The World Bank Second Inclusive Growth Programmatic DPF (P168713) Program Information Document (PID) Appraisal Stage | Date Prepared/Updated: 31-May-2019 | Report No: PIDA26999 Page 1 of 8 The World Bank Second Inclusive Growth Programmatic DPF (P168713) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Project Name Parent Project ID (if any) Second Inclusive Growth Argentina P168713 Programmatic DPF P167889 (P168713) Region Estimated Board Date Practice Area (Lead) Financing Instrument LATIN AMERICA AND Macroeconomics, Trade Development Policy 11-Jul-2019 CARIBBEAN and Investment Financing Borrower(s) Implementing Agency Argentine Republic Ministerio de Hacienda Proposed Development Objective(s) The Development Objectives of the operation are (i) strengthening the foundation for private sector led growth, and (ii) strengthening the social safety net and enhance fiscal equity Financing (in US$, Millions) FIN_SUMM_PUB_TBL SUMMARY Total Financing 500.00 DETAILS -NewFin3 Total World Bank Group Financing 500.00 World Bank Lending 500.00 Decision The review did authorize the team to appraise and negotiate Note to Task Teams: End of system generated content, document is editable from here. The appraisal stage Program Information Document summarizes the main elements of the operation to be appraised. The total length of the main body (i.e., Sections B to F) should not exceed 3-4 pages (in “Calibri� 11-point font size). Please delete this note when finalizing the document. Page 2 of 8 The World Bank Second Inclusive Growth Programmatic DPF (P168713) B. Introduction and Context Country Context The programmatic Development Policy Financing (DPF) series accompanies Argentina’s efforts to strengthen the economic recovery and the foundations for inclusive economic growth while the country undertakes macroeconomic stabilization. This proposed Development Policy Financing operation (DPF2), in the amount of US$500 million, is the second in a series of two operations, which support policy measures to: (i) strengthen the foundations for private sector- led growth (Pillar 1), and (ii) strengthen the social safety net and enhance fiscal equity (Pillar 2). The DPF series has been prepared as part of the international efforts to support Argentina’s program for economic stabilization, including the exceptional access Stand-By Arrangement (SBA) provided by the International Monetary Fund (IMF). This second operation in the DPF series has been prepared in a context of continued adherence to the IMF’s SBA. The Government implemented a strengthened fiscal and monetary policy framework under the IMF SBA. The DPF series complements the Government’s macroeconomic stabilization plan by focusing on the agenda for medium-term growth and strengthening the safety net and enhancing fiscal equity. The economic situation has changed significantly since the DPF series was designed during the summer of 2018. In the current economic and political environment, the proposed DPF operation has gained in importance. High inflation and the fall in economic activity have led to a rise in poverty, making it key to use strengthened social safety nets to partly mitigate the impact on the vulnerable population in the short run. The proposed operation has been strengthened to support the recent measures to protect the purchasing power of universal social assistance programs for children and pregnant women from high inflation and rises in utility tariffs. Given the importance of reducing inefficient and inequitable government spending, the proposed operation supports a significant reduction in costly and regressive gas and transport subsidies. The proposed operation also supports the implementation of the fiscal pact and fiscal responsibility law with the provinces with the aim of accompanying fiscal measures at the federal level with mutually reinforcing actions at the provincial level. In the current context, the proposed DPF operation is also important as it supports continued efforts to build the foundations for private- sector led medium-term growth. In this context, the proposed operation supports policy efforts to enhance competition including in key enabling service sectors, further decrease barriers to trade, reduce business costs, encourage capital markets development. The proposed operation also supports several reform measures, which strengthen adaptation to, and mitigation of, the impacts of climate change, including by promoting private investment in renewable energy. Relationship to CPF The proposed DPF operation is fully aligned with the priorities identified in the Argentina Country Partnership Framework FY19-FY22 discussed by the Board on April 25, 2019. The objectives selected for the CPF are closely linked to the priorities identified in the recent Argentina Systematic Country Diagnostic (SCD), which analyses key constraints to inclusive and sustainable growth and poverty reduction and suggests ways to address them: (i) supporting Argentina in securing access to long-term private financing on a sustainable basis; (ii) addressing key institutional constraints for better governance and service delivery; and (iii) supporting Argentina to implement its climate-related Nationally Determined Contributions (NDCs). C. Proposed Development Objective(s) Page 3 of 8 The World Bank Second Inclusive Growth Programmatic DPF (P168713) The Development Objectives of the operation are (i) strengthening the foundation for private sector led growth, and (ii) strengthening the social safety net and enhance fiscal equity Key Results PILLAR 1: STRENGTHENING THE FOUNDATIONS FOR PRIVATE SECTOR-LED GROWTH • Fostering competition and access to efficient input goods and services : The implementation of pro-competition reforms is expected to increase the ability of firms to compete on a level playing field, while being able to access more efficient input markets. • Opening up the railways to competition. The implementation of an open access railway management system will allow competition to be introduced in the services segment and is expected to deliver more efficient rail freight services, complementing the proposed rehabilitation and expansion of the currently underused railway network. • Supporting a more competitive tradable sector by reducing import barriers to input goods: The reforms are expected to benefit firms that need to import capital goods and intermediate inputs by reducing uncertainty and trade costs. • Encourage entry and exit to facilitating formal entrepreneurship : The implementation of comprehensive business registration