3 of 14 Since 1970, FA's freight traffic has suffered a constant decline, falling from about 15 billion ton-km to about 9 billion ton-km in 1988; interurban and suburban passenger traffic has declined by 15-202 over the same period. Unable to reduce its costs accordingly, FA has sustained massive operating losses: the ratio of operating expenses to revenues exceeds 3 to 1, labor costs comprise 50? of expenses, and the resulting deficit amounts to about 1Z of Argentina's GDP. As the Government's fiscal problems have mounted, it has tried to stem FA's losses by various means (mainly investment cuts and reduced salaries) that have only exacerbated the decline in services. Main problems that have precipitated this vicious cycle are: (a) duplication of services between the six railway lines that continue to resist consolidation; (b) use of excessive labor, interference by labor unions in management decisions, and work rules with an antiproductivity bias; (c) operation of unprofitable services based on political objectives imposed by local authorities; (d) lack of prioritization of investments resulting in deterioration of potentially profitable services (mainly cargo) and a declining market share; (e) procurement restrictions; and (f) lack of commercial criteria when tariffs are established. 6. Hydrocarbons. The State is also dominant in the hydrocarbon sector. Yacimientos Petroliferos Fiscales (YPF) produces 65? of all crude oil and more than 80? of all natural gas. In addition, YPF owns the national hydrocarbon transport network and accounts for 702 of the country's refining capacity and 5OZ of petroleum product distribution and sales. Traditionally, YPF held the petroleum rights to most sedimentary areas of Argentina, and administered more than 80 contracts with private sector investors for exploration and production. Under a government-imposed sharing arrangement, YPF was obligated to supply crude to private refineries and to sell all natural gas to Gas del Estado (GdE), which until recently enjoyed a virtual monopoly on natural gas distribution. YPF has also been charged to act as a regulator in exploration, and promotion, controlling access to shipping and pipelines, while GdE acts as regulator in natural gas distribution by private firms to residential users and ensures design standards for installations and gas pipelines. The output of petroleum has declined steadily over the last decade while the production of natural gas has expanded. The reserve/production ratios have fallen to 8 years for crude oil and 20 years for natural gas. Under current investment patterns in oil exploration and development, foreign exchange requirements from oil imports could increase from nil at present to over US$500 million p.a. in the next decade. In 1988, YPF registered an operating loss of US$200 million on sales of US$4.5 billion; but this figure does not account for the financial contribution the company has made to the public and private sector. It is estimated that YPF transferred a net US$1 billion to the Treasury and other PEs on account of taxes, royalties, and controlled transfer prices in 1988. GdE has had operating losses of US$150 million p.a. during the last 5 years. The dilemmas facing the petroleum sector have resulted from: (a) sector regulations including procurement restrictions, Government-guaranteed refinery margins, high excise taxes on petroleum products and natural gas, a refinery tax making trade in crude unattractive, and high-cost exploitation contracts of YPF with private petroleum companies; (b) financial, operational, and investment decisions affecting YPF and GdE but made outside the companies--e.g. as high royalty payments to the provinces, the influence of  - 15 - ANNEX 1 Page 4 of 14 provinces and labor unions on YPF's drilling programs, and GdE's obligation to subsidize the petrochemical manufacturers and domestic consumers of gas; and (c) lack of authority and accountability by company management in addition to their appointment for political considerations under short-term contracts. B. Reform Program 7. Approach. The Argentine Government has developed an ambitious program of PE reforms targeted to improve efficiency and the quality of services. The reforms focus on: (a) PE divestiture or downsizing and promoting participation of the private sector in areas hitherto dominated by PEs; (b) strengthening the government's oversight as a shareholder and restructuring those PEs that would not be subject to privatization; (c) setting clear rules of play and transparency of control by establishing regulatory processes and agencies; (d) rationalizing labor management by reducing employment commensurate with efficient operations, eliminating antiproductivity provisions in contracts and practices, and limiting the role of labor unions in PE management. To implement this program, the Government obtained new legislation (Law of Reform of the State and Economic Emergency Law, promulgated in September 1989) which empowered it to reorganize, privatize or liquidate PEs, and eliminate their subsidies (except for the wage bill for the railways), suspended the PE procurement law, and eliminated earmarked funds. Since enactment of these laws, the Government has made considerable progress in many important areas. 