Document of The World Bank FOR OFFICIAL USE ONLY Report No.P7479-AR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ONA PROPOSED STRUCTURAL ADJUSTMENT LOAN IN THE AMOUNT OF $400 MILLION TO THE ARGENTINE REPUBLIC AUGUST 6, 2001 Poverty Reduction and Economic Management Human Development Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit: Argentine Peso (ARG$) ARG$ 1= US$ I (Since March 1991) WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS ANSeS Social Security Administration PBU Basic Minimum Pension AFIP National Tax Administration PFCC Federal Council on Public Administration AFJP Private Capitalized Pension Fund PMA Medical Assistance Plan APE Administrator of Special (Health) Programs PMO Obligatory Medical Program ATN National Treasury Grants PNC Non-contributive Pensions BU Universal (Pension) Benefit PP Proportional Payment (pensions) CAMEL Capital Assets Management Earnings & Liquidity PPF Project Preparation Facility CAS Country Assistance Strategy PRES Higher Education Project CODE Committee on Development Effectiveness PRL Provincial Reform Loan DNU Special Decrees by the Executive Branch PRODYMES Secondary Education Project DOSMIL Special Large Tax-Payer Monitoring System PROINDER Project'for Small-scale Farmers EMBI Emerging Market Bond Index PROST Pension Reform Options Simulation Toolkit EPH Permanent Household Survey PSAL Programmatic Structural Adjustment Loan FEDEI Federal Rural Electrification Fund RRP Public Pay-as-you-go Regime FONAVI National Housing Fund SAFJP Superintendent for Capitalized Pension Funds FOPAR Social Fund SAL Structural Adjustment Loan FREPASO National Solidarity Front (political party) SCL Single Currency Loan FSR Solidarity Redistribution Fund SDR Standard Drawing Rights GDP Gross Domestic Product SIDIF Integrated Financial Management System ICR Implementation Completion Report STEMPRO System for Monitoring and Evaluating Social Programs ICT Information and Communications Technologies SlIP Integrated System for Retirement Benefits and Pensions IDB Inter-American Development Bank SINTyS National Social and Taxpayer Identification System IMF International Monetary Fund SISFAM Census of Social Program Beneficiaries INSSJP National Heath Institute for Retirees and Pensioners SNSS National Health Insurance System LIL Learning and Innovation Loan SRF Supplemental Reserve Facility NGO Non-governmental Organization SSAL Special Structural Adjustment Loan OECD Organization for Economic Cooperation SSS Health Services Superintendency and Development OED Operations Evaluation Department TAL Technical Assistance Loan ONC National Procurement Office TRABAJAR Temporary Employment Program OSPO National Managers' Health Plan VAT Value Added Tax OSS Union-administered Health Plans PAMI Integrated Program of Medical Care for Retirees and Pensioners Vice President: David de Ferranti Country Director: Myrna Alexander PREM Director: Ernesto May HDD Director: Xavier Coll Lead Economist: Paul Levy HD Sector Leader: Ariel Fiszbein Task Tearm Leaders: Ronald Myers, David Rosenblatt and Juan Pablo Uribe FOR OFFICIAL USE ONLY THE ARGENTINE REPUBLIC Programmatic Reform Loan Table of Contents LOAN AND PROGRAM SUMMARY ..............................................I A. INTRODUCTION .............................................1 THE ECONOMIC SETTING IN ARGENTINA ..............................................3 B. THE GOVERNMENT'S REFORM PROGRAM .................................... 13 ADMINISTERING SOCIAL PROGRAMS IN A FEDERAL SYSTEM ......................................... 13 FISCAL SUSTAINABILITY AND THE SOCIAL SECTORS ...................................................... 17 FEDERAL-PROVINCIAL FISCAL RELATIONS ........................................................ 18 HEALTH SECTOR REFORMS ........................................................ 21 THE REFORM OF SOCIAL PROTECTION PROGRAMS ........................................................ 27 MODERNIZATION OF THE STATE ........................................................ 34 REFORM OF TAX ADMINISTRATION ............................................. 39 C. THE PROPOSED LOAN ............................................ 42 LINK TO CAS ........................................................ 42 RELATIONSHIP TO OTHER BANK OPERATIONS ........................................................ 43 REFORM PROGRAM OBJECTIVES ......................................................... 45 PROGRAM DESCRIPTION ........................................................ 46 DESCRIPTION OF FINANCIAL ASSISTANCE ........................................................ 49 PROGRAM IMPLEMENTATION AND SUPERVISION ........................................................ 49 DISBURSEMENT AND AUDITING ........................................................ 53 PROGRAM BENEFITS AND IMPACTS ........................................................ 53 MAINSTREAMING GENDER ISSUES ........................................................ 54 ENVIRONMENTAL CONCERNS .................................... 55 SOCIAL IMPACTS .................................... 56 COLLABORATION WITH THE IMF AND IDB ................................... 57 LESSONS LEARNED ................................... 58 RiSKS AND RISK MITIGATION ............................ 59 D. RECOMMENDATION .................... 60 This Report is based on the findings of a team composed of David Rosenblatt (Team Leader - Provincial Issues and General Coordination), Ron Myers (Team Leader - State Modemization), Juan Pablo Uribe (Team Leader - Human Development), Milka Casanegra (Consultant), Daniel Cotlear, Enrique Fanta (Consultant), Ariel Fiszbein, Gillette Hall, Olympia Icochea (Consultant), Charlie Leonard (Consultant), and Enrique Zuleta Puceiro (Consultant). 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. ANNEXES Annex A: Letter of Development Policy Annex B: Matrix of Medium-Term Reforms Annex C: SAL Matrix of Reforms Annex D: The Federal Agreement and Federal-Provincial Fiscal Arrangements Annex E: Mainstreaming Gender Considerations Annex F: Argentina At a Glance Map - IBRD 29348 ARGENTINE REPUBLIC Structural Adjustment Loan Loan and Program Summary Borrower: Argentine Republic Implementing Ministry of Economy, Chief of Cabinet's Office, and Social Sector Agencies: Ministries Amount: US$400 million (including financing of the front-end fee). Terms: A Fixed-Spread Loan, repaid in 15 years, including three years of grace, at the Bank's Fixed-Spread Loan variable interest rate. Commitment Fee: 0.85 percent on undisbursed loan balances, beginning 60 days after signing, during the first four years following signing; thereafter the rate falls to 0.75 percent. Objectives: To improve the quality, equity and efficiency of social services and to reduce fiscal instability in the federal-provincial public sector. Such reforms are needed to secure sustainability of the economy. Description: This loan is intended to support the Argentine government's structural reform program within a coherent medium-term framework over the 2001-2003 period. One or two follow-up adjustment operations are planned within the medium-term framework, depending upon progress in implementing the continuing reform agenda. Despite a relatively high income per capita and GDP growth that averaged 4.8 percent per year during the 1990s, persistent poverty and macroeconomic shocks have led to social problems that the government is intent on addressing. The shocks themselves are, partly, a function of fiscal vulnerability due to imbalances at the federal and provincial levels. Thus, attaining fiscal balance is essential as efforts to assist vulnerable groups throughout the economic cycle depend upon the public sector's ability to deliver a steady stream of services. In terms of social services, the central government's role is focused on the national health insurance system, the national public pension system, income transfers, health care for the elderly and a wide range of targeted social protection programs. The provinces are responsible for primary and secondary education, public hospitals and clinics, housing and a variety of social protection i programs. Social expenditures comprise about 53 percent of provincial budgets. Financing of recurrent expenditures in the social sectors for both levels of government depends on tax revenues that are largely collected by the federal government. The federal government has launched an ambitious program to improve the public administration, in general, and specifically of those social programs under its own responsibility, improve the structure and regulatory environment of the national health insurance system, and improve the administration of the tax system that finances social expenditures at all levels of government. The federal government is also leading efforts to stabilize provincial transfers and provincial finances, and coordinate activities in the provinces to lead to improved transparency, budgeting and planning at that level of government. This program comes at a time when the government is facing a difficult fiscal and financial situation. Thus, the structural reforms under the Bank's proposed SAL accompany wider efforts, being supported by the international financial community, to secure adequate financing, stimulate investment, and enhance productivity as the underpinnings for restoring growth and reducing poverty. Benefits: Expected benefits include: (a) improved fiscal stability across levels of government; (b) improved stability in the level of social services provided by the public sector especially those targeted to the poor; (c) improved efficiency, equity and quality of health insurance services; (d) improved effectiveness of federal and provincial social protection programs in reaching the poor; (e) improved equity and financial sustainability of the national public pension system; and (f) improved efficiency of tax administration. Risks: The reform program faces high risks. First, Argentina's macroeconomic environment continues to be highly fragile. The current macro-economic framework may not be sustained, and growth may not recover at the pace expected by external markets, and required for fiscal sustainability. The present IMF-led program of international financial support is intended to reduce these risks, as are other actions by the government to reduce liquidity needs for the 2001-2003 period through debt swaps. Second, the complexity, the number of actors, and the medium- term institutional nature of many of the reforms pose a challenge for the implementation of the program. This risk is reduced by the completion of a strong set of prior actions before Board presentation, the tranching of the proposed operation, and the performance-based phasing of follow-up operations. A third important risk pertains to the strength of vested economic and ii political interest groups, which could slow down, inhibit, or stall reforms. The fourth major risk is deteriorating social conditions and, if the resulting social tensions rise further, the possible erosion of broad-based support for the overall program. The proposed operation and the envisaged follow-up operations are specifically designed to focus on establishing effectively targeted poverty interventions in the health and social protection areas. As they are implemented, these interventions will help protect the incomes and well-being of the poorest and most vulnerable segments of the population. The use of information and communications tools to explain the program costs and benefits to the people is critical to addressing the substantial political economy and social risks. Poverty Category: Program of Targeted Intervention Financing Plan: Not applicable Net Present Value: Not applicable Project ID Number: P073591 iii REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN TO THE ARGENTINE REPUBLIC A. INTRODUCTION 1. I submit for your approval the following Report and recommendation on a proposed Structural Adjustment Loan to the Republic of Argentina for US$400 million to support an on-going program of reforms in the administration and financing of social programs in a federal system. The loan will be a $400 million dollar-denominated fixed- spread loan with a maturity of 15 years and a grace period of three years. 2. This loan is intended to support the Argentine government's structural reform program within a coherent medium-term framework over the 2001-2003 period. One or two follow-up adjustment operations are planned within the medium-term framework, depending upon progress in implementing the continuing reform agenda. This series of fast-disbursing loans, as requested by the government, would form the centerpiece of the World Bank's contribution to an international financial support package of $39.7 billion that was coordinated in late 2000, during a period of deteriorating macroeconomic conditions.' The international support package includes a significant private sector contribution (roughly half of the pledged funding). The package, led by the IMF, also includes contributions from the Inter-American Development Bank and the Government of Spain. This broader joint effort provides Argentina with the support to address its financing needs and to restore market confidence. 3. The current macroeconomic situation continues to be highly fragile. Current indications are that the fiscal deficit remains within the Government's program targets and overall macroeconomic policies remain broadly on track at this time. However, uncertainty remains high, and staff continue to monitor the macroeconomic framework carefully, taking into account the ongoing IMF Review that is expected to be completed shortly. The social consequences of the ongoing recession generate serious concern. The proposed loan supports measures aimed specifically at assuring an enhanced government response to poverty alleviation, via improved targeting and efficiency of social programs, while also addressing the fiscal instability that has contributed to economic recession and increased poverty. I Other components of the Bank's support would include a proposed loan for the government's temporary public employment program (Trabajar) and continued efforts to work directly with individual provinces in their reform programs. The CAS FY01 Progress Report presented to Board in July 2001 provided more details on the revised program of assistance. 1 4. Despite a relatively high income per capita of about $7,500 and GDP growth that averaged 4.8 percent during the 1990s, the Argentine economy is presently facing problems of competitiveness, fiscal vulnerability and uncertainty, along with the related social consequences. It has been in recession since the latter part of 1998 and recovery is still not evident as it adjusts to external and internal shocks. The unemployment rate stands at about 16 percent and poverty is estimated to be about 30 percent. The poor have suffered the most during the economic downturn and efforts to assist vulnerable groups are dependent upon the public sector's ability to deliver a steady stream of social services. Meanwhile, the Argentine public sector is highly decentralized, with nearly half of all public expenditures administered by sub-national governments. Financing of recurrent expenditures in the social sectors for both levels of government depends on tax revenues that are largely collected by the federal government and redistributed to the provinces. In addition to ameliorating the social impact of economic shocks, the govermnent recognizes that the shocks themselves are, partly, a function of fiscal instability. This instability has been the result of fiscal imbalances at both the federal and provincial levels. 5. The federal government has launched an ambitious program to restore growth and to attain fiscal equilibrium. A main component of this effort focuses on the quality and efficiency of social services in the federal system, and the fiscal instability in the consolidated federal-provincial public sector. Restoring growth is a sine qua non for reducing poverty. The government intends to improve the administration of those social programs that are under its own responsibility, improve the regulatory environment of the national health insurance system, and to improve the administration of the federal taxes that finance much of social expenditures at all levels of government. In addition, the federal government has begun to coordinate activities in the provinces that will lead to increased transparency, and improved budgeting and planning by that level of government. These efforts complement other measures to: (1) secure adequate domestic and foreign financing to meet its needs through 2001 and into 2002; (2) improve the debt profile and smooth external debt amortization over the coming years; (3) reduce distortions in the tax system; (4) reduce transaction costs in transport; (5) expand access to credit; (6) improve productivity; and (7) reduce tax evasion. These measures, taken together, are aimed at restoring growth which will lead to reduce poverty over the medium term. 6. The FYOI-04 CAS, presented in June 2000, allows for expanded lending beyond the base case of $ 3 billion for the period in response to government efforts to expand and accelerate reforms particularly in the administration of social programs and federal- provincial fiscal relations as long as criteria for the high lending case scenario are met. This proposed structural adjustment loan, under the base lending scenario, would comprise the first step of the Bank's response to support these reforrn efforts. The 2 As part of the government's economic recovery program, the government will be adopting a series of measures to increase competitiveness, deregulate and reduce "red-tape", and make the investor climate more attractive. These measures are an essential complement to the reforms being introduced under the proposed series of structural adjustment loans, as outlined in the CASA FY0 1 Progress Report, which focus mainly on fiscal stability and social sectors. 2 government's reform program, if successfully completed, will secure an enhanced government capacity to respond effectively to the needs of vulnerable groups. By improving fiscal stability, the govermment will be able to better respond to these needs during those periods when deteriorating economic conditions provoke increased demand for social services, while laying the basis for renewed confidence and investment. THE ECONOMIC SETTING IN ARGENTINA Economic Reform and Growth 7. The Argentine economy is facing its most serious challenge since the hyper- inflation of the late 1980s. Since the launch of the Convertibility Plan in 1991, the Argentine economy had been transformed through a sweeping set of reforms that altered the monetary system (establishing a currency board arrangement), liberalized trade, and redefined the role of the state. The latter was achieved through a broad privatization program, increased decentralization to the provinces, and reform of the social security system. All of this was intended to reverse the long-term trend of slow growth, low labor productivity, state domination, low domestic savings, weak investment, high volatility, and chronic inflation, which the country had suffered for the previous 25 years. When hyperinflation broke out in 1989, the rate of poverty in the country had climbed to over 40 percent of the population. 8. The economic results of these earlier reform efforts have been dramatic. Argentina has experienced average economic growth of 4.8 percent over the 1991-1999 period, despite being hit by two severe external shocks, the first the Tequila crisis in 1994-95, and more recently the accumulative effects of the Asian crisis, followed by the Russian default and the devaluation of the Brazilian Real in early 1999. Instead of experiencing hyperinflation, Argentina has experienced one of the world's lowest rates of inflation since the mid 1990s. The federal government's fiscal deficit receded from an average of about 6 to 8 percent of GDP for most of the 1980s to 1.4 percent in 1998. At the provincial level, deficits averaged 0.9 percent of GDP during the 1990s, fluctuating between 0.5 percent and 1.6 percent of GDP. Still, Argentina remains vulnerable and highly dependent on international capital markets: even though foreign debt is moderate as a share of GDP (53 percent), the country's export base is small. As a result, total external debt represents more than four times the annual base of exports of goods and services, and debt service represented more than 85 percent of exports in recent years. 9. The accumulative impact of past external shocks and Argentina's continuing dependence on the international capital markets confound Argentina's ability to adjust to the impact of the most recent shock-the devaluation of the Brazilian Real in early 1999.3 The economy declined by 3.4 percent in 1999, followed by 0.5 percent decline in 2000, with no growth seen thus far in 2001. A number of factors, both internal and external, worked against Argentina's recovery: notably, low commodity prices, the realignment of critical currencies (US dollar, Euro), the structural shift in risk perceptions 3 Further devaluation of the real could perpetuate the adjustment needed on the side of Argentina to remain competitive. 3 of international markets towards emerging markets, plus deteriorating fiscal performance. The latter was, in part, due to the economic cycle; however, the fiscal situation was exacerbated by election year spending, and the difficulty of the governing coalition to present a cohesive and forceful stance to resolve the fiscal and economic problems. Additional political factors included the coalition's lack of a majority in Congress, and the fact that opposition parties controlled most of the provinces. Argentina's macro- economic framework, anchored in the parity of the Argentine peso to the US dollar, means that economic adjustment must occur via productivity increases, thus, limiting the kinds of policies that the govermnent could implement. Moreover, this had to be done in the context of relatively high poverty. The Bank's latest estimates put poverty at about 29 percent of the urban population.4 It is likely much higher in the rural areas. This situation is compounded by rising income inequality and high unemployment, especially for the unskilled, indicating that the benefits of growth have not been widely shared. Reactions to Past External Shocks 10. By the mid-1990s, poverty rates had been reduced almost to half the 1989 level. Argentina then suffered the consequences of two serious external shocks. The first came in late 1994-1995 after the devaluation of the Mexican peso. The Tequila produced a serious dislocation of the economy, the economy shrank by 2.8 percent in 1995, and unemployment rose to an all time high of more than 18 percent. Following the crisis, strong investment-led growth returned. Real GDP growth was 5.5 percent in 1996 and an impressive 8.1 percent in 1997. The federal government and many of the provinces used the crisis as an opportunity to advance on pending reforms, most notably in the area of banking restructuring, consolidation, supervision, and provincial bank privatization. It was also the opportunity to begin other reforms in the social sectors, namely health insurance, and the introduction of new targeted social programs. The reforms resulted in a stronger banking sector and the beginnings of more fundamental changes in social policies. Support from the Bank Group, IDB and IMF was critical in helping Argentina to recover from the external shock, implement continuing reforms, launch important targeted social programs-with a view to, over time, putting in place an effective social safety net and protecting the poor. 11. The second test began in late 1998 as a result of the combined effects of the downturn in East Asia, the devaluation of the Russian ruble, and deterioration of commodity prices. After 6.6 percent growth in the first half of 1998, a recession began in the fourth quarter of 1998. For that year as a whole, GDP growth was 3.9 percent. Despite the start of the recession, Argentina's commitment to prudent macroeconomic management, the new strength in the banking system, and the discipline inherent in its currency board arrangement generated confidence. Indeed, that was initially to be the case: Argentina was among the first emerging economies to regain access to international capital markets, following the Russia crisis. The Bank's special support late in 1998 played a significant role in this reentry and the continuation of structural reforms. 4 See the Bank's most recent Poverty Assessment for Argentina, Report No. 19992-AR; March 23, 2000. 4 12. The economic downturn in 1999 turned out to be deeper and longer than expected as the devaluation of the Brazilian Real in January 1999 provoked a serious adjustment process to regain competitiveness and to enter new export markets. This was coupled with less vigor in carrying out reforms, in contrast to what had happened in the aftermath of the Tequila crisis, and less fiscal discipline during an important election year. Overall, Argentina's GDP declined by 3.4 percent in 1999, a larger drop in output than experienced during the Tequila crisis of 1995. Unemployment, after falling to about 12 percent from the high of 18 percent reached in 1996, increased to 14 percent in late 1999. The volume of exports remained stable (although prices had fallen) as Argentina was able to find substitute markets for its exports. Because of the sharp contraction in domestic activity, the current account balance improved slightly to 4.3 percent of GDP, due to even larger declines for imports (particularly capital goods) than for export values. Inflation remained extremely low, with deflation occurring during most of 1999. 13. Slippage on the fiscal side emerged as a serious factor by the end of 1999. The fiscal program went off track in the latter part of the year, resulting in a deficit of about $7.4 billion, substantially higher than the target of $5 billion agreed with the IMF. The higher deficit was the result of higher interest costs, the duration of the recession, and a general weakening of fiscal discipline during the election year. Provincial governments encountered similar conditions and ended the year with a deficit of about $4.6 billion, almost twice the deficit in 1998. The consolidated public sector fiscal deficit (summing both the federal government and the provinces) amounted to approximately 4.2 percent of GDP, excluding privatization receipts. As a result, the new administration that took office in December 1999 faced the challenge of restoring order to the fiscal accounts, including those of the provinces. 5 Fig. 1: Quarterly GDP & Bi-Annual Unemployment 14. Despite the new government's best 1"3-20o1(proj.) efforts to spur the economy and to reform the 320 labor markets in early 2000, recovery was ______ elusive. Unemployment rose from 13.7 percent in October 1999 to 15.4 percent in 280 1_ May 2000. During the first half of the year, access to financial markets was relatively 2B0 _ _ - - I ___ l l 14 good, but with a high degree of volatility in spreads. Average spreads on foreign bond 240 - T T I I 1 l issues fell about 1 percentage point in the X first half of 2000, relative to average spreads 0 l l during 1999. Exports performed well, growing by almost 14 percent, year-on-year, 20 2.2 in the first six months of 2000. As described below, the already weak performance of the first half of 2000 deteriorated in the second I GDP $Billions,1993Pnces) half of the year. u Unemployment (%, lght-handscale) 5The federal govermnent deficit was the larger share: 2.6 percent of GDP versus 1.6 percent of GDP for the provinces. 5 Domestic Factors 15. The economic scene was complicated by increased uncertainty on the political front towards the end of 2000. The coalition government consisting of the Radical and FREPASO Parties, which defeated the Peronist Party in the October 1999 elections, pledged to continue the economic policies which had led to Argentina being able to master inflation and to see substantial economic growth for the first time in decades. The coalition's platform emphasized improved governance, reduced corruption, and increased social equity while retaining the essential features of the Convertibility Plan. It faced formidable challenges: not only was the economy in recession, the governing party itself was a coalition of two parties, one of which was last in power in 1989, and the other which never had an executive role. It had a working majority in the Congress but faced opposition in the Senate; it also faced a majority of provinces led by Peronist governors. In the midst of a painfully slow economic recovery, a political crisis emerged in September 2000 that resulted in the resignation of the Vice President, the leader of the FREPASO Party and a cabinet shuffle. These political developments raised doubts about the ability of the administration of President De la Riua to secure legislative approval of new measures in the future. 