Argentina - Provincial Pension Reform Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION Report No. P-6967-AR OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT OF US$300 MILLION TO THE ARGENTINE REPUBLIC FOR A PROVINCIAL PENSION REFORM ADJUSTMENT LOAN November 6, 1996 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Peso (Arg $) US$1.00 = Arg $1.00 GLOSSARY OF ABBREVIATIONS AFJP = Pension Fund Administrators ANSeS = National Social Security Administration CAS Country Assistance Strategy DGI General Tax Directorate EFF Enhanced Fund Facility ESW = Economic and Sector Work GDP Gross Domestic Product IDB Inter-American Development Bank IMF = International Monetary Fund MCBA = Municipality of the City of Buenos Aires MERCOSUR = Southern Cone Common Market PAMI = Integral Medical Attention Plan PPF = Provincial Pension Funds PRL = Provincial Reform Loan PSRL = Public Sector Reform Loan SAL = Structural Adjustment Loan SECAL = Sectoral Adjustment Loan UDAI = Integral Attention Unit VAT = Value Added Tax YPF = Privatized Petroleum Company FOR OFFICIAL USE ONLY ARGENTINA PROVINCIAL PENSION REFORM ADJUSTMENT LOAN TABLE OF CONTENTS Page No. I. THE SETTING ..................................... 1 Economic Context .. ................................. 1 Recent Performance .................................. 1 II. ARGENTINA'S PENSION REFORM PROGRAM ............. 3 The New Integrated Pension System .. ...................... 3 The National Social Security Administration: ANSeS ............. 4 The Program to Transfer the Provincial Pension Funds to the National Sy stem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Implications of the Transfer of the PPFs ..................... 9 Pension Reform Strategy .............................. 13 III. THE PROGRAM OF PROVINCIAL REFORMS ............. 14 The Provincial Financial Crisis .......................... 14 Provincial Structural Reforms . ........................... 15 Provincial Reform Strategy ............................ 15 IV. THE PROPOSED LOAN ............................ 17 Background.. ........................ ... ... ... ... . 17 Loan Objectives and Description ......................... 17 Rationale for Bank Involvement and Strategy ................. 18 Experience with Adjustment Operations in Argentina ............ 19 Coordination with Multilateral Institutions ................... 19 Loan Amount .................................... 19 Loan Conditionality ................................. 20 Impact, Benefits and Risks ............................ 26 V. RECOMMENDATION .............................. 28 This Report is based on the findings of an appraisal mission composed of Mariluz Cort6s (mission leader), Maria Emilia Freire, and Anita Schwarz, that visited Argentina in June 1996. Other team members are: David Vetter, Luis-Jos6 Mejia and Lou Enoff (consultant). Ms. Suchila Burns has been responsible for report processing. The responsible Division Chief, Project Adviser, and Department Director in this operation are, respectively, Paul Meo, Orville Grimes and Gobind T. Nankani. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed wihout World Bank authorization. ANNEXES I Policy M atrix ...................................29 II ANSeS Institutional Strengthening Program ................. 34 III ANSeS Financial Outlook ............................ 39 IV Financial Implications of the Transfer of the PPFs ............. 45 V Provincial Fiscal Performance and Reform Program ............. 56 VI Policy Letter ................................... 66 VII Status of Bank Group Operations ....................... 78 VIII Status of IFC Investments ............................ 79 IX Argentina at a Glance .............................. 85 Map - IBRD No. 26842 Vice President: Mr. Shahid Javed Burki Director: Mr. Gobind T. Nankani Division Chief: Mr. Paul Meo Task Manager: Mrs. Mariluz Cort6s ARGENTINA PROVINCIAL PENSION REFORM ADJUSTMENT LOAN Loan and Project Summary Borrower: The Argentine Republic Implementing Agency: Subsecretaria de Programaci6n Regional Beneficiaries: The National Social Security Administration (ANSeS), and the provincial governments that will be able to reduce their deficits by transferring their pension funds to the national social security system. Poverty: Not applicable Amount: US$300 million Terms: LIBOR-based U.S. Dollar loan, with a grace period of five years, a final maturity of 15 years, and level repayment of principal. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Schedule of Disbursements: ----------------US$ million-- Bank FY97 Disbursement Cumulative 2nd Quarter 150 150 4th Quarter 75 225 Bank FY98 2nd Quarter 75 300 Financing Plan: US$ million World Bank 300 IDB 320 Argentine Government 706 Total 1,326 Economic Rate of Return: Not applicable. Project Identification Number: AR-PA-44445 Map: IBRD No. 26842  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED PROVINCIAL PENSION REFORM ADJUSTMENT LOAN IN THE AMOUNT OF US$300 MILLION TO THE ARGENTINE REPUBLIC 1. I submit for your approval the following memorandum and recommendation on a proposed Provincial Pension Reform Adjustment Loan to the Argentine Republic for US$300 million to support reform of the Provincial Pension Funds and fiscal reform in the provinces. The loan would be a LIBOR-based Dollar loan, with a grace period of 5 years, a final maturity of 15 years and level repayment of principal. I. THE SETTING Economic Context 2. Argentina's economic landscape has changed dramatically since 1991, when the Government adopted drastic stabilization and structural reforms. During the first four years of the Convertibility Plan, output and productivity increases were dramatic. Output growth averaged 7.7 percent and hyperinflation gave way to an annual inflation rate of 3.9 percent in 1994. More importantly, the initial consumption-led boom of the early years of stabilization matured into a healthy pattern of investment and export-led growth. Privatization of state assets was far-reaching, and far more successful than expected. 3. The initial shock of the hemisphere's debt crisis of December 1994 reduced investors' confidence in Argentina. The crisis, together with higher international interest rates, contributed to net capital outflows with negative economic, financial, social and political implications. The effects of this crisis were most evident in the contraction of the economy in 1995; GDP fell 4.4 percent and unemployment soared. However, Argentina has since begun to recover from the recession without serious damage to the Convertibility Plan. Recent Performance 4. In the first four months of the crisis, banking deposits dropped 17.6 percent and international reserves declined by 30 per cent. Since under the Convertibility Plan the monetary base has to be fully backed by international reserves, the result was a demonetization of the economy that affected both the financial sector and real economic activity. As recession set in, unemployment increased, peaking at 18.4 percent in May 1995. Fiscal performance was negatively affected by the recession as tax receipts dropped. -2- 5. In the early months of 1995, the Government took strong measures to address the crisis. To reduce the fiscal deficit, it cut expenditures on, among other things, export subsidies, public sector wages, and social security expenditures, and raised VAT rates and other taxes. The Central Bank took measures to enhance liquidity and prevent further bank failures. In April 1995, the Government established a Bank Capitalization Trust Fund to handle the recapitalization/restructuring of distressed private banks. Another fund assisted the privatization of many provincial banks. Congress also reacted by approving a number of emergency measures. These measures were supported by a conditional IMF program and substantial financial support by the Bank and IDB. In mid-March 1995, the Government announced an international financial package of US$1.1 billion in support of the Convertibility Plan. This backing helped to stop the decline in bank deposits. 6. Helped by these measures, the Argentine economy bottomed out in the fourth quarter of 1995. Its access to international financial markets was restored and deposits returned to the banking system, recovering the losses suffered earlier in the crisis. Liquid international reserves regained all losses suffered in early 1995, contributing to the remonetization of the economy. Also, the impact of the crisis was moderated by a strong foreign trade performance that reduced the current account deficit to 1.5 percent of GDP, half the 1994 level. However, despite efforts to reduce expenditures, the shortfall in revenues generated a fiscal deficit in 1995 equivalent to one percent of GDP, or US$2.8 billion (including privatization receipts of US$0.9 billion). In addition to the federal fiscal deficit, the consolidated provincial fiscal deficit in 1995 amounted to 1.2 percent of GDP (see Section III). 7. Although 1996 is expected to see economic growth of at least 2.5 percent, the economic reactivation has been slow in coming due to the still-cautious consumer reaction. The IMF endorsed Argentina's economic program, and a new "stand-by" agreement was approved in April 1996. However, disappointing tax revenues had an adverse impact on fiscal accounts. On August 12, a new Economic Team announced a series of fiscal measures consisting primarily of higher fuel, corporate and personal income taxes, to redress the substantial fiscal imbalance that has been developing during 1996. This fiscal package was approved by Congress in late September, strengthening the position of the new economic team, and a recent IMF mission proposed new targets for the third and fourth quarters of 1996 and a waiver for non- compliance with second quarter performance criteria; this program was approved by the IMF Board in end-October. The August 1996 measures are expected to reduce the fiscal deficit further, to a targeted US$6 billion in 1996, US$4.5 billion in 1997, and a balanced position in 1998. Inflation in Argentina continues at very low levels. 8. We expect that the recent changes in the economic team, including the replacement of the Minister of Economy on July 26, 1996, will not materially change the economic program. Indeed, the Government is continuing a series of ambitious reforms. In March 1996, Congress passed the Second Reform of the State Law. Its -3- objective is to improve the quality of the services provided by the State and to reduce the level and increase the efficiency of public expenditures. Jointly with this law, Congress approved another law giving extraordinary powers to the executive to modify certain taxes (VAT and wealth tax) and eliminate some exemptions on VAT and income taxes. Provincial reforms continue at a fast pace, and are expected to cut the 1996 consolidated provincial deficit to less than half the 1995 level. Financial reforms continue, with the privatization of provincial banks, the announcement of the privatization of Banco Hipotecario Nacional, the state-owned mortgage bank, and the swap arrangement of the Central Bank to access commercial credits in time of crisis. In addition, the Government is proceeding with health insurance reforms, and has announced a substantial reform of the labor market to combat unemployment. II. ARGENTINA'S PENSION REFORM PROGRAM The New Integrated Pension System 9. Argentina reformed its pension system in mid-1994', when it substituted the old pay-as-you-go system by a new mixed public/private two-pillar structure. The prior system suffered from a very high dependency ratio that was, in turn, caused by widespread evasion, low retirement ages, and lax disability rules. Other problems were the promise of very high indexed pensions relative to wages, and the prevalence of special regimes that allowed for early retirement and encouraged evasion. This system required an unsustainable contribution rate' of 50 percent. Unable to impose such a high rate, the Government reduced it to 21 percent and reduced the replacement rate to half its target level, paying pensions with notes. Understandably, the system ran deficits during the 1980s. 10. The erosion of the real value of pensions prompted a barrage of law suits by pensioners. In 1991, the Government recognized the past debt to pensioners and offered cash payments with a limit of 1,580 pesos or payments with new bonds (dollars or pesos) with a maturity of ten years. The total recognized debt amounted to 7.5 billion pesos or 3.5 percent of GDP. 11. In 1994, the Congress passed legislation for a new, integrated pension system. This system, compulsory for all workers including the self-employed, has the following structure: 1. Vide, Dimitri Vittas, "Argentina, New Integrated Pension System, First Year Assessment", processed. 2. Percentage of the wage bill paid in contributions. -4- 12. The First Pillar is a defined-benefit system administered by the National Social Security Administration (ANSeS) and financed by employers' contributions, earmarked taxes and budgetary allocations. The employers' contributions are legally stipulated at 16 percent of wages, but discounts given to some sectors and regions have reduced the average contribution to an estimated 14.7 percent as of 1995. This pillar is responsible for three types of benefits: (i) a basic universal pension equal to 27.5 percent of the average covered wage, subject to a minimum eligibility period of 30 years and a normal retirement age of 65 for men and 60 for women; (ii) a transitory compensatory pension for past contributions to the old system, paying a pension equal to 1.5 percent of the average indexed salary of the last 10 years of employment for every year of contribution to the old system; and (iii) a pension paid to existing pensioners, also transitory. 13. The Second Pillar is financed by an 11 percent contribution rate by employees, who have the option to invest it in a private pension fund or to contribute to the system administered by ANSeS: (i) the private option allows employees to contribute to defined contribution plans based on individual capitalized accounts managed by pension funds administrators (Administradoras de Fondos de Jubilaciones y Pensiones- AFJPs). The old-age pension from this system will be in the form of a life annuity or scheduled withdrawals based on the accumulated balance of each account, and will be covered by group disability and life insurance. As of early 1996, about 6 million workers had chosen to join one of the AFJPs, representing 64 percent of all eligible workers and over 70 percent of affiliated workers. (ii) the public option allows employees to contribute to a defined benefit plan administered by ANSeS. It provides a public pension of 0.85 percent of the average indexed monthly salary of the last 10 years of employment for every year of service to the new system, and will also cover disability and survivorship benefits, similar to those offered by the private component. The National Social Security Administration: ANSeS 14. Institutional Outlook. ANSeS is not only responsible for the old pension system and the public component of the new integrated pension system, but also for other protection schemes such as family subsidies, the National Employment Fund, and the administration of other programs such as military and police pensions. By end-1995, ANSeS had 7,472,000 affiliates of which only 4,396,000 (58.8 percent) were active contributors. Benefit payments under the pension system amounted to US$13.9 billion in 1995. ANSeS does not collect contributions or make benefit payments directly. Collections are handled by the General Tax Directorate (DGI), and payments are made through about 80 banks under contract with ANSeS. -5- 15. ANSeS is the result of merging, a few years ago, some eighteen previous organizations, each with its own personnel rules and pay scales. Similarly, these organizations were responsible for administering a multitude of disparate pensions and other social security-related programs. While the merger of the various programs into one was accomplished by legislation, little had been done until recently to integrate the management and operations of the organization. As a result, ANSeS has a history of operating without clear lines of authority, accountability or definitions of purpose, and with nontransparent reward systems. Moreover, procedures for record keeping for contributors and beneficiaries lacked basic integrity safeguards, providing ample opportunities for inaccurate or fraudulent benefit payments. There were no public service objectives, and ANSeS' employees had little sense of service orientation to beneficiaries or contributors. Until recently, the leadership of its 150 field offices was fragmented and was not accountable for program performance. There is no quality review mechanism, or even an organizational component with responsibility for this activity. As a result of these problems, public awareness of ANSeS' programs and capabilities is lacking, which may contribute to the high evasion levels. 16. Against this scenario, the new leadership of ANSeS has initiated a vigorous reform effort. International consultants completed a diagnosis of the institution at the end of 1995. Based on it, ANSeS' management has adopted a two-pronged strategy which involves the development and implementation of an "Emergency Plan" to achieve a necessary level of control over the institution by end-1996. At the same time work has started on a "Transformation Plan" to transform ANSeS, over the next two years, into a streamlined organization, designed to reward performance and meet customer and shareholder needs. 17. The General Manager has already begun the process of establishing a clear vision for the organization and establishing clear lines of authority and accountability (see Annex II for a description of ANSeS' initiatives under its Emergency and Transformation Plans). Steps have been taken to identify key staff who can be counted on to change the culture of the organization and to define the new processes and procedures necessary to reengineer the entire operation. Also, efforts are underway to review the accounting system and strengthen internal auditing, as well as to detect and correct defective procedures and processes and to establish security and program safeguards. 18. Among the most important initiatives underway are those geared to detect fraud, including: (a) an audit of Beneficiary Files to validate existing records and to purge them of incorrectly calculated benefits or non-existent beneficiaries. This audit will eventually cover 750,000 files3; (b) the follow up of the Census of Beneficiaries 3. A pilot involving the revision of 3,000 files, during the first quarter of 1996, produced nearly 800 erroneous files (25 percent), with savings for ANSeS of -6- which identified about 300,000 irregular cases'; (c) a review of the Contributors' Data Base of persons that are within six months of retirement; and (d) a review of Invalidity Claims of about 7,000 cases, where there is a potential for 30 percent error. The potential savings from reducing fraud are enormous. A very conservative estimate made by ANSeS puts the savings at over US$300 million per year. 19. ANSeS has estimated that the initiatives would cost about US$80 million over five years, of which US$20 million would be financed by a proposed technical assistance loan from the World Bank. The rest would be financed by the Government and by ANSeS itself from the savings made by reducing fraud (see Section IV for a description of ANSeS' technical assistance program). 20. Financial Outlook. ANSeS currently requires large subsidies from the government to cover its expenditures. On the pension side alone, contributions covered only 50 percent of expenditure in 1995, down from 60 percent in 1994, and are not expected to cover more than 48 percent in 1996. To address this shortfall, the government has earmarked a number of revenue sources for ANSeS. Of the 11 percent of VAT revenue earmarked for social security, 90 percent goes to ANSeS and the remainder goes to the provincial social security schemes. In addition, 90 percent of the revenue from the personal property tax and 20 percent of the profit tax go directly to ANSeS. Thirty percent of the proceeds from privatization also are earmarked for ANSeS, as well as 15 percent of the coparticipated taxes. 21. Despite this earmarked support, expenditures still exceeded revenue by US$3.2 billion in 1995; about 18 percent of expenditures. ANSeS had to turn to the Government for an additional US$1.4 billion in direct support, and borrowed the bulk of the rest, mostly on the strength of the IOUs collected during a delinquent taxpayer penalty holiday. The current deficits in ANSeS have been exacerbated by a fall in revenue of 15 percent in real terms between 1994 and 1995. Expenditures during this period have also fallen, but by only around 1 percent. ANSeS expects its revenue to grow by 13 percent in 1996, but expenditures to grow by only 2 percent. 22. Three factors led to the decline in revenue for ANSeS. The first is permanent, the second is probably permanent, and the third is temporary. The first factor is employees' choice of individual capitalization accounts over the public option of the second pillar. By mid-1996, nearly 70 percent of workers had chosen to join an about US$6 million. 4. The census of 87 percent of the beneficiaries resulted in 270,000 beneficiaries that were represented by third parties and 174,000 beneficiaries that did not respond to the census. A sample of the first group showed that 30 percent had irregularities. By July 1996, 30,000 fraudulent benefits had been canceled. -7- AFJP rather than ANSeS. Second, in 1994 the government made the decision to lower employer contribution rates, giving some employers discounts ranging from 30 to 80 percent, depending on their location. While beneficial from the standpoint of improving competitiveness, generating employment and removing labor market distortions, these cuts entail an immediate loss in revenue to ANSeS without a corresponding cut in expenditure. The third factor is the state of the economy in 1995. Between May 1994 and October 1995, the unemployment rate increased from 11 percent to 18 percent, reducing the number of people who contributed to ANSeS. In May 1996, unemployment was still high at 17.1 percent. 23. In the short term the outlook for ANSeS is for a slight increase in revenues. The economy has already shown signs of improvement in 1996, and further improvement will generate revenue growth for ANSeS. Adding to this growth is the evasion-reducing incentive effects coming from the reduction in employer contributions and the move to a contribution-related second-pillar pension structure. Both of these policies were designed to reduce evasion, in one case by reducing the incentive for employers to avoid taxes and in the other by increasing the incentives to the individual for not evading. However, significant reduction of evasion is a behavioral change that will take time. Given the size of the pension deficits, employers also fear that the discounts on the contribution rates may be temporary and thus there would be less incentive to change behavior. 24. The government has taken measures to reduce expenditures. The Pension Solidarity Law of March 1995, allows annual pension increments to be determined by the Government and not automatically set equivalent to wage increases, as had been done in the past. The law also sets ceilings on pensions, with gradual reductions to pensions currently above those ceilings. Although currently being contested in the courts, this law has reduced the level of pension expenditure relative to revenue collected, since revenue collected will grow with nominal wages, while pension expenditure will grow to a lesser extent, based on annual decisions by the Government (no pension increase is to be granted in 1996). Furthermore, as current pensioners leave the system and are replaced by new retirees receiving lower benefits under the new system, the impact will be to lower pension expenditure. The retirement age is also gradually being raised to reduce the number of new retirees. However, each of these effects will take place slowly over time. A more drastic, but not immediate, reduction in expenditure may take place as ANSeS attempts to get its files in order, checking beneficiaries to see if they exist and checking benefit levels to see if they are as legislated. -8- The Program to Transfer the Provincial Pension Funds to the National System 25. The Provincial Pension Funds (PPFs). Most of the pension schemes for the benefit of provincial employees remain outside ANSeS' administration. Under the Fiscal Pact of August 1993, the Federal Government agreed to receive the PPF of any province that passed a law authorizing the transfer of its PPF within 90 days of signing a transfer agreement with the Federal Government. In the long run, such a move will be beneficial to the economy as a whole because most provinces have made financially unsustainable promises, generously granting lower retirement ages and higher replacement rates, and because the provincial civil servants will have the option of choosing the private pension scheme (see Table 1 in Annex IV). Moving the PPFs into ANSeS will ultimately confer the same retirement eligibility conditions and benefits on the provincial civil servants that are now available to the private sector in the provinces and to federal civil servants. In addition to reducing costs, the transfer will improve labor mobility between the private and public sectors in the provinces and within the public sector across provinces. 