Argentina - Provincial Bank Privatization

 ICRR 10520 Report Number : ICRR10520 ICR Review Operations Evaluation Department 1. Project Data : OEDID: OEDID : L3878 Project ID : P040826 Project Name : Provincial Bank Privatization Country : Argentina Sector : Financial Sector Development L/C Number : L3878 Partners involved : IDB Prepared by : Elliott Hurwitz, OEDCR Reviewed by : Anwar Shah Group Manager : Ruben Lamdany Date Posted : 08/20/1999 2. Project Objectives, Financing, Costs and Components : Objectives : The principal objective of the project was to support the privatization of up to 15 provincially-owned banks, comprising around 10% of total banking assets (40% of provincial banking assets ). Additional objectives were to improve the fiscal condition of the provinces, and to bring additional banks under the supervision of the Central Bank. Financing : The operation was funded by a 3-tranche IBRD adjustment loan of US$500 million, with IDB co-financing of US$750 million. The Provincial Bank Privatization project also received US$ 166 million that was redirected (per Board-approved Amendment of April 1997) from the closely-related Bank Reform Loan, which experienced a smaller-than-expected demand for funds . The project was approved May 4, 1995, became effective May 5, 1995, and closed on April 30, 1997, the original closing date. 3. Achievement of Relevant Objectives : The project largely achieved its principal objective : 17 banks were privatized, comprising around 7% of total banking assets and 32% of provincial assets (it is likely that several additional banks which joined the program late would bring the totals nearly to the project goals ). These privatizations brought the banks under supervision of the Central Bank. 4. Significant Achievements : By privatizing a significant proportion of provincial banks, the project helped alleviate a chronic and important problem--the poor performance of money-losing state-owned banks. The project also helped achieve a restructuring of the banking sector, and contributed to restoring confidence in the financial sector . 5. Significant Shortcomings : No significant shortcomings. 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : In a bank privatization project, use of a Privatization Trust Fund, which extends loans to provinces to purchase less attractive assets of privatizing banks, can greatly facilitate progress . In privatizing banks that are of lower quality, in order to create an entity attractive to buyers, it is necessary to apply significant resources to "buy out" or otherwise dispose of poor quality assets .  In bank privatization, residual asset recovery can be a major problem; the most promising approach is to begin as early as possible to inventory assets and evaluate their quality, and involve the private sector to the greatest feasible extent. 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : The ICR presents abundant and insightful data on the impact of this operation on the banking sector .