Argentina - First Municipal Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16641 IMPLEMENTATION COMPLETION REPORT ARGENTINA FIRST MUNICIPAL DEVELOPMENT PROJECT (Ln. 2920-AR) May 30, 1997 Public Sector Modernization and Private Sector Development Division Country Department I Latin America and the Caribbean Region 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$) EXCHANGE RATE Arg$1 = US$1 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CCU - Central Coordinating Unit (Unidad de Coordinaci6n Central) ICR - Implementation Completion Report IFC - International Finance Coorporation MDF - Municipal Development Fund NIDP-I - First Municipal Development Project MDP-II - Second Municipal Development Project PEU - Provincial Executing Unit SOE - Statement of Expenditures Vice President: Shahid Javed Burki Director: Gobind T. Nankani Division Chief: Paul Meo Task Manager: Miguel A. Mercado-Diaz  IMPLEMENTATION COMPLETION REPORT ARGENTINA FOR OFFICIAL USE ONLY FIRST MUNICIPAL DEVELOPMENT PROJECT (Ln. 2920-AR) Contents Preface .....i Evaluation Summary ...................... Part I. Project Implementation Assessment A. Statement of Objectives .1 B. Achievement of Objectives. 3 C. Major Factors Affecting the Project. 5 D. Project Sustainability. 7 E. Bank Performance. 8 F. Borrower Performance. 9 G. Assessment of Outcome .10 H. Future Operations .11 I. Key Lessons Leamed .13 Part II. Statistical Tables Table 1: Summary of Assessment .16 Table 2: Related Bank Loans/Credits .18 Table 3: Project Timetable .19 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual .19 Table 5A: Project Costs .20 Table 5B: Project Financing .20 Table 6: Status of Legal Covenants .21 Table 7: Bank Resources: Staff Inputs .27 Table 8: Bank Resources: Missions .28 Table 9: Project Portfolio by Type of Subproject .29 Table 10: Physical Investments by Type of Subproject 30 Table 11: Purchases of Equipment by Type .31 Table 12: Rate of Provincial Participation .32 Table 13: Rate of Municipal Participation .33 Table 14: Repayment of Municipal Subloans .34 Table 15: Cost Recovery from Direct Beneficiaries .35 This document has a restricted distribution and may be used by recipients only in the perforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Appendixes: A. Borrower's Contribution to ICR ...................... 36 B. Map ...................... 40  IMPLEMENTATION COMPLETION REPORT ARGENTINA FIRST MUNICIPAL DEVELOPMENT PROJECT (Ln. 2920-AR) Preface This is the Implementation Completion Report (ICR) for the First Municipal Development Project in Argentina, for which Loan 2920-AR in the amount of US$120 million equivalent was approved March 22, 1988, and became effective March 3, 1989. The loan was closed March 31, 1996. Final disbursement took place June 5, 1996, when a balance of US$205,344 was canceled. The ICR was prepared by Cecilia Zanetta (consultant), under the supervision of Miguel Mercado-Diaz, Task Manager (LAIPS), and reviewed by Paul Meo, Division Manager (LAIPS), Orville Grimes, Project Advisor (LA1DR), Tim Campbell (LATAD), Jim Hicks (AFTUl), David Vetter (LAIPS) and Mario Rothschild (consultant). Preparation of the ICR was begun during the Bank's final supervision and completion mission in December 1996. It is based on information in the project files, discussions with implementation units at the national and provincial levels, and with elected officials and technical staff of participating municipalities. The Borrower contributed to the preparation of the ICR by preparing its own evaluation of the project's ini:ial pre1,armtion and es ecution, and by contributing its views, providing background material, and ample support whenever needed.   IMPLEMENTATION COMPLETION REPORT ARGENTINA FIRST MUNICIPAL DEVELOPMENT PROJECT (Ln. 2920-AR) Evaluation Summary Introduction 1. The First Municipal Development Project (MDP-I) was primarily designed to contribute to more effective public sector management at the provincial and municipal levels through improved financial mechanisms for municipal investments. In this way, the project effectively supported two critical national objectives: a) the mobilization of resources in a non-deficit, non-inflationary manner; and (b) increased public sector efficiency. These objectives were quite ambitious given the macroeconomic conditions prevailing during 1987-88. Argentina's economy was crippled by high inflation, widespread stagnation and massive public sector deficits after decades of economic strategies characterized by heavy state interventionism, inward-looking trade orientation, and disregard for macroeconomic equilibrium. Capitalizing on the growing awareness of the need to introduce drastic reforms at all levels of government, the project laid the foundations for municipal reform by enhancing municipal practices and putting in place sustainable mechanisms for the financing of needed municipal investments. With its emphasis on fiscal responsibility and improved efficiency of municipalities, the project fully supported the objectives of the reform program that was later implemented by the Argentine Government. Project Objectives 2. The specific objectives of the project were to: a) mobilize external and internal resources in a non-deficit, non-inflationary way to finance municipal investments that would have positive economic and social impacts; b) strengthen municipalities' capacity to plan, finance and execute cost-effective capital investment programs; and c) promote structured, periodic consultations between municipal and provincial authorities for the formulation and evaluation of investment plans. 3. To accomplish these objectives, the project was structured as a portfolio loan that onlent project funds to municipalities for subprojects in accordance with eligibility criteria set for the provinces, the municipalities, and the subprojects themselves. These eligibility criteria were designed to guarantee adequate revenue-sharing transfers to municipalities, municipal creditworthiness, and recovery of the cost of physical investments from direct beneficiaries. The project financed subprojects under two components: a) physical  iii investments, including public infrastructure, community facilities, and the purchase of equipment; and b) technical assistance and training. 4. The project's design adequately supported the project's objectives. It combined a few, well-defined eligibility criteria that ensured the achievement of the project's main objectives, with a high degree of flexibility in terms of eligible subprojects that maximized the project's attractiveness among potential sub-borrowers. Municipalities were assigned an important role, including responsibilities for the assessment of their needs, subproject selection, preparation and implementation, and the adoption and implementation of cost recovery arrangements. Strong municipal responsibilities fostered their ownership of individual subprojects and maximized the potential for "hands-on" capacity building. As individual subprojects were selected by municipalities according to their own needs, the portfolio of subprojects was to be built over time following a "demand-driven" approach. Implementation Experience and Results 5. Achievement of Project Objectives: As a whole, the project widely promoted reform among participating municipalities and achieved substantial results in the area of sector policy, institutional development and physical objectives. Specifically, it improved sector policy by fostering the dialogue between provinces and municipalities, and by deepening understanding of the need and the concepts underlying municipal reform. It effectively improved public management at the municipal level by disseminating responsible municipal practices and enhancing municipalities' ability to plan, finance, and execute physical investments. The project also contributed to the rehabilitation and expansion of the country's deteriorated infrastructure stock by financing a large number of small physical investments estimated to have benefited more than 2 million people in 322 municipalities. However, the project attained only partial achievement of its financial objectives. Although it established sustainable mechanisms for the financing of municipal investments, based on cost recovery from direct beneficiaries and the capitalization of Municipal Development Funds, the actual performance of these mechanisms was less than expected. 6. Major Factors Affecting the Project: The implementation of the project was characterized by very slow disbursements for the first three years. The initial delays were caused by unfavorable macroeconomic conditions, the complex institutional framework of subnational governments, and the complexity of implementation that characterizes portfolio loans. Once the macroeconomic environment stabilized, subsidiary agreements were approved by provincial legislatures and a substantial number of subprojects were in the pipeline, the project picked up momentum and disbursed almost fully over the next three years. 7. Project Sustainability: The sustainability of the reform process fostered by the project in participating provinces and municipalities is somewhat uncertain over the long term. On the one hand, the enhanced municipal management practices introduced by the project have been incorporated into the routine operation of many municipalities; moreover, the concept of cost recovery from direct beneficiaries is now an accepted  iv objective among elected officials. The physical infrastructure and equipment financed under the project generally have improved the delivery of services, and have frequently resulted in considerable savings in operation and maintenance costs. Also, the PEUs have effectively filled the gap between the provincial governments and the highly autonomous municipalities, providing a venue for dialogue and consultation with regard to municipal physical investments. On the other hand, it less less certain whether the changes introduced as a result of this operation could be sustained if: a) the macroeconomic conditions worsen; b) an adequate system of incentive is not in place (see paragraphs 9 and 35 of the main report); and c) additional financing is made available to the municipalities on softer terms. Also, it remains to be tested whether the interface between municipalities and provincial governments in relation to investments will be maintained once the Bank's projects are over and the PEUs are dismantled. 8. Assessment of Bank's and Borrower's Performance: The Bank's performance was satisfactory with respect to the sectoral and technical aspects of project identification preparation. However, from a macroeconomic standpoint the Bank's performance at appraissal was deficient, as the project was allowed to move forward despite the chaotic macroeconomic conditions prevailing at the time. During the supervision stage, the Bank's performance was satisfactory, although a more direct supervision of the provincial executing units would have been desirable given the decentralized approach of the project and its strong emphasis on provincial autonomy. The Borrower's performance was highly satisfactory regarding project preparation and satisfactory regarding implementation and less than satisfactory with regard to compliance with loan covenants. Summary of Findings, Future Operations, and Key Lessons Learned 9. The outcome of the project has been satisfactory. Municipal participation was very high, the main objectives of the project were attained and the project contributed considerably towards the advancement of municipal reform. It is important to note, however, that the municipalities that participated in the project were those more prone to reform. Eligibility criteria stressing municipal creditworthiness and other project conditionalities are likely to have operated as a self-selection mechanism promoting the participation of the best-performing municipalities. Far from this being a shortcoming, the project provided a framework consistent with the main lesson learned from lending for reform worldwide: willingness to reform on the part of subnational governments is a pre- condition for success. As participating municipalities continue to demonstrate the feasibility of cost recovery and the benefits from sound municipal practices, reform is likely to extend to other municipalities. 