reforms is expected to lower bureaucratic barriers to entry and encourage formal registration of firms; it will also improve the quality and accessibility of data on registered firms. • Deepening the financial sector: Capital market reforms will allow for a more flexible, varied and versatile capital market framework providing much better potential for growth in assets and increased financing instruments for enterprises. • Greening the energy matrix. The reform will gradually help establish the renewable energy market for small-scale users, which has huge potential given the abundant renewable energy resources, such as solar, in Argentina. • Strengthening transparency and anti-corruption: The reforms are expected to strengthen the accountability framework and the ability to prevent and control corruption practices for private companies and public officials. PILLAR 2: STRENGTHENING SOCIAL SAFETY NETS AND FISCAL EQUITY • Protecting the poor and vulnerable while reducing costly, untargeted, and regressive subsidies. The reforms will result in a shift away from subsidies to provide incentives to the operators to invest and enhance the quality of service delivery and to the users to improve energy efficiency while protecting the poor and the most vulnerable. • Enhancing fiscal responsibility at the provincial level and equity of intergovernmental transfers: The proposed reforms should result in a gradual shift of sub-national tax structure from distortive and regressive composition toward a more efficient and progressive taxation. The implementation of Fiscal Responsibility Law at the provincial level will also help reduce procyclicality of fiscal policy and create more space for public investment in infrastructure. • Strengthening the social safety net system: The proposed reforms should result in expanded access of poor and vulnerable families to social support programs and lead to gradual increase in number of different programs that are included in the Single Window system. The proposed reform will also protect the benefits of effective social protection program in real terms from high inflation including due to the reduction of subsidies. • Effective Universal Health Coverage (UHC): The UHC strategy will increase the effective and equitable coverage of key health services provided to the vulnerable population and increase the capacity of the national and provincial stakeholders to implement mechanisms for an integrated delivery system. D. Project Description The DPF2 is the second in a series of two operations supporting reform measures to (i) strengthen the foundations for private sector-led growth, and (ii) strengthen the social safety net and enhance fiscal equity . The DPF series complements and reinforces the stabilization efforts by supporting measures that tackle distortions and level the playing Page 4 of 8 The World Bank Second Inclusive Growth Programmatic DPF (P168713) field for private sector-led growth, which are important measures to help sustain and increase potential growth. Similarly, strengthening the social safety net system and enhancing fiscal equity are central to the operation to protect the most vulnerable and improve inclusion. In the current economic and political environment, the proposed DPF has gained importance. The DPF series supports the continuation of the Government’s effort to lay the foundation for eventual private sector recovery and growth through measures that reduce policy distortions that act as barriers to private sector activity. includes actions to promote competition, reduce the costs of intermediate inputs/capital goods and the red tape associated with doing business, while encouraging private investment in infrastructure, including the exploitation of renewable energy. Productivity growth in Argentina has been very low over recent decades in an economic setting marked by macroeconomic and policy volatility. There are multiple factors holding back growth and productivity, such as the large barriers to competition and trade, as well as the high costs of doing business. Limited competition prevents the reallocation of resources efficiently and effectively across sectors. Firms struggle with limited access to finance and the large costs of doing business related in part to low quality transport and logistics services. Capital markets are underdeveloped, leaving little opportunity for financial market intermediation and reflected in low investment. Developing the country’s rich renewable energy resources by attracting private investment is not just important for growth, but for meeting the country’s ambitious climate change mitigation targets. In a context of deteriorating economic conditions and high level of inflation, strengthening the efficiency, effectiveness and equity of fiscal policy is an essential element of the program. Creating fiscal space for priority spending to generate resource for growth and equity, while better reaching the poor with social protection programs and universal health coverage are central to effectively mitigate adverse economic impacts of shocks on vulnerable population in the short run and build economic resilience and fiscal sustainability in the long term. Given Argentina’s federal system, it is also critical that actions at the federal level be accompanied by well-designed actions at the provincial level. Part of this agenda involves move away from costly untargeted subsidies towards more effective instruments for social protection. In this context, the operation has been strengthened by supporting the recent measures to protect the real value of benefits of social programs under Universal Child Allowance (Asignación Universal por Hijo), which is efficiently administered, have reasonably wide coverage, and have been shown to improve socioeconomic outcomes in the target population. Part of this agenda involves addressing the fragmentation of the social protection and health systems to ensure effective and efficient access to most vulnerable while reducing overlaps and costs for managing agencies, hence acting as effective automatic stabilizers. Given Argentina’s federal system, it is also critical in the current economic and political environment that actions at the federal level be accompanied by mutually reinforcing actions at the provincial level. E. Implementation Institutional and Implementation Arrangements F. Poverty and Social Impacts and Environmental Aspects Poverty and Social Impacts Page 5 of 8 The World Bank Second Inclusive Growth Programmatic DPF (P168713) The policy measures