Argentina - Provincial Agricultural Development

Report No. PIC2510 Project Name Argentina-Provincial Agricultural Development (@) Region Latin America and Caribbean Sector Natural Resources/Environment/RuralPoverty Project ID ARPA6010 Borrower The Argentine Republic Implementing Agency Secretariat of Agriculture,Livestock, Fisheries and Food (SAGPyA) Paseo Colon 922, Office 247 Buenos Aires-Argentina Telephone (54-1) 349-2068/73 Fax (54-1) 349-2069 Date PID Prepared April 21, 1997 Appraisal Date February 1996 Board Date April 22, 1997 (approved) 1. Country and Sector Background. In 1991, Argentina initiated a reform program that streamlined the public sector, transformed the monetary system and restructured its foreign debt, and thus restored confidence in the market as the primary force behind economic growth and monetary stability. As the mainstay of this program, a fixed exchange rate regime (Convertibility Plan) was established in 1991, under which the monetary base has to be fully backed by international reserves. In addition, the reform process regularized relations between the Federal and provincial governments supported by two Agreements (Pacto Federal and Pacto Fiscal), signed in 1992 and 1993 respectively, through which provinces pledged to reduce the size of their public sector and balance their fiscal situation. At the same time, the Federal Government pledged its assistance to this process by implementing a broad incentive program and establishing an automatic system for sharing with the provinces the tax revenues collected at the Federal level (Ley de Coparticipacion). 2. As a result, Argentina dramatically reduced inflation (from an annual rate of 4,023% in 1989 to a rate of 3.9% in 1994) and sustained an average annual real economic growth rate of 5.5 percent during 1991-94. Nevertheless, following the fast expansion of the first four years of the program, as a consequence of the repercussions of the Mexican financial crisis, the Argentine economy suffered a recession in 1995 and GDP declined approximately 4.69 during the year (with an inflation of about 1.6%). By the fourth quarter of 1995, the indications were clear that the economic deterioration had ceased, and that Argentina was pulling out of the recession. The 1995 economic crisis was the first real test and a validation of the Convertibility Plan and, more importantly, a clear demonstration to investors, domestic and international, of Argentina's commitment to preserve it. Preliminary results for 1996 confirmed that the recession was over.  Real GDP growth rate for 1996 is estimated to have reached 4 percent, with inflation during this year almost nil (CPI increased by 0.2t in 1996). Lagging fiscal revenues showed signs of improvements, reflecting the increase in economic activity. However, due to a relatively higher increase in imports with respect to exports, trade balance has been reduced to US$250 million in 1996. 3. The agricultural sector has traditionally played a central role in the national economy. Presently, it contributes only around 5t of GDP (down from around 15t in the late 1980s), provides about 12t of total employment (plus another 12t in farm-related manufacturing and transportation, and 10. in related services), and about 70- of export revenues from agricultural products or manufactured products of agricultural origin. This decreasing contribution of the sector has been the consequence of relatively lower rates of growth compared to other sectors of the economy. During the period 1985-94, agricultural growth has lagged behind the rest of the economy, reaching an annual average rate of only 1.6 percent during this period (3.89 in 1994), compared with 2.7 percent for industry (6.5w in 1994) and 3.1 percent for services (8.5w in 1994). In part, this resulted from decades of discriminatory policies against the sector, including heavy export taxation and an overvalued currency, which contributed to reduced investments in the sector and resulted in a land-extensive production system. During the early 1990s, this trend was reinforced by exceptionally low international prices for major commodities, as well as changes in the structure of relative prices in the economy (higher prices for non-tradables) adversely affecting many small and medium-sized farms. However, the situation has been changing in the last few years as a consequence of the opening up of the economy, the elimination of price controls and trade barriers, and the reduction or elimination of import and export taxes. In addition, adoption of new technologies and reduction in production costs, derived from lower input and transport costs, have increased sectoral competitiveness and made investments more profitable. All these factors, helped by a recent recovering of international prices of some traditional export products, as well as new trade possibilities arising from MERCOSUR, contribute to a positive trend in the level of net investment in the sector. 4. Because agriculture relies heavily on external trade, the sector is poised to benefit from fiscal and trade reforms creating a more open and competitive economy. However, appropriate macroeconomic policies alone will not achieve sustained agricultural growth. Certain regions, which had depended upon government support for a few agricultural products, need to adjust to the economic reforms. New investments in agriculture are essential to remove the bottlenecks created by years of neglect by both public and private sectors. Also, substantial investment would be required to rehabilitate rural infrastructure, including irrigation and drainage systems, transport, communications and marketing. Long-term strategies for diversifying the agro-export mix and penetrating new markets would however require a major - 2 -  reorientation of agricultural support services, including technical assistance, health and quality control, export promotion and marketing, as well as investment in rural infrastructure and advanced technology. Since provinces must now provide most agricultural support services as well as construct and maintain rural infrastructure, many are seeking innovative ways to fulfill their obligations, including institutional strengthening and closer private sector collaboration. 