8. Institutional Reforms. To implement the PE reform program the Government has appointed two Subsecretaries in ME: a Subsecretary of Public Enterprises in charge of overseeing the PEs and a Subsecretary of Administrative and Technical Coordination in charge of reform of the state, salary policies for the central government and PEs, and administrative support in the reform process. MOSP's role has been limited to the design and overview of the PE privatization program and the disposal of their excess assets. The Government has appointed special administrators ("Interventors") for each PE that report directly to ME. Their mandate is to implement the restructuring and privatization program in the companies under their jurisdiction. As the reform process advances, the Government intends to modify the institutional framework in which PEs operate as well as their legal status, which is intended to give autonomy and accountability to their management. 9. Overall Policies. General policy reforms include the following: (a) pricing--the reform will greatly reduce eliminate pricing as a Government policy instrument for petroleum and gas, rail freight, and telecommunications (see paras. 10 to 12); tb) procurement--the Government has begun to lower costs to PEs by suspending temporarily the 'Buy-Argentine' law, replacing it with a preference margin for domestic suppliers of 52 above the nationalized value of imported goods (CIF plus tariffs, fees and domestic taxes - about 40? of the CIF value). Further improvements concerning procurement would be required under the proposed PERAL; (c) labor management--to improve PE performance and facilitate privatization, the Government considers it necessary to: Ci) renegotiate labor contracts to introduce performance  - 16 - ANNEX 1 Page 5 of 14 incentives and eliminate clauses limiting management autonomy, and (ii) implement a labor-reduction program. For these purposes the Government has issued two decrees mandating renegotiation of labor contracts and established a special labor task force in ME; (d) regulatory framework--the Government is aware that effective regulations are necessary to ensure competition in sectors with monopolistic characteristics, and has begun by creating a separate regulatory authority for telecommunications (para. 10), while required undertaking an analysis to determine the extent of regulations for railways and hydrocarbons; (e) financial administration--with the view to restoring financial autonomy and responsibility to PE managers, the Government is limiting Treasury transfers to PEs, ending those to GdE, and drastically reducing those to FA. 10. Telecommunications. The objectives of telecommunications reform are to expand rapidly the availability of telephone service, to modernize the existing network, and improve the quality of service in a cost-effective manner. To achieve this, the Government strategy involves three lines of action: (a) privatization of ENTel; (b) fostering competition; and (c) establishing efficient regulations. Decisions have Deen taken to reorganize/privatize ENTel into four separate enterprises: two regional telephone companies serving the northern and southern parts of the country, respectively; an international basic telephone service company; and a service company for all other services that will be opened to competition. The regional telephone companies will have specific service improvement obligations in return for exclusive rights lasting seven years. Rate-of- return tariffs will be used for two years, followed by a price-cap approach during the remainder of the exclusivity period. Overall responsibility for regulation of the restructured sector will fall to a new independent regulatory agency. To date the Government has achieved the following: (a) completed the privatization of the telecommunications system awarding the northern region to a consortium of STET/France Cable et Radio/Morgan Bank and the southern region to a consortium of Telefonica/Citibank; and (b) advanced significantly in the creation of the telecommunications regulatory commission. 11. Railways. Government objectives for railway reform include to: (a) improve efficiency of the service within the context of the overall transport sector; (b) reduce the budgetary drain; and (c) minimize the adverse social effects of staff reduction. For these purposes, the Government has agreed with FA on a restructuring master plan, which includes: (a) privatization of all cargo services through concessions; (b) elimination of all unviable, nonessential interurban passenger services, maintaining only critical services under explicit local government subsidies; (c) establishment of a separate subsidiary to operate FA's Buenos Aires Metropolitan services; (d) development/sale of excess FA assets; and (e) reduction of the labor force and development of appropriate work rules. To ensure fair competition among the various future operators of railway businesses, the Government will establish a National Railways Systems Authority, while a Metropolitan Transit Authority will regulate and determine subsidy requirements for passenger services within Buenos Aires. The Government's program has made significant progress in implementation: (a) FA has set up a special Technical Unit in charge of implementing the master plan for restructuring; (b) the Rosario-Bahia Blanca  - 17 - ANNEX 1 Page 6 of 14 cargo line has been awarded as a concession to a private group and the concessionaires for the Urquiza cargo line have been selected through a tender; (c) 42Z of interurban passenger services has been identified as non- essential, of which 25Z has already been eliminated; (d) a Presidential Decree has been issued establishing an independent metropolitan service unit within FA; and Ce) FA reduced its labor force to 84,000. 