10. The following lessons, which are relevant for future municipal projects beyond Argentina, can be learned from the implementation of this Municipal Development Project: 11. Portfolio loans can be effective tools in lending for reform. This project demonstrates that portfolio loans can effectively combine wholesale lending and lending for reform. By combining a set of a few clearly-defined eligibility criteria with a high level  v of flexibility in terms of specific subprojects, the project effectively balanced the need to guarantee the achievement of its reform objectives while maximizing its attractiveness among potential sub-borrowers. 12. Do not lend into macroeconomic chaos. An important lesson from Argentina is not to lend under highly unstable macroeconomic conditions like the ones prevailing in Argentina during 1987-88, which eventually led to hyperinflation and macroeconomic chaos. The low level of disbursements over the first years of the project suggests that the loan would not have performed well if the Convertibility Law had not been passed and macroeconomic stability restored. 13. Physical investment loans cannot be a substitute for adequate policy incentives. The funding made available through physical investment loans does not provide per se sufficient incentives for municipalities to reform. An adequate system of incentives, both at the provincial and municipal levels, are prerequisites for broader municipal reform. At the provincial level, discretionary grants need to be removed and the revenue-sharing transfer system needs to reward fiscally responsible behavior and efficiency. At the municipal level, incentives should come from local constituencies that hold elected officials accountable for their management of public funds. 14. An important role for subnational governments is critical to the success of the project. Although the lack of adequate provincial and municipal technical and institutional capacity may result in initial project bottlenecks, their enhanced responsibilities within the project contribute to strong "hands-on" capacity building, both at the provincial and municipal levels. 15. Keep subproject requirements within reasonable bounds. Since individual subprojects are generally small, it is important not to overdimension preparation and evaluation requirements. Excessive requirements unduly increase the cost of borrowing and promote the unnecessary use of private consultants, which diminishes the potential for "in-house" capacity building. 16. Simplify as much as possible all review, procurement, and disbursement procedures. To effectively conduct a wholesale lending operation, it is critical to rely on agile review, procurement, and implementation procedures. Given the large number of subprojects --over 700 subprojects in the case of MDP-I-- and the vast number of related documents, such as bidding documents, contracts, and terms of reference, that characterize portfolio projects, simplified procedures are critical to avoid potential administrative bottlenecks and undue burdens on both the Borrower and Bank staff. Bank requirements for procurement and disbursement usually reflect practices that are more appropriate for traditional projects than portfolio loans. 17. Some supervision functions can be successfully privatized. In the case of MDP-I, some of the supervision of the project executing units and the supervision of some works were contracted to the private sector. The experience was successful and significantly reduced the supervision burden on the Borrower and the Bank.  vi 18. Do not expect municipal portfolio projects to disburse quickly and easily at first. Municipal portfolio projects like MDP-I need to be designed with longer implementation periods to account for the complex institutional framework of subnational governments and the complexity in implementation characteristic of portfolio loans.   Part I Project Implementation Assessment A. Statement of Objectives 1. Towards the end of the 1 980s, Argentina was experiencing high inflation, widespread economic stagnation, and massive public sector deficits as the result of over five decades of heavy state interventionism, inward-looking trade orientation, and disregard for macroeconomic equilibrium. As in most other countries in Latin America and the Caribbean, there was growing awareness of the need to drastically redefine the role of the government in the economy, reducing state intervention, tackling chronic fiscal imbalances, and increasing efficiency at all levels of government. 2. In its first steps towards reform, the Government sought Bank support to promote two key national objectives, namely, to enhance resource mobilization and increase public sector efficiency. Among the challenges faced by the Argentine Government was the need to mobilize the resources needed for public investment and recurrent costs in a way that would reduce deficit financing and inflationary pressures. At the same time, basic public management skills that had been lost over years of high inflation had to be rebuilt. The First Municipal Development Project (MDP-I) was designed to support these national objectives by contributing to more effective public sector management at the provincial and municipal levels through improved financial mechanisms for municipal investments. Specifically, the project sought to promote financing mechanisms for justified municipal investments that transferred, to the maximum extent possible, the full financial burden of public investments and recurrent costs to direct beneficiaries. In addition, the project sought to increase the efficiency of municipal governments in the delivery of services by enhancing their capacity to plan, program, and budget for capital improvements programs, as well as for the operation and management of existing and proposed facilities. Finally, the project sought to provide an interface for municipalities and provincial governments in relation to physical investments. 3. The project's specific objectives, as stated in the Staff Appraisal Report (SAR, Feb. 26, 1988), were to: a) mobilize external and internal resources in a non-deficit, non-inflationary way to finance municipal investments with positive economic and social impacts; b) strengthen municipalities' capacity to plan, finance, and execute cost- effective capital investment programs; and c) promote structured, periodic consultations between municipal and provincial authorities for the formulation and evaluation of investment plans.  2 4. To accomplish these objectives, the project was structured as a portfolio loan that onlent project funds to municipalities for subprojects based on eligibility criteria set for the provinces, the municipalities, and the subprojects themselves. Provincial eligibility criteria focused on resource mobilization, guaranteeing that shared revenues transferred to municipalities were adequate, both in terms of the level of fiscal transfers and the redistributive criteria. Municipal eligibility criteria focused on creditworthiness, requiring that municipalities meet adequate current-account surplus and debt-servicing capacity requirements to be eligible for physical investments.! Subproject eligibility criteria focused on cost recovery, guaranteeing that a minimum percentage of the cost of physical investments would be recovered from direct beneficiaries.2 5. The project financed subprojects under two components: a) physical investments, which included the construction and rehabilitation of public infrastructure, community facilities, and the purchase of equipment; and b) technical assistance and training, which included financial management, accounting procedures, computers, and maintenance procedures. The project followed the "demand-driven" approach that is characteristic of portfolio loans, as opposed to the "supply-driven" approach of traditional loans in which subprojects are determined a priori. Municipalities were responsible for identifying and selecting individual subprojects according to their own needs assessment. Thus, the portfolio of specific subprojects was not defined at appraisal but evolved over time. 6. The proceeds of the loan (US$120 million) were onlent from the Central Government to the five provinces participating in the project under the same terms and conditions as the Bank loan. In turn, the provinces onlent to municipalities on "harder" terms to capitalize a Municipal Development Fund set up to ensure project replicability within each province. Each province was assigned an initial allocation of funds for the first three years of the project's implementation. After that period, the provinces lost guaranteed access to their initial allocation and those funds that had not been utilized were reallocated based on performance of the province in project implementation. 7. The project as designed, with its emphasis on flexibility, was highly effective in addressing the wide range of needs and capacities among municipalities and the general lack of data on municipal finances at the time. While eligibility criteria ensured that the overall objectives of the program were met, the MDP-I provided a flexible framework that allowed municipalities to assess their individual needs over time, prepare and implement specific subprojects, and adopt cost-recovery arrangements tailored to these needs. Also, I Municipal creditworthiness criteria for physical investments required that municipalities had: a) current revenues (excluding discretionary grants) that exceeded current expenditures; b) debt obligations within adequate limits as defined by the following criteria: i) total debt not to exceed 60 percent of total municipal revenues; and ii) total debt service of outstanding and proposed loans not to exceed 15 percent of total budgeted revenues for the year of the proposed project. 2 Cost recovery criteria required that each annual investment plan presented by each municipality had at least 65 percent of total proposed physical investments allocated to components for which 100 percent of total investment costs would be fully recovered from final beneficiaries.  3 by allocating resources based on performance, the project fostered competition for loan funds among both provinces and municipalities and provided incentives for the agile preparation and presentation of subprojects. Finally, the municipal and subproject eligibility criteria introduced through the project provided a good approximation of market conditions, thus serving as an intermediate step toward the long term goal of municipal governments' access to private financial markets. B. Achievement of Objectives 8. The project was highly successful in terms of municipal participation. A total of 322 municipalities, accounting for more than a third of all municipalities in the five provinces, participated in the project (see Table 13). This high participation rate shows that the incentives built into the project were indeed attractive to municipalities. Overall, the project was an effective tool in promoting reform within participating municipalities and achieved substantial results with regard to sector policy, institutional development, and physical objectives, but only partial results with regard to financial objectives. 