Argentina - Provincial Agricultural Development Project

Document of The World Bank Report No. 15454-AR STAFF APPRAISAL REPORT ARGENTINA PROVINCIAL AGRICULTURAL DEVELOPMENT PROJECT March 21, 1997 Natural Resources, Environment and Rural Poverty Division Country Department I Latin America and the Caribbean Region  CURRENCY EQUIVALENTS (As of March 1997) Currency Unit Peso (Arg$) EXCHANGE RATE (March 1997) US$1.00 Arg$1.00 Arg$ 1.00= US$ 1.00 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES The metric system has been used throughout the report. Vice President: Mr. Shahid Javed Burki Director: Mr. Gobind T. Nankani Division Chief Ms. Constance Bernard Task Manager: Mr. Guzman Garcia-Rivero  ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CC Consultative Commissions CE Total Current Expenditure CFA Federal Agricultural Council Consejo Federal Agropecuario COPROSA Provincial Commission for Animal Health Comision Provincial de Sanidad Animal CORFO-RC Corporation for the Development of the Rio Colorado Valley Corporaci6n de Fomento del Rio Colorado CPI Consumer Price Index CR Total Current Revenues DGI General Irrigation Department - Province of Mendoza Departamento General de Irrigaci6n-Provincia de Mendoza EA Environmental Analysis EC Executive Comunittee EM Project Environmental Manual EPAF Provincial Unit for Financial Administration Entidad Provincial de Administracion Financiera EPDA Provincial Agricultural Development Agency Entidad de Programacion del Desarrollo Agropecuario ERR Economic Rate of Return FMD Foot-and-Mouth Disease GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GOA Govemrnent of Argentina IASCAV National Institute for Phytosanitary Health and Quality Control Instituto Argentino de Sanidady Calidad Vegetal IBRD Intemational Bank for Reconstruction and Development ICB International Competitive Bidding  IDB Inter-American Development Bank IDC Institutional Development Component IERR Internal Economic Rate of Return lNASE National Seeds Institute Instituto Nacional de Semillas INDEC National Institute for Statistics and Census Instituto Nacional de Estadisticas y Censos INTA National Agricultural Technology Institute Instituto Nacional de Tecnologia Agropecuaria LIBOR London Interbank Offered Rate MA Projects Environmental Manual Manual Ambiental del PROSAP M & E Monitoring and Evaluation Seguimiento y Evaluaci6n MEyOySP Ministry of Economy and Public Works and Services Ministerio de Economia y Obras y Servicios Pzwbhcos MERCOSUR Southern Cone Common Market Mercado Comtun del Cono Sur NBF Non-Bank Financed NCB National Competitive Bidding NGO Non-Governmental Organization NOA Northwestern Region of Argentina Noroeste Argentino NPV Net Present Value O & M Operation and Maintenance OED Operations Evaluation Department PDP Provincial Development Project PIP Project Implementation Plan POA Annual Operating Plan Plan Operativo Anual  POM Project Operational Manual PPF Project Preparation Facility PROMSA Agricultural Services and Institutional Development Project Proyecto de Modernizacion de los Servicios Agropecuarios PROSAP Provincial Agricultural Development Project Proyecto de Servicios Agricolas Provinciales RF Regional Fora SAGPyA Secretariat of Agriculture, Livestock, Fisheries and Food Secretaria de Agricultura, Ganaderia, Pesca y Alimentacion SBD Standard Bidding Document SEFINOA Phytosanitary Services for the Northwestern Region Servicios Fitosanitarios del Noroeste Argentino SENASA National Service for Food and Agricultural Sanitation and Quality Servicio Nacional de Sanidady CalidadAgroalimentaria SIIA Agricultural Statistics Integrated System Sistema Integrado de Informacion Agropecuaria SOEs Statements of Expenditure SSAGyF Undersecretariat for Agriculture, Livestock and Forestry-SAGPyA Subsecretaria de Agricultura, Ganaderia y Forestaci6n-SAGPyA TCG Tripartite Consultative Group TORs Termns of Reference UA Environmental Unit Unidad Ambiental UE Evaluation Unit Unidad de Evaluaci6n UEC Central Project Coordinating Unit Unidad Ejecutora Central UEP Project Implementing Unit Unidad Ejecutora de Proyecto US Monitoring Unit Unidad de Seguimiento  USDA United States Department of Agriculture UTP Provincial Technical Units Unidades Tecnicas Provinciales WUA Water Users Associations WRMP Water Resource Management Policy  ARGENTINA PROVINCIAL AGRICULTURAL DEVELOPMENT PROJECT TABLE OF CONTENTS LOAN AND PROJECT SUMMARY ...............................................................i 1. THE SECTOR ....................................................................................................................... A. MACROECONOMIC SETTING ...................................................1............................ B. AGRICULTURAL SECTOR: PERFORMANCE AND PROSPECTS ........................................... 2 C. SECTORAL POTENTIAL AND CONSTRAINTS ................................................................... 3 D. DECENTRALIZATION OF DELIVERY OF PUBLIC AGRICULTURAL SERVICES ........ ............. 5 E. PRIVATE SECTOR PARTICIPATION IN DELIVERY OF AGRICULTURAL SUPPORT SERVICES ............................................................................... 6 F. BANK EXPERIENCE IN THE AGRICULTURAL SECTOR ................ ............................ ........ 7 G. BANK LENDING IN ARGENTINA ............................................................................... 9 2. THE PROJECT 1............................................................................... 1 A. ORIGIN AND RATIONALE FOR BANK INVOLVEMENT .11................................................ 11 B. PROJECT OBJECTIVES ............................................................................... 11 C. SUMMARY PROJECT DESCRIPTION ............................................................................. 12 D. MAIN AREAS OF INTERVENTION ............................................................................... 13 E. PROVINCIAL ELIGIBILITY CRITERIA ............................................ ............................. 14 F. SUBPROJECT SELECTION PROCESS AND ELIGIBILITY CRITERIA ......... ......................... 15 G. SELECTION OF PRIORITY SUBPROJECTS ....................................................................... 16 H. GROUP A SUBPROJECTS ............................................................................... 17 I. INSTITUTIONAL DEVELOPMENT COMPONENT .......................8...................................... 18 J. PROJECT COST AND FINANCING .... ....................................................... ................ 19 K. SUBPROJECTS COST RECOVERY............................................................................... 22 3. PROJECT IMPLEMENTATION ............................................................................... 24 A. INSTITUTIONAL ARRANGEMENTS ..... .............. ........... ... 24 B. MONITORING AND EVALUATION ................................. ................................. 28 Project Monitoring ............................................................................... 28 Mid-Term Review ............................................................................... 29 Project Evaluation ............................................................................... 29 C. PERFORMANCE INDICATORS - SUBPROJECTS IN GROUP A ..... .................................... 29 D. PROJECT OPERATIONAL MANUAL ............................................................................. 31 E. PROCUREMENT ............................................................................... 31 F. DISBURSEMENTS ............................................................................... 35 G. ACCOUNTS AND AUDITS .................................. ............................................. 38 This report is based on the finding of an Appraisal Mission that visited Argentina between February 12 and 28, 1996 comprising: Messrs/Mlnes. G. Garcia-Rivero (Task Manager-LAIER), R. Van Puymbroeck (LEGLA), J. Uquillas (LATEN), and E. Gacitiua (LAIER); and A. del Castillo, P. Anguita and A. Soler (Consultants). The report also incorporates valuable contributions made during preparation from Mr. M. Wilson (MNINE). Peer reviewers were Messrs. J. Parker (LA3NR) and W. Nickel (SA2CI). MmNes. D. Ledesma and R. Rudran (LAIER) were responsible for the production of this report. Messrs/Mmes. G. T. Nankani, 0. Grimes and C. Bernard are Department Director, Projects Adviser and Division Chief, respectively.  4. PROJECT BENEFITS, IMPACTS AND RISKS ................................................................... 39 A. PROJECT BENEFITS ......................................................................... 39 B. PROJECT SUSTAINABILITY ......................................................................... 41 C. SOCIAL ASSESSMENT AND BENEFICIARY PARTICIPATION ........................................... 42 Findings ......................................................................... 42 Implementing Participation .............................................. ........................... 43 D. ENVIRONMENTAL ASPECTS ............................................................................ ... 45 E. RISKS, EXOGENOUS CONDITIONS AND MITIGATING MEASURES .................................. 