12. Hydrocarbons. The following is the Government's strategy to mobilize the large amount of investments required in the sector and to ensure their efficient allocation for reversing the declining trend in reserves: (a) adjusting all hydrocarbon prices to their international opportunity costs; (b) deregulation of crude oil purchases and sales including imports and exports; (c) promotion of private sector participation in exploration and exploitation of oil and gas; (d) restructuring/privatization of YPF and GdE; and (e) establishment of an appropriate framework for effective regulation of natural monopolies, mainly for common carriers of liquids and gas. Progress so far includes: (a) the sale of secondary production areas (38 areas); (b) renegotiation of oil production service contracts (representing (30Z of the crude oil produced in Argentina) into concession or associations to allow free disposability; and (c) advanced bidding for the establishment of joint ventures with private sector companies in YPP's main producing areas (representing at least 20? of YPF's production). 13. Other Public Enterprises. Privatization/restructuring/liquidation of other PEs under central and provincial government authority is also being considered. The Government has already advanced in two other large PEs: (a) Aerolineas Argentinas (AA), which has been divested to a consortium led by Iberia, in which the Government retains a minority interest; and (b) the Highway Authority (DNV), which has already franchised highway repair and maintenance of about 10,000 Km of the national road network to private companies which will operate through a toll system. C. Project Description (a) General PE Framework 14. Establishment of a Project Coordinating Unit in ME. A Project Coordinating Unit has been established to facilitate the efficient administration and timely implementation of activities under both PERAL and PEREL. The unit has two distinct roles: (i) to support reform activities at institutional and enterprise level and to monitor such activities for ME; and (ii) to manage the financing and participate in the contracting of consultants and the acquisition of equipment considered under the loan, ensuring that the guidelines and procedures agreed upon with the Bank are complied with. As part of these functions the unit would support the processing and expediting of the required documents for the implementation of the loans. The project would finance the unit team (composed of economists/administrators, a lawyer, and support staff) for about 401 staff-months during 3.2 years, as well as computers and office equipment. Initial financing is being provided under a Project Preparation Facility (PPF). Total cost would be US$1.2 million.  - 18 - ANNEX 1 Page 7 of 14 15. Establishment/Upgreding of Control Systems for PEs. The Government wishes to restore gradually autonomy and accountability to PE management, while at the same time to review ex-post PE performance. For these purposes, two types of activities are proposed under the project: (i) to develop a strategic plan for ME to: (a) continue the Government's program of restructuring/privatization of PEs; (b) upgrading of the management information systems; (c) preparing short and medium terms plans for PEs including recommendations to modify their institutional framework to provide managers with autonomy and accountability; and (d) establishing performance evaluation monitoring systems for YPF, AyEE, Hidronor, the Buenos Aires Metropolitan Railways and other PEs. About 360 staff-months of consultants during 2 years, as well as computers would be required at a cost of US$1.6 million; (ii) to upgrade Sindicatura General de Empresas Publicas' (SIGEP, the State Comptroller) MIS to improve its capabilities as financial comptroller of PEs, including its new responsibilities for monitoring PE operational and economic performance, and procurement arrangements. Consultants will be contracted to review current methods by SIGEP, to gather and evaluate information, and develop and assist in the implementation of an improved MIS system, which will permit the establishment of performance evaluation/ monitoring systems of PEs. The diagnosis stage will require 12 staff- months during 90 days for a cost of US$50,000 followed by an implementation stage, which will require 44 staff months over 180 days at a cost of US$150,000. 16. Rationalization of Labor Management in PEs. A labor strategy plan will be prepared aimed at improving labor productivity in PEs and facilitating their restructuring/privatization. The strategy will cov_r two main issues: (i) labor rationalization, focussing on concrete programs for staff reduction and redeployment, including quantitative targets and detailed cost estimates; and (ii) reform of labor contracts, focussing on the redesign and renegotiation of current collective labor agreements to eliminate antiproductivity provisions and proposed measures to broaden the scope for managerial decisions in personnel matters. A consulting company has been hired under a PPF for PERAL to develop the labor strategy master plan and detailed terms of reference (TOR) for implementation (60 staff-months at US$460,000); the master plan will be completed in the second quarter of 1991. The consultants are working in close coordination with the labor task force in ME, financed under the Public Sector Management Technical Assistance Loan (2712-AR). Priority PEs included in the program are FA, YPF, GdE and SEGBA. Implementation of the labor strategy, to be financed under the proposed PEREL, would include the following:  - 19 - ANNEX 1 Page 8 of 14 (i) extension of the labor task force in ME until the second quarter of 1991 for an estimated 9 staff-months at a cost of US$25,000; and (ii) renegotiation of company-specific collective labor agreements with the support of consultants, monitoring implementation of staff retirement programs, and other assistance with an estimated requirement of 84 consultant staff-months and software at an estimated cost of US$400,000. 