9. Sector Policies: Substantial Achievement. The project sought to promote reform within the municipal sector and dialogue between municipal and provincial authorities. With its emphasis on creditworthiness, cost recovery and capacity building, the project has been successful in complementing Argentina's overall reform program, which increasingly has placed a strong emphasis on fiscal responsibility and management efficiency of subnational governments. Together with other Bank operations aimed at promoting provincial reform3, the MDP-I has been central in supporting the Argentine Government's strategy for the reform of subnational governments. Although it is clear that the MDP-I could not be a substitute for an adequate system of incentives in inducing reform, it has been an effective tool in promoting municipal reform by rewarding fiscal responsibility and supporting reform efforts of reform-minded municipalities. As softer sources of financing to municipalities, such as discretionary grants from provincial governments, continue to disappear as the result of tight provincial budgets, municipalities are increasingly expected to subscribe to the concepts of creditworthiness and cost recovery that were introduced by the project. The project also has increased the dialogue between provincial governments and municipalities through the planning, implementation, and follow-up actions associated with subprojects, including review of annual investment plans, supervision of works, verification of cost recovery, and repayment of municipal loans. It also has contributed to the collection of data on municipal finances at the provincial level. Most importantly, it has deepened awareness of the need for municipal reform, among both provinces and municipalities. 10. Financial Objectives: Partial Achievement. The project sought to introduce financing mechanisms to mobilize resources in a non-deficit, non-inflationary manner. To achieve this goal, the project required that at least 65 percent of the financial burden of the investment and recurrent costs of all subprojects in the municipal portfolio be recovered 3 These operations are the Provincial Development Project (Ln. 3280-AR), the Second Provincial Development Project (Ln. 3877-AR), and the Provincial Reform Project (Ln. 3836-AR).  4 from direct beneficiaries through instruments such as betterment levies, connection fees, and user charges. Although participating municipalities subscribed to the concept and devised appropriate mechanisms in accordance with the project's requirements, they failed to fully implement them. In Santa Fe, which was the only province that stressed the implementation and monitoring of cost-recovery measures, the levels of cost recovery have been those required by the project.4 Cost recovery is reportedly lagging in the remaining provinces, with very few reliable data available to adequately assess it (see Table 15). Thus, although municipalities eventually might recover some of the unpaid debt when properties are sold or connections to municipal services are requested, the failure to recover costs at higher levels has been a source of municipal deficit, at least in the short run. It is also important to note that the Loan Agreement did not reflect the importance that cost recovery was given in the SAR, thus limiting the Bank's ability to legally enforce its compliance. 11. At the provincial level, the project has not been a source of deficit, except in the case of one participating province. Municipal debt has been repaid at a rate of almost 80 percent or more in four of the five participating provinces (see Table 14). In La Pampa, however, more than half of the issued municipal debt is still outstanding. As the municipal repayment of subloans was guaranteed through the provinces' revenue-sharing system, the sluggish repayment of municipal obligations in La Pampa reflects the lack of willingness to enforce the guarantee on the part of the province, suggesting that provincial authorities have a weak commitment towards promoting fiscal responsibility within the province. 12. Institutional Development: Substantial Achievement. The project sought to promote the dissemination of responsible municipal practices, including the use of sound bidding and contracting mechanisms, and to improve municipalities' technical capacity to plan, finance, and execute investments. Although specific technical assistance components were not widely implemented or stressed, the project has been highly effective in increasing institutional capacity, particularly financial and managerial, through a "hands- on" informal approach. This informal institutional strengthening was accomplished through the project's participation requirements, which made municipalities directly responsible for: (i) devising and implementing cost recovery mechanisms; (ii) capital budgeting of investments and management of cash flows; and (iii) subproject management, including design, bidding, and supervision. Most municipalities, particularly those of small and medium size, have improved significantly their technical capacity, and have incorporated the improved practices introduced by the project, such as financial analysis and bidding and contracting procedures, into routine municipal activities. Although municipalities that were not eligible for physical investments could still get financing for technical assistance and training, almost no municipality took advantage of this option. One of the contributing factors to the low demand for training and technical assistance subprojects was the period of hyperinflation prior to 1991, during which financial "wizardry" was far more important to municipalities than any structural reform. 4 Approximately 70 percent of the cost of all subprojects are expected to be recovered in Santa Fe, with at least 65 percent of the cost of all subprojects being recovered from direct beneficiaries.  5 13. Physical Objectives: Substantial Achievement. The achievement of physical objectives was substantially met. There was a higher demand for physical investment subprojects than anticipated (79 percent compared to 59 percent of the total project cost). More than 650 physical investment subprojects were implemented, with infrastructure works alone benefiting more than 2 million people (see Table 9). The largest demand was for pavement and related infrastructure (curbs, sidewalks, etc.), which accounted for roughly half of all project costs. In the case of C6rdoba and Buenos Aires, pavement subprojects constituted the bulk of their portfolios, accounting for 78 percent and 57 percent of all physical investments, respectively (see Table 10). A distant second was sewage disposal, with about 10% of all project costs. However, sewage disposal was a priority in Santa Fe, where it accounted for 31 percent of total physical investments. The purchase of equipment, mostly for road maintenance and garbage collection, came in third in terms of overall priorities, accounting for about 8% of all project costs (see Tables 10 and 11). Neuquen strongly favored the purchase of equipment, which accounted for 47% of its portfolio of physical investments. There were considerable differences among provinces in the composition of their investment portfolios, reflecting the wide differences between provinces in terms of physical endowments, institutional frameworks, and demographic, social, and economic indicators. Since municipalities were responsible for establishing investment selection and prioritization, and, since it is mandated to municipalities in some provinces, residents had the opportunity to oppose specific subprojects, individual subprojects financed under the project are expected to have responded to the needs of the recipients. Also, although not explicitly sought by the project, some municipalities required contractors to spend a minimum percentage of the cost of the investment locally, both in labor and purchase of materials, thus generating multiplier effects on the local economy. C. Major Factors Affecting the Project 14. The implementation of the project was characterized by very slow disbursements until 1991, or three years into the project. These initial delays were the result of several factors, including unfavorable macroeconomic conditions, the complex institutional framework of subnational governments, and the complexity of implementation that characterizes portfolio loans. Once the macroeconomic environment stabilized, subsidiary agreements were approved by provincial legislatures, and a substantial number of subprojects were in the pipeline, the project picked up momentum and disbursed at an annual rate of 27 percent over the next three years. Given the good performance of the project, its closing date was extended from June 1995 to March 1996 to allow for its full disbursement. 15. Macroeconomic Conditions. The period following the approval of the project was one of macroeconomic chaos, with inflation reaching up to 200 percent per month in 1989. Under these macroeconomic conditions, the project provided no incentives for municipalities to participate, except for a handful of reform-oriented local officials. Being fiscally responsible was not a rational behavior given the lack of accountability allowed by the macroeconomic chaos, and financial planning and cost recovery of physical investments made no sense in an environment of total uncertainty. This all changed in  6 April 1991, when the Convertibility Law was passed and price stability was finally achieved. At that time the Government also implemented a swift set of reforms aimed at tackling fiscal imbalances and deregulating the economy. Argentina's drastic reform program not only resulted in significant improvements in the country's economic performance but it also restored macroeconomic conditions that induced fiscal responsibility and public management efficiency at all levels of government. With the right system of incentives now in place, the demand for municipal subprojects to be financed under MDP-I flourished. 16. Complex institutional framework. Under Argentina's federal system of government, subnational governments --i.e., both provinces and municipalities-- are highly autonomous. In the case of provinces, they are govemed by their own constitutions, executive, and legislative branches, which requires that each province signs an individual subsidiary agreement that needs to be approved by the provincial legislature. This process was very cumbersome and time consuming, particularly because MDP-I was the first Bank project of this type in Argentina. It took provinces between one and two years to pass legislation ratifying these subsidiary agreements. 