Argentina - Special Structural Adjustment Loan (SSAL) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 22619 IMPLEMENTATION COMPLETION REPORT (SCL-44050) ONA SPECIAL STRUCTURAL ADJUSTMENT LOAN IN THE AMOUNT OF US$2.52525 BILLION TO THE ARGENTINE REPUBLIC FOR A SPECIAL STRUCTURAL ADJUSTMENT LOAN (SSAL) 07/30/2002 Argentina, Chile, Paraguay and Uruguay Country Management Unit Poverty Reduction and Economic Management Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective as of July 30, 2002) Currency Unit = Argentine Peso (Arg $) Arg $3.6 = US$ 1 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS BHN Housing Mortgage Bank BNA Federal Bank CAS Country Assistance Strategy ESW Economic Sector Work FSAP Financial Sector Assessment Program GDP Gross Domestic Product ICR Implementation Completion Report IDB Interamerican Development Bank IFI Intemational Finance Institutions IMF International Monetary Fund INSSJP National Health Institute for Retirees IPO Initial Public Offering LIBOR London Interbank Offer Rate MERCOSUR Common Market of the South OPS Operation Policy Strategy QAG Quality Assurance Group REPO Repurchase Facility Support Loan SAL Structural Adjustment Loan SSAL Special Structural Adjustment Loan SSN Insurance Suprintendent USA United States of America VAT Value Added Tax Vice President: David de Ferranti Country Director: Myrna Alexander Sector Director: Emesto May Task Team Leader/Task Manager: Paul Levy  ARGENTINA AR SPECIAL SAL (SSAL) CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 8 5. Major Factors Affecting Implementation and Outcome 17 6. Sustainability 19 7. Bank and Borrower Performance 20 8. Lessons Learned 24 9. Partner Comments 26 10. Additional Information 27 Annex 1. Key Performance Indicators/Log Frame Matrix 28 Annex 2. Project Costs and Financing 36 Annex 3. Economic Costs and Benefits 37 Annex 4. Bank Inputs 38 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 40 Annex 6. Ratings of Bank and Borrower Performance 41 Annex 7. List of Supporting Documents 42   Project ID: P062991 |Project Name: AR SPECIAL SAL (SSAL) Team Leader: Paul Levy TL Unit: LCC7A ICR Type: Core ICR Report Date: September 19, 2002 1. Project Data Name: AR SPECIAL SAL (SSAL) LUC/TF Number: SCL-44050 Country/Departmenit: ARGENTINA Region: Latin America and Caribbean Region Sector/stubsector: Banking (28%); Central government administration (28%); General finance sector (17%); Compulsory pension and unemployment insurance (15%); Other social services (12%) KEY DATES Original Revised/Actual PCD: 09/12/1998 Effective: 11/03/1998 Appraisal: 09/10/1998 MTR: Approval: 11/10/1998 Closing: 12/31/1999 10/31/2000 Borrower/lmplenmenting Agency: GOVERNMENT OF ARGENTINA/Agencies Other Partners: IDB & IMF STAFF Current At Appraisal Vice President: David De Ferranti Shahid Javed Burki Country Manager: Myrna L. Alexander Myrna Alexander Sector Manager: Emesto May Guillermo Perry Team Leader at ICR: Paul Levy Paul Levy ICR Primarv Author: Desmond McCarthy; Herman J. Nissenbaum; David Rosenblatt 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL-Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: U Susrainabilitj': UN Institutional Development Impact: M Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: HS S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Or-iginal Objective: Background Following two decades of economic stagnation, hyperinflation in the late 1980s and a poverty rate that had reached 40 percent of the population, Argentina embarked in 1991 on a set of economic policies collectively known as the Convertibility Plan. The name derives from the currency board arrangement that established full convertibility of the peso with dollar backing. The currency board itself provided for fiscal discipline, since government deficits could no longer be financed by borrowing from the Central Bank. But the Convertibility Plan encompassed much more than just this monetary arrangement. Trade barriers were lowered, capital controls were eliminated, state enterprises were privatized, the tax agency was revitalized and government expenditure programs were refocused. The results during the early 1990s were dramatic. The poverty rate that had reached 40 percent in 1990 was reduced to 22 percent in 1994. Economic growth averaged 7.9 percent over the 1991-1994 period. Following Mexico's devaluation in late 1994, Argentina's commitment to the Convertibility Plan was tested. Many local and foreign investors expected the currency board to be abandoned, capital began to flee the country and, by March 1995, the banicing system was at serious risk of a systemic crisis. Argentina's renewed commitment to the Convertibility Plan, a strong program of multilateral financial support and President Menem's reelection in 1995 all helped renew consumer and investor confidence. The economy suffered a contraction of 2.8 percent that year. Nevertheless, this crisis was also an opportunity and structural reforms at the provincial level began to accelerate, as did regulatory reforms and restructuring of the financial system. By the second quarter of 1996, the economy began to recover strongly - eventually registering growth of 5.5 percent and 8.1 percent during 1996 and 1997, respectively. During the first half of 1998, growth continued at a 6 to 7 percent pace. At the time of the Annual Meetings in 1998, Argentina was at a turning point in its recent economic development. Growth had been restored following the 1995 crisis; however, social conditions (including poverty and unemployment rates) had not fully recovered. The reforms of the early 1990s that had unleashed strong productivity gains needed to be supplemented by additional "second generation" reforms. Indeed, Argentina had entered into a period of consolidating reforms, especially at the provincial level, at a more measured pace as compared to the early 1990s. Meanwhile, the external environment had deteriorated dramatically with a reduction in international capital flows following the Asian crisis in 1997 and the Russian crises that hit in August 1998. These shocks resulted in a decline in international commodity prices and sharp increases in risk premiums for emnerging markets. Furthermore, there were fears of contagion with growing concerns that a crisis could unfold in neighboring Brazil - an event that did in fact occur within two months after Board approval of the SSAL. As a result, by the second part of 1998, Argentina's economy began to slip into distress. External capital flows dropped dramatically, jeopardizing the country's capacity to roll over its -2-  debt and finance its fiscal deficit. The latter increased as revenues began to fall during 1998 with the decline in economic activity, the trade balance and service accounts deteriorated, credit expansion slowed, employment and the stock market fell, leading to a rapid deterioration in the economy. As one indication of the deteriorating 1998 conditions, urban poverty in Buenos Aires increased to 29.4 percent. The Government had been preparing for such possible shocks, and there was heightened awareness among the IFIs of the risks facing Argentina (See the Bank's CAS Progress Report, dated February 1998). as well as other emerging market economies. The Government had already set up the Repurchase Facility with private banks to help the banking system face possible liquidity shocks and established a practice of accumulating substantial cash reserves, with advanced borrowings in the markets by approximately one-quarter of its annual needs. The Government has also converted its IMF stand-by arrangement (approved in February 1998) into a US$2.8 billion Extended Fund Facility which it had treated as precautionary and began to increase its primary surplus. But it also recognized the need for far more help in order to avoid a deflation comparable to that of the 1995 Tequila crisis. Typically, the Fund would have been the first one to be called upon to bolster defenses and strengthen market confidence but it was facing a potential liquidity problem because of other demands on IMF resources and the projected US$90 billion capital increase it sought had not yet been approved. Thus, at the juncture of the September 1998 Annual Meetings, there was considerable concern that the crisis affecting emerging markets that had started in Asia in 1997, and was exacerbated by the events in Russia (as well as the failure of an important hedging financial institution in the USA), could spread uncontrollably to other countries, especially those in Latin America known to be highly dependent on international capital flows. Argentina was one of those countries. Moreover, the Argentine authorities had publicly indicated that the Fund's support was precautionary and that its use could be taken by the markets as a sign of weakness. Facing these circumstances, the Bank, in collaboration with the IMF and together with the IDB, was asked by Argentina to be partners to mitigate the impact of market closure resulting from this series of external shocks, taking advantage of the new instrument-the Special Structural Adjustment loan-that was being especially designed as a key part of the Bank's arsenal in the face of global market shocks facing emerging markets. This support package was predicated on the macroeconomic framework, with the currency board in place, agreed with the Fund as part of its series of programs. Since the late 1980s, Argentina had almost continuously operated under a Fund-supported program and there was a history during the 1990s of the Bank setting its support for Argentina within the context of such a Fund program. With the Convertibility plan in place, there were several sine qua non to sustain that program: one was fiscal discipline since the Government could not rely on printing money, and another was productivity increases, since it was not possible to alter relative prices in the economy other than through productivity changes. Fiscal discipline thus had to be at the core of Argentina's macro-program and the focus of Fund support. Given Argentina's history-with fiscal deficits that had averaged about 8 percent of GDP during the 1980s-there had been admirable progress in reducing the overall fiscal deficit even -3-  though weaknesses persisted. Only in 1993 did the public sector reach a consolidated fiscal surplus, helped considerably by privatization proceeds. The Tequila crisis in 1995 set back fiscal performance further as the economy declined sharply and interest costs rose. During the recovery years of 1996 and 1997, the Government continued to pursue a relatively expansionary fiscal stance-with deficits in the order of 1-2 percent, reflecting both the need to address the continuing high unemployment (in the range of 15 percent) and the structurl deficit created by the pension reform in 1994 (estimated at 1-1.5 percent of GDP). By 1998, the federal fiscal deficit had been reduced to 1.4 percent of GDP, down from 2.2 percent in 1996, and the provincial deficit had declined to 0.8 percent of GDP. With an IMF program in place, further progress was thus expected in fiscal management as well as those elements of the remaining reform agenda that Argentina was facing. This included among other things reform of labor regulations, reform of federal-provincial fiscal relations, deepening of reforms in the social sectors that had begun only a few years back, as well as entering into the new areas of governance, anti-corruption, justice, and public sector efficiency and effectiveness. These latter actions were broadly part of the second generation reforms Argentina had yet to undertake or needed to reinforce. Equally important were continuing reforms in the financial sector and the deepening capital market development, as an essential ingredient of sound macro-economic management and a key vulnerability in the context of the Convertibility plan. Thus, when the full impact of the Russia crisis hit Argentina-and other emerging markets--in August 1998, the Government turned to the Bank and the IDB for extra-ordinary support. Looking back at that period, it was clear that the overwhelming concern globally was to prevent contagion if possible and to respond favorably to those countries-other things being equal-that had been following policies that were conducive to sustainable development. Such borrowers had to have had a solid track record on past reforms and a sustainable debt position over the medium term. But it was also understood that such lending could entail heightened risks for the Bank and as such there were special terms and conditions, consisting of a significantly higher spread for the Bank and a much shorter amortization period. Argentina, followed by Brazil, were the first two countries to benefit from this new kind of support from the Bank. Original Objectives The objectives of the Special Structural Adjustment Loan (SSAL) and accompanying Special Repurchase Facility Support (Repo) Loan were clearly stated in the President's Report (paragraph 107) . In general, the goal was to reduce Argentina's "vulnerability to extemal financial shocks" while simultaneously "increasing (Argentina's) capacity for sustainable and equitable growth." The more specific objectives were to: (i) facilitate the reentry of Argentina to the intemational capital markets and avoid the social and economic costs of forced adjustment to the closure of market access; (ii) protect vulnerable groups during a period of high uncertainty; (iii) add to the lines of defense of the banking system against potential liquidity shocks; and (iv) continue Argentina's successful reform program in several key sectors, described in more detail in section 4.2. The REPO specifically was to contribute to meeting objective (iii) above. -4 -  These objectives were fully consistent with the 1997 CAS. That document recognized that Argentina continued to be vulnerable to a reversal of capital flows and included the possibility of higher levels of lending under a shock scenario, foreshadowing the SSAL. The February 1998 CAS Progress Report further noted the increase in risks to Argentina after the East Asia crisis and again indicated the possibility of additional support in the event of an external shock. The Bank approved the Special Structural Adjustment Loan (SSAL) and Repurchase Facility Support Loan ("REPO") in November 1998, barely three months after the Russia crisis, in keeping with the nature of the crisis and the intended purpose of the instrument. A recently completed Financial Sector Review, the accumulation of country knowledge built up by years of ESW and operational activities in the areas of provincial finances, labor markets and poverty analysis, and ongoing policy dialogue in health and social sectors provided a sound knowledge base for designing the reform program supported by the SSAL. The knowledge base was critical in facilitating a rapid response to the Government's request for special assistance: the SSAL and its companion Special Repurchase Facility Support Loan were prepared, appraised and negotiated in approximately two months. The SSAL was to provide financing to the Government during what was perceived to be a temporary disruption in international capital flows, aggravated by the Russia crisis that occurred in August 1998. The financing by the IFIs would permit continued servicing of existing debt (that would have normally been rolled over in the international capital market) and meeting of the cash flows of the normal operation of the state during this period of temporary closure. Argentina at the time had to meet financing needs of some US$ 1-1.5 billion per month, and was facing particularly large debt repayments at the end of 1998 and early 1999. Thus, timing was critical. Moreover, support would allow the Government to focus on the remaining reform agenda during its last five quarters in office. With key social programs protected and a set of reforms moving forward, it was expected that the social and economic impact of the intemational financial crisis could be ameliorated. The SSAL was part of a broad intemational package. The $2.5 billion SSAL was designed as a three-tranche loan, originally to be drawn over an about 14-month period. The companion $505 million "REPO" Loan was a contingent loan, intended to be drawn only if the Central Bank required additional resources mainly to meet margin calls on a repurchase agreement with commercial banks. The IDB co-financed these two operations with its $2.0 billion Special Structural Adjustment Program Loan and an accompanying $0.5 billion "REPO" facility loan. The Fund's support first comprised $2.8 billion, approved at the start of 1998, as a precautionary package. Over time, however, as conditions changed, the Fund's support for Argentina was later expanded to $8.3 billion and further increased to $15.5 billion with the approval of new Fund Stand-by Arrangements in March 2000 and January 2001. The private sector's contribution was essentially via the participation of private banks in the REPO facility, roughly US$ 7 billion, followed later in the period with several voluntary debt swaps as part of the expanded Fund program. Because of the program's emergency nature, the operation focused on incremental steps that would advance the on-going policy dialogue and keep the reform program on track, - 5-  addressing the next measure required in a sequence of medium term reforms of considerable breadth, building on the body of knowledge in diverse sectors already accumulated on Argentina. As outlined in the prior CASes, Argentina was seen as a country in the consolidation phase of reforms, moving at a more measured pace than in the early 1990s, and requiring more time and consensus building. It was acknowledged that embarking on reforms in totally new areas would not have been consistent with the timing and nature of the proposed operation, nor would reforms that necessarily required considerable consensus building ex ante. Fortunately, the Bank's years of experience in Argentina and the breadth of the Bank's activities in the country were amenable to such an approach. (One of the differences with the other emergency type operations considered in this same period and under similar circumstances--- notably those for Korea and Thailand-did not have this same advantage, a point raised in the QAG reviews of these operations). Government officials interviewed report that the program represented a high degree of consensus between Bank staff and government staff in terms of priorities, realism for enactment given the time period and political schedule, as well as specific policy design. Nevertheless, these limitations also meant that the reform package would only be partial in several instances, especially those of an institutional nature that could take years to develop and internalize fully. Thus, many of these reforms involved complex stepwise processes, involving a combination of legislative action and institutional development. They also built on prior experiences in the various sectors-each one moving ahead in a process that would take more time and effort to complete in its entirety. (The inherent difficulties in these second generation reforms and the step-wise process of these reforms were highlighted in the 1997 CAS and again in the 2000 CAS). An example is the insurance sector. It was apparent that future private sector development would be affected by inefficiencies in the insurance sector. Prior to the SSAL, with the support of the Bank under a previous adjustment operation, the Government had already reduced its direct production role in the sector by privatizing the largest insurance company and closing the state-run reinsurance company. In addition, new capital requirements and other regulatory reforms had been initiated. However, much remained to be done and, taking advantage of the SSAL, additional measures to deepen the existing reform program were undertaken: for example, new laws for separating life and non-life businesses, strengthening of the resolution process and consumer protection norms. In addition, the Superintendency of Insurance needed to adapt an early warning detection system for identifying firms in trouble, as well as effectively implement the new capital requirements. This example illustrates the complexity of the process and the SSAL's role in promoting the continuation of the reform process. It further highlights the operation's technical complexities and the political uncertainties, heightened by the short time span that the administration had to work: November 1998 to December 1999 when a new Government would take office. All these factors escalated the operation's risks and its complexity. Under more normal circumstances, one might have argued for a smaller, longer phased or otherwise different kind of Bank-supported effort, or even perhaps awaiting the next administration. Programmatic lending might have been considered if the approach had been developed at that time. However, there were compelling concerns about the possible international as well as domestic consequences of a lack of prompt multilateral intervention, in view of the difficulties which Argentina then faced, and the risks of further deterioration in the region, more notably Brazil. These and the scale of Argentina's needs well justified the inclusion of this operation as the first of the Special Structural -6-  Adjustment operations approved by the Bank and launched to help mitigate the global crisis' effects. 3.2 Revised Objective: N/A 3.3 Original Conmponents: Paras. 4.1- 4.2 describe the components of the project and its rating. 3.4 Revised Components: N/A 3.5 Quality at Entrv: The quality at entry of this operation is judged as satisfactory. As noted above, it responded well to the concerns at that time, reflected and was well founded in prior ESW and country knowledge, was consistent with the Bank's policies and objectives, and was highly relevant. The problems which the operation sought to address may be summarized as those of a highly indebted country facing a liquidity constraint and.fiscal deficit, all set in a rather complex political milieu. In the face of these factors, the Bank appropriately selected the SSAL instrument to help Argentina deal with the problem. The latter clearly met the criteria for SSALs: exceptional support for a client with a good track record that was facing a potential or real crisis so as to help them meet extraordinary external financing requirements. (This was discussed in greater detail in the May 7, 2001 note to the Board on this instrument.) The above assessment is consistent with the conclusions of the Quality Assurance Review carried out by QAG after the SSAL's approval and while it was being implemented, which the QAG panel had judged as "highly satisfactory". The QAG panel had also carried out a review of comparable operations in Korea, Malaysia and Russia, and the operation for Argentina was considered as superior to these other similar operations. This panel applauded the operation's quick preparation. It also said that its technical due diligence had been good, with which the ICR evaluation generally concurs. In addition, the panel considered the operation's preparation to have been commendable in its selection of the relative priorities of the projected reforms and to significant aspects of country performance, which this review endorses. Further, the loan documentation reflected precise, well formulated criteria for judging the achievement of the envisaged objectives, along with reasonable assumptions about the SSAL's inherent risks. In assessing quality at entry for the ICR, several dimensions were tested. The most pertinent is the range of sectors covered and the number of specific conditions addressing the concern that the breadth of the operation may have distracted from the main objectives. An alternative might have been to select only a few sectors and reduce the number of conditions. However, the risk of this alternative would be not to maintain momentum and perhaps lose the opportunity to advance the policy dialogue in those areas not selected. Moreover, since the loan amount was substantial, the task team rightly felt that the loan conditions should be wide ranging and engage diverse actors in the Government's program. In retrospect, one of the loan's advantages was to engage a broad set of actors and to have clear steps across a broad front in order to guide the administration in its final months. This helped the authorities in ensuring that - 7 -  policy makers were moving along the agreed paths and ultimately did provide continuity with the in-coming administration at the end of 1999. Inevitably this requires judgment on how best to balance between "broad" and "specific" targets and between moving ahead a process, while searching for high impact on the short run. This process required that the team use its understanding of the country constraints, especially political and social. Such judgments were particularly evident in the case of the condition on labor modernization. The long term goal was to secure a complete modernization of labor regulations; however, this has been tried in 1995 and had failed to secure congressional approval, while equivalent measures by the executive had been declared unconstitutional. Thus the SSAL focused on only one dimension-severance payments-rather than the more contentious issues of collective bargaining. Even the effort on converting severance payments from lump-sum to individual employee saving "unemployment" accounts was difficult. As it developed however, by reviving the previous draft law on collective bargaining in early 2002, the new authorities were able to secure its passage. Thus they were actually able to achieve much more than the SSAL called for. Consequently a waiver was granted on the condition on converting severance payments. At the same time, the team judged during preparation that it did not have sufficient understanding of some potential public sector reforms, and so decided to drop them from the loan. In one area--judicial reform--it was clear that the Argentine counterparts were ill-prepared and their conviction to undertake genuine reform was dubious. The second main dimension, given the eventual negative outcome of Argentina's macro-economic policies by the end of 2001 and early 2002, is whether or not the task team should have predicted such an outcome at the time the SSAL package was put together in mid- 1998 and if so, should a different package have been supported, notably one which involved Argentina's exit from the Convertibility regime. There continue to be differing views on the causes of the crisis and if, when and how it might have been avoided. But, there continues to be consensus that the circumstances faced in 1998 justified the kind of support provided by the Bank and the other IFIs. The Bank's approach under the SSAL was consistent with the Concordat between the Bank and the IMF and the stance taken by the Fund on key macro-economic questions; there were no obvious early warning signs at that time; due diligence was undertaken to cross-check and to seek external opinions on the appropriate economic policy package for Argentina; and there was a viable range of policy options for Argentina to pursue that were considered to be sufficient at that time to overcome the difficulties then faced. Indeed, some economists indicate that the current crisis could have been avoided as late as mid 2001 with the appropriate policy responses by the Argentine authorities. While this may continue to be one of the more controversial aspects of this implementation completion report, the conclusion of this ICR is that the many intervening events-some external and some internal to Argentina-could not have been predicted at the time the SSAL was developed. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The ICR considers that the SSAL's overall objectives were not met even though the specific outputs were all achieved. It is clear, in retrospect, that the package of policy reforms - 8-  supported by the SSAL were necessary but ultimately insufficient to redress the cumulative impact of the series of shocks that confronted Argentina in 1999 and 2000. Designed for largely what were expected to be the transitory effects of an external shock stemming from Russia's devaluatiorn and default in August 1998 (akin to the Tequila crisis), the SSAL eventually was the main instrument used by the Bank to redress: (i) the devaluation of the Brazilian real in January 1999; (ii) the negative impacts of adverse campaign rhetoric by the leading presidential candidates in July 1999; (iii) the appreciation of the US dollar vis a vis the Euro; (iv) market nervousness because of Y2K towards the end of 1999; (iv) the increasingly weak executive capacity of the governing Alliance party that took over in December 1999; and (v) allegations of corruption and the resignation of the Vice President in October 2000. All of these events occurred while general market trends deteriorated: country risk premiums for all emerging markets were rising and commodity prices fell. As is well known, the economic, political and social situation in Argentina deteriorated dramatically during the course of 2001, after the SSAL was fully disbursed, leading to a new international support package, called the blindaje. This time, the IMF took the lead in providing resources, eventually disbursing US$16 billion between January 2001 and September 2001, with the Bank's support concentrated on provincial reform and a new SAL of $400 million in August 2001. There were three Ministers of Economy in quick succession in March 2001, with the final economic team resorting to increasingly risky and debilitating economic measures in an attempt to restore confidence. Even the injection of substantial resources in September 2001, when the Repo was activated and the Bank's financing for that program disbursed along with that by the IDB and IMF, could not restore confidence in the banking system. This ultimately led to the imposition of banking controls, a popular backlash, and the change of government in December 2001. At the end of 2001, default was declared on Argentine public debt (except for that with the IFIs) and in early 2002 the peso was allowed to float. In the meantime, the country continued to be in a deep recession with poverty reaching 50 percent of the population by July 2002. A recent retrospective on Argentina suggests that the current economic crisis resulted from the interaction of the country's vulnerabilities with inadequate policy responses, the result of weak institutions and political impasse that worsened as time went by (particularly in the period following the last disbursement under the SSAL). The retrospective points out that while external shocks may have been the root of the problems at the end of the 1990s, Argentina-specific factors became increasingly important by the end of 2000, notably with the resignation of the Vice President in October 2000, the two resignations of the Economy Ministers in quick succession in March 2001, the resignation of the President of the Central Bank in April 2001, and other events, combined with the Government's inability to deal with the situation ultimately proved to be the downfall. It may have been possible to avoid the crisis, or at least to reduce its costs, if the authorities had the political backing to act in a more timely and consistent fashion. Unfortunately, the retrospective concludes that it is not likely that anyone outside of Argentina could have effectively prevented the crisis from happening. Despite the overall outcome, a number of the SSAL's accomplishments were highly relevant. The loan, along with the Repo, facilitated the Government's access to international capital funds for the period 1999-2000, and bolstered the banking system's defenses to deal with -9-  volatile global markets until such time that poorly conceived domestic policies reversed the many hard fought reforms of the banking sector in late 2001. The SSAL's achievements were also important from a sector perspective. The proposed assistance was significant in keeping up the momentum of reforms that had been initiated under previous operations and were still part of the Bank's policy dialogue with Argentina, thus seeking to enable the Govenmment to remain focused on its reform agenda even while attending to pressing financing difficulties and the coming electoral campaign (with national elections held in October 1999). The SSAL agenda, furthermore, constituted the bridge from one administration to another, thus facilitating the transition of power at the end of 1999 and gave impetus to reforms by the new Administration. Although the SSAL was originally conceived to be disbursed within the remaining period of the Menem administration (that is by end 1999), there were delays in realizing third tranche conditions. Thus, when it became apparent that the new government would likely be formed by the Alliance party, the Bank sought to confirm ownership of the remaining measures with the new Administration. This was done starting as early as September 1999 and continued into 2000 when a new CAS was prepared. Following an extensive review of priorities, the new authorities endorsed the program and the SSAL served as a vehicle for maintaining a policy dialogue and providing the new officials with the instruments for addressing their reform priorities. It is important to highlight that the new Administration was committed to maintaining all important facets of Argentina's economic policy framework including the exchange rate regime. The beginning of the SSAL's implementation was auspicious and Argentina was the first emerging market to return to the international capital markets after the Russian devaluation and default. In late February 1999, Argentina successfully transacted a 20-year billion dollar issue, despite the Brazilian devaluation in January 1999 and the continuing impact of the Russian crisis on intemational capital flows. Access was expensive and somewhat restricted, however, in part, due to the extemal circumstances just described. During 1999, the Argentine federal government raised nearly $12 billion (about 4 percent of GDP) in intemational capital markets. Of this amount, the SSAL's second-tranche played a direct role in the issuing of $1.5 billion in intemational bonds in September 1999, when $250 million of the second tranche was converted into a Policy-Based Guarantee (Report No. P-7331-AR). Such market access lasted until October 2000, when country risk premiums rose once again to unsustainable levels following the resignation of the Vice-President. On the other hand, the shock created by Brazil's devaluation had a significant negative impact on Argentina's economy. Mercosur trade collapsed in all directions, with Mercosur countries the destination of about one-third of Argentine exports in preceding years. While Argentina's trade balance with Brazil continued to register a surplus, both imports and exports with Brazil declined sharply (exports to Brazil fell by 28 percent and imports from Brazil fell by 21 percent in 1999). A similar result occurred with the smaller partners of Mercosur. The appreciation of the dollar, weak international commodity prices and growing domestic concerns over the outcome of upcoming presidential elections added to the country's difficulties. In this environment, an economic contraction was extremely difficult to avoid, and real GDP fell by 3.4 percent in 1999. -10-  A decline in GDP of this magnitude imposes inevitable social consequences. Therefore, establishing a list of effective social programs to be protected in the 1999 and 2000 budget, the SSAL helped to at least preserve key social services during the downturn. However, the need to convince markets of progress on the fiscal front made it impossible to significantly increase social support programs during the recession. Due to some improvements in labor market distortions, unemployment in 1999 did not rise as substantially as during the aftermath of the Tequila crisis, despite the more severe GDP contraction experienced in 1999. The unemployment rate rose from an average of 12.4 percent in 1998 to an average of 13.8 percent in 1999. While the early part of 2000 showed signs of recovery, these were not sustained and the economy continued in recession during 2000 and 2001 before collapsing in early 2002. Social indicators have progressively worsened, necessitating a more concerted approach to income support for unemployed heads of households with children. The continuing financial sector reform effort under the SSAL, along with the financing itself and the accompanying Special "REPO" loan probably played a significant role in the relatively strong performance of the banking system during 1999 through to mid 2001. Despite the recession, deposits in the banking system expanded by 2.9 percent during 1999 - continuing the re-intermediation of the economy that began with the onset of the Convertibility Plan. Domestic credit grew by 1.1 percent, reflecting a cautious use of the expanded deposit base. International reserves of the financial system grew by nearly five percent. Thus, in many respects, it is likely that the reforms supported by the SSAL and Repo, building on previous SALs and FSALS, all contributed to maintaining confidence in Argentina's banking system for a longer period than might have been expected. It was not until early July 2001 that depositors began to withdraw their funds from the system and there were no major bank closings or disruptions to the payments system until the end of 2001, although a number of small banks were closed as part of the consolidation of the banling system that had been occurring in previous years. The present collapse of the banking system reflects the cumulative impact of measures taken during 2001 that reversed the earlier reforms by lowering reserve requirements, capturing banking credit by the public sector, imposing deposit restrictions, and converting dollar loans and deposits to pesos at different rates in early 2002. There were advances in certain other sectors. In general, advances were made in rationalizing social programs, improving health sector regulation, advancing the dialogue and understanding of provincial finance reforms, and advancing regulatory reforms. As is the case of the financial sector, some of these have now been reversed by intervening policy decisions but others continue in force. As acknowledged at the outset, some reforms remain only partial, reflecting the incremental approach to reform adopted in several areas. Some accomplishments consisted of the completion of reports, guidelines and plans which may or may not be pursued in the future. Others resulted in the preparation of legislative proposals without any immediate assurances of their subsequent adoption by the Congress Details are summarized in section 4.2 and elaborated on in Annex I. To be sure, the SSAL involved numerous instances in which the Bank sought to push the envelope and to lay the basis for reforms in the future as part of a continuing, evolving process. - 1 1 -  Thus, in many areas the ultimate achievements may only be realized if the Bank and the Government continue to be engaged. Given the nature of the Bank's relationship with Argentina, there is every expectation that this will be the case. While the immediate impacts may not yet be felt, some authorities believe that the various measures-including some of those which have not so far had an obvious impact--have created a cultural change that could prove to set the stage for valuable long lasting effects. 4.2 Outputs by conmponents: Human Development Sector Actions The labor reform objectives sought under the SSAL were successfully achieved and went beyond the initial targets set under the SSAL. These reforms should have long lasting impact even though implementation of the new legislation has been slow. During loan preparation, as in past attempts at labor reform, the pervasive and rising joblessness plus strong union resistance appeared to crimp the prospects for transforming the rigid, tightly regulated labor regime, especially rectifying the way in which collective bargaining is conducted. Thus, the Bank accepted a commitment to study possible options for creating a fully capitalized unemployment insurance scheme to replace the costly and outdated system of severance payments. However, the new administration in 2000 set its sights on bringing about an actual, direct and more comprehensive reform and resurrected an earlier reform package that had been developed by the previous administration with the Bank's support. This time, the measures won Congressional approval, along with legislation providing for the trimming of labor taxes and easing of restrictions on new workers. In the process, the specific target of developing proposal for lowering severance payment costs and creating individual worker accounts-a reform that has not yet been fully debated-was substituted via a waiver with the more comprehensive reform that had previously been sought. In mid-2001, the Labor Ministry established regulations that would lead to renegotiating the many contracts involved, according to the new, more flexible labor legislation. Once the reform is fully implemented, these new contracts could increase labor mobility substantially, easing the re-absorption of displaced workers in the market, and boosting productivity. In the health insurance sphere, the Government sought to extend its previous reforms for the liberalization of the market under the Health Insurance Reform Loan. That loan had opened competition among union-run health insurers, set up a mandatory package of health services and established a health superintendency. Building on these reforms, the SSAL called for the National Health Institute for Retirees (INSSJP) to outsource its services and improve its cost effectiveness. While this condition was technically met, this approach suffered a legal setback. Consequently, the new authorities recast the goal to aim at substantially expanding the number of providers and engaging them through far more transparent procurement procedures than had previously prevailed. This was achieved. Early on, INSSJP signed 75, mainly new, contracts covering the vast majority of eligible services. These were initially reported to be generating savings exceeding $17 million monthly, thereby helping to reduce the Institute's serious budget deficit (although under current crisis conditions the situation appears to be worsening). In the process also, some beneficiaries obtained freer choices of providers. Meanwhile, the Government verified the implementation of the new prudential and consumer protection norms set to govern beneficiary services, regulation of medical programs, marketing, etc. Likewise, it fixed suitable standards for - 12 -  the union-run carriers' public performance reporting, and triggered more open, frequent publication of the results. These actions were constructive but much more basic improvements are needed for the development of a competitive health care market and to make the Government's program cost effective. Three federal nutrition programs were consolidated into a single entity while steps were also taken to better target their services in order to cut duplication and overlap. To the same end, the Government prepared new eligibility criteria for recipients of pensions granted by the legislative and executive branches in order to raise this program's efficiency and its curb abuses. It called for their better auditing and cross-checking of beneficiaries, while also extending improved poverty measurement criteria to a new total of 14 social programs. Several well intended proposals were introduced which could signal the directions for significant higher education system changes-but they gained little standing. A plan was set out, with active Bank assistance, for improving the equity and efficiency of public university finance. Its implementation could provide badly needed improvements: greater opportunities for low income students, expanded cost recovery, and stronger weight in student selection on merit and transparency. While budget cuts have curtailed the use of this formula, it is currently being applied during 2002 as a way of rationalizing the distribution of at least some resources to public universities with the prospect for more general application over time. In addition, the Government issued a resolution to create a national fund which would help initiate actions to these ends. Nevertheless, these initiatives are not assured of sustained backing, and the constituency for changing education funding is not very powerful so far. The hope is that these initiatives will lead to a broad debate on how to finance the tertiary education system more generally. The Government also arranged for aptitude testing of all third year secondary school students and for distribution of its findings to schools, parents and the public. The resulting data could be useful for meeting Argentina's need to demonstrate the school system's accountability for its performance to the public, as well as increasing the skilled labor supply and better aligning the system with changes in the economy. But so far there is not a "culture" of using such standardized test results, and the ultimate use rests on the Federal authorities' success in persuading their provincial counterparts (who bear the sector responsibility) to pursue this effort more actively. The authorities undertook several direct poverty alleviation measures in addition to the aforementioned improvements in social protection activities for better targeting and effectiveness. The action with immediate consequences was to provide some protection of adequate spending levels for effectively targeted, high quality social programs against the 1999 budget cutbacks, and give them further support in 2000. This broke with tradition since Argentina's social expenditure pattern has been one of declining spending on priority programs when economic activity fell and poverty increased. The Government moreover enlarged the list of these programs agreed in the SSAL targets with added health and employment assistance. It also put in place a better methodology for calculating " basic needs" indices and moved to apply it starting in 2000. The authorities expanded the usage of this methodology to install proxy means testing in fourteen social programs and the same number of provinces, which should help to eliminate inappropriate beneficiaries. These measures should likewise lend more transparency to these programs. - 13-  Financial Sector Actions After the Tequila crisis, the banking sector was strengthened through improvements mainly in regulation and supervision, together with privatization. However, the mid-1990s' experience had also demonstrated a need for further reductions in the public banks' role in the sector. One of the SSAL's goals accordingly called for bringing the Government's second-tier housing mortgage bank (BHN) to the point of sale to private enterprise. In the event actually, the Government surpassed the target and sold commercial investors a controlling interest in the bank. On the other hand, national sentiment continued to oppose the privatization of the remaining federal bank (BNA). It was decided therefore to only seek a more transparent accounting of BNA's financial condition. This was obtained: BNA was comprehensively audited; its operations and guarantees were documented more openly; its accounts are published in Stock Exchange reports; and its condition is shown in BNA's "website." These have lifted some of the "veil of secrecy" regarding the institution--but not altered its problematic status. The current banking crisis leaves the role of the public banks unresolved and will no doubt have to be the focus of a renewed reform effort. The SSAL assisted in enhancing the private banks' regulatory framework. With its assistance, a new "Permanent Commission on the Evaluation of Financial Regulation" began to engage in better coordinated surveillance of, and attempts to resolve, banking system problems. It produced recommendations on liquidity management which led to rule changes. It also proposed changes regarding security markets and insurance from which legislative proposals were prepared. A parallel temporary inter-agency committee reviewed bank failure and closure procedures in order to assess the adequacy of the mechanisms for resolving problems in these fields. It produced recommendations that could improve existing laws and regulations by upgrading the legal security of assets, deposit carve-outs and transfers. Further, the committee and a consultant examined the Central Bank's governance regulations, which they found adequate. Also, proposals were drafted to amend the Central Bank charter so as to tighten bank licensing and other governance requirements. These so far have not won Congressional approval for political reasons. In complementary activity, the Government and Central Bank jointly reviewed the criteria being used for supervising public banks vis a vis private banks, as well as their enforcement. They found these criteria compatible. Further, the authorities submitted to the Congress proposals for protecting banking regulators and supervisors from personal liability for good faith actions. These failed to obtain a favorable reaction, reportedly because of differences over the immunity provisions. (This action was also politically inopportune since the Central Bank President then faced Congressional investigation, and so the proposed law appeared to be self-serving.) This recommendation was followed up in the 2001 FSAP, jointly undertaken between the Bank and the IMF. This proposal continues to be debated in mid-2002 for Congressional consideration. Separately, the Central Bank established a special unit dealing with "money laundering" that reviews suspicious transactions in line with Argentina's newly revised legislation (which is consistent with the international Financial Action Task Force recommendations). -14 -  In order to deepen the capital market, the Government won Congressional approval of new laws for facilitating the growth of leasing finance and permitting mutual fund investments outside the MERCOSUR area. It also requested, but has not yet won comparable approval of legislation which would promote the use of secured transactions in credit contracts. Under the SSAL as well, there was a study of the tax treatment of different financial instruments to determine whether corrective legislation was needed to achieve greater tax neutrality. This concluded that there was not any but it found the prevailing framework unclear and inconsistent. The Government therefore created a commission which addressed these problems and a March 2000 decree resolved issues of differential treatment of repurchase agreements versus pledges or guarantees. These findings were followed up through an IDB operation. Further, the Government reviewed, and then prepared an action plan to reform, the ratings industry. This would eliminate obligatory ratings on IPOs, debt instruments and equities while lessening the Securities Commission's reviews. Similarly, it sent the Congress high quality proposals to modernize the insurance market's framework, regulation and practices. Neither of these efforts have so far progressed to the accomplishments desired but there already have been some commendable improvements in the insurance area. Under the SSAL's influence, "best practice" concepts of solvency monitoring and early warning systems, along with greater attention to consumer protection concerns, are beginning to enter the industry. Meanwhile, the Insurance Superintendency constructively tightened life insurance companies' compliance with minimum capital requirements. And its more rigorous enforcement policies led to orders to over 40 companies to cease operations over the subsequent two years. Intergovernmental Fiscal Sector Actions The Federal and provincial authorities reached a long sought accord in principle on revising Argentina's complex way of financing sub-national governments and revenue sharing, a significant advance. The 1994 Constitutional Reform had called for Congressional enactment of changes in the system by the end of 1996, given the widespread appreciation of its inadequacies. But such changes had been hard to realize, even after several rounds of difficult negotiations with the provincial governments. Accordingly, the SSAL addressed the issues, taking into account the large sums involved (just under 6 percent of GDP in 1997) and their contribution to Argentina's public finance problems. It called for measures to help advance the dialogue, particularly about simplifying intergovernmental transfers and changing the formula for their allocation among the provinces. Under the program, intergovernmental proposals were prepared which would substantially change the rules and procedures governing transfers to the provinces. Their creation plus subsequent Congressional approval of the "Federal Commitment" document affecting the system presaged important changes. In fact, the reform proposals already influenced the adoption of a moving average provincial share of transfers for 2001-05 as part of a Federal-provincial agreement reached in November 2000. This was considered to constitute an agreement to simplify the system and to include social security finances in the primary distribution package. Moreover, arrangements were made for Federal-provincial negotiations on propositions for simplifying the revenue distribution formula to make it more transparent, equitable and more capable of motivating stronger provincial accountability and efficiency. At least, these major issues are now on the table and are the basis for ongoing negotiations in the design of a new -15-  federal provincial fiscal agreement. Correspondingly, there are also proposals for decentralizing the tax system, which would provide the provinces new instruments and greater revenue-generating authority. Infrastructure Sector Regulatory Actions The extensive restructuring of and participation of new players in infrastructure services by the late 1990s have made it necessary to rationalize the myriad changes. This coincided with greater recognition that Argentina's high transport costs and poorly integrated modes were causing costly economic difficulties. In response, the SSAL supported an effort to improve the institutional framework. It supported the preparation of proposals for the creation of an integrated freight transport regulatory agency keyed to encouraging multi-modal services. In addition, the Government designed a plan to increase the autonomy and independence of sector regulatory agencies through advancing the implementation of improvements in regulators' selections and tenure, as well as in these entities' funding sources. A draft law previously submitted to the Congress for harmonizing regulatory standards was revised to tighten some elements but it has not yet been passed. Meanwhile, the Attorney General sanctioned the abstention of traditional executive branch agencies from technical and economic issues in regulatory disputes, thereby fortifying regulatory entities' independence in these matters. 4.3 Net Present Value/Economic rate of return: N/A 4.4 Financial rate of return: N/A 4.5 Institutional development impact: There were constructive advances made, including some of long term importance, such as placing the housing mortgage bank under commercial management. The consolidation of responsibilities for nutrition programs and the further strengthening of banking supervision and regulation mechanisms figure as well. The Insurance Superintendency progressed, although it still needed to be fortified. In general, the supervision and regulation of the financial system served as strong points during the prolonged recession/stagnation of 1999-2001. Clearly, the bank run of late 2001 - due to macroeconomic considerations and concerns about the currency regime - along with the devaluation of 2002, led to tremendous stress on the financial system, perhaps permanently destroying some of the institutional achievements gained during SSAL implementation. Institutional improvements could accrue from the emerging consensus with the provinces on intergovernmental finances. The process of preparing high quality technical analysis of the reform of provincial taxes and transfers, along with the debate engaged with the provincial authorities, advanced the policy dialogue significantly. The ideas developed and presented at that time continue to serve the basis of discussions in Argentina on this complicated and politically difficult reform. -16-  All these are judged to more than balance the unsuccessful efforts to rationalize the National Health Institute (INSSJP) and the so far unpromising development of the transport regulatory agency. On these grounds, the SSAL's institutional development impact is rated "Modest" for the period covered during the project implementation. Sustainability of these institutional reforms will be discussed in Section 6. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Argentina confronted severe external shocks that affected its economic performance, and the implementation of this loan. After growing by 3.9 percent in 1998, the economy suffered a contraction of 3.1 percent in 1999. A recession begun in the fourth quarter of 1998, following the Russian crisis and subsequent turbulence in international financial markets. These financial factors initiated the recession, but then the Brazilian devaluation of early 1999 (Argentina's largest trading partner), falling commodity prices (terms of trade fell by over 10% in 1998/99), the appreciation of the US dollar vis a vis the Euro, and unfavorable weather conditions for the agricultural sector contributed to the downturn. In the second half of 1999, uncertainty over the presidential elections further complicated the panorama. So did the market fears about the costs and disruptions of Y2K in developing economies. As a consequence of external developments in 1999, part of that year's second tranche release was diverted to a policy based guarantee operation, enabling the authorities to strengthen the liquidity position of the government, and facilitate the transition to the new administration. Tracing the evolution of country risk ratings reveals the sensitivity of the markets to the impact of both external and internal events. Argentina's country risk ratings rose sharply when first Russia and then Brazil devalued. There was a jump again when statements were made by leading political figures about the desirability of defaulting the country's external debt in July 1999 during the presidential campaign. These jumps reflected increases in sovereign spreads, domestic interest rates with an impact on economic activity, and Argentina's ability to access the international markets and its pattern of capital flows. A pronounced contraction in capital flows became evident starting in 1998, which was accentuated in 2000. The electoral campaign period and the presidential transition had a significant impact on the conduct of economic policy, and slowed the loan's implementation. The other source of adverse real shocks was the global growth decline that started in 2000. Various parties involved in this operation likewise affected its outcome. For one, the SSAL's preparation and subsequent implementation benefited to a very large extent from the aforementioned earlier sizeable Bank investment in economic and sector work, as well as its intensive Government dialogue. There was also close coordination with the IMF, especially in the development and review of the Government's program and preparation of the Loans. The EFF in place provided an essential element for the underlying macroeconomic program, and there were frequent consultations on Argentina's conditions and prospects; The IDB participated comprehensively as well. The two banks' loans were well coordinated during identification and preparation through joint missions, followed by continuous - 17 -  dialogue in the course of implementation. The closely parallel conditionality of the Loans and working cooperation helped keep the Government focused on the shared reform program. The IDB made a special contribution in seeking to strengthen the quality of social services, for example in co-supervising the extension of irnproved poverty measurement methodology to additional Argentine programs. It also aided the activity in the education sector. 5.2 Factors generallv subject to governnent control: The implementation of the SSAL was affected considerably by the change in the Borrower's counterparts following the late 1999 elections, impacting the pace of reforms and the disbursement of the third tranche. The short timeframe planned for the three tranches imposed a tight schedule for complying with conditionality. The change in Government affected the timetable of meeting the SSAL's conditions in order to give the new administration the time to intemalize and commit to the remaining reforms. Ultimately, one waiver was granted at the time of the third tranche release concerning the labor reform condition (mentioned in section 4.2). This waiver, however, was largely technical. While the specific action was not completed, the Government secured legislative approval of a much broader labor reform than was originally established in the legal agreement. The advent of the new administration furthermore necessitated an initial extension of the Loan's Closing Date. The Bank worked with the new administration to take time and assess the SSAL's consistency with its own policy objectives, and to confirm its commitment to them. This led in tum to a further delay subsequently in order to help ensure Government's compliance with all Loan conditions and the solution of some procedural problems. In August 2000, a final extension was approved in order to enable the administration to complete the administrative processes required for submitting legislation to the Congress. The severity of Argentina's macro problems helped to shape the outcome. This was judged to have aided in pushing the reform agenda more forcefully than would have occurred without that impetus. This might have contributed to the Govenmment's exceeding some SSAL targets and its especially strong support of reforms under the direct purview of the Ministry of Economy. The fiscal situation remains a weak spot, as it did earlier when it led the Government to sponsor a Law of Fiscal Responsibility, passed in July 1999. This law laid out the path to a balanced fiscal budget by 2003, and the creation of a "rainy day" fund. Albeit well intended, this law never had teeth. The Govemment did not meet the fiscal targets included under the accompanying Fund program and there was a considerable overshooting of public spending in 1999, an election year. The lack of fiscal discipline-at a time when it was needed to generate confidence in the Government's ability to adhere to its commitments-proved to be one of the factors that affected the market's perceptions of Argentina's ability to stick to underlying tenets of the Convertibility plan. The new government, moreover, addressed its larger than expected fiscal deficit with new taxes in early 2000, as part of the expansion of the Fund's program. Again, while well intended, the negative impact of these measures on consumer confidence (as they mainly increased taxes on the middle class) and on the market's perception of the Government's ability to address the underlying fiscal issues more than offset the positive impact on tax revenues. Thus, once again, the lack of a real effort to tackle Argentina's fiscal imbalances continues to drag down confidence. -18 -  By late 2000, the continuing concerns over fiscal performance were compounded by a political crisis that eventually divided the two-party alliance governing Argentina. Economic activity, which had been largely flat during the first three quarters of the year, turned sharply negative during the fourth quarter. Access to international capital markets became restricted, and the Government sought a new international financial package at the end of 2000. Thus, when the SSAL had fully disbursed in September 2000, the Government soon faced an even worse crisis of confidence that ultimately led to another international support package led by the IMF. However, despite this new much more substantial international financial package, political tensions and an unfavorable external environment contributed to continuing economic difficulties during 2001. A greater crisis of confidence unfolded as Argentines began to withdraw deposits from banks, and capital flight followed starting in July 2001. By the end of the year, in the midst of a full-fledged bank run, capital controls were imposed, as well as restrictions on the withdrawal of cash from banks. President De la Rua was forced to resign, and during a period of a week, five interim Presidents passed through the Presidential palace. 5.3 Factors generally subject to implementing agency control: N/A 5.4 Costs andfinancing: During the implementation of the SSAL, Government financing needs surpassed expectations due to the depth and persistence of the economic downturn. Part of the Bank's response to this situation was to leverage the second tranche, canceling $250 million and allocating this amount to a Policy-Based Guarantee that raised about US$1.1 billion in the capital markets in October 1999. As noted above, the SSAL program, once disbursed, was subsequently followed by an even larger program, amounting to about US$ 40 billion, including the voluntary participation of private banks in public debt swaps. 6. Sustainability 6.1 Rationale.for sustainability rating: The events that followed the closing of the loan demonstrated that the reforms supported by the SSAL and the accompanying and subsequent Fund programs were not sufficient to sustain Argentina's economic policy framework. Moreover, the collapse of the banking sector is a clear case of past efforts to strengthen the system being undermined. Nevertheless, a number of specific actions from the SSAL reform program may still prove to be sustainable. For example, the Mortgage Bank (BUN) is still in private sector hands; however, the banking system is in dire straits and suffers from a variety of governmental restrictions. Other examples include the proposals for intergovernmental fiscal reform prepared under the SSAL, which remnain in the center of discussions between the federal government and the provinces, and will likely have its impact when a new revenue sharing agreement will need to be approved by the end of 2002. Some of the health sector reforms advanced somewhat over the last year, but they may face an uncertain future. Further consolidation of social programs, initiated under the SSAL, is now more necessary than ever. Efforts to provide legal protection to Central Bank managers in the - 19-  execution of their lawful duties, a proposal tabled to Congress in the context of this loan, continues being debated today in Argentina. Currently, the authorities are contemplating a stabilization and reform effort that would bolster credibility in national institutions and renew confidence among domestic and international investors towards the recovery of economic activity and reduction in unemployment and poverty. The SSAL established a framework for a number of operations which could be activated by the Bank and the IDB in such renewal efforts. As part of the Bank's contribution to the subsequent international package, the focus was on intensifying reforms in the social sectors, public sector institutional reforms, and intergovernmental fiscal relations. The IDB meanwhile also moved to follow up on some of the SSAL social sector, insurance, and capital markets initiatives. Currently, the consolidation of the social sectors, protection of social expenditures, reform of federal provincial and federal fiscal relations, reforms in public administration, financial sector reform, and private sector development, all having roots in the SSAL operation, are under consideration by the authorities for a renewed multilateral support effort. On balance, the overriding factor in rating sustainability as "unlikely" is that the general political and economic environment does not bode well for continuing some of the specific fiscal, regulatory and social sector reforms that had advanced well during the SSAL implementation. However, the continued implementation of such reforms remain an integral part of the new agenda for the current Administration in the context of an ongoing stabilization and reform effort. 6.2 Transition arrangement to regular operations: N/A 7. Bank and Borrower Performance Bank 7.) Lending: The Bank's performance during lending is judged to have been satisfactory. It was especially notable in providing timely and atypical assistance to a borrower impaired by exceptional and unanticipated financing needs. In particular, the time it took to proceed from the agreement to consider the Borrower's urgent loan request and bring it to fruition was exemplary. The Government requested the Bank support in August 1998; it was agreed to at the Annual Meetings, and the SSAL was prepared in about three months. It bears noting that a QAG sub-panel did not consider the Bank's work in preparing the SSAL fully adequate in terms of the treatment of fiduciary concerns regarding accounting and auditing. But the overall QAG report differed from the sub-panel's finding on the grounds of lack of clarity of the Bank's expectations in these areas with respect to adjustment operations. Since the sub-panel's criticism appears to have related more to IBRD adjustment operations generally rather thain this SSAL, it will not be fully addressed here. Nonetheless, it merits attention that the Bank met two of the overall QAG report's recommendations before the SSAL's approval. These were that a preliminary assessment be made of the adequacy of accounting and auditing arrangements relating to the Government's use of the funds, and general consideration be given to their institutional framework. The Bank had already assessed the Government's audit agency and found its practices and standards with project audits, acceptable. -20-  7.2 Supenrision: The Bank's performance during supervision is judged to have been highly satisfactory, particularly in light of the operation's complexity and broad coverage. This necessitated the management of specialized teams in numerous sectors, including highly qualified external and internal experts on issues such as tax laws, regulation, banking supervision, health insurance, poverty measurement, and so on. This generated some high quality Bank and Bank-supervised analytic work done during the SSAL's execution, e.g., in drafting the proposed legislation on insurance sector policies and secured transactions. Bank supervision also is reported to have helped bridge divergent interests of the two Governnent teams responsible for conducting the program without substantial slippage on policy grounds. This was deftly done, considering that the second administration was faced with satisfying the conditionality for the final tranche, some of whose provisions they had disagreed with when they were in the opposition. In this connection, a former Economy Ministry Undersecretary commended the Bank's team for helping to overcome "public choice" difficulties and resolving differences among Government officials. The Bank supervision team also displayed constructive flexibility in meeting some requests for modification of the original conditionality from some of the second administration's officials, for which the latter praised the Bank. The record shows intensive, sharply focused, sustained, highly responsive attentiveness to program implementation and high level problem solving, abetted by heavy Bank staff inputs. While only 7.4 staffweeks were expended on lending through December 1998 leveraged by substantial and relevant ESW available at the time of the request for such operation. this multiplied to over 47 sw by end FY99, and, ultimately to over 128 sw by FYO1 for supervision. A request for an inspection by the Bank's independent Panel was received during the course of implementation. This request, focusing on the budgetary protection provided to the targeted social programs, was considered to be without foundation by the Panel based on a preliminary review of the Bank's supervision efforts. The Bank supervision also took special precautions on the fiduciary side. In addition to supplementing the safeguard checks the measures on the fiduciary side taken before approval, the Bank requested an external audit of the disbursements which generated an unqualified satisfactory opinion on the Special Account. The Bank undertook a special review of this Account covering later transactions associated with the policy-based guarantee. Its conclusion was also satisfactory. The only area in which one might reflect upon is whether or not there was adequate assessment of the impact of the very rapidly changing conditions as the successive external and domestic shocks hit Argentina during implementation and whether these changing conditions should have triggered a different stance by the Bank as it proceeded with the SSAL. This question could be raised for example, when Brazil devalued in early 1999 in terms of what impact this had on the sustainability of Argentina's overall economic program. While in many dimensions the answer to this question goes beyond the SSAL program itself and goes to the heart of the reflection by the IFIs on whether or not the Argentine crisis could have been avoided, if alternative policy options had been pursued earlier. The general - 21 -  response provided in the Region's retrospective on Argentina is no. Many leading economist consider that Argentina's economic program remained viable until mid-2001 or later. Even with the exchange rate shock of the 1999 Brazil devaluation, there were reasonable prospects that Argentina could have regained competitiveness. This was borne out by ESW carried out in August 1999, assessing Argentina's competitiveness vis a vis Chile, Uruguay and Brazil, and was consistent with the Fund's calculations of Argentina's effective exchange rate at the time, even though more recent calculations by the Bank may show that the real exchange rate had appreciated considerably by 1999. More broadly, the Bank was cognizant of the additional effort-going beyond the SSAL--that Argentina would have to had undertaken to sustain its economic program and the risks of alternative exchange rate regimes, particularly if such a change were to be done under crisis conditions. On the fiscal side, the Bank's concerns were borne out by the risk assessment carried out in February 2000 that identified issues of debt sustainability if the persistent fiscal problems were not addressed while the Fund continued to insist on fiscal targets as part of its continuing support. Equally, the Bank had diagnosed and formulated an agenda to enhance productivity as well as strengthen the social safety net, all underpinning the Convertibility plan. Thus, the need for more intensive reformns in the public sector-particularly public expenditure management - and competitiveness was clearly laid out in the May 2000 CAS (see paragraphs 52 and 53). 7.3 Overall Bank performance: Overall the Bank's performance is considered satisfactory. Nevertheless, this operation flags the issue of the appropriateness of the IFIs - particularly the Bank--helping countries prevent or mitigate vulnerability to economic shocks, or cope with volatile capital market access. However, such questions appear to have been resolved when the Board approved assistance to such countries as Korea in response to the 1997/98 crisis, per the "Financial Crisis and Structural Reform: The Bank's Role and Instruments" paper ( ref. SecM98-743). These issues were moreover debated during the EDs' discussion on the SSAL/"REPO" in November 1998. And the EDs' approval in April 1999 of the extension of the Bank's credit guarantee program to encompass sovereign borrowings is considered to have augmented Bank sanction of the SSAL's approach (ref. "World Bank Policy-Based Guarantees," R99-53). In addition, this operation raised the question of the proper price and fee structure for program lending that is large, unexpected, and has strong liquidity features. The incremental financial risk to the Bank and discouraging the abuse of an incremental financing option justified a higher charge. The formula set provided that these loans would have five-year maturity periods, including three years of grace, and interest rates of LIBOR plus 400 basis points, in addition to a one percent front end fee and a commitment charge of 75 basis points over LIBOR. These conditions were judged adequate to compensate the Bank for its extra risk. On their face, these terms provided considerable price differentiation between IBRD products. They also took into account the SSAL's differential costs and attractiveness to the Borrower (especially after the Board approved more austere conditions for such lending in October 1998 than had applied to the first Korean emergency loan). It is believed therefore that they were appropriate for the -22 -  circumstances. But a more specialized, extensive assessment than this review can provide would be needed to definitively determine whether or not these terms fully reflected the costs to the Bank, as well as efficiently rationed the Bank's constrained capital and covered all relevant risks including those to cash flow. Additionally, in the context of the current crisis, the use of special terms with their significantly shorter than customary repayment needs, bears reexamination. Borrower 7.4 Preparation: Ref para. 7.7 7.5 Government inmplementation performance: Ref para. 7.7 7.6 Iniplementing Agency: N/A 7.7 Overall Borr7ower peifoirnance: The Borrower entered into the commitments under the SSAL with the understandable imperative of obtaining its resources. But despite this, the Government generally pursued the reforms satisfactorily. To this extent, the SSAL accomplishments derived from and reflected a considerable degree of "broad ownership" of the thrust of the proposed changes, especially from the more reformist-minded officials. This was evident at the outset. Moreover, some of the second administration's leaders provided fresh momentum and desire for reforms which proved useful, especially on the labor regime. Certainly, there were mixed Government views on many of the planned actions, as well as (with the benefit of hindsight) what was ultimately achieved. But there was a reasonable consensus, even among differing government groups, on the issues for which new directions were needed, and those were reflected in the SSAL. Further, there was often good professional accord with the Government and partner institutions on the appropriate policy responses. However, this sometimes tended to be truer in dealing with technical rather than top Argentine policy-making levels, particularly with the waning enthusiasm and political capital of the outgoing officials towards the end of the Menem Administration. The Ministry of Economy, Central Bank, and the Chief of Cabinet's Office, in addition to the Attorney Generl's Office, made especially helpful contributions in the implementation of this loan. Conversely, others manifested less avid backing, especially those concemed with the education and health system reforms, with outright dissent in some instances. Even the forceful support of Economy Ministry officers was sometimes insufficient to persuade their colleagues, some of whom appeared hesitant about the political costs and benefits of the proposed changes. And several had to contend with strong vested interest groups, whose powers stood to be possibly jeopardized. The officials responsible for these sectors are also understood to have resisted some proposals on the grounds that they were asked (during strong fiscal restraint) to perform difficult tasks without adequate incentives such as compensation from the Loan. Furthermore, quite a few proposals also encountered opposition from the Congress. These problems indicate that stronger Executive Branch control and backing for the proposals were needed. -23 -  Overall, the extent of the Borrower's collaboration in the preparation and implementation of the operation is judged to have been suitable under the circumstances. 8. Lessons Learned An OPS review of experiences with the first SSALs aptly drew the following lessons, with which this ICR concurs: (a) The Bank had developed a "rapid response capability" to help borrowers deal quickly and effectively with unexpected, turbulent international financial and economic difficulties. (b) The Bank could successfully adapt its instruments to emerging, unforeseen needs-in this case, to help overcome the severely limited ability of developing nations to access private capital markets. It confirmed that it could offer loans and guarantees to finance the attendant requirements to retrieve long-term stabilization, including financial system reconstruction. This does not indicate that the Bank should become a short-term crisis lender. Nor does it deal with whether the Bank has adequate flexibility for rapidly managing its risk profile or raising additional risk capital. But the new instruments demonstrated that the Bank can provide an important element of long term finance when it is not available for timely support of urgent reforms. (c) These lessons also point that for recent or possible IBRD "graduates", graduation does not mean that the Bank could not return quickly to support them during a crisis, even middle income countries with prior access to private capital markets. This SSAL allowed the Bank to respond flexibly and in an exceptional manner to the special circumstances of Argentina's 1998 crisis. This experience however raises some questions about this new instrument, which bear review. - (a) This SSAL was prepared with the intention of sustaining a reform effort under restricted financial conditions. It also played a role in assuring a dynamic reform trajectory leading up to elections that would occur approximately one year after the loan's approval. This, however, begs the question of whether local political institutions would be strong enough to carry on the reform agenda following the political transition. While intensive supervision efforts contributed to the new Government's eventual compliance with third tranche conditions (with one notable technical exception discussed above), these efforts did not prove sufficient. Although the Bank recognized the risks of the political transition, it may not have been in a position to predict, based on previous experience, that political institutions would later fail under a new administration, leading to serious doubts about the sustainability of the reform program. Nevertheless, the trade off between the desire to sustain a reform effort under tight financial constraints, and institutional capacity to implement it during unpredictable political transitions, remains an issue of concern in other operations; (b) There may be a potential conflict in the concept of SSALs advancing structural reforms simultaneous while meeting urgent liquidity objectives. The Argentine experience illustrates the practical limitations of attempting this approach in a country with a potential to enter into a crisis. In this circumstance, it took a prodigious effort in the limited time available to -24-  define and fix the reform package with the desirable detail. Fortunately as noted, the requisite analytical background was largely available thanks to a reservoir of several years' ESW studies supported by local competence. But it is questionable if this would normally prevail in most circumstances. (c) An inherent conflict/moral hazard may be created, on the government side, between the commitment to enact structural reforms of sufficient depth, and the desire to circumvent difficult external financing problems. Implementation of structural reforms entail laborious, time-consuming efforts within the broad government spectrum. Not all parts of the Government may have a similar incentive to support such an effort. As a result, the need to solve such problems in a SSAL situation can create undesirable tensions between activities to mobilize funds while pressing for definitive reform measures. It may not therefore be always true that such emergency-type circumstances as trying to manage grave external finance shortages afford good "windows of opportunity for reforms that might otherwise have remained closed." (d) The failure to achieve legislative approval for many of the proposed laws under the SSAL indicates a continuing lack of effectiveness of this form of conditionality and may point to the need to reassess when and how such conditionality is applied. This ICR did not address the issues of whether there might be better ways of addressing liquidity crises, and whether this could be done in a more efficient and less costly way. The Bank might devote some effort to analyzing whether alternate instruments might be more appropriate in various circumstances, as well as whether the Bank needs to have a more comprehensive arsenal of instruments available. In particular, in terms of financial conditions, this SSAL points to the risks inherent in providing short-term financing that complicates, rather than alleviates the medium-term financing requirements. In the case of Argentina, "special terms" resulted in a loan maturity that was significantly below the average maturity of Argentine public sector debt at that time. We also need to look at which types of structural reforms may be best combined with liquidity support operations. The experience under this SSAL offers lessons about ways of seeking good structural adjustment results. In this instance, those were obtained where three conditions were satisfied: (i) conditions need to be based on a good understanding of the country situation; (ii) all government counterparts need to have commitment to, and the authority to carry out, the desired changes; and (iii) the incentive structure needed to be sufficiently supportive for both the individuals in charge and those likely to be impacted, possibly requiring a large effort to inform and win over these parties. It is also important to ensure that the aforementioned good understanding of the country situation is readily available at the design stage. The Bank therefore needs to retain a minimum level of pertinent knowledge of each of its client countries, which has to be updated on a regular -25-  basis. This could be somewhat along the lines of the periodic Fund updates but putting emphasis on those areas of most interest to the Bank. In addition to traditional economic information, it is also essential to have at least a basic understanding of the political, social and cultural dimensions. Ultimately, however, even this knowledge base in this case was not sufficient to foresee the unfortunate events of 2001 and early 2002. An understanding of political, economic, social and cultural dimensions may not be sufficient in predicting the institutional collapse that ensued. 9. Partner Comments (a) Borrotver/i,nplententing agency: (b) Cojinanciers: IMF. The IMF official concerned commended the Borrower for its successful fiscal adjustment performance in 1996-98. But the program began to go off the track towards the end of that period. He said that the Asian and Russian crises and the hedge fund debacle in the US were substantially involved. He noted that Argentina had pioneered borrowing in advance, since 1996. As a result, he said, when the global contagion spread, there was an immediate possibility that the Government would run out of funds by December 1999. Against that backdrop, he considered that the program supported by the SSAL and the confinanciers to help the country was successful. He underscored its contribution in assisting the Government to regain access to the markets. In this connection, he questioned whether the accompanying "REPO" loan was the most suitable method for providing Argentina's Central Bank the guarantee it entailed. Perhaps a better vehicle might have involved a direct IBRD loan to that Bank, and for the latter to have established an escrow account for the purpose. He agreed with the SSAL's provisions, especially in addressing what the Fund considered to be the right issues. He felt that the targets relating to Federal-provincial revenue/sharing were particularly important. He hoped that the new intergovernmental pacts would be fully implemented, which would be quite beneficial. He commended the Bank's support of these efforts, including the envisaged replacement of the tumover tax. EDB. An IDB official judged that the SSAL along with the complementary assistance from the IDB and the Fund had been well justified in the light of Argentina's difficult circumstances in 1998. He said that the IDB had also been concerned about the potential dangers of the spillage of Argentina's crisis to affect other Latin American economies. In retrospect, the aforementioned assistance had been salutary in helping to stem the country's immediate liquidity shortage. The IDB is currently evaluating the performance and impact of the program which the SSAL and IDB's parallel loans supported. He added that the two banks' collaboration, had been positive and beneficial. (c) Other partners (NGOs/private sector): -26-  10. Additional Information The individuals interviewed in the course of this preparation of this Report included: Marcelo Acuna Myrna Alexander Miguel Angel Broda Guillermo Collich Daniel Cotlear Ariel Fiszbein Rogelio Frigerio Ricardo Garcioffi Jose Luis Guasch Pablo Guidotti Norman Hicks Anjali Kumar Miguel Kiguel Paul Levy Moises Lichtmajer Roberto Garcia Lopez Luis Lucione Jose Luis Machinea Donald McIsaac Margaret Miller Ferenc Molnar Ronald Myers John Page Carola Pessino Thomas Reichmann David Rosenblatt Maria Cristina Uehara Rene Vandenvries Walter Zunic -27-  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome /Impact Indicators: |Indcator lat :.-x ProjectedrlnlasltPSR - Achta1Labtst EsUnmate INTERGOVERNMENTAL FISCAL None of the Indicators shown in the left hand RELATIONS oolumn were amended a. Reform of the "copartidpation system' to a. An agreement (the 'Federal improve Federal revenue transfers to Commitrent") now exists to move towards a Argentina's provinces and to simplify the new system for the divison of revenues systern between the Federal and provincial levels. It constituted a de facto simplification of the system for 2001-03 (which was later extended to 2005). A second inter-governmental accord calls for a further simplification under which all federal taxes to be shared would enter a general pool. b. Rationalization of the distribution of b. Under the Government proposals, Federal revenues provinces with srnaller tax bases would receive larger transfers per capRta than those wih larger tax bases (application of the "equalization" formula). The proposals would strengthen the use of needs-based crteria in revenue allocations. The present five-fold disparity in per capita revenues between the highest and lowest provincial recipients would be reduced. -Improvement of data bases as a -Better tax bases should facilitate more foundation for determining per capita tax aocurate fund distributlon bases .. Consolidabon of numerous special c. Under the Govemment proposals, all c. Consolidation of numerous spearal revenue tansfers would follow a single sector programs for whIch earmarked taxes formula. The sector programs induded In the are now levied pool would no longer obtain "automatic" resources. Govemrnent spending would become more transparent d. Strengthening the provinoes abiltimes to raise greater revenues on their own d. A proposed provincial VAT would be superior to the present gross receipts tax. Its administrative costs should be less than the combined costs of the current gross receipts tax and federal VAT. A dual VAT should fadlitate cross-checking between Federal and Provincial agendes, and facilitate more automatic complance. The proposed provision that provindal residents pay the VAT where they lve could help link tax payments with the corresponding services taxpayers receive. FINANCIAL SECTOR a. Neutralizing the impact of tax policies on a.-The Govemments decree on the tax -28 -  financial instruments so that they better treatrent of repurchase agreements and respond to market forces pledges/guarantees brought Argentina in line with intemational practices on these instruments. However, the decree only affects a relatively small set of these instruments. Greater activity was limited by the need to ensure neutral fiscal effects. In this connection, the Govemment created a commission to pursue the fiscal neutrality of financial instruments. It is working to reduce or eliminate distortions. b. Greater protection of sector regulatory officers b. The Govemments proposal to increase these officers' liability protection was not approved by the Congress, partly because of opposition to the immunities recommended. c. Coordination of financial sector regulabon c. A new permanent commission on and supervision regulatory coordination recommended new rules for banks' liquidity management, which were changed, It also provided the basis for draft laws on security markets and insurance. Studies on the consistency of regulatory practices showed that the criteria for and regulabtion of public and private banks are essentialy similar, as are supervision and enforcement procedures. No additional actons for achieving greater homogeneity were found to be needed. The Commission's acUvities have encouraged greater cooperation and coordinaton among financial entifies. It is reported to be contributing to the solution of sector issues. BANKING SECTOR a. Reduced public sector role in the banking a. The sale of the Govemmenrs housing system mortgage bank (BHN) to private investors resuled in their obtaining control of its board. BHN's sale reduces the Govemmenrs fiscal burden. It also lessens possible systerric risk In the event of associated financial and fiscal crises. -The Central Banks audit of the Banco de la Nacion (BNA) and the publication of its Govemment guarantees and data on its accounts provided a clearer, more transparent picture of its financial condition than existed before. The extent of this information is limited though. Meanwhile, BNAs problematic status is unchanged. b. Facilitate weak banks' departures from the system b. An inter-agency committee's review of bank closure mechanisms led to some proposals which were not implemented. . The committees review of aspects of bank govemance found the Central Bank's c.. Enhance the marketability of residual bank regulations generally adequate. -29-  portfoios c. The new authorization to sell loan ACCESS TO CREDIT portfolios from liquidated public banks could stimulate future prnvatiztions a. Providing small businesses greater access to non-bank finance a. The new lasing law would eliminat barrlers to the growth of lasing finance. It b. Overcome constraints to the use of could produce more flexible term finance than movable collateral (secured transctions) in traditional loan contracts. The law is credit conbacts considered to represent a substantial improvement over its predecessors. CAPITAL MARKETS b. The proposed secured transactions law was not approved by the Congress. a. Diversify financial instruments a. The amendment of the Fund Law to b Improve the rating lndusts quality and remove restrIctions on intemational competitiveness Investments of mutual funds could Improve the diversification of portfolios b. The acton plan produced after review of the rating Industry was not implemented because of strong opposition. c. Modemize the insurance indusbys c. The legislative proposals on the framework insurance industry incorporated some 'best practie concepts, e.g., "early waming, solvency monitoring. " However, the Congress failed to pass them. -Secure more adequate captalizaton of the insurance companies Greater industry competition is not yet forthcoming. But there are advances towards greater consumer protectbon and the new capltal requirements are being enforced well. -Strengthen preventive supervision of the Quarterly reporting to the Insurance Industry Superintendent (SSN) is now the practice. The new data SSN received and its more rigorous monitoring led to the suspension of 40 oompanies in the past two years. HUMAN DEVELOPMENT a. Improved targeting and efficiency of a. The new methodology for measurng poverty-reducing social programs. poverty eliminates some deficiencies of the previous index, i.e., the absence of a health indicator and excessive relianoe on housing yardstcks. The expanded application of improved beneficary Identification (to 14 more programs) pefmits cross-checidng among programs. It could help limit duplicatory b. Improved efficiency of overlapping, poorly servbes. targeted programs. b. The establishment of an integrated nutrition program with coordination arrangements unified the three previous operations under the Social Develpment Secretariat. Collateral actions produced a unified registry of beneficaries, which could help - 30 -  control duplication and overlapping of food and nutrition assistance activites. c. Improved targeUng of the program of c. Review of the program showed that, save non-contributory pensions (granted at the for pensions issued at legislators discretion, discretion of the legislative and executive the remainder generally followed reasonable branches) needs-based criteria The Govemments acton plan for improvements includes better guidelines, beneficiary cross-checking, limits on pension transfers, and auditing. Its effective implementation could cut the number of d. Safeguarding the social programs critical non-elgibles. for the poor frorn budget cuts d. The Govemments commitments to 1999-2000 expenditure levels for agreed programs protected the maternal and child health and nutrftion services, AIDS, small farmers' extension services, primary schools upgrading and community garden activities which were IBRD/IDB-supported. The Govemment subsequently added employment programs and activifles to Improve indigenous peoples' health to the protected list. e. Improved system of unemployment e. The Govemments proposal for insurance and lower non-wage labor costs decentralized collective bargaining was more comprehensive and surpassed the policy Impact of the original SSAL goal (a fully funded capitalized Insurance scheme). The decentralization: -gives lower level unions more jurisdiction in negotiations; -permits more choices on negotiations levels; -phases out the systems which kept lapsed oontracts valid; and -provides incentives for resolving conflicts through mediation and arbitration. The Congress approval of a complmentary law provides for simplifying registration of new workers, lengthening their probationary period, and reducing taxes on them. Additional cuts in labor costs and strengthening the safety net for the unemployed, along with other improvements, still await changes in the severance payments and unemployment Insurance systems. f. Improved equity and efficency In public f. The Govemments strategy plan on higher spending on higher education education financing signalled efforts to make appropriate policy changes. However, the plan failed to receive high level, widespread support and was not Implemented. A parallel proposal to launch a "national fund for university equity' recommends cost recovery measures, merit-based scholarships, consolidated university budgeting. It was not implemented and, In any event, would not apply to the 85% of - 31 -  public funding for tertiary education that the Congress allocates. 