supported by this DPF series are expected to play a role in partly mitigating the short-term distributional impacts of the broader Government’s reform program on the most vulnerable, while implementing structural reforms to reduce distortions and enhance potential growth. As such, the overall reform package supported is expected to contribute to protecting the living standards of the poor, both directly through strengthening the social safety net, and indirectly through reducing distortions and constraints to inclusive and sustainable growth. In the short- run, however, poverty is likely to continue an increasing trend. Social protection measures, while mitigating the rate of increase in poverty and the level of extreme poverty, will not be sufficient to fully mute the impact. The long-run benefits of these reforms depend on how well they are implemented, and the efforts made by the Government to mitigate the short-term effects of deteriorating economic conditions. Environmental Aspects Some of the policy actions supported by this operation are expected to have significant positive environmental effects, with none of DPF-supported policies expected to generate significant adverse effect on Argentina’s environment, natural resources and forests. 1. By supporting policy measures aimed at strengthening the foundations for private sector development, the reform program under Pillar 1 is expected to increase economic activity. Reducing market frictions such as costs of doing business does not imply a relaxation of environmental standards. Prior action #1 (Competition Law) is not likely to generate significant environmental effects. Prior action #2 (open access railways) can have positive impacts through more efficient rail freight services contributing to reduce emissions of air pollutants and greenhouse gases. Prior Actions #3 (Reduction of Import Barriers) and #4 (Productive Financing Law) are likely to generate positive indirect environmental effects by reducing the costs for investment in higher quality and more efficient intermediate inputs and capital goods, such as computers and industrial machinery. However, as prior actions #3, #4, and #5 are expected to increase overall economic activity over time, including industrial and agricultural production, they may also generate negative indirect effects in environmental quality and management of natural resources where respective environmental regulations and standards and/or their enforcement present gaps. Prior action #6 (Greening the Energy Matrix) is expected to contribute directly to fighting climate change by supporting the move to renewable energy generation. Prior Action #7 (Anti- corruption) is not likely to generate any type of significant environmental effects. 2. Under Pillar 2 "Strengthening the social safety net and enhancing fiscal equity", reduction of subsidies in electricity, transport and gas (Prior Action #8) is likely to generate significant positive environmental effects, particularly in terms of local air quality and reduced CO2 emissions through more careful and efficient energy use. Targeted assistance to the poor to compensate for related tariff increases through social tariffs at the provincial level will prevent potential negative effects like switching from gas to lower quality, higher emission residential fuels for heating and cooking. In addition, the gradual increase in tariffs is expected to send signals to firms and consumers for a more efficient and rationalized transportation system. For example, the decrease in transport subsidies should also incentivize bus operators to rationalize routes (and reduce operating costs). Other prior actions are not likely to generate any type of significant environmental effect. Some of the supported measures help with Argentina’s contribution to the Paris Agreement on climate change1 as they support a more efficient use of energy, especially by end-users. Prior actions that generate climate co-benefits include the support to (i) open access to the system of railway cargo transport that would provide a more efficient rail freight 1For Argentina’s Nationally Determined Contribution (NDC), see: https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Argentina%20First/Traducción%20NDC_Argentina.pdf Page 6 of 8 The World Bank Second Inclusive Growth Programmatic DPF (P168713) services to replace the transport of cargo by trucks; (ii) increase electricity generation from renewable sources to promote a greener energy matrix; and (iii) decrease gas and transport to improve energy efficiency, while protecting the poor through social assistance (social tariffs and the child allowance program (AUH)). G. Risks and Mitigation . The overall risk rating of this operation is assessed as high. The major risks to the operation’s ability to achieve its development objective include macroeconomic risks, as well as political and governance risks, institutional capacity for implementation and sustainability risks. In addition, challenges related to sector strategies, stakeholders and social risks, are considered substantial. Technical design and fiduciary risks are considered moderate. The operation does not entail direct risks to the environment, while a number of prior actions are expected to contribute to higher energy efficiency with positive impacts on the environment. The high risks for this operation are anchored in the macroeconomic risks, as weakening external demand and/or a tightening of global financial conditions for emerging markets could dampen growth prospects and impact on the willingness of investors to rollover Argentine assets, even with full adherence to the fiscal and monetary targets. In addition, political uncertainty ahead of the 2019 Presidential elections and potential social discontent add to these risks. While there is a broad support around the World Bank-supported reform agenda to strengthen the foundations of inclusive growth, there are downside risks that could delay or complicate the implementation of structural reforms. CONTACT POINT World Bank Stefano Curto, Emily Sinnott Senior Economist Borrower/Client/Recipient Argentine Republic Agustín Mai Director Nacional de Financiamiento con Organismos Internaci agustinmai@mfin.gob.ar Implementing Agencies Ministerio de Hacienda Agustin Mai director agustinmai@mfin.gob.ar Page 7 of 8 The World Bank Second Inclusive Growth Programmatic DPF (P168713) FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Stefano Curto, Emily Sinnott Approved By APPROVALTBL Country Director: Renato Nardello 24-Apr-2019 Page 8 of 8