Argentina - Provincial Reform Loan

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 19338 IMPLEMENTATION COMPLETION REPORT ARGENTINA PROVINCIAL REFORM LOAN (Ln. 3836-AR) May11, 1999 Poverty Reduction and Economic Management Argentina, Chile and Uruguay Country Management Unit Latin America and the Caribbean Regional Office 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 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 BOCEP - Bono para la Creacion de Empleo Privado ICR - Implementation Completion Report IBD - Inter-American Development Bank FONAVI - National Housing Fund (Fondo Nacional para la Vivienda) MDP-I - First Municipal Development Project MDP-II - Second Municipal Development Project PDP-1 - First Provincial Development Project PDP-II - Second Provincial Development Project PERAL - Public Enterprise Adjustment Loan PEREL - Public Enterprise Adjustment Loan PRL - Provincial Reformn Loan PSRTAL - Public Sector Reform Technical Assistance Loan SEF - Superintendence of Financial Entities SUCATS - Project Coordinating Unit (Subunidad de Coordinaci6n, Asistencia Tecnica y Seguimiento) TATAL - Tax Administration Technical Assistance Loan SAREP - Ministry of Interior's Secretariat for the Economic Reform of the Provinces (Secretaria de Asistencia para la Reforma Econ6mica Provincial) Vice President: Shahid Javed Burki- Country Director: Myrna Alexander Sector Director: Guillerrno Perry Task Manager: Miguel Mercado-Diaz  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT ARGENTINA PROVINCIAL REFORM LOAN (Ln. 3836-AR) Contents Preface ..............1i Evaluation Summary .............. ii Part I. Project Implementation Assessment A. Statement of Objectives .1 B Achievement of Objectives .3 C. Provincial Resource Mobilization .6 D. Provincial Current Expenditures .7 E Provincial Banks .9 F Major Factors Affecting the Project .9 G. Project Sustainability .10 H. Bank Perforance .11 I Borrower Perforance .11 J . Assessment of Outcome .12 K. Future Operations .13 L Key Lessons Leared .14 Part II. Statistical Tables Table 1: Summary of Assessment .17 Table 2: Related Bank Loans/Credits .19 Table 3: Project Tietable .20 Table 4: Cumulative Loan Disbursements: Estimated and Actual .20 Table 5: Status of Legal Covenants .21 Table 6: Project Indicators .27 Table 7: Bank Resources: Staff Inputs .30 Table 8: Bank Resources: Missions. .30 Table 9: Matrix of Project Activities .31 Table 10: Provincial Financing Under the Transformation Fund .33 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.  Table 11: Change in Ingresos Brutos for PRL and Non-PRL Provinces: 1994-97 .................................. 34 Table 12: Change in Own-Source Revenues for PRL and Non-PRL Provinces: 1994-97 .35 Table 13: Change in Personnel Expenditures: 1995-97 .37 Table 14: Change in Provincial Employees for PRL Provinces: 1992-97 ... 37 Table 15: Change in Current Account Surplus for PRL and Non-PRL Provinces: 1994-97 ................... 38 Table 16: Change in Primary Surplus for PRL and Non-PRL Provinces: 1994-97 .39 Table 17: Strategic Projects in PRL and Non-PRL Provinces.... 40 Table 18: Privatization of Provincial Banks and Enterprises in PRL and Non-PRL Provinces .41 Appendices: A. Borrower's Contribution to ICR .42 B. Mission's Aide Memoire .53  IMPLEMENTATION COMPLETION REPORT ARGENTINA PROVINCIAL REFORM LOAN (Ln. 3836-AR) Preface This is the Implementation Completion Report (ICR) for Provincial Reform Loan in Argentina, for which Loan 3836-AR in the amount of US$300 million equivalent was approved January 24, 1995. The loan was disbursed in three tranches of US$100 million each on March 24, 1995, January 3, 1996, and January 22, 1997 respectively. The loan closed on June 30, 1998 as expected. It was disbursed in its totality, thus no balance was canceled. The ICR was prepared by Cecilia Zanetta (consultant), under the supervision of Miguel Mercado-Diaz, Task Manager (LCSPR), and reviewed by Mark Hagerstrom (LCSPR), David Rosenblatt (LCSPR), David Vetter (LCSPR), and Geoffrey Shepherd (LCSPR). Preparation of the ICR was begun in September 1998. It is based on infornation in the project files, and discussions with government at the national level and in participating provinces, and with technical staff of the project implementation unit. The Borrower contributed to the preparation of the ICR by preparing its own evaluation of the project's initial preparation and execution, and by contributing its views, providing background material, and ample support whenever needed.  IMdPLEMENTATION COMPLETION REPORT ARGENTINA PROVINCIAL REFORM LOAN (Ln. 3836-AR) Evaluation Summary Introduction 1. Towards the end of 1994, the success of Argentina's reform program was already being reflected in the country's economic performance. As a result of the swift and far- reaching reforms irnplemented under the Menem's administration, inflation rates had been drastically cut, economic growth had rebounded, and fiscal balance had been attained at the federal level. However, several challenges still remained, including the need to extend fiscal and economic reforms to the provinces. Provincial reform was critical to ensuring the sustainability of the government's stabilization program, since most provincial governments continued to be a source of fiscal imbalance and were ill- prepared to fulfill their role as efficient service providers, thus seriously endangering the productivity and competitiveness of the country's economy. 2. Since 1991, the national government had launched a concerted effort to promote fiscal adjustment in the provinces. Within its own direct jurisdiction, the national government's efforLs were aimed at correcting distortions within the revenue-shared system, including the reduction of discretionary transfers, and at eliminating Central Bank rediscounts for provincial banks, a traditional source of provincial deficit financing. To promote reform, within the jurisdiction of sub-national governments, the national government sought the Bank's assistance in developing a lending portfolio that provided both technical and financial support to provincial governments' efforts to stabilize their public finances, reform their administrations, and increase their efficiency as providers of public goods and services. Targeted at a group of reform-minded provinces, the Provincial Reform Loan (PRL) became a central component of the Bank's provincial lending portfolio, as, it mapped a comprehensive reform strategy that effectively guided provinces on their path towards reform. Project Objectives 3. The PRL's specific objectives were: a) to support an overall environment of incentives for restructuring provincial public finances by increasing provincial accountability in the use of federal transfers and eliminating special treatment of provincial banks; and b) to support reforms in eight of the 24 provincial governments with financial and technical assistance to improve the structure and administration of  iii taxation, establish budgetary and administrative controls, reduce redundant public employment, improve the efficiency of transfers to the municipalities, privatize services now performed by public enterprises, and reduce the potential for deficit spending and inflationary financing by privatizing provincial banks. 4. To accomplish these objectives, the operation was designed as a quick-disbursing adjustment loan of US$300 million to be disbursed in three tranches of US$100 million each. Specific policy actions and conditions had to be fulfilled by the federal government and provincial governments for the disbursements of the three tranches to take place (see Policy Matrix, Table 9). At the federal level, the loan's conditionalities ensured an adequate macroeconomic environment and the elimination of structural disincentives that hampered provincial fiscal responsibility. At the provincial level, the loan required a comprehensive set of structural reforms, ultimately aimed at sound fiscal performance. 5. The proceeds from the loan were used to capitalize the Transformation Fund, established by the national government in April 1993 to promote structural adjustment in the provinces. The national government established individual agreements with each of the participating provinces under the framework of the Transformation Fund, determining in each case the measures to be taken by the provincial governments, their needs for technical and financial support, and the terms for repayment. Implementation Experiences and Results 6. Achievement of Project Objectives: The operation has been highly instrumental in improving resource mobilization, containing public spending while improving efficiency, and reducing the size of the provincial banking sector among participating provinces. All but one of the PRL conditions have been satisfactorily met and even exceeded. The condition that required provinces in the second group to achieve operational primary balance in 1995 was waived, as the crisis provoked by the Mexican devaluation had caused severe shortfalls in the provinces in terms of own-source revenues and national transfers. As of the closing of the loan, twelve out of the 24 provinces have signed agreements under the Transformation Fund for over US$407.5 million, implementing a set of key policy actions that has set up the foundations for sound fiscal performance. The impact of these reforms is reflected in the fiscal and reform performance of the PRL provinces which, in the aggregate, has been considerably better than for the non-PRL province over the 1994-97 period (see Tables 11 tol 8). 7. The contribution of the PRL goes well beyond the specific conditions that have been documented for each tranche. Conceptually, it provided a road map that effectively guided provinces on their path of reform -- both those provinces with a vocation for reform of their own as well as those for which reform was the only option out of the deep financial crisis. Financially and technically, the PRL set in place the support mechanisms that not only furthered reform among provincial governments but also helped contain the impact of the Mexican crisis at the provincial level. 8. Major Factors Affecting the Project: The loan was implemented at a fast pace, with the conditions required for all three tranches being met several months before  iv expected. It is important to point out, however, that the regional financial crisis that resulted from the Mexican devaluation in December, 1994 had a major impact in accelerating the pace of reform. Provincial revenues preceding the crisis had been artificially high as the result of the Tanzi effect and windfalls from federal privatizations. Thus, most provinces managed to avoid making the necessary reforms until the end of 1994, when capitals financing the public deficits fled the country in response to the Mexican devaluation. The PRL provinces were better prepared to weather the crisis than non-PRL provinces. With their reform program already in place, they were able to move faster on the implementation of reforms. 9. It is also important to underscore the importance of a cohesive portfolio of Bank- financed project ainmed at promoting provincial reform. While each operation contributed to specific aspects of provincial reform, such as institutional development or the reform of individual sectors - i.e., banking, pension funds, roads, health and education -- , the PRL provided the forum for the provinces to agree on an overall reform strategy. The PRL-II continued to advance the overall reform strategy, when four of the twelve PRL provinces committed to a more stringent policy matrix in mid- 1 996. 10. Project Sustainability: The operation's objectives have been met and important reforms have been successfully implemented. While the reduction in provincial employment could be potentially reversed, it would be hard to reverse most of the other PRL actions, such as the privatization of provincial enterprises and banks. The Transformation Fund has itself become a sustainable financing instrument to promote reform among sub-national governments. Loans to provinces were done under tougher conditions than the Bank loan -- five years, period of grace of six months, and 10 percent interest rate. This has allowed for the successful capitalization of the Transformation Fund, which is expected to reach US$40 million after the repayment of the loan. 11. Assessment of Bank's and Borrower's Performance: The success of the PRL is directly related to an outstanding performance on the part of the national government and the Bank. The Igovernment's overall strategy towards the provinces had high internal consistency and, through the Fiscal Pacts and tight Central Bank policies, most of the structural disincentives to provincial fiscal responsibility were systematically eliminated. In turn, the Bank's lending portfolio was fully consistent with the government's strategy towards the provinces, with common rules being adopted for all provincial lending. The PRL, a central elemnent of both the government's and the Bank's strategy towards the provinces, permitted to capitalize on the window of opportunity provided by the Mexican crisis. Summary of Findiings, Future Operations, and Key Lessons of Experience 12. The project objectives have been met satisfactorily and even surpassed. The project widely promoted public sector reform among participating provinces, thus effectively consolidating the sustainability of the country's reform program. The loan's specific achievements include: a) the reduction of 55,000 provincial agents, b) the privatization or concessioning of 48 provincial enterprises; and c) the privatization of nine provincial banks. The project has also served as an interface promoting structured  v consultations between provincial and national authorities in relation to policy issues central to the process of public sector reform, including developing an adequate system of incentives at the national level. Finally, the PRL underscores the importance of sub- national governments for the overall success of a national reform program 13. For the Bank, the PRL is a landmark operation, as it is one of the first adjustment loans targeted to sub-national governments. Its innovative design addressed effectively the complexity of Argentina's provincial sector and can serve as a model for other operations, both in LAC and other regions. 14. The following lessons, which are relevant for future public sector reform projects for sub-national governments beyond Argentina, can be highlighted from the implementation of this Provincial Reform Loan. 15. Structural Adjustment Loans (SALs) targeted at sub-national governments can be key elements within the framework of a country's overall reform program. They can provide the forum for the provinces to agree on an overall reform strategy to articulate other operations designed to support actions in specific areas. 16. The success of SAL loans depends on a combination of factors, among the most important of which is strong political support. In the case of Argentina, the arnbitious set of reforms supported under the PRL succeeded as a result of a unique combination of strong political support, a solid leadership with a high level of determination, and access to a pool of sound professionals, both at the national and provincial levels. 17. Financial support cannot substitute adequate policy incentives. A sustainable reduction of expenditures depends on establishing an adequate system of incentives, both at the national and provincial levels. At the national level, the moral hazard of having the central government guaranteeing provincial debts needs to be removed and the intergovernmental transfer system needs to be improved to reduce the existing mismatch between unconditioned federal transfers and shared-revenues and provincial responsibilities. At the provincial level, incentives should come from constituencies that hold elected officials accountable for their management of public resources. 