5. The provinces have requested the Central Government to establish a mechanism to strengthen agricultural support services and finance investment projects considered to have high priority to promote provincial development in the rural areas. Consequently, the Government of Argentina (GOA) requested that the Bank and IDB, based upon their previous experience in Argentina, provide a comprehensive framework for supporting provincial agricultural development, combining substantial support for provincial institutional strengthening and development with funding for priority investments. Strong Bank support of the agricultural sector is warranted given the significant opportunities it offers for environmentally sustainable economic growth, increase employment, and foreign exchange earnings. Bank intervention can play a catalytic role in rationalizing public sector investment, strengthening key institutions, stimulating private sector investment, and increasing exports. 6. Project Objectives. The main development objectives of the proposed project are to: (a) increase and diversify agricultural production and exports, through intensifying land use, increasing productivity per hectare, as well as introducing new crops and modern varieties; (b) increase and stabilize the agricultural incomes of 120,000 small and medium-sized commercial farms; (c) improve the effectiveness of basic agricultural support services to increase the international competitiveness of agricultural products, by introducing new and more productive technologies, increasing quality and improving sanitary conditions of products, and eradicating diseases that limit access to international markets; (d) improve rural productive infrastructure to reduce production and marketing costs, through a significant reduction in the risk of losses (crops, livestock, equipment and facilities), as well as more efficient use and better conservation and management of natural resources; (e) strengthen national and provincial institutional capacity to formulate and analyze sectoral development policy, as well as to identify, prepare and implement investment projects; and (f) rationalize public investments and promote an expanded private sector role (e.g. farmers' organizations, NGOs, and service providers) in agricultural development. 7. Project Description. To achieve its objectives, the project would: (a) finance subprojects (about 93% of project costs), presented by the participating provinces in accordance with their priorities, development strategies and investment plans, and which satisfy the - 3-  eligibility criteria established for the Project. Most of these subprojects would be provincial initiatives to be implemented at the local level by a provincial executing agency. However, in special cases in which several provinces need to address a common regional issue by coordinated actions, the proposed project would finance national subprojects with multi-provincial coverage. In these cases, the implementation of the subprojects would be under the coordination of a executing agency with regional or national coverage to achieve overall consistency at the national level, increase effectiveness, and take advantage of potential externalities. Provisionally, the amount of subprojects to be implemented by a single province would be limited to 25t of total project costs, and the total amount of the national subprojects to be approved during the life of the project would be restricted to 30- of total project costs; (b) strengthen institutional development (about 2t of project costs), both at the national and at the provincial levels, to: (i) establish permanent operational mechanisms for supporting implementation of the proposed project; (ii) help define the role of the public sector and increase coordination between different public and private entities to increase their effectiveness; (iii) increase capacity to formulate and analyze agricultural policy, as well as to design legal and institutional reforms, which would facilitate the transfer of responsibilities to users' groups and promote sectoral development; and (iv) identify, prepare and implement agricultural development initiatives, promoting an increased participation of the private sector; and (c) provide project coordination and management, and monitoring and evaluation (M&E) (about 5t of project costs), at the national and provincial levels. 8. Project Cost and Financing. The total estimated project cost would be US$357.2 million equivalent over a seven-year implementation period. This total project cost includes allowances for physical contingencies of US$20.6 million (5.8w of total costs) and for price contingencies (domestic plus international inflation) of US$26.5 million (7.4w of total cost), as well as taxes and duties estimated at US$41.5 million (11.6t of total cost). The main investment categories would be: (i) civil works, US$124.8 million (359 of total costs); (ii) vehicles and equipment, US$38.8 million (10.9W); (iii) consulting and auditing services and technical assistance, US$72.8 million (20.3%); (iv) training and institutional development, US$12.1 million (3.4%); (v) incremental local staff US$50.3 million (14.1%); and (vi) operation and maintenance, materials and supplies, and miscellaneous US$58.4 million (16.3%). 