17. Complex implementation of portfolio loans. Portfolio projects like MDP-I are significantly more complex to implement than standard investment loans, such as for dams or roads. This is the result of several factors, including: (i) the large number of potential sub-borrowers --in this case there was a total of 322 participating municipalities within the five participating provinces; (ii) the great diversity among sub-borrowers in terms of most relevant indicators, especially institutional and technical capacity; (iii) the high number of subprojects --approximately 700 subprojects under MDP-I; (iv) the high diversity across subprojects, which covered many sectors; and (v) the majority of the subprojects were selected after appraisal. Thus, it is unreasonable to expect that a portfolio loan would follow the disbursement profile of a traditional loan, and that the administrative costs would be the same. The disbursement profile initially included in the SAR was too optimistic, and later had to be adjusted to better reflect the dynamics of portfolio loans. Also, portfolio projects tend to be more expensive to execute and supervise than traditional loans as a result of their increased complexity and the labor intensity required to support the high level of municipal involvement sought by the project. 18. Project Costs. Actual project costs differed from the ones anticipated at appraisal, as follows: (i) there were more physical investments and fewer technical assistance subprojects; (ii) higher project administrative and supervision costs; and (iii) lower percentages of municipal counterpart funds and overall project costs (see Tables 5A and B). In terms of the relative proportion of physical and technical assistance subprojects in the portfolio, the period of macroeconomic chaos prior to 1991 may have discouraged any serious efforts at reform on the part of municipalities, contributing to the low demand for institutional development subprojects --2 percent of total project costs compared to the 4 percent that was anticipated at appraisal. In terms of project administration and execution costs, the cost of the central unit, the five Provincial Executing Units (PEUs) and external auditing accounted for 9.7 percent of total project costs compared to the 4.6 percent initially budgeted. However, a high proportion of these costs -- all of which were  7 provincial counterpart funds -- was spent on informal technical assistance to municipalities provided by the PEUs' technical staff. Finally, IBRD share of the project's financing was increased from its original 50 percent to 75 percent in 1992, as the lack of municipal counterpart funds was identified as one of the bottlenecks contributing to the slow disbursements of the project. This action resulted in a lower total project cost (US$189 million compared to the initial US$240 million), with an overall 63.3 percent, 8.5 percent, and 28.3 percent of IBRD, provincial and municipal financing, respectively. As the project financed a time slice of investments, there were no price contingencies. D. Project Sustainability 19. Sustainability: Uncertain. The project objectives have been met and important administration reforms were made in many of the municipalities that participated in this operation. However, the sustainability of the reform process fostered by the project in the participating provinces and municipalities is somewhat uncertain, although there are signs that the many of the changes introduced might be sustained over the long term. 20. It was evidenced from visits to participating municipalities and reports from local officials that the project, through the introduction of enhanced management practices and sustainable financing mechanisms for municipal investments, has considerably improved municipalities' technical capacity and has set in place mechanisms for the mobilization of resources in a non-inflationary, non-deficit way that are likely to be sustained over the long term. With regard to management practices, the project helped rebuild basic skills in terms of budgeting, economic analysis, and programming of municipal investments that had been lost over years of high inflation. Despite the lower level of cost recovery, the concept has been successful, and it is no longer perceived by most local officials as having high political costs. Interestingly, the municipalities in Santa Fe, where the PEU had imposed the most strict monitoring of cost recovery by municipalities, are actively developing innovative mechanisms to increase cost recovery in other municipal physical investments and services. With regard to the large number of physical investment subprojects financed under the projects, they are likely to continue to work well and be adequately maintained as a result of good technical design and supervision of works, as well as the provisions made for maintenance and operation costs. Finally, with regard to the interface for municipalities and provincial governments in relation to investments, it is uncertain whether it will be maintained once the project is over and the PEUs are dismantled. The PEUs have effectively filled the gap between the provincial governments and the highly autonomous municipalities, providing a venue for dialogue and consultations with regard to municipal physical investments. 21. However, it less certain whether the changes introduced as a result of this operation could be sustained if: a) the macroeconomic conditions worsen; b) an adequate system of incentive is not present (see paragraphs 9 and 35 in the main report); and c) additional financing is made available to the municipalities on softer terms. Also, it remains to be tested whether the interface between municipalities and provincial governments in relation to investments will be maintained once the Bank's projects are over and the PEUs are dismantled  8 22. Replicability: Less than Expected. The project also has set in place mechanisms for project replicability, although its actual replicability has been less than anticipated. Replicability within each municipality has been weakened by the lower level of cost recovery and because, in most cases, the municipalities fully passed on to direct beneficiaries the favorable conditions of their subloans thus, missing an opportunity to capitalize and reach other beneficiaries. Replicability across municipalities was weakened by the slow capitalization of the Municipal Development Funds. These Municipal Funds were conceived as a sustainable financing mechanism to be established in each province to lend to municipalities under the same conditions as the project. Their capitalization was based on: (a) the spread between the rate charged to the province and that charged to municipalities; and (b) the shorter maturity of the loans given to the municipalities compared to that of the provincial subsidiary loan. However, these Funds failed to be capitalized as expected due to overly conservative management, in terms both of the conditions applied to municipal subloans and of the use of the Funds. With the exception of C6rdoba, the provinces have limited the use of these Funds to repayment of the provincial subsidiary loans. With the inflow of significant provincial revenue-sharing funds, C6rdoba instead has effectively used its Municipal Fund to finance a parallel portfolio of municipal subprojects as large as the Bank project itself E. Bank Performance 23. Project Identification: Satisfactory. The Bank correctly diagnosed and identified the need for institutional strengthening and sustainable financing mechanisms at the municipal level as a way of supporting the larger national objectives of improved public management and enhanced resource mobilization. It also managed to capitalize on the Government's increasing awareness of the need to reform at all levels of government. However, it is unlikely that these two national objectives would have been considerably advanced with a project like the MDP-I if the highly unstable macroeconomic conditions prevailing at the time had not changed. 24. Project Preparation: Satisfactory. During preparation, the Bank identified some of the key issues to be addressed to achieve project success. The main objectives of the project were to be achieved by a clearly defined set of eligibility criteria. The Bank also allowed for a high level of flexibility in terms of the specific investments to be financed as a way of maximizing the project's attractiveness to municipalities, and envisioned an active role for the participating municipalities. The Bank worked in close partnership with each participating province in the preparation of the project, which resulted in a high level of provincial "ownership" of the project. However, the low demand for project funds during the years prior to the Convertibility Law suggests that the project would not have performed well in the absence of the drastic set of reforms that were later implemented by the Argentine Government. 25. Project Appraisal: During appraisal, the Bank took into account the various risks that could affect the project and set up mechanisms within the project to mitigate them. The Bank also set up agile and innovative mechanisms to facilitate the supervision of the project, relying on private auditing firms and enhancing provincial autonomy and  9 responsibilities. However, from a macroeconomic standpoint the Bank's performance at appraissal was deficient, as the project was allowed to move forward despite the chaotic macroeconomic conditions prevailing at the time. In addition, the Bank was somewhat too optimistic about the pace at which the project could be implemented, including the time required to pass the required provincial legislation, build up the capacity of the Provincial Executing Units (PEUs) to the level required to implement such a complex project, and put in place a pipeline of subprojects. More importantly, the Bank underestimated the importance of a stable macroeconomic environment in making the incentives built into the project attractive among sub-borrowers. 26. Project Supervision: Satisfactory. The Bank worked closely with the Borrower to overcome the initial sluggishness in the implementation of the project. It actively adopted corrective measures when necessary, such as increasing the share of Bank financing, adopting more flexible creditworthiness criteria, and extending the closing date of the project. Given the decentralized approach of the project and its strong emphasis on provincial autonomy, a more direct supervision of the PEUs' activities would have been necessary, including placing more emphasis on the timely submission of provincial performance reports. It appears that the Bank relied on the Central Coordinating Unit (CCU) to carry out the supervision of the PEUs, a strategy that proved to be wrong, given the limited role the CCU had been assigned. While the performance of individual supervision missions was satisfactory, these missions were not as frequent as warranted. A set of project monitoring indicators would have facilitated project supervision as well as early identification of deviations from the project's objectives, such as in the area of cost recovery. F. Borrower Performance 27. Preparation of the Project: Highly Satisfactory. Participating provinces played a very active role in the preparation of the project. Each province was responsible not only for contributing its views to the project design but for drafting its own Project Manual, bidding, and contracting documents. The strong involvement of the provinces at this stage of preparation helped to enhance project design. 28. Project Implementation: Satisfactory. The project had a Central Coordinating Unit at the central level and a Provincial Executing Unit at each of the five participating provinces. The CCU acted as the liaison between the provinces, the Federal Government, and the Bank, in accordance to the role that originally had been envisaged. Performance of the CCU was highly effective in the negotiation of subsidiary loan agreements with participating provinces and in controlling reimbursements to the project's special account. It also complied with the submission of the annual independent audits, although this was typically completed only after significant delays. The CCU produced consolidated performance reports until March 1993, with a decline in the performance of its reporting functions subsequently. It appears that reporting requirements had been loosened up by the Bank based on the outstanding performance up to that time, although the agreement was never formalized.  