18. Early on during the reform program, identify possible post-stabilization windfall transfers and other sources of "soft" deficit financing available to sub- national governments. Windfall transfers and soft sources of deficit financing available to sub-national governments undermine the potential for fiscal reform. Thus, it is important to identify them early on in the process as well as a set of measures that could reduce or neutralize them. Potential sources of windfall transfers include increases in the automatic revenue sharing system due to the Tanzi effect, and some elements of the stabilization program itself, such as the consolidation of provincial debt or privatization of government assets. 19. If windfall transfers or soft financing appear, negotiate to neutralize their impact. Although many maintained it was "politically impossible" to modify the  vi revenue sharing system, the government negotiated continually to try to neutralize the impact of windfall transfers. The negotiation of the Fiscal Pacts provided a forum for engaging the provinces in the national reform effort. The success of these negotiations was largely due to the considerable incentives the national government was willing to put on the table. Some of these incentives were the guaranteed floor on the revenue share transfers, the gradual elimination of the national assets tax, and the transfer of the provincial pension systems to the national government. 20. Be preparecl to take full advantage of crises, as they generate risks but also opportunities. In spite of the incentives included in the Fiscal Pacts, only a few provinces chose to reform. The financial and economic shock that resulted from the Mexican crisis provided a window of opportunity for large-scale provincial reform. As provincial revenues dropped drastically and provincial banks became largely insolvent, the national governmnent took full advantage of the crisis by pushing for the privatization or closure of the provincial banks as well as the transfer of provincial pension funds to the central government. In this way, two major chronic sources of provincial fiscal imbalance were effectively eliminated. 21. Develop a portfolio of alternative sources of financing for provincial investment to increase reform leverage. In the case of Argentina, the government was very effective in developing a portfolio of loans designed to support provincial reform efforts. To gain reform leverage, it is critical that strict creditworthiness criteria be applied to all lending available to the provinces, including international lenders 22. Maximize reform leverage by focusing on a few reforming sub-national governments, especially in the case of adjustment lending. As Bank lending may be only a minuscule portion of total financing available, it should be focused as much as possible on the reforming provinces. Thus, focus as much as possible on the reforming provinces, as the worldwide lesson in adjustment lending is that political willingness to reform is a condition sine qua non.  I Part I Project Implementation Assessment A. Statement of Objectives 1. Towards the end of 1994, Argentina was already experiencing the benefits from the ambitious reform program implemented by the Menem administration after it took office in July 1989. Swift and far-reaching reforms targeted at reducing the role of the state in the economy, tackling fiscal imbalances and achieving price stability had been implemented successfully. The success of the reformn program was evidenced by the substantial improvements in the country's economic performance: inflation rates were drastically cut from a monthly rate of 200 percent in 1989 to an annual inflation rate of 3.9 percent in 1994, growth rebounded to an average of 7.7 percent over the 1991-94 period, and fiscal balance was achieved at the federal level by 1994. However, several challenges still remained, including the need to reduce high unemployment rates, sustain poverty reduction efforts, and rebuild the country's deteriorating infrastructure. 2. Within this framework, extending fiscal and economic reforms to the provinces was now critical to the sustainability of the government's stabilization program. Provincial governments not only affected the country's overall fiscal effort but were now primarily responsible for the provision of services. The adjustment at the federal level had been accomplished partly through a strong decentralization in the provision of services, which had made provincial governments the major providers of health, education, security, water and sanitation, electricity and other infrastructure. In 1993, provincial governments accounted for 60 percent of all public investment. 3. However, most provincial governments were ill-prepared to fulfill their role as efficient service providers, thus seriously endangering the productivity and competitiveness of the country's economy. They also continued to be a source of fiscal imbalance, as illustrated by an overall provincial deficit equivalent to 0.8 percent of GDP in 1993. Provincial taxes were being poorly collected and provincial spending was highly inefficient, mainly as a result of substantial overstaffing, inadequate administrative controls and weak provincial budgeting mechanisms. Provincial resources were also being drained by highly inefficient public enterprises, insolvent provincial banks, and insufficiently financed provincial pension funds. Moreover, fiscal irresponsibility of provincial governments, especially in the case of the northern provinces, had been a source of social unrest, as some of the provincial deficits had resulted in significant delays in meeting their payroll obligations. 4. Since 1991, the national government had launched a concerted effort to promote fiscal adjustment in the provinces. Within its own direct jurisdiction, the national government's efforts were aimed at correcting distortions within the revenue-shared system, including the reduction of discretionary transfers, and at eliminating Central Bank rediscounts for provincial banks, a traditional source of provincial deficit financing. To promote reform within the jurisdiction of sub-national governnents, the national government sought the Bank's assistance in developing a lending portfolio that provided  2 both technical and financial support to sub-national governments' efforts to stabilize their public finances, reform their administrations, and increase their efficiency as providers of public goods and services. 5. The main vehicles of the Bank's assistance strategy targeted directly at sub- national governmernts were the First Provincial Development Project (PDP-I) and Municipal Developrnent Project (MDP-I) and subsequent follow-up operations -- PDP-II and MDP-II.1 These loans were operations covering all provinces to provide, at a minimum, support: for institutional strengthening and, for those satisfying creditworthiness criteria, financing for investments linked to sector reforms and improved fiscal performance. These loans were complemented by a series of sector investment operations aimed at improving the efficiency of delivering secondary education, public health, provincial roads, water supply, and agricultural services and infrastructure. In terms of reform, the umbrella operations had been successful in strengthening the weak technical capacity o:f provincial and municipal governments and introducing the concept of rewarding good iiscal performance. However, they were not suitable to provide the necessary financial support to those provinces willing and able to implement major structural reforms. This was the objective of the Provincial Reform Loan (PRL). 6. Targeted at a group of reform-minded provinces, the PRL was aimed at deepening the fiscal reforms underlying macroeconomic stability and enhancing the capacity of the provincial governments to fulfill their increasingly important role as providers of public goods and services. The PRL's specific objectives, as stated in the Report and Recommendation of the President (Report No. P-6414-AR, December 30, 1994), were: a) to support an overall environment of incentives for restructuring provincial public finances by increasing provincial accountability in the use of federal transfers and eliminating special treatment of provincial banks, and b) to support reforms in eight of the 23 provincial governments - including the Municipality of Buenos Aires2 -- with financial and technical assistance to: i) improve the structure and administration of taxation; ii) establish budgetary and administrative controls; iii) reduce redundant public employment; iv) improve the efficiency of transfers to the municipalities; The Inter-American Development Bank co-financed the First Provincial Development Project and the Second Municipal Development Project. 2 Although the Municipality of Bs. As. was eligible to participate in the operation, it was a federal district rather than a provincial government. It has since adopted the status of provincial government - now called the Government of the City of Buenos Aires -- together with Tierra del Fuego, previously another federal territory. Thus, there are now twenty-four provincial governments.  3 v) privatize services now performed by public enterprises; and vi) reduce the potential for deficit spending and inflationary financing by privatizing provincial banks. 7. To accomplish these objectives, the operation was designed as a quick-disbursing adjustment loan of US$300 million to be disbursed in three tranches of US$100 million each. It was estimated that the first tranche would be disbursed before end FY95, the second tranche before end FY96, and the third one before end FY97. Specific policy actions and conditions had to be fulfilled by the federal government and provincial governments for the disbursements of the three tranches to take place (see Policy Matrix, Table 9). At the federal level, the loan's conditionalities ensured an adequate macroeconomic environment and the elimination of structural disincentives that hampered provincial fiscal responsibility. At the provincial level, the loan required a comprehensive set of structural reforms, ultimately aimed at sound fiscal performance. 8. The national government of Argentina was the borrower. The proceeds from the loan were used to capitalize the Transformation Fund, established by the national government in April 1993 (Decree 678/93) to promote structural adjustment in the provinces. The national government established individual agreements with each of the participating provinces under the framework of the Transformation Fund, determining in each case the measures to be taken by the provincial governments, their needs for technical and financial support, and the terms for repayment. The conditions to be met by each province consistently exceeded PRL conditionality, requiring even more ambitious targets and actions. Federal revenue-sharing funds were used to guarantee repayment by provincial governents. 9. This design effectively supported the operation's objectives. It combined a set of comprehensive, well-defined policy conditions that ensured the achievement of the project's main objectives with a high degree of flexibility in terms of the specific provinces in which the conditions were to be met. Specifically, four provinces were required to meet the conditions in each tranche, although the individual provinces could change from one tranche to the next. This flexibility served as an effective risk-control mechanism, spreading the risk of reforms being stalled among various provinces. In addition, four different provinces were required to meet the conditions of the first tranche. B. Achievement of Overall Project Objectives 10. The operation has been highly successful in extending the national government's program to reform and modernize the public sector into the participating provincial governments. As of the closing of the loan, twelve out of the 24 provinces have signed agreements under the Transformation Fund for over US$407.5 million, implementing a set of key policy actions that has set up the foundations for sound fiscal performance (Table 10). In particular, the PRL has been highly instrumental in improving their resource mobilization, containing public spending while improving efficiency, and reducing the size of the provincial banking sector. All but one of the PRL conditions have  4 been satisfactorily mnet and even exceeded. The condition that required provinces in the second group to achieve operational primary balance in 1995 was waived, as the crisis provoked by the Mexican devaluation had caused severe shortfalls in the provinces in terms of own-source revenues and national transfers. 11. Overall, the contribution of the PRL goes well beyond the specific conditions that have been documented for each tranche. Conceptually, it provided a road map that effectively guided provinces on their path of reform -- both those provinces with a vocation for reform of their own as well as those for which reform was the only option out of the deep financial crisis. Financially and technically, the PRL set in place the support mechanisms that not only furthered reform among provincial governments but also helped contain the impact of the Mexican crisis at the provincial level. 12. It is important to point out that the success of the PRL is closely linked to that of other loans. The P:DP-I and II in particular illustrate the potential complementarities between SALs and investment loans in terms of objectives, government counterparts, and time frames. Throuigh the PRL, the Bank and the national government worked closely with top provincial government officials in the design of the necessary reforms and provided strong financial incentives for the adoption of the enabling policy framework within a short time frame -- i.e., less than three years. However, the field work was done through the PDP-I and II, including building the necessary technical capacity at the provincial level and providing ongoing support to the provinces in developing and implementing the key instruments required to carry out these reforms, such as initial diagnostic studies, as well as cadastre projects, financial administration systems and tax administration systems. The Provincial Bank Privatization and the Provincial Pension Reform loans also reinforced the efforts to promote provincial reform, providing the support necessary to carry out the massive privatization of provincial banks and transfer of provincial pension funds to the national government.. The internal cohesion of the provincial portfolio in terms of objectives and creditworthiness criteria significantly increased the Bank's, leverage. 13. Macroeconoimic Policies: Substantial Achievement. When the PRL was designed, macroeconomic stability was still fragile, as evidenced by the high levels of the current account deficit, the volatility of capital flows financing such deficits, and the modest level of resierves exhibited at the time. Within this framework, the PRL has effectively contributed towards the stabilization of Argentina's economy and the sustainability of the overall reform program by supporting the implementation of measures conducive to reorient provincial public spending in ways that increased productivity and efficiency in the delivery of services while strengthening fiscal positions. Overall, ihe consolidated provincial deficit has been reduced from 0.8 percent of GDP in 1994 to 0.4 percent in 1997. 3 14. At the national level, the PRL has promoted conditions consistent with the objective of provincial reform. These conditions have been met successfully by the national governmeint over the life of the loan, including maintaining stable 3 "Argentina Provincial Finances," Update 1998, LCSPR, June 30, 1998.  