17. Strengthening the Government's Environmental Capabilities. At present, thz operations of PEs and other companies in their sectors are causing important negative environmental consequences (disposal of water residues resulting from petroleum extraction, air and water contaminants from oil refineries, gas spillages from gas transport and distribution, urban impact of railway transport). Higher levels of production, which would be achieved in many cases after restructuring/privatization of PEs, and sector deregulation may lead to an increase in these effects. The project includes a component to deal with these issues by: (i) preparing an action plan addressing main negative environmental effects in the hydrocarbon and transport sectors; (ii) establishing training programs for environmental control; and (iii) proposing an institutional framework to strengthen the Government's environmental control capabilities. Estimated resources required are 120 consultant staff- months at about US$600,000. (b) Telecommunications 18. Privatization of ENTel. Most of the financing for preparing ENTel for privatization has been provided during project preparation for PERAL and PEREL. A total of US$500,000 was made available from Loan 2712-AR to finance an international management consulting firm that prepared the framework for privatization of ENTel, addressing both company-related (e.g., operational and financial) and institutional (e.g., regulatory and structural) issues. This firm ha* assisted the Government in designing the new structure and competition policy of the telecommunications sector. The Bank also has provided advanced financing for financial advisors to facilitate the sale of ENTel. Out of a total of US$1.1 million, US$1 million was furnished under the PPF for PERAL. The remaining US$100,000 would be financed under the proposed PEREL. 19. Establishment of Regulations for the Telecommunications Sector. PEREL would finance consultants that will assist in the establishment and initial operation of the newly created National Telecommunications Commission (CNT). This assistance will ensure bringing CNT to full operational efficiency required to guarantee competitive behavior and compliance with service obligations by private operators. This will occur in two stages: (i) preparation of a program for the establishment and development of CNT, including a medium-term implementation plan and specification of technical assistance requirements. About 12 staff-months of regulatory experts would be required for about  - 20 - ANNEX 1 Page 9 of 14 3 months at an estimated cost of US$180,000 (US$100,000 has been already advanced under a PPF for PEREL); and (ii) technical assistance to CNT to build a minimum core of expertise in: regulatory policy; pricing and financial analysis; technical standards and quality of service; and administrative, legal and information systems. Estimated requirements amount to 188 staff-months plus training of staff spread over a two year period at a cost of US$2.82 million; CNT will provide equipment, training, and local consultants. This activity will include funds for a review by independent consultants by June 30, 1993 as to the effectiveness of the telecommunications regulatory authority. Counterpart funds would be provided by CNT from revenues arising mainly from fees to be paid by all telecommunication services operators. (c) Railways 20. Strengthening FA's Implementation Capabilities. A Technical Unit has been formed within FA to manage its restructuring program. The unit will report to a committee composed by PA's Interventor (chairman) and two representatives from ME and MOSP, respectively. It will be in charge of identifying, contracting and monitoring the activities required for railway restructuring, ensuring adequate coordination of the program within PA as well as with its consultants, government agencies, and the Bank. The project will finance about 180 staff-months of local consultants who would comprise the core of the technical unit, and 30 staff-months of international consulting assistance. Total cost would be US$1.67 million over 39 months (advanced financing is available under the PPF for PEREL). 