26. The transfer of the PPFs has a high political cost for the provinces, however, since most provincial workers who retire after the transfer would have substantially lower benefits, including those provincial legislators who must vote to enable the transfer (those retired before the transfer will not be affected, except for the ceiling of US$3,600 monthly retirement benefit established by the Pension Solidarity Law). Nevertheless, for some provinces and beneficiaries, regular payments assured by ANSeS may be preferable to the non-payment they currently experience. Many deficits in PPFs are presently financed by subsidies from the provincial treasuries or by withholding payments to pensioners. The federal authorities believe that, like the privatization of provincial banks, the provinces' severe fiscal difficulties have opened a political opportunity to reform their pension schemes, as well as to introduce major administrative and fiscal reforms. Up to 1995, only the municipality of Buenos Aires and two smaller provinces (Catamarca and Santiago del Estero) had transferred their pension funds. Since January 1996, another five provinces have signed transfer agreements (Mendoza, La Rioja, San Juin, Salta and Rio Negro). Two additional provinces (Jujuy and Tucumin) are in the process of transferring their PPFs. The authorities estimate that 16 provinces (out of 23 provinces plus the Municipality of Buenos Aires) with a total of 1.4 million contributors and 494,000 beneficiaries could be willing to transfer their pension funds to the national system within the next three years. -9- Implications of the Transfer of the PPFs 27. Financial Implications of the Transfer for ANSeS. In the short run, absorbing the PPFs into ANSeS will require substantial incremental resources, since the PPFs that would be willing to transfer are the ones running deficits. A model developed by the Ministry of Economy in cooperation with the World Bank and the IDB measures the additional costs to ANSeS resulting from the transfer of the PPFs (a description of the model is presented in Annex IV). Initially, ANSeS would bear the full burden of the current deficit of each transferred PPF, plus additional deficits that would arise as a result of the transfer. However, the deficits for ANSeS would become smaller over time, and at the end of the third year the deficit in ANSeS would be smaller than the deficits that would occur in the provinces without the transfer. By the eighth year the transferred pensions would no longer generate deficits for ANSeS. 28. One reason for the initial increase in a PPF deficit after its transfer is that employee contributions in the national system are lower than in the provinces; thus the revenues available to ANSeS to finance the provincial pensioners would be lower than those available to the provinces themselves, while the expenditures for the provincial beneficiaries would remain roughly the same. Moreover, contributions going to ANSeS after the transfer would be further reduced since some public servants may decide to join an AFJP instead of ANSeS. Moreover, some provinces have earmarked revenues from selected sources, such as lotteries, for their PPFs; these will not be transferred to ANSeS and will thus contribute to the increased deficit faced by ANSeS. 29. Over time the deficit will begin to fall, for four reasons. First, ANSeS will absorb the costs of the transfer without requiring any additional personnel, and the current administrative costs of the PPFs will thereby be eliminated. Second, provincial pensioners retiring after the transfer will receive the national pension which is lower than the provincial pension. Third, the initial flow of new retirees will be far lower than previously because the minimum retirement age in the provinces is substantially lower than in the national system. Finally, once transferred to ANSeS, the pensions will be subject to the Solidarity Law of 1995, which eliminated automatic wage indexation for pensioners and imposed ceilings on the size of the monthly pension. 30. After their initial fall, revenues will likely begin to grow again due to increases in real wages. Revenues from other sources, namely earmarked VAT taxes, will also continue to grow as the economy expands. The combined result of declining expenditures and increasing revenues will work to eliminate the deficit in about eight - 10 - years after the transfer of the PPFs to ANSeS1. 31. Fiscal Implications of the Transfer for the National Government. The federal Social Security System includes four main components: (a) ANSeS; (b) the pension system for the military; (c) the Police Pension Fund; and (d) PAMI (the Integrated Medical Attention Program)6. The finances of the federal Social Security System are quite complex. Individual systems receive revenues from their own members, from earmarked taxes, from additional budget transfers, and finally, whatever deficit is left has to be financed by the Treasury. For 1995, the last year of actual figures, the overall deficit of the federal Social Security System amounted to US$6.5 billion, equivalent to 12.8 percent of overall fiscal revenues or 2.3 of GDP. The largest share of that deficit was generated by ANSeS, at about US$4 billion. Government projections show that the broad deficit of the Social Security System (without the transfer of the PPFs) will grow to 14.2 percent of overall fiscal revenues in 1996, but will decline to 11.4 percent in the next two years, primarily due to the expected recovery of PAMI's own revenues and also ANSeS'. 32. With the transfer of the PPFs, ANSeS' deficits will initially increase. Fourteen PPFs are expected to be transferred to ANSeS during 1996 and 1997. The effect of the transfers on ANSeS' deficits during this two-year period will be as follows: seven PPFs transferred or to be transferred 1996 (La Rioja, Mendoza, Salta, San Juan, Rio Negro, Jujuy and Tucumdn), will cause an estimated first-year deficit to ANSeS of about US$582 million in 1996 and US$547 million in 1997 (since the PPFs of La Rioja, Mendoza, Salta and San Juan were transferred in early-1996, ANSeS will absorb their full first-year deficit in 1996, but the other three PPFs will generate less than the full first-year deficit for ANSeS in 1996, depending on the date of the transfer); another seven PPFs expected to be transferred in 1997 (San Luis, Santa F6, Corrientes, Chaco, Entre Rios, Misiones and Formosa) will cause a deficit to ANSeS of US$317 million in 1997. Summarizing, the transfers would increase the deficit of the Social Security System by US$582 million in 1996 and US$864 million in 1997. The transfer of the 14 PPFs will continue generating decreasing deficits for ANSeS for several years (e.g. US$767 million in 1998). If the two remaining provinces (Buenos Aires and C6rdoba) transfer their PPFs in 1998, they would generate an additional deficit to ANSeS of US$307 million that year. For details on the deficit calculations see Annex IV. 5. After the third year of the transfer, the consolidated deficit that the PPFs would generate for ANSeS would be lower than the deficit that they would have generated in the provinces (see Table 2 in Annex IV). 6. PAMI a beneficiary of two Health Insurance Reform Loans approved by the Bank in April 1996. - 11 - 33. Justification for Adjustment Lending. Adjustment lending in support of the transfer of the PPFs to the national system is justified on several grounds. First, the transfer of the PPFs will involve a significant increase in public expenditures in the short term and, therefore, there is a need to increase resource availability to at least partially offset the initial cost of the policy change. While the financing needs of the social security system are substantial, it should be emphasized that the long term benefits of transferring the PPFs to the national system outweigh the transition costs, as long as appropriate financing is allocated for this transition, so that such costs do not become a source of economic instability. A comparison of the fiscal cost to the consolidated public sector (fiscal and provincial) with and without the transfer of the PPFs is presented in Annex IV. The figures shows that the net present value (discounted at 10 percent) of the deficit of 16 PPFs staying in the provinces would cost the consolidated public sector US$5.6 billion, for the first eight critical years of transition. With the transfer of the PPFs to the national system, the cost is reduced over that eight-year transition period to US$4.4 billion, i.e., a net benefit to the consolidated public sector of US$1.2 billion. These benefits are expected to increase over time (at over US$1 billion a year, after the tenth year of consolidation), bringing the net present value of the benefits from this consolidation to more than US$4.4 billion over 15 years. Additional fiscal gains from the transfer of the PPFs to ANSeS will come from savings in expenditures resulting from the anti-fraud measures being implemented by ANSeS as part of its institutional strengthening program. These savings are conservatively estimated at over US$300 million per year. Also, the consolidated fiscal accounts would benefit from improvements in the financial management of the provinces brought about by the conditions that the federal government will attach to the transfers. Second, the transfer of the PPFs is one component of a broad reform program known as the Fiscal Pact, agreed to by the provinces and the Federal Government, and broadly supported by both the Word Bank and the IMF. 34. Finally, foreign borrowing to smooth the transitional cost of the reforms is justified due to: (i) the limitations on Government borrowing from the Central Bank due to the Convertibility Law; (ii) the potential negative impact of crowding out of private investment from domestic borrowing in the midst of a recession; and (iii) a reasonable level of additional foreign debt capacity of the federal government. The Government expects that: (a) two-thirds of the incremental cost of the transfers in 1996 will be covered by Bank and IDB funds; (b) one-third of the incremental cost of the transfers in 1997 will be covered by Bank and IDB funds and two-thirds will be financed by Government funding, including proceeds from privatizations (which were US$1.5 billion in 1996); and (c) all the incremental cost of the transfers in 1998 and afterwards will be covered by Government funds. The budget negotiated with the IMF for 1997 and 1998 explicitly includes the deficits caused by the PPF transfers and other expenditures related to structural reforms. - 12 - 35. Financial Implications of the Transfer for the Provinces. The transfer would have an important positive effect on the provinces' finances. The combined fiscal deficit of the 16 provinces expected to agree to the transfer amounted to US$2.5 billion in 1995, of which about US$733 million corresponded to the consolidated deficit of their PPFs (or about 30 percent), up from US$646 million in 1994. If the PPFs were left in the provinces, this situation would be unlikely to improve. On the revenue side, the financial situation in the provinces precludes an increase in the wage bill--both an increase in wages and an increase in the number employed--which would increase the revenues of the PPFs. Other revenues which might increase with an improvement in the economy represent only a small source of support for the PPFs, covering less than 5 percent of total expenditure. On the expenditure side, with the low retirement ages and the high level of average benefits, there is no scope for reductions in expenditures in the future. Thus, the deficits would be expected to grow, from US$733 million in 1995 to US$1.1 billion in 2000, and to continue expanding if the pension funds are left in the provinces (see Table 2 in Annex IV). Since the transfer of the PPFs to ANSeS constitute an important fiscal relief for the provinces, they should be able to reduce their total deficit by at least the amount of the fiscal relief in the years following the transfer. 36. Institutional Implications of the Transfer for ANSeS. The transfer of all 16 PPFs would increase ANSeS' contributors by 33 percent and beneficiaries by 15 per cent. While ANSeS as an organization requires profound improvements, the situation of the PPFs is even worse, which implies the need for a strong effort by ANSeS to audit the PPFs and review the files of contributors and beneficiaries to eliminate fraud. It is clear that the capability of ANSeS to carry out the verification and absorption of the PPFs is closely linked to its own reform process. 37. The successful transfer of the PPFs requires certain conditions. First, ANSeS must carefully review the beneficiaries of the transferred PPF. This will include a rapid review of files and the cross check of the data base of the provincial beneficiaries with the data base of ANSeS' beneficiaries. Second, ANSeS should established a system in which records transferred to ANSeS are segregated until such time as they can be validated and transferred into the proper format for the revised/new ANSeS system. Third, ANSeS should not be obligated to hire the personnel of the transferred PPF, except on a very restricted basis and at the request of ANSeS. - 13 - Pension Reform Strategy 38. The Government's Strategy for Pension Reform. The current deficits of the public pension system will disappear as measures to reduce evasion and fraud and to lower pension expenditures take effect. Two studies done in Argentina (see Annex II) concluded that ANSeS will run surpluses by year 2014 in one case and as early as 2003 in the other, depending on assumptions of evasion reduction, the percentage of contributors who choose the AFJPs and several other factors. However, in the longer-run, the pension system in ANSeS may again show deficits (the sustainability of the benefit structure in the longer-run is discussed in Annex IV). Under the current law, all individuals, whether they choose the ANSeS option or the AFJP option, will receive a basic benefit from ANSeS as a safety net. The Argentine society as a whole will have to decide the extent of the deficits that they are ready to accept to keep that safety net. 39. The Government is aware of the long-term issues facing the public pension system. Its strategy is to first reduce the burden of the system on the budget by reorganizing the institution--reducing operating costs, and reducing fraud--where there is a large savings potential before tackling longer-run reform issues to minimize the budgetary support to maintain the safety net. Unlike other countries where such a strategy is being attempted, in Argentina a major reform has already been undertaken with the creation of a privately managed, fully funded pillar as an option for employee contributions. The envisaged longer-run reforms will be improvements at the margin to a fairly sound scheme. These will involve, most likely, adjusting the sizes of the different pillars relative to one another, and lowering the flat pension to convert it into a safety net. Strengthening ANSeS at this stage will pave the way for these additional reforms. Any proposal to reform the public pension system will have to be based on a widespread public debate on the results of actuarial models more sophisticated than the ones being applied. ANSeS' capability to work with such models will be developed as part of its institutional strengthening program supported by a proposed technical assistance loan. 40. The Bank's Strategy for Pension Reform Assistance. The Bank objective is to help reduce the need for budgetary support to finance Argentina's public pension system by supporting the Government's efforts to: first, contain the hemorrhage of unsubstantiated benefits and reduce operating costs; and second, improve the long- term financial viability of the system. To this effect, the Bank proposes adjustment lending as well as a technical assistance loan to ANSeS. The present proposed adjustment loan would support the transfer of the PPFs to the national system, which would reduce the deficit of the consolidated pension system as the pensions of new provincial retirees are brought in line with the more affordable national standards. A parallel technical assistance loan would support the efforts of ANSeS' new management to gain control over the institution and reduce the extraordinary levels of benefits being paid as a result of fraud and mismanagement. These controls would - 14 - reduce, in a relatively short time, the need for treasury transfers to cover the deficits of the pension system. A second adjustment loan, sometime in the future, could support reforms to the public pension system to make it more financially sound in the long run. III. THE PROGRAM OF PROVINCIAL REFORMS 41. Since most PPFs run large deficits, their transfer constitutes an important fiscal relief for the provinces. The provinces' eligibility and use of this fiscal relief could ensure sounder provincial finances if well used. The Provincial Financial Crisis 42. The national crisis of 1995 aggravated the already critical situation of the provinces. Provincial own-source revenues and revenues received from the national government dropped, increasing the provincial deficits. In 1995, provincial revenues (including grants) declined by 6 percent in real terms (after expanding by 5 percent in 1994), while provincial expenditures declined by only 3 percent. The provincial fiscal crisis intensified at the end of 1995, when the provinces' overall deficit reached around US$3.3 billion (or 1.2 percent of GDP), and the provincial consolidated debt reached US$14.9 billion. Total financing needs, including amortization, increased from US$3.7 billion in 1994 to US$5.0 billion in 1995 (or from 14.1 percent to 19.2 percent of total revenues), due to higher amortization expenditures. 43. The provinces' debt problems have been exacerbated by the practice of many provinces of borrowing from banks to cover their short-run deficits, mortgaging, in some cases, up to 40 percent of their shared revenues for debt service. In many provinces, this practice has resulted in a cash flow squeeze. As access to bank financing decreased in the wake of the external debt crisis (and the privatization of some provincial banks); and as the Federal Government avoided bailing out distressed provinces, financing increasingly came from arrears to providers, salaries and pensions and in some cases by issuing paper script. A recent Bank study of Provincial Finances' concludes that 16 provinces are facing severe fiscal problems during 1996, although by the second half of 1996, bank lending terms for the provinces improved considerably. 44. Among the causes of the provincial fiscal crisis, cited in the Bank report, institutional factors play a major role, including: (i) lack of budgetary discipline inherited from the hyperinflation years; (ii) mandated service transfers; (iii) an 7. Argentina: Provincial Finances Study: Selected Issues in Fiscal Federalism, June 4, 1996, Green Cover Report No. 15487-AR. - 15 - inadequate set of rules with respect to accounting, reporting and transparency; and (iv) lagging institutional adjustment from the prevailing budgeting practices of the hyperinflation years. In addition, the rapid and unexpected rise in provincial revenues with the Convertibility Plan in the early 1990s led to unwise expenditure increases that could not be sustained when the boom broke. Many provinces turned to adjustment efforts in 1995. While initially adjustment was made mostly at the level of goods and services, it became clear that personnel expenditures also had to be cut. Provincial Structural Reforms 45. Since 1995, a combination of the financial crisis in the provinces and the entry of newly elected or reelected provincial governors has greatly accelerated the velocity of reforms supported by two Bank adjustment loans: the Provincial Reform Loan-PRL (Ln. 3836-AR) and the Provincial Bank Privatization Loan (Ln. 3878-AR). Currently, eight provinces have agreed to participate in the PRL and three additional provinces are negotiating their participation. Of a total of 35 enterprises scheduled for privatization in the eight provinces participating in the PRL, 17 have already been privatized and laws have been passed for all the rest. This is over twice the number of privatizations required by the PRL's third tranche conditionality. 46. The provincial bank privatization program is also progressing well. In total, 18 provinces are currently privatizing or closing their banks; nine of them have already been privatized. If privatization negotiations underway are successful, by the end of 1996 the number of provincial bank privatization/ closures would reach 15. 47. Annex V reviews the provinces' reform performance under the PRL and the Provincial Bank Privatization Loan. Of those in financial trouble, there are really only two non-reforming provinces: C6rdoba and Neuqu6n. However, these will be under strong pressure to reform to cover their expenditures. During appraisal, it was agreed that an eligibility condition for using the proceeds of the loan to cover the deficit of a transferred PPF would be that the province has privatized, or is in the process of privatizing, its banks and a significant state enterprise. Provincial Reform Strategy 48. The Government's Strategy for Provincial Reform. The provinces play a key role in the delivery of public services, financing in 1994, 97 percent of primary education, 92 percent of sanitation, 84 percent of social welfare, and executing 45 percent of total public expenditures. Therefore, provincial reforms are crucial to improving the efficiency, equity, and macroeconomic stability of the federal system as a whole. 49. Structural reforms of the provincial governments have three objectives: (i) to enhance the overall efficiency of the provincial public sector's service delivery; (ii) to - 16 - reduce distortions in provincial economies caused by provincial government taxation and interventions; and (iii) to achieve long-run fiscal sustainability at the provincial level. With the Federal Fiscal Pacts of 1992 and 1993, the provincial governments launched a significant program of structural reforms following the leadership of the federal government. The reforms agreed in the Fiscal Pacts (see Annex V for a description of the objectives of both Pacts) revolved around four themes: (i) eliminating highly distortionary taxes and substituting them with more efficient tax instruments; (ii) deregulating local economies (especially in the area of professional and transport services); (iii) privatizing public enterprises; and (iv) transferring the provincial public employee pension funds to the national streamlined pension system. 50. The Government is in the process of developing with the provinces a medium- term strategy to strengthen the provinces' financial situation and reduce their deficits. This strategy involves supporting provincial programs geared to achieving balanced current accounts, expenditure reductions, tax revenue increases, privatization of provincial banks and public enterprises, and the adoption of transparent budgetary and planning practices. The Federal Government strategy for the development of the provinces would provide the framework for external lending programs that directly or indirectly involve the provinces, including the provincial pension reforms. 51. The Bank's Strategy for Provincial Reform Assistance. The Bank's objective is to have an impact on the overall reform program in the provinces, by helping both national and provincial governments to develop reform programs in the provinces and support their implementation, increasing their chances of sustainability. Given limitations in available resources, the Bank will maximize its reform impact through greater selectivity of target provinces, primarily by reinforcing the adjustment process of provinces willing to reform (see CAS Update discussed at the Board of Executive Directors on April 25, 1996). 