Argentina - Public Enterprise Reform Adjustment Loan (PERAL) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-5451-4 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR CECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS O'N A PROPOSED PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN (PERAL) IN AN AMOUNT EQUIVALENT TO US$300 MILLION ro THE ARGENTINE REPUBLIC JANUARY 14, 1991 This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Unit - Austral (A$) 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 Used 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 BCRA Banco Central de la Rep6blica Central Bank of Argentina Argentina BUN Banco Ripotecario Nacional National Mortgage Bank BONEX Bonos Externos External Bonds DEP Direcci6n de Empresas P1blicas Directorate of Public Enterprises ELMA Empresa de Lineas Maritimas National Shipping Co. ENTel Empresa Nacional de National Telephone Telecomunicaciones Company FA Ferrocarriles Argentinos Argentine Railways GdE Gas del Estado National Gas Company HIDRONOR Hidroelectrica The Power Generating Norpatag6nica Company of Argentina ME Ministerio de Economia Ministry of Economy MOSP Ministerio de Obras y Ministry of Public Servicios Plablicos Works and Services OSN Obras Sanitarias de la Nacion The National Sanitation Company PE Empresas Pdblicas Public Enterprise PEREL Prestamo para Ejecuci6n de la Public Enterprise Reforma de las Empresas Plablicas Reform Execution Loan QRs Restricciones Cuantitativas Quantitative Restrictions SEGBA Servicios Electricos del The Buenos Aires Gran Buenos Aires Power Company SIGEP Sindicatura General de External Auditor of Empresas P(iblicas Public Enterprises SOMISA Sociedad Mixta Sider6rgica Argentina Steel Company of Argentina TPLII Segundo Prestamo de Politica Second Trade Policy Arancelaria Loan VAT Impuesto al Valor Agregado Value Added Tax YCF Yacimientos Carboniferos Fiscales State Coal Company YPF Yacimientos Petroliferos Fiscales State Petroleum Company  FOR OFFICIAL USE ONLY ARGENTINA PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN Table of Contents Page No. Loan and Program Summary ................................. I. THE ECONOMY ......................................... 1 A. Background ...................................... 1 B. Stabilization Programs of the Menem Government ...2 C. Macroeconomic Outlook ............................ 5 D. Ongoing Structural Reforms ................... 6 E. External Debt Management ......................... 9 II. THE PUBLIC ENTERPRISE SECTOR ................... ..... 11 A. The Growth of Public Enterprises ..... ............ 11 B. Supervisory Framework ............................. 12 C. The Current PE Structure and Legal Framework ...... 13 D. PE Employment ................................... 14 E. PE Financial Performance ......................... 16 III. THE PUBLIC ENTERPRISE REFORM PROGRAM ................ 20 A. Objectives and Strategy .......................... 20 B. The New PE Framework ............................. 21 C. Reforms of Major Sectors ........... .. ............ 23 (i) Telecommunications ...................... 23 (ii) Railways ............................... 24 (iii) Hydrocarbon Sector ...................... 26 IV. THE PROPOSED LOAN ....... ............... 31 A. Rationale for Bank Involvement ..... .............. 31 B. Scope of the Proposed Loan ....................... 31 C. The Proposed Loan ................................ 31 D. Project Implementation ........................... 32 E. Loan Conditions .................................. 33 F. Benefits and Risks ............................... 35 V. COUNTRY ASSISTANCE STRATEGY AND OPERATIONS ........ .. 37 A. Previous Bank Experience ......................... 37 B. Bank Strategy .................................... 37 C. IPC Lending Program .............................. 38 This report is based on the findings of the appraisal and post-appraisal missions which visited Argentina in June and OctnIC- 1990 respectively. The principal mission members included Messrs.