16. By early November 2000, these political developments, in the midst of a stagnant economy, created an internal crisis of confidence that led to a sharp rise in country risk. Over the October-November period, external debt markets were closed for Argentine govermnent borrowing, and domestic interest rates rose sharply. Foreign reserves of the financial system fell by about 5 percent during October 2000. Between the combined effects of the external and internal shocks, the economy shrank by 0.5 percent in 2000. The current account balance improved significantly to around 3.3 percent in 2000, with strong exports and slack import demand offsetting the rise in foreign interest payments. The federal fiscal deficit for 2000 was about 2.4 percent of GDP, and the provincial deficit 1.2 percent of GDP. The consolidated deficit of 3.6 percent of GDP represents an improvement over 1999, in spite of the ongoing economic slowdown. During the same period, unemployment rose to 14.7 percent in October 2000, significantly above the post- 1995 low just above 12 percent in October 1998, but well below the 18 percent peak in 1995. 17. During the year 2000, confidence in the banking system remained strong, as the monetary authorities have implemented prudent banking policies, strengthening the system since the Tequila crisis. The system maintained its deposit base in both pesos and dollars, exhibiting growth of 7 percent growth in the first half of the year.6 However, deposits declined in the face of the political uncertainty in October and November 2000. In addition, credit growth to the private sector has been negative, as banks have taken a cautious stance. The cutting off of domestic firms from credit has imposed a very strong limitation on new investment and a burden on firms attempting to adjust to the change in market conditions resulting from the devaluation of the Brazilian Real. The government's switch from external to domestic sources of financing further complicated this panorama. 6 In contrast, during the Tequila crisis, 18 percent of deposits were withdrawn from the system and a significant number of banks were forced to close, restructure and/or merge. 6 In addition, the continuing stagnation of the economy has led to an inevitable deterioration in the quality of bank portfolios. The Economic Response Program 18. In late 2000, the federal government initiated a new set of economic reforms to respond to the situation described above. These included a reduction in social security expenditures over the medium term via improved targeting, an agreement with the provinces limiting the growth of transfers, and an increase in employment creation programs. In addition, the government negotiated an international package of financial support totaling approximately $39.7 billion. The government reached agreement with the IMF on the economic parameters of the program. Commitments by the private sector comprise about half of the total package. The IMF augmented its stand-by arrangement to $13.7 billion, the World Bank and the IDB pledged approximately $2.5 billion each, largely consisting of already planned operations, and the Govemment of Spain committed $1 billion. In the case of the World Bank, the planned program was to include up to $ 900 million in support of the federal governnent's reform efforts, in addition to continuing support for the provinces and social programs. The intent of this package was to cover most of Argentina's external financing needs for 2001 and into 2002, thus, providing the space needed for structural reforms to be enacted. The expectation was that these reforms would restore growth and create a virtuous circle of increased revenues, reducing fiscal pressures. Box 1: The IMF Program and the Medium-Term Fiscal Strategy. The IMF expanded its three year, $7.4 billion Stand-By Arrangement (approved in March 2000). The expanded program, approved in January 2001, involves approximately $13.7 billion in support (SDR 10.6 billion), and approximately one-fifth of this amount will be provided by the IMF's Supplemental Reserve Facility (SRF). Approximately $2.1 billion were disbursed in late 2000, and another $2.9 in early 2001. Total disbursements of $6.7 billion are expected for the year 2001. The initial strategy of early 2000 was to seek a strong fiscal adjustment, leading to a decline in interest rates to spur growth. With the disappointing performance of the economy, the strategy now is to allow for a more gradual fiscal adjustment, lowering the negative fiscal impulse, so that growth can be established in the short-term. The target fiscal deficit for the Federal Government in 2001 is $6.5 billion (1.8 percent of GDP). There are also indicative targets for the consolidated provincial governments, including a deficit of $2.8 billion (I percent of GDP) in the year 2001. (Binding debt accumulation targets include both the federal and provincial levels.) In agreement with the IMF, the government has revised the fiscal sustainability law approved in 1999 that had set 2003 as a target date for achieving fiscal balance. Now the law sets 2005 as the date for reaching fiscal balance and it establishes intermediate steps for reaching that target. The provinces also agreed to this timetable. Recently, a majority of Governors expressed their commitment to accelerate this process along the lines of the federal zero-deficit plan. 19. With the announcement of these new reforms and the international financial package in place, financial variables improved substantially during the first two months of 2001, but these favorable tendencies suffered a reversal during March 2001. A variety of domestic and international events contributed to a worsening of the political environment. The Turkey devaluation negatively affected market perceptions. Domestic 7 issues also had a major impact. The government announced that the fiscal deficit for both January and February would be significantly higher than expected. At the end of the first week of March, the Minister of Economy resigned. His replacement announced a series of fiscal adjustment measures that were met with strong political resistance, leading to the resignation of Cabinet Ministers from the FREPASO Party. With little political support to advance on his measures, the new Minister of Economy resigned after a two-week tenure amidst tremendous political turmoil. At this point, EMBI+ spreads for Argentina had reached the 1000 basis point mark that had been breached in October 2000. 20. In mid-March 2001, the President appointed Domingo Cavallo as Minister of Economy. Mr. Cavallo is well-known for his earlier role in economic reforms as Minister of Economy during the 1991-1996 period and in the introduction of the Convertibility Plan. Faced with an extremely fragile fiscal and economic situation, the new economic team focused on reactivating the economy while maintaining the fiscal deficit within the original parameters of the program agreed with the IMF (see Box 1). The cornerstone of this program is improving Argentina's competitiveness. 21. The Competitiveness Plan, which was quickly passed by Congress (via Laws 25.413 and 25.414) with bi-partisan support, established new tax instruments and provided the executive branch with authority to enact various fiscal and institutional measures. These measures have been deepened over the past two months with addition executive orders and decrees, addressing the following: Measures to close the Fiscal Gap while protecting the Vulnerable 22. The Government is implementing policies with the objective to establish fiscal sustainability, while protecting the most vulnerable segments of society. Expenditure reductions are tempered by excluding low-income pensioners, and they are also compensated by increased expenditures in targeted social programs, as outlined below. In addition the improved performance of the medium-term program described in later chapters of this report will provide the efficiency gains in social spending that will make poverty alleviation more sustainable once the initial fiscal adjustment is in place. * Increased taxation to cover the additional deficit which are emerged in the first semester of 2001. The government introduced a financial transactions tax to provide revenues in the short-term. The tax (with a rate of 6 per 1000) is expected to raise $2.5 to 3.0 billion in new revenues. As the corner-piece of a new tax policy, this financial transactions tax will be converted over time to a type of "withholding" tax against which VAT and income tax could be credited. * Requiring all transactions over $1000 to be done through the banking system. This together with the new tax assists in tracing financial transactions as a means of improving the administration of other taxes and reducing evasion. A new proposal is that all public pensions and salaries would also be paid through the banking system. * Reduced VAT exemptions. 8 * Selective cuts in program expenditures in 2001 totaling $ 860 million plus new measures announced in July 2001 to reach a zero deficit immediately. The zero deficit plan calls for across-the-board expenditure reductions of a pre-determined percentage so as to establish a monthly federal deficit of zero, starting in July 2000 and extending through the end-of-the-year. The impact of these policies is a reduction of about $ 1.6 billion from the projected annual deficit. * Exceptions to the rule are granted for low-income pensioners receiving less than $500 per month compensated by additional cuts in public spending, increases in employee contributions and deferral of tax reductions. In addition, additional budgetary support of $108 million per month for targeted programs will be provided through the end of the year. * Voluntary debt exchange with the private sector that delayed debt service on approximately $30 billion worth of public debt. With this innovation, the debt service burden will be reduced over the next five years by $16 billion, with $7.8 billion of these savings occurring at over the next 18 months. Measures to Boost Growth D For a number of industrial sectors, increased non-Mercosur tariffs to 27 percent on final consumer goods as a short term measure to last until end 2002. * Decreased tariffs to zero on capital goods. * Other changes in provincial and federal taxes and labor and other regulatory burdens, negotiated sector by sector, to reduce overall cost of doing business. The estimated impact of these measures are to reduce production costs by some 5 percent. v Reductions in income taxes for middle-income groups to stimulate consumption by a group whose purchasing power had been decreased by earlier tax increases. * Modification to the currency board arrangement, allowing for the use of the Euro in addition to the US Dollar (now approved as law). Once the Euro reaches 1:1 parity with the dollar, the peso would be based on the value of a 50-50 basket of dollars and euros. * A Conversion Factor, initially set at 7.5 percent, that would provide export subsidies and import taxes as a function of the hypothetical value the peso if the euro-dollar basket were already in place. The subsidy payments (replacing an existing export subsidy) and import duty collections would be effected via the customs office. All foreign exchange transactions would continue to be conducted at the 1:1 peso-dollar parity. Since the subsidy/tariff will be paid outside the exchange system, on the basis of trade documentation, this policy has been interpreted as not implying a dual exchange rate. In addition, the increased import tax is offset by a reduction in tariffs. Whether the mechanism constitutes and intensification of import restrictions is currently being reviewed by the IMF. In addition, no Argentine trading partner to date has raised a complaint before the WTO regarding these policies. Hence, no 9 WTO ruling has been issued. The government has designed the policy, including other tariff and duty drawback adjustments, with the intention to maintain consistency with WTO policies. The government's view is that the Conversion Factor itself is expected to converge towards zero over the medium-term. Executive Powers to Restructure the Federal Government * The Modernization of the State program, with focus on the main spending agencies, along with systemic reforms to business processes. * Introduction of e-government, a new procurement law and revisions to procurement regulations, and increased transparency and accountability via citizens' charters. * Ability to merge or eliminate public institutions and to place the redundant personnel on "call" for two years, after which period they could be permanently separated from the public service. 23. These new measures are incremental to those announced in November 2000, elaborated in subsequent sections, and now in various stages of implementation. The November 2000 measures addressed the following: (1) modifications to federal- provincial transfer and fiscal management at the provincial level as part of the Federal- Provincial Fiscal Pact; (2) increased competition and choice for participants in the national health insurance system, operated by union run insurance providers, obras sociales; and (3) changes in the private and public pillars of the national pension system, to make it more equitable and to increase efficiency in the system. In the case of these reforms, the first has been adopted by the provinces and is being implemented; the second was challenged by the courts and has not been put into effect; and the third was also challenged by the courts but the legal opinion was in favor of the executive and there are plans to proceed with its implementation.7 In addition, the government announced measures to consolidate social programs and to reorient federal level assistance to vulnerable groups. Thus, there is still a pending agenda of reforms, as well as new measures, which need to be designed, adopted, and implemented.8 Many of these are 7 In the case of health insurance reforms, the government decided to work with the current legal framework while preparing a more comprehensive health sector reforms to be submitted to Congress. In the case of pension reforms, the Court of first instance ruled in favor of the government by dismissing the lawsuit; however this ruling has been appealed again. In case of unfavorable ruling against the government or the plaintiffs, any of said parties can appeal to the Supreme Court. In case of a negative ruling against the decree, the Government intends to submit legislation to Congress to effect the reform. 8 As noted earlier and outlined in the CAS FY01 Progress Report, there are also an array of structural measures which Argentina could consider to enhance the growth prospects of small and medium enterprises and to increase the efficiency of its transport system, to name two areas. Both of these are currently being addressed by ESW which could lay the basis for future support. In addition, the government has just begun the implementation of the new Labor Law, passed in early 2000, which effectively decentralized labor agreements to the firm level and requires that out-dated labor agreements be replaced over the new two years. Implementation of these requirements will be a major step forward in modernizing Argentina's labor markets. 10 critical for the stabilizing the financing and delivery of social services, and form the essential elements of the proposed World Bank's support, as described subsequently. Prospects 24. Argentina has reached a critical juncture in macroeconomic management and implementation of poverty-focused structural reforms. Macroeconomic uncertainty likely will continue during the implementation of the program over the coming months. Taken as a whole, the measures presently being implemented are designed to simultaneously address fiscal solvency and restore growth, while remaining within the parameters of the Convertibility Plan. Renewed economic stability will be essential to progress in poverty alleviation, as will completion of the overall social sector reform agenda, including in particular the improved targeting of social benefits, over time. * Ensuring fiscal solvency: ending the year 2000 with a deficit of $7.4 billion at the federal level, the government has restored revenues through new taxes that largely offset the decline in existing tax revenues caused by the ongoing recession. On the expenditure side, the government has announced expenditure reduction of approximately $2.4 billion. Similar efforts are being made by the provinces. With the new measures in place, the government may meet the 2001 deficit target of the IMF program with a significant margin. During the first half the year, the Government has reported that it has met the program target for the first semester by a margin of $195 million. * Improving debt servicing capacity: the profile of the federal external debt was improved via the voluntary debt exchange of $30 billion reducing debt servicing by about 16 billion in 2001-05. * Completing the financing plan for 2001: via the international financial package, and access to local markets, combined with the above fiscal measures, the financing plan for the year is largely covered, with the exception of the regularly scheduled rollover of short-term bonds. * Key tax reforms are underway to reduce evasion, restore incentives to investors, and to stimulate competition. * Other measures, such as rationalizing road tolls, are underway to reduce transaction costs and improve productivity. * The government is in the process of implementing the labor reform legislation approved by Congress last year. * A variety of institutional measures to modernize the State are well advanced in terms of design and are already being implemented. . Investment in human capital continues to have priority in federal and provincial budgets, along with measures to protect vulnerable groups during the downturn while 11 putting in place programs which will provide a more cohesive and inclusive social policy framework extending coverage for critical vulnerable groups. 25. As discussed below, these are necessary conditions for Argentina's medium-term solvency and poverty reduction. So far, the initial reactions by investors and consumers remain mixed. The heterodox nature of some of these measures has created concern about their long-term impact on productivity, while others have created uncertainty as to the impact on the fundamental features of the Convertibility plan, or Argentina's commitment to free trade and liberal market policies. In most cases, these measures will expire and/or be replaced by end 2002. Market reactions have also been complicated by the difficulties in securing cohesion within the governing coalition and the opposition to approve and implement structural measures. Markets continue to view Argentina with considerable skepticism, as reflected in country risk perceptions and borrowing access and costs. Thus, macroeconomic fragility continues to be high, and the coming months remain critical for Argentina to demonstrate its ability to carry through with its program. 26. With the measures falling into place, and if confidence is restored, a recovery in investment and consumer demand could lead to a return to economic growth by the last quarter of 2001. In addition, renewed access to foreign capital would assist in this process, further lowering domestic interest rates. InfMation is expected to continue to remain extremely low, or even negative. A recovery during the latter part of the year could result in real GDP remaining flat or slightly negative, following declines in the first half of the year on the order of 2 percent. Without more rapid growth, however, job creation is not expected to rebound significantly over the short term, and the unemployment rate may remain at relatively high levels (15-16 percent range). In the short-term, it will be difficult to lower poverty rates until more robust growth and job creation can be established. Social safety nets will play a critical role during this period. As a result, the efforts to better allocate social sector resources, via the actions supported by this loan, take on a greater urgency. 27. Over the medium-term, if the government's fiscal program is fully implemented, Argentina should experience the growth rates required to secure fiscal and external sustainability.9. This is a goal of the new zero deficit program adopted by the federal government and the provinces. Argentina's substantial external indebtedness implies that they will remain susceptible to temporary disruptions in international capital flows. Past and ongoing reforms are expected to reduce the adverse impact of these disruptions. The financial markets will continue to monitor economic developments carefully in Argentina, and fragility is likely to remain high. The poverty implications of macroeconomic disturbances need to addressed by ambitious reforns in the delivery and financing of social services, as outlined below. 9 A summary of the fiscal and external sustainability exercise is provided in the CAS FY01 Progress Report presented in July 2001. 12 B. THE GOVERNMENT'S REFORM PROGRAM ADMINISTERING SOCIAL PROGRAMS IN A FEDERAL SYSTEM 28. Poverty alleviation in Argentina is a function of the effectiveness of Argentina's social programs, and social programs in Argentina are affected by the country's federal structure. Like many geographically large nations, the Argentine public sector spans multiple layers of government -- federal, provincial and municipal --and each layer has its own legal autonomy and independent budget and planning. Historically, the provinces precede the Nation; that is, the founding of the country was based on a union of colonial jurisdictions. Each province's constitution determines the division and roles of municipalities within the province. 29. Table I below provides a general breakdown of the division of expenditure responsibilities across the levels of government. Argentina has become more decentralized, at least to the provincial level, over the last few decades. For example, the decentralization of secondary education in 1993 led to the transfer of physical infrastructure and public employees from the federal level to the provinces. There has been less decentralization to the municipal level. Overall, provinces are responsible for about 40 percent of public sector expenditures, the municipalities about 8 percent, and the federal government accounts for a little over half of expenditures (mostly pensions). It is also noteworthy that all levels of government have advanced significantly in re-focusing the role of government, via privatization of public enterprises, outsourcing of particular functions, concessions and infrastructure maintenance contracts with the private sector.1I 30. On the revenue side, responsibilities are more centralized. The central government collects about 80 percent of all tax revenues and has exclusive jurisdiction over trade duties, VAT, fuel excise taxes and income taxes. Provinces have exclusive jurisdiction over royalty payments on natural resources and a gross receipts (turnover) tax, real estate taxes, a stamp tax and automobile taxes are their main tax bases; however, some of the latter also are implemented at the municipal level. A complicated mix of revenue-sharing/tax-sharing arrangements, called co-participation, provides the main revenue sources for most provinces. Similarly, most provinces have revenue-sharing arrangements with their municipalities. 10 The Bank supported this first generation of reformns through a variety of operations during the 1990s. In particular, the First Provincial Reform Loan established reforn actions that a set of provinces could meet to trigger disbursement. With the Second Provincial Reform Loans, the Bank focussed on four provinces that had completed the privatization agenda and focussed on improving the efficiency and effectiveness of social expenditures while maintaining fiscal balance. Successor loans have now been approved for other provinces and new Provincial Reform Loans are in the pipeline. 13 Table 1: Division of Responsibilities in the Argentine Federal System Exclusively Central and Provincial Provincial and Municipal Central Governments Municipal Governments Governments Government (C=Mostly Central, (P=Mostly Provincial, _P-Mostly Provincial) M=Mostly Municipal) Spendin .. Defense Social Security, C Primary Education, P Markets, cemeteries Foreign Affaires Social Assistance, C Secondary Education, P Solid Waste Trade regulation Higher Education, C Health Care, P Local streets, drainage Mail and telex Preventive Health, C Social Assistance Inter-provincial Health Care, P Water and Sewerage, P transport Economic development Regional and local roads Infrastructure (e.g. Environmental Protection Land Use, M port Justice and Security, P Fire Control, M concessions, Housing toll roads, Passenger and cargo railway) Terminals Regional Infrastructure Electricity and gas energy, P I Regulation of public utilities Taxation Value Added Tax Gross Receipts Services charges for Income (Turnover) Tax, P street cleaning, solid Fuel Property, P waste disposal, and Trade tariffs Stamp, P cemeteries Personal Goods Automobiles, P Betterment fees Consumer Goods Royalties for natural Social Security Resource extraction*, P Contributions *Provinces receive these royalties directly from the companies involved in production; however, they do not have the power to set tax rates on natural resource extraction. 