9. From the total project cost estimated at US$357.2 million equivalent, the Bank and the IDB would finance US$125 million each, representing a total for both financiers of about 70% of project cost. The national and provincial governments would provide about US$90.0 million as counterpart funding from their own budgets (about 25.2%), and the remaining US$17.2 million (4.8%) would be financed directly by the beneficiaries. Project financing between -4 -  the Bank and the IDB would be done in parallel, with each donor financing separate subprojects. The exceptions would be the institutional development component, and the coordination and management components (federal and provincial), in which the Bank would finance technical assistance and consultants, and the IDB would finance all other categories within these components. 10. The provinces would assume responsibility for repayment to the Central Government for loan proceeds on-lent to them for financing provincial subprojects. The Central Government would assume sole responsibility for the loan proceeds which finance regional or national subprojects, implemented by or under the coordination of specialized federal agencies. Regardless of the external funding sources, repayment terms for provinces would be the average of the terms of the Bank and IDB loans, including the foreign currency risk and commitment and inspection fees. The Federal Government would charge each participating province commitment and inspection fees in proportion to their subloans. The provinces would guarantee repayment of subloans with their shares of funds from federally-collected taxes (Fondos de Coparticipacion). 11. A set of eleven priority subprojects (Group "A"), with feasibility studies and engineering designs ready, has been reviewed at appraisal. Seven of these subprojects would be financed by the Bank loan--four provincial irrigation subprojects and three regional subprojects (animal health and phytosanitary services). The other four subprojects (three irrigation and drainage and one national agricultural information) are to be financed by a loan from the IDB. These Group A subprojects have a baseline cost estimated at US$194 million, approximately 63t of total project base costs. The implementation of the subprojects in Group A would start immediately after loan approval, thus facilitating good implementation performance and rate of disbursements at early stages of project execution. 12. Project Implementation. The Secretariat of Agriculture, Livestock, Fisheries and Food (SecretarUa de Agricultura, GanaderUa, Pesca y Alimentacion, SAGPyA), within the Ministry of Economics, and Works and Public Services (MEyOySP), would be responsible for overall coordination and administration of the project. The Federal Agricultural Council (Consejo Federal Agropecuario, CFA), chaired by the Secretary of SAGPyA and including all the provincial agricultural authorities, would serve as a discussion forum for sectoral strategies and exchange of information on policies and procedures. 13. Within the SAGPyA's Undersecretariat for Agriculture, Livestock and Forestry (SubsecretarUa de Agricultura, GanaderUa y Forestacion-SSAGyF), the Central Coordinating Unit (Unidad Ejecutora Central, UEC) would be in charge of overall project coordination, financial administration and management, as well as supervision and monitoring. The UEC would consist of an Executive Coordinator (Coordinador Ejecutivo) and about sixteen professional and administrative staff divided in five technical units and an - 5 -  advisory group. 14. In each of the participating provinces, a provincial agricultural entity (Entidad de Programacion Agropecuaria, EPDA) would be responsible for project coordination and management at the provincial level. Most subprojects would be provincial subprojects and would be implemented by a Project Implementing Unit (Unidad Ejecutora de Proyecto, UEP), consisting mainly of a specialized provincial agency selected according to its experience and implementation capacities, and which would be implementing all activities directly or through agreements with experienced and capable private or public organizations (e.g., NGOs, farmers' organizations, cooperatives, and service providers). Other subprojects, especially programs for the eradication or control of animal and crop diseases, would be executed on a regional or multi-provincial level. These would be implemented under the coordination of specialized federal agencies with competence and experience in that area. These agencies would be mainly autonomous institutions related to SAGPyA with specific mandate in the subjects involved and with experience in internationally-financed projects (i.e., Servicio Nacional de Sanidad y Calidad Agroalimentaria-SENASA, for animal health, plant protection and phytosanitary services, for the subprojects included in Group A). 