Argentina - Second Provincial Reform Project : Tucuman

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 20699 IMPLEMENTATION COMPLETION REPORT ARGENTINA SECOND PROVINCIAL REFORM - TUCUMAN (LOAN 4221-AR) June 30, 2000 Poverty Reduction and Economic Management Argentina, Chile and Uruguay Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Bank authorization.  Currency Equivalents Currency Unit: Peso US$1 = ARG$1 Fiscal Year January 1 to December 31 ABBREVIATIONS AND ACRONYMS ANSES - National Administration of Social Security ANSAAL - National Administration Health Services CAS - Country Assistance Strategy CPI - Consumer Price Index EGB - Educaci6n General Basica (General Basic Education) ERR - Economic Rate of Return GCBA - Great City of Buenos Aires GDP - Gross Domestic Product GDP - Gross Domestic Product IBRD - International for Reconstruction and Development ICR - Implementation Completion Report ICSID - International Center for the Settlement of Investment Disputes IPS - Provincial Insurance Institute LPR - Letters of Provincial Reform MDP I - First Municipal Development Project MDP II - Second Municipal Development Project NGO - Non-Government Organizations PDP I - First Provincial Development Project PDP II - Second Provincial Development Project PRESSAL - Provincial Health Sector Development PRESSAL I - First Provincial Health Sector Development PRESSAL II - Second Provincial Health Sector Development PRISE Programa de Reformas en el Sector Educaci6n (Reform Program on Health Sector) PRL - Provincial Reform Loan PRL II - Second Provincial Reform Loan PRODYMES - Higher Education Reform PRODYMES I - Secondary Education Reform I PROMIN - Maternal and Child Health SAL - Structural Adjustment Loan SIPROSA - Provincial Health System Vice President Mr. David de Ferranti Country Director Ms. Myma Alexander Sector Director Mr. Guillermo Perry Task Manager Mr. Mark Hagerstrom  FOR OFFICIAL USE ONLY ARGENTINA FOR OFFICIAL USE ONLY SECOND PROVINCIAL REFORM LOAN -TUCUMAN TABLE OF CONTENTS Preface ... 4 Part 1. Project Implementation Assessment A. Statement of Objectives. 5 B. Achievement of Objectives. 8 C. Public Finance .11 D. Education .13 E. Health .15 F. Major Factors Affecting Project Implementation .18 G. Project Sustainability: Uncertain .22 H. Bank Performance .23 I. Borrower Performance .24 J. Assessment cf Outcome .24 K. Future Operation .25 L. Lessons of Experience .26 Part II. Statistical Annex Table 1: Summary of Assessments .27 Table 2: Related Bank Loans .28 Table 3: Project Timetable .29 Table 4: Cumulative Loan Disburse ments .29 Table 5: Status of Legal Covenants .30 Table 6: Key Indicators for Project Implementation .31 Table 7: Bank Resources: Staff Inputs .................................... 31 Table 8: Bank Resources: Missions .32 Table 9: Tucuman's Policy Matrix .34 Table 10: Changes in Own-source Revenues by Province 36 Table Ii: Change in Personnel Expenditures by Province 37 Table 12: Evolution of Current Account Balance by Province 38 Table 13: Change in Stock of Debt by Province, 1996-98 .39 Table 14: Change in the Fiscal Performance Indicators, 1995-98 . 40 Table 15: Education: Monitoring Indicators .41 Table 16: Health: Monitoring and Impact Indicators .42 Annex A: Letter of Provincial Reform .43 Annex B: Institutional Assessment .51 3 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  INTENSIVE LEARNING IMPLEMENTATION COMPLETION REPORT ARGENTINA SECOND PROVINCIAL REFORM LOAN TO TUCUMAN (Ln. 4221-AR) Preface This is the Implementation Completion Report (ICR) for the Second Provincial Reform Loan to the province of Tucuman, Argentina, for which Loan 4221-AR in the amount of US$100 million equivalent was approved on August 26, 1997 and declared effective on September 9, 1998. The loan was disbursed in two tranches of US$55 million and US$45 million on September 18, 1998 and July 9, 1999 respectively. The loan closed on December 31, 1999 as expected. It was disbursed in its totality, thus no balance was canceled. The ICR was prepared by Cecilia Zanetta (consultant), with Olympia Icochea (Institutional Development) under the supervision of Mark Hagerstrom, Task Manager (LCSPR), and reviewed by David Rosenblatt (LCSPR), John Underwood (LCSPR), and Geoffrey Shepherd (LCSPR). Preparation was begun in August 1999, following the new Bank guidelines for an intensive learning ICR. It is based on information in the project files and discussions with government at the national and provincial levels. Stakeholder workshops were conducted with provincial authorities and technical staff in each of the sectors to assess the scope and impact of the reforms, and the relevance of institutional factors in implementation and sustainability. Missions were fielded with specialists from outside the Region to review issues in fiscal performance (David Vetter, Cons), health (Simon Blair, ECSHD), and education (Luis Pisani, Consultant), with the participation of technical staff for the relevant federal ministries. The Borrower contributed to the preparation of the ICR by preparing its own evaluation of the project's initial preparation and execution, and by actively contributing its views, providing background material, and arnple support whenever needed. 4  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 reform 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. 