31. The specific institutional structures and processes governing the social programs listed in Table 1 substantially affect their role in poverty reduction: O Health: The health care system in Argentina is a complex mix of public and private insurance and service providers. The federal government operates an agency that provides health insurance for the elderly (known by the acronym "PAMI" and covering 3.5 million citizens). The Federal Ministry of Health provides for public health functions, in terms of sanitary controls and disease surveillance and controls. The federal government is also responsible, through the Superintendencia de Servicios de Salud, for the regulation and control of a national-level mandatory health insurance system that serves, through union-run health plans, roughly 12 million people. Provinces operate health insurance plans for their own (active and retired) public sector employees, totaling 6 million people (often municipal employees subscribe as well). Finally, provinces own and operate public hospitals that provide health care to the 13 million (mostly poor) uninsured individuals (representing 37 percent of the population). In addition, they often provide health care services to insured individuals who opt to use the public facilities. Some municipalities operate 14 local primary care clinics. Finally, there is an additional, unregulated private sector -- profit--seeking insurance companies that offer health services for an estimated 3 million people who can afford their services. > Education: Primary and secondary education is provided generally by the provinces and private schools. The latter also can receive subsidies from the provinces, and these subsidies are generally based on the number of teachers. In some instances, municipalities have contributed funds to provincial schools, or even established some municipally operated schools; however, the responsibility predominantly is with the provinces. After decentralizing secondary education in the mid 1990s, the federal government is left with public universities that are treated as autonomous (off-budget) institutions. The universities receive a budgetary transfer to cover most of their operating costs. The Federal Ministry of Education has a role in setting national education priorities and objectives, providing technical assistance the provinces, and monitoring and evaluating national education performance. A major reform effort has been underway in the sector since the mid-1990s to improve quality, update the curriculum, evaluate results, and improve resource allocation and spending efficiency. Efforts are also underway to improve the quality of infrastructure available to high risk schools, introduce computers, and expand the educational services offered to students. This included additional education opportunities under full-day school programs. The Bank's support for education is concentrated on basic education where the provinces are the most critical implementing agencies (Box 2). ) Public Pensions: The provincial role here is limited to pension plans for provincial public employees although eleven provinces and the City of Buenos Aires have transferred their pension plans to the federal government (as discussed in more detail below). The federal social security system underwent a dramatic reform in 1994, with the creation of a three-pillar system. Employees over 45 years of age then had the choice of allocating their payroll contributions to private social security accounts (know by the acronym "AFJPs") or continue to contribute to the public pillar. Meanwhile, all workers subsequently entering the formal labor force must join the private system. Anyone can also make voluntary contributions to private retirement plans. A basic minimum pension (PBU) is also guaranteed by the public pillar. Meanwhile, the government continues to pay benefits to those already retired or about to retire under the public pillar. Given that a majority of the currently employed chose to migrate (along with their tax base) to the private system, there is a significant transition cost to this reform, amounting to about 1-1.5 percent of GDP. In addition, the federal govermment finances pension plans for special cases of need and for extraordinary service to the nation. Other Social Protection Programs: The federal government currently plays a dual role in social assistance, directly administering one set of targeted programs ( 60 nutrition, income support. training, unemployment, and other programs targeted to specific vulnerable groups) and providing funding for an additional set of programs (e.g., housing, employment programs) administered by the provinces. In addition, the provinces are able to finance their own programs, often very comparable to the federally funded ones. The government's current reform program focuses on 15 improving the effectiveness (coverage, targeting) of their own programs along with efforts to coordinate better with similar provincial programs. The reforms involve: (a) changes in the content, size and delivery mechanisms of federally administered programs; (b) improved transparency of targeting mechanisms (supported by a well- functioning beneficiary registration system); and (c) changes in the institutional structure governing program administration, both at the federal level and between federal and provincial authorities. Box 2: The Bank's Program of Support for Education in Argentina Argentina's education system offers universal access to primary schooling and demonstrates many strong features, most notably low literacy rates, few gender-based differences and relatively high years of schooling. Importantly, the years of schooling for the children of poor parents show a significant increase as compared to their parents. However, the system has been increasingly under strain, stemming from the economic difficulties over the past 25 years and the urgent need to modernize the system. There are particular issues of repetition and dropout rates among poor students and notable differences in attainment in basic education between those who attend private schools (predominantly those from upper income families) and those who attend public schools (predominantly from lower income families). Attendance at universities, even public ones, by children from poor families is notoriously low. The secondary education graduation rate in Argentina is 52 percent as compared to and average of 80 percent for OECD countries. Out of 100 students entering primary school, only seven will graduate from university. These problems are more pronounced in the poorest provinces. The Bank has been heavily involved in the education sector in Argentina, particularly in financing the expansion of secondary education coverage and secondary education curriculum reform through the series of Secondary Education Quality Improvement Projects (PRODYMES I, II and III) and two Secondary Education Projects in the Province of Buenos Aires which has 40 percent of the student population. These efforts have also involved a curricular reform at the upper secondary level that provides for a better link with the labor market. These projects complement the government's own program of targeted assistance to the provinces to expand facilities to cope with the added three years of education now mandated nationally to bring the total to 10 years. As a result of these programs, secondary schools in Argentina now have significantly better infrastructure and access to educational inputs (computer and science labs, multimedia centers, etc.) that have helped revitalizing schools and students in a system that had been dormant from many years without innovations. These programs have had an important equity effect by concentrating on poor schools (see the Bank's Poverty Assessment). In particular, the Second Secondary Education Project in Buenos Aires supports a pilot full-day school experience in schools located in areas of the highest urban poverty in the country. Through PRODYMES I and, more recently, through a series of multi-sector Provincial Reform Loans, the Bank has supported administrative and management reform in the education sector addressing issues such as rational assignment of teachers, control over payroll, teacher attendance, medical leave, subsidies to private schools, teacher training and the balance between salary and non-salary spending. These reforms are difficult to bring about because of linkages with the organizational culture in shifting political situations, but the Bank and clients have gone through a successful process of learning which is reflected in the changing content of such loans. The introduction of evaluation and management systems are the key areas in which the Bank has focused. Other reforms to budget processes and school autonomy are being piloted as part of a continuing effort to modernize the system. 16 Box 2 (Education Sector) continued These efforts are beginning to pay off. The most recent results from the standardized testing of students in mathematics and Spanish language show that the gap between the poorest provinces and the national average is being closed, albeit slowly. An example of what can be done is demonstrated in the case of the Province of Salta, a relatively poor province in the North-east (see Implementation Completion Report for the Second Provincial Reform Loan, Report number 20698, dated June 30, 2000). The Province was able to consolidate administrative regimes, implement a new payroll system, and outsource control of sick leave and absenteeism. The time taken to appoint a teacher has been reduced from one year to 10 days; the savings on irregular payments are estimated at about $ 19 million or 10 percent of payroll. Absenteeism has been reduced to 5 percent in 1999, down from 17 percent for an annual saving of $ 11 million. The student teacher ratio has been reduced to 19:1 for basic education. Overall spending for education is up from $ 180 million in 1996 to $ 230 million in 1999 while system capacity increased from 70,000 students in 1996 to 150,000 in 1999. Meanwhile, the change in absolute grade 7 test scores for mathematics and Spanish language was almost 9 percent between 1993 and 1999, twice the national average. Overall, there continues being a role for the Bank to support the transformation of Argentine schools focusing on expanding learning opportunities for all students. Administrative reform will continue being an important challenge to be addressed both at the provincial level through the PRLs and accompanying investment loans, and at the national level through the ongoing work on modernization of the Ministry of Education as part of the federal government's State Modernization Program. An important challenge for Argentina is the upgrading of teacher quality and addressing the issues at one end of the spectrum of higher education, adult education and life long learning and at the other end, pre-school especially for poor children. The issues of equity, quality and efficiency in higher education are critical-equity because so few from poor families attend even the public universities, while tuition is free and favors the upper income groups; quality because a globalized economy demands increased skills; and efficiency because the cost per graduate in Argentina reaches $ 50,000. In higher education, the Bank has made an important contribution by supporting a major reform since the mid-1990s with the establishment of a national accreditation system and a quality improvement competitive fund. Progress has been less satisfactory in the area of university financing and budget allocation mechanisms for public universities given the high political sensitivity of the issues involved. Through the building of capacity for monitoring and evaluation and performance based funding at the level of the Ministry and the public universities there is, nevertheless, the potential for qualitative change in this area which the Bank will continue exploring and supporting. IFC is also active in the area of higher education where it set new precedents with lending to several private universities -a trend now being replicated in other countries including Uruguay. FISCAL SUSTAINABILITY AND THE SOCIAL SECTORS 32. The relationship between fiscal sustainability and social sector performance works in both directions. Social expenditures (including pensions) comprise 65-70 percent of federal government expenditures (net of transfers to the provinces). At the provincial level, social sector expenditures comprise 53 percent of total expenditures. In brief, the efficiency and effectiveness of social spending plays a large role in over public sector efficiency. Spending each peso well will be critical for long-run fiscal stability. 17 33. Fiscal stability is critical for a sustained poverty alleviation strategy. Indeed crises hurt the poor the most. Fiscal instability--due to macroeconomic shocks, poor tax administration, or expenditure inefficiency-- has been common in Argentina and disrupts the quality and scope of social programs. These shocks themselves, since they are often transmitted through the economy via adjustments in wages and employment levels, aggravate the need for social protection. Thus, it is when the economy is facing a crisis that social programs are most vulnerable to cuts and when they are most in need. Evidence for Latin America shows that Argentina has been one of the region's most volatile economies over the long-term.'" Most damaging for the poor has been the pro- cyclical nature of public social spending, combined with the fewer means that they have to protect themselves from the impact of shocks.12 During the recent recession, the federal government faced stringent financing constraints and was unable to expand most social programs to meet the growing social demands. At the provincial level, in particular jurisdictions, periodic financial crises occasionally have led to the inability to pay public employees or purchase needed medical supplies, resulting in lost school days and disruptions in health care in the public hospitals. 34. On the revenue side, a superior tax administration would help provide the required fiscal stability discussed above. It is the federal level that collects approximately eighty percent of taxes. There has been a tendency for tax evasion to increase during downturns in the economic cycle. Although the provinces collect a smaller share of taxes, there are a number of areas where coordination between the levels of government could improve revenue generation at both levels, as discussed in more detail below. In addition, there is a direct link between tax administration and the social sectors. Employee and employer contributions for health and old-age pensions are collected by the national tax agency. FEDERAL-PROVINCIAL FISCAL RELATIONS13 35. Both levels of government in Argentina are critical to overall public sector performance, human capital development and sustained poverty alleviation. As described above, the provinces are the main providers of a variety of social services in Argentina while the federal level has primary responsibility for tax collection. The provinces also have a role to play in determining Argentina's long-term fiscal and external solvency. The consolidated provincial governments fiscal deficit averaged 0.9 percent of GDP over the 1991-2000 period. Their debt stock is estimated to be about 9 percent of GDP. After registering a primary deficit in 2000 of 0.6 percent of GDP, it is estimated that a further adjustment of 1 percent of GDP is required to assure fiscal solvency at the provincial level. 4 11 See the Latin America and Caribbean Studies: View Points: Securing our Future in a Global Economy, 2000. 12 See two forth coming Bank studies: Coping with Economic Crises and Social Capital in Argentina 13 More details on federal-provincial fiscal arrangements are provided in Annex D. 14 See Bank Report, Argentina: Provincial Finances Update IV, February 12, 2001. 18 36. The Federal-Provincial Fiscal Agreement of November 2000 represents a consensual approach by the two levels of government to address the fiscal deficit and cooperate in measures that would improve medium-term fiscal stability.'5 This has been enhanced by the July 2001 agreement which commits the provinces to join the federal government in realizing a zero deficit. The November 2000 Federal Agreement also establishes the consensus for essential features of the future reformed system of inter- governmental transfers--an issue that affects both the efficiency and equity of provincial spending. 37. Simple Fiscal Rules. The Provinces and the Municipality of Buenos Aires first pledged to freeze primary expenditures over the 2001-2005 period. This pledge has been augmented by the July 2001 agreement to reach a zero deficit, by a combination of across-the-board cuts, selective reductions and improvements in tax collection. To support these commitments, the provinces also agreed that they should adjust local public employment rules so as to eliminate or limit automatic wage increases. 38. In the past, increases in federal tax revenues via economic growth, federal tax rate changes, or a rise in a particular revenue source (e.g., oil price impacts on fuel taxes) would translate immediately into a revenue windfall for the provinces, as they were entitled to a particular share of revenues from each federal tax source.16 Under the November 2000 Federal Agreement, the provinces accepted receiving a fixed amount of federal automatic transfers in 2001 and 2002. One advantage for the provinces is that they would receive no less than those amounts even if the recession were to deepen or if a new recession were to occur in the future. Over the medium-term, the fixed amounts would be transformed into a moving average of previous years' percentage shares of revenues. 39. Administrative and Budgeting Measures to Support Fiscal Adjustment and Improve Resource Allocation. Each province is to establish a medium-term fiscal plan, as one of the first steps for initiating the fiscal adjustment and improving provincial governments' resource allocation. A fiscal solvency or fiscal responsibility law, similar to the national law, is to establish annual fiscal targets along the path to fiscal balance, and indebtedness levels consistent with those targets. The annual budget process would support this initiative by including a multi-year budget plan, starting with the 2002 budget year. Enactment of improved financial administration laws would be another instrument in the process, allowing the provinces to better manage their expenditures. The general public would play a role in monitoring the process, with additional fiscal and financial information from the provinces published regularly on provincial government websites. 15 So far 21 of 23 provincial legislatures ratified the Agreement, establishing both the political will and formal obligation of the local authorities to enact the various clauses of the Agreement. The only Governor who did not sign the Federal Agreement was the Governor of Santa Cruz, an oil-rich province of approximately 200,000 people in the far south. 16 With the exception of trade taxes and federal payroll taxes. 19 40. The path towards fiscal balance is to be facilitated by improved tax performance at the provincial level. The November 2000 Federal Agreement calls for enhanced cooperation between the levels of government on tax administration, including the implementation of compatible software systems for registering tax payments (similar or identical to the OSIRIS system used at the federal level). In addition, the implementation of a common taxpayer identification number is planned, and information cross-checks will assist tax officials at both the federal and provincial levels. 41. Future Revenue-Sharing Reform. The Federal Agreement, on a temporary basis, simplifies the array of fiscal transfers by fixing the amounts but a long-term solution still needs to be found. It is noteworthy that intergovernmental transfers in Argentina are largely based on automatic rules. Only about 10 percent of federal to provincial transfers are discretionary, and even some of these discretionary transfers finance social programs that follow objective criteria for the distribution of funds. The automatic transfers, however, are based on a complex maze of rules. The general revenue-sharing pool is fed by federal VAT and income taxes while there are a variety of tax-sharing arrangements for fuels taxes. Some special programs siphon off funds from the income tax before reaching the general revenue-sharing pool. Annex D provides more details on these arrangements. The fact that particular tax instruments are shared to a greater or lesser extent with the provinces limits federal tax policy discretion. In addition, the excessive complexity inhibits the public's understanding of the flow of public sector resources. The system of transfers fails to provide an appropriate degree of redistribution from resource-rich provinces to resource-poor provinces. Changing the rules on the distribution across provinces (the "secondary" distribution) is a particularly complex political problem, as no individual province wishes to relinquish resources. 42. The November 2000 Federal Agreement moves that process one step ahead and establishes some principles for the permanent reform of revenue-sharing, namely that: (1) there should be a single pool of revenue-sharing incorporating all federal taxes (except trade taxes); (2) there should be a moving average of previous years' provincial shares of the total to determine the current year's provincial share, thus stabilizing total provincial transfers; (3) funds (from VAT and income taxes) currently earmarked to cover part of the transition costs of national pension reform, as they are released from declining transition costs at a future date, should be shared between the federal and provincial levels; and (4) the new "secondary distribution" rule will be applied only to the incremental growth in shared tax revenues, as a transition system for allowing provinces that lose shares to adjust gradually to the new rules. With these principles established among the parties, the prospects for change to the Co-participation Law in the 2002-03 time frame have been increased although remain uncertain as unanimity is required to change the law. 43. In addition to the above clauses, the federal government is committed to using a variety of instruments for securing provincial compliance with the actions agreed to under the Federal Agreement. First, in terms of fiscal discipline, the Federal Ministry of Economy has the power to approve or deny provincial requests to secure financing from the domestic banking system (according to Central Bank norms), or financing from overseas, if the latter involves the pledging of federal transfers (the only way that most 20 provinces can borrow from overseas). Secondly, the federal government has entered into bilateral fiscal and financial restructuring agreements with 11 provinces-those with relatively higher debt and worse fiscal performance-which include compliance with particular actions of the Federal Agreement as conditionality for receiving funding. Finally, the federal government is using the power of public opinion by publishing provinces' performance in complying with the provisions of the Federal Agreement. HEALTH SECTOR REFORMS 44. Since the late 1980s, successive Argentine governments have attempted to improve health care and to address the fiscal pressures arising from the health sector at the national level by: (i) reducing the fragmentation created by monopolistic union-run insurance schemes (obras sociales) of the National Health Insurance System (SNSS); (ii) increasing solidarity in this insurance system; (iii) strengthening regulation to promote consumer rights and increase competition and accountability; and (iv) improving the services and controlling the fiscal transfers needed by the insurance fund for retirees and pensioners (INSSJP, also known as PAMI for the acronym of its main health services program). Important pieces of legislation were approved between 1988 and 1993. Among these were: the regrouping of all national insurer funds under a unique health insurance law (Law 23.660, 1988); the centralization of all payroll contributions by the federal tax agency; and the creation of the Fondo Solidario de Redistribuci6n (FSR).'7 More changes were introduced in the 1996 - 2000 period with support from the Bank, through Loans 4002, 4003, 4004 and the SSAL. Significant steps taken by the government since 1996 include: - Opening up competition among national obras sociales by allowing formal sector workers to choose their insurer within each one of the two existing tiers of obras. Until then, workers were captive in the obra social operated by the labor union of their industrial branch. Now, blue-collar workers are free to choose among all existing Obras Sociales Sindicales (OSS) while white-collar workers can choose among the Obras Sociales de Personal de Direcci6n (OSPD). By September 2000, over half a million workers (about 14 percent of all formal sector workers enrolled to the SNSS) had exercised their right to switch insurer fund - two thirds of these workers had incomes of less than $1,000 per month. * Introducing an automatic redistribution mechanism (the FSR) to ensure a minimum monthly financing of $40 for each worker enrolled in an obra social. This change was to provide minimum funding for the basic health care package for low income workers, off-set by a levy on the contributions made by high income workers. This measure was implemented using an enrollment database created as part of the unification of social security. 17 The FSR was to be financed with a fixed percentage of payroll contributions going to insurer funds. Its resources were intended to: (i) ensure the ability of all insurers to finance a standard package of benefits to its affiliates; (ii) provide financial support to insurers in the form of unconditioned loans and subsidies; and (iii) finance special health care programs, including costly high-complexity events. Functions (ii) and (iii) are managed by the Administradora de Programas Especiales, APE. 21 * Publishing the first standard health benefits package (Programa Medico Obligatorio, PMO) to make explicit the rights of consumers and the obligations of insurers. * Creating a unified regulatory agency (the Superintendencia de Servicios de Salud, SSS) and issuing basic prudential and consumer protection regulations. * Instituting a system of beneficiary survey and feedback and other mechanisms to monitor the level of satisfaction with health care services provided by the obras. 45. Encouraging progress has been made, given the complexity of the system, but these efforts so far have been necessary but not sufficient. In the case of the health insurance system for the elderly, PAMI, such efforts have not been effective. The government is now attempting to further improve the SNSS by building on the previous reforms. Specifically, it seeks to: (1) increase equity and solidarity in the system by extending coverage typically to low income workers; (2) increase consumer choice and insurer competition; (3) improve consumer rights and the financial sustainability of the insurers; (4) enhance transparency and accountability as an essential complement to increased choice and competition; and (5) change the incentive structure for PAMI. During the year 2000, the executive pursued these objectives by issuing various decrees (Decretos de Necesidad y Urgencia, DNUs) that modified previous laws. However, these decrees were challenged in the courts by numerous obras, impeding their implementation. In light of this, the government has decided a new two-fold strategy to effect these changes: on the one hand, it will advance as far as possible in the short-term, working within the current legal framework; and on the other hand, it will begin the preparation of more comprehensive health sector reforms to be presented to Congress in the medium-term. 46. Increasing equity and solidarity in the system. The first steps taken in 1996 went part of the way in ensuring that low income workers could have access to the basic package of health care based on $40 per contributor although without regard for the number of family members or other health risk characteristics. An attempt was made to adjust to these other factors but it proved to be unfeasible in the way that the FSR was then structured. Thus, insurers still face incentives that make them discriminate against low income workers. As the basic premium is a fixed percent of their salary, low income workers bring lower premium payments and usually have larger family sizes. Under current rules, the FSR does not sufficiently compensate insurers for coverage of low income workers because: (i) it is too small (subsidies for 1999 were on the order of $230 million, representing only 8 percent of the total operating costs of the obras sociales); (ii) it assigns a significant fraction of its resources to the provision of arbitrary subsidies for selected obras (roughly 15 percent during 1999); and (iii) it does not compensate for the number of dependents in these larger families. 47. The proposed policy changes will: Increase progressiveness of the redistribution of funds by providing a minimum (to be defined) monthly subsidy per beneficiary. This is designed to increase the premiums obras sociales will receive for workers with larger families (modifying the provision 22 of providing a minimum of $40 per worker) and contributes to reduce disparities of available per capita resources among insurers. In order to put this into effect, a complete, updated enrollee database (including all contributors and beneficiaries and basic information such as gender, age and address) must be developed. The government has arranged the necessary actions to have this database completed before the end of 2001; and Expand, via new legislation, the amount of resources channeled through the FSR.18 This will imply increasing the fraction of social security taxes assigned to the fund, making it more progressive by requiring larger shares from higher paid workers' contributions to go into the FSR. The payroll tax itself would be unchanged - 8 percent - but its distribution between the "premium" paid directly to the obra and the payment going to the FSR would be modified, increasing the latter. 48. Increasing consumer choice and insurer competition. The reforms to date allow workers to choose among the obras of their tier (blue-collar or white-collar) but this right to choose only becomes effective after completing the first year of employment and still does not include moving between tiers or to private insurers. Even more, the entrance of new insurers to the SNSS has been prohibited. Meanwhile, private insurers remain unregulated, as legislation to regulate them has been in Congress since 1998. 49. The situation of a specific category of Argentine workers also deserves attention. Close to 2 million small businesses under a special tax regime ("monotributistas")'9 and domestic service workers ("trabajadores de servicio domestico") are to be covered through a special and complex regulation (Law 25.239, 2000), whereby they are charged a fee for health coverage and must register to any one of ten authorized obras (additionally, this special regime cannot be subject to subsidies from the FSR). However, currently only 16 percent of the roughly 700,000 who are paying this social security fee know where they are registered. The remaining 84 percent keep contributing without being aware of their right to demand health care from an obra. It is noteworthy that domestic service workers tend to be poor women. 50. Aware of this situation, the government is committed to: * Inform "monotributistas" and domestic service workers of their rights, in the short- run, while preparing a legislative proposal that would incorporate them to the core SNSS. This effort also includes an active monitoring of health services utilization rates for this group; Is This percentage is not defined yet. Based on the estimated impact of the unimplemented DNUs, it is expected that an increase in FSR's resources should be at least equal to 40 percent. For achieving this figure, the DNUs also intended to incorporate an annual amount equivalent to the VAT of existing private insurers, estimated at approximately $50 million. 19 The name derives from a program initiated several years ago that simplified the tax regime for small and medium enterprises with an annual turnover of less than $144,000. These firms would pay a single "mono- tax" as a substitute for the variety of payroll, corporate income and VAT taxes owed to the federal government. The idea was that this simplification would induce some tax evading small companies to enter "into the system" and effectively pay their reduced tax burden. 