15. During implementation, the project would consider any other technically feasible, economically sound, and environmentally sustainable subproject proposals presented by the provinces, based on their priorities and implementing capacities, and when consistent with the project's objectives and eligibility criteria. The subproject selection process would be simple and transparent. All eligible provinces could approach the UEC with subproject ideas. If the idea is considered promising and consistent with national and provincial priorities, the UEC could finance pre- feasibility studies required to continue the analysis of the idea. The UEC would assess the feasibility study against the subproject selection criteria to determine if the subproject would be included in the pipeline for further consideration. Each subproject proposal would be assessed and rated based on the selection criteria, to compete against all other proposals presented on the basis of the following characteristics: (i) technical feasibility; (ii) financial viability; (iii) scale and coverage; (iv) environmental impact; (v) implementation capacity; (vi) internal economic rate of return; (vii) beneficiary participation; and (viii) social impact. 16. Project Sustainability. The project would build on existing organizational structures, strengthening their operational capacity and thereby improving mechanisms for transferring technical assistance and for subproject implementation. At the same time, it would promote decentralization of key support services and the integration of public and private sector activities. Specific subprojects would promote the gradual transfer of operation and maintenance responsibilities (technical and financial) for irrigation, drainage and flood control schemes to the water users' associations, constituting a substantial saving for the provincial - 6 -  budget. 17. For other basic agricultural support services (i.e., technical assistance, animal health, and plant protection), the project would introduce a gradual sharing of responsibilities with private entities (beneficiaries' associations, NGOs, etc.) which would have an increasing control over the services provided. Building upon the experience with existing federal programs, contracts for generation and transfer of technology and for extension services in the subproject areas, especially irrigation, would be awarded through open competitive processes. The increased level of beneficiary participation, as well as control and cost- sharing, would be a major contribution towards project sustainability. 18. Participatory Approach. A grant from the Fund for Innovative Approaches in Human and Social Development (FIAHS) has provided financing during project preparation for specialized assistance to: (i) develop systematic consultation processes with the stakeholders; (ii) carry out an organizational analysis of the beneficiaries' organizations; and (iii) help prepare a strategy for permanent beneficiary participation in the project. The crucial challenges that emerges from this consultation have been to: (a) develop confidence, credibility and commitment on the producers' associations; (b) increase consultation and participation during implementation, as important means of influencing project activities; and (c) strengthen producer associations, particularly their organizational, technical and managerial skills. 19. To ensure proper analysis of social issues and to promote permanent beneficiary participation during project implementation, specific actions and procedures agreed with key stakeholders and the Government have been included in the project design and the procedures described in the Project Operational Manual (POM). These actions are the following: (a) introduction of social analysis in the screening and appraisal of subproject proposals; (b) implementation of dissemination activities to increase information among beneficiaries; (c) establishment of institutional mechanisms to promote permanent beneficiary participation in the decision-making process and in the monitoring of project activities and impacts (i.e., local fora and the Consultative Commission (CC) at the provincial level); and (d) institutional strengthening, including technical assistance and training, to increase managerial and organizational development of public agencies as well as beneficiaries' associations to be able to increase participation at all levels. 20. Environmental Aspects. The project would significantly improve water management and reduce salinization and erosion arising from inadequate irrigation and drainage infrastructure. Also, the project would improve soil conservation, land use and animal husbandry practices. Agricultural technology transfer and training of technicians and farmers would contribute to improved, more sustainable natural resource practices. In particular, - 7 -  training for irrigation water users would promote efficient water resource use, management and administration. Plant and animal health measures would reduce morbidity and mortality, and control the use of agro-chemicals, with economic and health consequences for producers and consumers. As project-funded infrastructure rehabilitation and construction would take place in zones which have been primarily under cultivation for some time, the project would have little effect on the natural fauna and flora. Institutional strengthening would improve provincial capacity for project implementation, including introducing or strengthening environmental analysis and monitoring of actions, both at the national and at the provincial levels. 