Argentina - First Municipal Development Project

 Municipal Development Report No: ; Type: Report/Evaluation Memorandum ; Country: Argentina; Region: Latin America And Caribbean; Sector: Urban Management; Major Sector: Urban Development; ProjectID: P005963 The Argentina First Municipal Development Project, supported by Loan 2920-AR for US$120 million equivalent (of which US$0.3 million was canceled), was approved in FY88. The loan was closed on March 31, 1996, nine months behind schedule. The Implementation Completion Report (ICR) was prepared by the Latin America and Caribbean Regional Office and includes the borrower's completion report, produced by the project's National Coordinating Unit at the Secretariat of Social Development, as an annex. This project was one of a package of five large operations, totaling US$1.2 billion of Bank lending, designed to give Argentina foreign exchange and policy support following the country's still unsuccessful attempt to stabilize the macroeconomy through the government's Primavera Plan. Macroeconomic conditions for project implementation were inauspicious indeed. Hyperinflation, negative economic growth, and a chaotic financial sector were the backdrop to project appraisal. In these circumstances, the project had an appropriately modest objective of strengthening public sector management in Argentina's provinces through (i) mobilizing resources to finance justified municipal investments; (ii) improving municipal managerial capacity for project investment; and (iii) promoting provincial/municipal consultations over investment plans. The project provided for the on-lending of the Bank's loan from the central government to five selected provinces, through whose municipal development funds loan proceeds were on-lent to qualified municipalities to finance eligible subprojects. The choice of projects was demand-driven by the municipalities themselves-the most popular being urban infrastructure in the form of street paving, drainage, curbs, sidewalks, and basic sanitation. Project design was based upon the earlier positive experiences of Bank-supported municipal development projects in Brazil. Project appraisal was very thorough, especially with respect to public finances from the provincial and municipal perspectives. Thoroughness of project design was also reflected in the careful attention given to project conditionalities for municipal participation and for the allocation of the Bank loan proceeds among provinces. Growing project complexity, however, was imposed by the political and fiscal autonomy of each province, and the large number of participating municipalities- more than 300 by completion- strained project implementation and delayed start up. A contributing design factor to complexity was the project's coverage of five provinces. The Brazilian models for this design included only one state (i.e., province) in each Bank-financed project in that country. Nevertheless, the dramatic stabilization of the Argentine economy from 1991 onward fostered the take-off of a project designed for much better macroeconomic circumstances than those that existed at the time of appraisal in 1987. Altogether, 95 percent of the loan amount was disbursed after Argentina's Convertibility Law of April 1991 helped put an end to hyperinflation in the country. By that date, project implementation arrangements had been put-sometimes exhaustively-in place, and the project was ready to meet the strong demand for finance for local investments by municipalities. There is much evidence of significant organizational strengthening and institutional development at both the provincial and municipal levels as a result of the project. In this sense, the project helped set the stage for subsequent reform. A blemish upon an otherwise successful operation, however, was the poor cost recovery results obtained. Municipal development funds did not capitalize as rapidly as foreseen, and efforts at recovering costs at the municipal level were fewer than hoped. Nevertheless, these issues remain on the agenda of the long-term effort at institutional reform at the subnational level currently being pursued by the government. OED ratings are consistent with those reported by the ICR. Outcome is rated as satisfactory, sustainability as uncertain, institutional development as substantial, and Bank performance as satisfactory. Key lessons of the project-which are well documented in the ICR-include the following: (i) a stable macroeconomic framework can contribute significantly to the success of a project like this one, something that should be borne in mind at appraisal; (ii) on-lending to lower tiers of government, subject to conditions of fiscal improvement being met, can be an effective instrument in institutional reform; (iii) in the first instance, on-lending for infrastructure subprojects rewards already-reform-minded municipalities, rather than changing the mindset of unreceptive municipalities; (iv) when many implementing agencies are involved-literally hundreds of municipalities in this case-project procedural requirements should be few and simple to remain manageable; and (v) projected disbursement for projects like this-with lending conditioned to a strong policy element-should anticipate a slow start-up in the first years -of implementation and rapid acceleration thereafter. The ICR for this project is of satisfactory quality and contains a plan for the future operation of the project. An audit is planned.