47 5. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ....................... 49 A. AGREEMENTS REACHED ......................................................................... 49 B. RECOMMENDATION ......................................................................... 51 ANNEXES: A. LESSONS LEARNED ............................................................ 52 B. DEscRuIP oN OF INVESTMENT SUBPROJECTS IN GROUP A ................ .................. 59 C . SUMMARY PROJECT COSTS AND FINANCING TABLES ........................................................ 78 D. DETAILED COST TABLES BY SUBPROJECT ............................................................ 96 E. PROJECT BENEFITS AND ECONOMIC ANALYSIS BY SUBPROJECT ...................................... 127 F. PROJECT ENVIRONMENTAL ASSESSMENT ............................................................ 141 G. PROJECT SOCIAL ASSESSMENT AND BENEFICIARY PARTICIPATION . ........ .............. 147 H. INSTITuTIONAL DEVELOPMENT CO PONENT ............................................................ 159 I. PERFORMANCE INDICATORS ............................................................ 165 J. SUPERVISION PLAN ............................................................. 173 MAP: No. IBRD 27905  ARGENTINA PROVINCIAL AGRICULTURAL DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: The Argentine Republic Implementing Agency: Secretariat of Agriculture, Livestock, Fisheries and Food (SAGPyA) and the Provincial Governments Beneficiaries: Directly, about 120,000 small and medium-sized commercial farmers and, indirectly, the entire rural population in the subproject areas. Poverty: Not applicable Amount: US$125 million Terms: Repayment in 15 years, including a grace period of five years, with loan amortization based on level repayment of principal and standard variable interest rate for LIBOR-based single currency loans. Commitment Fee: 0.75% on undisbursed loan balance, beginning 60 days after signing, less any waiver. Onlending Terms: Provincial subloans would be repaid in 18 years (including a grace period of five years) with variable interest rates at the average between IBRD and IDB rates. In addition, provinces would pay commitment and inspection fees (also the average of the rates for both banks) in proportion to the amounts of the provincial subloans. Financing Plan: See paras. 2.23-2.27 and Tables 2.2-2.3. Net Present Value: The NPV of total net benefits has been estimated at US$127.3 million (at a 12% annual discount rate), and the overall IERR at 22.2%, for a set of subprojects with completed feasibility studies ("Group A"), plus the full costs of the project institutional development and coordination components (at federal and provincial levels). This set of subprojects and components has a total baseline  cost of about US$194 million, representing about 63 percent of total project base costs. Staff Appraisal Report: IBRD No. 15454-AR Map: No. IBRD 27905 Project Identification No.: AR-PA-6010  - 1 - 1. THE SECTOR A. MACROECONOMIC SETTING 1.1 In 1991, Argentina initiated a reform program which streamlined the public sector, transformed the monetary system and contracted the foreign debt, and thus restored confidence in the market as the primary force behind economic growth and monetary stability. As a result, Argentina dramatically reduced inflation (from an annual rate of 4,923 in 1989 to about 3.8% in 1994) and sustained an average annual real economic growth rate of 5.5% during 1991-94. 1.2 The Argentine fiscal reform program balanced the federal budget by simplifying the tax structure, improving tax collection efficiency and rationalizing expenditures. In addition, many State enterprises were privatized and numerous State-run services eliminated. As one of the main pillars of this program, a fixed exchange rate regime (Convertibility Plan) was established in 1991, under which the monetary base has to be fully backed by international reserves. The process also restructured economic relations between the national and provincial governments supported by two Federal Agreements (Pacto Federal and Pacto Fiscal), signed in 1992 and 1993 respectively, through which provinces pledged to reduce the size of their public sector and balance their fiscal situation. At the same time, the federal government pledged its assistance to this process by implementing a broad incentive program and establishing an automatic system for sharing with the provinces the tax revenues collected at the federal level (Ley de Coparticipaci6n). 