21. The Flood Control and Drainage Subproject in Pozo Borrado (Province of Santa Fe), involves the rehabilitation of around 424 km. of existing canals and drains, and the construction of about 32 km. of new ones. The purpose would be to complete the network and make it fully operational to reduce losses (to crops, livestock, natural resources and physical facilities) derived from seasonal flooding. Given some potential environmental impacts of these civil works over local wetlands, the Bank required a full Environmental Analysis (EA) of this subproject. In addition, it also recommended carrying out complementary studies, including: (i) quantitative estimates of natural habitats affected; (ii) identification of existing protected areas to be strengthened or new areas that need to be created; (iii) a rapid field survey to determine the endangered species present in the area; and (iv) a plan of action to establish these protected areas, as well as to implement all environmental measures and mitigatory actions in the Pozo Borrado subproject. These studies and the introduction of the mitigatory actions in the subproject design are conditions for the approval of the Subsidiary Loan Agreement for Pozo Borrado and, therefore, for the initiation of its implementation. 22. Since some subprojects may have components which include minor infrastructure construction, the environmental classification assigned to the project is A. A baseline database would be established to be able to verify the project's environmental impact during implementation. The Project Operational Manual (POM), as well as the Project Environmental Manual (EM), contain detailed procedures for subproject environmental screening, impact evaluation, environmental monitoring and impact mitigation. The Environmental Unit within the UEC, would ensure that proper procedures are carried out in compliance with these manuals, in accordance with the Bank policies and procedures regarding environmental issues. 23. Program Objective Categories. The proposed project would promote decentralization, greater private sector participation, increased rationalization of public investment, agricultural production and exports, employment generation and poverty alleviation. In addition , the project would establish innovative mechanisms to help provincial governments fulfill their responsibilities to: (i) maintain rural infrastructure; (ii) provide agricultural services; and (iii) promote sectoral - 8 -  competitiveness by supporting the adoption of sound technology and increasing the value of exportable commodities through better quality and health controls. The project would strengthen the managerial and technical capacities of the provincial agencies, as well as emphasize closer collaboration with the private sector in the delivery of rural and agricultural services. All these objectives would contribute directly to the promotion of Environmentally Sustainable Development and Private Sector Development and, indirectly, to Poverty Alleviation, which are the main objective categories. 24. Poverty Category. Since the poor in Argentina are increasingly rural, the project's poverty alleviation spill-over effect could be significant. While not targeted to the poor, the project would benefit many poor farmers, particularly in the north/northwest and the south, which are the areas with highest incidence of poverty. These farmers would benefit from improved productivity and higher returns on their harvests resulting from diversification to higher-valued crops and greater market access. The project would also provide substantial employment opportunities in the rural areas, where unemployment rates of 21- surpassed the national average rate of 18.6t in 1995. The project's many infrastructure rehabilitation works would rapidly provide short- term employment. More importantly, the project would increase longer-term employment opportunities by stimulating provincial economies, introducing more labor-intensive technologies, intensifying land use, and promoting rural enterprises. 25. Project Benefits. The proposed project would result in: (a) increased and diversified production with higher proportion of high-value products (in some cases, derived from upgrading and accrediting production to internationally recognized sanitary and quality standards), thus increasing the competitiveness and value of exports (total value of production would increase about 45t over baseline levels); (b) increased net incomes (between 25 and 50t in real terms for different types of farmers) and improved standard of living of about 120,000 direct rural beneficiaries; (c) improved provincial fiscal situation derived from reducing current expenditures through the transfer of financial responsibilities to the private sector and increased tax revenues from a more dynamic sector; (d) improved provincial capacity to take policy decisions and to plan, select, implement and monitor investment alternatives; (e) strengthened and more integrated private sector, sharing implementation responsibilities and, therefore, increasing the long-term sustainability of proposed actions; and (f) mitigation of existing environmental problems (e.g. soil erosion, salinization and desertification, seasonal floods, inadequate drainage, and inappropriate water management) and improved capacity to monitor environmental effects. 26. Estimated IERRs for the eleven subprojects in Group A range between 15.09 and 40.1%. Considering aggregate benefits and total costs for these subprojects and adding the full costs for institutional strengthening, project coordination and management (both at the federal and provincial levels) for the project as a - 9-  whole, gives an estimated overall IERR of about 22.2%. This represents the IERR for a total investment of about US$214.2 million, or 60% of the total project costs of about US$357.2 million. Therefore, assuming Group A is representative of all subprojects to be financed during the project life, this IERR could be considered as a reliable estimate of the final overall project economic rate of return including all benefits and costs for all subprojects and components. Contact Point: Guzman Garcia-Rivero, Task Manager The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending May 2, 1997. - 10 -