52. The Bank's objective will be to operate either in: (a) creditworthy provinces where the capacity to undertake new debt exists and counterpart funds are available; (b) reforming provinces with adjustment programs agreed by the Government and the Bank; or in (c) areas such as federally financed poverty alleviation activities. In the case of new investment loans to the provinces, the eligibility criteria will include a positive current account fiscal balance and specific limits on debt service and debt stock ratios. Even if they do not qualify for investment borrowing, provinces can access Bank financing for restructuring and rehabilitation purposes when they meet the eligibility criteria of a Bank-approved reform program. - 17 - IV. THE PROPOSED LOAN Background 53. The Argentine Government gives its highest priority to World Bank and IDB assistance for the transfer of the PPFs to the National Social Security System. The proposed transfer would help reduce the fiscal deficits of the provinces and, over time, financially consolidate the national social security system. In the short to medium term, however, the transfer would increase the deficit of ANSeS. The Government has requested the assistance of the multinational banks not only to finance part of the increased deficit, but also to improve the capability of ANSeS to assimilate the PPFs and to ensure that the provinces make good use of the fiscal relief that they get with the transfer. Loan Objectives and Description 54. The proposed loan would support the Federal Government's effort to promote the reform of provincial finances and the improvement of the consolidated social security system. Provincial finances would improve with the transfer in two ways. First, the transfer itself would reduce the provinces' consolidated fiscal deficit during the first year of transfer by about US$850 millionP, which amounts to nearly 30 percent of the provinces' consolidated fiscal deficit. Second, for the program to finance the deficit caused by the transfer of a specific PPF, the province would have to meet stringent eligibility criteria in terms of its commitment to structural reforms, and will have to show improved fiscal performance as a result of the transfer in terms of reduced budget deficits. Similarly, the project would help improve the consolidated Social Security System in two ways. First, the absorption of the PPFs by the national system would eliminate a number of special pension regimes and privileges in the provinces and adjust the high pension levels and short length of service required for retirement of provincial employees to the more reasonable parameters of the national system. Second, the technical assistance loan associated with this adjustment operation would support ANSeS' institutional reform program, which would have a large pay-off in terms of lower expenditures (by reducing fraud), lower administrative costs and better services to the participants. 55. A technical assistance loan of US$20 million from the World Bank and US$60 millon in counterpart funds from the Government would finance a program of institutional reforms in ANSeS to be implemented over a five-year period, and designed in collaboration with the IDB. Once completed, ANSeS will be a new streamlined organization, free of fraud and geared to rewarding performance and meeting customer and shareholder needs. The main components of ANSeS' 8. Assuming all interested provinces transfer at once, which is unlikely. - 18 - institutional strengthening are the following: Control of Irregularities. This involves: (i) site verification of 300,000 beneficiaries and desk review of approximately 700,000 files; (ii) an evasion control program jointly with DGI; and (iii) a review of existing payment, granting and updating procedures. An Irregularities Control Unit will be set in place to ensure the correct use of procedures. Institutional Strengthening. A comprehensive institutional strengthening effort has begun with a review of the mission of the organization and the preparation of a master reorganization plan. The program involves: (i) management strengthening, including selection and training of managers; (ii) introduction of new procedures and basic administrative systems such as budgeting and accounting; and (iii) strengthening of human resources, including the introduction of new incentive and motivation systems and training for staff. Revision of Information Systems. This involves the strengthening of the Informatics Department and the replacement of the existing main frame by a main server and departmental client/servers. Improvement of Services to Clients. Services to the clients will be upgraded by the transformation of existing agencies into full-service agencies (Unidades de Asistencia Integral, UDAIs). Policy and Analysis Support. Units and functions in support of high-level decision-making will be set up or strengthened and equipped in the following areas: Continuous Improvement, Policy Analysis and Strategic Planning, and Economic, Financial and Actuarial Monitoring. Absorption of Provincial Pension Funds. The absorption of the PPFs will require a transition process, in which these funds will be processed separately and which necessitates an extensive review of provincial files. Rationale for Bank Involvement and Strategy 56. The FY95 CAS for Argentina, discussed by the Board of Executive Directors on May 4, 1995, and the CAS Update discussed on April 25, 1996, emphasize the Bank's desire to further the adjustment process by extending fiscal and economic reforms to the provinces. Bank support for the transfer of the PPFs to the national system is a critical part of this strategy. The Bank is in a very good position to support Argentina with this operation for several reasons. First, the Bank is already playing a very important role in support of the reform effort of Argentina's provinces through the Provincial, Provincial Reform and Provincial Bank Privatization Loans. The conditionality that the provinces would have to meet for this project would be a continuation and deepening of the conditions they had to meet under the latter two loans. Also, a recent Bank report on provincial finances gives the Bank a very good perspective for evaluating the reform programs the provinces would undertake under this project. Second, the Bank is increasingly involved in social security reform projects in Eastern Europe and elsewhere in Latin America, and is, therefore, in a position to bring to this project a great deal of expertise and experience on what has worked and what has not worked in other countries. Finally, Bank support for ANSeS' institutional strengthening program, through a parallel technical assistance loan, while ensuring the capability of that institution to absorb the provincial pensions, will allow the Bank to provide effective support to further improvements of - 19 - the public pension system. Experience with Adjustment Operations in Argentina 57. Argentina's record in satisfying the conditions of Bank adjustment loans has been excellent during the past few years. The Bank has extended US$2.6 billion in seven such operations since 1991 (not including a free-standing FY93 Debt and Debt Service Reduction Loan, Ln. 3556-AR), as well as US$74.5 million in four complementary technical assistance projects. The three completed adjustment operations, Public Sector Reform Loan (PSRL, Ln. 3394-AR), Public Enterprise Reform (Ln. 3291-AR) and the Financial Sector Adjustment Loan (Ln. 3558-AR), met all major objectives. The Provincial Reform Loan (PRL, Ln. 3836-AR), the Provincial Bank Privatization Loan (Ln. 3878-AR) and the Bank Reform Loan (Ln. 3926-AR) are still under implementation. Both the Bank Reform and the Provincial Bank Privatization loans have been progressing well, are achieving their respective objectives and are expected to close on target in 1997. The respective Second and Third tranches will likely be considered for disbursement by year-end (these loans are further discussed in Section III). Coordination with Multilateral Institutions 58. The Bank has worked closely with the IMF in the design and supervision of adjustment operations in Argentina, in formulating country strategy, and in economic and sector work. The IMF shares our concern regarding the need to help finance the deficit that will be caused by the transfer of the PPFs to the national system. The cofinancing arrangements with IDB for this loan are based on a close working relationship in a variety of fields, including adjustment and provincial finances: the IDB cofinanced the PSRL, Provinces I and the Provincial Bank Privatization Loan. Loan Amount 59. The Government has requested a Bank loan of US$300 million and an IDB loan of US$320 million to help finance part of the deficit that will be generated by the transfer of the PPFs to the national system during 1996 and 1997. During the loan disbursement period, the expectation is that about 14 provinces will transfer their PPFs to the national system, out of 16 provinces that are candidates for transfer. Since the Bank and IDB loans would meet only part of the deficit, the Government may need to be supported by another Bank loan in FY98. 60. The transfer of 14 PPFs (seven PPFs expected to transfer in 1996 and another seven in 1997) would increase the deficit of the Social Security System by US$461 million in 1996 and US$865 million in 1997 (see para. 32). Since half the Bank and IDB loans would be disbursed in calendar year 1996 and the other half in calendar year 1997, both loans would cover two thirds of the incremental cost of the transfers - 20 - in 1996 and about one-third of the incremental cost of the transfers in 1997. The rest would be financed by Government funding, including proceeds from privatizations. The Bank and IDB loans would be disbursed on the basis of an estimated full first- year deficit caused by each transferred PPF, independently of when during the disbursement period they are transferred. The total first-year deficit of the seven PPFs expected to transfer during 1996 would be US$582 million, and the first-year deficit of the additional seven PPFs expected to transfer in 1997 would be US$317 million. 61. The Federal Government of Argentina would be the borrower, and the implementation would be shared by the Federal Ministries of Economy and Labor (under which ANSeS operates). The Ministry of Economy through the Subsecretaria de Programaci6n Regional would coordinate and monitor compliance with the loan's conditions by participating provinces. During negotiations it was agreed that the loan would disburse in three tranches. Since 64 percent of the probable and eligible provincial pension funds (weighted by size) have already been transferred to ANSeS, half of the Bank loan--US$150 million (and half of the IDB loan) would be disbursed in the first tranche. The other two tranches would be of US$75 million each. Given the stock of already existing eligible provinces and their performance track record, the minimum time between the first and the second tranches would be three months, and the minimum time between the second and third tranches would be six months, to be able to review compliance with the loan conditions. It is estimated that disbursements would start before the end of calendar year 1996. Loan Conditionality 62. As detailed in the Policy Matrix (Annex I), the loan would have: (i) conditionality for the Federal Government, (ii) eligibility criteria and conditionality for the provinces, and (iii) conditionality for ANSeS. IDB's parallel loan would have similar conditionality. A. Conditionality for the Federal Government 63. Letter of Development Policy. The Government has presented a Letter of Development Policy (Annex VI) indicating the importance that the Government gives to this project and the Government's commitment to provide the necessary funds to continue covering the deficit caused by the transfer of the PPFs in the years following the transfer. The letter outlines ANSeS' strengthening program and the proposed Federal Government strategy for the development of the provinces. The letter provides the framework for Federal Government's support of provincial reforms, including the provincial pension reforms. Maintenance of sound macroeconomic conditions consistent with the policy objectives described in the Letter of Development Policy would be a condition of tranche disbursement under the loan. - 21 - 64. Government Commitment to finance ANSeS' deficits generated by the transfer of the PPFs. The Treasury transfers to ANSeS about US$ 1 billion per year to cover ANSeS' deficit in its provisional system. The transfer of the PPFs will add to the deficit that has to be financed with Treasury transfers. The Bank has reviewed budgetary projections for ANSeS for the period 1996-1998, reflecting the expected evolution of both revenues and expenditures, including the deficits generated by the transfer of PPFs. The Bank has also reviewed the Government's fiscal projections for the same period showing the effect of ANSeS' deficits on the Government's fiscal program. During negotiations the Bank received assurances of the Government commitment to: - include explicitly the budgetary expenditures to cover ANSeS' deficits resulting from the transfer of the PPFs into the 1997 and 1998 federal budgets, as well as other expenditures related to adjustment operations; - make the necessary budgetary allocations to cover ANSeS' needs for the next three years; - establish a separate account dedicated only to finance ANSeS' deficit in which deposits will be made of equivalent local currency funds freed up by the disbursements proceeding from the Bank loan; - monitor and enforce provincial compliance with eligibility criteria, fiscal adjustment targets and transfer conditions; and - continue to support ANSeS' institutional strengthening. 65. During negotiations it was also agreed that during the life of the loan, the authorities would: (i) submit to the Bank every six months (September and March) adjusted fiscal projections for ANSeS and for the public sector; and (ii) submit monthly information of the Government transfers to ANSeS. This information would be used to monitor the budgetary transfers to ANSeS. Maintenance of budgetary allocations to ANSeS within agreed financing program will be a condition of second and third tranche release. 66. Government Monitoring of Provinces' Compliance with Eligibility Criteria and Conditionality under this Loan. The proposed loan would be made to the Government to cover part of ANSeS' deficits produced by the transfer of the PPFs. There would be no direct agreement between the Bank and the provinces which transfer their PPFs. Therefore, it has been agreed that the Government will monitor the provinces' compliance with eligibility criteria, the transfer conditions in the Transfer Agreement signed between the provinces and the Federal Government, and the fiscal adjustment targets to be met by the provinces after the transfer. The Bank and the Government have agreed on the performance criteria to evaluate the - 22 - provinces' compliance with the eligibility criteria/conditionality. B. Eligibility/Conditionality for the Provinces 67. Since most PPFs run large deficits, their transfer constitutes an important fiscal relief for the provinces. The use of Bank funds to cover part of ANSeS' deficits produced by the transfer of the PPFs of specific provinces would be subject to eligibility criteria concerning its track record in structural reforms and their willingness to adopt measures to reduce their deficits'. The agreed eligibility criteria to be met by each province are as follows: - evidence of progress, satisfactory to the Bank, in provincial compliance with commitments under the Fiscal Pact of August 1993, concerning tax and regulatory reforms. Compliance would be determined with respect to the following provisions of the Fiscal Pact: elimination of the stamp tax on financial and insurance operations destined to agriculture, industry, mining and construction and advance in the elimination of this tax in other activities; elimination of specific taxes on transfer of fuels, gas, energy and sanitary services; elimination of taxes on interest from savings accounts and all forms of payroll taxes; elimination of the Gross Receipts Tax on primary and industrial production activities; and deregulation of internal trade of goods and services. - to have sold, closed or be in the process of selling or closing its provincial banks and one significant state enterprise; - approval by the Provincial Legislature of a Transfer Agreement that: delegates to the Federal Government the capacity to legislate in social security matters and agrees to abstain from issuing norms of any type that would establish directly or indirectly new provisional systems of any type in the province; 9. The deficits generated by the transfer of PPFs of provinces that are not eligible for Bank funding would be wholly financed by the Government. - 23 - extinguishes all the ordinary or special provisional regimes in the province; assumes responsibility for any legal claim on benefits granted prior to the transfer; assumes responsibility for any increase in benefits granted after the signature of the Federal Pact of 1993; guarantees the compliance of its payments to ANSeS, in regard to employer contributions, with its share of the coparticipated taxes, allowing an automatic deduction from these taxes by the National Government; and allows ANSeS to conduct financial audits of the PPF as of the time of its transfer to ANSeS. 68. The Government has presented suitable legal opinions as to the consistency of the transfer conditions with local laws. Evidence that provinces, or groups of provinces, with PPFs deficits of at least US$290 million are eligible would be a condition of Board Presentation. Evidence that additional provinces, or groups of provinces, with PPFs deficits of at least US$155 million (potentially including excess deficits from previously transferring provinces) are eligible would be a condition of second and third tranche disbursement. 69. Second and third tranche disbursements would be conditioned on the performanceo of provinces involved in previous tranches concerning: - reduction of the ratio of personnel expenditures to net current provincial income. The average weighted ratio of personnel expenditures/net current income of the provinces involved in prior tranches should be lower at the time of the next tranche release, with provinces with a ratio of over 85 percent in 1995 showing a reduction of this ratio of at least 10 percent by the time of the tranche release; - reduction of the provincial deficits in at least the amount of the fiscal relief provided by the transfer of their PPFs. The methodology to calculate the amount of the fiscal relief for each province should be satisfactory to the Bank. (see Annex V). 10. These targets for provincial fiscal performance are compatible with the provincial fiscal projections submitted by the Government. -24- C. Conditionality for ANSeS 70. The proposed loan would have conditionality directed at ANSeS to ensure that it implements the organizational reforms required to make the flow of money transparent, improve services and establish an efficient and cost effective organization; and that it takes the necessary measures to validate the transferred funds. ANSeS has clearly shown good progress in initiating reforms. These include approval by the Government of the institution's "value proposal" and of a new organizational structure; initial implementation of new key procedures, including procedures for granting and paying benefits; creation of a Fraud and Control Department; review of about 4,000 files of beneficiaries; termination or reduction of 30,000 irregular benefits; and presentation to the Government a plan to transfer medical evaluations for invalidity to the Superintendency of AFJPs. Second and third tranche disbursements would be linked to ANSeS's progress in implementing agreed actions under its restructuring plan and to ANSeS' review of the PPFs files transferred under previous tranches. Some of the measures to validate the transferred funds, including the revision of files, will be supported by the parallel Technical Assistance Loan. 71. The performance criteria to evaluate ANSeS' progress during 1996 and 1997 (presented in more detail in Annex II) include: selection and training of managers adoption of new organizational structure training of staff establishment of pilot UDAls establishment of computerized communications with UDAIs reduction of number of days to grant a pension benefit reduction of number of days to pay pension benefits review of files of ANSeS and of transferred PPFs D. Summary of Conditions 72. Tranche Conditions. First Tranche conditions have already been met and are listed as "accomplished" in Annex I hereto. Second and Third Tranche Disbursement will be conditioned upon: - satisfactory progress in carrying out the program set forth in the Letter of Development Policy; - documented maintenance of a sound macroeconomic framework consistent with the policy objectives described in the Letter of Development Policy; - maintenance of budgetary allocations to ANSeS within an agreed financing - 25 - program; - ANSeS' compliance with administrative performance targets; - positive assessment of compliance of provinces in previous tranches with deficit and personnel expenditure reduction targets; - evidence that additional provinces, or groups of provinces, with PPF deficits of at least US$155 million (potentially including excess deficits from previously transferred provinces) are eligible according to loan eligibility criteria; and compliance with other conditions set forth in Annex I hereto. 73. Disbursements, Records and Auditing. Loan disbursements would be made under simplified SAL/SECAL disbursements". 74. The Borrower will be required to open and maintain a Deposit Account in its Central Bank. As funds are released, the Borrower will submit a simplified withdrawal application against which the Bank will disburse the loan proceeds into the Deposit Account for the borrower's use. The Borrower will deposit counterpart funds equivalent to the respective amounts of each disbursement into an ANSeS Support Account, to be used to meet ANSeS' deficits. If after deposited in the Deposit Account, the proceeds of the loan are used for ineligible purposes, the Bank will require the Borrower to either (a) return that amount to the account for use for eligible purposes; or (b) refund the amount directly to the Bank, in which case the Bank will cancel an equivalent undisbursed amount of the loan. 75. Prior to each tranche release, the Borrower will submit to the Bank a report on the compliance with the provinces that transferred their PPFs with the loan's eligibility criteria and tranche release conditions. The Borrower will also submit to the Bank every six months (October and April) adjusted projections for ANSeS and adjusted fiscal projections for the public sector; and submit monthly information of the Government transfers to ANSeS. This information would be used to monitor the budgetary transfers to ANSeS prior to each tranche release. The Deposit Account may, and the ANSeS' Support Account shall be audited by independent auditors acceptable to the Bank. Copies of the Deposit Account audits will be submitted to the Bank no later than four months after the date of the Bank's request for such audits. Receipt of a satisfactory audit report of a prior tranche would be a condition of subsequent tranche releases. The loan closing date would be June 30, 1998. 11. These conditions are specified in a memo from The Bank's Operation's Policy Department (OPR) dated February 8, 1996. - 26 - Impact, Benefits and Risks 76. Social Impact. The Federal Government has transferred to the provinces responsibility for essential public services such as health and education. The ability of many provinces to deliver these services is hampered by their critical fiscal situation. Lack of social services affect the poor in the provinces disproportionately. By further extending structural reforms to the provinces and helping them to reduce their fiscal deficits, this loan would help to position provincial governments to more effectively deliver needed social services. The system of "floating debt" to finance the deficits of the PPFs also affects vulnerable groups in the provinces such as widows/widowers and minor children of deceased public employees, who are receiving paper, instead of cash, for their pension payments. By transferring the PPFs to the national system, the arrears in pension payments to these groups would be eliminated. 77. Environmental Aspects. The program is not expected to have any environmental impact; it thus has a "C" rating. 78. Benefits. Assimilation of the PPFs by the national system will ultimately lower social security costs by reducing overly generous benefits in the provinces and by improving their administration. Retirement ages in the national system are generally higher than in the provinces (retirement ages can be as low as 55 for men and 50 for women in some provinces compared to 65 and 60 at the national level). The provinces also have higher replacement rates than the national system (82 percent of a base that varies between the last year's salary and the average of the last 10 years' salaries in the provinces, compared with 53 percent of the average of the last 10 years' salaries in the national system). Furthermore, after the transfer, the PPFs would be covered by the Pension Solidarity Law (March 1995) which removed the automatic wage-indexation in the national system and placed a ceiling on the size of the pension. The transfer of the PPFs to the national system would have the additional benefit of giving provincial public employees the choice that other employees have of joining the private pillar rather than the public pillar of the social security system. It is expected that at least 55 percent of the provincial public employees will chose the private pillar. A benefit of the transfer that would go beyond the social security area is that if private sector employees in the provinces were subject to the national system, covering public sector employees under the same system would increase labor mobility between the private and public sectors in the provinces. This issue is particularly important given the necessity for public sector downsizing in many of the provinces and the proposed privatization of some activities. Labor mobility across provinces would also be enhanced since all workers, with the exception of the security forces, would be under the same system. 