10 29. The performance of the PEUs has been critical to the success of the project. They were directly responsible for the design, implementation and supervision of the project, as well as for providing guidance and technical assistance to municipalities. In general, the PEUs fulfilled their responsibilities as defined under the project agreement and the project operation manual. They also complied with their requirement to produce semi-annual performance reports, although, as in the case of the CCU, this compliance weakened after 1993. Overall, the PEUs were staffed with competent and dedicated staff who were strongly committed to the principles of the project. They implemented and supervised the project according to the operation manuals with very little supervision on the part of the CCU or the Bank, and were the primary agents of institutional strengthening at the municipal level. Their main shortcoming has been the lack of monitoring of cost recovery, with the exception of Santa Fe. As could be expected, strong provincial support was critical to the performance of the PEUs, as it influenced both the resources available and their political leverage. However, the PEUs with strong political support were more vulnerable to changes in the political environment, generally experiencing isolation or considerable staff changes under the next administration. 30. Compliance with Covenants: Less than Satisfactory. On the whole, compliance with legal covenants was satisfactory. Over the life of the project, compliance was met, but with significant delays. Although there are some covenants with a poor record of compliance. This non-compliance, in some cases, was apparently due to informal agreements with the Bank, whereby several items to be submitted to the Bank were judged to be unnecessary in the latter part of the project implementation. This was the case with some of the bi-annual provincial performance audits, the CCU's consolidated reports of such audits, and the Annual Investment Programs after all the loan proceeds had been committed. These agreements, of course, should have been formalized. All other covenants were satisfactorily met. G. Assessment of Outcome 31. Overall Rating: Satisfactory. On the whole, the project objectives have been satisfactorily met. The project widely promoted reform among the many participating municipalities. Confirming the expectations underlying the project's design, local authorities have been willing to respond to most of the requirements and participation criteria of the project, including subproject design, evaluation and bidding processes, to obtain financing for physical investments. In this way, the project has built considerable institutional capacity through the adoption of more sound and efficient practices, as well as strengthened municipal capacity to identify, evaluate, and implement physical investments. There is already evidence that these practices are being expanded to other municipal activities outside the project, including alternative cost-recovery initiatives and the use of the same bidding documents in other investments. The project also has supported municipalities in devising adequate mechanisms for cost recovery among direct beneficiaries. It also established a financing mechanism (Municipal Development Funds) in each of the participating provinces that, if adequately managed, can ensure the sustained replicability of the project over the long run.  11 32. It is important to note that the project was likely to be most effective in introducing and extending reforms in those municipalities that already were most fiscally responsible and prone to reform. Eligibility criteria stressing municipal creditworthiness and other project conditionalities are likely to have operated as a self-selection mechanism, promoting the participation of the best performing municipalities. Far from this being a shortcoming, the project provided a framework that is consistent with the main lesson learned from lending for reform worldwide: willingness to reform on the part of subnational governments is a pre-condition for success. As these municipalities continue to demonstrate the feasibility of cost recovery and the benefits from sound municipal practices, reform is likely to extend to other municipalities. 33. With regard to promoting structured consultations between municipal and provincial authorities in relation to investment plans, the PEUs successfully served as interfaces. While respecting the high level of autonomy that municipalities are conferred under Argentina's Constitution, the PEUs have helped municipal authorities and technical staff in the selection of investment subprojects within the framework of technical and financial requirements imposed by the project's eligibility criteria. Over the life of the project, participating municipalities have developed a close working relationship with the PEUs, relying on them for technical assistance. In this way, municipal authorities have enhanced the way in which they select specific investments, complementing their intuition, political wit, and first-hand knowledge of the needs of their municipalities with sound technical criteria, such as financial feasibility. H. Future Operations 34. Based on the experience from this project, there are several relevant lessons to be learned. Most of these lessons have already been or are in the process of being incorporated into the Second Municipal Development Project (MDP-II, Ln. 3836-AR): a) Greater emphasis should be placed on cost-recovery design and implementation. The PEUs should evaluate not only the design of cost recovery measures but also their implementation. Successful implementation of cost recovery mechanisms should be made a condition for subsequent borrowing by municipalities. Also, components aimed at improving collection rates of other municipal revenues should be at the core of institutional strengthening subprojects. It is important to note that in the case of MDP-I, the Loan Agreement did not reflect the importance that cost recovery was given in the SAR, thus limiting the Bank's ability to legally enforce its compliance. This deficiency was corrected for MDP-II. b) Any agreement affecting project covenants should be formally recorded. This is particularly important as task managers, on the part of both the Borrower and the Bank, may change over the life of the project. c) An interim financing mechanism between payment to contractors and actual disbursement should be devised to relieve some of the financial  12 pressure on the municipalities. Currently, disbursement arrangements require municipalities to present SOEs. This requirement resulted in considerable financial stress on municipalities, since most of them do not have the cash flow required to finance payments to contractors until the receipt of disbursed funds, particularly in the case of the purchase of equipment. This introduced irregularities in the payment to contractors, and, in one case, a municipality had to delay the payment of its own payroll to meet its obligations to a contractor. d) Greater emphasis must be placed on technical assistance and training subprojects under institutional strengthening components. Municipalities should also be encouraged to carry out institutional diagnosis and prepare financial action plans to improve their fiscal situation, possibly with the support of institutional strengthening subprojects. The PEUs could also capitalize on potential economies of scale and explore alternative solutions to problems that are common to many municipalities. e) The role of the CCU and PEUs as information clearinghouses should be emphasized. In general, executing units have not capitalized on their competitive advantage to promote cross-fertilization and the dissemination of best practices among provinces and municipalities. f) A set of performance indicators should be developed to monitor the achievement of the project's objectives. Performance indicators are particularly important in this type of project, which takes a long time to implement and whose impact is highly related to other variables, especially macroeconomic ones. g) The role of the CCU has been strengthened. Given the high number of participating provinces under MDP-11, the CCU was assigned a stronger management role and a more direct supervision of the PEUs activities. A stronger CCU was necessary also to provide needed technical assistance to the PEUs of the newly incorporated provinces. h) Operation manuals and other project documents have been normalized across provinces. There is a tradeoff between provincial autonomy and consequent ownership and implementation efficiency. With only five participating provinces, it was possible under MDP-I to have each province draft its own operation manual and other project documents. This was no longer possible with the 13 provinces participating in MDP-11. i) Potential synergies with other entities, such as the International Finance Corporation (IFC), should be maximized. IFC's strategy for Latin America and the Caribbean includes the promotion of private sector participation in the delivery of services. Among other municipal investments worldwide, IFC co-financed the privatization of municipal water and sewerage services  13 in Limeira, Brazil, in 1996. IFC's strategy is highly consistent with the objectives of MDP-I and II, for which there is the potential for increased synergies between the Bank and IFC through the M[DP-II, possibly by simply increasing awareness of IFC financing instruments and requirements among the CCU and PEU staff. I. Key Lessons Learned 35. Portfolio loans can be effective tools in lending for reform. This project demonstrates that portfolio loans can effectively combine wholesale lending and lending for reform. By combining a few, clearly-defined eligibility criteria with a high level of flexibility in terms of specific subprojects, the project effectively balanced the need to guarantee the achievement of its reform objectives while maximizing its attractiveness among potential sub-borrowers. 36. Do not lend into macroeconomic chaos. An important lesson from Argentina is not to lend under highly unstable macroeconomic conditions like the ones prevailing in Argentina during 1987-88, which eventually led to hyperinflation and macroeconomic chaos. The low level of disbursements over the first years of the project suggests that the loan would not have performed well if the Convertibility Law had not been passed and macroeconomic stability restored. 37. Physical investment loans cannot substitute for adequate policy incentives. The funding available through physical investment loans does not provide sufficient incentives for municipalities to reform in and of itself This project was highly effective in rewarding and supporting the reform efforts of reform-minded municipalities, rather than in inducing reforms in unreceptive municipalities. An adequate system of incentives, both at the provincial and municipal levels, are prerequisites for broader municipal reform. At the provincial level, discretionary grants need to be removed and the revenue-sharing transfer system needs to reward fiscally responsible behavior and efficiency. At the municipal level, incentives should come from local constituencies that hold elected officials accountable for management of their public resources. In the case of Argentina, adequate incentives are slowly developing, as discretionary grants are increasingly being reduced because of tight provincial budgets, and democratic mechanisms continue to mature. 