21. Privatization of Further Cargo Networks. The Government's overall program for privatizing/restructuring FA was developed with the assistance of a consulting company financed under Loan 2712-AR. The assistance included the definition of two cargo networks, Rosario-Bahia Blanca and Urquiza, and the preparation of the bidding documents for franchising such networks to private operators. PEREL will provide financing to engage consultants to analyze and refine future network such options and address potential problems for such operations to maximize their probability of success. The remaining network concessions to be offered are: (i) those parts of the Roca lines not included in the Rosario-Bahia Blanca network concession; (ii) the Belgrano lines; and (iii) two networks formed by the Mitre and San Martin sines and the remainder of the Sarmiento line not included in the Rosario-Bahia Blanca network concession. The consultants will assist the Government in estimating rail line viability and preparing the remaining networks to be franchised by: (i) developing potential traffic levels for different segments; (ii) estimating operating costs based on improved operating practices; and (iii) establishing the precise configuration for each network concession considering both economic benefits to the country and attractiveness to potential bidders. Subsequently, the consultants will provide assistance in developing prequalification and bidding documents for these networks and will provide advice during the franchising process. They will also assist and advise the  - 21 - ANNEX 1 Page 10 of 14 Government in developing workable and fair prototype agreements governing the relationships between different network concessions. The project will finance 42 staff-months of consultants for an estimated US$630,000. 22. Restructuring of Interurban Passenger Services. This subcomponent aims at achieving a reduced, more efficient level of interurban passenger operations to reduce FA's losses and subsidy requirements. Consultants will be financed to analyze options for interurban passenger services, identifying the most unprofitable non-critical services to proceed with their elimination, and assisting in the development of procedures for maintaining critical services under special financial arrangements agreed with the local governments. Different options for operating critical services will be considered. An action plan will be developed and implemented for franchising the Buenos Aires-Mar del Plata line, identified as possibly the only profitable passenger line. Assistance will also include the development of prototype agreements between passenger operators, network operators (cargo concessionaires), and the Government. Financing will be provided for 28 consultant staff-months for a duration of 9 months at an estimated cost of US$330,000. 23. Privatization of Other FA Facilities. Apart from transport operations, the Government intends to privatize other activities and facilities, such as shops, ticketing and maintenance services, with the objective of improving competitiveness of services for the railways. The following stages are envisaged: Ci) identification of privatizable activities and facilities; (ii) development of privatization options; (iii) assistance in preparation of bidding documents; and (iv) development of prototype agreements with concessionaires. The loan will finance 30 staff months of international and local consultants for a duration of about 1 year at an estimated cost of US$450,000. 24. Franchising of FA Rolling Stock. The restructuring/ privatization of railway operations generates a need to address the options for existing rolling stock not needed by new operators or requiring high capital expenditures for upgrading and maintenance. Financial assistance will be provided under PEREL to: (i) define franchisable rolling stock; (ii) analyze the financial impact of rolling stock concessions with respect to reduction of capital requirements for network concessionaires; and (iii) develop prototype agreements between network and rolling stock concessionaires. This assistance will finance 40 consultant staff-months for a period of 9 months at an estimated cost of US$400,000. 25. Development of Excess Assets. An Excess Asset Management Unit to be established within FA, will be responsible for the development and/or sale of real estate, facilities, and other assets not needed for railway operations or which will become redundant during the restructuring process. To ensure a process that will provide maximum benefits to the Government/FA, the unit will require assistance to: (i) develop procedures and processes to identify the assets; (ii) implement identification of assets; and (iii) prepare an action plan to develop/sell excess assets. The project will finance 25 consultant staff-months for 2.5 years at an estimated cost of US$500,000.  - 22 - ANNEX 1 Page 11 of 14 26. Labor Reduction Program. A Railway Employee Management Unit will be established within FA to implement labor reduction programs and propose changes in work rules. This unit. assisted by consultants, will carry out the following tasks; (i) evaluate the profile of FA's labor force; (ii) estimate future FA and concessionaire labor requirements; (iii) establish employee costs to FA, determine employee legal rights, analyze work rules and propose changes; and (iv) develop a program for labor reduction considering buyouts, early retirement and retraining options. PEREL will finance about 35 consultant staff-months at an estimated cost of US$610,000. Although program duration is estimated at three years, partial implementation of activities will be accomplished at different stages within this period. 