23 * Re-enforce consumer choice through a set of immediate activities that include public information campaigns, simplification of transfer procedures for those insured willing to transfer and guaranteeing the option to choose insurer (within the corresponding tier) since the first day of employment, regardless of the worker's income level; and * Expand the options open to workers, through future legislation, by allowing blue- collar workers to choose white-collar obras (and vice versa) and by allowing all formal sector workers to choose also among eligible private insurers which would be authorized to join the system. 51. Improve consumer rights and the financial sustainability of health insurance. While a PMO was issued in 1995 to reduce notorious differences in the depth of health care offered among insurers, it suffered from significant shortcomings. In terms of services provided, it did not sufficiently address primary care interventions (including health promotion and disease prevention) nor did it provide guidelines regarding the health care delivery model. Additions to the original PMO were the result of lobbying by suppliers of specific services and were not subject to public or technical scrutiny. Also, there was no detailed study to ensure that the available revenues of the obras were sufficient to confront the expected actuarial cost of the PMO (in aggregate, the authorities then estimated that revenues of the obras would cover costs). Subsequently, any financial deficit was blamed on special benefits added to the PMO. These deficits were then transformed by the insurers into requests for reimbursements by the FSR through APE. 52. The federal government approved a redefined PMO in October 2000 (Resolution No. 939/00 from the Ministry of Health), which corrects some of the deficiencies by emphasizing preventive and primary health care and defining a specific delivery model (the "Plan Medico Asistenciar', PMA). Complementary reforms will establish a transparent process of periodic review of additions and changes in the PMO, including reproductive health care, based on: (i) technical principles of cost-efficiency and burden of disease, and (ii) actuarial equilibrium between revenues and costs. 53. Improve transparency and accountability. Reforms of the SNSS in the 1990s improved transparency in the regulation of obras sociales and in the management of the segment of the FSR used for automatic distributions (the $40 per worker compensation). There remain, however, significant challenges to further improve accountability and transparency in the system. The segment of the FSR that was not automatically distributed (and is administered through APE) has been subject to political pressures in its two functions: discretionary financial subsidies to obras and reimbursement for special health-care services. In addition to costing the FSR over $145 million over the last two years, APE has created an unofficial debt of unknown magnitude to a large number of obras due to the accumulation of thousands of unprocessed claims for reimbursements, many of which eventually will be rejected. 54. Simultaneously, the SSS has issued regulations to monitor and control insurers and is acting to enforce some of them (for example, collecting and monitoring on a monthly basis insurers' financial and economic indicators, monitoring consumer 24 complaints and improving the processing of claims for health care reimbursements from the FSR). Other key regulations, however, continue without enforcement, including resolutions that require the SSS to order the restructuring, intervention and/or closure of those obras sociales that persistently display unacceptable indicators. This regulation was adopted under the SSAL but is yet to be fully enforced. So far, no truly active obras have been closed.20 It is estimated that the number of individual obras needs to be brought down from over 270 to about 150, through mergers, consolidations, and/or closings. This does not mean that all small obras need to merge with others but that they enter into alliances so that they gain the benefits from risk pooling or otherwise reinsure their risks. 55. The new reforms will: * Eliminate the discretionary use of FSR's resources (through APE) going to funding "loans and subsidies" to insurers, hence expanding the fraction of the contributions used to paying a minimum insurance premium for low income workers and their families. This will be done in two phases: initially, subsidies to insurers with chronic deficits (defined as non-compliance with a given minimum acceptable set of economic and financial indicators) will be prohibited; then, an automatic per capita compensation mechanism will be put into place to assure insurers a minimum flow of resources in those situations in which contributions have been jeopardized, eliminating all remaining types of discretionary subsidies funded through the FSR; * Enforce existing rules requiring actions from the SSS on those insurers in financial crisis (Resolutions 109 and 177 of 2000, and Resolution 232 of 2001)21, and develop new regulations that will allow the SSS to exclude from the SNSS's registry of eligible insurers all those obras not complying with these indicators (this includes specifying a maximum acceptable period of time for the SSS to act, as well as an explicit procedure for transferring affected enrollees to other insurers); and * Transform APE's residual role of reimbursing for selected health-services claims, over the medium-term, by better redefining the menu of eligible health care events and developing water-tight rules for the management of a reinsurance scheme for high-cost/low-frequency interventions. 56. Reforming INSSJP (PAMI). By far the largest single health insurer in Argentina, PAMI covers more than 90 percent of the nation's population 65 years and older and their dependents, representing an estimated 4 million beneficiaries. Financed through payroll taxes and taxes on retirees' pensions, PAMI contracts with private provider groups under prospective payment mechanisms for health services throughout the country for its captive clientele. 57. Among the most serious weaknesses in PAMI's structure and functioning are the following: 20 In the past, closure has been done of obras which really had no affiliates. 21 This implies immediately sending crisis notifications to 77 obras sociales and requesting from them restructuring programs. 25 * Lack of Beneficiary Choice. Beneficiaries have no choice of insurer other than PAMI and, within it, cannot select their provider; thus, there are weak incentives to improve the quality of services and under-service has become a chronic problem, aggravated by the use of capitation payments with weak monitoring systems; * Chronic Operating Deficits. Financial equilibrium has never been reached despite past efforts to contain expenditures. Instead, there has been a repeated cycle of temporary cuts followed by large operating deficits that lead to a chronic combination of service stoppages and bailouts (for the year 2000, despite various administrative and financial measures, the annual operating deficit was an estimated $301 million on expenditures of $2,619 million, bringing the Institute's overall debt above $2.5 billion); * Lack of Focus. Other social programs, not related to its core mission ($362 million, or 15 percent of 2001 total expenditures), are also operated through the INSSJP, reinforcing inefficiencies and lack of focus (e.g., Probienestar, a food assistance program); and E Hil-h Administrative Costs. Administrative costs are an estimated 15 percent of total operation costs (including the payroll for its 11,500 employees), and there are serious flaws in the contracting and information systems, lack of transparency, political manipulation, and allegations of corruption. 58. PAMI has been subject to various restructuring attempts. Between 1996 and 1998, and given the similarities of the issues it faced to those of the national obras sociales, it was included in the World Bank's Health Insurance Reforn Program (Loans 4002/3-AR). Specific objectives pursued through this support included debt restructuring, improving internal efficiency (mainly through reduction of personnel), and developing a new organizational structure with better monitoring and information systems. This latter objective included renegotiating contracts with providers and outsourcing services. Unfortunately, the results of this effort were mixed. Although various savings were achieved initially reducing its monthly operating deficit, PAMI did not carry out most of the institutional development activities originally contemplated (for example, the outsourcing of two inefficient clinics directly operated in Rosario), and the savings effort quickly dissipated. Whatever improvements achieved were short-lived, as the fundamental incentives and structure were unchanged. As a result, the Institute still has not secured financial and technical sustainability, requiring further extraordinary financial support from the government, while poorly serving its beneficiaries. 59. The government has expressed its desire to reform PAMI once-and-for-all and effectively solve its increasing financial deficit, frequent corruption scandals, and chronic tendency to under provide services. The proposed strategy, which reflects previous recommendations by the Bank and the results of technical assistance financed under the Health Insurance TAL and by UNDP, focuses on: (i) achieving operation equilibrium by the end of this year, mainly through tight management and multiple cuts in expenditures (including a 15 percent reduction in its personnel); (ii) further changing provider 26 contracting mechanisms; and (iii) reviewing other social, non-health, programs, including PROBIENESTAR, in a first step towards modifying and/or transferring them. 60. Core features of the changes sought in health-care contracting mechanisms include: * Creating (and periodically updating) regional registries with multiple, certified, health care providers which then form certified networks (replacing current monopolies); * Setting a unique capita (per beneficiary)and including in it as many health services as possible; • Allowing beneficiaries to freely choose among all registered providers (and provider networks) in the region; and * Strengthening service monitoring and quality control through improvements in information and surveillance systems.22 61. As the reform program advances, further work needs to be done with the PAMI' s administration to ascertain precisely how and when these reforms could take place. There is no specific conditionality in this first SAL; however, a detailed action plan will be presented and discussed in the coming months. It also will include a review of previous reform attempts, as well as of possible strategies to integrate PAMI to the SNSS. THE REFORM OF SOCIAL PROTECTION PROGRAMS AND THE SOCIAL SECURITY SYSTEM 62. Argentina has the highest per capita income in Latin America ($7,500)23 and some of the region's highest social sector expenditures, both in terms of GDP share (17.6 percent) and per capita value ($1,594 per year). Based on these figures, Argentina is more comparable to OECD countries than many of its Latin American neighbors. Social expenditures also absorb 65 percent of federal and provincial public expenditures - among the highest share in the world.24 However, these figures co-exist with serious pockets of poverty and vulnerability, driven by a skewed distribution of national income and public resources. According to the Bank's latest Poverty Assessment, 29 percent of the population was considered as poor and 7 percent as indigent in 1998 (World Bank, 1999). While in most OECD countries at or above these spending levels provision of basic social infrastructure and services is virtually universal, important gaps in coverage persist in Argentina, with serious implications for poverty levels. 22 These changes in contracting mechanisms are being tested by PAMI in the Provinces of Mendoza and Neuquen under the name of Sistema Integrado de Atencion Medico-Social (SIA). 23 In purchasing power terms, Chile, Costa Rica and Uruguay exceed Argentina. 24 Argentina's social sector spending as a share of total public expenditures surpasses that of many OECD countries with highly developed social insurance and social assistance networks, such as the United Kingdom (52 percent), USA (53 percent), and Sweden (60 percent) [World Bank, 1999]. 27 63. Among social protection programs and assistance for the poor, a major distinction has to be made between social insurance (contributory) and social assistance (transfers) which together absorbed roughly 30 percent of national social sector expenditures in 2000 ($18.8 billion, see Table 1). Social insurance programs ($15.5 billion) include pensions, Asignaciones Familiares (a per-child family allowance) and unemployment insurance. Social assistance programs ($3.3 billion) include an array of subsidies, direct income transfers and other programs across a range of sectors: of these, FONAVI (housing subsidies) and non-contributory pensions (income-transfers) are the most significant in budgetary terms--together totaling over half of all social assistance spending. Table 2: Federal Social Protection in Argentina: Programs, Budgets and Major Beneficiaries Category/Program Budget (2000) Major Beneficiaries Million pesos L. Social Insurance 15,500 Retirement security (old-age pensions) 13,500 Formal sector employees Asignaciones Familiares 1,700 Formal sector, low-income, with children Unemployment Insurance 300 Formal sector employees In Socil Assistance 3,300 A. Housing subsidies and emergenev relief 1.200 FONA VI 900 Middle-income households Emergency assistance (flooding) 200 Flood victims Other 100 B. Income Transfers 900 Non-contributory pensions 850 Elderly poor/disabled (45%), other (55%) Other 50 C. Qther (59 nroerams) 1200 Education and Health (special programs) 450 Low performance schools, dropouts, etc. Social and Community Development 290 Children, elderly, indigenous, etc. Training and Employment 260 Low-skilled labor force, unemployed Food and Nutrition 180 Low-income elderly and families with Children Total Social Insurance and Social Assistance 18,800 ____ 64. Despite these interventions, significant gaps persist in the coverage of at-risk groups. In social protection, these gaps are mainly the result of the following three factors: (1) social insurance programns that do not cover large sections of the at-risk population, namely those who are not employed in the formal sector;25 (2) emphasis on several large federal programs, such as FONAVI and non-contributory pensions, which are costly but yet direct a significant proportion of benefits to the non-poor; and (3) the existence of over 60 low-budget social assistance programs that are relatively well targeted but costly to administer and by default attempt to address major shortcomings in 25 Some 40-45% of the labor force is employed informally, and thus by definition ineligible for social insurance coverage. Furthermore, the poor are more likely than the non-poor to be employed informally - 46% of the indigent and 45% of the poor are employed in the informal sector versus 36 % of the non-poor (World Bank, 1999). 28 social insurance and basic sector services, as well as meet the needs of specific vulnerable groups. The end result is that only about 25 percent of the poor benefit from some form of public social program.26 65. Given the current federal expenditure levels and the government's budget constraints, there is little room for addressing these coverage gaps by simply allocating a greater share of public resources to social protection. Greater coverage of key vulnerable groups, and thus more effective poverty-reduction impact, will result from: (a) restructuring the existing array of programs to prioritize the provision of basic benefits to key risk groups, including children, the working-age poor, and the elderly; (b) phasing out assistance programs or subsidies which are not well-targeted; (c) converting many in- kind programs to direct income support; (d) increasing administrative efficiency by eliminating overlapping programs directed to the same target group among competing institutions, reducing fraud, and simplifying administrative procedures; and (e) establishing a single registry of beneficiaries, and improving outreach (facilitating the registration process) for eligible but uncovered populations. 66. The federal government's strategy for improved social protection policy contains four main elements: (i) reform of the contributory retirement security system (SUP) to broaden coverage of the system and raise its fiscal sustainability; (ii) reform of non- contributory pensions to improve poverty-targeting, including tightened eligibility criteria and eventual phasing out of pensiones graciables (pensions granted by the legislature) combined with harmonization of the pensiones asistenciales (pensions to the poor and disabled) with all other national income transfer programs; (iii) reform of the existing per-child family allowance, Asignaciones Familiares, to reduce fraud and achieve universal coverage among the poorest families with children, and (iv) improved systems for identifying, registering and delivering benefits to federal social assistance program beneficiaries, including a national registry of beneficiaries and one-stop-shop for applying for national program benefits. 67. (i) Reforms to Retirement Security (SIJP). Six years after a structural reform that introduced the multi-pillar pension model in 1994, Argentina's contributory retirement security system (Sistema Integrado de Jubilaciones y Pensiones, SIJP) still suffers from burdensome public liabilities and limited coverage. In 1999, public expenditure on retirement, survivor and disability benefits under the continuing public pillar at the national level totaled $18.7 billion, or 5.6 percent of GDP. Over 67 percent of this expenditure was financed with transfers from general revenues of $12.7 billion or 4.5 27 percent GDP. In the same year only 39 percent of the employed work force contributed to the private pension system.28 68. A package of reforms to the public and private pillars (Regimen de Reparto Puiblico or "RRP" and Regimen de Capitalizaci6n or "AFJP", respectively) of the SIJP was adopted by Presidential Decree No. 1306 in December 2000. Decree 1306 was 26 See Managing Social Risk in Argentina (World Bank, 2000). 27 INDEC (2000), tables 4.2.1, 4.2.2, pp. 300-301 28 Rofmnan (2000) 29 legally questioned by a group of members of Congress in the labor/social security courts. In late May the courts dismissed the complaint. The complainants have now appealed the case to a court of appeal. The Decree has not been rejected (unlike the case of the de- regulation of obras sociales) and is still legally valid. The government, however, has decided not to implement the reform until the courts settle the dispute. In other words, the government has, at this point in time, the authority to start implementing the reforms but has decided not to, expecting a prompt resolution by the courts. In the event that the courts support the complaint, the government would submit a bill of law to Congress following the same principles as Decree 1306. 69. The reforms promoted under Decree 1306 are intended to improve the equity of the system and improve medium-term financial results. In order to extend coverage to those segments of the population facing the highest risk of indigence in old age, the blanket retirement benefit under the RRP (Prestaci6n Bdsica Universal, PBU, equal to $200 per month and now available only to workers with 30 years of contributions to the system) will be replaced with three new benefits that seek to redistribute public spending on retirement security to workers with lower incomes. These new benefits include a targeted payment of $ 100 per month for the elderly with no documented contribution nor any other source of income (the Beneficio Universal, BU); a proportional benefit (Prestaci6n Proporcional, PP) for those with at least 10 years of contributions, that increases in value with each additional year, up to 26 and eventually 30 years of contributions; and a supplementary benefit (Prestaci6n Suplementaria, or PS) for workers whose final retirement pension from either the RRP or the private AFJP pillar falls short of $800 per month.29 70. Analysis of the equity and fiscal impact of the Decree 1306 shows that the proposed changes would succeed in redistributing public expenditure on retirement benefits to workers with lower earnings.30 In addition, while the government estimates that there could be savings in the order to $ 600 million per year in the medium-term, future fiscal savings from the reforms will depend critically on the performance of Argentina's system of individual private retirement accounts. Regularly updated simulations to monitor and anticipate the expenditure of the public pillar (given medium term changes in economic conditions, the gradual integration of provincial pension fumds, increases in the number of participants and most importantly the performance of AFJP retirement accounts) will be critical to ensuring fiscal sustainability. 29 Parallel reforms in the private pillar are designed to cut administrative costs and make the net returns to beneficiaries more attractive. The proposed changes would: (i) assign workers that have neither specified the AFJP pillar nor yet chosen a specific fumd manger (the "indecisos") to the AFJP with the lowest commissions; (ii) forbid flat fees to be charged on AFJP contributions (a practice that discriminated against lower-earning workers); (iii) limit the market share of any single fund manager to prevent the rise of monopolies; and (iv) give greater discretion to the SAFJP in setting investment rules and require the use of unisex mortality tables in the calculation of private annuities. 30 This analysis was conducted using the Bank's pension software, PROST Pension Reform Options Simulation Toolkit © IBRD. 30 71. (ii) Non-Contributory Pensions (Pensiones No Contributivas - PNCs). The current administration has already placed strong emphasis on reforms to the non- contributory pension system. Recent reforms have addressed issues in both of the existing non-contributory regimes, the pensiones asistenciales (which provide monthly income transfers of $100-150 per month to vulnerable groups including the elderly, disabled and mothers with 7 or more children) and the pensiones graciables (granted by Congress under no specific eligibility criteria and ranging in value from $100 to $ 600 per month). Under the SSAL, the pensiones asistenciales system was improved to allow for more transparency in eligibility criteria as well as more efficient delivery. Benefit rolls were also reviewed to identify current beneficiaries who were ineligible, and these beneficiaries removed from the program resulting in substantial savings used to fund benefits for new beneficiaries from the program waiting list.31 More recently, a reform to the pensiones graciables initiated in 2000 makes eligibility more strict (the beneficiary must reside in Argentina, and cannot be a relative of someone in Congress). Benefit levels have also been capped at $300 for a maximum of 10 years as opposed to being a renewable benefit. Finally, there is a newly-applied income criterion, such that beneficiaries cannot have incomes that exceed $150 per month (this regulation actually existed by law before but only since 2000 has it been applied rigorously). Applying these new regulations resulted in the removal of 15,959 people (of a total 170,000 current beneficiaries) from benefit rolls and a reduction in benefits for an additional 8,517 beneficiaries. These actions resulted in a savings of $10.5 million, and the legislature approved the transfer of a portion of the savings generated ($5 million) to the pensiones asistenciales budget for 2001. 72. Further reforms to the non-contributory pension system are being considered. The redesign of this program may become necessary within the context of on-going reforms to SIJP and Asignaciones Familiares (see below). With the future introduction of the new BU and PP paid by ANSeS, and given the momentum to reform the per-child famnily allowance program, some of the benefits paid by the PNC program (currently targeted to the elderly, disabled, and families with numerous children) may become redundant, or may be more effectively administered through a single organization. Also under discussion are efforts to close the pensiones graciables regime entirely and use the associated funds to expand coverage of existing poverty-targeted programs. 73. (iii) Per-Child Family Allowances (Asignaciones Familiares). The Asignaciones Familiares is an employer contribution-based, per-child family allowance program administered by ANSeS. The problems with the current program include: (a) insufficient coverage - currently, access to the program is granted through employment status; only workers for whom contributions are declared to AFIP/ANSeS can receive the benefit which effectively excludes a significant proportion of poor families with children from the program;32 (b) weak financing structure - in most cases a deduction from pay- 31 The pensiones asistenciales program operates with an extensive waiting list (160,000 current beneficiaries, 40,000 approved but on the waiting list, from which it usually takes 2-3 years to move onto actual benefit rolls). 32 The existing gap to be covered is high, as evidenced by national poverty rates among children - about 45 percent of children ages 0-14 are poor compared with a national poverty rate of 29 31 roll taxes is made as opposed to an actual contribution by employers to the authorities (this system is vulnerable to fraud and evasion, and leading to growing program deficits); and (c) accumulation in the type of benefits paid (marriage benefit, adoption benefit, etc.) beyond those aimed strictly at meeting the objectives of the program, raising program costs without improving coverage. 74. As a first step towards addressing these problems, ANSeS is committed to implementing changes in Asignaciones Familiares payment mechanisms to reduce fraud in the system and thus reduce program deficits (see paras. 75 to 77). Under discussion are options for extend the basic per-child benefit to all poor families with children. Details of the extended basic benefit - the age groups covered under the benefit, amount of the benefit, and income threshold used to determine eligibility - have yet to be worked out, and hinge in part on financing decisions which have also yet to be made. 33 Diagnostic work in support of these decisions will in part be supported with funding from the project preparation facility (PPF) for the proposed Social Protection V Project which will support eventual implementation of the reforms. The extended benefit is also linked to other reforms, especially the creation of the national beneficiary registry and one-stop- shop federal program application centers, described below. 75. (iv) National Registry of Beneficiaries (Re-aistro Unico de Beneficiarios). The government is committed to developing a well-functioning national registry for identifying, determining eligibility, and tracking federal social program beneficiaries. Such a system would also be used by the provinces or otherwise be interconnected with the federal system, as well as other data bases. The Jefatura or Chief of Cabinet's Office is currently working towards meeting this goal via: (a) the Social and Fiscal National Identification System--SINTyS--the system supported by a Bank-financed project and used to link together the various civil, tax, administration, and social program data bases at both the national and provincial levels as a way of detecting fraud and evasion; and (b) SISFAM, developed by the IDB and expanded under the SSAL, a selective census of beneficiaries by poor municipalities administered by SIEMPRO, supported by the Bank- financed Social Protection IV Project. 76. Jefatura's immediate goal is to complete the first demonstration phase of SINTyS in 2001 and continue its implementation. To date, the protocol covers about 40 of the 70 main national data bases and links these bases with each other and with several provinces. It has identified cost savings and/or revenue opportunities worth $ 135 million annually (at a cost of only about $ 7 million under the project). Universal implementation of the SINTyS protocol for all provinces and the relevant federal agencies requires establishment of standard protocol (minimum set of data to be included in the file for each social program beneficiary) which the government is committed to achieving. The government is also developing a simple and practical way for citizens to percent in 1998 according to EPH survey data. Further, the government's 1998-99 Public Expenditure Review indicated that this program, along with FONAVI, the public housing scheme, was highly regressive. 33 Uruguay has successfully transformed its Family Allowance systems into a targeted income transfer mechanism for poor families, starting from a similar base as in Argentina. 