79. The transfer of the PPFs to the national system would have important fiscal benefits at both the national and provincial levels. At the national level, the transfer - 27 - would produce a net benefit to the consolidated public sector of US$1.2 billion over an eight-year period. These benefits are expected to increase over time, bringing the net present value of the benefits from this consolidation to more than US$4.4 billion over 15 years (see para. 33). Additional fiscal gains from the transfer will come from savings in expenditures resulting from the anti-fraud measures being implemented by ANSeS as part of its institutional strengthening program. These savings are conservatively estimated at over US$300 million per year. Also, the consolidated fiscal accounts would benefit after the transfer from better financial management in the provinces, brought about by the conditions that the Federal Government will attach to the transfers. At the provincial level, the transfer of the PPFs will reduce the consolidated fiscal deficit of the provinces by about 30 percent. Also, since part of the provincial deficits are being covered by transfers from the Federal Government, over time, the transfer would reduce the need for budgetary support from the federal government, thus improving the federal fiscal balance. The fiscal relief of the transfer would be in itself a powerful incentive for the provinces to agree to the reform conditions established under this program. In other words, the PPFs' transfer program supported by the Bank could become both an incentive and a vehicle to further the provincial reforms initiated under the Provincial Reform and Provincial Bank Privatization loans. 80. Risks. There are several risks involved with a project to reform the PPFs. First, the provincial savings from the transfer of their PPFs could potentially be used to escape adjustment (e.g., pay for salaries with no real fiscal reform). This risk would be minimized by establishing ex-ante conditions of eligibility based on the provinces' reform track record and on conditioning subsequent tranche releases to evidence of improved fiscal performance of the provinces that have transferred their PPFs, in terms of lower deficits and lower ratios of personnel expenditures/net current income. Another risk is that the Government may find it difficult to finance the incremental deficit generated by the transfer of the PPFs to the national system. This risk would be mitigated by the Government commitment to include explicitly the budgetary expenditures to cover ANSeS' deficit generated by the transfers, in the reduced 1997, and zero deficit budget of 1998, committed in the Letter of Development Policy, and by Bank close monitoring of the monthly transfers of the Treasury to ANSeS to cover ANSeS expenditures. An additional risk is that ANSeS may be ill equipped to assimilate the PPFs. This risk would be reduced in several ways. First, tranche disbursements would be conditioned upon ANSeS' meeting agreed targets of its "Emergency Plan". Second, the Bank would support ANSeS' reform program through a technical assistance loan. Third, ANSeS would maintain the files of the transferred participants and beneficiaries separate from its own files, until ANSeS has validated and cleaned this information, as well as cleaned and validated its own files. 81. There would also be risks in not supporting the provincial transfers. If the transfers were to be postponed indefinitely, the provincial finances could continue - 28 - deteriorating, derailing other reform efforts and increasing the consolidated national burden for social security payments. The provinces already account for about half of the consolidated public deficit, and their pension deficits, now one third of their deficits, could double in 10 years. Also, by postponing the transfer, the stock of existing provincial pensioners who are both young and collect relatively high pensions would continue to grow, making the transfer progressively more expensive in the future. Alternatively, the willingness to transfer could falter due to political circumstances (a number of the new Governors that took office in December 1995 are in favor of transferring the pensions) and the Government would have missed an opportunity to improve the overall pension system. V. RECOMMENDATION 82. 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. James D. Wolfensohn President by Caio Koch-Weser Washington, D.C. Attachments ANNEX I POLICY MATRIX  - 29 - ARGENTINA ANNEX I PROPOSED PROVINCIAL PENSION REFORM A: POLICY MATRIX Activity Objective Accomplished For Second and Third Tranche Disbursement FEDERAL GOVERNMENT A. Macroeconomic stability Maintain sound macroeonomic stability The IMF approved an 18-month "stand-by" program in Maintenance of sound macroeconomic to facilitate further fiscal reforms in October 1996. framework consistent with the Letter the provinces. of Development Policy. The Government has presented to the World Bank a Letter of Development Policy. B. Financing the transfer of Ensure the availability of resources to The Government has: Satisfactory progress in carrying out the PPFs share the initial burden of the transfer the program set forth in the Letter of with the Multinational Banks and - presented to the World Bank its fiscal projections for Development Policy. continue covering the deficits during 1996 to 1998 showing the effects of ANSeS' deficits, the years in which the transfer will including the deficits caused by the transfer of the PPFs, Maintenance of budgetary allocations generate deficits for ANSeS. on the Government's fiscal program. to ANSeS within agreed financing program. - agreed to budget the necessary resources to cover ANSeS' needs for the next three years. - initiated procedures for the establishement of an ANSeS Support Account in which local currency funds equivalent to the respective amounts of each loan disbursement will be deposited to finance ANSeS' deficits resulting from the transfer of the PPFs of eligible provinces. - 30 - C. Monitoring provincial Ensure that provinces benefiting from The Government has: Second Tranche disbursement when: compliance with the the fiscal relief produced by the loan's transfer conditions transfer comply with: - presented evidence that provinces causing a consolidated - additional provinces causing a first year deficit to ANSeS of at least US$290 million consolidated first-year deficit for - eligibility criteria are eligible. ANSeS of at least US$155 million - fiscal adjustment targets (potentially including excess - transfer conditions. - agreed to verify that the provinces that have transferred deficits from previously their PPFs comply with deficit and personnel transferring provinces) become expenditure reduction targets. eligible. - presented suitable legal opinions as to the consistency of - positive assessment of compliance the transfer conditions with local laws. of provinces in previous tranches with deficit and personnel expenditure reduction targets, with Fiscal Pact conditions, with privatization conditions and with the pension transfer agreement provisions. Third Tranche disbursement when: - additional provinces causing a consolidated first-year deficit for ANSeS of at least US$155 million (potentially including excess deficits from previously transferring provinces) become eligible - positive assessment of compliance of provinces in previous tranches with deficit and personnel expenditure reduction targets, with Fiscal Pact conditions, with privatization conditions and with the pension transfer agreement provisions. - 31 - ANNEX I Activity Objective Accomplished For Second and Third Tranche Disbursement SOCIAL SECURITY ADMINISTRATION A. Institutional Establish controls, reduce ANSeS has: Compliance in implementing agreed actions Restructuring administrative costs and under ANSeS' restructuring program improve services. - prepared, with the help of international consulting firms: (i) an according to agreed performance indicators. Emergency Plan (to be implemented by end-1996); (ii) a Transformation Plan (medium-term restructuring). - obtained Government approval of the institution's "value proposal" and new organizational structure. B. Reduce Reduce irregularities and ANSeS has made advances in its strategy to reduce irregularities Compliance in implementing agreed actions Irregularities reduce ANSeS's deficit. by: under ANSeS' restructuring program according to agreed performance indicators. - reviewing 4,000 files of beneficiaries and developing a strategy to review up to 700,000 files. - terminated or reduced 30,000 irregular benefits identified in the census. - created a Fraud and Control Department. - presented to the Government a plan to transfer medical evaluations for invalidity claims to the Superintendency of AFJPs. C. Absorption of PPFs Reduce errors and Compliance in implementing agreed actions irregularities in the ANSeS has established a system to segregate temporarily PPFs' under ANSeS' restructuring program transferred PPFs. files from ANSeS' records. according to agreed performance indicators. - 32 - ANNEX I B: PROVINCIAL ELIGIBILITY CRITERIA Activity Objective Accomplished For Second Tranche For Third Tranche Disbursement Disbursement A. Compliance with Ensure that provinces have implemented By mid-1996, the provincial response Each province in the Second Each province in the Third conditions of Fiscal regulatory and tax reforms agreed under was: Set of Provinces is Set of Provinces is Pact. the Fiscal Pact of August 1993. - substantially complied: 11 demonstrating progress, demonstrating progress, - partially complied: 12 satisfactory to the World Bank, satisfactory to the World - not complied: 1 in complying with the Bank, in complying with the conditions to which it agreed conditions to which it agreed under the Fiscal Pact of 1993. under the Fiscal Pact of 1993. B. Approval of pension Legally transfer to the Federal Since the beginning of 1996, the Each province in the Second Each province in the Third transfer by Government constitutional responsibility legislatures of 4 provinces have Set of Provinces has entered Set of Provinces has entered legislature. for pension administration. approved the transfer of their PPFs and into, and is complying with the into, and is complying with another 3 are considering transferring terms of, a transfer agreement the terms of, a transfer Ensure that provinces do not establish before end-1996. with the Borrower, approved agreement with the parallel pension systems or compensate by the province's legislature Borrower, approved by the for loss of benefits. Transfer Agreements (new and already and having entered into effect, province's legislature and signed) prohibit parallel or new systems. entered into effect. C. Privatization of state Reduce the role of the state in the By mid-1996: Each province in the Second Each province in the Third banks and enterprises, provinces -35 state enterprises scheduled for Set of Provinces has sold, Set of Provinces has sold, privatization, of which 17 already closed or is in the process of closed or is in the process privatized selling or closing its provincial of selling or closing its S18 provinces are privatizing or closing banks and 1 significant state provincial banks and I their banks enterprise, significant state enterprise. - 33 - D. Adoption of fiscal Ensure that provinces use fiscal relief Provinces' fiscal performance improved All provinces in the First Set All provinces in the First Set adjustment measures. from the transfer of their PPFs to substantially in the first semester of of Provinces have, in the of Provinces and all improve their fiscal situation. 1996. Four provinces went from an aggregate, reduced their provinces in the Second Set operational primary deficit of US$249 average weighted ratio of of Provinces have, in the million to a surplus of US$130 million. personnel expenditures/net aggregate, reduced their current income so that said average weighted ratio of ratio is lower in the Second personnel expenditures/net Tranche Release Date than it current income so that said was at the end of 1995; ratio is lower in the Third provinces for which the ratio Tranche Release Date than it was over 85% at the end of was at the end of 1995; 1995 shall have reduced its provinces for which the ratio ratio so that it is at least 10% was over 85% at the end of lower than it was at the end of 1995 shall have reduced its 1995. ratio so that it is at least 10% lower than it was at the end of 1995. Each province in the First Set Each province in the First of Provinces shall have reduced Set of Provinces and each its provincial deficit so that it province in the Second Set is lower in the Second Tranche of Provinces shall have Release Date by an amount reduced its provincial deficit equal to at least the fiscal relief so that it is lower in the provided by the transfer of Third Tranche Release Date, their PPFs, than it was at the by an amount equal to at end of 1995. least the fiscal relief provided by the transfer of their PPFs, than it was at the end of 1995 and, in the case of the First Set of Provinces, it is also no higher than it was on the Second Tranche Release Date. 10/28/96 m:\pdarruz\pensionoannvx-i  ANNEX II ANSeS INSTITUTIONAL STRENGTHENING PROGRAM  -34- ANNEX II ANSeS INSTITUTIONAL STRENGTHENING PROGRAM 1. Some of the most important initiatives underway that pertain to both the Emergency and the Transformation plans for ANSeS are the following: Organizational and Management Reform. The priorities of the organizational reform are to: (i) make the flow of money transparent; (ii) improve services; and (iii) establish an efficient and cost effective organization. Under the Emergency Plan, steps have been taken to identify key staff who can be counted on to change the culture of the organization and to define the new processes and procedures necessary to reengineer the entire operation. "Change Teams" are in place to lead the reform process. ANSeS' management has already made several changes to begin to establish clear lines of authority and accountability and a monthly performance indicator report is being designed to strengthen the accountability process. Steps have been taken to review the accounting system and strengthen internal auditing. A new National Accounting Process is currently being implemented and should provide for common accounting processes among the tax and social security functions across Ministerial lines. As steps towards the "Transformation Plan", ANSeS has started working on the definition of the institution's overall vision and strategy and the design of the new organizational structure. Reorganization of Field Offices (UDAI) Network. ANSeS has 150 full- service offices distributed throughout the country. A study is being conducted to determine the ideal size and organization of a UDAI and to determine how many are needed. As a short-term measure, ANSeS has selected one supervisor for all activities in each of 46 UDAI offices and is beginning to introduce standardized practices and reporting for all the full- service offices. It has also initiated surprise audits. The goal is for each UDAI to perform all the processing of benefits in the field. Review of Processes. Efforts are underway to detect and correct defective procedures and processes and to establish security and program integrity safeguards. Under the Emergency Plan, the objective is to establish a minimum of certainty and control over key process such as processes for allowances, updates and payments. The redesign of these processes will be finalized by December 1996. Detection of Irregularities. The early findings of the consultants' work show that the Beneficiary and Contributors files are fraught with problems. Much of the problem is complicated by the 45 legal systems to be interpreted with no standardized benefits computation process which can be - 35 - ANNEX II reviewed. The detection of fraud is being done through the following programs: Audit of Beneficiaries Files. Efforts have begun to validate existing records and purge the files of incorrectly calculated benefits or non-existent beneficiaries. ANSeS will carry out the audit of 750,000 files that comprise ten groups identified as vulnerable to irregularities through interviews and the review of a sample of 5,000 files. ANSeS' plan is to review 100,000 files per month and to initiate judicial actions to recover wrongly committed resources. The validation of records would proceed only to the point of bringing a positive cost-benefit return. Follow up to the Census of Beneficiaries. A Census of Beneficiaries that started in 1994 and was completed in 1996, identified 300,000 irregular cases. ANSeS has initiated a review of these cases and plans to review about 30,000 cases per month. The potential savings from eliminating fraud are enormous. A very conservative estimate made by ANSeS puts the savings at over US$300 million per year. Review of Contributors Data Base. ANSeS will review the contributors data base to clean up the information of all contributors that are within six months of retirement. Invalidity Review. ANSeS is in the process of reviewing the invalidity claims of about 7,000 people. A review of the files indicates the potential for about a 30 percent error rate. Since July 1994, the Superintendency of AFJPs was given responsibility for the review of invalidity claims. The Superintendency is also in charge of the disability claims of AFJP members. ANSeS expect to be able to achieve substantial savings as a result of this initiative. Reduction of Tax Evasion. Since 1993, the tax authorities (DGI) have taken charge of collecting social security contributions and receive payments from ANSeS of about 20 million pesos per year for this service. Currently, the DGI and ANSeS are working on establishing common definitions of information systems, unified language for exchange of information, and ways and procedures to carry out the exchange of information The Tax Evasion Project is led by the DGI and involves ANSeS, the Labor Police, and the Employment Services. The project will focus on policing the misuse of worker identification. A related project focuses on giving every person a tax identification and pension identification number. -36- ANNEX II Restructuring of Information Services. ANSeS's computerized system is the result of the merger of three systems. There is little or no documentation of software. A consulting firm is in the process of documenting and developing a short-term plan focused on controls and security. ANSeS has also developed a back-up plan with IBM. Consultants are also working on a proposal for a new management information system. Personnel Training. ANSeS has a very large staff of 8,600 individuals. The new ANSeS will require a much smaller staff, with a different skill mix. Together with the new organizational structure, ANSeS is designing new staff profiles and training programs to be implemented in the medium term. - 37 - ANNEX H ARGENTINA INSTITUTIONAL STRENGTHENING OF ANSeS PERFORMANCE INDICATORS Objective Activity Performance Indicators Dates A. Institutional Strengthening a) Management a. select new managers and assign responsibility for the a. 30/50 managers selected 8/96 Strengthening process of reform b. managers to receive 2/3 weeks of training b. 30/50 managers trained 11/96 c. implement new structure c. 1. new structure sent for approval to Cabinet Leadership 8/96 c.2. new structure implemented 2/97 b) Human a. define and apply an incentive system for training, personnel a. 1. pilot implementation in the UDAls 6/98 Resources promotion and remuneration Strengthening b. define a new structure for jobs and responsibilities and b. 1. 50% of personnel with new functions training for the new responsibilities and trained 9/97 c) Improvement of a. review and improve payment process and conversion to a.1 85% of payment orders made 3/98 Procedures electronic payment electronically B. Restructuring a. design strategy and plan for an electronic information a. 1. electronic information plan completed 10/96 Electronic system. Improvement of telecom services a.2. 160 UDAIs online 07/97 Information b. implement intermediate phase of electronic information b. replacement of terminals for PCs and 7/97 Systems plan departmental servers - 38 - ANNEX H C. Improvement of a. improvement payment process a.1. reduction from 55/60 days to 30 days 6/97 Services between granting and payment of benefits a.2. elimination of non-paid benefits 6/97 b. improvement benefit granting process b. 1. time in granting pensions reduced from 6/96 180 days to 30 days; survivors' benefits from 30 to 5 days c. improvement in clients' access to information c. 1. information mailed to all clients 12/96 c.2. no delays in responding to client's 8/96 inquiries. d. establishment of UDAls d.1. establishment of 10 pilot UDAls 6/97 d.2. establishment of 150 UDAIs 12/97 D. Reduction of a. revision of records of ANSeS' beneficiaries a. have reached an average pace of review of 3/97 Irregularities at least 1,000 files per month a.1. have initiated census of beneficiaries of prior to next transferred PPFs tranche a.2. have initiated cross review of data base prior to next of PPF's beneficiaries with national tranche registrars a.3. have initiated verification of disability prior to next claims tranche b. revision of records of PPFs transferred in each loan tranche  ANNEX III ANSeS FINANCIAL OUTLOOK  - 39 - ANNEX III ANSeS FINANCIAL OUTLOOK 1. ANSeS currently requires large subsidies from the government to cover its expenditures. On the pension side alone, contributions covered only 50 percent of expenditure in 1995, down from 60 percent in 1994, and are not expected to cover more than 48 percent in 1996. This financial situation can be attributed to a number of causes, many of which are not directly under the control of ANSES. 2. The most fundamental cause is that the Argentine pension system is undergoing a transition toward a multi-pillar system, with a fully funded second pillar. The employee portion of the pension contribution can be used to fund an individual capitalization account rather than being used to pay current pensioners as has been done in the past. Ultimately, these workers when they retire will receive pensions from two sources, a modest flat pension from ANSeS and an additional annuity from their own capitalization accounts. However, in the interim, retirees are receiving full benefits from ANSeS, even though its funding base has been cut. 3. To account for this shortfall, the government has earmarked a number of revenue sources for ANSeS. Of the 11 percent of VAT revenue dedicated to social security, 90 percent is earmarked for ANSeS; the remainder goes to the provincial social security schemes. An additional 90 percent of the revenue from the personal property tax goes to ANSeS. In addition, 20 percent of the profit tax goes directly to ANSeS. Thirty percent of proceeds from privatization also are earmarked for ANSeS. Finally, 15 percent of the revenue-sharing funds are directly transferred to ANSeS. 4. Despite all of this earmarked support, expenditures still exceeded revenues by US$2.5 billion in 1995, around 15 percent of expenditure. ANSeS had to turn to the Government for an additional US$1.4 billion in direct support, and borrowed the bulk of the rest, mostly on the strength of the IOUs collected during the delinquent taxpayer penalty holiday. Short-Term Outlook 5. The current deficits in ANSeS have been exacerbated by a fall in revenue of 15 percent in real terms between 1994 and 1995. Expenditures during this period have also fallen, but only slightly, around 1 percent. ANSeS is expecting revenue to grow by 3 percent in 1996, but for expenditure to continue falling at about 1 percent. Reviewing the reasons for the decline will help determine how to evaluate these projections. - 40 - ANNEX III 6. Revenue. Three factors have led to the decline in revenue for ANSeS. The first is permanent, the second is probably permanent, and the third is temporary. The first factor is the choice of individual capitalization account over public defined benefit for the second pillar. By end-1995, 55 percent of workers had chosen to open an individual capitalization account, resulting in their employee contributions being directly transferred to the fund of their choice rather than coming to ANSeS. By end-1994, only 44 percent had chosen the individual capitalization account, but even by September 1994, only 32 percent had made this choice. The movement toward the individual capitalization account is clearly an ongoing process, not yet complete. The data so far shows that younger individuals are choosing the individual capitalization accounts more often than older workers. As new workers, generally young, enter the labor force and older workers retire, the movement toward capitalization will continue. As even more individuals choose this system, revenue to ANSeS will continue to fall. While individuals have a window within which they can switch back to the public second pillar, the movement in that direction is small, and the window will be closed in November 1996. 7. Second, in 1994 the government made the decision to lower employer contribution rates, giving employers in certain sectors discounts ranging from 30 percent to 80 percent, depending on the region. While beneficial from the standpoint of improving competitiveness, these cuts entail an immediate loss in revenue to ANSeS without a corresponding cut in expenditure. These discounts did not apply during the full year and are not necessarily viewed as permanent. Any move to reduce them would improve the finances of ANSeS in the short run. 8. The third and temporary effect is the state of the economy in 1995. Between May 1994 and May 1995, the unemployment rate increased from 11 percent to 18.4 percent. The unemployment rate is currently between 18 and 19 percent. Unemployment increases affect ANSeS revenues by reducing the number of people who contribute to ANSeS. The economy has already shown signs of improvement in 1996 and further improvement will generate growth in revenue for ANSeS. 9. Adding to this growth is the evasion-reducing incentive effects coming from the reduction in employer discounts and the move to a contribution-related second pillar pension structure. Both of these policies were designed to reduce evasion, in one case by reducing the incentive for employers to avoid taxes and in the other by increasing the incentives to the individual for not evading. However, reduction of evasion is a behavioral change that will take time. Given the size of the pension deficits, employers also fear that the discounts on the contribution rates may be temporary and thus, there would be little incentive to change behavior. - 41 - ANNEX III 10. Overall, on the revenue side, improvements in the economy suggest a slight increase in revenue in the short term, but this would be have to be balanced against further shifts toward the individual capitalization accounts. 11. Expenditures. On the expenditure side, the Government passed the Pension Solidarity Law in March 1995, which allows annual pension increments to be determined by the Government and not automatically set equivalent to wage increases, as had been done in the past. The law also sets ceilings on pensions with gradual reductions to pensions currently above those ceilings. Although currently being contested in court, this law will over time reduce the level of pension expenditure relative to revenue collected since revenue collected will grow with nominal wages, while pension expenditure will grow to a lesser extent, based on the annual decisions by the Government. In 1996, no pension increase is to be granted. However, this effect has to be slow to be politically sustainable. 12. Furthermore, current pensioners in Argentina received benefits under a different structure, one which was generally more generous than the current system. As these pensioners leave the system and are replaced by new retirees retiring under the new system who will receive lower benefits, the impact will be to lower pension expenditure. The retirement age is also gradually being raised to reduce the number of new retirees. However, each of these effects will take place slowly over time, stretched out further by the generous transition provisions which give higher accrual rates to years served under the old system than to years served under the new system for new retirees. 13. A more drastic, but not immediate, reduction in expenditure may take place as ANSeS attempts to get its files in order, checking beneficiaries to see if they exist and checking benefit levels to see if they are as legislated. ANSeS currently shows 17 percent of its beneficiaries claiming disability, which is high by international standards. Review of the disability claims may lead to a reduction in expenditure if claims are found to be invalid. The extent of this expenditure reduction might be substantial, but is unlikely to occur in 1996. Medium Term Outlook 14. The medium term outlook for ANSeS, without the provincial transfers, suggests that it will continue to run deficits in 1996 and 1997 despite the already ample revenues generated by the earmarked taxes. By 1988 it expects to show a small surplus, including the revenue from the earmarked taxes. Table EII-1 shows ANSeS' performance in 1995 together with projections for 1996-98. - 42 - ANNEX III Table I-i ANSeS' Medium Term Financial Projections 1995al 1996 1997 1998 ] REVENUES (US$ mil) Contributions' 9,461 8,610 9,180 9,793 Earmarked Taxes 2,632 4,162 4,649 5,079 15% Co-Participation 1,950 2,989 3,620 3,821 Privatization Revenues 301 460 - - Other Revenue 52 16 16 16 Total Revenues 14,396 16,237 17,465 18,709 EXPENDITURES (US$ bil) Pensions 13,646 13,309 13,391 13,443 Unemployment 559 542 548 553 Family Allowances 723 788 796 804 Operating Costs 298 235 242 250 Military Pensions 1,617 1,630 1,647 1,663 Tax Collection (DGI) 185 167 170 182 Net Contribution to Retiree 525 623 627 628 Health (PAMI) Department of Social Welfare - 567 567 567 Others 55 18 28 26 Total Expenditures 17,608 17,879 18,016 18,116 Contributions include both employer and employee contributions to the pension system, Sistema Integrada de Jubilaciones y Pensiones, and contributions for unemployment insurance and family allowances. 1995 numbers exclude $1.4 bil promised during the moratoria, but not yet received. a/ Actual 15. The projections for 1995 show a drop in own contribution revenue of 9 percent, followed by subsequent annual increases of 6.7 percent. Own revenues are expected to drop both as contributors continue to switch to the AFJP system and as discounts on employer contributions are extended to more employers and - 43 - ANNEX III are applied for the full year in 1996. Subsequently, contributions rise more slowly than real GDP growth, but assume a positive growth in the wage bill of 3.5 percent, which includes both a reduction in evasion and real wage growth. 16. The enormous growth in earmarked taxes, 58% between 1995 and 1996, is attributable to the increase in the base rate of value-added taxes from which ANSeS draws its revenues, from 18 percent to 21 percent. The Ministry of Economy also projects increased revenues from personal property taxes due to improvements in administration and collection. The increase in value-added taxes, which adds into the co-participation revenues, also explains the projected increase in revenues from the 15 percent of co-participation revenues to which ANSeS is entitled. 17. On the expenditure side, little growth is expected. Pension expenditures fall between 1995 and 1996 due to administrative changes which shift the burden of social assistance pensions from ANSeS to a new Department of Social Welfare. Unemployment compensation is expected to fall slightly as unemployment rates fall. 18. As a result, ANSeS which showed a deficit of US$3.2 billion in 1995, would slowly improve its finances from a projected deficit of US$1.6 billion in 1996 to a projected surplus of US$593 million in 1998, without the transfer. However, with the transfer ANSeS is projected to run a deficit of US$2.1 billion in 1996, gradually reducing to a deficit of US$176 million in 1998. Long Run Outlook 19. In the longer term, some of the beneficial effects noted above, the reduction in evasion, the gradual erosion of the higher old system pensions, and the removal of automatic wage-indexation of pensions will all result in an improvement in finances for ANSeS. Combining these improvements with the relatively young population structure, in comparison with that in OECD countries, could lead to a complete turnabout with contribution revenue exceeding expenditure in the pension part of ANSeS in the future. 20. Two studies done in Argentina, one by FIEL, a noted research institute, and the other by the Ministry of Economy in conjunction with demographic projections from a study being conducted at the University of Buenos Aires, conclude that ANSeS will run surpluses by the year 2014 in one case and as early as 2003 in the other. The speed of this transformation will depend on a variety of factors such as the extent of evasion reduction, the percentage of contributors who choose the individual capitalization accounts, and a host of other factors. Further -44- ANNEX III work with these models is required to determine the robustness of the projections to different assumptions on these factors. 21. However, in the longer term, there is concern that the pension system in ANSeS may again show deficits. Once the transition issues have been resolved, under the current law, all individuals will receive a basic benefit from ANSeS, 27.5 percent of the current economy-wide average wage for 30 years of work, with an additional 1 percent for each year above 30. Those individuals who opt to retain the public defined benefit pension as a second pillar will receive that pension from ANSeS as well. Both benefits are funded on a pay as you go basis, with contributions from current workers being used to pay benefits to current retirees. 22. One quick check on the sustainability of the benefit structure looks at the potential numbers of workers and pensioners in each future year to determine whether there are enough workers to pay promised pensioner benefits. Assuming the current contribution structure remains constant, employers will pay only 9.6% of wages, after the discounts, and employees will pay 11 percent of wages, although 1.5 percentage points will be used to fund survivor and disability insurance. The sum available to fund current pensions will be 19.1 percent of wages. Assuming that people work from age 21 to retirement age continuously, women will retire after 40 years of service and men after 45. Women will thus get 32 percent of average wage plus 30.25 percent of the average of their own last 10 years' salary. Assuming that the average of the last 10 years' salary is close to the average wage, the benefit comes to 62.25 percent of average wage. If workers are paying 19.1 percent and beneficiaries receive 62.25 percent, demographically 3.26 workers per beneficiary are required to make the system solvent. The World Bank population projections show that by 2035, even if all men worked from age 21 to age 65 and all women worked from age 21 to age 60, there would not be sufficient workers to fund such a pension for retirees. And in fact, some workers will be unemployed; some will work in the informal sector. As a result, this unsustainability point will occur much earlier. In fact, using the same definition for potential workers and retirees in 1995, there should be 4.47 workers per retiree in ANSeS. Due to evasion, high disability rates, and unemployment, already there are only 1.56 workers per retiree. The longer-run reforms to improve the public scheme will involve, most likely, adjusting the sizes of the different pillars relative to one another, and lowering the flat pension to convert it into a safety net. Any proposal to reform the public pension system will have to be based on a widespread public debate on the results of actuarial models more sophisticated than the ones being applied. 10-29-96 - m:\mariluz\pension\annex2-3 ANNEX IV FINANCIAL IMPLICATIONS OF THE TRANSFER OF THE PPFs  - 45 - ANNEX IV FINANCIAL IMPLICATIONS OF THE TRANSFER OF THE PROVINCIAL PENSION FUNDS TO THE NATIONAL SYSTEM 1. Under the Fiscal Pact of 1993, the Federal Government agreed to absorb the provincial pension funds (PPFs) into ANSeS. In the long run, such a move will be beneficial to the economy as a whole because the provinces have been overly generous in granting lower retirement ages and higher replacement rates and have made financially unsustainable promises. Moving the PPFs into ANSeS will confer the same retirement eligibility conditions and benefits on the provincial civil servants that are now available to the private sector in the provinces and to federal civil servants. In addition to reducing costs, the transfer will improve labor mobility between the private and public sectors in the provinces and within the public sector across provinces. Financial Outlook for the Provincial Pension Funds 2. The provincial pension funds are generally in poor financial condition. The combined deficit for the 16 provinces who have indicated a willingness to transfer came to US$733 million in 1995, up from US$646 million in 1994. These financial results can be attributed to a combination of low minimum retirement ages and high benefits. Table IV-1 presents the minimum retirement ages for each province for both the general scheme and the teachers' scheme and the average pension being paid in 1995. 3. The financial situation in the provinces precludes an increase in the wage bill, both an increase in wages and an increase in the number employed, which would increase the revenues of the PPFs. Other revenues, which might increase with an improvement in the economy, represent only a small source of revenue for the PPFs, covering less than 5 percent of total expenditure. With the low retirement ages and the high level of average benefit, there is no scope for reductions in expenditures in the future. Thus, the deficits are expected to grow, from US$733 million in 1995 to US$1.077 billion in 2000, and to continue expanding if the PPFs are left in the provinces. - 46 - ANNEX IV Table IV-1 Minimum Retirement Age and Average Pension Province Minimum Minimum Average 1995 Retirement Age Retirement Age Pension General Scheme Teachers Buenos Aires 60/60 50/50 $578 Catamarca National National National Cordoba 58/55 55/50 966 Corrientes 65/60 65/60 714 Chaco 60/60 No min. 851 Chubut 55/55 No min. NA Entre Rios 62/57 57/52 971 Formosa NA NA 818 Jujuy 55/60 No min. 759 La Pampa 60/55 57/57 NA La Rioja 60/55 No. min. 644 Mendoza 65/62 52/52 625 Misiones 60/55 55/52 876 Nequen NA NA NA Rio Negro 60/60 52/52 1112 Salta 60/58 55/53 749 San Juan 63/58 NA 914 San Luis 65/60 55/52 560 Santa Cruz NA NA NA Santa Fe 60/55 50/50 728 Santiago del Estero National National National Tucuman 55/51 55/50 681 Tierra del Fuego 55/50 43/43 NA MCBA National National National ANSeS 65/60 65/60 299 NOTE: Retirement ages are expressed as male/female. ANSeS retirement ages are currently 62/58, but will rise to 65/60 by 2003. - 47 - ANNEX IV Implications of the Transfer for the National Pension System 4. In the short run, absorbing the PPFs into ANSeS will cost money since the provinces willing to transfer are the ones already running deficits. A model developed by Ministerio de Economia in cooperation with the World Bank and the 1DB measures the additional costs to ANSeS resulting from the transfer of the PPFs. ANSeS would bear the full burden of the current deficits, which came to US$733 million for the 16 provinces considering transfer at end 1995. 5. In addition, ANSeS would face greater costs due to differences between the provincial laws and the national laws. For example, the national system specifies that employees contribute 11 percent of their wages toward a pension system. The average contribution by employees in the provinces is 14 percent in the general system and 15 percent for teachers. As a result, initially, the revenues available to ANSeS to finance the provincial pensioners would be lower than those available to the provinces themselves, while the expenditures for the provincial beneficiaries would remain roughly the same. Thus, the deficit initially increases as a result of the transfer. 6. The actual contributions available to finance the provincial beneficiaries will be even lower than what is attributable to the change in the individual contribution rate. Once absorbed, the provincial civil servants will have the same options to join an individual capitalization scheme sponsored by an AFJP as any other participant in ANSeS. The employee contributions for those who choose this option will go directly to the AFJP and will no longer be available to help finance current beneficiaries. The combined effects of the reduction in contribution rate and affiliation with AFJP are estimated at US$543 million during the first year of transfer, although these are partially offset by an increase in employer contributions of US$249 million. 7. Similarly, the provinces have assigned to the PPFs revenues from selected sources, such as lotteries. This provincial revenue, roughly estimated to be US$64 million in 1996, will not be transferred to ANSeS and will thus contribute to the increased deficit faced by ANSeS. Provinces have also collected contributions directly from the pensioners themselves. These contributions, worth approximately US$79 million in 1996, will also be eliminated. 8. However, over time, the deficit will fall for four reasons. First, ANSeS has proposed absorbing the costs of the transfer without requiring any additional personnel or materials. As a result, the current administrative costs of the provinces for social security will be eliminated. Second, the provincial pensions are currently substantially higher than the national system pensions. The average - 48 - ANNEX IV pensioner under the provincial schemes receives US$784 per month, while the average pensioner in ANSeS receives only US$299 per month. Pensioners retiring after the transfer will receive only the national pension. Thus, there will be a reduction in costs as the provincial pensioners leave the system and a smaller increase in costs as new workers retire and receive lower pensions. Third, the relative flow of new retirees will be far lower than previously since the minimum retirement age in the provinces is substantially lower than in the national system and there will be fewer new retirees for a number of years. Finally, the pensioners in both the provincial and national systems have been accustomed to full wage indexation in the past. The Solidarity Law of 1995 eliminated automatic wage indexation for pensioners in the national system, making any increase a policy choice each year based on the finances of ANSeS, and imposed ceilings on the size of the monthly pension. The provisions of this law will immediately be applied to existing pensioners in transferring provinces, further reducing expenditures. 9. On the revenue side, after the initial fall in revenues due to changes in the contribution rates and a fall in the first two years in the overall wage bill of the provinces, revenues will begin to grow again due to increases in real wages. Revenues from other sources, namely earmarked VAT taxes, will also continue to grow as the economy grows. 10. As a result, declining expenditures and increasing revenues will work to eliminate the deficit in 10 years, after the transfer, while without the transfer, the deficit increases 63 percent in 8 years, from US$743 million to US$1.192 billion. 11. Table IV-2 sets out the deficits year by year if all 16 provinces transfer during 1996, comparing the deficits with the transfer to the deficits which would occur if the pension funds remained in the provinces. In the first year of transfer the deficits increase by 39 percent over the non-transfer case. But by the eighth year the deficits will be only 52 percent of their 1995 level. They will disappear shortly thereafter, while in the non-transfer case, they increase by 63 percent. - 49 - ANNEX IV Table IV-2 Deficit of Provincial Pension Funds Year Deficit with Transfer Deficit without Transfer I j(mil) (mil) 1994 US$646 US$646 1995 733 733 Year 1 1,210 871 Year 2 1,190 912 Year 3 944 965 Year 4 708 1,029 Year 5 636 1,077 Year 6 560 1,134 Year 7 471 1,182 Year 8 378 1,192 Implications of the Transfer for the Provinces 12. In general, the provinces benefit from the transfer. They no longer face pension expenditures and lose access to the contributions used to finance those expenditures as well. They will also lose access to the VAT revenue earmarked for social security. But since these revenue sources were insufficient to cover pension expenditures, the provinces will on aggregate be getting rid of a deficit projected to be US$871 million in 1996. Money which the provinces had earmarked for their PPFs, such as earnings from lotteries, will not be transferred to ANSeS and will now be available for funding other purposes. In aggregate, this amounts to US$64 million. The personnel currently employed by the pension funds are not to be transferred, but the provinces are under no obligation to release them. The employees can simply be transferred elsewhere within the provincial civil service. The aggregate savings should the employees be released would be an additional US$63 million. However, the provinces now have to pay what on average is a higher employer contribution to ANSeS than what had previously been paid to their provincial funds. This increased cost is estimated to be US$249 million in 1996. On net, the provinces will save US$622 million without releasing the provincial employees of the pension funds and up to US$685 million if they release all such employees. - 50 - ANNEX IV 13. Table IV-3 summarizes the gain to each of the provinces during the first year of transfer. Note that certain provinces such as Buenos Aires, San Luis, and Santa Fe actually lose from the transfer. Buenos Aires benefits from the transfer in the fourth year after the transfer, and Santa Fe in the third, although San Luis always finds the transfer to be more costly. This is attributable to the increase in employer contribution each will have to pay after the transfer. In the case of both Buenos Aires and Santa Fe, the provincial government only pays 12 percent and 12.2 percent, respectively, of salary as the employer contribution now, but will have to pay 16 percent if the pension fund is absorbed into ANSeS. Similarly in the case of San Luis, for the general scheme, the provincial government only pays 12 percent now, but pays 17 percent for the teachers. San Luis will have to pay more for the general civil servants, but will pay less for the teachers, resulting in a small net increase, but enough to wipe out the savings. Model to Measure the Cost of Transferring the Provincial Pension Funds to ANSeS 14. The model developed by Ministry of Economy in cooperation with the World Bank and the IDB measures the additional costs to ANSeS resulting from the transfer of the provincial social security schemes. 15. The model projects both revenues and expenditures per province under both the transfer case and the non-transfer case for 8 years, with 1996 being the first year of transfer. Revenues potentially consist of six items: contributions from employees, contributions from employers, contributions from pensioners, other contributions, share of national VAT tax, and other revenue sources, such as lotteries. Expenditures potentially consist of five items: personnel costs, administrative expenditures on goods and services, pension benefits, other current expenditures, and capital expenditures. The model assumes a 3 percent inflation rate throughout. 16. Revenues. The model assumes that the wage bill and thus the contributions from employers and employees fall 8 percent in real terms or 5 percent in nominal terms the first year (1996) and 1 percent in real terms the second year. In all remaining years, the wage bill and thus contributions rise 2 percent each year in real terms. Note that wages need not fall in nominal terms for these assumptions to hold true. Virtually all of the provinces are in financial trouble and are committing to reducing staff. Thus, the nominal wage bill might fall even if nominal wages do not. These assumptions hold true regardless of whether transfer to ANSeS occurs or not. - 51 - ANNEX IV Table IV-3 Provincial Gains From the Transfer Province Deficit to be Other Personnel Increase in Savings Savings Transferred Revenue Costs Employer without with Freed Cost Reduction Reduction in in Personnel Personnel 1 2 3 4 1+2-3-4 1+2-4 Buenos Aires 116.9 12.2 5.5 147.5 -24.0 -18.5 Cordoba 109.3 14.2 20.3 -27.6 130.8 151.1 Corrientes 32.9 0.0 2.4 -2.1 32.6 35.1 Chaco 29.1 0.0 0.6 -2.3 30.8 31.5 Chubut - - - - - Entre Rios 54.1 9.7 2.9 22.0 38.9 41.8 Formosa 20.5 2.5 3.3 0.0 19.7 23.0 Jujuy 50.0 0.0 1.6 2.7 45.8 47.4 La Pampa - - - - - La Rioja 26.4 8.6 5.6 6.1 23.3 28.9 Mendoza 35.8 3.2 1.5 -5.7 43.2 44.7 Misiones 33.7 1.6 4.1 5.6 25.7 29.8 Neuquen - Rio Negro 89.2 0.0 1.7 5.2 82.4 84.1 Salta 50.0 1.9 4.3 5.4 42.1 46.5 San Juan 93.9 0.0 2.7 4.4 86.8 89.5 San Luis 3.6 0.0 0.4 7.3 -4.2 -3.8 Santa Cruz - - - - - Santa Fe 67.3 4.4 2.3 81.4 -11.9 -9.7 Tucuman 57.9 5.2 3.7 -0.9 60.2 64.0 Tierra del - - - - - Fuego TOTAL 870.7 63.6 62.9 249.0 622.4 685.3 - 52 - ANNEX IV 17. In the case of transfer, the employee contributions are further adjusted to reflect changes in the contribution rates, both employer and employee, to conform with the national system and affiliation with AFJP. The first year 35 percent of contributors are assumed to opt for AFJP. The second year, an additional 20 percent of the total are assumed to opt for AFJP, making the AFJP affiliates 55 percent of the total. Subsequently, no additional individuals are assumed to change systems. These numbers correspond to the national affiliation rate for AFJP. However, it should be noted that the national system has existed for less than two years. Any further switching which occurs in the future within the national system is not included in the model, but would be expected to affect provincial civil servants as well. 18. As noted above, contributions by pensioners, contribution of the total first salary, and revenues from lotteries will no longer be available to finance the pension system after transfer. Revenues from earmarked taxes are expected to rise 76 percent in real terms between 1995 and 1996 and subsequently rise 2 percent annually in real terms. 