5 macroeconomic conditions even under the strain of the Mexican crisis, reducing discretionary transfers to the provincial governments, auditing FONAVI funds to increase provincial accountability, and eliminating rediscounts to provincial banks by the Central Bank, a historical source of financing provincial quasi-fiscal deficits. The PRL has also promoted the restructuring of provincial taxes in line with the 1993 Fiscal Pact, thus reducing regressive taxes and distortions in the overall economy. 15. Financial Objectives: Substantial Achievement. Significant savings have resulted from increased efficiency in the functioning of the public sector, the reduced role of the government in the economy, improved tax administration, and the rationalization of public expenditures. Some of these savings are described below for each of the individual components. They include savings in the payroll of the provincial administration corresponding to a reduction of 55,000 public sector positions and the privatization of 48 public enterprises. Finally, the closing or privatization of nine provincial banks will prevent the need for future provincial government bail-outs, such as the one that took place in Mendoza in 1995, the cost of which has been estimated at approximately US$138.7 million, or equivalent to 1.8 percent of the GDP at that time.4 16. Public Sector Reform: Substantial Achievement. This is the area in which the operation has made its central contribution. It has successfully accomplished its original objectives by effectively supporting reforms aimed at improving provincial resource mobilization, increasing efficiency in provincial public expenditures, and reducing the size of the provincial administrations. As a result, participating provincial governments are now considerably stronger, leaner and more efficient. Moreover, the idiosyncrasy of government officials and provincial administrators has been drastically transformed, with a new awareness regarding the importance of sound public administration. 17. It is important to note that the specific actions agreed upon by each province resulted from sound sector work financed under PDP-I. A comprehensive diagnosis of the overall situation of the provincial public sector was carried out in each of the potential participating provinces. The findings and recommendations of these diagnostic studies served as a framework for the specific agreements under the Transformation Fund, adapting and fine-tuning the targets required by the PRL for each province and including additional conditions when necessary. In this way, participating provinces were also required to deregulate various economic activities within provincial jurisdiction, introduce cost recovery mechanisms for public investments, undertake institutional strengthening subprojects in various areas including tax administration, personnel management, and evaluation of physical investments, and undertake reforms in the health and education sectors, including improvements in the provision of services and sizing of personnel. 4 Since 1995, approximately 70 percent of Mendoza's consolidated indebtedness has been incurred as a result of the liquidity and credit crisis suffered by the Banco de Mendoza and Banco de Prevision following the Mexico Crisis. In order to privatize both banks, the government of Mendoza had to assume a US$679.3 million in debt (excluding voluntary retirement programs) equivalent to 8.3 percent of the province's GDP in 1996. (Source: Offering Circular of $S250,000,000 Bonds; Province of Mendoza, August 29, 1997.)  6 18. The improvements in these areas have translated in the improvement in the overall fiscal performance among the participating provinces. As shown on Tables 12 through 18, the reiForm and fiscal performance have been considerably better in the aggregate for the PRL provinces as compared to the non-PRL provinces over the 1994-97 period. Clearly, the "tequila effect" from the Mexican devaluation provided added reform impetus for all provinces. However, as most of the PRL provinces had their reform programs already designed and ready for implementation when the crisis hit, they were able to react faster, thus more reforms were implemented. Although the fiscal performance of some PRL provinces leaves much to be desired, as a group they did better than the non-PRL provinces as the good performers more than compensated for the less consistent ones. 19. A detailed analysis of the factors that affected the implementation of each component and the achievement of their specific objectives follows below. C. Provincial Resource Mobilization 20. As a result of tightening federal transfers, provinces had already begun to focus on increasing the collection of provincial taxes, which increased by over 50 percent in real terms between 1991 and 1993. However, to consolidate and deepen these improvements it was still necessary to increase the institutional capacity of the provinces to collect taxes and to change the structure of provincial taxation, bringing taxing and spending responsibilities more in line. The PRL supported these actions. 21. Structure of Provincial Taxes: The August 1993 Fiscal Pact sought to eliminate the stamp tax, to transform the cascading tumover tax into a retail sales tax to remove the negative effect on output, and to promote the use of provincial property taxes. As a Second and Third 'Tranche condition, participating provinces were required to obtain legislative approval of the Fiscal Pact and to adhere to their agreed timetables for substantially implementing the tax reform measures. These conditions were satisfactorily met. There were as many as 23 potential individual tax reforms in each province, and it is estimated that comapliance reached more than 80 percent. 22. Improved Tcx Administration: The successful implementation of the Fiscal Pact depended largely oIn the capacity of provincial governments to implement fundamental reforms in tax administration, including incentives for collection and automation of information systems' with assistance from the National Tax Agency (DGI). As a Second and Third Tranche condition, participating provinces were required to adopt the DGI program for monitoring, inspecting and auditing the nation's largest taxpayers. Technology was developed for DGI and transferred to the provinces with support from the Bank-financed SLecond Tax Administration Loan (Ln. 3460-AR). This condition was satisfactorily met, with 50 percent and 75 percent of the largest taxpayers in each province being adequately monitored by the Second and Third Tranches release. Moreover, all PRI, provinces have made substantial progress towards developing integrated systems linking cadastres, tax administration, and registries of real estate property as a way of strengthening collection of property taxes. Most of these systems  7 have been promoted under PRL with financing under PDP-1 and II (see Table 17). 23. These actions had a positive effect on increasing own-source revenues, with 60 percent of the PRL provinces evidencing an increase larger than the media over the 1994- 97 period, compared to only 43 percent of non-PRL provinces (see Tables 11 and 12). The same is true for the change in revenues from Ingresos Brutos during the same period: 60 percent of all PRL provinces exhibited increases greater than the media for all provinces, compared to just 43 percent of all non-PRL provinces. In aggregate, the PRL provinces increased revenues from Ingresos Brutos by 16.57 percent over the 1994-97 period, which is more than twice as much as the non-PRL provinces -- 7.69 percent. D. Provincial Current Expenditures 24. Several PRL conditions were aimed at improving expenditure efficiency among participating provinces, including: 25. Downsizing of Provincial Administrations: Provincial efforts at reforming administrative practices and reducing redundant public employment had been limited by inadequate programs, insufficient financing, and concern by provincial authorities about the lack of alternative employment opportunities. While several provinces had already attempted employment reduction programs, these had generally not been based on a prior diagnosis and strategy for administrative reform, nor were adequate controls set in place to ensure that such reductions would be sustained over time. In most provinces, important adjustments were needed, including reductions in labor force, reform of leave policies and mechanisms for leave verification, and mechanisms for provincial agencies to improve accountability in human resource management. 26. The PRL supported provincial efforts to reduce the level of public employment by requiring as a condition for Second and Third Tranche release that redundant public employment in participating provinces be reduced by a total of 20,000 (10,000 per tranche). This target has been amply surpassed, with more than 55,000 public sector positions having been eliminated in the participating provinces (see Tables 13 and 14). This considerable reduction has had a positive impact on current expenditures. For instance, personnel expenditures among PRL provinces have decreased 3.49 percent over the 1995-97 period, compared to an increase of 4.55 percent among non-PRL provinces. 27. Provincial strategies towards downsizing included identifying and removing "ghost" employees from the public rolls, privatizing and contracting out ancillary services, targeted hiring freezes, and employment separation incentive programs. Reforms of leave policies and mechanisms for proper enforcement were also adjusted, thus contributing to a reduction in the size of the public work force by greatly reducing the need for retaining large numbers of substitute workers. In response to concerns expressed by provincial governments about the lack of viable job alternatives for displaced public workers, the Government implemented a retirement incentive scheme, the "Bono para la Creaci6n de Empleo Privado" (BOCEP), which was financed through the Transformation Fund. As of the closing of the PRL, a total of 6,322 provincial agents have benefited from this program, which amounted to US$89 million.  8 28. Strengthening of Financial Management Systems: To improve accountability, the PRL supported the transfer to the provinces of financial management and personnel control systems introduced at the federal level under the Bank-financed Public Sector Reform Loan (PSFL, Ln. 3394-AR) and its companion technical assistance loan (PSRTAL, Ln. 3362-AR). As a Second Tranche condition, the participating provinces were required to draft legislation to reform provincial financial management procedures and reporting in line with the Federal Law of Financial Management (No. 24,156). For the Third Tranche they had to submit such legislation for approval. These conditions have been met, although the law has not been passed in all cases. Nine of the ten PRL provinces are impleraenting financial administration projects -- either under PDP-I and II, the Secretary of Finance, or with their own resources -- compared to only five of the 14 non-PRL provinces. (See Table 17). 29. Privatization of Provincial Public Enterprises: The PRL also supported the privatization of public enterprises in the provinces. Financing through the Transformation Fund was required since the financial benefits from these efforts were not expected to be as great or immediate as for the federal privatization program. In some instances, proceeds from sales did not cover the costs of employee layoffs and liquidation did not cover existing debts. Apart from the fiscal benefit, the long-term benefits of privatization have been reducing the cost and expanding the availability of the services provided. Privatizations and concessions were patterned on those implemented at the federal level and in several provinces, which the Bank has supported through Water Supply I (Ln. 2641..AR) and Power Distribution (SEGBA V, Ln. 2854-AR). Several fuature privatizations/concessions were supported through technical assistance under SEGBA V and Water Supply II (Ln. 3281 -AR). As a condition for the Second Tranche release, participating provinces were required to offer at least eight public enterprises for sale/concession or legally declare them in liquidation. Environmental audits or evaluations satisfactory to the Bank were also required for public enterprises involved in manufacturing, extractive and power-generating activities. As a Third Tranche condition, eight public enterprise had to be privatized or concessioned or be in the process of liquidation. 30. These conditions were largely exceeded by the number of enterprises that were actually privatized or concessioned. A total of 48 provincial enterprises (including two municipal banks) have been privatized in the ten PRL provinces, compared to only 27 (including one municipal bank) in the fourteen non-PRL provinces. Thus, PRL provinces have privatized at arn average rate of almost five enterprises per province, compared to less than two enterprises per non-PRL province (see Table 18). 31. Provincial Transfers: As a condition for the Second Tranche release, participating provinces were required to draft new legislation on revenue-sharing with municipalities, incorporating incentive rules that based at least 30 percent of transfers directly on fiscal performance. A Third Tranche condition required that such legislation be submitted to provincial legislatures. These conditions were met. However, it was very much an effort pro forma, as none of the proposals were adopted. In general, most provincial governments are waiting to see the outcome of the forthcoming Fiscal Pact negotiations  9 where some innovative concepts, such as direct revenue-sharing transfers to the municipalities, are likely to be discussed. Also, the revision of current criteria implies that some municipalities stand to lose revenues; thus there is a lot of political opposition to the proposed changes. E. Provincial Banks 32. Since 1991, and in line with the new Central Bank Charter, provincial banks have been denied access to Central Bank rediscounts except for liquidity purposes. Also, provincial banks have adhered to tighter regulations of the Superintendence of Banks on lending to the public sector, repayments to the Central Bank (about US$400 million was recovered), reserve requirements, maximum lending rates and loan classification and provisioning. Provincial banks are now treated on a footing equal to that of all other banks. Furthermore, the Superintendence has improved its supervisory capacity and has been stepping up supervision. As a condition for the release of all tranches, the Central Bank was required to maintain regulations that treated provincial banks as equal to all other banks; as a condition for the Second and Third Tranche release provincial banks had to be inspected or audited during the 15 months prior to tranche releases. These conditions have been met adequately over the life of the loan. 33. Despite the tighter regulatory and supervisory framework, it was imperative to accelerate the privatization of provincial banks. Provincial bank performance was well below that of Argentina's banking system and any major failure would create political pressure for a Central Bank bailout. As an overall condition for the Second Tranche release, at least four banks had to be offered for sale or be legally declared in liquidation. The Third Tranche release required that four banks had been privatized or were under liquidation. These targets have also been amply exceeded: nine provincial banks have been privatized or liquidated in the ten PRL reforms, compared to only six among the fourteen non-PRL provinces (see Table 18).5 F. Major Factors Affecting the Project 34. The loan was implemented at a fast pace, with the conditions required for all three tranches being met several months before expected. It is important to point out, however, that the regional financial crisis that resulted from the Mexican devaluation in December, 1994 had a major impact in accelerating the pace of reform. Provincial revenues preceding the crisis had been artificially high as the result of the Tanzi effect and windfalls from federal privatizations. Thus, most provinces were able to avoid making the necessary reforms in the earlier period, 1991-93. 