32 apply for federal benefits and a transparent mechanism to determine eligibility and consistency across programs. The government is thus moving towards a self-registration system, beginning with establishment of federal 'one-stop-shops' where beneficiaries can register for all federal social assistance programs, twinned with implementation of the single registry for federal programn beneficiaries. 77. (v) Institutional Strengthening of the Social Security Agency (ANSeS). The critical role of paymaster for these social programs is in the hands of ANSeS. It was established in its present form in 1991, based on the merger of 18 agencies responsible for distinct pension systems. Its prime business remains the administration of the public pension system for those already retired and those over 45 years of age who have opted to stay with the public pillar. While the number of beneficiaries in the public pillar will decline over time, this function will be needed for the next 30 years. ANSeS also makes payments for family allowances, unemployment insurance, and work-fare program such as TRABAJAR. In total, it administers about $ 17 billion in payments per year, equivalent to 40 percent of total federal spending and almost 7 percent of GDP. It is worthy to note that ANSeS does not collect revenues. Employee and employer contributions are collected by AFIP, the tax authority, discussed in subsequent sections. 78. Like many Argentine institutions, ANSeS faces formidable challenges but, in contrast to other core economic management institutions, such as the Central Bank and the Ministry of Economy, it has long suffered from neglect. Its management systems have been weak, it did not have a functioning accounting system until recently, checks to suppliers often have been written by hand (although benefit payments are made through the banking system), and it has not produced an unqualified financial statement since its creation. Efforts at reform have been slow and, as of 1995, when ANSeS first received Bank support under the National Pension Administration TA Project, it was still operating as 18 separate entities each with its own rules and processes and in need of dramatic restructuring. While there has been some progress in the past few years, much of the effort has been directed at building core systems to address improper pension payments, improve client services and absorb the transfer of provincial pension and more remains to do done. ANSeS has a backlog of 85,000 claims waiting to be processed, and has lost some $ 1.7 billion in court claims and penalties for late or inaccurate pension payments over the past two years. A major source of fraud is the fact that there are significant gaps in records for past pension contributions, and the process of verification is open to technical errors and manipulation. Estimates put the potential savings from internal administrative reforms at $ 300 million per year but the potential may be much higher. 79. The reforms envisaged for this agency focus on securing reliability and reducing the potential for fraud and corruption in the determination of benefits and their payments. The key to this will be the rapid computerization of the main payment processes. A start has already been made on this process, with the assistance of the on-going Bank-financed Pension Administration TA project. In addition, the legal costs and the way that ANSeS defends itself against unjustified claims needs to be revamped entirely. Given its pivotal role, ANSeS is one of the pilot agencies selected for intensive restructuring under the government's State Modernization program. Thus, ANSeS will participate in a process of 33 comprehensive institutional strengthening and address internal management, human resources, performance-based management, and accountability. Its action plan includes the following areas of intervention: improving agency management, cleaning up existing backlogs and delays in operations, strengthening client services, and significantly reducing waste and fraud, as outlined below. Operational Strengthening: A major effort will be accelerated to reengineer key business processes, inventory and clean up the existing backlog of pending claims and legal actions, transfer client records from paper to an electronic data bank, purge the beneficiary registry and the data bank, standardize the determination of benefits and eligibility to increase transparency and reduce discretion, and transfer the bulk of the payment of benefits to the banking system (while reducing or eliminating the service fees charged to ANSeS by the banks). * Results Oriented Management: Reform in ANSeS' management structure will reduce bureaucratic layers, better match the organizational structure to business needs and increase staff accountability. Agreed actions include: approval of new organizational structure (with a reduction of 40% of managerial positions and transfer of 1500 staff from the central administration to client service centers); strengthening of human resources administration; implementation of results based management and integrated financial management system; and development of internal control and management information systems to track workflow. * Fraud reduction and transparency: Specific measures will be pursued to address fraud including more systematic completing gaps in labor history (a major source of discretion and corruption), cross-matching of data, and elimination of automatic family allowance payments to the employees of new companies (frequently dummy firms) or for unrealistically low salaries (dummy employees). * Collaboration with partner agencies: Strategic partnerships will be pursued with AFIP, the National Office of Citizen Registry, provincial governments, and SINTyS to allow better sharing of data, improved audit of ANSeS contributions by AFIP, and increased cooperation in knowledge sharing and best practices. MODERNIZATION OF THE STATE 80. The above example of ANSeS is illustrative of the need for systemic modernization of the state, and its direct impact on the efficiency of delivering social assistance to the needy. This applies at both the federal and provincial levels and is an essential part of meeting the fiscal objectives-without quality public services and rational levels of public spending, many in Argentina will continue to feel that they have an excuse for evading taxes. At the same time, the services being provided by these agencies are critical for responding to the needs of Argentine citizens. Meeting the dual objectives of improving social services and creating the conditions for fiscal sustainability requires changes in the way the federal government operates. 34 81. During the reform period of the 1990s, Argentina went through a successful transformation of the role of state, the so called "first generation" reforns. It undertook major privatization, market deregulation, and decentralization. It also undertook a number of institutional improvements, most notably, in the areas of financial management, auditing and internal controls, with heavy investment in information technology, particularly the tax authority, customs administration, banking supervision, and core economic management. Many ministries were the subject of institutional reforms to improve their policy making and technical capacities, often with the support of the Bank and the IDB. 82. Nevertheless, these past reforms only went so far and largely focused on downsizing or "de-inventing" the state, rather than on reinventing the state in the broadest sense, for the mission of poverty alleviation. Antiquated administrative procedures live side by side with modern technology, delegation of authority conflicts with traditional hierarchical structures and regulations and, even though there are better controls and management systems, the focus is still on inputs and not on results. Human resources management has only partially been changed, there remain some 180 separate federal agencies, information systems remain patch-work, and overly bureaucratic processes hamper responsiveness to citizens demands. Moreover, since the 1990s, expectations have changed: Argentine citizens now expect their governments to be transparent and accountable. The public's perception of corruption remains high. 83. The government sees modernization of the state as a necessary feature to improve both the quality of public services and the sustainability of its fiscal position. Without system wide changes to institutional capacities, experience has shown that policy reform on its own is less likely to be successful. Thus, the government's state modernization program has three main pillars: (1) a restructuring and streamlining of the macro structure of government, including a major effort to strengthen the use of information technology and cross matching of data to detect waste, fraud, and abuse; (2) a process of horizontal reform which affects government wide systems and procedures, including public procurement, human resource management, administrative procedures, results- based management, and facilitating efforts to improve provincial public administration; and (3) targeted organizational restructuring which will-vertically-address institutional capacity in several high priority agencies that are important for the main goals of social service delivery and fiscal sustainability. The targeted institutions are the tax and customs authority (AFIP), as well as the social security agency (ANSeS), and the Ministry of Education. The Bank and IDB will continue their broad support for the modernization of the state effort, through a variety of instruments, notably the restructured Y2K project, now converted to the State Modernization TAL. 84. Restructuring/streamlining of the Central Government. This will take advantage of emergency legislation passed in March 2001 (Law 25.414), giving the executive branch powers for one year to issue decrees with the status of law covering a wide variety of reforms. Reforms to be pursued under this legislation could include the consolidation or elimination of federal entities, changing public employee contracts on an agency by agency basis (in order to start the process of increasing discipline and flexibility in public employment where outdated collective bargaining agreements and strong unions impede 35 modem management and a focus on results and accountability), and eliminating superfluous boards of directors in decentralized agencies. As the state modernization process gains momentum and studies are completed, further structural reforms are contemplated. 85. A major reduction in staffing is not anticipated at this time, as the government asserts that: (i) overall employment levels are not out of line with international comparators; (ii) the focus should be on the strengthening of performance through a better mix of incentives and training; and (iii) a weak labor market and union power would turn any reductions in the workforce into a costly and ultimately counterproductive failure. In the meantime, however, the government believes that carefully designed interventions to better use and link existing data bases could yield significant efficiency gains. One example would be the elimination of "double-dipping," where by some currently employed workers are also receiving a public sector pension. Consequently, the State Modernization Secretariat (in the Chief of Cabinet's Office) is strongly supporting SINTyS, as a foundation for cross-matching of data from the tax administration, social security administration, provincial governments, the National Citizen's Registry, and other sources. 86. E-zovernment. The nascent effort at e-government, based on preliminary advances achieved under the SINTyS project, could in fact promote significant savings in program expenditures and lessened tax evasion and social security fraud assuming that the various agencies collaborate as planned. Moreover, business process reengineering, improved services to citizens through the internet, and better use of information technology will create more scope for staff adjustments in the future. The potential for gains in efficiency, effectiveness, and transparency stemming from adequate integration and communications across systems is large. Despite the rapid spread of modem information and communications technologies (ICTs) in the Argentine public and private sectors, the government still lags behind in making strategic use of its ITC investments. Systems are not interconnected, there is a large degree of overlap between the different functions of existing systems, and security is low. As a result, better delivery of services to citizens and dramatic improvements in operational performance are being foregone. A key constraint is the lack of a formally defined strategic vision by the Argentine public administration to maximize the transformation facilitated by ICTs. No agency is in charge of overall ICT leadership and coordination. In addition, despite the existence since 1998 of a Decree on Digital Signatures for the public sector (Decree 427/98), there is currently no application that takes advantage of this possibility. Consequently the authorities have developed a three pronged strategy to promote e-government, supported by the proposed loan and State Modernization TAL, covering: * Development and implementation of a strategic plan for public sector information and communication systems and e-govemment applications within the context of a "knowledge-based" economy; * Strengthening of the legal foundations for e-government by enacting two key pieces of legislation: (i) a new and broader law on Digital Signatures to replace the soon to expire decree, which in any case is limited to the public sector; and (ii) issuance of 36 regulations relating to the "Habeas Data Law" (enacted October 2000) clarifying issues relating to privacy and exchange of personal data between public agencies. Another important piece of legislation, which overlaps the area of e-government, is the procurement law, which will be closely coordinated with the Digital Signatures law, so that electronic and fully paperless transactions can be legally conducted; and * Effective interconnection of systems and use of data cross-checking within the SINTyS model involving an accelerated effort to link existing systems (e.g. personnel, social security, tax, cadastre data banks) amongst themselves, including: (i) issuance of a decree regarding legal obligation of agencies to collaborate with and use the SINTyS model; (ii) effective establishment of SINTyS Coordination Committee; (iii) successful finalization of demonstration phase of SINTyS, achieving consensus on the technological model and a successful concept test, as well as readiness to move on to the on-line phase (i.e. a "virtual" unified database); and (iv) effective interconnection of data bases between ANSeS, AFIP and other institutions in line with SINTyS model. 87. Strengthening Government-wide or horizontal systems. A comprehensive program of systemic reforms will be pursued in a wide variety of agencies including the three target institutions of AFIP, ANSeS and the Ministry of Education. It consists of reforming key government-wide systems and strengthening the incentive framework with the aim of creating a new model of public management. This involves both improved inputs (in terms of management systems and tools) and changed incentive framework through greater accountability to senior officials (linked to explicit performance agreements and budget results, and the piloting of Program Managers in several agencies) and to citizens (through published compacts on agency goals). Specific initiatives include: * Management by Results. To revive a focus on performance, the government will seek to increase managerial authority simultaneously with increasing accountability for results. This will include three initiatives supported by the State Modernization TAL: (i) internal agency reform programs with specific time-bound change initiatives (relating to agency restructuring, business process reengineering, measures to better integrate budget, planning, human resource administration, management decentralization, training, etc.) in up to 20 agencies; (ii) explicit Annual Program Agreements signed between the agency and the Chief of Cabinet's Office laying out financial and physical indicators to guide and evaluate annual performance; and (iii) a program of Citizen Compacts, which would lay out (in print and internet) the agency's mission, citizen rights and responsibilities, complaint procedures, as well as specific annual objectives of the agency. * Increasing Transparency and Reducing Corruption. The government is placing considerable efforts into improving financial management at the agency level by updating its integrated financial management system (SIDIF) and extending it to line entities. This plus the availability of more public information available on the performance of public institutions (for examnple via the government's Crystal web page) should help promote improved perfornance. These measures complement the 37 efforts of the Office of Anti-Corruption which has been active in the investigation of allegations of corruption by agents of the federal government. * Human Resources Management The government is also moving to create a new human resources management system to inventory existing staff resources and skills and eliminate ghost workers or duplicative payments. Additionally, training will be strengthened including its oversight of a reformulated system of training based on demand and agency needs plus the out-sourcing of training where appropriate. * Administrative Procedures and Deregulation. To streamline administrative procedures (and the regulations and traditions governing them) which are often slow, inefficient, costly and aggravating to citizens, the authorities would compile and publish (in print and electronically) existing administrative rules applied by agencies and related operational information and an assessment of their impacts, prepare a new Administrative Procedures law and regulatory framework aiming at streamlining and speeding processes; and monitor reform of the procedures if the law is approved. * Promoting Provincial Government Reform. The federal authorities would support institutional capacity building for provincial governments through a small targeted programn linked to the Federal Council on Public Administration (PFFC), a group chaired by the Chief of Cabinet and comprised of all provincial governors. Created in 1992, it has been revived by the current national administration as an information clearing house and forum for federal/provincial discussions on public administration issues. This initiative would complement the efforts to integrate information from provincial tax and property registries. * Procurement Reform. A critically important cross cutting reform with implications for cost savings, transparency, and improved services to taxpayers and suppliers involves a reform of the government's procurement policies and procedures. Experiences in other countries show that these changes could generate a savings of some 10-20 percent of public contracting. The Bank's latest Country Procurement Assessment recently confirmed that federal government's public procurement suffers from inefficiencies and lacks transparency (see a brief summary in the CAS FY01 Progress Report). The process is lengthy, cumbersome, and costly due to: (i) an outdated legal framework, overly elaborate procedures, and lack of uniformity among sectors and agencies; (ii) inadequate institutional mechanisms to develop and ensure implementation of policies and regulations; (iii) insufficient dissemination of information about bidding processes, contract awards, etc.; (iv) limited staff capacity in procurement; and (v) deeply rooted and outdated perceptions and behaviors that resist change. The government has been taking steps to address the most critical issues. Decree No 436/2000 regulating national procurement of goods and services, issued in May, 2000, brings about considerable improvements to previous regulations and sets up the basis for increased transparency. It strengthens the role and authority of the National Procurement Office (ONC) and establishes a national procurement information system. Implementation of those actions are underway, including the development and installation of the information system. However, additional improvements to the legal and institutional framework are needed to foster the 38 introduction of more efficient and modem practices, such as electronic procurement. A national procurement law that would replace current procurement provisions in the Accounting Law and set up standard policies for procurement of goods, works and services currently ruled by other statutes is especially important. The executive branch, using its emergency powers, intends to issue soon a new procurement law, via decree. The law would also include provisions for electronic transactions and contemplate the national procurement information system evolving into a web-based transactional system automatically linked to SIDIF. A conceptual design of the national procurement information system will be elaborated, an assessment of the procurement units and staff skills undertaken, and training and institutional strengthening would be initiated in priority agencies. REFORM OF TAx ADMINISTRATION 88. Key fiscal agencies have been selected as pilots for restructuring, with the intent on maximizing the fiscal benefits from this effort. The Tax and Customs Authority, AFIP, is the obvious leading candidate. In 2000, AFIP, the largest financial agency in Argentina in terms of staffing and revenue, collected $56.7 billion from 5.7 million taxpayers involving 19 million tax returns and 31 million individual payment transactions. It oversaw one million import and export transactions with a declared value of $65 billion. Tax evasion has been an important problem in Argentina for decades: some have estimated that Argentina collects only about half of its potential revenue, with the greatest evasion in the area of income taxes. Tax collections rose sharply with the economic reforms introduced in the early 1990s but they have stagnated at about 24 percent of GDP since 1992. Rough estimates show that reducing evasion to 25 percent, about the level experienced in Chile, would create enormous opportunities to cut tax rates, repay debts and expand coverage of priority public programs. Tax relief is an important consideration, both to stimulate investment and to make the tax system more equitable. At present, the statutory tax burden is neutral: that is, all income levels pay approximately the same share of their income as taxes while a more progressive system would be desirable particularly by reducing the VAT rate, which is currently at 21 percent (but excluding food stuffs). 89. Achieving these goals, while maintaining fiscal equilibrium, is one of Argentina's greatest challenges. The main issue is that there is a widespread perception that there is a low risk to evasion. This is despite a number of advances made in the early 1990s to improve tax collections and the considerable investment made in modem tax information systems. A notable step with Bank and IMF support was the introduction of the dedicated system--DOSMIL--in 1991 for tracking the tax payments of the 250,000 largest tax payers. Although it covers only 4 percent of contributors, they are responsible for 87 percent of tax collection. Other notable steps were the installation of the Maria computer system for processing customs duties and the processing of tax collections via the banking system which helped considerably in the collection process. To capture synergies between customs and tax collections, the government merged the responsibilities for the administration of customs, tax and social security contributions under one agency (Administraci6n Federal de Ingresos Puiblicos-AFIP) in 1997.. Tax policy formulation remained elsewhere in the Ministry of Economy. Another important 39 step has been the recent creation of specialized tax fraud courts although they have not yet begun functioning. 90. With the high level of evasion and the critical need to achieve fiscal sustainability, the government recognizes that further progress on the tax front is urgently needed. There has been little tangible improvement in reducing evasion since the early 1 990s, the system remains hamstrung in many ways, and it is considered by the general public to be corrupt. The authorities understand that the effectiveness of the tax administration depends on multiple actors: the legal system, banks, fiscal authorities, and tax agency. A high degree of political commitment will be needed to gain this collaboration, especially from the private banks and the judiciary. The continued use of tax amnesties and various payment facilitation schemes raises doubts about the government's cornmitment to enforce tax laws on a consistent basis. The frequent and significant changes to tax laws create uncertainty about the requirement of the those laws for both tax officials and taxpayers. For years it has also been difficult for AFIP to obtain judicial support for the timely hearing of tax disputes, enforcement of collection of tax debts, and prosecution of tax fraud cases. While the banks receive tax payments, there are problems relating to processing of returns and efforts to collect overdue tax debts. Provinces have been slow to accept the use of a single taxpayer identification number or to share data on tax payments or property ownership. 91. Internal weaknesses also plague AFIP. Management systems (human resources, administrative, financial) are weak, the organization structure and procedures are out of line with current needs, the integration of the two services has proceeded slowly, and the organization has suffered from budget cutbacks, staff downsizing, and frequent changes of leadership. Tax audit has been under-funded and there is a need to apply a national audit plan and increase audit coverage of taxpayers' liabilities from the current low levels of about 0.7 percent of the taxpayer population. More aggressive cross-matching of data from banks, provinces, and other sources of information must be pursued and the use of information technology within the agency expanded and given a stronger institutional mandate. Regarding customs administration, considerable resources invested in systems and procedures over the last years have not yet resulted in enhanced management control. Unions and judges inhibit the transfer or separation of non performing staff. Recent evaluations of AFIP by the IMF and State Modernization Secretariat highlight the following problems: * The lack of an audit plan combined with excessive autonomy of the regional offices in carrying out audits in an hoc fashion; * The lack of integration of various information systems and the apparent lack of use of these systems and available statistical data in a systematic manner; * The lack of a "current' account for each individual taxpayer which keeps track of the status of that person's (or entity's) tax liabilities and payments; and * The slow processing and high costs of legal proceedings combined with the fact that only tax liabilities over $ 5000 are pursued in the courts. Almost 250,000 court 40 orders for confiscation of property for overdue taxpayers have been processed in the past 2 years, worth about $ 6.5 billion, with only just less than $ 500,000 actually recovered. 