2. However, the financial crisis that resulted from the Mexican devaluation in December 1994 pointed out the vulnerability of the reform program. Investors' reduced confidence in Argentina, together with higher international interest rates, contributed to net capital outflows. As a result, GDP fell 2.8 percent and unemployment soared to 18 percent during 1995. The government took prompt measures to control the crisis by cutting expenditures, raising main tax rates, and taking measures to enhance the liquidity of the banking system. Moreover, with the support of the Bank and IDB, a package of US$1.1 billion was made available in support of the Convertibility Plan. This backing helped to restore confidence in the economy and the financial sector. 3. By the end of 1995, the Argentine economy had recovered and was well out of a recession. Economic growth reached 5.5 percent in 1996, and inflation (CPI) was practically nil. The need to deepen the adjustment effort, particularly among provincial governments, had now become obvious to the federal government. 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, accounting for a (leficit of 1.2 percent of GDP in 1995.1 Improvements in fiscal performance at the provincial level had been mostly cyclical, reflecting the increase in transfers from the center rather than a sustained effort to reduce expenditures and improve resource allocation. Ensuring a sustained fiscal balance at the provincial level continued to be a major challenge for the government and for the success of the stability program. Moreover, 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. The adjustment strategy at the federal level included the decentralization of health and secondary education to provincial governments. In 1994, provincial governments accounted for 38.5 percent of all public expenditures and were "Argentina Country Assistance Strategy," Report No. 16505-AR, April 24, 1997. 5  responsible for 96.5 percent of public spending in basic education and 74 percent in health care.2 4. Provincial reform was not a new item on Argentina's reform agenda. 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-sharing 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 sub-national governments' efforts to stabilize their public finances, reforn their administrations, and increase their efficiency as providers of public goods and services. 5. The first generation of IBRD operations targeted at sub-national governments were the First Provincial Development Project (PDP-I) and the Municipal Development Project (MDP-I) and subsequent follow-up operations--PDP-I1 and MDP-II.3 These loans were multi-sector 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. In time, 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 multi-sector operations had been successful in strengthening the weak technical capacity of provincial and municipal governments and introducing the concept of rewarding good fiscal performance. However, they were not suitable for providing the necessary financial support to those provinces willing and able to implement major structural reforms. The Provincial Reform Loan (PRL) was designed to fill in this gap. 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. To accomplish these objectives, the operation was designed as a quick-disbursing adjustment loan with conditionalities both at the federal and at the provincial levels. The loan's proceeds were used to capitalize a Transformation Fund, established by the national government in April 1993 to promote structural adjustment in the provinces. Under the framework of the Transformation Fund, the national government established individual agreements with each of the participating provinces, deternining 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 national government, in turn, was responsible for maintaining an adequate macroeconomic framework. The PRL operation in concert with the complementary Provincial Bank 2 "Argentina: Provincial Finance Study," Report No. 15487-AR, July 12, 1996. 3 The Inter-American Development Bank co-financed the First Provincial Development Project and the Second Municipal Development Project. 6  Privatization and the Provincial Pension Reform loans were highly successful in deepening public sector reform anong participating provinces. Some of their specific accomplishments under the PRL include the reduction of 55,000 provincial agents, the privatization or concessioning of 48 provincial enterprises, the privatization of nine provincial banks, and the transfer of eight provincial pension funds to the national social security system. 7. The Second Provincial Reform Loan (PRL-2) came as the next step in the progression towards more direct interaction with selected, reforn-minded provinces. T argeted directly to individual provinces that had demonstrated their willingness and ability to implement reforns, the PRL-2 was conceived as a more agile lending tool tailored to fit the reform programs of individual provinces, thus avoiding the administrative bureaucracy of programs administered at the central level and increasing ownership at the provincial level. 8. The PRL-2's specific objective, as stated in the Report and Recommendation of the President (Report No. P-7136-AR, July 30, 1997) was to help four Argentine provinces--Rio Negro, Salta, San Juan, and Tucuman--to reform and restructure their governments so as to ensure an efficient and responsive delivery of public services, particularly in health and education, within fiscally sound policies. To accomplish these objectives, the PRL-2 was structured as four quick-disbursing adjustment loans to the individual provinces to support fiscal adjustment combined with structural reform in the social sectors. The operation was to finance the adjustment cost of the provincial programs and to provide technical assistance and analytical support to the provinces. The ]'RL-2 was fully consistent with the 1997 Country Assistance Strategy (CAS), which defined a strategy towards the provinces that focused on reform and sector investment operations aimed at deepening reforms in selected provinces by improving the efficiency of social expenditures.4 9. According to the eligibility criteria and the focus of the program that had been agreed between the national government and the Bank, the PRL-2 loans were available to provinces that: (i) had introduced significant structural reforms in terms of the size of the provincial government and the privatization of major public enterprises; (ii) had accepted the transfer of the provincial pension funds to the national system; and (iii) had demonstrated ability and political commitment to further reforms. On the basis of these criteria four provinces were selected to pilot this approach: Rio Negro, Salta, San Juan, and Tucuman. These provinces also represent a diverse pool in termns of their main demographic and socio-economic indicators, economic base, and the political affiliation of the provincial administrations Together, the four provinces account for 6 percent of Argentina's GDP and 10 percent of the country's population.. 10. The borrower of the four adjustment loans was the Argentine Republic, which in turn was to onlend funds equivalent to the loan amounts to each province. The amount of each loan was determined as a function of the population of each province, its adjustment needs, and the depth of each program. Tranche conditionality was also tailored to match 4 "Argentina Country Assistance Strategy," Report No. 16505-AR, April 24, 1997. 7  the depth and pace of reforns in each participating province. Disbursements for each loan were conditioned on Board approval (i.e., loan effectiveness) and subsequent positive evaluations on the compliance of the loan conditionality agreed with each province. While the formal tranche-release actions were limited to key measures, the operations supported an ambitious reform program in each of the participating provinces that were detailed in the Letters of Provincial Reform (LPR) drafted by each province. 11. Tucuman was one of the four participants in the PRL-2. A relatively poor province from the NW, Tucuman had a per capita income of about $3,600 in 1995, less than half Argentina's average.5 It accounts for 2.2 percent of Argentina's GDP and 3 percent of the country's population. During the first part of this decade, the fiscal situation of the province had deteriorated rapidly due to weak public administration and rapid growth in current expenditures. By 1995, the wage bill had doubled, payment arrears had accumulated to about US$200 million, and debt service expenditures consumed half of the provincial revenues. In 1996, the Bussi administration took the first steps to restore fiscal balance with the support of the PRL. Some of the early accomplishments of Tucuman's reform efforts included the reduction of 4,800 provincial agents and the privatization of the two provincial enterprises and the provincial and municipal banks. The PRL-2 was designed to continue to provide critical support to the implementation of this program, both financially and through technical assistance in policy formulation. 12. The loan amount for Tucuman (Loan 4221-AR) was US$100 million, to be disbursed in two tranches of US$55 million and US$45 million respectively. The first tranche was to be released after loan effectiveness, since the actions required for disbursement had been implemented prior to Board presentation. The second tranche was to be released within 12 to 18 months, depending on the pace in the implementation of the agreed actions. The conditions required for disbursement included actions aimed at enhancing: a) the province's fiscal performance; b) efficiency in the education sector; and c) efficiency in the health sector (see Policy Matrix, Table 9). These specific conditions supported the overall reform program set forth by the province in the Letter of Provincial Reform (Annex A). A complete set of monitoring instrunents was also defined at negotiations, including: a) fiscal targets to assess progress (i.e., personnel as a ratio of net current revenues, current balance and debt stock as percentage of current revenues); b) the mechanics of a Public Expenditure Review Program; and c) a set of performance indicators. B. Achievement of Objectives 13. Overall, Tucuman's PRL-2 has been effective in providing ongoing support to the province's reform programn, particularly in relation to its fiscal aspects and the health sector. The impact of the PRL-2 is reflected in Tucuman's fiscal performance, which was well above the average fiscal perfornance of Argentina's provincial sector as a whole in terms of all the main fiscal indicators for the 1996-99 period.6. The impact of 5 Argentina's average GNP per capita in 1995 was US$7,700 (Argentina CAS, 1997). 6 For a detailed description, see para. C.28. 