35. However, the vulnerability of the fiscal situation in most provinces was evidenced shortly after the PRL's approval, when capitals financing the public deficits fled the country in response to the Mexican devaluation. The PRL provinces were better prepared 5 In the case of Corrientes, the privatization of the provincial bank was not completed due to the failure of the selected bidder to complete the transaction. The province is currently working on a second attempt to privatize it.  10 to weather the crisis than non-PRL provinces. With their reform program already in place, they were able to move faster on the implementation of reforms. Even with the economic downturn in 1995 due to the "tequila effect," the PRL provinces had a deficit only 14 percent higher than in 1994, while the rest of the provinces had an increase of 37.5 percent. The experience of the PRL underscores the importance of having an adequate system of incentives at the macro level that is conducive to fiscal reform. 36. Towards the end of 1997, financing under the Transformation Fund had considerable competition for sources of private financing that offered more attractive lending terns withouit conditionalities. This eroded the interest of participating provinces and the pace of reforms began to slow down. This was resolved during the Midterm Review by devising a system of incentives that rewarded good provincial performance by improving terms and interest rates on undisbursed balances. As of the closing of the loan, a total of US$380 million have been disbursed to the provinces through the Transformation Fund, with only US$68.4 million still undisbursed (see Table 10).6 37. Finally, it is important to underscore the importance of a cohesive portfolio of Bank-financed project aimed at promoting provincial reform. While each operation contributed to specific aspects of provincial reform, such as institutional development or the reform of individual sectors - i.e., banking, pension funds, roads, health and education -- , the PRL provided the forum for the provinces to agree on an overall reform strategy. The PRL-II continued to advance the overall reform strategy, when four of the ten PRL provinces committed to a more stringent policy matrix in mid-1996. G. Project Sustainability 38. Sustainabilily: Likely. The operation's objectives have been met and important reforms have been successfully implemented. While the reduction in provincial employment could be potentially reversed, it would be hard to reverse most of the other PRL actions, such as the privatization of provincial enterprises and banks. The sustainability of the reform efforts on the part of the provinces is also evidenced by their continued interest on the Transformation Fund. Two more provinces have signed agreements within the last few months (i.e., Chubut and Santa Cruz), and participating provinces have signed additional agreements to extend reforms to other areas, such as the municipal sector. 39. The Transformation Fund has become a sustainable financing instrument to promote reform among sub-national governnents. Loans to provinces were done under tougher conditions than the Bank loan -- five years, period of grace of six months, and 10 percent interest rate. This has allowed for the successful capitalization of the Transformation Fund, which is expected to reach US$40 million after the repayment of the loan. It is important to note that the actual establishment of the Transformation Fund can be directly attribiuted to the PRL, as the other sources of funding that were anticipated -- i.e., proceeds fromL the privatization of various national financial institutions, including 6 Included in this amount are US$31 million to be disbursed to Chubut and Santa Cruz. The two provinces signed subsidiary agreements just recently, i.e., on 3/2/98 and 7/2/98 respectively.  11 the Caja de Ahorro -- never materialized. H. Bank Performance 40. Project Identification: Highly Satisfactory. The Bank correctly diagnosed the need to consolidate the larger national objectives of public sector reform by extending the reforms already implemented at the national level to provincial governments. The operation's design as an agile, quick-disbursing adjustment loan provided attractive financial incentives to those provinces willing and able to implement reforms. Moreover, the PRL was just one of the several lending operations that were implemented within the framework of a broad, comprehensive and internally-consistent Bank strategy that capitalized on the potential synergy with other loans in the provincial portfolio, the PDP-I and II in particular. 41. Project Preparation: Highly Satisfactory. The Bank's perfonnance was highly satisfactory with respect to the sectoral and technical aspects of the operation, identifying an ambitious but feasible Policy Matrix that operationalized the major aspects of the government's reform strategy towards the provinces. The Bank worked in close collaboration with individuals in the national and provincial governments and maintained a high degree of coordination between the PRL and other Bank operations, both provincial and sector loans. 42. Project Appraisal: Highly Satisfactory. During appraisal, the Bank took into account the various risks that could affect the operation and set up mechanisms within the project to mitigate them, including spreading risk among different provinces. 43. Project Supervision: Highly Satisfactory. SAL operations pose a challenge in terms of supervision, as they require both precision and agility. The Bank worked closely with the Borrower, assessing the overall evolution of the provincial sector, as well as monitoring the progress towards reform being made in each of the participating provinces. Individual supervision missions were reported by the Borrower as being highly satisfactory and described as a team effort between the Bank and the Borrower. The Bank provided strong support during the Mexican crisis, moving quickly to accelerate the disbursement of the corresponding tranches and in preparing related loans, such as the Provincial Pension Reform Loan. Periodic Bank reports on provincial finances have provided a close pulse-taking of the sector, permitting the timely identification of changing trends and the elaboration of appropriate actions. I. Borrower Performance 44. Preparation of the Project: Highly Satisfactory. The project had a unique combination of political support, strong determination of individual actors and excellent technical resources that were key to the success of the programn. Rather than constituting an isolated effort, the operation was an integral element within the country's strategy to reform the public sector. The Undersecretary of Provincial Reform was responsible for the entire package of provincial lending operations with multilateral financing, including he PDP-I and PDP-I1. He was also responsible for the Fiscal Pact negotiations that were carried  12 out by the govemrnent, thus generating sufficient bargaining leverage to induce the provinces to reform. 45. Another key element in the success of the loan preparation was the excellence of the technical team, a group of top-quality professionals with years of experience in the different areas to be reformed. Moreover, the majority of them came from the provinces. Thus, although playing the role of the "feds," they understood the problems and idiosyncrasies of the provinces and had a deep respect for provincial autonomy. 46. Project Implementation: Highly Satisfactory. The implementation of the project was shared by the Federal Ministries of Economy and Interior. The Ministry of Interior, through the Secretariat for the Economic Reform of the Provinces (SAREP), was responsible for coordinating and monitoring activities by participating provinces, as well as providing technical assistance to the provinces. The project's coordinating unit (SUCATS) was established within SAREP. 47. This unit is constituted by a multidisciplinary group of top-notch professionals with expertise in different areas, such as fiscal policies and tax administration, public finances, privatizations and deregulation, and sector specialists in education and health. Its excellent perfonnance in providing technical support to the different provincial governments has been a key factor in the success of the PRL. The SUCATS has become a pole of reform and cross-fertilization among provinces. It has become a routine stop for top provincial government officials visiting Buenos Aires, thus developing both formal and informal networ]ks of reform-oriented actors across political affiliations. The smooth implementation of the PRL illustrates the importance of using top professionals in project management. The Ministers of Economy of the participating provinces have served as counterpart, thus providing a clear and effective interlocutor at the provincial level. 48. Compliance with Covenants: Satisfactory. Compliance with legal covenants was satisfactory. Over the life of the project, compliance with the stipulated covenants and agreements was met. Reports of excellent quality have been submitted in a timely manner, offering a clear and complete picture of the progress of the program. Adequate documentation was made available to support the request for each tranche. 49. Despite these achievements, there were some shortcomings in the administration of the Transformalion Fund. In some cases, provinces received advances on disbursements without having complied with all conditionalities. Although a waiver reportedly had been granted in each case, no record was kept to document it. Future disbursements were mnade only after the Bank's no objection had been granted. 50. As explained above, the Third Tranche condition requiring operational primary balance for participating provinces in 1995 was waived based on the extraordinary circumstances resulting from the Mexican crisis. J. Assessment of Outcome 51. Overall Rating: Highly Satisfactory. The project objectives have been met  13 satisfactorily. The project widely promoted public sector reform among participating provinces, thus effectively consolidating the sustainability of the country's reform program. The loan's specific achievements include: a) the reduction of 55,000 provincial agents, b) the privatization or concessioning of 48 provincial enterprises; and c) the privatization of nine provincial banks. The project has also served as an interface promoting structured consultations between municipal and national authorities in relation to policy issues central to the process of public sector reform, including developing an adequate system of incentives at the national level. 52. For the Bank, the PRL is a landmark operation as it is one of the first adjustment loans targeted to sub-national governments. Its innovative design has addressed effectively the complexity of Argentina's provincial sector and can serve as a model for other operations, both in LAC and other regions. 53. In summary, the PRL had set in place the financial and technical resources that helped the national government to capitalize on the financial pressure resulting from the Mexican crisis and to promote structural reforns at the provincial level. Moreover, it underscores the importance of sub-national governments for the overall success of a national reform program. K. Future Operations 54. Based on the experience from this project, the following aspects ought to be taken in consideration for future operations: a) Minimize the risk of changing political commitment towards reform in individual provinces by working with groups of provinces. b) Make sure that the additional conditions imposed by the government are within reach. c) Make sure that lending conditions remain attractive, in line with the reform efforts being required on the part of sub-national governments. For this, take into account the ability of sub-national governments to access private lending using their revenue sharing as a guarantee. d) Through the PRL-II, the Bank has targeted subsequent adjustment lending in Argentina to individual provinces, with the objective of deepening reforms in those provinces that have demonstrated the strongest willingness and ability to reform. e) The PRL model, however, might be use effectively to promote the municipal reform, which is still pending in Argentina. The PRL-II has a specific municipal component that sets the stage for future dialogue. The coming fiscal year provides a window of opportunity, with incoming provincial authorities and strong financial pressure as the result of the Asian and Russian crises in 1998, and the Brazil crisis in 1999. The lessons learned from PRL indicate that the conditions are right to promote  14 another round of structural reforms among sub-national governments. L. Key Lessons Learned 55. The following lessons, which are relevant for future public sector reform projects for sub-national governments beyond Argentina, can be highlighted from the implementation of this Provincial Reform Loan:7 56. Structural Adjustment Loans (SALs) targeted at sub-national governments can be key elemenlts within the framework of a country's overall reform program. They can provide the forum for the provinces to agree on an overall reform strategy to articulate other operations designed to support actions in specific areas. 57. The success of SAL loans depends on a combination of factors, among the most important of which is strong political support. In the case of Argentina, the ambitious set of reforms supported under the PRL succeeded as a result of a unique combination of strong political support, a solid leadership with a high level of determination, and access to a pool of sound professionals, both at the national and provincial levels. 58. Financial support cannot substitute adequate policy incentives. A sustainable reduction of expenditures depends on establishing an adequate system of incentives, both at the national and provincial levels. At the national level, the moral hazard of having the central government guaranteeing provincial debts needs to be removed and the intergovernmental transfer system needs to be improved to reduce the existing mismatch between unconditioned federal transfers and shared-revenues and provincial responsibilities. At ithe provincial level, incentives should come from constituencies that hold elected officials accountable for their management of public resources. 59. Early on duaring the reform program, identify possible post-stabilization windfall transfers and other sources of "soft" deficit fimancing available to sub- national governments. Windfall transfers and soft sources of deficit financing available to sub-national governments undermine the potential for fiscal reform. Thus, it is important to identify them early on in the process as well as a set of measures that could reduce or neutralize them. Potential sources of windfall transfers include increases in the automatic revenue sharing system due to the Tanzi effect, and some elements of the stabilization program itself, such as the consolidation of provincial debt or privatization of government assets. 60. If windfall transfers or soft financing appear, negotiate to neutralize their impact. Although nriany maintained it was "politically impossible" to modify the revenue sharing system, the government negotiated continually to try to neutralize the impact of windfall transfers. The negotiation of the Fiscal Pacts provided a forum for engaging the 7 For a more extensive analysis, see David Vetter and Cecilia Zanetta's article on "Subnational Governments in a Stabilization Program: Lessons Learned from Argentina", Journal of International Administration, forthcoming.  