92. Reform Program. In late 2000 AFIP entered into a process of internal review, with the support of the Chief of Cabinet's Office and the diagnoses prepared by that office and the IMF. It produced a Strategic Reform Plan for 2001-2003 targeting seven key objectives, including: (i) reducing tax evasion by raising the perception of risk through strengthened control, detection, and sanctions; (ii) promoting tax simplification and equity; (iii) strengthening public support for the fight against evasion and smuggling; (iv) increasing use and crossing of internal and external information; (v) increasing support for line agents; (vi) strengthening human resource management and the professional capacity and ethics of employees; and (vii) improving financial and administrative management systems. The goal of this program is to increase tax collections (after taking into account changes in the tax structure and the economic cycle) at least by 0.25 percent of GDP per year for three years. Implementation of this action plan, once agreed, would be funded by national resources, the amended Loan AR-4423, and possible resources from an existing IDB loan. 93. Under the strategic plan, key initiatives include: * A Massive Program of Audits: The back bone of the strategy to reduce evasion is a strengthening of the quality of tax audit and a massive program of audits of VAT and income taxes. This would involve 100,000 or about 5 percent of all contributors in 2001, expanding thereafter. The audits and their follow-up would be enhanced by the improvement of criteria and systems for selecting taxpayers and types of taxes for audit, using a national audit plan (based on national risk assessments and non- discretional audit selection), improving management supervision of auditors and audit results, creating an electronic data warehouse of audit information, and integrating audit results into individual taxpayer current accounts, once those are created. AFIP would also conduct annually a study of voluntary tax compliance in order to better focus its operations. * Risk Analysis: The Customs Division of AFIP would also strengthen the risk analysis used in determining the selection of goods and/or declarations for closer scrutiny (with the aim of reducing the number and deepening the intensity of physical inspections, cutting opportunities for discretion and non-transparency in inspections, and facilitating trade flows) and increase post-release inspections (including combined operations of Customs, domestic tax auditors, and border police inspectors) to compare declared imports against business operations and inventories of the importers. * Complementary Collection and Recovery Measures: Accompanying the audit program, there will need to be attendant improvements to the collection system, particularly to extend the DOSMIL to more taxpayers and more aggressively pursue non-filers. Reduction in tax evasion would be facilitated by a program to sanction banks that permit the withdrawal of deposits following notification from AFIP that a 41 depositor's bank accounts are subject to attachment. Given the importance of legal proceedings for recovery, there remains a very substantial agenda to improve legal processes, even though these may require new laws. * Improvements to Information Systems: The reengineering of the system DOSMIL, which has served Argentina well since 1991, is a priority to allow it to interact with other systems and to adopt a more flexible data structure. This would include the creation of the unique tax payer current account. Inproved cross matching of data from within AFIP and outside (ANSeS, provincial tax administrations, banks, property cadastres, registries of births and deaths, etc.) will be pursued and a separate information technology department created to facilitate the modernization and use of IT within the agency. Efforts to promote the use of a single taxpayer identification number for federal and provincial taxpayers have been initiated, as well as programs to facilitate electronic filing. * Results Oriented Management: Adopting and installing new management systems, including those related to finance and accounting, human resources, training, results evaluation, and client service which will form the basis for a new public management culture based on results. Special attention will be paid to developing a strategic planning capacity, realigning the structure of AFIP, and focusing on better definition of results expected and achieved. 94. Reform of tax policies, as described in earlier sections, are at the core of the government's fiscal effort both to reach equilibrium and to recreate the incentives for investment. A number of changes in tax policy have therefore been announced over the past few months. This began with the Competitiveness plans for selected industries, followed by the extension of VAT to many previously exempted activities, changes in income tax rates for middle-income tax payers, the introduction of compensatory mechanisms for exports and imports, and most recently, in June 2001, a further package of complex measures to improve fiscal performance, enhance competitiveness and investment, and promote domestic demand. These measures, among other things, involve tax reductions and/or offsets, a switch of VAT payment from accrual to a cash basis, and creating a Fiduciary Fund to collect arrears of firms, as well as issue certificates that could be used to guarantee credits, obtain working capital and settle debts. This program constitutes an "all out war against tax evasion", through aggressive use of the banking system to cross-match data and assist in the collection of tax arrears. The impact of these new policies will be incorporated into the agency's strategic plan. C. THE PROPOSED LOAN LINK TO CAS 95. The FYO1-04 CAS, discussed in June 2000 and updated in July 2001, has the following objectives: (i) enhancing social development; including poverty alleviation and human resource development; (ii) improving the performance of the state, particularly at the sub-national level; and (iii) consolidating structural reforms. 42 Consistent with these objectives, the proposed loan would support the government's efforts to re-organize and improve the efficiency of social sector expenditures, as well as improve fiscal performance, budgeting and planning at the federal and provincial levels. The current Federal Agreement and the reform efforts in the federal social sector ministries provide a framework for improving provincial social sector performance, transparency, budgeting and planning. The medium-term reform program would also support consolidation of structural reforms at the federal level, specifically in the areas of tax administration, public sector management, and in the health sector. Efforts in these areas are vital for enhancement of the investment climate, human capital development, and mediurn-term poverty reduction. In sum, the proposed operation would play an integral role in supporting the achievement of the objectives set out in the CAS, by contributing to the fiscal and economic stability that permits a more effective attack on poverty, while improving the efficiency and effectiveness of targeted poverty interventions. 96. The CAS anticipated a base case lending program of $3 billion over FY01 to 04. In the high case, this level would be raised to $3.5 billion. As discussed in the CAS FY01 Progress Report, the program foresees a shift to the high case when the triggers indicated in the CAS are met. It is the government's intention that the increased resources allowed under the high lending scenario (i.e., $ 500 million) be directed to subsequent loans as programmatic or traditional Structural Adjustment Loans for FY 02- 03. The high lending scenario anticipated the need for additional support addressing federal-provincial revenue sharing, consolidation and simplification of social programs, further reform of the pension and health insurance systems, all covered by the proposed SAL. In addition, given the present fiscal situation, even more weight will be given to modernization of the state, including restructuring of the central administration, the tax authority and social security agency. It is understood, nevertheless, that under the present parameters of the CAS, should the agreements reached with the government not materialize, the subsequent phases of the proposed support for the government's medium- term program would not go forward and the high case lending would not be realized. Thus, the move to the high case lending scenario remains conditional on the actual adoption of the reforms as well as meeting the other triggers for moving to the high case lending scenario as presently outlined in the CAS. RELATIONSHIP TO OTHER BANK OPERATIONS 97. The Bank has worked with the federal social sector ministries since the early 1990s. Although the Bank only began to support specific social sector programs in 1993 with the approval of the First Maternal-Child Health and Nutrition project, the formulation of social policies had been supported earlier by the Social Sector Management TAL, approved in the late 1980s, which lay the foundation for future programs. Since then, the social sectors have turned out to be the most dynamic parts of the Bank's program with Argentina at both the provincial and federal levels. Highlights of the Bank's support follows: 43 * In the mid-1990s, the First and Second Secondary Education Projects supported the central government in its coordinating role and financed investments in the provinces to improve service delivery. Subsequent projects have supported higher education and specific reforms and investment in basic education by selected provinces, notably the Province of Buenos Aries, and the provinces participating in the series of Provincial Reform Loans (PRLs). • In health, the first stage of introducing competition into health plans was supported by the First Health Insurance Adjustment Loans and the accompanying Health Insurance Technical Assistance Loan in the mid-i 990s. Reform of hospital administration and autonomy and the building of capacity at the provincial level to improve provincial health policies were supported by the Provincial Health Loan. Provincial initiatives to introduce universal health insurance-Health Insurance for the Uninsured-and reforming the provincial health insurance agencies are also being supported by PRLs and a separate LIL (yet to be signed). * On social protection, the Bank's initial focus has been on building up an array of new programs for social protection, capacity building and community development addressing the needs of vulnerable groups. This was particularly the case following the Tequila crisis, at which point it became evident that Argentina did not have the programs in place to cope with severe shocks to the economy nor to provide insurance or mitigation for those at risk. Thus, the Bank has supported improvements and expansion of the public works program TRABAJAR, which it continues to finance, and has added support for small farmers (PROINDER), indigenous peoples, family capacity building, and a social fund, FOPAR. At the same, time the Bank assisted the government in addressing a critical bottleneck-the lack of information on social conditions and the lack of monitoring and evaluation systems to measure program impacts under SIEMPRO. * Importantly, to assist with implementation of the social protection dimensions of the proposed Loan, the Bank also intends to provide technical assistance via the proposed Social Protection V Project. 98. Equally, the Bank has a long standing role in public sector management. The first efforts in the early 1990s focused on reforms to financial management, auditing and control, downsizing and rationalization of the public sector. These were complemented by a number of technical assistance loans. On the revenue side, the Bank has assisted in tax administration in the past with two now completed technical assistance projects: the project goals were achieved but results were less than what had been hoped initially. The Bank had also has been providing technical assistance for improvements in the social security agency, ANSeS, as well as support for the introduction of SINyTS and improved poverty monitoring under SIEMPRO, respectively, under the National Pension Technical Assistance Loan, the First Phase SINyTS Technical Assistance Loan and the Social Protection II and IV Loans. The Bank as also been assisting in improvements to public expenditure management, under the Public Investment Strengthening Technical Assistance Loan. The government's latest program for modernization of the state has been developed with the assistance of the Y2K loan, now restructured and renamed the 44 State Modernization Technical Assistance Loan. This latter loan will be instrumental in assisting the government in implementation of the state modernization program. 99. With respect to the provinces, more than half of the Bank's program is directly or indirectly supporting provincial activities via a combination of adjustment and investment loans. Earlier in the 1990s, this included privatization of provincial banks - a long known hindrance to fiscal transparency and prudent fiscal management-as well as major public utilities mirroring the efforts at the federal level. The Bank also supported various programs for incorporating provincial public employee pension plans into the national system, improved property tax registries, financial management, budgeting, flood control and prevention, and upgrading physical infrastructure, including out-sourcing of road maintenance. In selected provinces under the series of PRLs, the Bank has provided a new platform for provinces to address issues of education and health, social protection, investment climate and basic economic management. The Bank has contributed considerably via ESW on developing the conceptual underpinnings of the latest measures and new directions for reform of the federal-provincial revenue sharing scheme. For more intensive inter-action, the Bank will continue to work with individual provinces via a combination of adjustment and investment loans as laid out in the CAS and the FY01 Progress Report. 100. The Country Assistance Evaluation Update,34 completed by OED in anticipation of the last CAS, indicated that the Bank's financial assistance to Argentina in the 1990s was among the best Bank-wide and represented a dramatic improvement over the past. In addition, it considered the Bank support cost effective in terms of both cost per project and per amount committed. Overall outcome was rated satisfactory, with only one out of the last 17 loans considered not to have met its goals at that time, and institutional development was rated substantial in some areas. While project sustainability was rated 98 percent for that part of the portfolio already evaluated, there was concern expressed as to the vulnerability of the economy to external shocks and the need to improve on poverty levels and income distribution. In terms of recommendations for the future, OED advised that the program should concentrate even more on social sectors and provincial reform, and not to neglect the reform of federal institutions. Thus, the proposed SAL responds to the priorities identified in OED's evaluation. REFORM PROGRAM OBJECTIVES 101. The government's reform program has the dual objectives to improve the quality and equity of social services and to reduce fiscal instability in the consolidated federal- provincial public sector which both increases the demand for social assistance and undermines the ability of the governments to deliver these services. As noted above, these objectives are fully consistent with CAS priorities. Persistent poverty and the vulnerability of particular segments of society require action on the part of governrment to improve the capacity to respond to these needs. Improved fiscal sustainability will be critical to lowering the likelihood of future economic shocks - events that dramatically 34 See Argentina: Country Assistance Evaluation, Report number CODE2000-4 1, dated May 17, 2000. 45 exacerbate social needs. The reform actions to be supported by the proposed loan would address fiscal stability directly through improved tax administration. In addition, reforms to improve the efficiency and effectiveness of public resource allocation will enhance the poverty alleviation impact of social policies. 102. The federal government has launched an ambitious medium-term program addressing these twin goals. The government intends to improve the administration of those social programs that are under its own responsibility, improve the regulatory environment of the national health insurance system, and to improve the administration of the federal taxes that finance much of social expenditures at all levels of government. In addition, the federal government has begun to coordinate activities in the provinces that will lead to increased transparency, and improved budgeting and planning by that level of government. One of the over-arching objectives of these actions is to improve the consolidated public sector's fiscal balance. Hence, adjustment lending is justified on fiscal grounds. The link between fiscal performance and balance-of-payments financing in Argentina is particularly strong, given the large share of public sector external interest payments in the current account deficit. 103. These objectives do not cover the totality of the country's development needs for poverty reduction and restoration of growth. As laid out in the CAS and the FY01 CAS Progress Report, Argentina's present situation calls for a dual, inter-related approach. The first dimension, the focus of this proposed program, is ensuring the sustainability on the fiscal side without which investor and consumer confidence will not be restored and without which the resources needed to support Argentina's social protection system will be at risk and the poor will continue to be vulnerable. Within that, there is the need to reorder social programs and priorities, redirecting available resources more efficiently while seeing that the social protection system addresses the risk faces by the poor and vulnerable. Because of Argentina's federal structure, this entails actions at both levels of government and complementary reform at the level of individual provinces. That process must recognize the varying capacity of the provinces to undertake reforms, as followed under the Bank's approach to individual provincial reform operations which will accompany the proposed SAL including efforts in the education sector to support efficiency, expanded capacity and improve quality. The second dimension, which is being addressed under other future and on-going operations in concert with the IDB and the IMF, is the economy's underlying competitiveness, the investment climate, and improvements in human capital for long-term growth and poverty reduction. As explained in the CAS and the FY01 CAS update, it is important to continue in parallel the work on labor markets, transport and logistics, deregulation, capital market development, judicial improvements, education and taxation as the key to Argentina's long-term growth and poverty reduction. PROGRAM DESCRIPTION 104. The main elements of the overall program have been defined and are presented in Annex B. The annex provides a general description of the medium-term reform areas to be pursued under the proposed operation and possible future adjustment loans, as well as parallel endeavors which are being supported by different instruments, most notably the 46 series of Provincial Reforms Loans, the ongoing series of education loans, and other possible new operations. The phasing of the program supported by the proposed operation (and in some cases using different instruments operating in parallel) will depend on the following factors: (i) institutional capacities available to manage the changes; (ii) the development of technical parameters and details, including underlying studies and analyses; (iii) the outcome of legislative actions required in some cases to entrench firmly the reforms and to give them full force; (iv) the evolution of fiscal and other variables which may precondition the availability of financing and coverage of anticipated program changes; (v) the support from the public and other key stakeholders; and (vi) the sequencing and adoption of complementary actions some of which may be inter-dependent on the above. It is envisaged that the first phase of the overall program supported by the proposed two-tranche operation will be followed by one or two more adjustment operations, depending upon progress in implementing the continuing reform agenda. Throughout the implementation of the proposed operation, the Bank will continue advising and providing technical support to the authorities, and work with the government to elaborate and refine the specific details of the medium-term reforms. 105. The reforms supported by the proposed loan are set out in detail in Annex C, which provides a complete list of the specific actions to be supported by the proposed SAL, including prior actions completed before Board presentation and the conditions for release of the second tranche (all actions in the "Actions Completed" column have been completed prior to Board presentation; all conditions in the "Second Tranche" column have been included as conditionality in the Legal Agreement). The following overview highlights the key actions by thematic area: 9 Building on earlier agreements, the Federal Agreement of November 2000 stabilizes the flow of fiscal transfers to the provinces over the 2001-2005 period. The 2000 Agreement established guidelines for transparency of provincial accounts, budgeting and expenditure planning. It also establishes fiscal targets and the basis for improved federal-provincial coordination in tax administration, transparency and financial management. As prior action, the provinces have been adhering to fiscal requirements of the Agreement and have begun implementation of other measures. The federal government's compliance with the transfer rules laid out in this Agreement will be monitored as a second tranche condition, as will the provinces' fiscal performance. In addition, a second tranche condition states that the federal government will publish an updated report on the provinces' fiscal performance and compliance with the Federal Agreement. > The federal government's own decision and the agreement with the provinces in July 2001 takes this further by committing both federal and provincial governments to attaining zero deficit for the second half of 2001, greatly accelerating the schedule for balancing the budget ahead of the 2005 which was in the original agreement. > The other features of the November 2000 Agreement including elimination of automatic salary increases, transparency in accounts and budget processes, and improved financial management and exchange of data to reduce evasion are progressively being implemented. As a prior action, twelve provinces have enacted 47 fiscal solvency laws, eighteen have enacted legislation that either limits or eliminates automatic wage adjustments for seniority, and thirteen provinces have established financial administration laws compatible with the federal financial administration law. For the second tranche, the three largest provinces in Argentina will have begun to use a tax payment information system that is compatible with the federal government system, thus facilitating the exchange of information. > Control is being exercised over the level of indebtedness of the provinces, combined with debt relief for those provinces which comply with the fiscal program with plans to move this to market based mechanisms. As prior actions, the federal government has limited debt authorizations to a level consistent with provincial deficit targets, and they have implemented a "below the line" monitoring system for tracking provincial deficits. > Regulatory reform of the national health insurance system will advance, in order to increase competition, choice, equity and efficiency in the provision of health care for roughly one third of the countries population, as part of a highly complex reform of the health care system. Second tranche conditionality envisions improved choice by calling for a decree that would allow all workers, including low-income workers, to choose their health insurer from the first day of employment, rather than having to wait one year. Equity concerns are addressed through second tranche conditionality that calls for a new compensation system for the redistribution fund, making the subsidies proportional to the number of beneficiaries (including affiliates' covered family members) rather than the number of affiliates. > Process to restructure, close and/or merge has been initiated for those obras under stress which do not meet minimum financial and operating requirements according to existing regulations. As a prior action, the SSS has notified all insurers that fail those criteria that they are in a "crisis situation," and requesting restructuring plans from those insurers. For the second tranche, financial subsidies will be eliminated for insurers that suffer from chronic operating deficits, and the insurers that remain in a crisis situation will be removed the National Registry of Health Insurance Agents. > Decrees were issued in December 2000 to fine-tune and extend previous reforms of the social security system, so as to improve the equity of the system and generate savings over the long run. These are currently expected to be in effect by the end of 2001, barring further legal challenges; the reforms would then be adopted by law. > Efforts have begun to reduce corruption and inefficiency in, ANSeS, the agency that administers social security transfers and accounts for about half of federal spending as part of a comprehensive institutional reform program, with specific targets for compliance to be monitored as a condition for release of the second tranche. > The government has initiated a program to consolidate and improve targeting of federal social protection programs and is advancing on plans to expand considerably the coverage of these programs for three targets groups, with an emphasis on poor children by redirecting resources from now untargeted income transfers. The agreed 48 structure of this reform has been officially communicated to the Bank, as a prior action. > The government has initiated a program to improve the auditing and monitoring by AFIP, the national tax collection agency, as part of a renewed campaign to reduce evasion. So far, some 45,000 audits have been performed out of the 100,000 anticipated for the year. Second-tranche conditionality specifies a timetable for advancing towards this goal. Other specific measures, notably the introduction of a recovery procedures (for example, norms for ensuring that banks do not allow withdrawals from delinquent taxpayers' accounts, extension of the large taxpayer monitoring system, joint customs-tax agency inspections, and the creation of taxpayer current accounts in the tax monitoring system) would be implemented according to agreed timetables under second tranche conditionality. >' A framework for system-wide modernization of the state has been adopted, including the initiation of results management via the signing of performance contracts by selected middle-managers. In addition, there are specific actions to increase transparency, improve public sector procurement (a new procurement law issued for the second tranche), lay the legal basis for e-government (a Bill of Law has been presented to Congress to enable electronic signatures), and institutionalize the system of data cross-checking and fraud detection in public programs. On the latter, a new family allowance payment system will be initiated according to an agreed timetable specified as a second tranche condition. In addition, further cross-checks of information will be implemented to identify beneficiaries that are not in fact eligible to receive payments. DESCRIPTION OF FINANCIAL ASSISTANCE 106. The proposed loan is in the amount of $400 million, including the front-end fee, and is to be disbursed in two equal tranches of $200 million. The Bank's financial assistance will support the implementation of the first phase of the structural reforms laid out in this report, during a fragile period in Argentina's political economy. The Borrower will be the Argentine Republic. The loan is part of the Bank's contribution to the $39.7 billion international financial support package for Argentina and assist the government in meeting its financing needs for the 2001-2002 period. As discussed in the FY00 CAS and FY CAS Progress Report, the Bank's strategy is that the future policy actions, described in medium-term policy matrix of Annex B, could be supported by one or two additional loans depending on progress in implementation of the medium-term reform program as well as the attainment of the specified triggers for the high case lending scenario. PROGRAM IMPLEMENTATION AND SUPERVISION 107. The Federal Ministry of Economy will be responsible for the overall implementation of the program and for reporting progress and coordinating actions with the other concerned agencies and ministries. In each of the respective areas of the 49 program, the corresponding chief executive (minister or agency head) would be responsible for those actions that fall within that organization's mandate. The Chief of Cabinet's Office would play the key role of arbitrating among ministries and agencies and for ensuring consistency and coordinated actions among the different parties. In particular, the Chief of Cabinet's Office will continue to chair the Social Cabinet to address the area of consolidation of social programs and the redirection of existing programs. The Ministry of Economy will also have the responsibility for coordinating actions with the provinces as they relate to compliance with the November 2000 Federal- Provincial Agreement and the specific actions included in the program. 108. Bank staff will monitor actions and review progress of the implementation of the proposed program of the SAL as well as the subsequent actions of the medium-term reform program. This will entail a continuous progress of engaging the concerned authorities with the development of those reforms which are yet to be fully defined and actions to be taken for possible future support as it has done during the preparation of this proposed operation. It will also focus on the impact outcomes of the reforms and the adjustments which need to be made to the program as it evolves to take into account the latest country development, stakeholder support and feasible options for realizing the intended development goals. The review will largely be based on the monitoring indicators (which serve as benchmarks to assess whether to proceed) and the goals that the reforms pursue. At the same time, the overall status of the country program will be monitored to determine whether or not country conditions and the specific triggers have been met to allow the Bank to continue and to proceed to the high lending scenario. 