27. Efficiency and Quality Improvements of Buenos Aires Passenger Services. The Government has initiated a program (with assistance from consultants under a Canadian Government grant) to restructure FA's metropolitan passenger railway services and thus improve their efficiency and reduce subsidies. The consultants will produce an action plan to create a Metropolitan Transit Authority that would develop regional guidelines and funding policy for urban and suburban transportation in the Greater Metropolitan Area of Ruenos Aires, and an operating organization, Ferrocarriles Metropolitanos (FM), to manage and operate integrated metropolitan rail transit services using FA's existing facilities. The action plan will include: (i) definition of the Metropolitan Transit Authority; (ii) identification of parameters to be considered in a possible agreement between FM and the Government for payment of subsidies; (iii) definition of FM's management structure; (iv) establishment of staff and labor force requirements; (v) identification of potential interfaces between FM and the subway; (vi) identification of required operational improvements; and (vii) identification of FM's potential privatization activities (contracting out). Implementation of the action plan for restructuring FA's Metropolitan Railway services will be carried out with the assistance of consultants under PEREL, which will finance 50 consultant staff-months for 15 months plus computer and software at a cost of US$980,000. 28. Development of Accounting and Insurance Systems for the New Railway Organization. The new railway organization would require: (i) an appropriate accounting system to reflect the financial situation of the new business units, and (ii) a new insurance scheme to account for liability problems with railway concessions. PEREL will provide assistance for these tasks, financing about 30 staff-months of consultants at a cost of US$350,000. 29. Development of New Rules for Operating Practices and Safety of Railway Operations. Improvement of railway operations requires new rules to replace the previous system, which restricts efficiency improvements while not allowing the implementation of modern safety standards. The Bank will finance 10 staff-months of consultants for this activity at a cost of US$200,000. 30. Development of New Regulatory Framework for Railway Services. Two activities are envisaged under this component: (i) the establishment of a National Railway Authority to ensure fair competition and access to the railway system for all users; and (ii) the establishment of a Buenos Aires Passenger Authority to regulate/fund passenger services within Buenos Aires.  - 23 - ANNEX 1 Page 12 of 14 For this purpose. the Bank will finance 70 consultant staff-months over 2 years at an estimated cost of US$980,000. (d) Hydrocarbons 31. Development of Strategic Plan for New YPF. The Government requires a strategic plan for the new YPF entity that will emerge after the privatization/restructuring process takes place. The strategic plan will define the long-term objectives of YPF in the various business activities and a plan of action in terms of human and financial resources, as well as the ownership structure, organization, and management capability needed to achieve these objectives. PEREL will finance 33 staff-months of consultants to assist in the development of this plan at a cost of US$360,000. 32. Implementation of New Business Units for YPF. The strategic plan for the new YPF will produce TORs for the implementation of new business units as profit centers that would develop according to market requirements. The activities under these TORs would include: (i) organization of the new business units, and (ii) development of management processes and systems for each unit. PEREL will finance 80 staff-months of consultants for an estimated cost of US$980,000 for this activity. 33. Divestiture of Selected YPF Operations. Assistance will be required for the privatization and/or establishment of joint ventures of selected YPF upstream and downstream operations, upstream services (drilling, geophysics, maintenance, etc.) and transport services. This activity will consist of: (i) analysis and evaluation of all assets with potential for privatization or joint ventures; (ii) selection of preferred ownership structure for each operation; (iii) valuation of units to be privatized or converted into joint ventures; and (iv) assistance in preparation of bidding documents and negotiation. PEREL will provide financing for about 119 staff-months ox consultants at an estimated cost of US$920,000. 34. Privatization of Natural Gas Pipelines and Distribution Networks of GdE. Financial assistance is required to: (i) define business units to be privatized; (ii) develop action plans; (iii) appraise the value of assets of business units to be privatized; and (iv) prepare bidding documents and assist in negotiations. Fifty-six staff-months of consultants will be financed at a cost of US$840,000. 35. Strenatheninp of the Government's Regulatory Capabilities. In view of the new institutional arrangement of the hydrocarbon sector after price liberalization and restructuring of YPF and GdE, the Government intends to establish the minimum regulations that will ensure national objectives for the hydrocarbon sector within a competitive framework. The Bank has provided technical assistance under a Japanese Grant to develop the necessary regulations for gas transmission and distribution in terms of access and tariff setting. PEREL will finance assistance to provide recommendations for the remainder of the hydrocarbon sector and for the implementation of the new policies and regulations. About 12 consultant staff-months would be required for this activity at an estimated cost of US$400,000.  - 24 - ANNEX 1 Page 13 of 14 (e) Preparation of Other Assistance. 36. Restructurina/Privatization of Other PEs. Assistance would be provided to prepare and carry out additional privatization/restructuring activities in other PEs. This includes development/implementation of strategic plans to: (a) redimension ELMA through sale of over one-half of its fleet, voluntary retirement of staff and privatization of some services (40 consultant staff- months, US$600,000); (b) analyze various options for privatizing and/or franchising AGP port operations and implant the most appropriate one (50 consultant staff-months, US$925,000); (c) restructure ENCOTEL and privatize or franchise its operations (20 consultant staff-months, US$300,000); (d) restructure OSN and privatize/franchise selected operations (50 consultant staff-months, US$1 million); (e) restructure SEGBA and privatize/franchise operations (30 consultant staff-months, US$750,000); (f) continue franchising DNV's highway maintenance services (10 consultant staff-months, US$250,000); (g) restructure AyEE and privatize/franchise operations (25 consultant staff- months, US$500,000); and (h) privatize/restructure other PEs including those under the Ministry of Defense (US$950,000). D. Project Administration and Implementation 37. Project Organization and Implementation. The Borrower will be the Argentine Republic. The Ministry of Economy (ME) will be the Executing Agency. Attachment 3 presents a chart showing implementation responsibilities for the project. The Subsecretary of Public Enterprises would head a Project Coordinating Unit as National Project Director, which would be responsible for overall project implementation. He would be assisted by a full time Deputy Director with powers to hire consultants and request disbursements from the Bank. The functions of the Project Coordinating Unit would be to: (a) manage Bank financing and technical support to PEs and monitor compliance with the Bank's legal agreement; and (b) oversee and coordinate the reform process, provide policy guidelines to PEs and monitor PE performance. In carrying out the proposed project, the Subsecretary of Public Enterprises would coordinate the implementation of specific project components with:(a) SIGEP for upgrading SIGEP's M-IS; (b) CNT for the implementation and development of the telecommunication regulations; (c) the Subsecretary of Public Works in MOSP and the different PEs for implementation of the restructuring/privatization prog':ams; and (d) sectoral Subsecretaries for the development of sector specific policies and regulations (i.e., Energy and Transport). 38. Procurement. The goods and services to be financed under the project, as summarized in Schedule A, would be procured in accordance with procedures satisfactory to the Bank. Contracts for the procurement of equipment, supplies, and maintenance items the equivalent of US$250,000 or more would be awarded through ICB following the Bank's guidelines for procurement; between US$25,000 and US$250,000 with an aggregate amount not to exceed US$700,000 would be made through LCB; and when valued below US$25,000 up to an aggregate amount of US$100,000 would be awarded through local or international shopping by requesting quotations from at least three eligible suppliers. The Government's LCB procedures have been reviewed by the Bank and found acceptable. Consultants for technical assistance and training services under  - 25 - ANNEX 1 Page 14 of 14 the project would be selected in accordance with Bank Guidelines and under terms of reference and employment conditions satisfactory to the Bank. To facilitate the importation of equipment and the hiring of consultants the Borrower will employ a procurement agent acceptable to the Bank. 39. Disbursements and Retroactive Financina. For amounts related to the procurement of equipment, supplies and maintenance items below the LCB thresholds, expenditures will be disbursed against statements of expenditures for which detailed documentation providing evidence of expenditures would be retained by the Project Coordinating Unit at ME and made available for the required audit and also for supervision by the Bank. The Bank will require prior review of all contracts awarded under ICB and LCB. All other contracts would be subject to ex post review by the Bank. The loan would provide retroactive financing of up to US$500,000 for expenditures made from July 1, 1990. Disbursements for activities under retroactive financing would be made against contracts which meet the procurement requirements for this operation. 40. The Government's contribution of approximately US$9.85 million equivalent would normally consist of counterpart staff, local consultants, office space, supplies, secretarial services, and vehicle operation to be provided in the different project components. 41. Accounts and Audits. Separate accounts would be kept for all expenditures made under the project. The Project Coordinating Unit at ME would maintain records and accounts for all project activities. The accounts and statements of expenditures would be audited each year by auditors acceptable to the Bank in accordance with the Bank's Auditing Guidelines, and the audit reports would be submitted to the Bank no later than 4 months after the close of its fiscal year.  