Transcript of meeting of the Executive Directors of the Bank and IDA, held on Wednesday, December 11, 1996

NM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Wednesday, December 11, 1996 Washington, D.C. The meeting of the Executive Directors was convened at 10:05 a.m. in the Board Room, 700 Eighteenth Street, N.W., Washington, D.C., Mr. Sven Sandstrom, Chairman, presiding. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] nm C O N T E N T S ITEM PAGE 3 Proposed Loan to Argentina - Provincial Pension Reform Adjustment Loan 136 Mr. Veglio 141 Mr. Portugal 145 Ms. Cordeiro 149 Mr. Marek 155 [--- Unable To Translate Graphic ---] nm C O N T E N T S ITEM PAGE 5 Projects Processed Under Streamlined Procedure: 192 (b) Proposed Loan to Argentina - Flood Protection Project  MR. SANDSTROM: The next item is a proposed loan of $300 million to the Argentine Republic for the Provincial Pension Reform Adjustment Operation. I would like to welcome Mr. Kreis of the IMF who is attending the meeting, I hope, or who is coming over there. Welcome. I believe that Pieter Stek has circulated his statement in advance. I will ask Mariluz Cortes to introduce the proposal. Mariluz, please. MS. CORTES: Thank you, Mr. Chairman. Mr. Chairman, Members of the Board: In 1994, Argentina undertook a major pension reform establishing a privately managed funded system, similar to the system in Chile. A new private pillar forms a major component of the pension system and, like the other newly established MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] systems in Latin America, makes the system more financially sustainable in the medium term. However, the Argentines chose to provide a more explicit social safety net for pensioners than in Chile, with each pensioner receiving, through a public pillar, 27.5 percent of the average covered wage, regardless of the person's own earnings or contributions. As a result, the Argentine system provides for more income redistribution and poverty alleviation than some other reformed systems. This increased redistribution is due partly to policy choice and partly to the emerging consensus of Argentina's democratic system. At the time of its inception, an important group representing 10 percent of the economically active population, provincial civil servants, was excluded from the reformed national public and private pension system. This loan will help remedy this problem by supporting the transfer of the pension funds of the provincial civil servants to the national system, upon agreement with the particular province. The absorption of the provincial pension funds by the national system will improve the efficiency of the consolidated social security system and at the same time MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] support the government's efforts to reform provincial finances. In this respect, the loan is an important element of the Bank's country assistance strategy of extending fiscal and economic reforms to the provinces. I would like to inform you of two recent developments that concern this loan. First, on October 30, 1996, the IDB Board approved a parallel loan of $320 million to support the transfer of the provincial pension funds, with similar conditionality as this loan. Second, the day before yesterday the IMF released a $145 million tranche after Argentina met third quarter targets under its ongoing stand-by program. Now, I would like to answer some questions raised by Executive Directors. Mr. Pieter Stek and Mr. Bernd Siegfried expressed concern about the reduction in pension levels of the provincial civil servants due to the transfer of their pension funds to the national system, and asked if this would cause some resistance among the beneficiaries. We expect little resistance from the provincial pensioners. Pensioners that have retired before the transfer will not see their pensions reduced, except for the ceiling of $3,600 per month imposed by the Pension Solidarity Law of 1995. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] This is very high compared to an average pension of $750 per month received by provincial pensioners and an average of $299 per month received by the rest of the pensioners. The average pensioner will benefit from the transfer by having more reliable payments from the national system than from the provinces, which often pay them with vouchers instead of cash. Mr. Siegfried also asked why we expect that in the long run the national pension system in Argentina will again show deficits. Our calculations show that after many years of running surpluses -- of course, this is after they overcome the deficit that they have at the moment -- we expect that by 2003 they will start running surpluses and this will go up to the year 2035. By the year 2035, if all men worked from age 21 to age 65, and all women worked to age 60, there would be insufficient workers to fund the retirees under the public pillar. Depending on employment and the share of the informal sector, the funding problem may come earlier. A solution to this long-term problem will require better actuarial models than the ones we have at the moment, and MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] a public debate in Argentina about the tradeoffs involved. He also asked if the Bank may need to continue its support by another loan in 1998. As it turned out, most of the provinces that will transfer will do so in 1996 and 1997. Therefore, we no longer plan for a second provincial pension loan, although as noted in the CAS progress report of April 1996 the Bank's assistance strategy will continue to support the deepening of provincial reforms more generally. Thank you. MR. SANDSTROM: Thank you very much, Mariluz. Mr. Veglio, please. MR. VEGLIO: Thank you, Mr. Chairman. I want to support this operation basically for the same reasons mentioned by Mr. Stek in his circulated statement. Let me maybe make some observations about this operation. The first one is that I assume that the basic objective of this loan and of the IDB loan is to strengthen social security institutions in Argentina. This is, in a certain sense, the weakest part of the present social security system. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] But what I think what is important also to note is that a significant trend toward privatization of old aged insurance in Argentina has been successful experience. Of course, this has not been elaborated in the President's memorandum but it should not go unnoticed, and I think maybe some shortcomings on this interesting experience could be very helpful for us also because of its importance for Latin America and not only Latin American countries. This operation is, of course, a very complex one and maybe the most difficult task, that is that benefits are expected only in the long-term for future generations. The accompanying technical assistance loan will certainly play an important role in improving the control of irregularity which really constitute major problems presently and the also very difficult and challenging absorption of provincial pension funds. I hope that this technical assistance will be a successful one. I think that Argentina in this specific area has had some good performance in recent years. Maybe three questions which can be raised. The first one is that I have listened to Ms. Cortes and probably she is right when she says we should not expect MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] a big reaction from the provincial pensioners. But the fact remains that lawsuits against the provincial pension funds are possible and initiated with lawsuits of course by beneficiary groups who stand to lose under the reform. It could be important and interesting maybe to have some explanation on this specific point and maybe on the possible impact on the Bank operation in case there are some lawsuits and in case the courts would decide against the present system. The second observation is 74 percent of all of the probable and eligible provincial pension funds have already been transferred to National Social Security Administration. This is a major success, but it remains at least that at least eight provinces have not joined. Among them, there are some important provinces, Cordoba, for instance, just to mention one. So, there is the possibility that not all provinces will join the new centralized system and this, of course, could, among other aspects, also introduce some labor market rigidities in a system which is also characterized already now by some rigidities. The third observation is on the uncertain funding prospects of the public system, of the social security public system, in a situation in which the MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] younger population seems to give preference to private retirement funds. So, even if the financial implication of the transfer of the provincial pension funds to the national system have been fully analyzed, I think this remains a major issue and maybe some comments could be useful. Last but not least is the issue of conditionality. The first observation is that we really welcome that the first tranche conditions have already been met for the Bank and for the IDB. This is a major and important aspect. But as far as the second and third tranche conditionality, there is a concern and there is an observation. The concern is that the government commitment to finance the National Social Security Administration deficits generated by the transfer of the provincial pension funds, in particular the inclusion of budgetary expenditure to cover deficits into the 1998 federal budget, could be maybe a bit undermined by the somewhat contradictory explanation that we have in the President's memorandum about the intention of the Bank -- maybe of IDB too -- to finance another adjustment loan in FY98. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] Maybe here some explanation would be very welcome because I see a problem in this area. The other is that, as far as the eligibility criteria concerning the track record of specific provinces willing to transfer their system, I think that in the area of structural reform and adoption of measures to reduce their deficit, there should be maybe more clarity. It is really imperative to ensure that the provincial savings from the transfer of their systems are not used to escape adjustment. In this respect, the conditionality, I quote, "to have sold, close or be in the process of selling or closing is provincial banks" and one significant state enterprise is partially vague and should be better clarified. Thank you very much for your attention. MR. SANDSTROM: Thank you very much. Mr. Portugal. MR. PORTUGAL: Thank you, Mr. Chairman. I would like to express my full and enthusiastic support for this loan for a number of reasons: first, because we are very impressed by the great progress that the Argentinean Government had made since 1991 towards MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] macroeconomic stabilization and by the result that the Argentinean Government has shown throughout this period when there was need to take tough measures required by changing international conditions. Second, because we know that in large federated countries where you have a high degree of financial and tax decentralization, fiscal stance depends not only on the performance of the central government but as much so the performance of state and provincial governments. The third reason is because, as it has been shown in the document, the Argentinean Government has already made a very substantial progress towards reform of its pension system. I would like to raise one question regarding conditionalities. We know that the fiscal effect of this program depends very much on what will be the performance of the provinces because we are transferring expenditure from the central government. This transfer will in the first instance represent an increase in expenditures by itself, apart from the transfer. And, of course, the fiscal gain will very much depend on what the provinces do with the room they now have by being released from these expenditures. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] So, this is a concern which is fully recognized throughout the project appraisal document and there is a conditionality there saying that the second and the third tranches would be disbursed only if provinces reduce their deficit by the same amount of the fiscal relief which they are so getting with the project. So, that would, in a way, satisfy the condition that the overall public sector deficit is reduced. Although I recognize the need for a reduction in the deficit in the province of the same size as the relief they are getting, I don't think that this is a conditionality which would work, and that for two reasons: first, because we are putting the conditionality on the central government, and there can now be the case that the central government performs and do all it is asked to do and then one of the provinces do not. So, in that case, it would not be very rationalize to penalize the party which has complied with everything and has already accepted an additional expenditure burden by the transfer. The other reason is because, as it has been said before here, this is a project where the benefits will only appear in a very long period. And here, we have two tranches, the second one being disbursed in a minimum MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] time period of three months after the first and the third one being disbursed at the minimum time period of six months after the second. So, it is a total of nine months for complete disbursement and you have the period for reaping the benefits of eight years. So, for these two reasons I am not convinced that this conditionality will really achieve what it is meant for. Perhaps a more adequate way of doing that, depending, of course, on the acceptance by the Argentinean Government, would be to include this conditionality on the transfer agreement, because I have seen on the project that every province will have to sign a transfer agreement with the federal government with a number of conditionalities for the provinces, and there I think it will be the case where we could include a condition saying that if the provinces don't reduce their deficit by a given amount, then they will have to either pay the central government what the central government had to pay because they accepted the transfer of funds, and that could be guaranteed by the shares of co- participated taxes that the central government transfers to the province. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] So, I think the way this conditionality has been drawn, perhaps it is not the most efficient one. Thank you. MR. SANDSTROM: Thank you very much. This being your first Board meeting, you are up to speed very quickly, I must say. Thank you. Helena Cordeiro. MS. CORDEIRO: Thank you, Mr. Chairman. First, I would like to apologize to management and staff that I missed the initial presentation and I regret it, and I think by listening to Pieter, I think some of the comments I would like to make may have been covered. So, my apologies if they have been clarified. But as others and in particular Pieter Stek's written statement, I really want to thank him, but maybe the best way is to thank staff for this loan. I really welcome this loan. It fits perfectly in what in what we have discussed as an appropriate strategy for the Argentinean further step in consolidating fiscal progress. I believe this loan is basically at this stage a fiscal tool towards broadening the fiscal improvement to the provinces and it is well grounded in the ESW, and we very much welcome that. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] I see the loan precisely with a nature, a double nature of an intermediary step in the fiscal adjustment and also a step towards a possible broader reform of the social security system in the future, which we have to recognize a lot has already been done by the Argentinean authorities themselves. So, the question remains if that is needed and when -- and I think the document before us leaves the door open if further adjustment lending will be necessary -- to further look into the national social security system. I have a feeling that it might be needed, and I would welcome the opportunity for the Bank to envisage that support. Another very important aspect of this loan is the opportunity to review progress that has been achieved by the provinces under two ongoing projects, and I very much like the detailed progress report under the provincial reform loan and the privatization provincial bank loan, if I recall the titles. We talk so often about knowing more about implementation. I think this is an interesting tool that management uses to inform the Board on two major loans that are going on. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] The third element is again the cooperation with IDB. I think we have encouraged that. I think we have seen in Latin American countries. Quite often Argentina is an example, although I must confess that I always fail to understand what that cooperation is beyond the cofinancing of the loan and that might be more appropriate to discuss in another forum. But we welcome the partnership that one guesses to be behind this effort, actually a tripartite partnership with the government. Another element of a very important nature of this loan, although I fully agree with Mr. Portugal on the issue of the conditionality, I must say that, before getting into the particular item of the design of the conditionality linked to the improved fiscal situation of the provinces, I welcome the somehow cross-conditionality with the other ongoing projects regarding progress on the privatization and on other structural reforms. Again, I think it is a way to encourage what is already going on with a very clear message, and eventually is a way to address the mitigated leverage that this loan has found to influence the provinces' public finance. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] I think Mr. Portugal is absolutely right in questioning what is in fact the leverage and the compliance at the level of the provinces, because one sees that there is a link, but it is not directly with the loan. Although its design might still be possible to be incorporated, but I feel that we are giving a tremendous role to the central government in pursuing a major aspect of the fiscal program at the national level. I think I see the advantage of the eligibility criteria that bring the provinces onboard early on, but it is difficult to see how the sustainability of the fiscal improvement is going to be assured. I share his concern if, in fact, we have in place enough tools to induce compliance. One other issue actually I had a chance to discuss with staff was already raised by Pieter, which is the political social consensus for the reduced benefit that this transfer implies in the future. And I must say that I recognize that there are different groups that would be affected. In fact, the beneficiaries of the current provincial pension reforms will be receiving less benefits than what they are entitled to today. So, the MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] issue of the court ruling against this change I believe is appropriate. I understand there is a legal mechanism to involve different levels of eligibility for power and I think that might be sufficient reassurance, but we should not rule out that it could, in fact, lead to at least some cases to be brought up and reduce the acceptability of this package. If one things that in the long run the financing, the sustainability financing of the national system may induce additional change, one has to anticipate some difficulties in the implementation. I am sure that staff and the government are aware of this and one has to account for some difficulties in the actual implementation. That might reflect on the depth of the fiscal adjustment. Two detailed questions that I didn't get clearly if they have been taken into account and what the outcome would be. I think this transfer can also have an additional impact on the current beneficiaries and potential new beneficiaries of the national system, which in fact is that newcomers might be discouraged in joining this national system and opt for a private funded pension system. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] Were those the assumptions that were used in the model and in what regard, because I think it can affect the outlook of the revenue forecast which is quite sensitive, I believe, to some of the essentials that may have been taken into account. The other one, which again is a little of a technicality, but I was surprised -- and I think the reason why we are surprised is we have the chance to follow Argentina quite closely through the press -- there is a very strong performance on inflation. I recall that when the CAS was discussed, I thought that there was a too conservative assumption on the inflation forecast, 2-1/2 percent at the time. I notice here there is an assumption of 3 percent used in this model, which has an impact on the real revenues of the system and the transaction costs that are involved. There was an additional reason to review up the inflation forecasts and if that has anything to do with the duration of the fiscal outlook is more what I am concerned about. But, as I started saying, we are very pleased to see this loan and we are happy to fully support it. I think it also represents a new wave of the Bank involvement on social security and the upcoming loan for MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] Mexico, which is even a more full-fledged social security reform loan which we welcome very much. Thank you, Mr. Chairman. MR. SANDSTROM: Thank you very much, Helena. Michael Marek, please. MR. MAREK: Thank you, Mr. Chairman. We support this loan as well. As the President's Report notes, this operation supports the CAS focus on extending fiscal and economic reforms to the provinces. Provincial reform is clearly a vital component of Argentina's recovery and we commend the Federal Government for the determination it is demonstrating in the pension reform program now underway. As we know from our own experience, pension reform is an emotionally charged issue which can generate strong political pressures. Strong sustained government commitment at both the provincial and federal level is essential. This project is ambitious and it carries high risk. The National Social Security Administration still has many institutional weaknesses and its ability to efficiently to absorb provincial pension funds is far from assured. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] Even with the additional World Bank and IDB support, absorbing the PPFs will impose additional transitional strains on the federal budget. The commitment of the provinces to use fiscal savings wisely will also be tested. As we have discussed extensively over the past two weeks, risk taking is an essential part of the Bank's unique development mandate. In this case, there are very strong arguments for maintaining the momentum of the pension reform already underway and I believe the Bank is right on target in its judgment that failing to act decisively now to arrest the major cause of this serious deterioration in provincial finances has serious downside risks which could have enormous adverse consequences at both the provincial and national level. Although Argentina's recent record in following through on the conditions of adjustment operations is encouraging, managing the risks of this operation poses a number of difficult challenges for the government as well as for the Bank, not the least being accelerating and deepening the institutional and financial reform of the National Social Security Administration. Therefore, we do welcome the Bank's technical assistance loan which will help support this effort. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] Project success will also require tight fiscal discipline at the provincial and federal levels. It is particularly important for the provinces to take advantage of the opportunity that transfer of pension responsibility provides for regaining control of public expenditures, and every effort needs to be made to restore sound fiscal management. The ambitious scope of this operation also underscores the point which Mr. Wolfensohn made last week of ensuring Bank capacity to identify implementation problems at an early stage and to ensure rapid and responsive corrective action. Thank you very much. MR. SANDSTROM: Thank you very much. Are there any further comments at this point? [No response.] MR. SANDSTROM: If not, who would like to start? Gobind. Please. MR. NANKANI: I would like to take two general issues that were raised and then request Paul Levy and Mariluz to deal with the provincial and project issues, respectively. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] On the question of whether or not there will be a follow-up loan to this, we did say in the President's Report when it was put out that we were planning such a loan. But our analysis since then has indicated that we expect 16 of the provinces to have been transferred in the life of this loan and another three had already been transferred. We don't expect the others to make an immediate transfer. In any event, the majority of them are running surpluses. However, this does not preclude, as we had said in our CAS progress report, our objective of assisting with deepening provincial reforms more generally, and we have an ongoing provincial reform loan, and have begun work at the request of the government on a follow-up to the provincial reform loan to deepen reforms in various provinces. So, there is no immediate plan for a new pension reform loan for the provinces. However, we do recognize, as was indicated, that the transfer to the national system poses other issues. Here, we see the technical assistance loan as providing a basis for possible improvements. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] We have conservatively estimated savings at a later date of some $300 million a year from evasion, fraud and so on. I would just also note that we are working with the government on an economic report that will look at elements for providing for greater fiscal sustainability over the medium-term to address issues such as these and other issues which are going to impose strains on the fiscal system at the national level. Secondly, on the question of leverage, I would just add that we do indeed with the central government have a whole menu of assistance options with the provinces, each of which has access criteria that require provincial balanced budgets and progress on various aspects of public finances at the provincial level to complement this. So, the access criteria in this particular operation are only one of many things that the central government uses and some of which we assist with. I think it would be helpful if perhaps Paul Levy took up the question of the transfer agreement and the criteria by which we will be judging second and third tranche conditions. Or you can do it. Okay. Then, Mariluz, please. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] MS. CORTES: All the comments on the conditionality are concerned about the fact that we don't have a direct linkage with the provinces in these conditions. The reason is the following: Under the fiscal pacts, all the provinces that have complied with the provision of the fiscal pact have the right to transfer their pension funds to the national system. So, even if we don't finance the deficit caused by the transfer of a specific province, the government may be required to accept that pension fund. Now, what we have agreed with the government is that our resources and the resources of the IDB will finance part of the deficit caused by the transfer of the pension funds of provinces that complied with eligibility criteria. They may have to fund the transfer of the other provinces with their own funds. So, we cannot have conditions attached to the transfer agreement of the provinces because for them the fact that they are complying with the fiscal pact opens the way for their transfer. Now, when we asked the government to make sure that the provinces comply with the eligibility criteria MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] and that for the second and third tranche release the provinces that transferred in the previous one complied with the other conditions that we have in terms of the expenditures in salaries and in the reduction of their deficit, it is in the interest of the central government to make the provinces comply with this and so they can use our funds to cover this initial deficit. Now, we are confident that if we do that, not only for the need to use our funds but the government strategy with respect to provinces is to continue inducing them to reform their administration, reduce their debts and reduce their deficits. We have made the projections of their deficits and their expenditures in personnel and the projections under different assumptions support our contention that for the second and third tranche they are going to comply with these conditions. So, it is not possible under this law to put direct conditionality on the transfer agreement of the provinces with the central government for the transfer of the pension funds. The other issue is on privatization. What we tried to do is that we want this operation to complement MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] and support our other operations in Argentina, support in privatization of banks and public enterprises. Most of the provinces that we are going to finance in these initial tranches have already complied with this conditionality, and we think that with the time frame that we have for the two-tranche releases all the provinces will comply. Actually, the two provinces that are not in this program are the ones that are lagging behind the privatization, and it is possible that they will not decide to transfer their pension funds until 1998. By that time, things may have changed and they may also privatize their banks and public enterprises. Maybe I can elaborate a little more on the question about the reaction of the provincial pensioners, because there are a groups that stand to lose with the transfer. My response in the speech is that for those who already retired, there is not going to be a decrease in benefits but, of course, for those who will retire afterwards, there is going to be a decrease in benefits. But we have to start the view that there are benefits given in the provinces that are completely out of line with the rest of the country. There are some MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] groups like teachers in some provinces that retire at 45. They retire with full payment and indexed according to the change in salaries of active teachers, for example. As you see, the average size of the pension in the provinces is almost three times the average size of the pension in the rest of the country. Now, in Argentina, it has been very painful the difficulties that pensioners have had and there are lots of lawsuits against the government in the past because the governments in the past have made pledges that were very difficult to meet about indexation and very generous pension benefits. The country cannot afford that and they passed the Social Security Solidarity Law in 1995 to stop this hemorrhage that was really affecting the whole fiscal position of the country. So, it is true that some people suddenly are going to find out that after they transfer their pension funds, they are going to have to wait ten more years to retire. But this is unfortunate. The country cannot afford to retire people at 45 years of age with very few years of work, because in the pension system of the provinces there is no follow-up of how many years people have worked. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] The other thing is that really the ones who stand to lose more are people like the legislators in the provinces. Of course, in the past the pensions have benefited these people and they are the ones who have to pass the law accepting the transfer. So, evidently they have seen that the situation cannot continue as it is and they have agreed to accept a cut in their future pensions and have voted for it in many cases. The third point that was made was about the uncertain funding of the public system once the transfer has occurred. In Argentina at the moment, as the report indicates, only 50 percent of the benefits are covered by contributions. The rest comes from Treasury transfers. Some are taxes that are specifically attached to social security. Some are from general taxes. Once the transfer occurs, once the pension funds go to the national system, they are like any other pensions that the government has to cover. They cannot fail to honor them unless they fail to honor the rest of the pensions. And that would be a major problem. So, once they are absorbed, there is no difference between the provincial pensions and the rest of the pension system. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] There were two questions about the model. MS. SCHWARZ: On the model, one of the questions that was asked was about whether we had taken into account the rate of moving to the private system. We have no way of actually knowing what the rate will be, but we did use a variety of assumptions and each case the costs increased -- if more moved over, the costs will increase. The cost increase was not significant enough to make the transfer not a beneficial thing to do in the long run. So, from eight years for the transfer to be fiscally sustainable, it might go to eight-and-a-half years or nine years, but it was never a significant increase and certainly would still make the system viable. The other point that I think was raised about the inflation rate and the inflation rate as far as the modeling is concerned, we used the inflation rate that the Argentines had provided for us. If the inflation rate actually is a bit higher, this will actually improve the system from the standpoint that the pensions are no longer inflation indexed, so that the expenditures would be even lower. So, that would actually improve the system, but the difference MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] between 2.5 and 3 percent would not be enough to cause any great difference in terms of the system's viability. MR. NANKANI: I would just add on the transfer issue which was raised by one or two Directors, there is indeed the fact that it is difficult for the second and third tranche conditions to be fully implemented through the loan. I think one has to recognize, as Ms. Cortes indicated, that under the fiscal pact, the central government has already agreed that any of the provinces that signed the fiscal pact earlier would have the option of transferring its provincial pension funds to the national system. What our second and third tranche condition really represents is an understanding and agreement with the central government that its other mechanisms for fiscal interrelations between the federal government and the provincial governments will be brought into play to ensure that the savings generated by this transfer go to deficit reduction. This is in the context of the broader relationship between the federal government and the central government. We could not do what both you and we would have preferred to because of the earlier agreement. MR. SANDSTROM: Thank you very much. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] Are there any further questions or comments, follow up? [No response.] MR. SANDSTROM: If not, the loan is approved on the terms proposed. Thank you very much. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  MR. SANDSTROM: Item five on the agenda is the approval of the two operations which are listed under the streamlined procedure. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 [--- Unable To Translate Graphic ---] In the absence of any objection, the two loans are approved. Item six, the minutes of today's meeting will record your previous approval of the item listed on the agenda. Item seven, no other business? [No response.] MR. SANDSTROM: Item eight, date of the next meeting, tomorrow morning at ten o'clock. Thank you very much. [Whereupon, at 4:25 p.m., the meeting was adjourned.] MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666