15 provinces in the national reform effort. The success of these negotiations was largely due to the important incentives the national government was willing to put on the table. Some of these incentives were the guaranteed floor on the revenue share transfers, the gradual elimination of the national assets tax, and the transfer of the provincial pension systems to the national government. 61. Be prepared to take full advantage of crises, as they generate risks but also opportunities. In spite of the incentives included in the fiscal pacts, only a few provinces chose to reform. The financial and economic shock that resulted from the Mexican crisis provided a window of opportunity for large-scale provincial reform. As provincial revenues dropped drastically and provincial banks became largely insolvent, the national government took full advantage of the crisis by pushing for the privatization or closure of the provincial banks as well as the transfer of provincial pension funds to the central government. In this way, two major chronic sources of provincial fiscal imbalance were effectively eliminated. 62. Develop a portfolio of alternative sources of financing for provincial investment to increase reform leverage. In the case of Argentina, the government was very effective in developing a portfolio of loans designed to support provincial reform efforts. To gain reform leverage, it is critical that strict creditworthiness criteria be applied to all lending available to the provinces, including international lenders 63. Maximize reform leverage by focusing on a few reforming sub-national governments, especially in the case of adjustment lending. As Bank lending may be only a minuscule portion of total financing available, it should be focused as much as possible on the reforming provinces. Thus, focus as much as possible on the reforming provinces, as the worldwide lesson in adjustrnent lending is that political willingness to reform is a condition sine qua non.  16 Part II Statistical Tables Table 1: Summary of Assessment .................................. 17 Table 2: Related Bank Loans/Credits .................................. 19 Table 3: Project Timetable .................................. 20 Table 4: Cumulative Loan Disbursements: Estimated and Actual ................... 20 Table 5: Status of Legal Covenants ...... ............. 21 Table 6: Project Indicators ................... 27 Table 7: Bank Resources: Staff Inputs ........ ........... 30 Table 8: Bank Resources: Missions ................... 30 Table 9: Matrix of Project Activities ....... ............ 31 Table 10: Provincial Financing Under the Transfornation Fund.33 Table 11: Change in Ingresos Brutos for PRL and Non-PRL Provinces: 1994-97 .34 Table 12: Change in Own-Source Revenues for PRL and Non-PRL Provinces: 1994-97 .............................. 35 Table 13: Change in Personnel Expenditures: 1995-97 .............. 37 Table 14: Change in Provincial Employees for PRL Provinces: 1992-97 .37 Table 15: Change in Current Account Surplus for PRL and Non-PRL Provinces: 1994-97 .38 Table 16: Change in Primary Surplus for PRL and Non-PRL Provinces: 1994-97 .................................. 39 Table 17: Strategic Projects in PRL and Non-PRL Provinces .... 40 Table 18: Privatization of Provincial Banks and Enterprises in PRL and Non-PRL Provinces .41  17 Table 1 Summary of Assessments A. Achievement of Objectives Achievement of Objectives Substantial Partial Negligible Not ___________________________ A pplicable Macro Policies / Sector Policies / Financial Objectives / Institutional Development - Physical Objectives I Poverty Reduction _ Gender Issues I Other Social Objectives Environmental Objectives _ Public Sector Management I Private Sector Development _ Other I B. Project Sustainability 8 Project Sustainability Likely Unlikely | Uncertain C. Bank Performance Bank Performance Highly Satisfactory Deficient Satisfactory Identification I Preparation Assistance Appraisal / Supervision I  18 D. Borrower Performance Borrower Performance Highly Satisfactory Deficient Satisfactory Preparation =- Implementation J Covenant Compliance l Operation (if applicsable) E. Assessment of Outcome Assessment of Outcome Highly Satisfactory Unsatisfactory Highly L ~~~~~~Satisfactory Unsatisfactory  19 Table 2 Related Bank Loans Loan Purpose Year of Approval Status Preceding operations 2641-AR - Water Supply I Privatization 1988 Closed 1330-AR - Power Privatization 1988 Closed Distribution SEGBA 2920-AR - Municipal Municipal Reform 1988 Closed Development I 3280-AR - Provincial Provincial PS and 1991 Closed Development Loan Reforms 3291-AR Public Public Enterprise Reform 1991 Closed Enterprise Reform Loan I 3556-AR - Public Public Enterprise Reform 1993 Closed Enterprise Reform Loan II 3555-AR Debt and Debt Debt Reduction 1993 Closed Service Reduction Loan 3558-AR - Financial Financial 1993 Closed Sector Adjustment Loan FoUlowing operations 3877-ARProvincial Provincial PS and 1995 Ongoing Development Loan II Reforms 3860-AR Municipal Municipal Reform 1995 Ongoing Development II 4218-AR Provincial Provincial Reform 1997 Ongoing Reform (Rio Negro) 4219-AR Provincial Provincial Reform 1997 Ongoing Reformn (Salta) 4220-AR Provincial Provincial Reform 1997 Ongoing Reform (San Juan) 4221-AR Provincial Provincial Reform 1997 Ongoing Reform (Tucuman)  20 Table 3 Project Timetable Steps in Projeclt Cycle Date Planned Date Actual Identification -(Executive Project Summary) Preparation -Appraisal ---- July 29, 1994 Negotiations November 7, 1994 Letter of Development Policy ---- December 6, 1994 Board Presentation January 24, 1995 Signing ---- March 24, 1995 Effectiveness March 24, 1995 First Tranche Release May 1995 Midtern Reviewv April 21, 1997 Second Tranche Release January 2, 1996 Third Tranche Release ---- February 7, 1996 -Project Completion June 30, 1998 June 30, 1998 ;Loan Closing June 30, 1998 June 30, 1998 Table 4 Cumulative Loan Disbursements: Estimated and Actual (US$ million) 'umulative FY95 FY96 FY97 D][isbursements Appraisal Estimate 100 100 100 Actual 100 100 100 Actual as % of Estimate 100% 100% 100% Date of final disbursement: February 7, 1996.  21 Table 5 Status of Legal Covenants Agreement Section Covenant Present Description of Comments Type Status Covenant L3836 2.02 5 C The amount of the Loan may be withdrawn from the Loan In compliance Account in accordance with the provisions of Schedule I to this Agreement 2.03 5 C The Closing Date shall be June 30, 1998 or such later date as the Bank shall establish. 2.04 5 C The Borrower shall pay to the Bank a commitment charge In compliance. at a rate of 3/4 of 1% per annum on principal amount of the Loan not withdrawn from time to time. 2.05(a) 5 C Borrower shall pay interest on the principal amount of the In compliance Loan withdrawn and outstanding from time to time, at a rate for each Interest Period equal to the cost of Qualified Borrowing determined in respect of the preceding Semester, plus 1/2 of 1%. 2.06 5 C Interest and other charges shall be payable semi-annually In compliance. on March I and September 1 in each year. 2.07 5 C The Borrower shall repay the principal amount of the loan In compliance. in accordance with the amortization schedule set for in Schedule 2 of this Agreement. 2.08(a) 5 C BCRA is designed as representative of the Borrower for the In compliance purposes of taking any action required or permitted to be taken under the provisions of Section 2.02 of this Agreement and Article V of the General Conditions 2.08(b) 5 C Borrower entrusts BCRA with responsibility for the In compliance. preparation of withdrawal applications under the Loan and for the collection of documents & other evidence to be furnished to the Bank in support of such applications. 3.01(a) 5 C Borrower and the Bank shall from time to time exchange In compliance. views on the progress achieved in the carrying out of the Program and the fulfillment of the conditions set forth or referred to in paragraph 4 of Schedule I to this Agreement. 3.01(b) 5 C Prior to each exchange of views, Borrower shall furnish to In compliance. the Bank for its review and comment a report on the progress achieved in carrying out the Program. 3.01(c) 5 C Borrower shall exchange views with the Bank on any In compliance. proposed action to be taken after the disbursement of the Third Tranche which would have the effect of materially reversing the objectives of the Programn, or any action taken under, including any action specified in paragraph 4 of Schedule I and in Schedules 4 and 5 to this Agreement 3.02 5 C Except as the Bank shall otherwise agree, procurement of In compliance. the goods to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 3 to this Agreement. 3.03(a) 5 C The Borrower shall maintain or cause to be maintained In compliance. records and separate accounts adequate to reflect in accordance with consistently maintained sound accounting practices the expenditures financed out of the proceeds of the Loan.  22 Table 5 Status of Legal Covenants (Cont.) Agreement Section Couenant Present Description of Comments Type Status Covenant 3.03(b) I C Borrower shall have the records and accounts referred to in In compliance. (i) para. (a) of this Section in respect of expenditures under each of the First Tranche, Second Tranche and Third Tranche audited, by independent auditors acceptable to the Bank. 3.03(b) I C Subject to paras. 9 and 14 of Schedules 4 and 5 to this In compliance. (ii) Agreement, respectively, furnish to the Bank as soon as possible, but in any case not later than 4 months after the last withdrawal from the Loan Account has been made under each of the First Second and Third Tranches, a certified copy of the report of such audit by said auditors. 3.03(b) 1 C Borrower shall furnish to the Bank other information In compliance. (iii) conceming records and accounts and their audits 3.03(c) I C For all expenditures with respect to which withdrawals In compliance. from the Loan Account were made on the basis of statements of expenditures, the Borrower shall maintain or cause to be maintained, in accordance with Section 3.03(a), records and accounts reflecting such expenditures. 3.03c(i I C Borrower shall retain, until at least one year after the Bank In compliance. i) has received the audit report in respect of the expenditures under the Third Tranche, all records evidencing such expenditures. 3.03c(i I C Borrower shall enable the Bank's representative to examine In compliance. ii) such records referred to in para c (ii) of this section. 3.03 c I C Borrower shall ensure that such records and accounts are In compliance. (iv) included in the audits referred to in para (b) of this Section and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during the fiscal year, can be relied upon to support the related withdrawals. 3.03(d) I C The Borrower shall appoint the auditors referred to in para. (b) In compliance. (i) of this Section not later than 30 days after the respective dates on which final disbursement of the proceeds of the first Tranche, Second Tranche, and Third Tranche have been made. 3.04 1 C Borrower shall, promptly after the respective dates on In compliance. which final disbursement of the proceeds of the First Tranche, Second Tranche, and Third Tranche have been made, deposit into the Transformation fund, an amount equivalent to the respective amounts disbursed under the First Tranche, Second Tranche and Third Tranche. 3.05 1 C The Borrower shall (a) maintain a unit, within the In compliance. Borrower's Secretariat for the Economic Reform of the Provinces, for the purposes of administering the Transformation Fund; (b) provide, promptly as needed, the funds, facilities, services and other resources required by such unit to carry out its functions and responsibilities in a timely manner.  23 Table 5 Status of Legal Covenants(Cont.) Agreement Section Covenant Present Description of Comments Type Status Covenant Schedule I 1 1 C Subject to the provisions set forth or referred to in this In compliance. Schedule, the loan proceeds may be withdrawn from the Loan Account for expenditure made during the execution of the Program. I I C Notwithstanding the provisions of para. I above, no In compliance. withdrawals shall be made in respect of:: 2(a) I C Expenditures included in the SITC groups or subgroups In compliance. 2(b) I C Expenditures in the currency of the Borrower or for goods In compliance. supplied from the territory of the Borrower. 2 c I C Retroactive financing no greater than $60,000,000 for In compliance. expenditures before September 15, 1994. 2(d) I C Expenditures for goods procured under contracts costing In compliance. less than $10,000 equivalent 2(e) I C Expenditures for goods supplied under a contract which any In compliance. national or international financing institution or agency other than the Bank shall have financed or agreed to finance 2(f) 1 C Expenditures for goods intended for a military or In compliance. paramilitary purpose or for luxury consumption 2(g) I C Expenditures in excess of an aggregate amount equivalent In compliance. to $50,000,000 for petroleum products and foodstuffs. 3 1 C Withdrawals for the procurement of goods estimated to cost In compliance. less than $5,000,000 may be required by the Bank upon the basis of SOEs under such terms and conditions as the Bank shall specify. 4 1 C No withdrawals shall be made and no commitment shall be In compliance. entered into after the aggregate of the proceeds of the Loan withdrawn from the Loan Account and the total amount of such commitments shall have reached. 4(a) I C The equivalent of $100,000,000, unless the Bank is In compliance. satisfied, after an exchange of views (para. 3.01), based on evidence satisfactory to the Bank. 4(a)(I) I C With the progress achieved by the Borrower in the carrying In compliance. out of the Program 4(a)(ii) I C That the macroeconomic policy framework of the Borrower In compliance. is consistent with the objectives of the Program. 4(a)(iii) I C That BCRA is maintaining and enforcing regulations which In compliance. treat banks owned or controlled by the Provinces in the same manner as the private commercial banks 4(a)(iv) 1 C That Provincial banks (owned or controlled) have been In compliance. inspected by the Superintendency of Financial Institution, or received from an external auditor an opinion on their financial statements consistent with BCRA within the last 15 months. 4(a)(v) I C That the records and accounts for the expenditures made by In compliance. Provinces with proceeds for FONAVI and FEDEI are being audited in a manner satisfactory to the Bank. 4(a)(vi) I C That the Borrower is complying with its obligations and In compliance. enforcing its rights under the Transformation Fund Agreements in accordance with the respective terms.  24 Table 5 Status of Legal Covenants(Cont.) Agreement Section Covenant Present Description of Comments T ype Status Covenant Schedule 3 4(a)(vii) 2 C That the actions described in Schedule 4 to this agreement In compliance. have been taken. 4(b) I C The equivalent of $200,000,000 unless the Bank shall be In compliance. satisfied, after an exchange of views as described in section 3.01 of this agreement, based on evidence satisfactory to the Bank. 4(b)(ii) I C If the Bank notifies the Borrower that it has not met the In compliance. conditions referred to in para 4 above, and if within 90 days of notification the conditions are still not met, the Bank may cancel the unwithdrawn portion of the Loan. Schedule 4 1 11 C Standardized reports on the Provinces' budgets, including In compliance. both current and capital expenditures and their financing, have been prepared in accordance with principles of the Borrower's Law in respect of the calendar year preceding the release of the 2d Tranche. 2 11 C First group of provinces is complying with the timetable for In compliance. implementation of tax reforms set forth in the Pacto Fiscal. 3 9 C First group of provinces in monitoring, in a manner In compliance. satisfactory to the Bank, at least 50% of the target groups of large Taxpayers in each such Province. 4 9 C The First Group of Provinces has reduced in 10,000 the In compliance. aggregate number of staff positions in the public service in relation to the number on 12/31/92. 5 5 C The First Group of Provinces has prepared draft legislation In compliance. of reform each such Province's financial management system in accordance with the principles contained in the Borrower's Law. 6 11 C 8 Enterprises and four banks owned or controlled by In compliance. Provinces included in the First Group of Provinces or have been prepared for concessioning acceptable to the Bank. 7 6 C The Enterprises referred to above, which are in In compliance. manufacturing, extracting, or power generation industries have been submitted to an environmental audit or evaluation acceptable to the Bank. 8 11 C The First Group of Provinces has prepared draft legislation In compliance. satisfactory to the Bank, on revenue-sharing with municipalities providing that at least 30% of financial transfers from Provinces to Municipalities will be based on performance. 9 1 C A certified copy of the audit referred to in section In compliance. 3.03(b)(ii) of this Agreement in respect of expenditures financed out of the First Tranche has been furnished to the Bank. Schedule 5 1 11 C Standardized reports on the Provinces' budgets, including In compliance. both current and capital expenditures and their financing, have been prepared in accordance. With principles of the Borrowers' Law, in respect of the calendar year preceding the release of the 2nd Tranche.  25 Table 5 Status of Legal Covenants(Cont.) Agreement Section Covenant Present Description of Comments Type Status Covenant Schedule 5 2 11 C The Second Group is monitoring, in a manner In compliance. satisfactory to the Bank, at lest 75 of the target groups of Large Taxpayers in each such Province. 3 11 C The Second Group has implemented, in a In compliance. substantial manner satisfactory to the Bank, the tax reform measures set forth in the Pacto Fiscal. 4 5 C The Executive branches of the 2nd Group have In compliance. submitted to the respective legislative branches of each such Province bills of law substantially similar to the draft legislation referred to in para. 8 of Schedule 4. 5 1 C The Second Group has reduced in 20,000 the In compliance. aggregate number of staff positions in the public service of such Provinces in relation to that number on December 31, 1992. 6 1 CP The executive branches of the Second Group All have drafted their have submitted to the provincial legislative respective laws. branch laws substantially similar to the draft Corrientes is the only legislation referred to in para 8 of the Schedule province in the group to 4 of this agreement. have submitted their law; Misiones will by the end of August. 7(i) I NC The Second Group has achieved an operation None of the provinces in primary balance (excl. SS expenditures) in each the second group reached Province's budget for FY95 and any other later an operational primary FY preceding the 3rd Tranche Release. balance in FY 1995; however, several did for 1996, and most of the first semester data for FY 1997 shows significant improvement. 7(ii) I C The 2nd Group has been submitted, for leg. In compliance. approval a balanced budget for their FY96 and any other later FY preceding the Third Tranche release. 8(a) I C 8 Enterprises and four banks owned or In compliance. controlled by Provinces included in the 2nd Group have at least 51% of their respective voting shares sold to private companies or have concessionized in a way acceptable to the Bank. 8(b) I CD All action recommended in any environmental In compliance. audit as necessary to correct environmental damage resulting from past operating practices of the enterprises referred to in para (a) in a manner satisfactory to the Bank.  26 Table 5 Status of Legal Covenants(Cont.) Agreement Section Covenant Present Description of Comments lType Status Covenant 9 1 C Legislation ratifying the Pacto Fiscal has been In compliance. ratified in the Third Group of Provinces. 10 I C The 3d Group of Provinces has formnulated, In compliance. with the assistance of the Sec. of Public Revenues, systems satisfactory to the Bank to monitor and carry out the audit and inspection of Large Taxpayers. 11 I C The 3rd Group of Provinces has agreed with In compliance. SAREP on plans satisfactory to the Bank, for downsizing of public employment in such Provinces. 12 1 C The 3rd Group has formulated accounting and In compliance. budgeting systems compatible with those of the Borrower. 13(i) I C Legislation has been approved authorizing: (i) In compliance. private juridical or natural persons of at least 51% of the voting shares of 8 enterprises or four banks. 1 3(ii) I C Legislation has been approved authorizing the In compliance. transfer or concessioning of the enterprises or banks. 13(iii) I C Legislation has been approving liquidation or In compliance. such enterprises or banks. 14 I C A certified copy of the audit referred to in In compliance. Section 3.03(b) of this agreement has been furnished to the Bank with regard to the Second Tranche of the Loan. 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  27 Table 6 Key Indicators for Project Implementation L Key Implementation Indicators in President's Report Estimated - Actual (These indicators are taken from Schedule 4 of the loan NA agreement) This set of indicators considers a First group of four provinces for which the 2nd tranche disbursement would proceed upon compliance of such activities 1. Standardized reports on the province's budgets, including 1. Complied both current and capital expenditures and their financing, have been prepared, in accordance with the principles contained in the Borrower's Law No. 24,156, of September 30, 1992, in respect of the calendar year immediately preceding the release of the second tranche. 2. At least four provinces shall comply with timetable for 2. Complied implementation of tax reforms set forth in the Pacto Fiscal 3. At least four provinces shall monitor at least 50% of the target groups of Large Taxpayers in each such province 3. Complied 4. At least four provinces shall reduce in 10,000, the aggregate number of staff positions in the public service of such 4. Complied Provinces in relation to that number on December 31, 1992 5. At least four provinces shall prepare legislation to reformn l each such province's financial management systems in 5. Complied accordance with the principles contained in the borrower's Law No. 24, 156 of September 30, 1992 6. Eight enterprises and four banks owned or controlled by provinces included in four provinces have been brought to the point of sale, and/or the respective services of such enterprises 6. Complied and/or banks have been offered to be transferred under concession arrangements, to private juridical or natural persons, and/or such enterprises and/or banks have been legally declared under liquidation. 7. The enterprises referred to in paragraph 6 above, which are manufacturing, extracting or power generation industries, have 7. Complied been submitted to an environmental audit or evaluation. 8. At least four provinces have prepared draft legislation, on 8. Complied revenue-sharing with municipalities, providing that at least 30% of financial transfers from each such province to their municipalities will be based on satisfactory fiscal performance by such municipalities.  28 Table 6 Key Indicators for Project Implementation (Cont.) L Key Implementation Indicators in President's Report Estimated Actual (Cont.) This next set of indicators considers a Second group of four NA provinces for which the 3rd tranche disbursement would proceed upon compl iance of such activities (These indicators are taken from Schedule 5 of the loan agreement) 1. Standardized reports on the province's budgets, including 1. Complied both current and capiital expenditures and their financing, have been prepared, in accordance with the principles contained in the BoiTower's Law No. 24,156, of September 30, 1992, in respect of the calendar year immediately preceding the release of the second tranche. 2. At least four provinces shall monitor at least 75% of the 2. Complied target groups of Large Taxpayers in each such province 3. At least four provinces shall implement in a substantial manner, the tax reforms measures set forth in the Pacto Fiscal 3. Complied 4. The Executive Branches of the second group of provinces 4. Complied have submitted to the respective legislative branches of each such province bills of law substantially similar to the draft legislation referred to in paragraph 5 of schedule 4 to this agreement. 5. At least four provinces shall reduce in 20,000, the aggregate 5. Complied number of staff positions in the public service of such Provinces in relation to that number on December 31, 1992 6. The Executive Branches of the second group of provinces have submitted to the respective legislative branches of each 6. Complied such province bills of law substantially similar to the draft legislation referred to in paragraph 8 of schedule 4 to this agreement. 7. The second group of provinces has (i) achieved an 7. Complied operational primary balance (excluding social security expenditures) in each such province's budget for their 1995 fiscal year and any other later fiscal year preceding the release of the third tranche; and (ii) had submitted, for the approval of the respective legislative branches of each such province, a balanced budget for their 1996 fiscal year and any other later fiscal year including the year of the release of the third tranche.  29 Table 6 Key Indicators for Project Implementation (Cont.) I. Key Implementation Indicators in President's Report Estimated Actual (Cont.) 8. (a) Eight enterprises and four banks owned controlled by 8. Complied provinces included in the second group of provinces have had at least 51% of their respective voting shares sold to private juridical or natural persons, and/or the respective services of such enterprises and/or banks have been transferred under concession arrangements, acceptable to the Bank, to private juridical or natural persons, and/or such enterprises and/or banks have been legally declared under liquidation. (b) All action recommended in any environmental audit as necessary to correct environmental damage resulting from past operating practices of the enterprises referred to in paragraph (a) above has been taken in a manner satisfactory to the Bank. 9. Legislation ratifying the Pacto Fiscal has been enacted in the 9. Complied third group of provinces. 10. The third group of provinces has formulated, with the assistance of the borrower's Secretariat of Public Revenues, 10. Complied systems, satisfactory to the Bank, to monitor, and to carry out audit and inspection of, Large Taxpayers. 11. The third Group of Provinces has agreed with SAREP on 11. Complied plans, satisfactory to the Bank, for downsizing of public employment in such Provinces. 12. The Third group of Provinces has formulated accounting 12. Complied and budgeting systems compatible with those of the Borrower. 13. Legislation has been approved authorizing (i) the transfer to 13. Complied private juridical or natural persons of at least 51% of the voting shares of eight enterprises and four banks owned or controlled by provinces included in the Third Group of Provinces, and/or (ii) the transfer to such persons, under concession arrangements, acceptable to the Bank, of the services of such enterprises and/or banks. And/or (iii) the liquidation of such enterprises and/or banks. II. Modified Indicators Not Applicable |m. Other Indicators Not Applicable  30 Table 7 Bank Resources: Staff Inputs Planned Revised Actual Stage of Project Cycle Weeks US$'000 Weeks US$'000 Weeks US$'000 Preparation to Appraisal 0 0 0 90 290.3 Appraisal-Board 0 0 0 9.1 37.1 Negotiations through Board Approval 0 0 0 13.6 41.8 Supervision 51.5 177.1 61.9 55.9 191.9 Completion 5 52.1 7 4.3 7.6 TOTAL 56.5 229.2 68.9 172.9 568.7 ' Includes Bank-financed and trust fund consultants. Dollars are direct costs only. Table 8 Bank Resources: Missions Performance Rating Number Specialized Implementati Develop-met Stage of Month/ of Days in Staff Skills on Objectives Types of Project Cycle Year Persons Field Represented Status Problems Through Appraisal _- = Appraisal through _ _ __ Board Approval Supervision 3/95 2 TM, Economist HS HS 11 2/96 2 TM, Economist HS HS III 7/96 1 TM HS HS IV 5/97 1 12 Operations HS HS Project Analyst Management V 9/97 2 4 TM, Prov. Fin. HS HS Completion - - 1/ Mission leader. 2/Key to specialization: A. Sr. Public Enterprise Specialist B. Legal Counsel C. Sr. Country Economist D. Principal Financial Management Specialist E. Consultant F. Sr. Country Officer G Tax Administration Specialilst H. Task Manager  Table 9 Policy Matrix . I Actions Activity Objective Accomplisbed l By Board j Second Tranche I Third Tranche 1. FEEA G}==-EN ____ A. Macroeconomic Stability Maintain macroeconomic In broad compliance with Maintenance of a sound Maintenance of a sound Maintenance of a sound stability to facilitate further IMF Extended Fund Facility macroeconomic framework macroeconomic framework macroeconomic framework consistent fiscal reforms in sub- during the past three years. consistent with policy consistent with policy objectives with policy objectives and programs national governments. objectives and programs and programs described in the described in the Letter of described in the Letter of Letter of Development Policy. Development Policy. Development Policy B. Transfers to Provinces Reduce incentives for Reduced discretionary Provide financial support to Provide financial support to provinces inefficient provincial transfers to provinces from provinces implementing agreed implementing agreed adjustment spending and help finance 21% of total transfers in adjustment programs through the programs through the Transformation provincial reforms. 1990 to 11% in 1993. Transformation Fund. Audit Fund. Audit provincial expenditures provincial expenditures under under FONAVI and FEDEI. Provide Created a Transformation FONAVI and FEDEI. Provide Bank with report on budgetary Fund and earmarked surplus Bank with report on budgetary performance of all provinces. revenue sharing resources to performance of all provinces. Comply with its agreements and provinces undertaking Comply with its agreements and enforce its rights under the reforms. enforce its rights under the Transformation Fund Agreement. Transfoirmation Fund Agreement. C. Provincial Banks Increase incentives for Under PSAL, BCRA Maintain BCRA regulations Maintain BCRA regulations that Maintain BCRA regulations that treat privatization/closure by reduced discounts and that treat provincial banks the treat provincial banks the same as provincial banks the same as other eliminating special established regulations to same as other banks. other banks, and inspect or audit banks, and inspect or audit provincial treatment by Central Bank limit provincial bank provincial banks during the fifteen banks during the fifteen months prior (CBRA). funding to public sector, and months prior to tranche release. to tranche release. to establish reserve requirements for public deposits. L. PROVIICIIAL G FM* Provinces bive At loom. Ar provincs ave t four pto eshave Ae o i a ..ft: re form pgtms. met conditions below.: . nditlios low conditionS below. At leastfur additionl Provinces _________ ----__ -__ --__ _have fiht frstwlchIconditiokns A. Improve Resource Improve tax administration.... Formulate system to monitor System monitors at least 50% of System monitors 75% of large Mobilization largest taxpayers. large taxpayers. taxpayers. Change the structure of provincial taxes in line with Legislative approval of the Adhere to timetable to achieve Tax reforms substantially the Fiscal Pact. Fiscal Pact, reforms. implemented.  Table 9 Policy Matrix (cont.) Activity Objective | Accomplished By Board Second Tranche | Third Tranche B. Improve Efficiency of Reduce the number of I Formulate plan for dowsizing. Achieve a reduction in 10,000 Reduce public employment positions Expenditures | public provincial employees. | public employment positions from by an additional 10,000. I I end~~~~~~~~~~~~~~~~~~~~~--1992 leve!. Strengthen management, Formulate improved information, and control accounting and budgetary Draft legislation to reform Submit legislation to reformn provincial systems. system compatible with that of provincial financial management financial management law in the Federal Govemment. law in accordance with the accordance with the principles of principles of Federal Law No. Federal Law No. 24.156. 24.156. Approve legislation for Reduce the size of the public privatization/concession of Offer eight enterprises for sale, Eight enterprises have been privatized sector and improve eight provincial public concession or liquidation, with or concessioned, or are under efficiency of transfers. enterprises. environmental audits satisfactory liquidation. Recommendation of to the Bank. environmental audits undertaken. Draft legislation on revenue- Submit legislation on revenue-sharing sharing with the municipalities with the municipalities incorporating s incorporating incentive rules that incentive rules consistent with sound base at least 30% of transfers on fiscal behavior and expenditure fiscal performance. efficiency. Execute balanced budget in 1995; Improve fiscal performance. submit balanced budget for 1996 and subsequent years. C. Provincial Banks Reduce the size of Approve legislation for Four banks have been offered for Four banks have been privatized or provincial public banking privatization of four provincial sale or legally declared under are under liquidation. sector. banks. liquidation. Source: Report and Recommendiation to the President (Report NO. 6414-AR), December 30, 1994.  33 Table 10 Provincial Financing Under the Transformation Fund As of 9/10/98 (US$ Million) Provinces Date Sub-Loan Amount Amount Disbursed Amount Pending Initial Sub-Loan (US$ Million) (US$ Million) (US$ Million) Entre Rios 3/31/95 54.0 54.0 0.0 Misiones 4/11/95 48.6 48.0 0.6 Corrientes 4/26/95 42.0 40.5 1.5 Chaco 5/4/95 36.0 30.0 6.0 San Juan 5/23/95 24.0 18.5 5.5 Catamarca 5/23/95 35.1 31.1 4.0 Santiago del 6/28/95 12.0 6.4 5.6 Estero Tucuman 1/9/96 25.8 25.6 0.2 Salta 7/96 30.0 30.0 0.0 Rio Negro 11/27/96 40.0 26.0 14.0 Chubut 3/2/98 30.0 21.5 8.5 Santa Cruz 7/2/98 30.0 7.5 22.5 Total 407.5 339.1 68.4 (*) It includes capitalization of the Fund. Source: SUCATS, Interior Ministry  34 Table 11 Change ill Ingresos Brutos Among PRL and Non-PRL Provinces 1994-97 Ingresos Brutos (US$ '000) Province 1994 1997 1997-94 % Change 1994-97 Ne ueo ~~~~78,5.01 103,785.00 25,031-993.7 Buenos Aires 1,8,8.5 ,3,500 41754 La Rioja 14,822.52 17,408.17 2,585.65 17.44% Jujuy 31,341.99 34,900.00 3,558.01 11.35% ..................................................................86......4 2.......4 0.... 00................ 4 ,10...........................................................................14..........1...........7....... La Panpa 38,792.00 42,340.00 3,548.00 9.15% G.C.B.A. 1,4578.7 1509,900.00 84,151.63 5S.90% S,anta Fe 50789 9,0.0 -,5.0-.5 Cordoba 503,118.20 459,800.00 -43,318.20 -8.61% Tierra del Fuego 41,424.46 36,960.00 -4,464.46 -10.78% Formosa 20,419.71 18,200.00 -2,219.71 -10.87% Mendoza 233,650.13 201,000.00 -32,650.13 -13.97% San Luis 46,740.43 35,394.32 -11,346.11 -24.27% Media 9.86% Mean All Provinces 8.68% Non-PRL Provinces 7.69% (*) The media has been used instead of the mean because it is a more stable measure of centrality. (**) Chubut and Santa Cruz have not been included in the PRL provinces, as they have signed agreements much later than the other provinces. Source: SUCATS, Ministly of Interior (based on data from the national and provincial Ministries of Economy).  35 Table 12 Change in Own-Source Revenues Among PRL and Non-PRL Provinces 1994-97 Own-Source Revenues (US$ '000) Province 1994 1997 1997-94 % Change 1994-97 oia ~~~~22,668.77 29,642.00 6,973.2 30.76% Buenos Aires 3,432,923.86 4,327,876.00 894,952.14 26.07% Neuquen _ _ 113,599.59 136,095.00 22,495.41 19. 80% Jujuy 52,545.79 61,859.00 9,313.21 17.72% LaPampa 82,839.00 94,861.00 12,022.00 14.51% Santa Cruz 55,112.11 61,467.66 6,355.55 11.53% G.C.B.A. 2,315,638.28 2,524,750.00 209,111.72 9.03% Chubut 52,142.69 55,562.00 3,419.31 6.56% Snt Fe 97052.90 97,800.00 -9,252.9 0.5% Cordoba 881,566.62 856,166.00 -25,400.62 -2.88% Mendoza 415,656.31 392,200.00 -23,456.31 -5.64% San Luis 79,749.24 73,637.62 -6,111.62 -7.66% Formosa 27,275.96 24,557.00 -2,718.96 -9.97% Tierra del Fuego 54,497.24 43,581.00 -10,916.24 -20.03% Media 9.24% Mean All Provinces 12.65% Non-PRL Provinces 12.69% (*) The media has been used instead of the mean because it is a more stable measure of centrality. (**) Chubut and Santa Cruz have not been included in the PRL provinces, as they have signed agreements much later than the other provinces. Source: SUCATS, Ministry of Interior (based on data from the national and provincial Ministries of Economy).  36 Table 13 Change in Personnel Expenditures Among PRL and Non-PRL Provinces 1995-97 Personnel Expenditures (US$ Million) Province 1995 1997 1997-95 % Change 1995-97 La Rioja 333.00 82.10 -09 1.9 Tiradel' Futego 20.81782 -25 J98 -12.72% Neuquen 474.24 430.10 -44.14 -9.3 1% San Luis 2 1.7 1970 -18.7 -8.69% Jujuy 3.41.54 327.00 -14.54 -.6 Santa Cruz 28.8273.4 -7:1 -2.56% Cordoba 1,202.72 1,180.2087 Mendoza 653.91 645.90 -8.01 -1.22% Chubut 291.07 290.40 -0.67 -0.23% SantaFe 1,172.74 1,213.30 40.56 3.46% Formosa 342.94 355.50 12.56 3.66% La Pampa 206.70 218.50 11.80 5.71% B.A. 1,580.53 1,708.90 .12% Buenos Aires 3,497.98 3,988.20 490.22 14.01% Media -2.03% Mean All Provinces 15,206.14 15,543.00 336.86 2.22% Non-PRL Provinces 10,797.88 11,288.70 490.82 4.55% (*) The media has been used instead of the mean because it is a more stable measure of centrality. (**) Chubut and Santa Cruz have not been included in the PRL provinces, as they have signed agreements much later than the other provinces. Source: SUCATS, Ministry of Interior (based on data from the national and provincial Ministries of Economy).  37 Table 14 Change in Number of Provincial Agents in PRL Provinces 1992-97 Number of Provincial Agents Province 1992 1997 Decrease 97-92 Catamarca 30,708 25,685 5,023 Corrientes 43,133 37,752 5,381 Chaco 51,825 46,025 5,800 Entre Rios 64,028 55,610 8,418 Misiones 38,821 36,386 2,435 Sgo. del Estero 36,585 30,435 6,150 San Juan 40,046 36,097 3,949 Tucuman 55,580 50,751 4,829 Rio Negro 31,446 29,095 2,351 Salta 42,822 32,141 10,681 Total 434,994 379,977 55,017 Source: SUCATS, Ministry of Interior  38 Table 15 Change in Current Account Surplus Among PRH and Non-PRL Provinces 1994-97 Current Account Surplus (US$ Million)" 1994 1997 1994-97 % Change 1994- 97 Neuquen -11.2 90.5 101.7 909.27% San Luis ~~~~~~~~~~~~~248.03 Cordoba -193.3 222.6 415.8 215.16% La Pampa 8. 89.24 Jujuy ~~~~-83.5 -45.1 384 45,95 La Rioja -157.2 -144.9 12.3 7.84% Formosa -65.1 -66.2 -1.1 -1.66% T. del Fuego -69.9 -80.4 -10.4 -14.92% Bs. As. 202.6 15.5 -187.1 -92.36% Mendoza 143.5 -47.4 -190.9 -133.07% Santa Cruz -5.8 -16.2 -10.4 -178.00% Media 66.26% Mean All Provinces -703.6 301.3 1,004.9 142.83% _!___~~~~slw Non-PRL Provinces 86.7 325.6 238.8 275.46% Current Revenues (excluding Transfers) minus Current Expenditures (including Interest). (*) The media has been used instead of the mean because it is a more stable measure of centrality. (**) Chubut and Santa Cruz have not been included in the PRL provinces, as they have signed agreements much later than the other provinces. Source: Ministry of Economy and Public Works.  39 Table 16 Change in Primary Surplus Among PRL and Non-PRL Provinces 1994-97 Primary Surplus (US$ Million)"' 1994 1997 1994-97 % Change 1994-97 Santa Fe -13.85 44.04 57.89 417.97% La Rioja -23.27 64.60 87.88 377.57% San Luis -40.58 99.71 140.29 345.74% Cordoba -320.13 98.44 418.57 130.75% Neuquen -109.01 26.25 135.26 124.08% La Pampa -44.01 8.72 52.73 119.82% Santa Cruz -50.73 -4.14 46.60 91.85% Jujuy -133.37 -34.24 99.13 74.33% Mendoza 10.15 16.84 6.68 65.85% Chubut -185.79 -91.14 94.65 50.94% T. del Fuego -32.64 -38.24 -5.60 -17.16% Formosa -116.60 -143.42 -26.82 -23.00% MCBA 133.84 29.82 -104.02 -77.72% Bs. As. -250.46 -536.38 -285.91 -114.15% Media 76.18% Mean All Provinces -2162.89 -603.70 1559.19 72.09% Non-PRL Provinces -1176.45 -459.13 717.32 60.97% Current Revenues (including Transfers) minus Current Revenues (excl. Interest) minus Capital Expenditures. (*) The media has been used instead of the mean because it is a more stable measure of centrality. (**) Chubut and Santa Cruz have not been included in the PRL provinces, as they have signed agreements much later than the other provinces. Source: Ministry of Economy and Public Works.  40 Table 17 Strategic Projects Under Implementation in PRL and Non-PRL Provinces Strategic Projects Under Implementation Tax Financial Property Province Cadastre Administration Administration Registry Total La Rloja Yes Yes Yes Yes 4 BuenosAires Yes Yes Yes 3 banta Fe Yes Yes Yes 3 Tierra del Fuego Yes es Yes 3 Cordoba Yes Yes 2 Formosa Yes Yes 2 Jujuy Yes Yes 2 Mendoza Yes Yes 2 Neuquen Yes Yes 2 San Luis Yes Yes 2 La Pampa Yes I G.C.B.A. Yes I Santa Cruz 0 Media 3 Number of Subprojects All Provinces 20 23 14 5 62 Non-PRL Provinces 11 13 5 1 30 Note: All these subprojects: are being financed under PDP-I and II, unless it is indicated differently. (1) Financed by the Secretaria de Hacienda de la Nacion. (2) Financed with provincial resources. Source: SUCATS, Ministry of Interior.  41 Table 18 Provincial Banks, Other Banks and Enterprises Privatized in PRL and Non-PRL Provinces Provincial Banks and Enterprises Privatized, Concessioned or Liquidated Provincial Other Provincial Total Province Bank Banks Enterprises (w/o Provincial Bank) ;,, ~~~~~~~~~~~~~~~~... .. ... .. ... San Luis Yes 6 6 Mendoza Yes . 1 4 5 Formosa Yes 3 3 Buenos Aires 3 3 Neuquen 3 3 Tierra del Fuego 3 3 Jujuy Yes 1 I La Rioja Yes 1 1 Santa Fe Yes 1 1 Chubut 1 1 Santa Cruz Yes 0 0 Cordoba 0 0 La Pampa 0 0 G.C.B.A. 0 0 Media 3 Total All Provinces 16 3 72 75 Non-PRL Provinces 7 1 26 27 (*) Although the provincial bank was privatized in Corrientes, it is now back in the hands of the provinces, as the selected bidder failed to complete the transaction. The province is currently working on a second attempt to privatize it. Source: SUCATS, Ministry of Interior.  42 Annex A: Borrower's Contribution Annex A Borrower's Contribution8 INFORME FINAL DE EVALUACI6N PIROGRAMA DE REFORMA PROVINCIAL (PREP) Resumen Ejecutivo 1. Marco Macroecon6mico y Situaci6n Financiera en las Provincias: Cuando la Administraci6n del Presidente Menem comenz6 su primer periodo constitucional en julio de 1989, la economia argentina estaba sumida en una profunda recesi6n y en una hiperinflaci6n que Ilegaba a los tres digitos por mes. La situaci6n economica que se vivia demandaba urgentemente de una reforma estructural a fondo, la que fue pronta y responsablemente asumida por la nueva Administraci6n. La serie de reformas que siguieron fueron notables por su alcance y la rapidez con que se ejecutaron. En todo el proceso de ajuste estructural, el Banco Mundial jug6 un papel de relevancia, sustentado en un trabajo y dialogo de varios afios con el Gobierno. Es asi que cuando se negocia el Programa de Reforma Provincial (PREP) en 1994, la relaci6n con el Banco Mundial contaba ya con una lista significativa de operaciones fructiferas. Como resultado de las reformas, la economia argentina se habia expandido en un 25,5% en el trienio 1991-93, y seguia creciendo a buen ritmo en 1994. El perenne problema de la inflaci6n estaba claramente bajo control. No obstante, la profunda reestructuraci6n econ6mica seguia enmarcada en un mercado laboral rigido, que se reflejaba en una alta tasa de desempleo. Este era uno de los sintomas de que el esfuerzo por transformar la economia necesitaba auin continuar vigorosa y decididamente. 2. Hacia 1994, el tipo de cambio real se habia apreciado y el deficit en la balanza comercial requeria de monitoreo, derivado del fuerte crecimiento mostrado por las importaciones. Sin embargo, su financiamiento no aparecia como un problema, por la fuerte entrada de capitales externos y el mas holgado acceso al credito internacional. En agosto de 1994 se establecia el MERCOSUR, paso trascendental para la creaci6n de un mercado comfin regional e importante motor para el crecimiento del pais. Planteaba tambien el desafio de ahondar y extender el proceso de ajuste, particularmente hacia areas como la gesti6n pfiblica provincial, donde el impetu reformista era ai6n incipiente. 3. Un riesgo importante era la frAgil situaci6n financiera de la banca publica provincial. Los problemas del sector bancario, combinados con una potencial desaceleraci6n en la entrada de capitales externos-como efectivamente se materializ6 con el Ilamado "Efecto Tequila"-se vislumbraban como una mezcla peligrosa, que podian causar fuertes alzas en las tasas de interes domdsticas y una contracci6n en la actividad productiva. En lo positivo, las tasas de interes de los dep6sitos en pesos habian bajado substancialmente hacia 1994. Sin embargo, los margenes de intermediaci6n de la banca se mantenian altos (cerca de 13%), reflejando claramente sintomas de segmentaci6n y fragilidad en el sistema financiero argentino. 4. En particular, se telmia que una crisis financiera pudiese lievar a una falla sisternica de la banca p(iblica provincial, por lo que uno de los objetivos del PREP fue tratar de desactivar dicho 8 The Borrower has prepared a comprehensive report presenting its own views on the project's performance. For reasons of space, only the Executive Summary is included in this ICR. A copy of the complete report is in the project's files and can be made available upon request.  43 Annex A: Borrower's Contribution riesgo. La estrategia del Gobiemo era terminar con la gesti6n puiblica en estos bancos, optAndose por la privatizaci6n o su liquidaci6n ordenada. Cuando la crisis en Mexico deriv6 en una escasez generalizada del financiamiento extemo en la regi6n, la crisis bancaria a nivel local se desat6 fuertemente. Se recurri6 entonces no s6lo al PREP, sino que ademas a otros programas, como el Prestamo para la Privatizaci6n de la Banca Provincial. 5. La crisis facilit6 politicamente las privatizaciones. En 1994, habia 25 bancos de propiedad de las Provincias, los que contaban con cerca de 700 oficinas y empleaban unos 24.000 funcionarios. Su actividad crediticia se habia expandido fuertemente, concentrindose principalmente en pr6stamos a sus propios gobiernos y a las empresas puiblicas. Los bancos provinciales acudian frecuentemente al redescuento del BCRA, para asegurar su financiamiento. Hacia 1994, cuando se disefiaba el PREP, la pobre gesti6n de cr6dito y a las perdidas acumuladas ya habian motivado a los gobiernos provinciales a atacar resueltamente el problema. En efecto, el 80% de los banco provinciales eran candidatos para la privatizaci6n y seis ya habian incorporado capital privado. 6. En relaci6n a la situaci6n fiscal, los gobiernos provinciales hist6ricamente habian contribuido fuertemente a la cr6nica inestabilidad macroecon6mica del pais. El equilibrio fiscal del Gobiemo Nacional se habia restaurado hacia 1993, mientras que las Provincias continuaban como grupo siendo deficitarias. Las dificultades fiscales de las Provincias persistian aun despues de un alza de proporciones en la coparticipaci6n federal. Los deficits resultaban muy dificiles de financiar y se habia producido un exceso de endeudamiento con bancos privados nacionales y extranjeros, garantizados comunmente por los ingresos de coparticipaci6n federal. La precaria situaci6n fiscal de varias Provincias era especialmente preocupante por las nuevas y expandidas funciones que sus gobiemos debian desarrollar, como resultado de la descentralizaci6n de los servicios y la privatizaci6n de funciones por el Gobierno Nacional. Se requeria, por un lado, mejorar la gesti6n estatal, haciendo mas eficiente el gasto puiblico y, por otro, incrementar la recaudaci6n tributaria, reduciendo a la vez las distorsiones que introducia. En cuanto a las empresas puiblicas, estas eran productoras ineficientes, que penosamente se sostenian gracias al apoyo fiscal amplio que recibian. Muchas de ellas claramente eran insolventes. 7. El Programa de Reforma Financiera de las Provincias: El PREP form6 parte integral y fue una herramienta mas del programa de reforma financiera de las Provincias que el Gobierno Nacional ha impulsado continuamente durante la presente decada. El alcance, los objetivos centrales y las intenciones de politica que estaban detras de este prograrna de gobiemo y, consecuentemente del PREP, quedaron claramente especificados en la Carta de Politica de Desarrollo ("Letter of Development Policy") de diciembre de 1994, enviada al Banco Mundial para solicitar su asistencia, la que se materializ6 con el PREP. Este fue uno de los tres pilares en que se sustentaba la estrategia de reforma financiera provincial del Gobierno Nacional. Los otros dos fueron el Fondo para la Transformaci6n de los Sectores Puiblicos Provinciales (Decreto 678/93), creado en abril de 1993, a cargo del Ministerio del Interior, y el Pacto para el Empleo, la Producci6n y el Crecimiento (el Pacto Fiscal), firmado en agosto de 1993 con varias de las Provincias. En la practica, estos tres pilares se complementaron entre si. La Secretaria de Asistencia para la Reforma Econ6mica Provincial (SAREP) del Ministerio del Interior se hizo cargo del PREP, como antes del programa Provincias I, que provey6 de asistencia tecnica al PREP. 8. El PREP aport6 los recursos financieros que le dieron un contenido practico al Fondo para la Transformaci6n. Se debe recordar que, segun el marco constitucional que rige a Argentina, las Provincias son entidades aut6nomas, de modo que los cambios estructurales que se buscaban debian ser concensuados a traves de acuerdos especificos. De hecho, el Fondo para la  44 Annex A: Borrower's Contribution Transformaci6n y el Pacto Fiscal representaron dos acuerdos marco para encausar la reforma financiera en las Provincias. 9. El Fondo para la Transformaci6n de los Sectores Publicos Provinciales. Los recursos del Fondo estaban destinados a apoyar a las Provincias dispuestas a la instrumentaci6n de un programa de transformaci6n integral de su sector publico, el que debia incluir medidas y encuadrarse dentro de las pautas que el mismo Decreto 678/93 delineaba. Los cr6ditos de libre disponibilidad ofrecidos a las Provincias eran a un plazo de hasta 5 afios, con amortizaci6n mensual y un plazo de gracia de hasta 6 meses. La tasa de interes se fij6 inicialmente en un 12% anual. La SAREP representaba al Gobierno Nacional en los convenios con las Provincias y el seguimiento diario correspondia a la Subunidad de Coordinaci6n, Asistencia Tecnica y Seguimiento (SUCATS) de la Unidad Ejecutora Central (UEC), dependiente de la SAREP. El seguimiento y control de las metas fiscales en los convenios se coordinaban con la Secretaria de Hacienda. 10. Previo a cualquier desembolso, los convenios debian ser sancionados por ley de la Provincia prestataria, quedando los fondos garantizados con la coparticipaci6n federal. El Fondo se realiment6 con el servicio de los creditos colocados, lo que posibilit6 su extensi6n en el tiempo, y de hecho continuia operando. En cuanto a su condicionalidad, el Fondo para la Transformaci6n pretendia corregir los desequilibrios fiscales provinciales, a traves de mejoras en la movilizaci6n de recursos locales, rnayor eficiencia en las erogaciones y reducciones en el gasto corriente. Asimismo, exigia un programa para la privatizaci6n de empresas y bancos puiblicos provinciales. El Fondo para la Transformaci6n tambien contemplo el financiamiento de retiros de agentes piiblicos a traves del mecanismo de los Bonos para la Creaci6n del Empleo en los Sectores Privados Provinciales (BOCEP). 11. El Pacto Fiscal. El Pacto Fiscal llamnaba a las Provincias a reformar sus estructuras impositivas, reduciendo sus impuestos distorsionantes que gravaban al sector productivo, a la vez que promoviendo f6rnulas para incrementar los ingresos tributarios locales. A cambio, el Gobierno Nacional se comprometia a aumentar los ingresos minimos provinciales provenientes de la coparticipaci6n federal; a posponer el servicio, y posiblemente condonar, algunas de las deudas provinciales con el Gobierno Nacional, y a aceptar la trasferencia al Sistema Nacional de Previsi6n Social de las Cajas de Jubilaciones Provinciales. Asimismo, el Gobiemno Nacional queria que los tributos coparticipados, cuando excedieran un monto acordado, se usaran para cancelar deudas anteriores a agosto de 1992 o para financiar inversiones de capital o programas de reforma. Se buscaba tambien intensificar la fiscalizacion y el control tributario, uniformando los sistemas impositivos provinciales segiin pautas de la DGI. Ademas, abogaba por la desregulaci6n de las actividades profesionales y de transporte; la derogaci6n de las restricciones sobre la oferta de bienes y servicios, y la adhesi6n a la politica federal en materia de medicamentos y alimentos. 12. En este contexto, el PREP con su prestamo de rapido desembolso por US$300 millones, venia a asegurar el financiamiento para apoyar el proceso de reforma financiera y fiscal provincial. El PREP realzaba tambi6n el contenido de las propuestas incluidas en el Pacto Fiscal y el Fondo para la Transfornaci6n, dAndole mayor fuerza y respaldo a la condicionalidad acordada con las Provincias. Ademas, se aprovechaba la sinergia resultante del reforzamiento institucional logrado bajo los programas Provincias I y II. 13. Las Principales Caracteristicas y los Objetivos del PREP: Con el PREP, el Gobierno Nacional buscaba Ilegar a acuerdos especificos sobre cambios de fondo con un subgrupo de los gobiernos provinciales, entre aquellos mAs comprometidos con un proceso de reforma financiera  45 Annex A: Borrower's Contribution integral. Al enviar la Carta de Politica al Banco Mundial, el Gobierno Nacional estaba en condiciones de especificar los objetivos y una tematica claramente definida para el PREP. El Gobiemo requeria encontrar a lo menos cuatro Provincias que pudieran cumplir con la condicionalidad acordada para los dos primeros tramos y dos grupos distintos, de cuatro Provincias cada uno, para el tercero. La condicionalidad del primer tramo debia cumplirse antes de la presentaci6n del PREP al Directorio del Banco Mundial, por lo que el PREP tuvo una alta dosis de condicionalidad previa. 14. Tres de los objetivos que se especificaron en la Carta de Politica perseguian mantener la continuidad de politicas ya en aplicaci6n por el Gobierno Nacional. Estos objetivos eran: (a) la mantenci6n de la estabilidad macroecon6mica; (b) limitar transferencias discrecionales adicionales de apoyo fiscal; (c) la mantenci6n del programa normativo que igualaba el tratamiento de los bancos puiblicos provinciales y los bancos privados. 15. El Gobierno Nacional tambien buscaba un equilibrio en las cuentas fiscales consolidadas y la estandarizaci6n de la informaci6n estadistica presupuestaria de las Provincias. Hoy todos estos informes son peri6dica y oportunamente publicados. Adicionalmente, el Gobierno se comprometi6 a aumentar la asistencia tecnica a las Provincias, a focalizar los programas de asistencia social y a conceder anticipos, a traves del Fondo para la Transformaci6n, para paliar el impacto de las reforrnas y ajustes. 16. El PREP se esperaba estuviese completamente desembolsado en menos de tres ainos y estaba en principio abierto a todas las Provincias y a la Municipalidad de la Ciudad de Buenos Aires. Si bien el PREP era un programa de caracter integral, estaba acotado en el tiempo y en el financiamiento de que disponia, por lo que no pretendia agotar el tema de la reforma de las finanzas provinciales. Sus dos objetivos centrales a nivel de las Provincias fueron: a) un mejoramiento de la eficiencia en el gasto piublico, por medio del reforzamiento del proceso presupuestario, la reducci6n del sector puiblico, la reforma administrativa y tributaria y el mejoramiento de los mecanismos de transferencias; y b) una reducci6n del papel de los bancos provinciales, a traves de su privatizaci6n o, en caso contrario, procediendo a su liquidaci6n. Los compromisos adquiridos por el Gobierno Nacional quedaron detallados en la Matriz de Politicas que se acord6 con el Banco Mundial. 17. Los convenios firmados entre el Gobierno Nacional y las Provincias. El apoyo financiero y tecnico que el Gobierno Nacional ofreci6 a las Provincias con voluntad de reformar, fue a cambio del compromiso de que estas tomasen medidas y acciones especificas que, entre otras cosas, sirvieran para satisfacer la condicionalidad que el Gobierno Nacional habia asumido con el Banco Mundial. Estos convenios que permitian a las Provincias el acceso al financiamiento del Fondo para la Transformaci6n debian ser ratificados por las Legislaturas provinciales. Cada Provincia debia tambien aprobar por ley el regimen de retiro voluntario a traves del BOCEP. Para acceder a estos convenios con la SAREP, las Provincias debian previamente cumplir con una lista importante de condiciones. En la practica, la pesada condicionalidad inicial de los convenios limito el universo de aspirantes al financiamiento de dicho Fondo (doce Provincias hasta fines de 1998). 18. Habia otras dos diferencias de peso entre los terminos y condiciones del PREP y los de los convenios entre las Provincias y la SAREP. Primero, las tasas de interes del financiamiento ofrecido a las Provincias fueron menos atractivas que las del prestamo del Banco Mundial a la Repuiblica. Segundo, los plazos convenidos con las Provincias para cumplir con las condicionalidad del primer, segundo y tercer tramos se fijaron en 90, 270 y 540 dias, respectivamente, lo cual fue muy demandante. El financiamiento del Fondo para la  46 Annex A: Borrower's Contribution Transformaci6n no flue un gran incentivo para las Provincias mas grandes, por lo que participaron mas bien Provincias con economias de menor tamailo relativo. 19. Evaluacion del lIogro de los Objetivos bajo el PREP: La firma de convenios exhaustivos tuvo implicancias imiportantes para la profundidad del proceso de cambio y su velocidad. El programa de reformas se aplico a un universo mas amplio de Provincias que el minimo de ocho que en teoria se necesitaba para cumplir con el compromiso adquirido con el Banco Mundial. El programa de reforma de las Provincias contin(ua y el Fondo para la Transformaci6n y la UEC siguen proveyendo apoyo financiero y tecnico a las Provincias comprometidas con la transformaci6n. Fueron tambi6n meritos del programa y de su disefio que los cambios estructurales logrados sobrepasaran en muchos casos los requerimientos de la Matriz de Politicas y que se implementaran con mayor celeridad que la originalmente proyectada. La autorizaci6n del tercer tramo del PREP tuvo lugar menos de dos ainos despuds de que este entrara en efectividad. 20. La lista de acciones tomadas bajo el PREP fue considerable si se evalua el proceso de cambio desde la perspectiva del universo de Provincias que firmaron convenios con la SAREP, siendo justificado calificar el cambio alcanzado bajo el PREP como altamente satisfactorio. S6lo una de las condiciones en la Matriz de Politicas, la de ejecutar un presupuesto fiscal con un resultado operativo primario en equilibrio en 1995 y anos posteriores precedentes al tercer desembolso, no se cumpli6. Pero en este caso se puede argumentar fuerza mayor, producto del deterioro fiscal generalizado, secuela de la fuerte crisis econ6mica y financiera que azot6 al pais y a toda America Latina desde fines de 1994 y durante 1995. 21. Sin duda, la reforma a nivel provincial fue mucho mAs allA del PREP pero, entre las medidas y acciones tomadas durante el periodo 1995-97, resaltan en particular aquellas obradas por las Provincias del PREP rnonitoreadas por la SUCATS. En cuanto a los objetivos globales, por los que debia velar principalmente el Gobierno Nacional, 6stos se cumplieron razonablemente, no obstante la crisis comentada en el parrafo anterior. Pese a la crisis, el proceso integral de reforina fiscal y financiera siguli6 adelante en las Provincias, lograndose en forma altamente satisfactoria los objetivos perseguiidos al nivel de las diez Provincias consideradas para evaluar el cumplimiento de la corndicionalidad del PREP. 22. Previo a la declaraci6n de efectividad del PREP en marzo de 1995, las cuatro Provincias que se consideraron para evaluar la condicionalidad previa exigida (Catamarca, Chaco, Entre Rios y Misiones) habian: a) aprobado legislacion adhiriendose al Pacto Fiscal; b) formulado sistemas para monitorear a grandes contribuyentes; c) formulado planes de reducci6n de personal; d) formulado sistemas de contabilidad y presupuestarios mejorados; e) aprobado legislaci6n para privatizar o concesionar ocho empresas puiblicas; y f) aprobado legislaci6n para la privatizaci6n de cuatro bancos provirnciales. Objetivos Perseguidos a Nivel del Gobierno Nacional: 23. Estabilidad macroecon6mica: Crucial para la consecuci6n de este objetivo era mantener la estabilidad de precios, la preservaci6n del equilibrio fiscal y la operaci6n de una economia con mercados no sujetos a restricciones, competitivos y propiamente regulados, en el caso de los servicios publicos. BAsicarnente, se requeria para ello continuar adelante con el programa de reforma estructural que el Gobierno habia seguido desde su inicio. Ello ocurri6 efectivamente asi. Ademas de los programas de reforma apoyados por el Banco Mundial, Argentina seguia un austero programa de ajuste macroecon6mico con el Fondo Monetario Internacional, el que se reformul6 para adecuarlo a la nueva y mas precaria situaci6n macroecon6mica desatada por el  47 Annex A: Borrower's Contribution "Efecto Tequila". La crisis se tom6 como un desafio, procediendose a acentuar auin mas el proceso de reforma estructural. En todo esto, la reforma a nivel provincial jug6 un papel importante, contribuyendo substancialmente a la restauraci6n del equilibrio macroeconomico y al retorno del crecimiento econ6mico. 24. Reducci6n de los incentivos para el gasto ineficiente de las Provincias y apoyo de sus reformas financieras: Se siguio una estrategia con cuatro caminos de acci6n. Primero, se transfiri6 al Fondo para la Transformacion los recursos provenientes del PREP, para apoyar a las Provincias dispuestas a implementar reformas. Es significativo que el financiamiento proporcionado por el Fondo fue superior a los US$300 millones aportados por el PREP, como resultado de la capitalizaci6n de intereses y del calendario de repago mas corto de los prestamos a las Provincias. Segundo, se Ilevaron a cabo oportunamente por el SIGEN auditorias de los registros y cuentas de los gastos realizados por las Provincias con fondos del FONAVI y FEDEI, para eliminar el uso indiscriminado de estas transferencias que representaban alrededor de un 65% de las transferencias discrecionales recibidas del Gobierno Central. Tercero, la Secretaria de Hacienda de la Nacion confeccion6 informes estandarizados de las ejecuciones presupuestarias para las 23 Provincias y la Ciudad de Buenos Aires, siguiendo los principios contenidos en la Ley N