38. An important role for subnational governments is critical to the success of the project. Although the lack of adequate provincial and municipal technical and institutional capacity may result in initial project bottlenecks, their enhanced responsibilities within the project contribute to strong "hands-on" capacity-building, both at the provincial and municipal levels, and fosters their sense of ownership of the project. 39. Keep subproject requirements within reasonable bounds. Since individual subprojects are generally small, it is important not to overdimension preparation and evaluation requirements. Excessive requirements unduly increase the cost of borrowing and promote the unnecessary use of private consultants, which diminishes the potential for "in-house" capacity-building.  14 40. Simplify as much as possible all review, procurement, and disbursement procedures. To effectively conduct a wholesale lending operation, it is critical to rely on agile review, procurement, and implementation procedures. Given the large number of subprojects --over 700 subprojects in the case of MDP-I-- and the vast number of related documents, such as bidding documents, contracts, and terms of reference, that are characteristic of portfolio subprojects, simplified procedures are critical to avoid potential administrative bottlenecks and undue burdens on both the Borrower and the Bank staff. Bank requirements for procurement and disbursement usually reflect practices that are more appropriate for traditional projects than for portfolio loans. 41. Some supervision functions can be privatized successfully. In the case of MDP-I, some of the supervision of the project executing units and the supervision of some works was contracted out to the private sector. The experience was quite successful and significantly reduced the supervision burden on the Borrower and the Bank 42. Do not expect municipal portfolio projects to disburse quickly and easily at first. Municipal portfolio projects like MDP-I need to be designed with longer implementation periods to take into consideration the complex institutional framework of subnational governments and the complexity of implementation characteristic of portfolio loans.  15 Part II Statistical Tables Table 1: Summary of Assessment .................... ........... 16 Table 2: Related Bank Loans/Credits ............................... 18 Table 3: Project Timetable ............................... 19 Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual ............................. 19 Table 5A: Project Costs ............................... 20 Table 5B: Project Financing ............................... 20 Table 6: Status of Legal Covenants ............................... 21 Table 7: Bank Resources: Staff Inputs ............................... 27 Table 8: BankResources: Missions.....- .... 28 Table 9: Project Portfolio by Type of Subproject ................... 29 Table 10: Physical Investments by Type of Subproject ............. 30 Table 11: Purchases of Equipment by Type ............................. 31 Table 12: Rate of Provincial Participation ............................... 32 Table 13: Rate of Municipal Participation ............................... 33 Table 14: Repayment of Municipal Subloans ........................... 34 Table 15: Cost Recovery from Direct Beneficiaries .................. 35  16 Table 1 Summary of Assessments A. Achievement of Objectives Achievement of Objectives Substantial Partial Negligible Not Applicable Macro Policies Q Sector Policies _ _ _ Financial Objectives 1X1 Institutional Development Q Physical Objectives I1 __ Poverty Reduction . _ _ _ Gender Issues _ I Other Social Objectives Q Environmental Objectives __ Public Sector Management ___ Private Sector Development _ _ O ther__ _ _ _ _ _ _ _ _ _ _ _ B. Project Sustainability Project Sustainability Likely | Unlikely Uncertain C. Bank Performance Bank Performance Highly Satisfactory Deficient Satisfactory Identification 1__ Preparation Assistance Appraisals Sectoral-Technical Aspects Macroeconomic Aspects ___ Supervision la 5 The Bank's performance was satisfactory with respect to the sector design and technical aspects of project identification and preparation. However, from a macroeconomic standpoint, the Bank's performance at appraisal was deficient, as the project was allowed to move forward despite the chaotic macroeconomic conditions prevailing at the time.  17 D. Borrower Performance Borrower Performance Highly Satisfactory | Satisfactory Deficient Preparation III Implementation 19 Covenant Compliance __ _6 Operation (if applicable) E. Assessment of Outcome Assessment of Outcome Highly Satisfactory Unsatisfactory Highly Satisfactory Unsatisfactory 6 Although the borrower complied with all covenants, compliance with two important covenants was always late: the submission of the Audit Reports and the submission of the Project Progress Reports. In fact, the Borrower stopped submitting Progress Reports for almost two years.  18 Table 2 Related Bank Loans/Credits Ioan Purpose 1 Amount Year of Status Loan PurMse (US$ ND Approval] (As of March 9, 1997) Preceding Operations L _ _ _ _ T T____ _ ] I _ _ I ____ Subsequent Operations l Provincial Development I To provide financial support and incentives 200.0 1990 Scheduled to close December 1997. (Ln. 3280-AR) for provinces to undertake their own Undisbursed balance US$65.2 M. adjustment programs (own-source revenue enhancement and expenditure control) consistent with the national adjustment program. Second Municipal Development To contribute to more effective public sector 210.0 1995 Loan declared effective December (Ln. 3860-AR) management at the provincial and municipal 1995. Undisbursed balance levels through improved financing US$202.8 M. mechanisms for municipal investments; to achieve more effective fiscal federalism by strengthening the municipalities' capacity to assume the responsibilities being transferred to them. Provincial Reform (Ln. 3836-AR) Support the Federal Government's efforts to 300.0 1995 Undisbursed balance US$0.4 M. promote the reform of provincial finances. To deepen the fiscal reforms underlying macroeconomic stability and enhance the capacity of the provincial governments to fulfill their increasingly important role as providers of public goods and services. l Provincial Development 11 To continue to provide financial support and 225.0 1995 Loan declared effective June 1996. (Ln. 3877-AR) incentives for provinces to undertake their Undisbursed balance US$224.5M. own public sector reform programs consistent with the national program.  19 Table 3 Project Timetable Steps in Project Cycle Date Planned Actual Date/or Duration Identification (Initial Executive 10/17186 Project Summary) Preparation Seven months Appraisal 11/10/87 Negotiations 02/08/88 Board Presentation 03/22/88 Signing 11/29/88 Effectiveness 03/03/89 |Loan closing 06/30/95 03/31/96 Table 4 Loan Disbursements: Cumulative Estimated and Actual (US$ million) FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 Appraisal estimate 5 14.7 33 58.8 81.8 100.8 116.9 120 Actual 0 5 5 5.95 17.65 47.82 95.74 115.07 119.78 Actual as % of estimate 34% 15% 10% 22% 47% 82% 96% Date of final disbursement: June 5, 1996  20 Table 5A Project Costs Appraisal estimate (US$M) Actual (US$M) Item Local Foreign Total Local Foreign Total Costs Costs Costs Costs A. Infrastructure 98.3 42.0 140.3 104.4 44.6 149.0 B. Community Facilities 12.8 5.2 18.0 2.4 1.0 3.4 C. Project Design and Supervision 9.4 1.7 11.1 15.5 2.8 18.3 D. Equipment and Vehicles 4.8 18.8 23.6 3.0 11.8 14.8 E. Technical Assistance and Training 6.7 3.4 10.1 2.5 1.3 3.8 Contingencies 24.0 12.9 36.9 0.0 0.0 0.0 Total 156.0 84.0 240.0 127.8 61.5 189.3 'Bible 5B Project Financing Appraisal estimate (US$M) Actual estimate (US$M) Source Local Foreign Total Local Foreign Total costs costs costs costs IBRD 36.0 84.0 120.0 58.2 61.5 119.7 Provinces 32.0 0 32.0 16.1 0.0 16.1 Municipalities 88.0 0 88.0 53.5 0.0. 53.5 Total 156.0 84.0 240.0 127.8 61.5 189.3  21 Table 6 Status of Legal Covenants Agreement Section Type of Present Description of Covenant Comments ._______ Covenant Status Loan Agreement Section 3 C The Borrower shall open and maintain in dollars a Complied. 2.02(b) special account. Section 5 C The Closing Date shall be June 30, 1995. Closing Date was extended to 2.03 March 31, 1996. Complied. Section 3 C The Borrower shall relend the proceeds of the Loan to Complied. 3.01 (b) (c) the provinces under subsidiary loan agreements. After three years from the date of this Agreement (March 1, 1992) the Borrower shall reallocate the undisbursed and uncommitted amount of the Loan amount the provinces. Section 5,4 C The Borrower shall maintain a National Liaison Unit in Complied. 3.03 (a) (b) the Secretariat of Housing and Environmental Management of the Ministry of Public Works and Social Affairs and provide the funds, facilities and resources needed to carry out its functions efficiently. Section 9 CD Not later than March 31 and September 30 of each year, Last progress report submitted 3.04 the Borrower shall prepare and send to the Bank a report 12/22/95. Between 1993 and on the execution of the project. 1995 there were no progress reports. Section 10 NYD The Borrower shall prepare and furnish to the Bank Due March 31, 1997. 3.05 through the National Liaison Unit a consolidated completion report. Section 1,2 C The Borrower shall maintain separate records and Complied. 4.01 (a) accounts reflecting all deposits and payments made into and from the Special Account and enable the Bank's representative to examine such records. Section I CD The Borrower shall have all records and accounts for Complied with delay. No major 4.01 (b) each fiscal year audited by independent auditors observations. acceptable to the Bank and send to the Bank, not later than four months after the end of each year, the audit reports. Schedule 5 3 C The amount of the loan shall be relent to the Provinces Complied. Actual amounts by as fbllowa: Province: Buenos Aires - 55 million Buenos Aires - 48.5 million Cordoba - 21 million Cordoba - 31.3 million La Pampa - 3.5 million La Pampa - 13 million Neuquen - 9.5 million Neuquen - 5.2 million Santa Fe - 31 million Santa Fe - 22 million Total 120 million Total 120 million Covenant Types: I = Accounts/Audits 8 = Indigenous people 2 = Financial performance/generate revenue from 9 = Monitoring, review and reporting beneficiaries 10 = Project implementation not 3 = Flow and utilization of Project funds covered by categories 1-9 4 = Counterpart funding 11 = Sectoral or cross sectoral 5 - Management aspects of the project budgetary or other resource or executing agency allocation 6 = Environmental covenants 12 = Sectoral or cross-sectoral policy/ 7 = Involuntary resettlement regulatory/institutional action 13 = Other Present Status: C = covenant complied CD = complied with after delay CP = complied with partially NC = Not complied with  22 Agreement Section TIpe of Present Description of Covenant Comments Covenant Status Santa Fe Project Section 4 C Santa Fe shall carry out the project with diligence and Complied. Agreement 2.01 (a) shall provide the funds. facilities, services and other resources required for the project. Section 3 C Santa Fe shall select eligible municipalities and Complied. 