1.3 Increasing confidence in the economic reforms resulted in the levels of foreign capital flows expanding from negative US$1.1 billion in 1990 to positive US$3.6 billion in 1994. The growing economy led to imports growing from US$4 billion in 1990 to over US$21.5 billion in 1994. Until 1994, capital goods imports led the expansion, indicative of the acceleration in investments and the restructuring of the economy. Exports also expanded, from US$12.4 billion in 1990 to more than US$15.8 billion in 1994. Improved economic conditions in Brazil contributed to the export growth, and the advent of the MERCOSUR pointed towards even greater economic interdependence with Brazil, which today accounts for 28% of Argentina's total trade. 1.4 In 1995, following the fast expansion of the first four years of the Convertibility Plan, as a consequence of the repercussions of the Mexican financial crisis, the Argentine economy suffered a recession, during which GDP declined approximately 4.4% and unemployment reached 16.6%, even though inflation decreased to 1.6%. During the first half of 1995, capital outflows caused a 30% decline in liquid reserves. However, reflecting stronger international commodity prices, a real depreciation of the local currency (Peso) and the fast pace of the economic expansion in Brazil, exports expanded to US$21 billion in 1995. Because of a sharp contraction in import demand (1995 imports declined to US$20 billion in 1995), the trade balance improved, shifting from a US$5.8 billion deficit in 1994 to about a US$1.0 billion surplus in 1995. As a result, the current account deficit was cut to US$2.8 billion, less than half the 1994 level, or 1.0% of GDP. Despite the improvement in the current account, the sharp drop in net capital inflows resulted in a reduction of US$69 million in net international reserves.  - 2 - 1.5 By the fourth quarter of 1995, the indications were clear that the economic deterioration had ceased and that Argentina was pulling out of the recession. The stock and bond markets have rebounded strongly, and deposits and international reserves have recovered the losses suffered early in the crisis. The 1995 economic crisis was the first real test and validation of the Convertibility Plan and, more importantly, a clear demonstration to investors, domestic and international, of Argentina's commitment to the plan. Preliminary results for 1996 confirmed that recession was over. Real GDP growth rate for 1996 is estimated to have reached 4 percent, with inflation during this year almost nil (CPI increased 0.2% in 1996). Lagging fiscal revenues showed signs of improvements, reflecting the increase in economic activity. Due to a relatively higher increase in imports with respect to exports, the trade balance has been reduced to US$250 million in 1996. 1.6 At the provincial level, the 1995 national crisis aggravated an already problematic situation. Faced with serious deterioration in their fiscal affairs, and social unrest in a number of provinces, various provincial governments, assisted by the Federal Government's incremental support to the provincial reform effort, accelerated their adjustment processes. Five provincial banks were privatized (with another ten in the process of privatization), three social security systems were transferred to the streamlined national system, and public salaries and staff levels were cut. Additionally, of the total of 35 provincial public enterprises scheduled for privatization in eight provinces, 17 were privatized by early 1996, and privatization laws have been passed for the rest. 1.7 Between 1990 and 1993, Argentina's poverty level' declined from 35% to 20%. The highest rates of poverty --averaging 40% --occurred in the Northern regions. As poverty declines were greater in the metropolitan areas, the share of the nation's poor living in the north rose from 23% to 29%.2 In absolute numbers the urban poor represented three times the rural poor. However, the incidence of poverty was higher in rural areas (34.2%) than in urban centers (16.7%). Although there are not updated estimates for levels of poverty at the national level after 1993, partial data for the Buenos Aires metropolitan area 3 indicate that the percentage of the population below the poverty line increased again. In the Gran Buenos Aires, it increased from 13.1% in 1993, to 18.2% in 1995. B. AGRICULTURAL SECTOR: PERFORMANCE AND PROSPECTS 1.8 Argentina's agricultural sector has traditionally played a central role in the economy. Presently, it contributes around 5% of GDP (down from around 15% in the late 1980s), provides about 12% of total employment (plus another 22% in farm-related manufacturing, transportation I The poor are classified as, and include: (a) indigent, or those whose income is insufficient to purchase a minimum food basket; (b) the stagnant poor, or those whose income is insufficient to purchase the minimum food basket and non-food consumption goods, and (c) vulnerable groups, or those whose incomes fluctuate within the previously defined poverty band. Argentina 's Poor. A Profile, Report No. 13318-AR, World Bank, 1995. 2 Argentina's Poor: A Profile, Report No. 13318-AR, World Bank, 1995. 3 Secretarla de Programaci6n Econ6mica, MEyOySP, 1995.  -3 - and related services), and about 60% of export revenues from agricultural products and manufactured products of agricultural origin. Argentina's more than 420,000 farms extend over 177 million ha. More than 30.7 million ha are cultivated, 91 million ha are natural pasture land; 37 rnillion ha are forested and the rest are used for non-agricultural purposes. Large and extensive farms domninate, with 3.2% of the farrns (those with more than 2,500 ha) occupying 61% of the total farmland. On the other hand, nearly half the farms have under 50 ha, occupying less than 8.5% of the area. 1.9 Cereals and oilseeds are the principal agricultural crops, the majority of which are cultivated in the Pampas (very fertile, plain and temperate area covering the Province of Buenos Aires, and parts of La Pampa, Santa Fe and Cordoba). In 1994/95, more than 20 million ha of cereals and oilseeds were planted, occupying about two-thirds of the cultivated farm land. Other important crops include cotton and sugar cane, both concentrated in the Northeast, yerba mate, tobacco, and tea. Wine grapes are grown primarily in Mendoza, San Juan and other western provinces. The Pampas support most of the national cattle herd of 52 million head. Sheep are raised in Patagonia and the Pampas. 1.10 The prospects for sustained agricultural and agroindustrial growth are very promising. The agricultural sector is highly competitive, receiving minimum public support, price subsidies or trade protection to encourage production. The macroeconomic reforms removed many distortions which had stultified sectoral investment and growth. Agricultural production costs are decreasing due to declining freight and transport charges stemming from privatization of port facilities, the elimnination of the diesel tax and lower import charges for fuel, seeds and other production inputs. Liberalization of fertilizer and farm machinery imports have reduced costs to farmers, resulting in stronger sales of tractors and increased fertilizer use. The expected impact of the GATT Agreement and the reforms in the European Union have strengthened international price projections for major Argentine agricultural export crops, especially cereals and oilseeds. C. SECTORAL POTENTIAL AND CONSTRAINTS 1.11 Argentina has a significant comparative advantage in agricultural and agroindustrial production. The country's rich soils and varied agro-climatic conditions permit the production of a wide range of commodities. This ensures self-sufficiency in most foodstuffs, provides low-cost raw materials for a developing agro-industrial complex, and allows the country to be a significant factor in world markets for a number of products, especially cereals, oilseeds and beef In addition, the country has great potential to diversify into the production and export of fruits, vegetables, fisheries, and forestry products. 1.12 Despite its rich natural endowment, agriculture has been the slowest-growing sector in the national economy. Between 1991 and 1994, the annual average sectoral growth rate was 1.13%, compared with 7.7% for the national economy, 17.1% for construction, 9.3% for commercial services, and 7% for manufacturing sectors. Agricultural growth has lagged due to exceptionally low international prices during 1991-93 and high real domestic interest rates. Past discriminatory policies against the sector, including heavy export taxation and an overvalued exchange rate, combined with negligible capital investment in the sector, resulted in a land-extensive agriculture, which offered few opportunities for a quick response to new macroeconomic conditions. With  - 4 - the reduction in State subsidies and trade protection, regional economies, which had depended upon a few non-competitive agricultural products, are experiencing significant adjustment problems. For most of these farmers, the rise in the real exchange rate4 experienced since 1990 has decreased the prices they receive for their commodities compared with their costs of production. 