8  PRL-2 on this performance is evidenced by the general improvements of all PRL-2 provinces as a group, as compared to no-PRL-2 provinces during the 1996-99 period (Tables 10-13). The average change in own-source revenues for PRL-2 provinces was 18 percent between 1996 and 1999, compared to 9 percent for non-PRL-2 provinces (see Table 10). Similarly, PRL-2 provinces showed an average increase in personnel expenditures of only 8 percent between 1996 and 1999, compared to 17 percent for the remaining provinces (see Table 11). The performance of PRL-2 provinces in terms of both revenues and expenditures was also reflected in a strong improvement in current account balance, which improved from a consolidated average annual level of -$310 million for the 1995-96 period, to a only -$17 million in 1998-99. (see Table 12). Finally, the performance of PRL-2 provinces was also clearly superior with respect to the provincial debt, with PRL-2 provinces increasing their stock of provincial debt by an average of only 3.6 percent during the 1996-99 period, compared to 30 for the remaining provinces (see Table 13). 14. The PRL-2 has also provided a valuable road map to guide the participating provinces in its efforts to introduce reforms in the health and education sectors. Tucuman has been particularly effective in implementing reforms designed to improve the quality and efficiency of health services. The same degree of success was not achieved in the education sector. Moreover, the sustainability of the reforms implemented under the PRL-2 is being tested, as the political party of the provincial administration was not reelected. The new administration appears convinced of the need to deepen the fiscal adjustment and has endorsed many of the other reforms. However, it remains to been seen whether it has the commitment and willingness to implement further measures needed in health and education. 15. It is important to point out that the achievements of the PRL-2 are closely linked tc, those of other loans. In particular, the PRL-2 builds upon the technical and institutional capacity built by the PDP-I and II at the provincial level. It also carries one step further the efforts towards provincial reform that began under the PDP-I and II and that were later deepened under the Provincial Reform, the Provincial Bank Privatization, and the Provincial Pension Reform loans. Moreover, the PRL-2 has demonstrated the potential complementarities between adjustment and sector operations by articulating provincial sector objectives within the framnework of sound fiscal performnance. In this way, the PRL-2 served to reinforce and promote the objectives of sector loans in education7 and health.8 16. Macroeconomic Policies: Substantial Achievement. Clearly, as a pilot program iinvolving four provinces representing 10 percent of the Argentine populace, PRL-2 was 7 The specific objectives of the two education loans are as follows: a) IBD's PRISE supports reforms in the education sector; and b) IBRD's PRODYMES I promotes the decentralization and improvement of secondary education. s The specific objectives of the four IBRD health loans are as follows: a) the Social Protection Project protects high priority federal social expenditures; b) PROMIN promotes maternal-child care programs; c) PRESSAL, a pilot project, introduces the concept of self-managed hospitals in the context of a broader sector reform; and d) the Health Insurance Refonn Project addresses efficiency and equity issues related to Obros Sociales Nacionales. 9  not expected in itself to have a major direct impact on the country's fiscal situation. However, by promoting reforms aimed at improving fiscal performance, while at the same time protecting and enhancing expenditures in the social sectors, the PRL-2 has demonstrated that the provinces can make an important contribution to further Argentina's macroeconomic stability. In the case of Argentina, the link between fiscal balance and macroeconomic stability is a particularly important one due to the strict restrictions on currency emission established by the Convertibility Law. By putting pressure on the balance of payment, persistent fiscal deficits at the provincial level can be a source of strain on the money supply and the financial system, thus reducing the credibility of the government's long-run ability to maintain the Convertibility Plan. The PRL-2 has contributed towards improving fiscal balance in the four participating provinces by reducing large deficits in current spending, as noted above, from -$310 million on average annually during the 1995-96 period to only -$17 million for the 1998- 99 period. This performance compares well to the overall consolidated accounts of the provinces, where the current balance declined for $75 million in 1995-96 to -$690 million in 1998-99. (see Tables 12). 17. The challenge of reducing the public deficit in the provinces is compounded by the important role that provinces play in the provision of social services--education and health--which are critical to the country's long-terrn economic growth and poverty reduction. Within this framework, the PRL-2 has also contributed towards the stabilization of Argentina's economy and the sustainability of the overall reform program by supporting the implementation of measures conducive to reorienting provincial public spending in ways that increased productivity and efficiency in the delivery of services while strengthening fiscal positions. In the case of Tucuman, these improvements were achieved mainly within the health sector, as shown on Table 16. 18. Financial Objectives: Substantial Achievement. In the case of Tucuman, significant savings have resulted from increased efficiency in the functioning of the public sector in general, and of the social sectors, i.e., health and education, in particular. Some of these savings are described below for each of the individual components. They include savings in the payroll of the provincial administration corresponding a reduction of an additional 2,500 public sector positions, savings of approximately US$10 million resulting from an improved monitoring of teachers' absenteeism and leave, and increased revenues from health insurance providers by self-managed hospitals. In the case of the Hospital Padilla alone, the increased annual revenues are more than US$600,000 relative to 1996. 19. Public Sector Reform: Substantial Achievement. The PRL-2 has successfully accomplished its original objectives by effectively supporting reforrns aimed at improving efficiency in the management of resources within the social sectors--health and education--in the participating provinces within a framework of sound fiscal responsibility. As a result, Tucuman has consolidated its fiscal situation and is at the forefront of public sector reform in the health sector. A detailed analysis of the factors that affected the implementation of each component and the achievement of their specific objectives follows below. 10  C. Public Finance 20. Achievement of Objectives: Satisfactory. Tucuman's fiscal situation had experienced rapid deterioration during the first part of the 1990's. Weak public admninistration had led to rapid growth in current expenditures and serious fiscal imbalances, marked by excessive public employment and borrowing. By 1995-96 the deficit reached $75 million annually, or about 10 percent of current revenues. The wage bill had doubled since 1990 and by 1995 it absorbed 83 percent of the provincial net revenues. Payment arrears had reached approximately US$200 million by end of 1995, or almost one-third of the outstanding debt of US$650 million, which itself grew to $930 million by 1996, and provincial bonds and scripts represented another 20 percent of the outstanding debt. The rest was owed to commercial banks at high interest rates. Debt service consumed half of provincial revenues (see LPR, Annex A). 21 Beginning in 1996, the newly-elected Bussi administration embarked on a comprehensive reform program aimed at reestablishing provincial fiscal balance, increasing tax collection, reducing current government expenditures, and reducing provincial debt (see LPR, Annex A). In the framework of the PRL, Tucumrnn had taken its first successful steps towards reform including the privatization of the provincial bank, another publicly owned bank and two provincial enterprises, the transfer of the provincial pension fund to the national government, and the implementation of an administrative reform program. Both the pace and depth of the reforms accelerated in the framework of the PRL-2, which supported more ambitious fiscal targets together with the implementation of structural refonns in health and education. 22. The specific fiscal objective adopted by Tucuman for 1997-99 in the framework of the PRL-2 was to achieve a sustained fiscal balance through improvements in tax administration and better spending. In particular, Tucumain expected to reach: (a) a decline in its wage bill to a sustainable 65 percent of net revenues by the end of the program; (b) a current account surplus beginning in 1997; (c) an increase in current savings to enable the province to finance a higher share of public investment; and (d) a decline in the debt stock as a share of revenues. The province was successful in attaining its objectives, as demonstrated by its ability to meet the agreed performance benchmarks and its fiscal performance compared to other Argentine provinces. In particular: 23. Civil Service Reform: Overstaffing had been a continuing problem for Tucuman. In 1995, it employed 45 provincial agents per 10,000 inhabitants relative to 33 for the national average. As a result, personnel expenditures represented a large share of net current revenues, reaching 83 percent in 1995.9 In its initial steps towards reform, the province took several measures leading to a reduction of 4,800 provincial agents. During 1997-99, the government continued to implement a program for rationalizing public 9 For the purpose of the fiscal targets, "Current Revenues" are calculated as (i) revenues from taxes; (ii) non-tax revenues from the sale of goods and services and from property rentals; and (iii) revenues from federal revenue-sharing transfers (fondos de coparticipaci6n; excluding those from Fondo Nacional de la Vivienda, from Fondo Especial de Desarrollo Electrico del Interior and for the financing of public works expenditures. "Net Current Revenues" excludes revenues that are transferred by the Province to its municipalities. 11  sector employment by means of a privatization program, early retirement, outsourcing of peripheral services, natural attrition, and non-renewal of temporary contracts. This program has been successfully implemented, reducing an additional 2,500 positions during 1999, thus bringing the level down to less than 19,000 public agents. This achievement surpasses the initial target of no more than 20,000 positions. 24. These efforts have enabled the province to lower its personnel salary and benefits expenditures to 62 percent of net current revenues, meeting 65 percent target required for the second tranche release. '