2.01 (b) subprojects, enter into sub-loan agreements and procure goods and services to be financed out of the proceeds of the loan, maintain records, approve annual investments and carry out activities in accordance with this agreement and the Project Operations Manual. Section 3 C Santa Fe shall make subloans to eligible municipalities to Complied. 2.01 (d) finance the execution of sub-projects as set forth in the Project Operations Manual. Section 5 C Unless the Bank shall otherwise agree, Buenos Aires Complied. 2.01 (e) shall not amend, abrogate, waive, fail to enforce or repeal the Project Operation Manual, the Sub-Loan Agreement or any provision thereof. Section 5,4 C Santa Fe shall maintain the PEU for coordinating, Complied. 2.02 (a) supervising the execution of the project and provide the PEU with staff, funds and resources for carrying out its .________________ functions until the final completion report. Section 2 CP On Sept. 30 of each year Santa Fe shall prepare and No new investment programs 2.03 (a) furnish to the Bank an annual investment program for were prepared for 1994 and the following year which should include municipal 1995, as funds were fully investment projects which meet the eligibility criteria set committed with the 1993 forth in the Project Operation Manual. Investment Program. Section 2 C Santa Fe shall maintain the Municipal Development Complied. 2.04 (a) Fund and shall contribute into such fund all the proceeds collected as principal, interest, and other charges on sub- __________________ _ __________ loans. Section 2 C Santa Fe shall manage the loan proceeds in accordance Complied. 2.04 (b) with appropriate financial and administrative practices satisfactory to the Bank and use the proceeds to make subsidiary loan payments, finance new investments, including technical assistance and training programs. Section 6 C Santa Fe shall cause the eligible sub-projects to be Complied. 2.05 carried out with due regard to ecological and environmental concerns, as provided in the Project Operations Manual. Section 3 C Procurement of goods, works and consultants' services Complied. 2.06 required for the project and to be financed out of the proceeds of the loan, shall be governed by the provisions of Schedule 6 of the Loan Agreement. Section 9 CD (i) Santa Fe shall have the records and accounts for each Complied with delay. No major 3.01 (b) fiscal year audited by independent auditors acceptable to observations made. the Bank; (ii) furnish to the Bank not later than four months after the end of the fiscal year, the report of such audits; (iii) furnish to the Bank that audit report, as the Bank shall reasonably request. Section I CP Santa Fe shall ask auditors to issue every six months a Bank received as part of the 3.02 (a)(i) performance report regarding the compliance by the annual audit. Performance municipalities and agencies responsible for carrying out report satisfactory to the Bank. the project and a report on the accounts and financial However, this is received situation of the Municipal Development fund. Santa Fe annually, not bi-annually. should send these reports to the Bank no later than 60 days from the date they are issued.  23 Agreement Section Type of Present Description of Covenant Comments Covenant Status Buenos Aires Section 4 C Buenos Aires shall carry out the project with diligence and Complied. Project Agreement 2.01 (a) shall provide the funds. facilities, services and other resources required for the project. Section 3 C Buenos Aires shall select eligible municipalities and Complied. 2.01 (b) subprojects, enter into sub-loan agreements and procure goods and services to be financed out of the proceeds of the loan, maintain records, approve annual investments and carry out activities in accordance with this agreement and the Project Operations Manual. Section 3 C Buenos Aires shall make subloans to eligible municipalities Complied. 2.01 (d) to finance the execution of sub-projects as set forth in the Project Operations Manual. Section 5,4 C Buenos Aires shall maintain the PEU for coordinating, Complied. 2.02 (a) supervising the execution of the project and provide the PEU with staff, funds and resources for carrying out its functions until the final completion report. Section 2 CP On Sept. 30 of each year Buenos Aires shall prepare and No new investment programs 2.03 (a) furnish to the Bank an annual investment program for the were prepared for 1994 and following year which should include municipal investment 1995, as funds were fully projects which meet the eligibility criteria set forth in the committed with the 1993 Project Operation Manual. Investment Program. Section 2 C Buenos Aires shall maintain the Municipal Development Complied. 2.04 (a) Fund and shall contribute into such fund all the proceeds collected as principal, interest, and other charges on sub- loans. Section 2 C Buenos Aires shall manage the loan proceeds in accordance Complied. 2.04 (b) with appropriate financial and administrative practices satisfactory to the Bank and use the proceeds to make subsidiary loan payments, finance new investments, including technical assistance and training programs. Section 6 C Buenos Aires shall cause the eligible sub-projects to be Complied. 2.05 carried out with due regard to ecological and environmental concerns, as provided in the Project Operations Manual. Section 3 C Procurement of goods, works and consultants' services Complied. 2.06 required for the project and to be financed out of the proceeds of the loan, shall be governed by the provisions of __________ XSchedule 6 of the Loan Agreement. Section 5 C Buenos Aires shall exchange views with the Bank with Complied. 2.09 (a) (b) regard to the progress of the project and shall inform the Bank of any condition which interferes with the performance of the project. Section 9 CD (i) Buenos Aires shall have the records and accounts for Complied with delay. No 3.01 (b) each fiscal year audited by independent auditors acceptable major observations made. to the Bank; (ii) furnish to the Bank not later than four months after the end of the fiscal year, the report of such audits; (iii) furnish to the Bank that audit report, as the ._______ __ Bank shall reasonably request. Section I CP Buenos Aires shall ask auditors to issue every six months a Bank received as part of the 3.02 (a)(i) performance report regarding the compliance by the annual audit. Performance municipalities and agencies responsible for carrying out the report satisfactory to the project and a report on the accounts and financial situation Bank. However, this is of the Municipal Development fund. Buenos Aires should received annually, not bi- send these reports to the Bank no later than 60 days from annually. the date they are issued. I _I  24 Agreement Section Type of Present Description of Covenant Comments Covenant Status La Pampa Section 4 C La Pampa shall carry out the project with diligence and shall provide Complied. Project 2.01 (a) the funds. facilities, services and other resources required for the Agreement project. Section 3 C La Pampa shall select eligible municipalities and subprojects, enter Complied. 2.01 (b) into sub-loan agreements and procure goods and services to be financed out of the proceeds of the loan, maintain records, approve annual investments and carry out activities in accordance with this agreement and the Project Operations Manual. Section 3 C La Pampa shall make subloans to eligible municipalities to finance Complied. 2.01 (d) the execution of sub-projects as set forth in the Project Operations Manual. Section 10 C La Pampa shall not amend, abrogate, waive, fail to enforce or repeal Complied. 2.01 (e) the Project Operations Manual, the Sub-Loan Agreements, or any provision thereof. Section 5,4 C La Pampa shall maintain the PEU for coordinating, supervising the Complied. 2.02 (a) execution of the project and provide the PEU with staff, funds and resources for carrying out its functions until the final completion report. Section 2 CP On Sept. 30 of each year La Pampa shall prepare and furnish to the No new investment programs 2.03 (a) Bank an annual investment program for the following year which were prepared for 1994 and should include municipal investment projects which meet the 1995, as funds were fully eligibility criteria set forth in the Project Operation Manual. committed with the 1993 ____________ l_______ Investment Proiram. Section 2 C La Pampa shall maintain the Municipal Development Fund and shall Complied. 2.04 (a) contribute into such fund all the proceeds collected as principal, _________ interest, and other charges on sub-loans. Section 2 C La Pampa shall manage the loan proceeds in accordance with Complied. 2.04 (b) appropriate financial and administrative practices satisfactory to the Bank and use the proceeds to make subsidiary loan payments, finance new investments, including technical assistance and training Drograms. _ Section 2 C La Pampa shall manage the Municipal Development Fund in Complied. 2.04 (c) accordance with appropriate financial and administrtive practices. Section 6 C La Pampa shall cause the eligible sub-projects to be carried out with Complied. 2.05 due regard to ecological and environmental concerns, as provided in the Project Operations Manual. Section 3 C Procurement of goods, works and consultants' services required for Complied. 2.06 the project and to be financed out of the proceeds of the loan, shall I____________ be governed by the provisions of Schedule 6 of the Loan Agreement. Section 10 C La Pampa shall inform the Bank of any condition which interferes Complied. 2.09 (b) with the progress of the project, the accomplishment of the purposes of the Loan, or the performance by La Pampa of its obligations under this Agreement and the Subsidiary Loan Agreement. Section 3,2 C La Pampa shall maintain separate records and accounts adequate to Complied. 3.01 (a) reflect the operations, resources, and expenditures in respect to the PEU, the municipalities and other agencies responsible for carryirg out the project. Section 9 CD (i) La Pampa shall have the records and accounts for each fiscal year Complied with delay. No 3.01 (b) audited by independent auditors acceptable to the Bank; (ii) furnish to major observations made. the Bank not later than four months after the end of the fiscal year, the report of such audits; (iii) furnish to the Bank that audit report, as the Bank shall reasonably request. Section 1,9 C For expenditures for which withdrawals from the Loan Account were 3.01 (c) made using SOE, La Pampa, through the PEU, shall (i) maintain (i)&(ii) separate records and accounts of these expenses; (ii) retain all records for these expenses for at least one year; (iii) enable the Bank to examine such records; and (iv) ensure that such records are included in the annual audit report. Section 1 CP (a) Auditors shall issue every six months a performance report on Bank received as part of the 3.02 compliance by the Municipalities of La Pampa and its agencies and a annual audit. However, this (a)(b) report on the financial situation of the Municipal Development Fund; is received annually, not bi- (b) La Pampa shall furnish to the Bank copies of the reports annually. mentioned on (a) not later than 60 days from the date they are issued.  