ARGENTINA PUBLIC ENTERPRISE REFORM EXECUTION PROJECT (PEREL) PROJECT ACTIVITIES PROJECT COMPONENT EXPECTED OUTPUT TIMING TARGETS MAIN OBJECTIVES ACTIVITIES IMPACT (starting/completion) GENERAL 1. Strengthen 1. Establish Coordinating 1. Output: 1. Start: Government's Unit in ME (401 MM - (a) Mechanism to supervise August 1990 (PPF). Administrative Capacity US$1.2 million). and administer program to Execute the Public execution. Completion: Enterprise Reform (b) Administrative December 1993. Program. interphase between Government and Bank. Impact: Efficient administration and timely implementation of program activities. 2. Implement 2.(a) Develop Strategic 2. Output: 2. (a) Start: Government's Overall Plans and Performance (a) Comprehensive and Second Quarter 1991. Strategy for PEs. Evaluation Systems for PEs reliable information for Completion: under the authority of ME decision-making. Second Quarter 1993. (360 MM - US$1.6 million). (b) Ex-post control of PEs (b) Start: on the basis of Second Quarter 1991. (b) Upgrade SIGEP's MIS performance parameters. Completion: (56 MM - US$0.2 million). (c) Proposals for Second Quarter 1992. restructuring/ privatization of PEs. Impact: Improved decision-making for Government strategy on PE reform and effective OlQ rtZ o X I-t>  ARGENTINA PUBLIC ENTERPRISE REFORM EXECUTION PROJECT (PEREL) PROJECT ACTIVITIES PROJECT COMPONENT EXPECTED OUTPUT TIMING TARGETS MAIN OBJECTIVES ACTIVITIES IMPACT (starting/completion) 3. Rationalize Labor 3. (a) Develop labor 3. Output: 3.(a) Start: Management in PEs. management strategy (60MM (a) Master Plan for October 1990 (PPF). - US$0.46 million; renegotiation of labor Intermediate Report: financed under PERAL PPF). contracts and design of December 1990. labor reduction/ Completion: retirement mechanisms Second Quarter 1991. includinig TOR for 3(c). (b) Extend labor task (b) Assist ME in overall force in ME (9MM - labor strategy and (b) Start: US$0.025 million) coordinate with February 1991. consultants for 3(a). Completion: Second Quarter 1991. (c) Renegotiate company (c) Elimination of specific collective labor antiproductivity (c) Start: agreements and monitor provisions in labor Second Quarter 1991. implementation of staff contracts and progress Completion: retirement programs (84MM reports on staff reduction Second Quarter 1993. and software - US$0.4 at PEs. million). Impact: Improve labor productivity and PE competitiveness. I> 0 93  ARGENTINA PUBLIC ENTERPRISE REFORM EXECUTION PROJECT (PEREL) PROJECT ACTIVITIES PROJECT COMPONENT EXPECTED OUTPUT TIMING TARGETS MAIN OBJECTIVES ACTIVITIES IMPACT (startingicompletion) 4. Contain Environmental 4. Strengthen 4. Output: 4. Start: Damage of PEs. Environmental Capabilities (a) Action plan addressing Third Quarter 1991. of the Government (120MM - main negative US$0.6 million). environmental effects in Completion: the hydrocarbon and First Quarter 1993. transport sectors. (b) Set-up of training Programs for environmental control. (c) Strengthen Government's environmental entities. Impact: Reduce damage of PEs to the environment. o fj Fh rt 0 c  ARGENTINA PUBLIC ENTERPRISE REFORM EXECUTION PROJECT (PEREL) PROJECT ACTIVITIES MAIN OBJECTIVES PROJECT COMPONENT EXPECTED OUTPUT/ TIMING TARGETS ACTIVITIES IMPACT (starting/completion) TELECOMMUNICATIONS 1. Sell ENTel to 1. Assistance to ENTel's 1. Output:(a) Issue 1. Start: Qualified Operators. authorities in: (a) bidding documents for the November 1989 (PPF). drafting international award of telecom- public bid tender munications franchises. Completion: documents including (b) Promote the interest November 1990. offering memorandum; (b) of qualified operators organizing international and commercial banks in information campaign to the purchase of ENTel. interest potential (c) Advice on the bidders; (c) structuring financial structure of financial arrangements for ENTel's sale. ENTel's sale. (Retainer fees to investment bank - Impact: US$1.1 million; includes Select qualified US$1 million financed operators and maximize under PPF for PERAL) sales value. 2. Establish Effective 2. Set-up National 2. Output: 2. Start: Regulations for Telecommunications Establishment of CNT with First Quarter 1991. Telecommunications Commission (CNT), and capability to develop and System. bring to full operational implement: (a) regulatory Completion: efficiency (200MM - policies; (b) price, cost First Quarter 1993 US$3 million). and financial analyses; (c) quality of service, investment program, and technical standards; and (d) administrative, legal co and information systems. X a Impact: Regulations to ensure competitive behavior and compliance with service obligations of private operators.  ARGENTINA PUBLIC ENTERPRISE REFORM EXECUTION PROJECT (PEREL) PROJECT ACTIVITIES PROJECT COMPONENT EXPECTED OUTPUT TIMING TARGETS MAIN OBJECTIVES ACTIVITIES IMPACT (startinglcompletion) RAILWAYS 1. Strengthen Capabilities 1. (a) Establish Technical 1. Output: 1. Start: of Perrocarriles Argentinos Unit in FA to manage (a) Identification, October 1990 (P?F). (PA) to Develop and restructuring program (180 contracting and supervision Implement Railway Reform MM - US$1.01 million). of activities required for Completion: Program. railway restructuring. December 1993. (b) Provide continuing international consulting (b) Coordination of program assistance to FA's with FA, consultants, Technical Unit (30MM - government agencies and US$0.66 million). Bank. a Impact: