Argentina - Provincial Pension Reform Adjustment Loan (PPRL) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18683 IMPLEMENTATION COMPLETION REPORT ARGENTINA PROVINCIAL PENSION REFORM ADJUSTMENT LOAN (PPRL) Loan No. 4116-AR December 11, 1998 Poverty Reduction & Economic Management (PREM) Country Management Unit 7 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 Argentine Peso (Arg $) US$1.00 = Arg $1.00 FISCAL YEAR July I to June 30 ABBREVIATIONSANDACRONYMS AFJP Administradora de Fondos de Jubilaci6n y Pensiones (Pension Fund Administrator) AFP Administradora de Fondos de Pensiones (Chilean Pension Fund Administrator) ANSeS Administracion Nacional de Seguradad Social (National Social Security Administration) CAS Country Assistance Strategy DB Defined Benefit Pension Scheme DC Defined Contribution Pension Scheme DGI Direcci6n General Impositiva (General Tax Directorate) EFF Enhanced Fund Facility ESW Economic and Sector Work GDP Gross Domestic Product IDB Inter-American Development Bank IMF Intemational Monetary Fund MCBA Municipalidad de la Ciudad de Buenos Aires (Municipality of the City of Buenos Aires) MERCOSUR Mercado del Cono Sur (Common Market of the Southem Cone) PAMI Plan de Atenci6n Medica Integral (Integral Medical Assistance Plan) PAYG Pay-as-you-go Pension System PPF Provincial Pension Funds PPRL Provincial Pension Reform Loan PRL Provincial Reform Loan PSRL Public Sector Reform Loan SAL Structural Adjustment Loan SECAL Sector Adjustment Loan UDAI Unidad de Atenci6n Integral (Integral Assistance Unit) VAT Value Added Tax YPF Yacimientos Petrolif cos Fiscales (Privatized Petroleum Company) Vice President: Mr. Shahid Javed Burki Country Director for Argentina: Ms. Myma Alexander Director (PREM): Mr. Guillermo Perry Task Manager: Ms. Mariluz Cortes  FOR OFFICIAL UJSE ONLY TABLE OF CONTENTS page number Preface ............................................................ iii Evaluation Summary ........................ .................................... v Part One Provincial Pension Reformn Loan Implementation Assessment I. Background .I II. Program Objectives. 3 Ill. Achievement of Program Objectives. 4 IV. Major Factors Affecting the Program. 9 V. Program Sustainability .10 VI. Bank Performance .11 VII. Borrower Performance .13 VIII. Assessment of Outcome .14 IX. Future Operations .14 X. Lessons Learned .14 Part Two Statistical Annex of ICR Tables .17 Appendixes A. Evidence of Compliance with Loan Conditions B. ICR Mission's aide-memoire C. Borrower contribution to the ICR (Ministerio de Economiay Obrasy Servicios Pzublicos ) D. Cofinancier contribution to the ICR (IDB) E. Map IBRD No. 26842 This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ::  iii IMPLEMENTATION COMPLETION REPORT ARGENTINA PROVINCIAL PENSION REFORM ADJUSTMENT LOAN (Loan No. 4116-AR) Preface This is the Implementation Completion Report (ICR) for the Provincial Pension Reform Adjustment Loan (Loan No. 4116-AR), in the amount of US$300 million, which was approved on December 11, 1996, signed on December 17, 1996 and made effective on December 19, 1996. The loan was closed on June 30, 1998. The first tranche was released upon effectiveness. Subsequent tranches were released on May 19, 1997, and December 17, 1997. The loan was filly disbursed by December 17, 1997. Cofinancing for the program in the amount of US$320 million was provided by the Inter-American Development Bank (IDB). The ICR was authored by Mr. Truman Packard, Economist (Consultant), under the supervision of Ms. Mariluz Cortes, Senior Operations Officer (LCSFP) of the Latin America and Caribbean R,gion. The borrower and cofinancier provided comments that have been incorporated to the ICR and are reproduced (unedited) in an appendix to the report. Preparation of this ICR was begun during the Bank's completion mission to Buenos Aires, August 24 - 28, 1998. The report is based on material in the project file, interviews with key participants in the loan's preparation, the implementation team's counterparts, and the findings of earlier Bank studies of the pension system in Argentina.   v IMPLEMENTATION COMPLETION REPORT ARGENTINA PROVINCIAL PENSION REFORM ADJUSTMENT LOAN Loan No. 4116-AR Evaluation Summary Introduction 1. Argentina has made substantial progress in bolstering the capacity of its economy to withstand the ifrequent volatility of international capital markets. Much of this progress has come in the wake oi the Tequila Effect arising from Mexico's Peso Crisis in December 1994 and the recession that followed in 1995. Since August 1996, economic authorities have taken measures to increase fiscal compliance and foster growth, that in 1997 reached 8.6 percent. In conjunction with fiscal measures taken nationally, the Government undertook a fast-paced program of provincial reforms. Both the financial crisis of 1995 and the coming to power of responsive provincial governments, accelerated the pace of provincial reforms. The Federal Government's provincial reform strategy seeks to increase the efficiency of public expenditure, cut budget deficits, and to eventually remove the system of federal guarantees that has been a source of moral hazard in spending by provincial governments. 2. Reforrn of the country's social security system has been a cornerstone of the Government's new economic model. The administration, with the support of Congress, enacted legislation thaLt replaced the country's single-pillar, public pay-as-you-go (PAYG) pension program, with an integrated, two-pillar system of public and private management, that combines a defined-benefit with a defined-contribution plan of individually capitalized accounts. A key element of the Government's provincial reform strategy, as well as of its agenda for restructuring social security,, is the integration of workers in provincial government to the new national pension system, through the absorption of provincial pension funds (PPFs) by ANSeS. The transfer of the PPFs to ANSeS, incurred considerable costs in the medium-term. The Government decided to partially finance the transfer through international borrowing. The Provincial Pension Reformn Adjustment Loan (PPRL) for US$300 million, was co-financed with a loan of US$320 million from the Inter-American Development Bank (IDB). Program Objectives 3. With the enactment of the Fiscal Pact in 1993, the Federal Government agreed to absorb the PPF and pension liabilities of any provincial government that approved its transfer and relinquished its right to legislate in pension related matters. Although the Government's commitment to relieve the provinces of their considerable pension debt included reciprocal requirements for provincial reforms to increase efficiency and prevent future budget deficits, these were not initially fully enforced. The program of reforms supported by the Bank accelerated provincial compliance with the conditions of the Fiscal Pact by introducing strict eligibility criteria for transfer of the PPFs, linked to conditionality under this structural adjustment loan, and other World Bank provincial reform operations. 4. The PPRL supported the Federal Government's efforts to advance structural reforms at the provincial level, while strengthening the new integrated system of social security. The  vi objectives of the Government's reform strategy supported by the PPRL were to; (i) significantly reduce the provinces' consolidated fiscal deficit; (ii) compel provincial governments to meet strict eligibility requirements for PPF transfer, including a commitment to structural adjustment and proof of improved fiscal performance; (iii) consolidate splintered pension regimes into a single system and bring vesting and benefit parameters into line with those of the national pension refonn of 1994; and (iv) eliminate fraud, lower administrative costs, and improve the efficiency of ANSeS through a parallel program of institutional strengthening. Implementation Experience 5. High on the Federal Government's list of priorities is the elimination of the financial vulnerability posed by unsustainable budget deficits in the provincial public sector, and fiscal reforms to ensure that deficits are avoided in the future. The PPRL had a direct impact on meeting the Government's objectives through fiscal relief from the transfer of the PPFs. The Government's long-term strategy of consolidating Argentina's splintered pension system into a single regime, although increasing pension liabilities in the short run, will quickly lead to significant savings, as actuarially unviable contribution and benefit rates for provincial public servants adjust to national parameters. Of Argentina's twenty four provinces, eight provinces - Rio Negro, Mendoza, San Juan, Tucuman, Jujuy, Salta, San Luis and La Rioja - were considered for PPF transfer with the support of the Bank's PPRL. With the transfers and further structural reforms at the provincial level, the consolidated provincial public sector deficit fell from US$3.5 billion in 1995 to US$1.5 billion in 1997. 6. The provinces being considered for PPF transfer were grouped into three sets. Each set of provinces was required to meet and maintain eligibility criteria before the Borrower could use Bank funds to finance the transfer of the pension plans of the following set. The provinces were expected to have: (i) demonstrated progress, satisfactory to the Bank, in compliance with the conditions of the Fiscal Pact of 1993; (ii) privatized, or have initiated the process of privatizing their public banks and at least one other significant public enterprise; and, (iii) signed a transfer agreement with the Federal Government for the transfer of their PPF to the national system. Each transfer agreement was approved and enacted by the provinces' legislature. With their approval, provincial legislatures relinquished all authority and future involvement in matters related to pensions and social security. 7, The extensive structural reforms required of each province have taken the provincial, governments that participated from severe budgetary deficit in 1995, to projected surpluses in 1999. In all of the provinces, except Rio Negro, deficit reductions in the first year far outweighed fiscal relief from PPF transfer. The participating provinces privatized their insolvent banks and public utilities, and rapidly increased their efficiency through reductions in pay-roll expenditure. As was the case of the loan's fiscal conditions, most provinces surpassed the structural reform requirements set by the Bank and the Federal Government. Federal authorities are confident that these adjustments are sustainable, pointing out that the depth of the structural reforms required for PPF transfer, and those supported by parallel Bank operations, have caused a fundamental shift in the orientation of public sector administration at the provincial level. 8. Argentina's social security reform has been conducted in sequential phases. The first round of consolidation of provincial plans into the national system in 1997, not only translates into considerable long-tenn reductions in the country's implicit pension debt (IPD), but also increases the flexibility of the labor market by standardizing pension parameters and making benefits portable within and across sectors of the economy. While it is too soon after the transfer to evaluate the reform's impact on the labor market, achievement of the program's objective of strengthening the new national system has been substantial. In the first year of the transfer, 68%  vii of provincial civil servants that previously counted on unfunded public pension plans, chose to contribute into individual accounts managed by the AFJPs. 9. Although not all of Argentina's 24 provincial pension plans could be consolidated with the support of the loan, those provinces whose PPFs were transferred have established a powerful precedent for the remainder to follow. Promotional efforts of federal authorities and a lively public debate of the advantages of pensions consolidation in the press, have contributed to a growing consensus that a single national system of social security is preferable to twenty-four separate systems. Furthermore, the substantial fiscal gains that the first eight provinces have made from PF'F transfer are expected to present the reform as an attractive option for provincial authorities weighing their adjustment alternatives. 10. The Government recognized the need for drastic measures to be taken at ANSeS in order for the institution to credibly manage Argentina's public pension pillar and absorb the PPFs. Loan effectiveness, and the release of the second- and third-tranches were contingent on ANSeS having reached important thresholds in its reform strategy. Although the Bank chose to separate its financial support of reforms at ANSeS from the PPRL, rather than bundle its technical assistance wii h the adjustment operation as did the IDB, advancements in institutional capacitation were nested into the conditions of the loan in order to ensure that the beneficiaries of provincial plans - that already suffered from considerable mismanagement - were not absorlbed into a system with even greater problems. Considerable progress was achieved in strengthening ANSeS through an extensive review of current beneficiaries to root out fraud and ghosting, and a significant upgrading of the organizations' computer systems and infrastructure to ensure improved serviice to its clients. 11. Bank staff who participated in the Provincial Pension Reform program and their counterparts interviewed in Buenos Aires, agree that the PPRL can serve as an important example of innovative program design, Bank-Borrower and Bank-Cofinancier cooperation, appropriate conditionality, and of fortuitous political timing in execution. The conditions of effectiveness, second- and third-tranche release were meet in a timely and professional manner. The loan was fully disbursed within a year of effectiveness. Performance 12. Borrower performance in the identification, preparation and implementation of the Provincial Pension Reform program was highly satisfactory. Under the management of the Direccion Nacional de Coordinaci6n Fiscal con las Provincias, the branch of the Ministry of Economy that supervises structural reforms in the provinces, federal authorities maintained a clear implementation agenda that included close coordination with provincial governments and the special reforn unit operating within ANSeS. In addition to demonstrating technical leadership and initiative, federal authorities took measures to promote PPF transfer among key figures in provincial admilnistrations and members of the opposition in provincial legislatures. These efforts were critical in awakening public attention to the dangers to the national system presented by the bankrupt provincial regimes, and building consensus behind the need for reform. 13. Bank performance in the implementation of the program, was also highly satisfactory. The Bank responded in a timely fashion to the Govemment's request for financial and technical support in the consolidation of its national pension system. Staff were effective in working with policy makers to design an operation that would address the urgent need for reform at the provincial level, and at the same time fortify the recently installed, two-pillar pension system. The Bank's financial support significantly accelerated the consolidation of provincial pension plans with the national system and the implementation of structural adjustment in the provinces,  viii while allowing the Government to remain within the fiscal parameters stipulated by its 1996 stand-by facility with the IMF. Program Sustainability and Assessment of Outcome 14. The sustainability of the reforms supported by the PPRL is highly likely and underscored by the extent of Borrower compliance, at the federal and provincial level, with the conditions of the loan. Under the requirements of the Fiscal Pact, the provinces whose PPFs have been transferred have eliminated most forms of provincial pay-roll taxation, and agreed to abstain from legislating in social security matters, and from establishing public credit institutions in the future. 15. Having said this, it is important to note that the sustainability of progress achieved in meeting the program's objectives will depend on the timely consolidation of the remaining PPFs, and is now intimately tied to the fate of the national pension system as a whole. Experts at the Bank agree that Argentina's integrated pension system is a sound improvement on the previous single-pillar regime, and that it has begun to replicate some of the now familiar capital- and labor- market benefits observed in Chile in the seventeen years since that country's pension reform. However, even in Chile, after an initial period of booming returns on AFP investment, the defined-contribution model of individually capitalized accounts invested by specialized private fund managers, is coming under increasingly critical scrutiny. Policy makers should keep abreast of developments in the ongoing pensions debate, pay close attention to regulatory revisions being considered in other countries, and remain open to modifications in the structure of the new AFJP system should further changes be theoretically and empirically justified. 16. Furthermore, while a degree of financial risk is theoretically acceptable given the long- run character of pension-fund investment, the AFJP model has never been put to the political test of sustained low and even negative returns. In the wake of the recent international financial crisis there has been high volatility and a strong downward trend in Argentina's stock market. Pension authorities should be prepared to address any short-term losses and face the concerns of the AFJP-affiliated public with education and awareness campaigns to forestall any political risk to the considerable progress that has been achieved. 17. Overall, the outcome of the operation is considered highly satisfactory. The preliminary analysis of indicators in this report, concludes that the Borrower has not only meet, but in most areas surpassed the Bank's expectations, as embodied in the conditions of the loan. The achievement of the objectives of the PPRL was both substantial and timely. Lessons Learned 18. The main conclusions and principal lessons learned in the implementation of the first phase of the Provincial Pension Reform Program in Argentina are: (i) Consistency of Objectives and Coordination Between Bank Operations. In the course of preparing and implementing complex adjustment operations, it is essential to orchestrate the objectives of related Bank programs in order to ensure consistency and the achievement of desirable outcomes. From the outset of loan preparation, the Bank and the Borrower sought to avoid losing their leverage on provincial governments, by making difficult structural reforms a condition of fiscal relief. Federal authorities, with the help of Bank staff, designed the loan to complement rather than hinder parallel fiscal and structural reforms at the provincial-level. Additionally, in implementing the first round of PPF transfers, the Bank and its counterparts relied on extensive technical work carried out under the earlier Provincial Reform and Provincial Bank Privatization Loans. The PPRL benefited from ESW on provincial finances, and became an  ix important part of the dialogue in establishing a direct lending program between the Bank and the provinces. (ii) Putting the Tools of Analysis in the Hands of the Borrower. Where the counterparts' professional ;md technical capacity will allow, the benefits from sharing analytical tools and letting the Borrower conduct its own analysis are considerable. Collaboration in the design of the model and preparation of the preliminary projections of the fiscal costs and long-run benefits of PPF consolidation, enabled federal authorities to engage in a deeper, more effective dialogue with Bank experts. Having used similar tools in their analysis of the problem, the Bank and the Borrower shared a vision of what the operation could realistically achieve. Freedom to elaborate and innovate on the original model, and to arrive at their own projections, strengthened the commitment of the Argentine authorities to the consolidation program. Furthermore, federal authorities continued use of the fiscal-cost model as well as the provincial indicators in their ongoing supervision of the provinces, represents additional value-added from the operation. (iii) Borrower Ownership - the Key to Close Cooperation with Cofinanciers. As in any adjustment program, Borrower ownership of loan conditionality is critical. Ownership becomes even more important to successful implementation in joint operations between the Bank and the IDB. The clarity of purpose of the Argentine authorities in setting the objectives of the Provincial Pension Reform Program and enforcing compliance of participating provincial governments with eligibility criteria, allowed the Bank and the IDB to present a united front and to cooperate closely in setting the conditions of their financial support.  Argentina: Provincial Pension Reform Adjustment Loan (PPRL) Page I of26 PART ONE: PROJECT IMPLEMENTATION ASSESSMENT I. BACKGROUND 1. Argentina has made substantial progress in bolstering the capacity of its economy to withstand the frequent volatility of international capital markets. Much of this progress has come in the wake of the Tequila Effect arising from Mexico's Peso Crisis in December 1994. To preserve price stability - achieved since 1991 through strict adherence with the monetary constraints of the Convertibility Plan - financial authorities in Argentina were obliged to bear a rapid decline in dollar reserves and an increase in interest rates that pushed the economy into a severe recession in the year that followed. By May 1995, the rate of unemployment had peaked at 18.4%, and the public deficit deepened due to falling tax revenues. The Government was forced to cut public expenditure, and to sharply raise taxes on consumption. As a result of these actions, and with the financial support of a US$11 billion aid package from the Bank, the IDB and the IMF, the Menem administration was able to safe-guard the Convertibility Plan, and by the fourth quarter of 1995, to regain access to international financial markets. However, despite the Government's efforts, the shortfall in tax revenues in 1995 widened the fiscal deficit by one percent of GD)P, and caused the consolidated deficit among the provincial governments to balloon by 1.2 percent of GDP. 2. Since August 1996, economic authorities have taken measures to increase fiscal compliance and foster growth, that in 1997 reached 8.6 percent. Further measures were taken to strengthen the financial sector through the privatization and internationalization of commercial banks, and to ensure liquidity by establishing a US$6.7 billion contingent line of credit from private foreign banks. Increases in tax revenue reduced the overall public sector deficit from 3 percent in 1996 to 2 percent in 1997, and are expected to bring the budget into balance by the close of 1998. In the first quarter of 1998, the economy grew 6.9 percent over the previous year, and the level of unemployment fell to 13.2 percent due to growth in the number of jobs generated in the private sector. As a result of the Government's financial sector reforms, the impact of the recent Asian financial crisis, that reached Latin American markets by October 1997, has so far been contained.' The ability of the country's financial system to absorb limited shocks was bolstered, a massive out-flow of capital similar to that experienced in 1994 -'95 has for the time being been prevented, and the country's access to foreign capital has gone relatively unaffected. 3. In con unction with fiscal measures taken nationally, the Government undertook a fast- paced program of provincial reforms. Even before the 1995 recession, provincial govemments found themselves in dire budgetary straits as a consequence of excessive populist spending in reaction to the windfall in revenues from economic stabilization. Federal authorities sought to take full advantage of the political opportunity and financial leverage presented by the provinces' severe fiscal deficits to introduce major administrative and fiscal reforms. Both the financial crisis of 1995 and the coming to power of responsive provincial governments, accelerated the H Having said this, Argentina's terms of trade in 1998-99 are likely to suffer from the decline in international commodity prices caused by the crisis. Demand for exports will be further affected by economic slowdown in Brazil - a major buyer of Argentine exports. Further, although both the Ministry of Economy and economists at the World Bank expect some increase in interest rates and economic slowdown at the margin - as emerging markets bear the unease of investors after the August 1998 Russian debt default and devaluation of the ruble - they are confident that Argentina is in a much better position to handle the inevitable fall-out from the crisis.  Implementation Completion Report Page 2 of 26 pace of provincial reforms. The Federal Government's provincial reform strategy seeks to improve the quality of services, increase the efficiency of public expenditure, cut budget deficits, and to eventually remove the system of federal guarantees that has been a source of moral hazard in provincial spending. The Bank has supported these efforts through a Provincial Reform Loan (Ln. 3836-AR) and a Provincial Bank Privatization Loan (Ln. 40826-AR). 4. Reform of the country's social security system has been a cornerstone of the Government's new economic model. In the face of a growing actuarial deficit, changing demographic trends, widespread evasion, and the distortionary effects of burdensome pay-roll taxes, Argentina undertook an ambitious reform of its national system of social security. The administration, with the support of Congress, enacted legislation that, in July 1994, replaced the country's single-pillar, public pay-as-you-go (PAYG) pension program, with an integrated, two- pillar system of public and private management that combines a defined-benefit with a defined- contribution plan of individually capitalized accounts. The new integrated regime incorporates many of the features of the private system in Chile, and in its fourth year of operation, is widely judged to be a sound and significant improvement in the provision of retirement income, as well as a spur to development of private capital markets and the country's financial sector.2 5. A key element of the Government's provincial reform strategy, as well as of its agenda for restructuring social security, is the integration of workers in provincial government to the new national pension system, through the absorption of provincial pension funds (PPFs) by ANSeS, the federal social security authority created in 1991. In addition to relieving provincial governments of a significant burden on their budgets, the transfer of the PPFs to the federal system benefits the economy as a whole by bringing unsustainable contribution and benefit rates into line with the 1994 reform, eliminating a source of labor market rigidity, and in the long term, reducing the consolidated pension deficit. 6. The Government's Provincial Pension Reform Program, and the transfer of the PPFs to ANSeS, would incur considerable costs in the medium-term. Through the transfer, the federal system appropriated pension liabilities and deficits from the provinces, and could expect further losses of revenue in the transition, as provincial workers rushed to retire before the transfer or chose to contribute into individual accounts under the private pillar of the new integrated system. In order to ensure the timely transfer of the PPFs, to prevent a reversal of considerable gains made in lowering the budget deficit, and to adhere to the performance criteria of a 1996 stand-by agreement with the IMF, the Government decided to partially finance the transfer through international borrowing. 7. The Bank's Provincial Pension Reform Adjustment Loan (PPRL) for US$300 million, was co-financed with a loan of US$320 million from the Inter-American Development Bank (IDB). The Borrower contributed US$706 million to the total financing plan. The loan financed approximately 27% of the estimated additional deficit incurred by ANSeS in 1996 and 1997 from the PPF transfers. The total fiscal cost of the PPF transfer operation is estimated at US$1.6 billion over three years. The Bank and the IDB loans covered 38% of this cost. The adjustment loan from the IDB includes a US$20 million technical assistance component supporting a program of institutional reform and strengthening for ANSeS. A parallel program of technical 2 For a detailed description of the new pension system in Argentina, see Vittas, D., 1997, Private Pension Funds in Argentina's New Integrated Pension System, World Bank PRWP No. 1820  Argentina: Provincial Pension Reform Adjustment Loan (PPRL) Page 3 of 26 support to improve ANSeS' efficiency has been financed through a separate technical assistance loan of US$20 million from the World Bank.3 II. PROGRAM OBJECTIVES 8. Argentina's 1994 social security reform excluded pension regimes for provincial civil servants that covered nearly 10 percent of the economically active population. Lax vesting requirements and indulgent retirement benefits in these special regimes posed a serious risk to the long-term development and efficiency of the new national system. The absorption of the PPFs into the national system would eliminate special pension privileges in the provinces, and adjust unsustainable vesting and benefit criteria to the more reasonable parameters of the reformed national system. Further, the transfer would offer provincial civil servants the option to contribute to the national private pillar managed by theAdministradoras de Fondos de Jubilacion y Pensiones (AFJPs). 9. In 1993, with the enactment of the Fiscal Pact, the Federal Government had agreed to absorb the PPF and pension liabilities of any provincial government that approved its transfer and relinquished its right to legislate in pension related matters. Although the Government's commitment to relieve the provinces of their considerable pension debt included reciprocal requirements for provincial reforms to increase efficiency and prevent future budget deficits, these were not initially fully enforced. The program of reforms supported by the Bank accelerated provincial compliance with the conditions of the Fiscal Pact by introducing strict eligibility criiteria for transfer of the PPFs, linked to conditionality under this structural adjustment loam, the Provincial Reform Loan, and the Provincial Bank Privatization Loan. 10. The PPRL supported the Federal Government's efforts to advance structural reforms at the provincial level, while strengthening the new integrated system of social security. The objectives of the Government's reform strategy supported by the PPRL were to; (i) significantly reduce the provinces' consolidated fiscal deficit; (ii) compel provincial governments to meet strict eligibility requirements for PPF transfer, including a commitment to structural adjustment and proof of improved fiscal performance; (iii) consolidate splintered pension regimes into a single system and bring vesting and benefit parameters into line with those of the national pension reforrn of 1994; and (iv) eliminate fraud, lower administrative costs, and improve the efficiency of ANSeS through a parallel program of institutional strengthening. 11. The loan's objectives were clear and appropriately designed within a medium-term social security and provincial reform strategy agreed between the Bank and the Borrower. The objectives were consistent with the Government's policy agenda, as articulated in the Fiscal Pact of 1993 and the Letter of Development Policy, dated November 6, 1996. The PPRL was consistent with the Bank's Country Assistance Strategy (CAS) for Argentina, discussed by the Executive Directors on May 4, 1995, and updated on April 25, 1996, which emphasizes the ' Within the framnework and conditionality of the PPRL, ANSeS conducted a major program of institutional reform aimed at reducing pension expenditures through the elimination of fraud, lowering its administrative costs, and providing better service to its beneficiaries. These reforms have improved ANSeS' capacity to receive and administer the transferred PPFs. The program of institutional reforms was supported by a technical assistance loan (Loan 4131-AR) approved by the Board on January 21, 1997. For a detailed review of the Bank's technical assistance to ANSeS, see Memorandum of the President No. P7021-AR, and TechnicalAnnex T7021-AR. A separate ICR will be prepared for this operation.  Implementation Completion Report Page 4 of 26 institution's desire to further the adjustment process by extending fiscal and economic reforms to the provinces. 111. ACHIEVEMENT OF PROGRAM OBJECTIVES 12. The PPRL was approved to partially finance the additional liabilities incurred by ANSeS from the absorption of the PPFs into the national pension system. However, to ensure that the transfer of their indebted pension plans would not remove budgetary pressures on provincial governments to undertake difficult structural reforms, the Federal Government established strict eligibility criteria, acceptable to the Bank, that each of the provinces would have to meet before Bank funds could be used to cover the additional deficits to ANSeS produced by the transfer of their PPFs. By linking the obligations of the Fiscal Pact with the conditions of the adjustment loan, the Bank was able to indirectly leverage important structural reforms at the provincial level. Of Argentina's twenty four provinces, eight provinces - Rio Negro, Mendoza, San Juan, Tucuman, Jujuy, Salta, San Luis and La Rioja - were considered for PPF transfer in 1997 with the support of the Bank's PPRL. 13. The provinces being considered for PPF transfer were grouped into three sets. Each set of provinces whose PPFs were transferred, was required to meet and maintain eligibility criteria before the Borrower could use Bank funds to finance the transfer of the pension plans of the following set. The provinces were expected to have: (i) demonstrated progress, satisfactory to the Bank, in compliance with the conditions of the Fiscal Pact of 1993,4 (ii) privatized, or have initiated the process of privatizing their public banks and at least one other significant public enterprise; and, (iii) signed a transfer agreement with the Borrower for the transfer of their PPF to the national system. In addition to these criteria, each province's transfer agreement with the Federal Government would have to be approved and enacted by its provincial legislature. With their approval, the provincial legislatures relinquished all authority and future involvement in matters related to pensions and social security. 14. In order to ensure that the Federal Government's infrastructure for pension administration would be able to withstand the sudden financial burden from PPF transfer, the Bank the IDB and the Borrower agreed to conditions that would oblige ANSeS to follow a program of institutional strengthening and modernization. Although financed under a separate Bank operation, the adherence of ANSeS with institutional benchmarks set in negotiations with the Bank, was a key factor in the Borrower's compliance with the conditions of the loan. 15. A detailed record of compliance of both the provinces and the Federal Government with the transfer process, as well as of ANSeS' observance of the program of internal reforms is provided in the declaration of effectiveness, and in the President's Notifications to the Executive Directors of second- and third-tranche release.5 Specific evidence of the Borrower's compliance with all of the loan's conditions is provided in Appendix A: Evidence of Compliance with Loan Conditions of this report. 4 Conditions of the Fiscal Pact of 1993 consisted broadly in elimination of various distortionary taxes - including payroll taxes and taxes on primary production and retail sales, (a) partial or total privatization of provincial state banks, (b) deregulation of pharmaceutical and commercial transport industries, and (c) relaxation of restrictions on registration of public works contracts 5 SecM97-405, 19 May 1997, and II December 1997, in the Project File  Argentina: Provincial Pension Reform Adjustment Loan (PPRL) Page 5 of26 16. Although it may be too soon to determine the long-term impact of the reforms supported by this adjustment loan, a preliminary analysis of available indicators of progress towards the loan's objectives is essential to guide future dialogue between the Bank and the Borrower in the areas of provincial and social security reform. A discussion of available indicators is provided below. III.i. Reductiions in Consolidated Provincial Deficit 17. High on the Federal Government's list of priorities is the elimination of the financial vulnerability posed by unsustainable budget deficits in the provincial public sector, and fiscal reforms to ensure that deficits are avoided in the future. The PPRL had a direct impact on meeting the Ciovernment's objectives through fiscal relief from the transfer of the PPFs. The Government's long-term strategy of consolidating Argentina's splintered pension system into a single regime, although increasing pension liabilities on the federal budget in the short run, will quickly lead to significant savings, as actuariallyunviable contributions and benefits rates adjust to national parameters. Figure I below shows the estimated evolution of the consolidated provincial deficit with and without the PPF transfers, illustrating the considerable long-term gains from the operation.6 1400 . 1200 l 1000 800 600 400 200 0 N R +0 <02 vib l02>s0t A006 >02 -S0