25 Agreement Section Type of Present Description of Covenant Comments Covenant status Cordoba Section 3 C Cordoba shall make subloans to eligible municipalities to finance Complied. Project 2.01 (d) the execution of sub-projects as set forth in the Project Operations Agreement Manual. Section 5 C (a) Cordoba shall maintain the PEU for purposes of coordinating, Complied. 2.02 (a) supervision and participating in the execution of the project until (b) the issuance of the final completion report. (b) Cordoba shall not amend, repeal or abrogate the Law 7715, dated November 1, 1988 that established the PEU. Section 3 CP Cordoba, through PEU, shall fumish to the Bank for approval a No new investment programs 2.03 (a) detailed annual investment program for the next calendar year not were prepared for 1994 and later than September 30 of each year. 1995, as funds were fully committed with the 1993 Investment Program. Section 10,3 C If significant deficiencies are noted by audit and management Complied. 2.03 (b) reports or supervision of the project, Cordoba should include a technical assistance plan designed by the PEU for these purposes. Section 2 C Cordoba shall maintain the Municipal Development Fund and shall Complied. 2.04 (a) contribute into such fund all the proceeds collected as principal, interest, and other charges on sub-loans. Section 2 C Cordoba shall manage the loan proceeds in accordance with Complied. 2.04 (b) appropriate financial and administrative practices satisfactory to the ____________ =Bank. Section 2 C Cordoba shall manage the Municipal Development Fund in Complied. 2.04 (c) accordance with appropriate financial and administrative practices. Section 6 C Cordoba shall cause the eligible sub-projects to be carried out with Complied. 2.05 due regard to ecological and environmental concerns, as provided in the Project Operations Manual. Section 3 C Procurement of goods, works and consultants' services required for Complied. 2.06 the project and to be financed out of the proceeds of the loan, shall be governed by the provisions of Schedule 6 of the Loan =___________ _Agreement. Section 5 C Cordoba shall duly perform all its obligations under the Subsidiary Complied. 2.08 Loan Agreement and shall not take or concur in any action that would amend, abrogate, assign or waive the Subsidiary Loan Agreement. Section 10 C Cordoba shall inform the Bank of any condition which interferes Complied. 2.09 (b) with the progress of the project, the accomplishment of the purposes of the Loan, or the performance by Cordoba of its obligations under this Agreement and the Subsidiary Loan .______ Agreement. Section 3,2 C Cordoba shall maintain separate records and accounts adequate to Complied. 3.01 (a) reflect the operations, resources, and expenditures in respect to the PEU, the municipalities and other agencies responsible for carryirg out the project. Section 9 CD (i) Cordoba shall have the records and accounts for each fiscal Complied with delay. No 3.01 (b) year audited by independent auditors acceptable to the Bank; (ii) major observations made. furnish to the Bank not later than four months after the end of the fiscal year, the report of such audits; (iii) furnish to the Bank that audit report, as the Bank shall reasonably request. Section 1,9 C For expenditures for which withdrawals from the Loan Account 3.01 (c) were made using SOE, Cordoba, through the PEU, shall (i) maintain separate records and accounts of these expenses; (ii) retain all records for these expenses for at least one year; (iii) enable the Bank to examine such records; and (iv) ensure that such .___________ _______ __________ ____ _ records are included in the annual audit report. Section 1 CP (a) Auditors shall issue every six months a performance report on Bank received as part of the 3.02 compliance by the Municipalities of Cordoba and its agencies and annual audit. However, this (a)(b) a report on the financial situation of the Municipal Development is received annually, not bi- Fund; (b) Cordoba shall furnish to the Bank copies of the reports annually. mentioned on (a) not later than 60 days from the date they are issued.  26 Agreement Section Type of Present Description of Covenant Comments Covenant Status Neuquen Section 3 C Neuquen shall make subloans to eligible municipalities to finance Complied. Project 2.01 (d) the execution of sub-projects as set forth in the Project Operations Agreement Manual. Section 5,4 C (a) Neuquen shall maintain the PEU for purposes of coordinating, Complied. 2.02 (a) supervising and participating in the execution of the project until (b) the issuance of the final completion report. (b) Neuquen shall not amend, repeal or abrogate the Law 7715, dated November 1, 1998 that established the PEU. Section 3 CP Neuquen, through PEU, shall furnish to the Bank for approval a No new investment programs 2.03 (a) detailed annual investment program for the next calendar year not were prepared for 1994 and later than September 30 of each year. 1995, as funds were fully committed with the 1993 Investment Program. Section 10,3 C If significant deficiencies are noted by audit and management Complied. 2.03 (b) reports or supervision of the project, Neuquen should include a technical assistance plan designed by the PEU for these purposes. Section 2 C Neuquen shall maintain the Municipal Development Fund and Complied. 2.04 (a) shall contribute into such fund all the proceeds collected as principal, interest, and other charges on sub-loans. Section 2 C Neuquen shall manage the loan proceeds in accordance with Complied. 2.04 (b) appropriate financial and administrative practices satisfactory to the Bank and use the proceeds to make subsidiary loan payments, finance new investments, including technical assistance and training programs. Section 2 C Neuquen shall manage the Municipal Development Fund in Complied. 2.04 (c) accordance with appropriate financial and administrative practices. Section 6 C Neuquen shall cause the eligible sub-projects to be carried out with Complied. 2.05 due regard to ecological and environmental concems, as provided in the Project Operations Manual. Section 3 C Procurement of goods, works and consultants' services required for Complied. 2.06 the project and to be financed out of the proceeds of the loan, shall be governed by the provisions of Schedule 6 of the Loan Agreement. Section 5 C Neuquen shall dully perform all its obligations under the Complied. 2.08 Subsidiary Loan Agreement and shall not take or concur in any action that would amend, abrogate, assign or waive the Subsidiary _________ Loan Agreement. Section 10 C Neuquen shall inform the Bank of any condition which interferes Complied. 2.09 (b) with the progress of the project, the accomplishment of the purposes of the Loan, or the performance by Neuquen of its obligations under this Agreement and the Subsidiary Loan Agreement. Section 9 CD (i) Neuquen shall have the records and accounts for each fiscal Complied with delay. No 3.01 (b) year audited by independent auditors acceptable to the Bank; (ii) major observations made. furnish to the Bank not later than four months after the end of the fiscal year, the report of such audits; (iii) furnish to the Bank that audit report, as the Bank shall reasonably request. Section 1,9 C For expenditures for which withdrawals from the Loan Account 3.01 (c) were made using SOE, Neuquen, through the PEU, shall (i) maintain separate records and accounts of these expenses; (ii) retain all records for these expenses for at least one year; (iii) enable the Bank to examine such records; and (iv) ensure that such records are included in the annual audit report. Section I CP (a) Auditors shall issue every six months a performance report on Bank received as part of the 3.02 (a) compliance by the Municipalities of Neuquen and its agencies and annual audit. However, this a report on the financial situation of the Municipal Development is received annually, not bi- Fund; (b) Neuquen shall furnish to the Bank copies of the reports annually. mentioned on (a) not later than 60 days from the date they are issued.  27 Table 7 Bank Resources: Staff Inputs /1 Stage of Actual project cycle Weeks US$ Through appraisal 101.2 178.2 Appraisal-Board 11.4 22.0 Board-effectiveness 10.9 19.6 Supervision 128.0 367.2 Completion 9.6 19.6 TOTAL 261.1 610.0 ' Includes Bank-financed and trust fund consultants. Dollars are direct costs only.  28 Table 8 Missions Stage of Project cycle Month/ Number Specialized year of Days in staff skills Performance rating persons field represented 1/ Implementation Development Types of Status objectives problemns Through appraisal October 1985 2 3 D,L October 1986 4 7 A,B,L,M March 1987 4 14 A,B,C,J August 1987 4 14 A,B,C,J Appraisal through November 1987 1 5 A Board approval Board approval August 1988 3 10 A,B through effectiveness Supervision December 1988 2 10 AB 1None April 1991 3 B,C,D 2 1 None July 1991 2 3 C,D 2 1 None May 1992 4 5 C,D,E,F 1 2 None November 1992 3 10 C,D,E 1 1 None September 1993 2 5 C,D I I None May 1995 2 2 D,G S S None June 1995 5 10 G,H,I,J,K S S None December 1995 2 10 D,H S S None Completion December 1996 1 15 J - - 1/ Key to specialization: A. Mission Leader B. Institutional Specialist C. Municipal Prov Specialist D. Sr. Urban Specialist E. Implementation Specialist F. Procurement Specialist G. Transport Specialist H. Operations Analyst 1. Civil Engineer J. Urban/Financial Specialist K. Accountant/Financial Analyst L. Principal Planner M. Sr. Financial Planning Specialist 339933999  Table 9 Project Portfolio by Type of Subproject in All Participating Provinces Type Number of Total Amount IBRD Financing Avg. Subproject Beneficiaries Subprojects US$'000 %/ of Total US$'000 %/ of Total Size ci-Il 1*1VOrs Pavernent 315 96,977 51.21% 66,768 55.74% 308 1,362,607 * Water 39 11,343 5.99% 7,291 6.09% 291 369,164 * Sewverage 34 19,431 10.26% 13,220 11.04% 572 83,470 Drainage 10 7,716 4.07% 5,430 4.53% 772 131,779 Gas 19 12,132 6.41% 8,587 7.17% 639 45,643 * Street Lighting 5 1,459 0.77% 983 0.82% 292 28,341 * Subtotal 422 149,058 78.72% 102,279 85.38% 353 2,021,003 * Conmmldty Facilities Subtotal 25 3,353 1.77% 2,295 1.92% 134 86,600 Equipment Subtotal 220 14,833 7.83% 9,812 8.19% 67 1,808,461 Technical Assistance *** NIunicipalities 39 1,694 0.89% 1,385 1.16% 43 623,553 PEUs n.a. 2,073 1.09% 2,047 1.71% n.a. n.a. Subtotal 39 3,767 1.99% 3,432 2.86% na. 623,553 Project Execution and Supervision Auditing n.a. 2,063 1.09% 1,977 1.65% n.a. n.a. Provincial Executing Units n.a. 16,050 8.48% 0 0.00% n.a. n.a. Central Coordinating Unit n.a. 240 0.13% 0 0.00% n.a. n.a. Subtotal na. 18,353 9.69% 1,977 1.65% na. iLa. Grand Total 706 189,363 100.00% 119,795 100.00% 268 4,539,617 * Estimate based on average of other participating provinces. ** Does not include the Province of Buenos Aires *" It includes only subprojects specifically designated as technical assistance. However, it is estimated that at least 50% of the costs of the project executing units were used in providing technical assistance to the municipalities.  Table 10 Project Portfolio by Type of Subproject All Participating Provinces Physical Investments Participating Provinces by Type Buenos Aires Cordoba La Pampa Neuquen Santa Fe All US$'000 % of Total US$'000 % of Total US$'000 % of Total US$'000 % of Total USS'000 % of Total US$'O0O % of Total Civil Works Pavement 39,011 56.6% 34,771 78.5% 5,894 33.6% 2,124 39.9% 15,177 48.8% 96,979 58.0% Water 7,134 10.3% 2,007 4.5% 118 0.7% 129 2.4% 1,955 6.3% 11,343 6.8% Sewerage 8,582 12.4% 860 1.9% 193 1.1 % 298 5.6% 9,498 30.5%/o 19,431 11.6% Drainage 1,752 2.5% 957 2.2% 4,884 27.8% 0 0.0% 123 0.4% 7,716 4.6% U Gas 5,252 7.6% 80 0.2% 5,952 33.9% 97 1.8% 751 2.4