1.13 In addition, its deteriorated rural infrastructure, resulting from decades of public neglect and minimum private investment, directly restricts agricultural production and productivity. More than three-quarters of the national irrigation systems operate inefficiently due to poor maintenance and management. Most irrigated areas are affected by impeded drainage and salinization. In more humid areas, flooding, due to improperly maintained drainage systems, seriously threatens agricultural production, forcing many farmners to permanently abandon agricultural pursuits. 1.14 Any long-term strategy of diversifying Argentina's agro-export mix to penetrate regional and international markets would require overhauling the sectoral technical services, including extension, health and quality control and export promotion, as well as investment in production infrastructure and advanced technology. To expand market access, Argentina will need to comply with international plant and animal health and sanitary standards. The presence of insects, diseases and agro-chemical residue in Argentinean commodities precludes their entrance into important and valuable markets. Also, many varieties produced, especially of fruits and vegetables, fall below modern consumer quality standards. Extension efforts are needed to encourage producers to upgrade traditional varieties to higher-valued ones. 1.15 Argentina animal health programs have made significant progress in their campaign to eradicate Foot-and-Mouth Disease (FMD), the presence of which excludes Argentinean fresh beef from higher-value export markets. While large areas in Argentina have been FMD-free (with vaccination) since 1992, until these areas are internationally certified as such, certain meats from these zones cannot enter the FMD-free markets. Certification requires, inter alia, the establishment and operation of a reliable, internationally acceptable, animal disease protection and prevention system, involving, in some cases, the construction of laboratories and quarantine stations. 1.16 Export market promotion services are also needed to help Argentina expand its world market presence. Traditional Argentine agricultural exports, such as basic grains and oilseeds, have required virtually no market promotion. To diversify agricultural exports and increase value added, producers will need market information concerning international demand, technical assistance to meet world market standards and shipment requirements, and investment capital. 4 Real exchange rate calculated using international trade- weighted indices and domestic combined price index (1988 = 100). Source: Carta Economica.  - 5 - D. DECENTRALIZATION OF DELIVERY OF PUBLIC AGRICULTURAL SERVICESS 1.17 As a result of sweeping reforms to decentralize, provinces are fast becoming the main source of core public infrastructure and services, spending close to US$29 billion in 1995 (almost 10% of GDP and 40% of total public expenditure). In 1996, their share of public investment has been estimated at around 70%. Provinces are now major providers of health, education, security, water and sanitation, and economic development services. However, in the short-run, these reforms have drastically reduced both the quality and scope of provincial agricultural support services. 1.18 The Central Government, through the Secretariat of Agriculture, Livestock, Fisheries and Food (Secretaria de Agricultura, Ganaderia, Pescay Alimentaci6n, SAGPyA) of the Ministry of Economy, and Works and Public Services (MEyOySP), formulates national agricultural policy and legislation. It executes intra-provincial and intemational programs, such as quality standards and grading for export products and consumer goods, and intra-provincial irrigation systems and meat packing plants. National animal and plant health protection and sanitary campaigns are administered by National Service for Food and Agricultural Sanitation and Quality (Servicio Nacional de Sanidady CalidadAgroalimentaria, SENASA). The new SENASA was recently established (by Presidential Decree dated 6/24/96) as an autonomous and autarkic institution in the public domain of SAGPyA, by merging two similar institutions and assuming their roles and responsibilities: the National Animal Health Service (ex-SENASA) and the National Institute for Phytosanitary Health and Quality Control (IASCAV). The National Agricultural Technology Institute (Instituto Nacional de Tecnologia Agropecuaria, INTA) is responsible for basic agricultural technological research and the provision of agricultural extension through its Regional Centers. 1.19 The provinces, through their agricultural institutions, formulate agricultural provincial policy and are responsible for agricultural research and extension, supervision of meat packing plants, crop and animal disease control, and management and maintenance of irrigation systems at the provincial level. These provincial agricultural institutions are loosely affiliated with the SAGPyA through the Federal Agricultural Council (Consejo Federal Agropecuario, CFA). With few exceptions, provincial support programs are restricted in scope, benefiting relatively few farmers. To strengthen extension services, some provinces have recently entered into cooperative agreements with specialized federal agencies, such as INTA. The exceptions are Mendoza and Cordoba which have noteworthy provincial extension programs. Neuquen has an effective network of local agricultural production centers. Water users' associations have different degrees of organizational development. Most of them are rather weak and unskilled, and have little experience with decentralized water management systems. The exceptions are the water users' associations in Buenos Aires and Mendoza, which are relatively sophisticated and well connected to the provincial governments. The Argentine State is organized into three political-administrative and territorial jurisdictions: Central, provincial and municipal levels. Within this organization, all government powers emanate from the provinces whereby provinces delegate limited powers to the Central Government and retain for themselves all other authority. Provinces are autonomous entities governed by their own Constitutions. Municipalities are organized as part of each province's system of government.  - 6 - 1.20 Provinces have full jurisdiction over water matters (except navigational) and set water users' tariffs. While a volumetric-based tariff could provide a closer estimate of the value of the water used, tariffs for irrigation and drainage infrastructure improvements are currently based upon area under irrigation. Some provinces with long experience in irrigation (e.g., Mendoza and Rio Negro) are considering implementing a volumetric tariff system. 1.21 Lirnited experience as well as technical and financial constraints severely restrict the ability of the provincial governments to effectively formulate agricultural plans, implement projects, and deliver agricultural services. According to a recent study, the payrolls of the provincial agricultural agencies are swollen with non-professional personnel, comprising between 50% and 85% of total staff. Low provincial salaries and weak career incentives attract few qualified technicians and cause high professional turnover. These technical weaknesses, exacerbated by poor communications among the various provincial agricultural agencies, contribute to the inefficient allocation of scarce provincial resources6. Comprehensive measures, including better personnel incentives, are urgently needed to improve management. Some provinces are seeking ways to fulfill their obligations by reorganizing and strengthening institutions, working more closely with the private sector and charging users the full economic value for previously subsidized services. E. PRIVATE SECTOR PARTICIPATION IN DELIVERY OF AGRICULTURAL SUPPORT SERVICES 1.22 The redefined role of the State is to provide only those essential services which, under normal circumstances, are not provided by the private sector. This covers basic research, the national agricultural database, animal and plant protection, sanitary and quality controls, and international marketing promotion. Although there is a need to proceed gradually, the government is transferring to the private sector the responsibility for irrigation and extension services, the provision of which had been highly subsidized. 1.23 Existing provincial legislation permits cost recovery through taxation and beneficiary charges. Nevertheless, the legislation is flexible, allowing the provincial government to determine recovery terms on a case by case basis. As responsibility for irrigation 0 & M is being transferred to user groups, increasingly tariffs are being designed to not only recover 0 & M and investment costs, but to reflect the resource's economic value. 1.24 Extension services to small and medium farmers had been provided mainly by the public sector. But, as a result of recent budgetary constraints, the coverage and quality of these services has fallen dramatically. To address this, the government has instigated a pilot program, "Rural Change" (Cambio Rural) which encourages gradual introduction of private extension services. Under this program, farm groups, cooperatives and grower associations, through a competitive selection process, directly contract private extension services. The government contribution, which covers 80% of costs in the first year, declines to zero by the fifth year. 6 Ministerio de Economia y Obras y Servicios Puiblicos, Secretaria de Agricultura, Ganaderia y Pesca; Fortalecimiento de la Capacidad de Programaci6n del Desarrollo Agropecuario Provincial, Buenos Aires, January 1995.  - 7 - F. BANK EXPERIENCE IN THE AGRICULTURAL SECTOR 1.25 Bank experience points to six elements essential for successful agricultural development projects.' First, sound macroeconomic and sector policies, as reflected in a country's public expenditure program, create a project-enabling environment, reducing tendencies to overburden projects with multiple objectives. Second, intensive consultation with beneficiaries build needed consensus, support for project objectives and facilitate corrective measures during implementation. Third, a phased approach, which begins at project preparation with building a subproject pipeline, reduces the risk of disbursement bottlenecks at project start-up. Fourth, project scale must conform to the implementing agency's institutional capacity. Fifth, while project design should be flexible, objectives and indicators need to be clearly defined. Finally, subprojects need to be technically and economically sound. 1.26 Institutional Development. Institutional development has been a common feature of Bank operations because to a great extent the sustainability of development depends on the character and performance of institutions. While components aimed at strengthening institutions figured in a high proportion of Bank-financed operations, and the approaches used have been diverse, many such components have failed to have lasting effects. 1.27 Bank projects administered by competent institutions tend also to have healthy economic rates of return. Technical assistance is the mechanism most commonly used in Bank projects to strengthen institutions, but the Bank's experience has been mixed. Effective technical assistance programs have tended to be flexible, based closely on the beneficiary's needs and skills, subject to frequent review, modification, and supervision, and focused on strengthening technical, managerial, or administrative systems. Institutional analysis up-front is essential8. Priorities ought to be promoting the use of more creative technical assistance delivery mechanisms, and expanding local consultant capacity. Attention to legal issues is also important, including the regulatory framework in which projects are carried out; the rules that define the powers, functions, and responsibilities of institutions as well as their interrelationships; and legal measures to ensure the sustainability of institutions. 1.28 Private Sector Involvement. Bank experience demonstrates that the search for greater efficiency may involve privatization, and agricultural projects should strive to integrate the private sector wherever possible, limiting government's role to a narrower focus on: (i) creating an enabling policy framework for production and market efficiency; (ii) funding public goods, principally in agricultural research and extension, and rural infrastructure, and leaving their delivery, operation and maintenance, wherever feasible, to private agents, (iii) funding targeted interventions needed to correct market failures and address acute poverty or food security issues, 7 Annual Review ofEvaluation Results, 1991 and 1992, OED Report No. 11062, 1992 and Report No. 12403, 1993. s Managing Technical Assistance in the 1990s: Report of the Technical Assistance Review Task Force, November 11, 1991.  - 8 - but devolving their execution to private entities; and (iv) building institutional capacity so that public sector services are carried out efficiently9. 1.29 Years of public neglect and insufficient 0 & M by users have resulted in improper maintenance and badly deteriorated irrigation systems. Transferring state-owned and state-managed systems to user groups would require infrastructure rehabilitation before users would take charge of the systems. Further, the capacity of users to self-manage systems must be upgraded, through technical assistance arrangements specifically designed for their needs. 1.30 Beneficiary Participation. The experience of several multilateral agencies, including the Bank, shows that beneficiary participation is a crucial factor for project success and sustainabilityl