19. In the non-transfer case, the employer and employee contributions are adjusted only for changes in the wage bill as noted above. Pensioner contributions are reduced 3 percent the first year, consistent with no increase in nominal terms and 1 percent in real terms the second year, and increased by 2 percent in real terms in all subsequent years. These assumptions differ from the wage bil changes only in that nominal pensions and thus contributions derived from them are not allowed to fall in real terms. Other contributions for first salary and the like are also assumed to fall by 3 percent the first year, 1 percent the second year, but increase by 2 percent in all subsequent years. 20. Revenues from VAT are no different from the transfer case. Revenues from other sources, such as lotteries, are expected to fall 3 percent in real terms the first year and 1 percent the second year, but are expected to grow 2 percent per year after that. 21. Expenditures. Expenditures are more complicated. Under both scenarios, pension payments have to be adjusted each year to account for new retirees, deaths of retirees, new survivor pensioners as a result of the deaths of retirees, and increases in pensions due to indexation. The rates of each of these adjustments will vary depending on whether the transfer takes place, and the expenditures will also be subject to special costs or savings depending on whether the transfer takes place and the year. - 53 - ANNEX IV 22. With the transfer, new retirees are calculated as the percentage of current contributors in that province that is reaching the retirement age in that year. Data on the age and gender distribution of actual contributors were not available. The age distribution of the provincial population was used instead, with the percentage of new retirees calculated as the number of individuals in the whole province reaching the respective retirement age divided by the sum of the male provincial population between the ages of 21 and 65 and the female provincial population between the ages of 21 and 60. This number of new retirees was given the average pension provided under the national system in 1995. No adjustments were made in this amount for inflation or wage growth in subsequent years. 23. Retiree deaths, under the transfer, are calculated by multiplying the number of retirees times the average death rate per provincial retiree in each province. The initial value for the death rate represents the 1995 rate. The rate is increased for subsequent years by 4 percent to account for the increased age of the retirees, i.e., with retirement ages raised, no young retirees will be entering the retiree population, raising the average age of retirees, and their probability of dying. The reduction in expenditure per retiree death is calculated as the average pension provided by the provincial system in 1995, and is not adjusted to reflect the decline in real value over time. 24. Survivor pensions are expected to grow at a 1.5 percent annual rate. This number is derived by reviewing the figures for ANSeS, which show a 3.1 percent annual growth. Because the retirees in the provincial systems are generally younger, they are less likely to die and thus less likely to leave survivors. The decision to choose a rate half that of ANSeS is arbitrary. 25. Under the transfer, indexation increases are not provided to the pensioners for the first four years after the transfer. As a result, pensions fall by 3 percent in real terms, the rate of inflation, for the first four years. Subsequently, increases are granted, but at a rate of 1 percent in real terms per year. This is half the growth of real wages. 26. For the first year of the transfer two additional factors are included. First, in many provinces there is a stock of individuals ready for retirement, but who cannot retire because the province does not have the money to pay them. They will retire during the first year of transfer and thus will add to the stock of existing pensioners. They are assumed to receive the average old system pension. 27. Second, with the transfer it is assumed that ANSeS will review records for each beneficiary. The model assumes that 3 percent of expenditure is reduced for each of the first two years due to fraudulent or multiple claims. - 54 - ANNEX IV 28. Without the transfer, new retirees are larger because more people are likely to reach the lower retirement ages. The pensions received by the new retirees are also equal to the average provincial pension, which is more than double the average national pension. Death rates are a tiny bit lower, but not much. Pensioners are expected to grow at the same 1.5 percent rate as for the transfer scenario. Those waiting to retire continue to wait and are not allowed to retire immediately. Except for the first year, pension increments match the growth in wages, with a 1 percent real decline the second year, and 2 percent real growth thereafter. During the first year, while wages decline 8 percent in real terms, pensions only decline 3 percent, suggesting that pensions have upward mobility in both real and nominal terms, but no downward mobility in nominal terms. 29. In terms of other expenditures, in the case of transfer, there are no other expenditures since neither personnel or goods and service costs are expected to transfer to ANSeS. 30. In the non-transfer case, personnel costs, administrative costs for goods and services, other administrative costs, and capital expenditures all follow the behavior of wages. Fiscal Implications of the Transfer of the PPFs 31. With the transfer of the PPFs, ANSeS' deficits will initially increase. Fourteen PPFs are expected to be transferred to ANSeS during 1996 and 1997 (see Table IV-4). The effect of the transfers on ANSeS' deficits during this two-year period will be as follows: seven PPFs transferred or to be transferred in 1996 will cause a first-year deficit to ANSeS of about US$582 million in 1996 (four of these PPFs that were transferred early in 1996 will cause ANSeS the estimated full first- year deficit in 1996; other PPFs transferred later in 1996 will cost ANSeS a smaller than the estimated full first-year deficit in that year); US$547 million in 1997 and US$470 million in 1998. Another seven PPFs expected to be transferred in 1997 will cause a deficit to ANSeS of US$317 million in 1997 and US$297 million in 1998. The transfer of the 14 PPFs will continue generating decreasing deficits for ANSeS for several years. If the two remaining provinces (Buenos Aires and C6rdoba) transfer their PPFs in 1998, they would generate an additional deficit to ANSeS of US$307 million that year. - 55 - ANNEX IV Table IV-4 Provincial Pension Funds Deficit for ANSeS Generated by the Transfer" Province 1996 1997 1998 Transfers in 1996: La Rioja 39 38 31 Mendoza 92 89 75 Salta 68 62 50 San Juan 141 129 112 Rio Negro 80 75 66 Jujuy, 81 75 66 Tucumdnv 81 79 70 Sub-total 582 547 470 Transfers in 1997: San Luis 12 8 Santa Fe 57 57 Corrientes 60 55 Chaco 55 50 Entre Rios 81 75 Misiones 31 31 Formosa 21 21 Sub-total 317 297 Total Transfer Cost T 582 864 767_J 1/ Excluding the PPFs of Cordoba and Buenos Aires 2/ Transfer of these PPFs is expected before the end of the calendar year. Since their transfer will take place in late-1996, the actual cost to ANSeS in 1996 of these two PPFs would be less the amount shown.  ANNEX V PROVINCIAL FISCAL PERFORMANCE AND REFORM PROGRAM  56 ANNEX V PROVINCIAL FISCAL PERFORMANCE AND REFORM PROGRAM 1. Argentina's public sector is highly decentralized. Sub-national governments are responsible for 45 percent of public sector expenditures, a share that is higher than in many Latin American countries. In 1994, the Argentine provinces financed 97 percent of basic education, 92 percent of health and 84 percent of welfare outlays. On the revenue side, provinces collect only 18 percent of the public sector revenues. Own-source revenues cover 37 percent of provincial expenditures. The gap between expenditures and revenues is filled by transfers and shared-revenues. 2. Argentine provincial finances are under stress. The overall provincial deficit -- which had improved after the stability program from 1.4 percent of GDP in 1990 to 0.2 percent in 1992 -- has deteriorated since, rising to 1.2 percent of GDP in 1995. Borrowing and outstanding debt have increased, payment arrears have accumulated and the provinces are delaying the payment of essential expenditures. 3. The roots of the provincial troubles go back at least 20 years, when high inflation rates, together with reliance on centrally collected revenues and lack of budget discipline, led to continued fiscal deficits. With the Convertibility Plan, the revenue situation improved significantly. Provincial revenues went up rapidly but expenditures also adjusted quickly -- in part due to additional decentralization of social services -- pushing the overall deficit to previous levels. Personnel expenditures grew 37 percent in real terms, primarily due to higher real wages. Provincial pension funds - - insufficiently financed and with generous benefits -- contributed to about one third of the provincial deficits. Table V.1: Indicators of Provincial Fiscal Performance (Billion Pesos, As % of GDP Annual Growth (%) Constant Prices) 1993 1994 1995 1993 1994 1995 94/93 95/94 Current Revenues 24.4 25.5 24.1 8.9 8.8 8.6 4.7 -5.6 Current Expenditures 25.2 26.5 25.5 9.2 9.1 9.1 5.0 -4.0 Current Savings -0.8 -0.9 -1.4 -0.3 -0.3 -0.5 -14.5 -39.3 Government Transfers 1.7 1.9 2.0 0.7 0.7 0.7 9.2 1.2 Capital Spending 3.5 4.1 4.0 1.3 1.4 1.4 16.8 -2.7 Total Deficit -2.2 -2.7 -3.1 0.8 0.9 1.1 22.7 14.0 Amortization 1.0 1.1 1.9 0.4 0.4 0.9 9.0 63.4 Gross Financing -3.3 -3.9 -5.0 1.2 1.3 1.8 18.1 29.0 Constant Prices of 1995 4. By the end of 1995 the situation was unsustainable. With the decline in economic activity, as Argentina confronted the "Tequila effect" (GDP fell 4.4 percent 57 ANNEX V in 1995), provincial revenues dropped 6 percent in real terms and despite some expenditures cuts, the fiscal deficits persisted. Out of 24 provinces, only four generated savings to finance investment. The few capital expenditures made were financed partly by earmarked transfers (43 percent), partly by borrowing. In many instances, transfers from the central government were mortgaged to pay due debt service. Arrears accumulated and several provinces resorted to issuing their own script as a form of payment. 5. At the end of 1995, provincial debt was estimated at US$14.9 billion, of which US$1.1 billion was multilateral debt. Provincial per capita debt averaged $430, which is high compared with $400 in the average of the US states. Debt service is relatively low -- 11 percent of current revenues on the average -- but this reflects the automatic capitalization of due interest and amortization. For some of the poorer provinces the debt service was absorbing more than 30 percent of their revenues. Short-term debt makes up more than 50 percent of the financial debt. 6. At present, there are few limits on provincial domestic borrowing. The provinces can use their unconditional transfers (coparticipation funds) as collateral for commercial and investment borrowing. The state-owned Banco de la Nacion executes the guarantees appropriating the coparticipation funds to pay due debt service. This makes provincial lending an attractive business for domestic banks, although many provinces have overcommitted those funds and have found themselves in serious fiscal trouble. Differences in Provincial Performance and Adjustment Needs 7. Argentina's provinces vary widely in size, economic potential and fiscal performance. Broadly speaking, five provinces (traditionally classified as the advanced ones --the province of Buenos Aires, the Municipality of Buenos Aires, Cordoba, Mendoza and Santa Fe) represent 70 percent of the country's GDP, and 60 percent of total provincial borrowing, and have thus a key role in the aggregate provincial fiscal situation. In 1995, of these five provinces, two were in balance -- the province of Buenos Aires and the Municipality of Buenos Aires. Santa Fe, Mendoza and Cordoba were facing current balance deficits, which together represented 20% of the aggregated provincial current deficit of $1.4 billion. 8. Recent ESW1 has classified the provinces according to fiscal indicators -- current and overall fiscal balance, debt service/current revenues and debt stock/current revenues. Provinces are then classified into (i) moderately balanced (unbalanced) -- if current fiscal balance is less (greater) than 10 percent of current revenues; (ii) in too much debt if the debt ratios are greater than 15 percent and 60 percent, respectively. In these respects the provinces can be classified as follows. "Argentina - Provincial Finances Study, Selected Issues in Fiscal Federalism", Report AR15487, June 4, 1996. 58 ANNEX V * The first group includes seven provinces whose fiscal situation is stable or could be stable with a small fiscal adjustment. This group includes San Luis, La Pampa (traditionally well-managed provinces), the city of Buenos Aires, the province of Buenos Aires (all with surpluses in the current account) and Santa Fe, Salta and Neuquen. The last three provinces had deficits of about 5-9 percent in the current account. The structure of the expenditures of Salta and Neuquen shows a disproportionally high share of personnel outlays, indicating the need to reduce this item by 30 percent and 20 percent respectively. * The second group -- provinces with serious fiscal problems -- includes Santa Cruz, San Juan and Tierra del Fuego. In 1995, their current deficits reached 21 percent, 37 percent and 53 percent of their current revenues, respectively. In order to ease this problem, these provinces would need to reduce current expenditures by 27 percent in the case of San Juan and 35 percent in the case of Tierra del Fuego. * The third group includes two provinces -- Mendoza and Cordoba -- with debt ratios well above the limits and problems in serving the debt. Early 1996, Cordoba had 33 percent of its coparticipation funds retained to pay debt service; Mendoza and about 40 percent. The ratio of debt/revenues is high -- 93 percent in Mendoza, and 80 percent in Cordoba. In all cases, debt service and personnel expenditures absorb more than 80 percent of their revenues. * The fourth group includes eleven provinces with both fiscal and debt service difficulties. These provinces contribute up to 10 percent of the country's GDP but up to one third of the provincial debt. The worst cases include La Rioja, Rio Negro, Jujuy, Formosa (despite a wide program of reform), Corrientes and Misiones. Debt stock is larger than annual revenues, and the current deficit is above 20 percent. For most of these provinces, a reduction in personnel outlays between 25 and 40 percent would be necessary to restore fiscal discipline. A simulation exercise indicates that La Rioja would need to reduce current expenditures by 50 percent and personnel expenditures by 73 percent. Catmarca and Rio Negro would need to cut personnel outlays by around 40 percent; Chaco and Formosa more than 25 percent. 9. Among the causes for the provincial fiscal crisis, institutional factors have played a major role: (i) lack of budgetary discipline inherited from the hyperinflationary years; (ii) mandated service transfers; (iii) inadequate set of rules with respect to accounting, reporting, and transparency; and (iv) lagging institutional adjustment from the prevailing irresponsible budgeting practices of the hyperinflation years. In addition, the rapid and unexpected rise in provincial revenues with the Convertibility Plan in the early 1990s led to unwise expenditure increases that could not be sustained when the boom broke. 59 ANNEX V 10. In addition, the incentives at the central level may have been favorable to provincial overspending. During the inflationary years, central government financing was almost automatic, and provincial bailouts were the rule. After the Convertibility Plan, the situation changed towards greater discipline. However, increasing discretionary transfers from the center together with the unlimited use of transfers as collateral to commercial borrowing and current deficit financing have had a negative influence on provincial fiscal discipline. Provincial Structural Adjustment. 11. With the Convertibility Plan, the Federal Government promoted structural reforms in the provinces through two broad-range policy agreements (Federal Fiscal Pacts, 1992 and 1993). Provinces agreed to (i) improve own-resource mobilization, (ii) reform the structure of the provincial taxes and eliminate a series of distortionary taxes, modernize the provincial public administration, privatize public enterprises (including the provincial banks), (iii) deregulate the provincial economy, (iv) privatize public enterprises and (v) transfer the provincial public employees pension fund to the national streamlined pension fund. In exchange, provincial governments were ensured floors in revenue-sharing which sheltered them from possible declines in own-source revenues associated with the economic reforms. 12. Progress has been achieved in many of those areas, notably in the privatization of the provincial banks and the deregulation of many provincial economic activities. Progress in achieving fiscal adjustment has lagged. In 1995, there were many provinces reducing goods and services expenditures substantially. In the early part of 1996, severe personnel cuts were being planned. A major problem is the size of the outstanding debt and the lack of capacity of many provincial governments to service their debt obligations. 13. Achieving sustainable fiscal accounts is now a priority for the central government. Taking advantage of the current fiscal problems experienced by the provinces, the central government is prepared to negotiate with selected provinces adjustment programs of debt restructuring-cum-fiscal adjustment. These programs would include refinancing of the existing debt with central government instruments so as to lengthen the maturity and lower the current interest rate. The provincial governments would agree on the implementation of fiscal adjustment programs to be implemented over at the most four years, with clear fiscal targets aimed at a sustainable fiscal balance. Details on the financing of this package are being worked out by the Government of Argentina. 14. Some elements of those programs are the following. First, reforming provinces need to adopt (i) Fiscal objectives, strategy and timetable aimed at reaching a current account balance, a ceiling in the debt/revenue ratio; and a sustainable debt service/current revenue ratio; (ii) Public expenditure reviews (notably in the social 60 ANNEX V sectors) to prioritize expenditure programs and avoid cuts in essential items and (iii) Public Expenditure Management Systems. 15. To complement the provincial reform program, a new incentive structure at the central level is needed as advised by the Bank within the ongoing policy dialogue. The main objective is to remove the moral hazard of having the central government guaranteeing provincial over-spending and limiting the capacity of the provincial government to borrow against their transferred funds. This will require (i) removal of the Banco de La Nacion from executor of the guarantee, (ii) imposing limits on how much the coparticipation can be pledged; (iii) letting the market have the role by requiring the commercial banks to have technical ratios in line with the risk of the provinces to which they lend. In addition, the central government should provide clear signals that it will no longer bail out provinces which get themselves into trouble. 61 ANNEX V The Federal Fiscal Pacts Pact I, 1992 Objectives: Attend to basic social needs, guarantee economic stability, and consolidate the basis consolidated economic growth, deepen the reform of the public sector, facilitate the access to housing, deepen the process of decentralization ad a model for service delivery Provinces Central Government a) 15 percent of shared taxes would be earmarked The federal government would advance with the for the social security system; reform of the social security and the national privatization program; the transfer of social sector b) a $44 million fund would be created and service responsibilities. allocated to 20 provinces; c) provinces would be guaranteed a monthly floor in coparticipated revenues of $725 million; d) provinces promised to submit balanced budgets in 1993 and limit current expenditure to at most 10 percent of the 1992 level; e) provinces would have greater autonomy over earmarked transfers housing, water electricity and road funds. Pact I, 1993 a) Elimination of stamp tax, tax on transfer of Month minimal coparticipation increased to $740 fuels, energy and sanitary services, the tax on million interest from savings accounts, and all forms of payroll taxes. b) Gradual elimination of the Gross Receipts Tax Provinces were asked to use any excess above $800 to a retail sales tax through exemptions at the million to retire debt or finance investment input production level, starting with primary expenditures. production. c) Provinces gained the right to transfer their social security systems to the national government. d) Partial or total privatization of state banks. c) Continuation of de d. rival of restriction on busin,s, .!e local of pharmacies, sale of medicaments outside the pharmacies, liberalization of freight transport services and the loosing of restrictions on registration for public works contracts. 62 ANNEX V Perspectives for 1996-98 16. The outlook for 1996 shows a moderate increase in provincial revenues due to the recovery in economic activity (GDP growth is expected at least 2.5 percent), better tax collection at the central level and an increase in the tax rates of the national value added tax. Transfers from the central government to the provinces are projected to grow 5.3%. This increase in revenues will be operational to compensate for the negative effect of the elimination of some provincial taxes (the stamp tax contributes 30 percent of total provincial revenues) and to allow the provinces to retire as much debt as they can, provided they maintain a good grip on the fiscal adjustment program. It is estimated that current transfers will increase 5.1 percent in 1996 and 9 percent in 1997 and in 1998. Provincial current revenues will grow less rapidly (Table V.2) since own-source revenues are expected to decline in 1996, as a result of the complete elimination of the stamp tax. The government expects an improved performance in 1997 and 1998 as the efforts to improve provincial tax collection will materialize into larger revenues. Table V.2 Fiscal Performance Outlook -1996-98 (Billions of Pesos) Actual Projections Cresc. Annual (%) Item 1993 1994 1995 1996 1997 1998 1996 1997 1998 1. Current Revenues 23.0 24.7 24.1 24.7 26.5 28.0 2.7 7.0 5.7 Provincial 10.3 11.4 10.9 10.9 11.3 12.1 -0.2 3.8 7.1 National 12.7 13.3 13.2 13.8 15.2 15..9 5.1 9.6 4.6 2. Current Expenditures 23.8 25.6 25.5 24.7 25.0 25.0 -3.1 0.9 0.3 .of which, Personnel 14.1 15.0 15.1 14.8 14.6 14.6 -2.1 -1.1 0.0 .Interest 0.5 0.6 0.7 0.9 1.1 1.0 30.0 23.4 -9.6 .Transfers 6.4 6.9 6.6 6.5 6.6 6.8 -2.9 1.7 3.0 -Municipalities 3.0 3.1 2.9 3.1 3.3 3.5 5.9 7.3 7.2 - Social Security2 1.1 0.9 0.9 0.7 0.5 0.5 -25.9 -35.3 7.9 Discretionary Grants 1.7 1.9 2.0 2.3 2.1 2.1 14.8 -6.2 1.1 4. Current Balance (1-2) -0.8 -0.9 -1.4 0.0 1.5 3.0 5. Capital Expenditures 3.3 3.9 4.0 3.8 3.6 3.9 -3.9 -6.3 7.0 6. Overall Deficit -2.1 -2.7 -3.1 -1.3 0.3 1.6 7. Amortization 1.0 1.1 1.8 3.1 2.3 2.0 70.1 -26.0 -40.3 8. Gross Financing Needs 3.1 3.8 4.9 4.4 2.0 0.4 Memo Items Current Balance as% Revenues -3.5 -3.8 -5.8 0.1 5.8 10.6 ersonnel/Net Revenues 64.3 63.1 65.1 65.0 63.0 59.0 Own Revenues/Total Revenues 41.1 42.2 41.3 40.3 39.5 39.91 17. Current expenditures are projected to decline in 1996 (3 percent), as provincial government adjust their expenditures. Personnel expenditures are projected to decline 2 In 1997 and 1998 seven provinces will still keep their own pension funds - La Pampa, Santa Cruz, Cordoba, Buenos Aires, Chubut, Tierra del Fuego, and Neuquen.. 63 ANNEX V 2.1 percent in 1996 and 1.1 percent 1997). This will be compensated by the increase in interest payments and transfers to the municipalities. 18. As a result, the consolidated overall deficit would improve from a deficit of $3 billion in 1995 to a deficit of $1.3 billion in 1996, gradually increasing to reach a surplus of $1.6 billion in 1998. This would allow the retirement of part of the outstanding debt and the reduction of the debt service in the case of the most indebted provinces. The Impact of the Project on Provincial Fiscal Balance 19. The project and the government program it supports are expected to have two measurable fiscal benefits. First, it will ease the fiscal problems of the provinces, by transferring their pension fund responsibilities to the central government. Second it will ensure that the national social security system will be financially viable and sustainable in the long run. 20. Table V.3 summarizes the fiscal relief of each province after transferring the pension funds from the provincial governments to the central government. It is computed as the difference between the expenditures that the provincial government had to finance with their own pension funds and the financial costs they will have in the new situation. These financial costs are due to higher employer contributions to the national system. The fiscal relief is calculated in terms of current balance and overall balance in 1995. 21. This fiscal relief measures the decline in the current and the overall deficit that the provinces agree to maintain in the three years of the Bank-financed project. The federal government, together with the province, will choose the timing and the method to verify that the agreed conditionality is met. While, it is normally easier to check fiscal accounts at the end of the year, it is possible to work with the monthly provincial accounts (on an accrual basis). 22. As a complement of the first fiscal performance indicator, the ratio of personnel expenditures to net revenues was chosen to enforce the need for fiscal adjustment. The rationale for such a ratio is the following. Provinces will need to keep expenditures within their means. These resources can be well measured as the provincial current revenues (own-resources plus non-discretionary transfers) minus rigid expenditures such as transfers to the municipalities '. It is commonly accepted in public finance literature that if any local government could maintain personnel expenditures at less than 60 percent of net revenues, debt service at less or equal 15 3 Municipalities have very limited tax power and depend on provincial transfers for almost the entirety of their resources. Argentina has 1,100 municipalities. Municipal sources of revenues and responsibilities are established by the provincial constitutions. 64 ANNEX V percent of net revenues; the remainder can be shared between non-personnel expenditures, other transfers and capital expenditures financing. Table V.3 Social Security and Financial Imbalance 1995 (in Millions of Pesos) Current Overall Fiscal New New Savings Provinces Account Deficit Relief Current Overall in Overall Account Deficit Deficit,% (1) (2) (3) (4) (5) (6) Transfers in 1994 157 -59 157 -59 Catamarca -66 -64 -66 -64 MCBA 225 28 225 28 Santiago del Estero -3 -23 -3 -23 Transfers in 1996 -979 -978 435 -544 -543 44 La Rioja -273 -52 23 -250 -29 44 Mendoza -14 -34 72 58 38 212 Salta -59 -99 55 -4 -44 55 San Juan -170 -164 87 -83 -77 53 Rio Negro -195 -209 97 -98 -112 46 Jujuy a! -145 -193 45 -100 -148 23 Tucumana -124 -227 56 -68 -171 25 To Be Transferred in 1997 -454 -850 136 -318 -714 16 San Luis 63 -10 -2 61 -12 -20 Santa Fe -112 -215 -12 -124 -227 -6 Corrientes -63 -59 33 -30 -26 56 Chaco -100 -110 31 -69 -79 28 EntreRios -90 -160 39 -51 -121 24 Misiones -59 -145 26 -33 -119 18 Formosa -93 -151 21 -72 -130 14 Sub-total Program -1432 -1828 571 -861 -1257 31 To be Transferred later _ -132 -1292 100 -32 -1192 8 Buenos Aires 266 -281 -31 235 -312 -11 Cordoba -122 -397 131 9 -266 33 Chubut -86 -203 0 -86 -203 La Pampa 49 -2 0 49 -2 La Neuquen -39 -247 0 -39 -247 Santa Cruz -87 -95 0 -87 -95 Tierra de Fuego -112 -66 0 -112 -66 Total -1,407 -3,179 671 -736 -2,508 22 P', Program 102 57 85 117 50 0 a/ Transfer to be completed by December 1996 65 ANNEX V 23. Table V.4 shows the evolution of that ratio during 1991. The values chosen for 1997 were prepared by the Government of Argentina, and seem to be plausible. Table V.4- Personnel Expenditures as Percentage of Net Revenues projections Provinces 1991 1992 1993 1994 1995 1996 1997 1998 Transferred in 1994 Catamarca 60.2 66.7 88.6 104.5 99.3 80.3 73.0 68.5 MCBA 54.9 62.5 59.6 55.6 58.4 57.6 56.7 52.9 Santiago del Estero 69.3 71.9 87.7 94.3 82.6 73.2 67.3 63.1 Transfers in 1996 La Rioja 128.5 130.7 132.2 137.2 219.4 169.6 159.6 155.0 Mendoza 62.7 63.3 71.3 77.5 74.1 71.7 70.6 66.3 Salta 89.1 84.9 80.4 81.1 85.3 70.1 67.0 63.1 San Juan 67.8 63.7 82.6 109.5 105.9 68.7 64.5 60.5 Rio Negro 84.7 78.3 101.0 97.3 103.9 77.9 74.3 69.9 Jujuy a/ 82.5 66.0 75.0 87.5 94.2 81.1 76.3 72.0 Tucuman a/ 65.6 63.2 73.5 76.7 84.5 71.4 69.0 64.7 To be Transferred in 1997 San Luis 57.7 64.1 62.9 70.2 61.1 55.7 53.7 50.5 Entre Rios 67.8 73.7 74.5 70.3 74.5 61.0 58.6 54.9 Santa Fe 62.3 62.3 64.2 60.9 69.6 64.9 65.8 61.1 Corrientes 74.4 92.2 88.0 83.3 83.6 67.5 63.9 59.9 Chaco 72.8 83.4 91.2 87.6 92.7 78.9 73.5 68.6 Misiones 70.2 74.1 82.2 78.1 81.1 67.9 64.8 60.6 Formosa 102.3 79.6 87.4 82.1 92.1 70.8 64.9 60.8 Other Buenos Aires 78.6 56.7 58.0 56.4 54.0 53.7 55.6 52.5 Cordoba 76.5 69.9 76.8 74.3 74.3 64.1 62.6 58.6 Out of the Program Chubut 78.7 82.8 94.9 88.7 83.0 71.8 69.0 65.7 LaPampa 50.3 55.5 60.5 66.7 58.5 66.0 62.8 59.2 La Neuguen 71.2 70.6 90.5 75.4 84.5 66.5 64.9 62.1 Santa Cruz 86.2 63.2 67.7 72.0 77.0 73.6 70.8 67.6 Tierra del Fuego 132.7 101.2 86.2 104.6 134.9 124.2 119.2 113.9 Total 72.3 66.5 70.3 69.5 71.0 64.4 63.5 59.6 a/ Transfer to be completed by December 1996 ANNEX VI POLICY LETTER  - 66 - ft a y (Yewvicial 9a0(tO ARGENTINA PROVINCIAL PENSION REFORM POLICY LETTER Mr. James D. Wolfensohn President The World Bank Washington D. C. Dear Mr. Wolfensohn: 1. This letter of Development Policy describes the economic reform program of the Argentine Government as well as specific steps to deepen the reforms in the social security sector. To implement these reforms, the Government requests financial assistance from the World Bank and the Interamerican Development Bank. Assistance from the international financial institutions is particularly needed at this juncture when the economy is emerging from the adverse impact that external developments, including the hemispheric debt crisis of December 1994, have had on the economy. We would like to take this opportunity to also present the macroeconomic framework which complements the reform program. I. Macroeconomic Framework 2. Price stability and sustained growth remains the centerpieces of the Government's economic program. The Government has made important progress since 1991. To eliminate fiscal deficits that were fueling inflation, the Government initiated profound structural reforms. As a result, monthly price increases dropped from over 30 percent at the beginning of 1991 to below international rates in 1995, when annual inflation reached a fifty year low of 1.6 percent. 3. By laying the basis for price stability, the Government has chartered an agenda for the future with the following objectives: * the consolidation of stability through strict compliance with Law N.23928 of March 27, 1991 (the Convertibility Law), the preservation of fiscal equilibrium and the operation of a market economy with deregulated and unrestricted competitive markets and regulation by the state of non-competitive markets; - 67 - * the strengthening of economic growth through increased levels of savings, investment, productivity, privatization of public enterprises, private sector development and exports and an intensification of trade, financial and technological integration of the Argentine economy into world markets; and * the achievement of higher levels of employment and a more equitable distribution of income, both at a personal and regional basis, through consolidation of economic stability and growth, substantially increased public investment in human resource development and social services, and measures to promote regional development. 4. Sustained economic recovery and improvements in welfare will continue to be achieved by undertaking lasting structural reforms in the public sector, improvement in national savings and policy reforms that would continue to promote private sector activity through gains in productivity, lower domestic taxes and factor market improvements. To ensure that the private sector remains the leading expansionary force in the economy, the Government is committed to maintain flexible and open markets free of domestic regulations and major external trade barriers, and with a strong financial sector to improve intermediation. The Government's program of market reforms covers the following areas: * Open Market Economy: The Government has eliminated controls on prices, wages, interest rates, and capital flows as well as a complex network of subsidies and implicit taxes. The Government is committed to maintain such policies. Additionally, to facilitate more rational allocation of resources in the economy, and improve international competitiveness through the reduction of production costs and improvement of incentives for productive investment, the Government is committed to promote structural reforms by introducing and supporting legislation for: (a) liberalizing labor markets; (b) reforming public sector administration; (c) reforming the health insurance cooperatives; (d) reforming provincial pension systems; and (e) encouraging the reform of provincial finances, including the reduction of inefficient taxes. * Trade Liberalization: The Government has made rapid strides towards opening the economy, in terms of flows of trade, capital and technology. The import tariff structure has been simplified and the average tariff rate was lowered to approximately II percent. Export taxes have been nearly eliminated, and most quantitative restrictions and other procedures that slowed the entry of trade, capital and technology have been removed. The Government will keep the economy open to international competition and will keep Argentina's antidumping provisions in line with the respective GATT code. Moreover, the MERCOSUR treaty came into full effect in January 1995. As specified in the Treaty of Asunci6n, the Government -68 - eliminated most intra-MERCOSUR tariffs, dropped all other intra-market trade barriers, and established a common external tariff covering 85 percent of the positions in January 1995. * Financial Sector Reform: Financial sector reforms have been aimed at increasing financial deepening and the efficiency of financial intermediation. Following interest rate liberalization in 1987, and the elimination of directed credit by the Central Bank, the Government's strategy has been to increase depositor and investor confidence Under the Convertibility Law price stabilization, liberalized interest rates and tighter regulation and enforcement of liquidity, capital adequacy and provisioning requirements were the chief reforms that permitted financial deepening. Similarly, capital market reforms, including the elimination of transaction taxes on securities trading and improvements in the regulation of public offerings, encouraged the development of a major emerging market. During 1995, the authorities took significant measures to facilitate, through the establishment of two Fiduciary Funds, the restructuring of provincial and private banks affected by the hemispheric debt crisis. The Government is committed to maintain liberalized interest rates and to refrain from directing credit allocation of financial institutions, to further strengthen banking supervision, and deepen further the capital markets. 5. Since the hemispheric debt crisis, the Government's aim has been to sustain past achievements through deepening reforms. Foremost among these changes are a deepening of public and financial sector reforms that will strengthen confidence in sovereign debt, the financial sector, and the sustainability of the Convertibility Law. The following sections discuss these reforms as well as upcoming steps of the reform program. H. The Reform Agenda 6. The Government's program for 1996 is maintaining and deepening structural reforms. The Government is proceeding with the implementation of the administrative reform (Second Reform of the State). This reform should enhance the Executive's efficiency and predictability by improving its organization and performance. The reform will seek the merger or elimination of public entities and restructure or close inefficient programs and redundant agencies. 7. Following on labor reforms, bankruptcy, and workmen's compensation, the Government is also committed to proceed with the modification of regulations on collective bargaining contracts and associated employment risks. The Government is committed to improving the flexibility in the labor market by decentralizing and rescinding the perpetuity of collective bargaining agreements, reducing direct and indirect labor costs, and introducing I- 69 - Mxa 4xveicio.1Tili& contractual flexibility. The Government will proceed with a Health Insurance Reform that will open membership of health insurance plans to competition in order to improve the efficiency and equity of health services provision in Argentina. 8. The new economic team has begun work on a fiscal reform package. Some of the measures in this package, mostly on the revenue side, have already been implemented. The government reduced tax reimbursements to exporters and the government changed the income tax regulations so that the income tax would apply to these reimbursements. The government increased tariffs on capital goods imports from non-MERCOSUR countries (according to a MERCOSUR agreement) and simultaneously reduced subsidies to domestic capital goods producers. Another measure changed the way self-employed workers' income is calculated in order to increase by 30 percent the self-employed income base for determining social security contributions. 9. A number of additional measures have already passed Congress, including an increase in fuels taxes (not to be shared with the provinces), an increase in the top personal and corporate income tax rate from 30 to 33 percent, the creation of a tax on the sale of new cars, and the elimination of a number of exemptions on the corporate income tax. In addition, the government is implementing a program of tax administration reforms which will improve the efficiency of the tax agency and increase revenues. A broader revision of the national tax system is on the agenda for 1997. 10. On the expenditure side, the administrative and civil service reforms of the Second Reform of the State will produce savings in current expenditures of the central government. Steps have already been taken to begin to identify and eliminate fraudulent social security and health insurance payments. 11. Monetary policy will continue to be governed by the Convertibility Law, which requires full backing of the monetary base with international reserves. According to the law, U.S. dollar-denominated Government bonds held by the Central Bank can be used to cover part of the monetary base. Credit expansion by the Central Bank to the public sector and the financial sector will be limited in accordance with the Convertibility Law. 12. During 1996, the Central Bank will rebuild excess international reserves and introduce a swap arrangement with commercial banks abroad in order to strengthen its ability to absorb external shocks. The Central Bank will continue improving its banking supervisory capability and take measures to improve the stability of the financial system by proceeding vigorously with the restructuring of the private banking system and the restructuring/privatization of provincial banks, and by vigorously enforcing prudential regulation. * - 70 - 13. The overall program of provincial reforms discussed below should reduce distortions in the tax system and result in a permanent reduction in the size of the public sector that will improve the allocation of resources and increase overall economic efficiency. These and other reforms, together with the progressive extension of institutional changes to all governmental jurisdictions, will help to further strengthen the profound transformation of our country. As part of the provincial reforms, the Government is committed to the transfer of overdimensioned provincial pension funds to the reformed national system. HI. Public Sector Finances The Federal Government 14. The Argentine economy has recovered from the financial crisis of 1995. Bank deposits are above end-1994 levels, the level of foreign reserves has recovered, and the prices of Argentine stocks and bonds have risen substantially since the crisis. The economy registered positive real growth in the second and third quarters of 1996. Exports have continued to be strong and diversified, and the current account deficit for 1996 is expected to remain below 2 percent of GDP. Inflation continues to be one of the lowest in the world. 15. Despite these generally favorable circumstances, the fiscal situation deteriorated in the first half of 1996, largely due to tax revenues that grew more slowly than had been projected in the 1996 budget. The sluggish growth of tax revenues was due to slower than anticipated economic growth, lower inflation than expected, and delays in the elimination of a number of tax exemptions. On the expenditure side, discretionary expenditures surpassed budgetary and IMF Program limits by only a small margin. 16. Over the last five years, the Government has undertaken a major effort to improve revenues through an improved overall economic performance, the implementation of a much-broader and uniform VAT, and reduction of evasion. The Government is also committed to further improve the efficiency of the tax administration by improving substantially audits and controls. The increased reliance on more efficient taxes will continue to allow the Government to eliminate or reduce distortionary taxes while observing fiscal targets. Over the last twelve months, the Government obtained Congressional approval of laws broadening the coverage of the personal assets tax, limiting expenditures to social security payments, restructuring the public sector, and taking extraordinary fiscal measures to tighten public finances. Additionally, it implemented a tax moratorium generating a future flow of $4 billion in revenues over 30-35 months. In the longer term, the Government is committed to the introduction and implementation of tax reforms that will reduce labor taxes and VAT rates while strengthening the income tax system. - 71- n~~C/ &e C'nomi'a 17. Specific fiscal targets have been set. The government is committed to restricting the federal deficit for 1996 year to no more than $6 billion (excluding privatization revenues), or 2.1 percent of GDP. In 1997, the target federal deficit is $3 billion (excluding the transfer of provincial pensions and the initial costs of downsizing). At the provincial level, the aggregate deficit for 1996 is expected to fall to $1.1 billion, or 0.4 percent of GDP, due largely to wage bill reductions and the transfer of provincial employee pension programs to the national level of government. Progress in provincial fiscal adjustment, assisted by additional transfers of the provincial pensions, is expected to result in an aggregate provincial surplus of $300 million in 1997. The Provincial Governments 18. Throughout the 1980s, deficits generated by provincial governments contributed to the chronic instability of the Argentine public sector. Over the last four years, fiscal adjustment, essential to the recovery of the economy, has occurred mainly at the federal level. The increase in provincial government expenditures has exceeded the rise in revenues received from the Federal Treasury under the revenue sharing arrangements and from their own resources, resulting in operations primary deficits in the provinces of about 0.7 percent of GDP in 1993 and 1994. That deficit rose to an estimate 1.1 percent of GDP in 1995. At the same time that provincial governments have lagged in making necessary fiscal adjustments, their role within the economy has grown as the result of the decentralization of many federal functions, notably secondary education and public health, as well as security, water and sanitation, electricity, and other infrastructure. 19. Provincial deficits in 1993 and 1994 were largely financed by the regularization of debt owed by the National Administration to the provinces, by their share of the proceeds from the sale of YPF, and in 1994 by issues of Treasury bonds amounting to ARG$0.6 billion, secured by shared revenues. In 1995, arrears to creditors, suppliers, and in certain provinces to wages and pensions, increased. A major adjustment of provincial finances is expected for 1996, since sources of provincial deficit financing are now exhausted. 20. Since the early 1990s, the Federal Government has promoted structural reform in the provinces through two broad-range policy agreements: the Fiscal Pact of 1992 and the Fiscal Pact of 1993. The objectives of these pacts are to regularize the transfer of co-participated federal revenues; reduce unconditional discretionary transfers, that reward poor fiscal performers; improve local resource mobilization; modernize and downsize public administration, improve the provision of social services in health and education; privatize or close inefficient public enterprises, eliminate Central Bank rediscounts; promote privatization of provincial banks; and more generally improve the efficiency of allocation of resources in the provincial public sector. - 72 - pAn.tewia doe wonaomf,a 21. To reduce tax and other regulatory distortions and improve the fiscal situation and performance of the provinces, the Federal Government, in the context of the 1993 "Fiscal Pact" is seeking from provinces to: (a) eliminate highly distortionary taxes and substitute them with more efficient tax instruments; (b) deregulate local economies (especially in the areas of professional and transport services); and (c) privatize public enterprises. In return, the Federal Government agreed to increase minimum co-participated transfers; postpone, and possibly forego, certain provincial debt obligations; and assume responsibility for provincial pension systems which are deficitary in most provinces. In the framework of the Fiscal Pact, the provinces agreed to contribute to the financing of the national pension system with 15 percent of the coparticipated taxes. 22. In April 1993, a Transformation Fund funded chiefly by the World Bank was established to finance structural adjustment measures in the provinces, funded, inter alia, by further privatizations at the federal level. To gain access to the Transformation Fund, adjusting provinces must enter into an agreement with the Ministry of Interior taking measures aiming at: (a) improvements in local resource mobilization; (b) improvements in the efficiency of expenditures; and (c) reduction in the size of the provincial banking sector. 23. The Federal Government is already working with the provinces on the formulation of a medium-term strategy to put their finances on a sound footing and provide a basis for the continued development of private sector activity. The process of adjustment aims to reach a sharp reduction of the provincial deficit in 1996 through, inter alia, a further cut in current expenditures and improvements in the administration of the provinces' own tax base. Consolidated Public Finances 24. To sustain low levels of inflation and the stability of the financial system, the federal authorities are committed to a continuous and significant improvement of consolidated (federal and provincial) fiscal performance in 1997 and 1998 from 1996 levels. 25. With the acceleration of economic growth in 1997 and 1998, fiscal performance of the Federal Government in 1997, including all expenditures related to structural reforms, will not exceed US$4.5 billion. By 1998 the Federal Government is committed to achieving budgetary balance (including expenditures related to structural reforms). 26. To further strengthen fiscal accountability at the provincial level, the Federal Government will actively seek and continue supporting the standardization of budgetary reporting from all provinces, including both current and capital expenditures, and their financing, according to the principles contained in the Law of Financial Management and Performance Control (Law N. 24.156). Available provincial financial statements will be -73 - made public by the Federal Government, which will also present, on an annual basis, the financial condition of the consolidated public sector. IV. The Pension Reform Program 27. Argentina has recently implemented a major pension reform. With the promulgation in October 1993 of Law N. 24.241 that created the new Integrated Pension System, Argentina moved from the former pay-as-you-go pension system to a new mixed public/private structure. The new system, which became effective on July 15, 1994, is composed of: (i) a first pillar financed by employers' contributions which provides a basic universal pension and is publicly managed; and (ii) a second pillar financed by employees' contributions which offers employees the option to invest in a privately managed defined contribution system, based on individual capitalization accounts or in a publicly managed defined-benefit system. 28. The objective of the pension reform was to provide adequate long-term financing to achieve the following: * stimulate individual savings, encouraging workers to put aside part of their present earnings to ensure a future standard of living once they retire; * provide a safety net to low income individuals who have very low savings capacity; and * provide insurance to working individuals against contingencies such as incapacity or death. 29. Up to now, more than 65 percent of employees have chosen the privately managed individual capitalization accounts. The Government expects that increasing number of employees will chose to put their contributions in capitalization accounts and that the public system will limit its role to that of providing a safety net. 30. At the moment, however, the bulk of the pensions being paid correspond to the old pay-as-you-go system. Additional outlays are required as US$7.5 billion in bonds issued in 1991, in recognition of past debts to pensioners, begin to mature. The National Social Security Administration (ANSeS) is responsible for both the old pension system and the public component of the new pension system, as well as some other provisional schemes. Currently, ANSeS requires large subsidies from the Government to cover its expenditures. However, the Government has taken and plans to take important measures to reduce the level of subsidies. Some of the most important measures on the expenditure side are: 94xa y eoxwiciai1&CO * passage in March 1995 of the Social Security Solidarity Law which establishes maximum limits for all beneficiaries, eliminates the automatic adjustment of benefits, and applies the provisions of the Convertibility Law to the determination of pensions and modifies the associated legal proceedings. It also establishes a limit on pension outlays; and * initiation of a major institutional restructuring of ANSeS to: (i) eliminate irregularities; (ii) increase accountability; (iii) reduce operating costs; and (iv) improve procedures and processes and establish security and program safeguards. 31. Among the most important initiatives underway in ANSeS to detect irregularities are: (i) the review of beneficiary files to validate existing records and to purge them of incorrectly calculated benefits; (ii) the follow up of the recent Census of Beneficiaries; (iii) the review of contributor's files of persons within 6 months of retirement; and (iv) the review of incapacity claims where potential for error or fraud has been detected. ANSeS estimates that the potential savings from reducing fraud could be over US$300 million per year. 32. The Government is also taking measures to reduce the high level of evasion of social security taxes, as part of its efforts to reduce tax evasion at all levels. 33. Even if we are confident that we will be able to reduce ANSeS' deficit, we are aware that the public pension system could be further improved to minimize the future cost of the system to the national budget. To address this issue, ANSeS will commission the elaboration of regular actuarial reviews that will provide the basis for consensus building on how to improve the financial outlook of the public pension system. V. Program to Reform the Provincial Pension Funds and the National Social Security Administration 34. Most of the provincial employees' pension schemes remain outside ANSeS' administration. Under the Fiscal Pact of August 1993, our Government agreed to accept the transfer of provincial pension funds to the national system of any province that passes a law authorizing the transfer and signs a specific transfer agreement with the Government. We give high priority to the transfer of the provincial pension funds to the national system for several reasons. The transfer would represent an important fiscal relief for the provinces, because these funds account for about 30 percent of the consolidated provincial deficit. The transfer will also benefit the consolidated social security system by harmonizing the provincial pension benefits and contributions with those of the newly integrated national pension system, and by extending to them the provisions of the Social Security Solidarity Law. The transfer would also extend to provincial public employees the opportunity to - 75 - chose between the a capitalized private fund and the publicly managed defined benefit system. 35. Nevertheless, in the short to medium term, the transfer will increase the deficit of the national system. We estimate that this deficit would be initially substantial, but would decrease and disappear in about eight years. However, if left in the provinces, the deficits of the pension funds would increase every year. The total deficit to be absorbed by the national system over an eight year period could be of the order of US$5 billion. 36. The transfer of the provincial pension funds would increase ANSeS' contributors by 33 percent and beneficiaries by 15 percent, requiring a strong effort by ANSeS to validate the provincial files of contributors and beneficiaries. We are convinced that the ability of ANSeS to succeed in this effort will be closely linked to the success of its own reform process. 37. The pension funds of the Municipality of the City of Buenos Aires and of the provinces of Catamarca and Santiago del Estero were transferred to the national system in 1994. Since early 1996, another six provinces--Jujuy, La Rioja, Mendoza, Rio Negro, Salta and San Juan--have transferred their pension funds to the national system. Several additional provinces are currently negotiating the transfer of their pension funds. These transfers are already generating an important additional cost to ANSeS. 38. The Provincial Pension Reform Adjustment Loan. The Government is asking the World Bank and the Interamerican Development Bank for US$620 million in loans to help finance part of the initial deficit generated by the transfer and to support ANSeS' restructuring. By accepting the transfer of the provincial pension funds, the Federal Government assumes a commitment with the provincial pensioners that it will pay their benefits. To fulfill this commitment, the Federal Government will take adequate fiscal measures to finance the deficit generated by the transfer as long as the transfer generates deficits for ANSeS. 39. The Government views the transfer of the provincial pension funds to the national system as part of the Government's support for the provinces' structural and financial reforms. For this reason, the Government will use the proceeds of the Provincial Pension Reform Loan to cover the deficit generated by the transfer of the pension funds of provinces that have: * a good track record on structural reforms, including privatization of public enterprises and banks; - 76 - Qffini.stei&~ de Wcnm' * satisfactory progress in its compliance with commitments under the "Fiscal Pact" of August 1993 concerning tax and regulatory reforms; * subscribed a Transfer Agreement, ratified by its legislature, transferring to the Federal Government the capacity to legislate in social security matters. 40. As a result of the transfer, the provinces are expected to: * reduce the ratio of personnel expenditures to net current provincial income; and * reduce their fiscal deficit in at least as much as the fiscal relief provided by the transfer of their pension funds. 41. In the context of this loan, the Federal Government is committed to ongoing policies and to: * maintain the sound macroeconomic policies referred to in Section I and II of this letter; * include explicitly the budgetary allocations related to the transfer of the provincial pension funds in the budgets for 1997 and 1998 to be agreed with the IMF, which will be exhibiting a decline and eventual elimination of their deficit, and make the necessary budgetary allocations to finance ANSeS' needs for the 1996/1998 period, including the deficits generated by the absorption of the provincial pension funds; * establish a separate account in which local currency funds equivalent to the proceeds from the World Bank loan will be deposited to be used exclusively to meet ANSeS' deficits resulting from the transfer of the provincial pension funds of provinces that meet the loan's eligibility criteria and tranche conditions; * monitor and enforce provincial compliance with the Loan's eligibility and transfer conditions. * cause ANSeS and the provinces to subscribe Transfer Agreements with provisions to ensure that provinces dismantle their pension systems, and do not compensate for loss benefits; and * continue supporting the restructuring of ANSeS. *- 77 - Qffiiecia~ W'e Wonomc'a V. World Bank and Interamerican Bank Support 42. The above presentation demonstrates the depth of the Government's overall public sector reform program. The Government believes that financial assistance from the World .2 Bank and the Interamerican Development Bank is essential to implement the transfer of the provincial pension funds to the national system. This transfer would improve the fiscal balance of the provincial governments as well as Argentina's consolidated social security system. Sincerely yours, Dr~~~~ ET- ~9JA' ~LANDjEZ ECST O WO1AIO,A V Cla Y Ull~CO PUUI ANNEX VII STATUS OF BANK GROUP OPERATIONS  78 MOP Schedule D Generated: November 5, 1996 Status of Bank Group Operations in Argentina IBRD Loans and IDA Credits in the Operations Portfolio Difference Original Amount in US$ Millions Between actual Loan or Fiscal and expected Project ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed Disbursements a/ Number of Closed Loans/credits: 48 AR-PA-5945 L26410 1986 GOVERNMENT WATER SUPPLY 60.00 0.00 20.03 1.64 21.67 AR-PA-5968 L28540 1987 SEGBA SEGBA V 276.00 0.00 0.00 68.45 68.45 AR-PA-5977 L32810 1991 ARGENTINE REPUBLIC WTR SUPPLY II 100.00 0.00 0.00 81.59 60.99 AR-PA-6005 L32800 1991 REPUBLIC OF ARGENTINA PROVINC DEV PROJ 200.00 0.00 0.00 80.96 79.46 AR-PA-6009 L32970 1991 GOVT OF ARGENTINA INA AG SERVCES4INST DEV 33.50 0.00 0.00 6.17 2.77 AR-PA-6034 L34600 1992 GOVERNMENT TAX ADMIN II 20.00 0.00 0.00 2.83 2.42 AR-PA-6003 L36110 1993 GOVT OF ARGENTINA INA RD MAINT & REHAB SCT 340.00 0.00 0.00 187.25 123.40 AR-PA-6036 L35200 1993 GOVERNMENT YACYRETA II 300.00 0.00 0.00 4.02 3.26 AR-PA-6051 L35210 1993 ARGENTINA FLOOD REHABILITATION 170.00 0.00 0.00 16.24 16.24 AR-PA-598 L37090 1994 REP OF ARGENTINA A CAPITAL MKT DEVT 500.00 0.00 0.00 483.88 -16.12 AR-PA-6025 L36430 1994 GOVT OF ARGENTINA INA MTNAL CHILD HLTH & N 100.00 0.00 0.00 66.68 26.68 AR-PA-6062 L37100 1994 MIN OF ECONOMY CAPITAL MKT TA 8.50 0.00 0.00 5.98 3.08 AR-PA-40826 L38780 1995 ARG REPUBLIC PROV.BANK PRIV. 500.00 0.00 0.00 166.00 166.00 AR-PA-5992 L37940 1995 GOVT OF ARGENTINA INA SECONDARY ED I 190.00 0.00 0.00 180.43 83.63 AR-PA-6018 L38770 1995 ARGENTINE REPUBLIC PROV DEVT II 225.00 0.00 0.00 225.00 15.00 AR-PA-6035 L38360 1995 REP OF ARGENTINA PROV.REFORM 300.00 0.00 0.00 100.37 .37 AR-PA-6060 L38600 1995 GOVT OF ARGENTINA MUNIC DEVT II 210.00 0.00 0.00 202.81 -3.43 AR-PA-34091 L39210 1996 REP OF ARGENTINA HIGHER ED REFORM 165.00 0.00 0.00 158.54 33.54 AR-PA-35495 L39570 1996 SEC.OF SOC.DEVIT (OFFICE SOCIAL PROTECTION 152.00 0.00 0.00 55.13 8.03 AR-PA-37049 L39580 1996 GOVT OF ARGENTINA PUB.INV.STRENGTHG 16.00 0.00 0.00 16.00 1.40 AR-PA-38883 L39600 1996 REPUBLIC OF ARGENTINA ENT.EXPORT DV. 38.50 0.00 0.00 35.99 7.25 AR-PA-40904 L39260 1996 REPUBLIC OF ARGENTINA BANK REFORM 500.00 0.00 0.00 333.00 250.01 AR-PA-40909 L40020 1996 REP. OF ARGENTINA H. INSURANCE REFORM 250.00 0.00 0.00 100.00 -108.31 AR-PA-40909 L40030 1996 REP. OF ARGENTINA H. INSURANCE REFORM 100.00 0.00 0.00 100.00 0.00 AR-PA-45687 L40040 1996 REP. OF ARGRNTINA H.INSURANCE TA 25.00 0.00 0.00 23.17 -1.83 AR-PA-6030 L39310 1996 REPUB OF ARGENTINA PROVCL HLTH SCTR DEV 101.40 0.00 0.00 98.08 4.88 AR-PA-6040 L39480 1996 GOVERNMENT FORESTRY/DV 16.00 0.00 0.00 15.70 .50 AR-PA-6055 L39270 1996 GOVT. OF ARGENTINA MINING SCTR DEVT 30.00 0.00 0.00 22.29 -5.01 AR-PA-6057 L39710 1996 GOV'T OF ARGENTINA SECNDARY ED 2 115.50 0.00 0.00 115.50 13.90 AR-PA-40808 L40850 1997 GOA N.FOREST/PROTC 19.50 0.00 0.00 19.50 0.00 AR-PA-5980 L40930 1997 GOVT OF ARGENTINA PROV ROADS 300.00 0.00 0.00 300.00 0.00 Total 5,361.90 0.00 20.03 3,273.22 Active Loans Closed Loans Total Total Disbursed (IBRD and IDA): 2,068.65 5,526.89 7,595.54 of which has been repaid: 151.01 2,695.63 2,846.64 Total now held by IBRD and IDA: 5,190.86 2,831.47 8,022.33 Amount sold 0.00 12.79 12.79 Of which repaid : 0.00 12.79 12.79 Total Undisbursed : 3,273.22 .21 3,273.43 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Rating of 1-4: see OD 13.05. Annex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system will be used (HS = highly Satisfactory, S = satisfactory, U = unsatisfactory, HU = highly unsatisfactory) : see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. c. Following the FY94 ARPP, "Implementation Progress" will be reported here.  ANNEX VIII STATUS OF IFC INVESTMENTS  79 MOP Schedule D Generated: November 5, 1996 Argentina STATEMENTOF lIFC's Committed and Disbursed Portfolio As of 09/30/96 In Millions US Dollars Committed Disbursed ---- IEFC-- --------- - -------I1FC --- - ------- FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1960 Acindar 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1977 Alpargatas 0.00 0.00 0.00 0.00 0.00 0,00 0.00 0.00 1978 Minetti 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1981 Minetti .84 0.00 0.00 0.00 .84 0.00 0,00 0.00 1984 Alpargatas 0.00 1.05 0.00 0.00 0.00 1.05 0.00 0.00 1985 ROPASA 0.00 .05 0.00 0.00 0.00 .05 0.00 0.00 1986 Alpargatas 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1986 Minetti .30 0.00 0.00 1.48 .30 0.00 0.00 1.48 1987 BGN-Bolland 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1987 BGN-CENCOSUD .13 0.00 0.00 0.00 .13 0.00 0.00 0.00 1987 BGN-CILSA .03 0.00 0.00 0.00 .03 0.00 0.00 0.00 1987 BGN-Flichman .04 0.00 0.00 0.00 .04 0.00 0.00 0.00 1987 BGN-Longvie .05 0.00 0.00 0.00 .05 0.00 0.00 0.00 1987 BGN-Noroeste .07 0.00 0.00 0.00 .07 0.00 0.00 0.00 1987 BGN-Sebastian .13 0.00 0.00 0.00 .13 0.00 0.00 0.00 1987 BGN-TBR .25 0.00 0.00 0.00 .25 0.00 0.00 0.00 1987 BGN-Vandenfil .07 0.00 0.00 0.00 .07 0.00 0.00 0.00 1987 BRLP 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 1987 Minetti .59 0.00 0.00 2.96 .59 0.00 0.00 2.96 1987 Terminal 6 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1987 BGN-Valley .07 0.00 0.00 0.00 .07 0.00 0.00 0.00 80 MOP Schedule D Generated: November 5, 1996 Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1987 BGN-Tevycom .04 0.00 0.00 0.00 .04 0.00 0.00 0.00 1987 BGN-Moldeada .13 0.00 0.00 0.00 .13 0.00 0.00 0.00 1987 BGN-COLORTEX .13 0.00 0.00 0.00 .13 0.00 0.00 0.00 1988 Alpargatas 1.70 0.00 1.37 0.00 1.70 0.00 1.37 0.00 1988 Bunge y Born 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1989 Astra CAPSA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1989 Banco Frances 5.39 0.00 0.00 1.43 5.39 0.00 0.00 1.43 1989 BGN-Algodonera .38 0.00 0.00 0.00 .38 0.00 0.00 0.00 1989 BGN-Bolland .31 0.00 0.00 0.00 .31 0.00 0.00 0.00 1989 BGN-Ferrum 1.17 0.00 0.00 0.00 1.17 0.00 0.00 0.00 1989 BGN-Flichman .23 0.00 0.00 0.00 .23 0.00 0.00 0.00 1989 BGN-Genaro .96 0.00 0.00 0.00 .96 0.00 0.00 0.00 1989 BGN-Parafina .88 0.00 0.00 0.00 .88 0.00 0.00 0.00 1989 BGN-Willmor .96 0.00 0.00 0.00 .96 0.00 0.00 0.00 1989 ROB-COMESI .47 0.00 0.00 0.00 .47 0.00 0.00 0.00 1989 ROB-Fracchia .28 0.00 0.00 0.00 .28 0.00 0.00 0.00 1989 ROB-INTA .47 0.00 0.00 0.00 .47 0.00 0.00 0.00 1989 Terminal 6 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1989 BGN-Interpack .35 0.00 0.00 0.00 .35 0.00 0.00 0.00 1989 BGN-FRIGOTOBA .18 0.00 0.00 0.00 .18 0.00 0.00 0.00 1990 CIP 0.00 .08 0.00 0.00 0.00 .08 0.00 0.00 1990 Petroken 9.17 0.00 5.00 4.58 9.17 0.00 5.00 4.58 1990 Terminal 6 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 Astra CAPSA 11.57 0.00 0.00 20.42 11.57 0.00 0.00 20.42 1991 BCA 2.20 0.00 0.00 2.80 2.20 0.00 0.00 2.80 81 MOP Schedule D Generated: November 5, 1996 Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1991 Minetti .74 0.00 0.00 0.00 .74 0.00 0.00 0.00 1991 ROB-Alimenticia .41 0.00 0.00 0.00 .41 0.00 0.00 0.00 1991 ROB-Emprigas .56 0.00 0.00 0.00 .56 0.00 0.00 0.00 1991 ROB-Guilford .27 0.00 0.00 0.00 .27 0.00 0.00 0.00 1991 ROB-Jugos .13 0.00 0.00 0.00 .13 0.00 0.00 0.00 1991 ROB-Longvie .56 0.00 0.00 0.00 .56 0.00 0.00 0.00 1991 ROB-Surfactan .09 0.00 0.00 0.00 .09 0.00 0.00 0.00 1991 ROB-Mendoza .56 0.00 0.00 0.00 .56 0.00 0.00 0.00 1991 ROB-Interpack .50 0.00 0.00 0.00 .50 0.00 0.00 0.00 1992 Astra CAPSA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1992 Bridas 26.57 0.00 15.00 43.43 26.57 0.00 15.00 43.43 1992 BRLP 11.91 0.00 0.00 2.63 4.38 0.00 0.00 2.63 1992 FEPSA 11.35 0.00 0.00 14.13 9.15 0.00 0.00 11.73 1992 Malteria Pampa 7.59 0.00 0.00 14.62 7.59 0.00 0.00 14.62 1992 MBABolsa 0.00 .16 0.00 0.00 0.00 .16 0.00 0.00 1992 Oleaginosa Oeste 7.64 0.00 5.00 11.83 7.64 0.00 5.00 11.83 1992 Rioplatense 6.33 1.00 0.00 2.00 6.33 1.00 0.00 2.00 1992 San Jorge 10.00 27.00 0.00 23.33 10.00 0.00 0.00 23.33 1993 Argentina Equity 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 1993 APSA 0.00 19.47 0.00 0.00 0.00 19.47 0.00 0.00 1993 Bunge y Born 4.79 0.00 0.00 36.09 4.79 0.00 0.00 36.09 1993 Cadipsa 9.29 0.00 5.00 11.70 9.29 0.00 5.00 11.70 1993 Malteria Pampa 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1993 Minetti 1.95 0.00 0.00 0.00 1.95 0.00 0.00 0.00 82 MOP Schedule D Generated: November 5, 1996 Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1993 Molinos 0.00 4.31 0.00 0.00 0.00 4.31 0.00 0.00 1993 Nuevo Central 8.13 3.00 0.00 13.75 8.13 3.00 0.00 13.75 1993 Yacylec 9.36 5.04 0.00 36.13 9.36 5.04 0.00 36.13 1994 Aceitera 15.00 10.00 0.00 15.00 15.00 10.00 0.00 0.00 1994 Aguas 36.53 7.00 0.00 107.60 36.53 7.00 0.00 107.60 1994 Alpargatas 12.69 0.00 10.00 20.71 12.69 0.00 10.00 20.71 1994 BGN 12.00 0.00 3.00 0.00 12.00 0.00 3.00 0.00 1994 Cia. Combustible 19.46 15.00 0.00 32.80 19.46 15.00 0.00 32.80 1994 EDENOR 21.13 0.00 15.00 99.25 21.13 0.00 15.00 99.25 1994 La Maxima 0.00 10.19 0.00 0.00 0.00 10.19 0.00 0.00 1994 LBAR 0.00 1.17 0.00 0.00 0.00 .64 0.00 0.00 1994 Molinos 0.00 1.24 0.00 0.00 0.00 1.24 0.00 0.00 1994 Petroken 17.50 0.00 0.00 2.50 17.50 0.00 0.00 2.50 1994 Quilmes 13.43 0.00 0.00 12.50 13.43 0.00 0.00 12.50 1994 MASISA 10.31 0.00 0.00 0.00 10.31 0.00 0.00 0.00 1994 LBAV 0.00 3.62 0.00 0.00 0.00 3.62 0.00 0.00 1995 Acindar 15.00 0.00 10.00 20.00 6.43 0.00 10.00 8.57 1995 Aguas 40.00 0.00 0.00 173.00 28.20 0.00 0.00 121.80 1995 Banco Roberts 0.00 0.00 20.00 0.00 0.00 0.00 20.00 0.00 1995 Bridas 20.00 10.00 0.00 40.00 20.00 10.00 0.00 40.00 1995 Cadesa 20.00 0.00 8.00 0.00 20.00 0.00 8.00 0.00 1995 CEPA 13.00 0.00 0.00 4.20 13.00 0.00 0.00 4.20 1995 EDENOR 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1995 Kleppe/Caldero 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 1995 La Maxima 0.00 0.00 4.00 0.00 0.00 0.00 3.96 0.00 83 MOP Schedule D Generated: November 5, 1996 Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1995 Mastellone 38.57 0.00 0.00 35.00 38.57 0.00 0.00 0.00 1995 Nahuelsat 30.00 5.00 0.00 0.00 30.00 5.00 0.00 0.00 1995 SanCor 20.00 0.00 20.00 30.00 20.00 0.00 20.00 30.00 1995 Socma 24.99 0.00 0.00 0.00 24.99 0.00 0.00 0.00 1995 Terminales Port. 10.00 2.00 0.00 0.00 7.00 1.40 0.00 0.00 1995 Tower Fund Mgr 0.00 .15 0.00 0.00 0.00 .05 0.00 0.00 1995 Tower Fund 0.00 20.00 0.00 0.00 0.00 6.82 0.00 0.00 1995 SIDECO 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1996 Aguas 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 Alpargatas 15.00 0.00 0.00 81.00 10.00 0.00 0.00 81.00 1996 APSA 0.00 0.00 2.50 0.00 0.00 0.00 2.50 0.00 1996 Banco Galicia 30.00 0.00 0.00 200.00 30.00 0.00 0.00 200.00 1996 Brahma - ARG 18.50 0.00 0.00 33.00 18.50 0.00 0.00 33.00 1996 Grunbaum 8.00 0.00 2.00 0.00 8.00 0.00 2.00 0.00 1996 Malteria Pampa 6.00 0.00 1.00 0.00 6.00 0.00 1.00 0.00 1996 Minetti 10.00 0.00 0.00 30.00 4.10 0.00 0.00 12.30 1996 Terminal 6 10.50 0.00 0.00 6.50 10.00 0.00 0.00 6.00 1996 Transconor 22.50 0.00 20.00 152.00 22.50 0.00 20.00 152.00 1996 Zanon 14.00 0.00 6.00 0.00 7.00 0.00 6.00 0.00 Pending Commitments 1996 * AGUAS III - INC 15.00 0.00 0.00 75.00 1996 * BANSUD CL 25.00 0.00 0.00 0.00 1996 * CCBA ARG B INC 0.00 0.00 0.00 8.00 1996 * DIADEMA FIELD 15.00 0.00 5.00 40.00 84 MOP Schedule D Generated: November 5, 1996 Committed Disbursed IFC IFC FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic Approval 1994 * EDENOR INCREASE 0.00 0.00 0.00 8.00 1996 * EDESUR II BLINC 0.00 0.00 0.00 108.00 1996 * EDESUR REHAB 40.00 0.00 0.00 80.00 1993 * FEPSA (II) 0.00 0.00 0.00 4.00 1996 * FRANCES CL 40.00 0.00 0.00 0.00 1997 * MILKAUT 20.00 0.00 0.00 5.00 1996 * MINETTI EM 0.00 0.00 10.00 0.00 1996 * NEUQUEN BASIN 0.00 26.40 0.00 0.00 1995 * R-E-C TOLL H'WAY 20.00 0.00 0.00 61.00 1996 * REFISAN 20.00 0.00 0.00 30.00 1996 * TRANSCONOR II 5.00 0.00 0.00 0.00 1994 * TUCUMAN 0.00 .30 0.00 0.00 1997 * VICENTIN 25.00 0.00 0.00 10.00 1996 * WESTERN ACCESS 30.00 0.00 5.00 130.00 ANNEX IX ARGENTINA AT A GLANCE  - 85 - Argentina at a glance Latin Upper- POVERTY and SOCIAL America mldle- -- --- - Argentina & Carib. Income Development diamond' Population mid-1995 (millionsl 34.6 480 440 GNP per capita 1995 (USSi 7,770 3.300 4 300 L-Ie epecancv GNP 1995 (billions USS) 268 8 1 584 1.892 Average annual growth, 1990-98 Population (%1 12 18 1 7 C.r1P Grrss Labor force { % 20 24 2 1 Most recent estimate (latest year available since 1989) cap.la enrollmen, Poverty. headcouni index (% of populabon) 26 Urban popujalion % of lotal population) 88 74 74 Life expectancy a] billh (years) 73 68 69 Infant mortality (per 1.000 ive births) 22 41 36 Access to safe v*aler Child malnutrition (% of chilrn under 6) 5 Access to safe waler (% orpopulation) 64 81 89 Illiteracy (% of population age 15+) 4 13 13 Argrin3 Gross primary enrollment (% of school-age populahon) 107 110 107' Male 108 . - Upper rnidle-incorne group Female 107 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1994 1995 Economic ratios' GDP (bllions USS) 52 4 88.4 280 5 2760 Gross domestic investmentlGDP 294 17.6 199 17 6 Openness &f economv Exports of goods and non-factor services/GDP 5 8 11 7 6 8 8 9 Gross domesdc savIngsvGDP 29 3 23 1 176 18 0 Gross national savingsiGDP 26.9 165 16 6 170 Current account balance/GDP -2.5 -1.1 -3 3 -0 8 Interest paymentslGDP 0 9 5 0 1 3 18 Savings - Invesiment Total debuGDP 14 7 57.6 276 303 Total debt servicetexports 44 7 601 326 336 Present value of debt/GDP .. .. 244 Present value of debt'eports . .. 3258 Indeuledness 1975-84 1985-95 1994 1995 1996-04 (average annual growth) - Argerihna GDP 10 2 8 7.4 -4 4 4u9 GNP per capita -15 2 0 5 9 -52 3 7 Exports of goods and rits 5.1 5 9 148 257 so STRUCTURE of the ECONOMY (% of GDP) 1975 1985 1994 1995 Growth rates of output and investment (%) Agriculture 6.6 7.6 4.9 .. 40 Industry 50.1 39.3 30.1 20- Manufacturing 38.2 29.6 20.0 0 Services 43.3 53.1 65.1 91 92 93 94 .20 Private consumption 58.1 66.5 69.2 69.6 -40 General govemment consumption 12.6 10.4 13.3 12.4 - GDI GDP Imports of goods and non-factor services 6.0 6.3 9.2 8.7 1976-84 1985-95 1994 1995 (average annual growth) Growth rates of exports and Imports (%) Agriculture 1.7 1.6 3.8 2.1 so industry -1.1 2.7 6.5 -6.0 Manufacturing -1.4 1.4 4.2 -6.5 Services 2.5 3.1 8.5 -3.4 40 20 Private consumption General government consumption .. .. . . 92 93 9 Gross domestic investment -2.4 5.4 19.0 -15.9 -20 9 Imports of goods and non-factor services 4.5 14.0 20.9 -10.6 Exports Imports Gross national product 0.0 3.4 6.9 -5.0 o Note: 1995 data are preliminary estimates. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. - 86 - Argentina PRICES and GOVERNMENT FINANCE 1975 1985 1994 1995 Domestic prices Inflation (%) (% change) 4,000 Consumer prices 182.6 .. 3.9 1.6 3.o0o Implicit GDP deflator 198.2 618.0 1.8 2.5 2,000 Government finance 1,000 (% OfGDP) 0 Current revenue .. .. 16.6 16.5 go 91 92 93 94 95 Current budget balance .. .. 0.7 -0.1 - GDP def. ----CPI Overall surplus/deficit .. .. 0.0 -1.0 TRADE 1975 1986 1994 1996 (millions US$) Export and Import levels (mill. USS) Total exports (fob) 2,961 8,396 15,839 20,968 25,00 Food .. .. 1,323 1,956 Meat 1,546 1,572 20,000 Manufactures .. .. 8,059 10,635 isooo Total imports (cio 3,947 3,814 21,590 20,124 1o'a0o Food .. .. .. .. Fuel and energy .. .. 591 628 'aco Capital goods .. .. 6,039 4,754 0 Export price index (1987=100) . .. 118 124 s s0 91 92 93 94 95 Import price index (1987=100) .. .. 115 120 O Exports Dimports Terms of trade (1987=100) .. .. 102 103 BALANCE of PAYMENTS 1975 1985 1994 1995 (mlilons US$) Current account balance to GOP ratio (%) Exports of goods and non-factor services 3,498 10,039 18,507 23,857 2 Imports of goods and non-factor services 4,324 5,285 25,591 23,724 Resource balance -826 4,754 -7,084 133 1 Net factor income -466 -5,706 -2,547 -2,842 0 Net current transfers 6 0 320 432 , 90 9 2 93 94 Current account balance, 2 before official transfers -1,286 -952 -9,310 -2,277 Financing items (net) 208 2,200 9,868 2,208 Changes in net reserves 1,078 -1,248 -558 69 -4 Memo: Reserves including gold (mill. USS) 848 4,703 19,758 19,888 Conversion rate (IocalUS$) 3.7E-10 6.0E-05 1.0 1.0 EXTERNAL DEBT and RESOURCE FLOWS 1975 1988 1994 1995 (millons USS) Composition of total debt, 1995 (mill. USS) Total debt outstanding and disbursed 7,723 50,946 77,457 83,724 IBRD 341 700 4,109 4,913 G A IDA 0 0 0 0 7171 4913 C 6131 Total debt service 1,603 6,209 6,847 8,609 D IBRO 43 114 709 565 4501 IDA 0 0 0 0 E Composition of net resource flows 11428 Official grants 0 6 16 20 Official creditors 58 217 715 851 Private creditors -111 2,350 5,805 1,993 Foreign direct investment 0 919 1,200 3,900 F Portfolio equity 0 0 1,205 294 49580 World Bank program Commitments 0 0 509 2,272 A - IBRD E - Bilateral Disbursements 19 144 547 941 B - IDA D - Other multilateral F - Private Principal repayments 17 68 425 259 C -IMF G - Short-term Net flows 1 75 122 682 Interest payments 26 46 284 306 Net transfers -25 30 -162 376 International Economics Department 8/20/96 IBRD 26842 70 BOLIVIA 5 oo PARAGUAY San Salvador 0 de Jujay Saito eTucuman Santgo Resistencta BRAZ IL 0 de( Ester (0' Posadas Catamarca o La Rio®aD 30 30- Santa Fe San Juan ; Cordoba 0 Paran6 Mendoza 0 0 San Lu,s Rosano URUGUAY BUENOS AIRES® La Pilat Santo Rosa Mar del Plato Bohia Bianca NeuquenD U ARGENTI NA Carmende 0 Selected Cities Potogonesi Viedma E Province Capitals National Capital Rawson( Province Boundaries International Boundaries MILES 0 100 200 300 400 500 KILOMETERS 0 200 400 600 800 Rio Gallegas The boundaries, colors, 50 denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, huaia or any endorsement or acceptance of such boundaries. BO 70 60 SO APR'IL 995   IMAGING Report No: P- 6967 AR Type: PR