9. Improved secondary education g. The standardized aptitude testng of 5th year public secondary students produced useful data on their achievements and on the education evaluation system. However, the attempt to distribute the test results was poorly received and Implemented. Consequenty, public accountability to parents and students is unlikely to have been increased. h. Strengthened regulatory framework of h. The Govemmenfs implementation of new health insurance. prudential and consumer protection norms for the union-run health plans (Obras Sociales-OS) provides a basis for improved govemance of beneficiary services and their marketing and regulation. It also fixed suitable standards for OS' public -Better public information on OS perfornance reportng. performance and consumer satisfaction. -The Health Insurance Superintendent began issuing annual reports on benefidaries' services, medical program regulabtion, marketing and treatment of complaints. Consumer satisfaction polls were launched and their findings publicized. I. Development of a competitive mansged I. The scheme for the Health Institut for care market for providing health services to Retirees (INSSJP) to out-source its services pensioners was replaced by measures to contract many more providers to meet pensioners' health care needs. Initially some 23 (now 75) providers were contracted through more transparent bidding procedures than previously employed. A limited number of beneficiaries gained freer choices of providers. These acUons however do not consttute substantial strides towards the competitive health care market goal REGULATORY REFORMS a. More efficient regulation of Infrastructure a. The approval of the Executive Branch's services abstention from regulatory disputes on technical and economic issues could make the regulatory agendes more independent The proposed new law on harmonizing regulatory practices, r passed, could: -strengthen the division of responsibilites between the executive and legislatve branches; -limit legislators oversight of regulatory agendes in the process; -stabilize operating conditions for presidents of regulatory commissions. but Congressional support for the proposal has been limited b. Integration of transport regulaton b. The creation of a multi-modal transport directorate provides a potential mechanism for seeking consistency among different freight carriers and possible rationalization of - 32-  roads, ports and railways. It has been slow however In moving towards that goal. Output Indicators: v . IndlcatorlMatrix Projected In last PSR Actla/Latest Estimate INTERGOVERNMENTAL FISCAL RELATIONS a. Proposal of new system of inter a. Prepare a proposal for putting all major a. Develped policies to revise the present govemmental financial transfers federal taxes to be distributed Into a single methods of dividing federal tax proceeds pool, and otherwise simplify the system between the Federal and provincial levels -Obtain agreement with the provincial -Intergovernmental agreement endorsed by authorities on the proposal the Congress, changes the amounts to be transferred, moving to a fixed sum -Consensus has been reached with provincial authorities to discuss further changes b. Rationalization of the distribution of funds b. Prepare proposals for future funds b. Designed "equalization-oriented" formula distribution in line with an "equalization" and disswsed it with the provincial formula authorities c. Improvement of data bases as a c. Improved data on provincial consumpton, foundabtion for determining per capita tax autormrobile and property values bases d. Consolidation of special sector programs d. Prepare proposal for incorporation of d. Designed and advanced the proposal with for which earmarked taxes are now levied special programs In the Federal budget as the provinces line items or including them in the general e. Strengthening the provinces capabilities co-participabon pool to raise more revenues on their own e. Design proposals for decentralized tax e. Prepared proposal for new provinial tax powers. Instrument to replace present distortUonary powers. taxes. It calls for a provincial VAT whose rates would be set kxlally. FINANCIAL SECTOR a. Neutralizing the Impact of tax policies on a. Review tax treatment of financial a. Review perfomed did not Indicate any financial instruments Intem ediation and propose measures to need for corrective legisltion. Govemment achieve neutrality established a commission aimed at Improving tax rules and guidelines b, Improving the protecton of financial b. Design proposals to strengthen bank b. Preparation of a draft law aimed at sector regulators regulators' and supervisors' protection Increasing Iability protection. against legal actions affecting them c. Coordinating financial sector regulation c. Establish and make operational an c. Creation and activation of a Permanent and supervision inter-agency committee of financial regulatory Commission on the Evaluation of Financial agencies Regulation BANKING SECTOR a. Reducing public sector role in the a. Bring the second Uer housing mortgage a. The Govemment sold its controlling banking system bank (BHN) to the point of sale interest In the BHN to private investors b. Facilitating weak banks' departure from b. Creaton of an inter-agency mechanism to b. A temporary inter-agency commission the system improve the resolution of bank failure reviewed bank falure mechanisms and problems and govemance guidelines, and govemance provisions propose remedial measures c. Enhancing the marketability of residual c. Authorization of federal banks to sell loan c. Authoriation provided - 33 -  bank portfolios portfoltos from liquidated banks ACCESS TO CREDIT a. Developing competitive leasing industiy a. Submission of revised leasing law to the a. Draft revision submitted to the legislature Congress b. Overcoming legal Impediments to the b. Submission of new legislative proposals b. New proposals given to the Congress use of secured transactions CAPITAL MARKETS a. DiversIfying financial hstruments a. Presentaton to the Congress of draft bw a. Government submitted such proposals to remove the restriction on mutual funds Investments intemationally b. Increasing compettiveness in the ratng b. Contract a review of the Industry and b. Govermment review and plans completed Industry Implement proposals based on Its findings and recommendations c. Proposals submitted for revised legislation c. Modemizing the insurance industry's c. Present revised laws to Congress framework, supervision and regulation incorporating more advanced concepts and greater attentiveness to consumer protection -Draet pegislatin calls fr early waming interests detKon practkes -Strengthen preventive supervision -Install early waming detection system in - Stricter SSN enforcement launched Insurance Superintendent (SSN) -Securing more edequate industry capitalization -Adoption of SSN plan to enforce new capItl requirements HUMAN DEVELOPMENT a. Improved targeting of poverty-reducing a. Proposal of new poverty line and a. Definition of new methodology for social programs methodology for measuring unsatisfied measuring poverty 'basic needs' -Expanded coverage of beneficiary - Application of improved information -Extension to 14 more social programs identification systems systems to more social programs b. Trm cetainsocil prgmms b. esig andimplnion proosal fbr b. Merger under the Social Development b. Trim certain social programs' b. Dtesign and implement proposals for Secretariat of food and nubtition programs overlapping and poor targting Integrating food and nutrition programs Into an Integrated acvtivty. -Review the distribution of -Review was conducted and plan non-contributory pensions programs and prepared for improved distribution propose new eligibility criteria c. Safeguarding spending levels for key . . c. crttsraa social programs against budget cuts c. Obtain commitments for 1999 spending c. Commitments obtained on key programs d. Improving unemployment insurance d. Examine options for installing fully d. The study was carried out. it was then system and lowering non-wage labor costs capitalized unemployment insurance scheme replced by a Govemment proposal for, and and prepare the instruments needed Congressional ratification of, the decentralIation of collective bargaining. e. Preparation of funding policy changes and Addition of complementary supportive law. e. Achieving greater equiy and efgiency in resolution for Education Ministry fntroduction e. Plan prepared and Government of incentives for greater cost recovery, announcement of intention to establish merit-based scholarships and consolidated national fund for university equity releding university budgets those principles f. Improving secondary education f. Aptitude testing of all 1998 fifth year secondary education students, and f. Testing perfomied and resutts provided to certifcation of the resuling grades Federal Council education officers for public -34 -  distribution g. Strengthenirg health insurance's g. The Health Supenintendents g. SHSs reports attesting to satisfactory regulatory tramework implementation of prudental and consumer implementation provided protecion norms, and reportng on the union-run health programs' performance -2.500 beneficdaies were surveyed under consumer polls, comparing services of restructured union-sponsored providers with those not restructured. h. Development of more competitive heft h. INSSP (GovemmenVs health p ISJPcotatigrxenernmero car prvelogoramst for more compensionersfor the retired) out-souring servces to major care providers with some provisions for providers greater transparency and service choices REGULATORY REFORMS a. Rationalizfaon of infrastructure regulation a. Reducfion of Executive Branch's role in a. Verification that Executve Branch regulatory disputes organizations need not hear appeals of regulatory agendes' decisions on technical and analytical matters. Govemment prepared plan for increasing b. Integraton of transport servie regulation regulatory agendies autonomy b. Preparafton of design and implementaton plan for an integrated Federal agency on . freiht ranpor b. Proposed agency established. ,fr3ight transport End of project - 35 -  Annex 2. Project Costs and Financing N/A N/A N/A N/A - 36-  Annex 3. Economic Costs and Benefits SSAL operations do not lend themselves to conventional rates or return or equivalent calculations of economic costs and benefits. - 37 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identiflcation/Preparation September 1998 13 Mission Leader, Fiscal Sector, Financial Sector, Human Capital, Regulatory Issues, Public Sector Supervision December 1998 11 Mission Leader, S S Sub-national Issues, Financial Sector, Labor Regulation, Health Sector, Education Sector, Social Sectors, Regulation, Insurance May 1999 9 Mission Leader, Financial S S Sector, Health Sector, Social Sector, Regulation, Labor Regulation, Sub-National Issues, Education November 1999 9 Mission Leader, Social Sector, S S Sub-National Finances, Labor & regulatory, Social Sector, Financial Sector, Education Sector, Health Sector February 2000 10 Mission Leader, Social Sector, S S Labor & Regulatory, Sub-National Finances, Transport, Health Sector, Insurance, Financial Sector, Education Sector March 2000 3 Mission Leader, Sub-National S S Finance Labor & Regulatory July 2000 8 Mission Leader, Labor & S S Regulatory, Sub-National & Finance, Finance, Health ICR June 2001 1 Consultant -38 -  (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ (000) Identification/Preparation 33.92 231.90 Supervision 128.11 740.60 ICR 9.00 40.32 Total 171.03 1012.82 Costs include travel and consultant fees. - 39 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating O Macro policies O H OSUOM * N O NA OI Sector Policies O H *SUOM O N O NA OI Physical O H OSUOM O N * NA L] Financial OH *SUOM ON ONA 3I Institutional Development 0 H O SU 0 M 0 N 0 NA F Environmental OH OSUOM O N * NA Social O Poverty Reduction O H *SUOM O N O NA L Gender O H OSUOM O N * NA LI Other (Please specify) O H OSUOM O N * NA Ol Private sector development 0 H * SU O M 0 N 0 NA OI Public sector management 0 H O SU * M 0 N 0 NA l Other (Please specify) O H OSUOM O N * NA -40-  Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bankperformance Rating D Lending OHS OS OU OHU El Supervision OHS OS O U O HU O Overall OHS OS O u O HU 6.2 Borrowerperformance Rating O Preparation OHS OS O u O HU rl Government implementation performance O HS O s 0 U 0 HU El Implementation agencyperformance OHS OS O U O HU Ol Overall OHS OS O U O HU -41 -  Annex 7. List of Supporting documents Argentina: A Retrospective Review -42 -   Report No.: 22619 Type: ICR