109. Table 3 summarizes the performance and monitoring indicators and pertinent quantitative benchmarks for the proposed operation and the medium-term reform program. These indicators and the possible benchmarks have been indicated by the government in its Letter of Development Policy (Annex A) as follows: > Macroeconomic Performance: GDP growth and price stability. > Fiscal Stability: Federal government fiscal deficit is expected to comply with IMF program targets. Likewise, provincial government fiscal targets are to be monitored. To realize these targets, provinces are expected to freeze primary expenditures during the first half of 2001 and to reduce to zero their deficit by year end. > Provincial Budgeting Practices and Transparency: Provincial budget submissions for 2002 should include a multi-year fiscal plan. Those provinces that do not already publish fiscal accounts on the internet are expected to do so in a timely fashion. > Health Sector Deregulation: Transfer of workers across obras sociales; incorporation of prepagas to the system; coverage expansion towards lower-income level workers; increase of transfers and service utilization rates among monotributistas and domestic service workers; elimination of discretionary subsidies to insurers and enforcement of regulations including the closure of non-viable obras sociales. 50 Social Security for the Aged: Basic benefit ('Beneficio Universal') implemented and received by at least 90,000 elderly with pre-benefit incomes below poverty line. > "Universalization" and Targeting of Family Allowances: Per child family allowance expanded to all poor families with children (amount of benefit and exact eligibility requirements are still being analyzed). > Social Security Administration: Extend infonnation crossings on births and deaths to at least 12 provinces and eliminate ineligible payments where detected; and existing stock of claims backlog; reducing fees paid to banks for effecting payments of benefits. > Tax Revenue Performance: Medium-term goal is to increase the tax Revenue/GDP ratio by 0.25 percentage points per year due to improved tax administration; increased number of audits; monthly post-release customs inspections increased, including joint inspections by tax auditors and Customs agents; and arrears collection on a monthly basis in line with annual target of no less than 10 percent reduction in stock of arrears. > Procurement: Approval of new procurement law and issuance of new procurement regulations. > Education: Education is primarily a provincial responsibility (see Box 2) and is being addressed in parallel using other instruments. As noted in the CAS Progress Report, the government and the Bank will monitor high-school graduation rates, as well as implementation of education reforms in the provinces that receive assistance, via the Provincial Reform Loans and complementary investment loans in selected provinces. This is an integral part of the overall social sector reform agenda. 51 TABLE 3: SUMMARY OF SAL PERFORMANCE AND MONITORING INDICATORS Policy Area Indicators Government Expectations Macroeconomic -GDP growth -Reactivation by end of 2001 Performance -Average 4 percent during 2002-2003 -Inflation -Inflation less than 3 percent Fiscal Performance -Federal fiscal -Compliance with IMF Program Targets deficit for 2001 -Provincial fiscal -Compliance with primary expenditure deficit freeze, fiscal deficit targets for 2001, __________________ followed by progress towards zero deficit Tax Administration -Tax Revenues/GDP -Increase by 0.25 percentage points per year (calculated according to an agreed methodology) -Audits completed -Progressive accomplishments according to agreed schedule, with 70,000 completed by October 2001 -Customs collection -Post-release inspections increased, including joint Customs and Internal Revenue audits Social Security -Stock of -Eliminate stock of claims backlog Administration unresolved claims progressively according to agreed schedule for cases over 70 days old Pension Reform - Coverage of basic - Basic benefits (Beneficio Universal) (SIJP) pension benefits received by at least 90,000 elderly with pre-benefit incomes below poverty line Child & Household -Coverage of basic -Implementation of basic per child benefit Welfare child benefits to all poor families with children Health -Closure of non- -Crisis notification letters sent to at least viable OSSs 75 OSSs, and restructuring plans in effect in those OSSs over the medium-term -Number of requests -No specific target; however, to be (by new workers) to monitored to as indicator of flexibility in change OSS insurer the system 52 DISBURSEMENT AND AUDITING 110. Loan disbursements would be made under simplified SAL disbursement procedures under which loan proceeds are disbursed against satisfactory implementation of the program, including compliance with stipulated tranche release conditions. Disbursement will not be linked to any specific purchases; hence, evidence will not be needed to support disbursements. However, there is the standard prohibition on using proceeds to cover expenditures incurred in the borrower's currency and the loan proceeds can be kept as country foreign reserves or used to finance imports other than the standard excluded expenditures. Tranche review release and program supervision will ensure that that program supported by the loan is carried out as agreed. 111. Once the loan becomes effective, the Borrower will open and maintain a corresponding deposit account in dollars in the Central Bank. Once the Bank is satisfied that the Borrower has fulfilled the conditions for first tranche release, which is expected when the loan becomes effective, the Borrower will submit a simplified withdrawal application against which the Bank will disburse the corresponding loan proceeds into the deposit account for the Borrower's use. This process would be repeated for release of the second tranche according to the conditions set out for the release of that tranche. Independent auditors acceptable to the Bank may audit the deposit account if the Bank so requests. Copies of any audit will be submitted to the Bank no later than four months after the date of the Bank's request for such an audit. PROGRAM BENEFITS AND IMPACTS 112. Besides noteworthy improvements in the quality and equity of key social services, the program is expected to have a notable impact on the federal government's bottom line. These savings and increased revenues form a significant part of the government's efforts to reduce Argentina's vulnerability to external shocks, its dependence on external financing, and the realization of long-term fiscal and debt solvency. These are necessary conditions for restoring growth and continuing on the path for poverty reduction. The proposed program, when fully realized, is expected to generate benefits in the following broad areas: * Fiscal sustainability at both the federal and provincial levels: this will contribute to improved investor confidence and reduced country risk and interest rates as preconditions for restored growth. Reduced volatility should have a positive impact on the poor as they lose the most during economic down turns. It will also generate greater predictability in public spending, especially for social protection for the poor which has in the past been more volatile than other types of public spending. * A consistent strategy for social protection targeting the key vulnerable groups with their inclusion in core parts of the social security and health care system, most notably for poor children, poor working families and poor women. 53 * Redirection of a significant part of federal social spending from untargeted to targeted social assistance programs for key vulnerable groups and conversion of social spending to more efficient and effective forms of support while reducing administrative costs. 113. More specifically, the expected benefits in the area of social services include: (a) improved efficiency, equity and choice in the national health insurance system-the proposed changes are designed to address, among other things, the disincentives to providing health care to large families of low income workers, the inclusion of poor formal workers who are presently excluded from the health insurance scheme, and the access by small entrepreneurs and domestic service workers, predominately poor women; (b) improved effectiveness of federal and provincial social protection programs which will enhance coverage for the 75 percent of the poor who do not presently receive any public benefit. The share of total spending to poor families with children is expected to increase considerably. By consolidating programs and converting programs from in-kind to cash (or equivalent), the reforms are also expected to make programs more effective and lower overall administrative costs; and (c) improve the equity of the public pension system by explicitly covering those who are presently excluded from any program, while reducing benefits for those less deserving and gaining from efficiency in the delivery of pensions with savings over the long term. 114. On the side of fiscal sustainability, the benefits are expected to be: (a) improved efficiency of tax administration which is to generate improved collections and reduce evasion, thus contributing to long-term fiscal sustainability and creating the conditions for reform of the tax structure which could make tax policy more equitable as the next step-the gains are estimated at 0.25 percent of GDP or about $ 750 million per year; (b) improved efficiency of the social security payment agency which will reduce fraud, corruption and overpayments, as well as gains in administrative costs estimated to be in the order of $ 300 million annually and these savings could be much larger if an effective method is found to reduce legal claims and penalties which presently cost as much as $800 million per year; and (c) system-wide improvements in public sector management which would add to the quality of public services, transparency and accountability and which also lead to savings particularly in public procurement and reduced corruption generating additional savings in the order of 10 to 20 percent of public contracting. MAINSTREAMING GENDER ISSUES 115. As part of project preparation, a gender assessment was conducted (see Annex E for more details). The gender assessment did not find that the reforms would have negative gender impacts. On the contrary, the reforms when implemented would have important effects on reducing intra-gender disparities in the access to and benefit from public services and subsidies, and enhancing opportunities for achieving gender equity in civil service. In recent years, gender issues have become more prominent in the Bank's program of support to Argentina. In December 1999, the Bank published an overview of 54 gender issues in Argentina.35 The report focused on five areas that need to be addressed in the short-run: (a) family structure, gender relations and family capacity; (b) youth problems, including violence, teenage pregnancy and unemployment; (c) access to reproductive and maternal health services; (d) violence prevention; and (e) opportunities in the labor market. As noted in the CAS FY01 Progress Report, there have been noticeable advances in the dialogue on family structures and on access to reproductive health services.36 There are a number of reform actions in the proposed SAL that could indirectly impact these issues in a favorable way. For example, the restructuring of the health insurance system should improve the efficiency and equity of family health care. Specifically this can be addressed in the criteria for future modifications to the standard health care package (PMO) covered by the insurance system. The improved targeting of family allowances should also benefit family structures. Additionally, there are opportunities to inject the gender dimension to the Modernization of the State program and an agreement has been reached between the Secretary for State Modernization and the National Council of Women to include gender in the Citizens' Charters for public agencies. Beyond these impacts, the sequential approach of the proposed reform program presents an opportunity to incorporate a gender dimension in reform design and planning for the next phase of reforms according to the strategic framework developed with the government. ENVIRONMENTAL CONCERNS 116. The intention throughout the reform process is to analyze and monitor any environmental impacts, consistent with prevailing policies and guidelines for structural adjustment lending. The focal areas of the proposed SAL (reforms in health insurance, pensions, social security, federal-provincial relations) do not directly increase public investment programs that could lead to significant negative environmental impacts. The proposed program has no direct linkages to trade liberalization and policies in the productive sectors (energy, mining, industry) that could induce indirect environmental impacts. The proposed reform program does not include, at this point, tax reforms that would change the structure of specific tax policies (e.g., fuels, extractive activities) that could induce indirect negative environmental effects caused by changes in the patterns of production and consumption. On the fiscal side, there is however the possibility that overall reduction of governmnent budgets at the central and provincial levels will affect the allocation to environmental institutions management. While there is no expectation that these cuts will be disproportionately higher in environmental agencies than in the rest of the public sector, the Bank's ongoing assistance helps mitigate this potential risk. Bank projects support capacity building at the central and provincial level in addressing 35 Published in Spanish as "Las relaciones de genero en la Argentina, Un panorama sectorial," December, 1999. 36 The Bank has completed ESW on Gender and the Legal System, and on Reproductive Health Services for the Rural Poor. A study of the legal underpinning for reproductive health is presently underway. In addition, the PHRD grant to help mainstream gender in the Bank's activities in Argentina has recently been approved for government execution. However, the Family Capacity Building LIL has been awaiting for govermment approval. 55 pollution problems and natural resource management (e.g., forestry management, biodiversity protection, water resources management). 117. In Argentina's federal system, the provinces have autonomy in terms of legislation and institutions addressing environmental management. Few areas are the direct jurisdiction of the central government (e.g., transfer of hazardous material between provinces, coastal waters beyond 12 miles). This has created some conflicts because of uneven regulation and differential requirements. The main constraint to improved environmental management is poor enforcement. In the past, the central government made limited attempts to promote coordination with the provinces and to lead the way in enforcing environmental regulations. However, the current administration has prioritized collaboration with the provinces by strengthening the role of the two Federal Environmental Councils dealing with environmental management and natural resources (e.g., fisheries) that promotes discussion and coordination of national and provincial environmental policies. In addition, closer support to municipalities in urban environmental management is also support by Bank projects and special initiatives in the areas of solid waste management, hazardous waste regulation, air and water quality management, and sustainable land use. SOCIAL IMPACTS 118. As demonstrated during public consultations in preparation for the last CAS, there is a high level of public interest and debate of economic reforms in Argentina, particularly regarding the social costs of adjustment, poverty and sustainable job creation. The government continues to engage in open discussion of the economic program with the press and in the legislature. A review of recent public opinion polls show considerable popular support for: (i) opening competition between the obras and private health insurers; (ii) making the pension system more flexible for workers who do not have 30 years of employment; (iii) reducing tax evasion and reducing fraud in public spending; (iv) reducing Argentina's dependence on debt, which implies support for reducing the fiscal deficit; and (v) maintaining the Convertibility Plan. There is also wide spread support for extending the fiscal adjustments to the legislative branch whose spending is considered excessive. At the same time, there are continuing concerns about what cuts may mean on services and personal security, whether extending the retirement age for women is positive or negative, and whether the tax collection effort will really include those who have been successful in evading so far. In sum, the Argentine public sees both opportunity and risks in the reform process and many are uncertain about the future. 119. Looking more specifically at the fiscal adjustment being implemented by the federal and provincial governments, this will have negative impacts on particular groups, most notably public sector civil servants who will see their salaries cut in order to attain zero deficit. But it will also have an extremely positive impact on the economy as a whole via the reduction in the country risk premium and interest rates, which should allow for a reactivation of the economy. A similar process of labor cost reductions has been in effect in the private sector throughout the recession as a way of increasing competitiveness and maintaining production. The remaining short-run alternatives are 56 few, if any, and the failure of the current economic program would likely have much more serious social consequences. Much of this is an unavoidable result of the high share of wages in total public sector spending and the few degrees of freedom that remain for Argentina to otherwise adjust. 120. Measures are being taken to mitigate some of these negative impacts while much of what is specifically to be supported under the proposed SAL will be enhancing of social conditions especially for the key vulnerable groups, and will have an positive impact on the equity of many social programs. Some of these features are: * The government is committed to retaining as much redundant labor in the public sector as possible, with training and transfers to other areas. * The budget cuts will not affect those receiving less than $500 per month in pension benefits. It is noteworthy that about 50 percent of pensioners receive the minimum payment of $300 per month. 3 Temporary public works programs, such as TRABAJAR, are continuing and the government has requested the Bank's renewed support. These programs provide support for some 150,000 workers per year. 3 The government has also announced that it will increase funding for targeted programs by $ 108 million per month for the remainder of the year. 3 The proposed reforms of the health and pension systems are clearly equity enhancing by addressing the needs of low income workers. 3 The emerging strategy on social programs and policies ought to lead to considerably better coverage of the poor, especially families with children. 121. The initial social survey carried out for the proposed SAL has established the baseline for impact of the proposed reforms on particular segments of society. It also established a methodology for building consensus for the reforms, as well as the means for effectively communicating and debating the rationale of the reform program and the detailed content of future actions. The intention is to continue to monitor public opinion, use surveys and focus groups to understand better the reactions of the public, and to work with key stakeholders in the design and implementation of reforms. COLLABORATION WITH THE IMF AND IDB 122. The long history of close collaboration between the Bank and the IMF in Argentina has continued as the recent economic events have unfolded. The macroeconomic framework supporting the reform program was established between the government and the IMF, with Bank inputs as appropriate on structural dimensions. The proposed loan would form the centerpiece of the Bank's contribution to the international financial package, agreed to in December 2000, and led by the IMF. The Bank and the IMF collaborate on a regular basis on provincial fiscal issues. The tax administration 57 program was developed with input from IMF staff specialized in this area. Social sector reforms, in particular for health and pensions, have benefited from dialogue with the IMF. 123. As in the past, the Bank and the Inter-American Development Bank are collaborating in providing support for Argentina's reform effort as part of the international financial support package. At the end of 2000, IDB approved, a fast- disbursing loan of $ 400 million for the social sectors, of which $ 200 million has already been disbursed. A $500 million loan was approved to support financial sector reforms with $250 million disbursed and a $500 million loan to support reforms in federal- provincial fiscal relations, similar to actions supported under the proposed SAL, is expected to be presented to the IDB's Board in September. In addition, one other fast- disbursing loans is planned for 2001: a $500 million loan to support competitiveness and economic infrastructure services. LESSONS LEARNED 124. The proposed program reflects the lessons of experience in working extensively in Argentina for more than ten years on a broad range of operations most of which have been successful in reaching their development objectives. These past experiences indicate that Argentina has the institutional capacity to undertake far reaching reforms and that it is able to rise to the challenge of a crisis. In light of the country's present economic circumstances, there is an even greater sense of urgency to carry out the reforms. Lessons learned include: 3 The need for detailed and thorough knowledge, analysis and preparation before adopting the reforms. In most respects, the Bank has been well prepared for the proposed operation, based on past work in the respective areas, particularly federal- provincial fiscal relations, health insurance, and some other parts of the social agenda. But it is less so the case in the area of tax administration so that the IMF has been a critical partner in that component. * Incentives need to change. The earlier experience in reforming PAMI, the health insurance provider for the aged, demonstrates that administrative reforms, such as curbs on budget allocations, do not have lasting effect. Sustainable impacts only come from changing the rules of the game such that the actors in the system-the agency, its staff, the beneficiaries, and the health service providers-work towards common goals. * The key role of people and institutions in making reforms effective and sustainable. In the past, the Bank has been modestly successful -- in the area of tax administration, for example -- but more profound reforms were resisted by vested interests and waned when leadership was not able or convinced to move ahead. * Strong leadership is vital. Several of the Provincial Reform Loans demonstrate this, as do earlier reforms in the 1990s. Given the current crisis, it is important that the reform program has a credible and articulate leader. 58 * Information is important and may be critical in making lasting changes in the way decisions are made, reducing individual discretion and reducing opportunity for corruption. The example of SINTyS is a good one, showing that modest amounts of resources can generate substantial payoffs. While computerization and access to information may not be a panacea, they can be a powerful instrument to change behavior and overcome vested interests. * Good communication of the purpose and content of the reforms can often help to overcome fears and concerns. This has occurred in some of the Provincial Reform Loans, as well as the most recent attempts by the government to reform the pension and health insurance programs. RISKS AND RISK MITIGATION 125. The reform program faces high risks. The main risks include: (1) Argentina's macroeconomic fragility; (2) incomplete or delayed implementation, due to the complexity and institutional nature of the program itself; (3) a weakening of political- economy support for the program; and (4) social risks. 126. Argentina's macroeconomic environment continues to be highly fragile. There is a risk that the current macro-economic framework may not be sustained, and growth may not recover at the pace expected by external markets, and required for fiscal sustainability. A further deterioration in fiscal balances could lead to even more severe limitations on access to borrowing and jeopardize the program. It could also limit the govermment's scope for making the proposed shifts in social spending to the poor. Moreover, Argentina continues to be vulnerable to external or domestic economic shocks. The present IMF-led program of international financial support is intended to reduce these risks, as are other actions by the government to reduce liquidity needs for the 2001-2003 period through debt swaps. 127. The complexity, the number of actors, and the medium-term institutional nature of many of the reforms pose a challenge for the implementation of the program. This means that all of the components of the reform program do not have the same chance of success. The proposed SAL would support the first phase of reforms in several key areas. The timing of possible follow-up operations, which would support later stages, would depend on the progress in implementation of the medium-term program. The completion of a strong set of prior actions before Board presentation, the tranching of the proposed operation, and the performance-based phasing of follow-up operations help reduce the implementation risks. 128. A third important risk pertains to the strength of vested economic and political interest groups, which could slow down, inhibit, or completely stall reforms. There are powerful groups related to the health system, tax collections and social security payment system which will not want to see serious reforms take place. Many public sector workers (with incomes above a minimum threshold) will be affected by wage and pensions reductions-as has happened to private sector employees over the last three years. At the same time, the government has publicly stated that there will be no 59 involuntary downsizing in the federal public sector. The use of information and communications tools to explain the programn costs and benefits to the people is critical to addressing this risk. Mobilizing public opinion leaders as a force for change is particularly important in this regard. 129. Deteriorating social conditions are a fourth major risk. Argentina's economic and social conditions have worsened considerably in the past three years, and social tensions are high. If such social tensions rise further, they could erode broad-based support for the overall program and jeopardize sustained program implementation. The proposed operation and the envisaged follow-up operations are specifically designed to focus on establishing effectively targeted poverty interventions in the health and social protection areas. As they are implemented, these interventions will help protect the incomes and well-being of the poorest and most vulnerable segments of the population. While the government's overall reform program entails cuts in salaries and pensions, such cuts are restricted to recipients with incomes above a minimum threshold, and components under the program supported by the proposed operation provide for the targeting of benefits to the poorest segments below that threshold. The Bank has discussed with the authorities the importance of an effective communications strategy laying out clearly the elements of the program and how they will help improve social conditions and protect the poorest. 130. While the risks are high, they are on balance offset by the expected benefits. Greater stability in the country's macroeconomic and fiscal situation, including at both federal and provincial levels of government, is critical for reestablishing confidence, rebuilding a positive investment climate, and restoring growth and reducing poverty. The overall reform program itself fundamentally addresses the structural and social weaknesses perceived by the Argentine public-including tax evasion, corruption, waste, misguided spending and slow, bureaucratic public services. As such, the program is expected to generate positive benefits for the poor and for the population at large. The specific targeted interventions are focused to directly benefit the poor. D. RECOMMENDATION 131. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it. James D. Wolfensohn President By: Sven Sandstrom Washington D.C. August 6, 2001 60 Annex A Page 1 of 14 Annex A: Letter of Development Policy Buenos Aires, August 2, 2001 Mr. James D. Wolfensohn President International Bank for Reconstruction and Development Washington, D.C. Dear Mr. Wolfensohn, This Policy Letter describes the Government of Argentina's economic reform program for 2001, as well as the specific measures it will take to deepen reforms already underway. The Argentine Government is requesting financial assistance from the International Bank for Reconstruction and Development in order to implement the structural reforms described in this document while avoiding a deterioration in the financial profile of the public debt. 1. The Macroeconomic Context and the Government's Actions The Argentine Government has recently launched a broad set of economic policy measures, which aim to consolidate fiscal solvency, reduce financial vulnerability, and launch a strategy for growth (from the demand side as well as the supply side). The new economic program is based on reaching fiscal solvency, improving the tax system, and reinforcing tax collection by battling against tax evasion. At the same time, the Government has aimed at a positive growth path through various routes: improving the competitiveness of the economy and protecting the economy from new adverse external shocks, while simultaneously strengthening public accounts with a "Zero Deficit" policy. With the intention of reducing financial market fears about the will and capacity of Argentina to fulfill its debt obligations, as well as avoiding the vicious cycle of debt dynamics which will inhibit any possibility of growth in the long run, the Government has implemented two fundamental policies: (i) a voluntary debt refinancing, and (ii) a "Zero Deficit" rule. With respect to the public finances, the national govermment decided to guarantee its financial solvency with a voluntary refinancing of public debt, offering new financial instruments to the markets, and has achieved a reduction of Argentina's debt obligations by US$7.8 billion over the next 18 months and US$16 billion over the next 5 years. The debt refinancing had three objectives: first, to reduce roll-over risk and increase the flexibility of public debt management; second, to smooth the profile of debt maturities in order to facilitate better fund-capture by the public sector; and third, an adjustment of financing needs due to the transition of the social security system (from a public "pay-as- you-go" system to a system of private, individual capitalized accounts). In the fiscal area, the Argentine Government has decided to immediately implement a new and key structural reform law, comparable in significance to the Annex A Page 2 of 14 Convertibility Law of 1991, the "Zero Deficit Rule." Under this new fiscal rule, the government makes explicit the objective of not increasing the level of debt and has achieved budgetary equilibrium since the second semester of 2001. This initiative, politically and legally approved in Congress, represents a key element for restoring market confidence, reducing interest rates, and achieving economic recovery. The nucleus of this new fiscal rule (i.e., that the government is not able to finance current expenditures with new debt) is based on a law that has the status of Public Order Norm, and is thus not subject to judicial laws against "innovating." The New Law of Fiscal Equilibrium, in Articles 14 and 15, explicitly modified the Civil and Commercial Code to prohibit any legal action to suspend its implementation. With the objective of alleviating the burden of fiscal adjustment on public employees and the beneficiaries of the pension system (for those with a monthly income of less than $500), the National Congress proposed this group of complementary measures: (i) increasing employer social security payroll contributions for service sector companies; (ii) delaying the implementation of the reduction of the Income Tax and the Diesel Tax; and (iii) generalizing the VAT tax rate. On the public sector expenditure side, an adjustment coefficient will be applied to all budgetary items (including Judicial and Legislative salaries), except for monthly salaries and retirement benefits which are lower than $500, provincial transfers, and interest payments on the debt. Along with this fiscal effort, the government deemed it necessary to reinforce the allocation of social programs by a monthly amount of $108 million during the second semester of 200 1. One of the long-term objectives of the new fiscal policy is to generate a more efficient and equitable tax structure while, at the same time, reducing the tax pressure on the private sector. To achieve these objectives, distortionary taxes will be gradually eliminated to eventually converge into a system based on two taxes: the VAT (with a rate that will be reduced to 16% in the long run) and the Income Tax. Nevertheless, the convergence towards this new tax system requires that the gradual reduction of distortionary taxes be accompanied by mechanisms which substantially reduce levels of evasion. The possibility of computing some taxes as payment towards VAT is the mechanism with which the government will take advantage of the good collection and control mechanisms already in place, while, at the same time, incorporating a greater number of contributors to the system. Within this framework, the government has moved towards the use of taxes which are easily collected such as the mechanism of pre-payment (pago anticipado). One of the central instruments of this strategy has been the implementation of the new Tax on Financial Transactions (ITF), which, due to the difficulty it poses for evaders, has contributed to an increase in tax revenues. However, the greatest contribution of the new law has clearly been its focus on tax evasion; in the short run the ITF will be fiscally neutral, given that its payments will be calculated as pre-payments on the VAT and the Income Tax. "Competitiveness Plans" have been implemented to support investment, the generation of employment opportunities, and growth through tax reductions. As well as stimulating investment, these plans also play a special role in the simplification of the tax system. That is, the gradual **generalization of sectoral programs, which work to eliminate distortionary taxes, will function over time as a mechanism to simplify the tax system as a whole. Nevertheless, it is almost impossible to immediately and completely Annex A Page 3 of 14 reduce distortionary taxes, given the strong fiscal restrictions faced by the public sector. For this reason, the Argentine Government has decided on a gradual change of the scheme, taking certain sectors or geographic areas and exempting their payments of distortionary taxes which, one way or another, will be eliminated in the medium term. To this end, the "Competitiveness Plans" do not provide any special incentives for the structure to be applied in the long term for each sector and, consequently, they do not introduce any new distortion in the allocation of resources. An appropriate framework to achieve greater investment and growth requires the reduction of the country's vulnerability to international monetary shocks. In this, Argentina has made important progress with the convertibility framework, by proposing a broader scheme which incorporates the Euro as the currency supporting the monetary base and fixes the exchange rate as a simple average between the U.S. Dollar and the Euro. This will become operative as soon as the exchange rate between the Dollar and the Euro reaches unity, as a means of avoiding a discrete jump in the exchange rate of the Argentine Peso. The broadened convertibility scheme preserves the fundamental characteristics of the current scheme: (i) complete support of the monetary base with international reserves; (ii) strict limits on monetary policy; and (iii) freedom of currency choice for undertaking economic transactions. It reduces volatility in the exchange rate and the need to make inflationary or deflationary adjustments as a response to international monetary shocks. In order to anticipate the benefits from the broadened convertibility scheme, a trade compensation mechanism has been created, called the "convergence factor." Exports will receive compensation equivalent to the difference between the current exchange rate ($1=US$1) and that corresponding to the Dollar/Euro basket (at this moment, that difference would be approximately 7 cents) defined in the broadened Convertibility Law. This difference is not fixed, but rather it varies according to the daily value of the Dollar/Euro exchange rate. In the same manner, imports will pay one tariff, which will also be adjustable and of the same magnitude. This mechanism will be of an entirely fiscal nature, without any participation of the Central Bank or monetary authorities, which will continue to exchange one Peso per Dollar, as determined in the Law of Convertibility. The fact that the Central Bank does not play any role in this mechanism implies that the international reserves supporting the convertibility are not altered in any way, and the support of these reserves is free from any danger. In this manner the introduction of the "convergence factor" in no way weakens the objectives of convertibility nor the strength with which it can be defended. In terms of trade policy, the introduction of the "convergence factor" has various benefits: (i) it protects the economy from further appreciation of the Dollar; (ii) it simplifies trade policy by homogenizing export subsidies and tariffs on all activities; (iii) it reduces the "trading preference for MERCOSLJR" and, since the Euro and the Real have tended to move in the same direction (a strong pattern of behavior observed over the past few years), it protects the economy from further depreciation of the Brazilian currency. In addition, by being a temporary factor (which will disappear in the case that the Dollar/Euro exchange rate reaches unity), it solves the economic policy problem that appears when the Government deems it necessary to reduce taxes and export subsidies. Eventually, when the aforementioned parity is reached, the mechanism will disappear, leaving behind an economy with fewer distortions and barriers to trade. Annex A Page 4 of 14 However, Argentina's trade policy continues to be oriented towards free trade and a more aggressive opening towards the rest of the world. To this end, the Argentine Government is strongly pursuing its integration into global trade, with MERCOSUR as it launching platform, through the implementation ofjoint negotiations, and the considerable acceleration of negotiations for bilateral trade agreements with the rest of the world. In the short term, the economic agenda of the Argentine Government is irrevocably committed to a market economy, and centered on pending structural reforms that will guarantee sustainable economic growth. On the fiscal front, these reforms are directed to a greater improvement in long-term fiscal solvency, a reduction in unproductive government spending (principally bureaucratic expenditures), greater progress in the fight against tax evasion, and the start of a co-participation agreement with the provinces, which should bring about better incentives for the design of fiscal policy and the control of public expenditures. 2. Sectoral Reforms to be Implemented As mentioned previously, the national government is committed to the development of second-generation structural reforms, refining the modernization process of the economy, begun in the past decade, while also promoting other reforms not yet addressed. The function of the proposed loan will be to support the implementation of the following group of reforms, described below. A. Fiscal Relationship with the Provinces The policy objectives and legal framework which currently regulates fiscal relations between the national and provincial governments are established in the "Federal Agreement for Growth and Fiscal Discipline," passed in November 2000 and recently complemented with the Pacts] signed with the provinces during July 2001 through which, among many important issues, the provinces commit to adopting the principle of Zero Deficit, in line with the aforementioned policy taken on by the national government. The Federal Agreement makes manifest the will of the national government, the provinces, and the City of Buenos Aires to put in place a group of fiscal and financial policies oriented towards advancing the solutions for fiscal problems faced by the country, promoting the process of modernization of the State, and eliminating the distortions that affect the private and public sectors and the level of unemployment, strongly affected by the recessionary trend of the economy over the past few years. The Federal Agreement contemplates the agreement to freeze primary expenditures, which will permit the establishment of a path towards the balancing of fiscal accounts in accordance with that established for the country in the Law of Public Resource Management (Law 25.152, August 25, 1999), as well as the deepening of the National Program of Financial Assistance and Fiscal Improvement, aimed at provincial states with financial difficulties. Each province will adopt the mechanisms it considers appropriate for this end. Similarly, it includes the commitment of the government to increase the l The nine provinces with governments from the majority party and the Province of Neuquen signed the "Independence Agreement" and the 14 provinces governed by the Partido Justicialista signed the "Institutional Support Agreement for Governance of the Argentine Republic." Annex A Page 5 of 14 budgetary allotment for social welfare and employment programs and transfer resources to be managed exclusively by the provincial governments. In addition, it is important to note that through the Federal Agreement, all parties take on the responsibility for bringing about and guaranteeing a system that ensures an appropriate remuneration for public officials in all areas, leading to the fulfillment of the objectives of austerity, equity, and transparency in the execution of the public function. In the area of modernization and organization of fiscal management, it is the government's intention to give impetus to the adoption of new financial, budgetary, and tax management policies at the national and provincial levels. These policies will be more transparent, methodical, and in line with the goals of fiscal consolidation, and will include actions aimed at improving the efficiency in social expenditure management and establishing norms to support greater fiscal discipline in the provinces. Regarding these policies and the goals of strengthening the generation of fiscal revenues and improving public expenditure management, the government will promote: the establishment of fiscal responsibility and financial management laws at the provincial level; the adoption at the federal and provincial level of multi-year budgets (and it will propitiate fiscal transparency through the public diffusion of fiscal-financial information); the decentralization of social program management towards the provinces; and the establishment of efficient provincial systems for managing tax obligations. These fiscal modernization and management actions form part of the national government's strategy to reach a harmonious fiscal situation that is sustainable over time. To accompany these measures and their impact on the achievement of the objectives set forth by the Federal Agreement, the national government has expressed its commitment to supplying the World Bank with trimesterly data on the evolution of the principal fiscal and financial indicators at the federal and consolidated provincial levels, as well as from the provinces with whom the national government has reached financial control agreements. The government intends to facilitate the improvement of intergovernmental relations and adopt policies that will simplify and grant greater efficiency and predictability to the distribution of federal co-participant revenues between the federal and provincial governments. With the objective of advancing with the reform of the federal tax co-participant framework, in the short run the government intends to hold discussions with the provinces on a draft reform law. Consistent with this reform is the intention to move towards the creation of a new Federal Fiscal Organization, whose functions would include the control of provincial debt, and which would offer a forum for the analysis of the expenditure quality control problem. This organization would employ a permanent technical team capable of producing the basic, necessary studies for decisionmakers, as well as monitoring and identifying any weaknesses, and it would operate as a mechanism to improve the impact of public credit, at the federal and provincial levels. In addition, the Federal Fiscal Organization could act as an important player in the coordination of provincial debt, including the discussion of a future regulatory framework for provincial debt based on market conditions. Another aspect of great importance in the government's reform program is the adoption of policies that will lead to the reform of provincial tax systems and make progress on the elimination of existing distortions facing productive activities. The Annex A Page 6 of 14 govemment intends to make headway in the definition of a federal pact with the provinces on tax harmonization and management which will permit, amongst other results: the reduction of the dispersion of tax rates for similar tax bases; the harmonization of tax bases and exemptions; and the focussing of the tax burden of the gross receipts tax on the final stage of a commercial transaction. These measures would contribute to facilitate the effective establishment of policy measures that could minimize the distortionary effect of provincial taxes on productive activities. In the medium term, tax instruments will be developed with the provinces in line with a simplified tax system. Finally, the government will seek to establish conditions and incentives which make viable the determination of joint policy actions between the federal and provincial governments in the area of Modernization of the State. For this, the government intends to put into place a federal pact which supports the objectives of greater efficiency in public management, a deepening of the process of decentralization, the facilitation of citizen control over government management, and the optimization of the quality of public expenditures. B. The Health Sector The general social sector transformation strategy of the national government, and in particular the strategy for the reform of the National Health Insurance System (SNSS), is based on the need to consider the activities of the health sector as a whole. The government is convinced that equity can improve and risks can be lessened if the system is integrated significantly, with norms for deregulated functions that stimulate the choices available to the beneficiary, thus obtaining an improvement in the allocation of resources. For this reason the national government is prioritizing the mechanisms of free choice, competition amongst entities, subsidies to lower-income beneficiaries, the broadening and improved transparency of the redistribution mechanisms, and the possibility of revenues from new entities in various areas. In conclusion, the central objective of the national government consists in deepening the process of deregulation of the SNSS. The government is currently working in two parallel directions: On the one hand, the Executive Office plans to send to the national congress a draft National Health Law. This law would propose the integration of the different health sub-systems in Argentina into a framework that would guarantee universality, equity, and accessibility of medical assistance services, and would thus extend the health insurance coverage for all its populace. In terms of the SNSS, it is important to note that the government will approve a series of decrees and resolutions that will introduce significant changes, anticipating, in this manner, actions that are consistent and necessary for the implementation of the greater reformns which will be developed in the congress. Amongst these initiatives, the following stand out: * A decree to determine the roster of beneficiaries in the SNSS and to establish the procedures for subsidizing those whose income-level is the lowest on a per-capita basis. * A decree to facilitate the application of the right to choose by the beneficiaries of the system, authorizing this from the beginning of the beneficiary's employment. * A decree to suppress financial subsidies given by the Special Program's Administration to the SNSS agents with chronic operational deficits. Annex A Page 7 of 14 * A decree to define the procedures and time-frame for releasing from the system those health insurers who cannot provide proper services and cannot comply with the fundamental requirements for such institutions. In addition, the Argentine Government will send to congress a draft law modifying the financing framework for the Redistribution Solidarity Fund, increasing its resources through the application of a progressive scale of deductions towards contributions, as a function of the level of gross monthly remuneration of each person in the system, and preparing, at the same time, for the expansion of coverage to those lower-income workers who currently have none. On the other hand, advances will be made in the medium term to eliminate all financial subsidies given out by the Special Programs Administration (APE), replacing them with automatic mechanisms that will operate in situations of emergency andforce majeur. In addition a general reform is to be drafted for the coverage of low-incidence and high-cost benefits, currently administered by APE, with changes in the menu of services covered, probably oriented towards the coverage of chronic pathologies, which are those that limit the mobility of the beneficiaries within the system. And, finally, with respect to the INSSJP (PAMI), regardless of the government's efforts, it presents organizational problems, running financial deficits which can compromise the availability and quality of services provided. The Argentine Government intends to generate substantial improvements in health coverage for retirees and pensioners, to reach acceptable efficiency levels in resource use, and to attain optimal levels of equity in the availability of and access to services. Some of the action plans on which the government is working are aimed at replicating conceptual and organizational elements applied in the reform of the health insurance sector. In this way, the government intends to develop a complete proposal for the INSSJP. C. Social Protection Due to a deteriorated economic situation in the last few years, inequality and poverty are realities that threaten to involve an increasing number of millions of Argentines. While increasing poverty is generating a growing demand for public sector poverty alleviation policies to needy families, there exists the general perception that focussed expenditures on social programs ($6.4 billion, or 2.5% of GDP, of which $3.6 billion are managed by the federal government and $2.8 billion by the provinces) are inefficient. Amongst the flaws observed in social policies, what stands out is the lack of adequate targeting mechanisms, since there is still no roster of social program beneficiaries. In addition, there is ample consensus on the disproportionate number of social programs, which generates numerous problems including: inconsistencies, low definition of priorities, overlapping, gaps, high administrative costs, and control difficulties. To this list we must add one federal assistance structure with little power for inter-jurisdictional coordination and the lack of mechanisms to guarantee independent, professional, and efficient management of each program. Thus, the low coverage, insufficient targeting mechanisms, exaggerated number of programs, horizontal inequities, expensive administration, and management inefficiencies create a system that is incapable of responding effectively to society's demands. Annex A Page 8of14 Faced with this evaluation and the magnitude of accumulated problems, the national government understands that it must prioritize the transformation of social policy in Argentina towards a more transparent, focussed, and efficient system. The principles upon which the new social policy must be founded are: (i) the utilization of objective criteria for the allocation of assistance benefits, avoiding discretionality and political favoritism; (ii) a monetary nature of assistance (for example, food coupons and school coupons); (iii) the taking on of responsibilities by beneficiaries in the areas of health, education, and/or labor; (iv) the establishment of a new administrative structure for the implementation of programs, through service agreements based on simple, transparent, and easily monitored protocols; (v) the implementation of a Unique Register of Beneficiaries (RUB) constructed upon a minimum of homogeneous data, an agile, efficient information system for the RUB, and a broad, simple, transparent, and efficient strategy to reach potential beneficiaries as yet unregistered (for example, through the establishment of unique desks for social programs registration at the local level); (vi) the increase in budgetary allocations aimed at social assistance policies; (vii) the unification of programs with the objective of receiving efficiency gains and economic savings; and (viii) the reform of the sub-systems of Social Security, which will permit the reduction of pressure on fiscal accounts, thus permitting the government to aim greater resources to social policies. Based on these principles, the Argentine Government will refocus investment in social assistance actions such as the child subsidies, coverage for those older than 70 years of age currently without coverage, scholarships, work programs, and training programs. These programs will be oriented towards the RUB. The first two will be designed and monitored by a national, autonomous, and professional entity (the Social Agency), developed at the municipal level, and carried out by ANSES. In addition, the Social Agency, through a "Social Bank" will select and carry out assistance programs focussed on specific vulnerable populations and will attend emergency cases. The main objective is to advance in the direction of a social policy with universal reach to: * Low-income households with children, offering an allotment per child for informal sector workers. This will require normative adjustments that will modify the criteria for eligibility, changes in paymnent mechanisms, changes in the definition of identification mechanisms, and the selection of beneficiaries. The financing for this coverage can be guaranteed as long as: (i) savings are produced in the current social security system from the reduction in fraud; (ii) a transfer of resources occurs from those currently assigned to other social programs for similar groups of the target populace, such as the food coupon program or pension assistance; and (iii) co-financing from the provinces and/or international organizations is available. * Elderly citizens above 70 years of age that live in non-income-receiving households. This will bestow economic help to those who have not been able to work or contribute regularly during the time period set down by the provisional norms, and have no other source of income. The instrument to be used will be the Universal Benefit as defined by the national government (DNU 1306/00) which, once implemented, would permnit the replacement or consolidation of other benefits (PNCs and food programs for the elderly). Annex A Page 9 of 14 With the aim of ensuring ample coverage in social policies, the national government is willing to strengthen the 2002 budgetary allotments for programs that solidly respect the aforementioned principles of universality and management. In addition, it is important to note that, even during the latest adjustments and reorganizations in public expenditures, the national government has prioritized the maintenance of social expenditures. A relevant advance in the area of social protection for the elderly is that which took place in the provisional system of our country (Integrated System of Retirement Benefits and Pensions, SIJP). Through the signing of the Necessity and Urgency Decree 1306/00, the provisional Argentine system is held up by two pillars: the public "pay-as-you-go" regime (administered by ANSES), and the private capitalized regime (administered by the pension fund association, AFJP). With respect to the public **reparto regime, the aforementioned decree proposes a remuneration scheme which consolidates the system's financial sustainability. In addition it replaces the benefit called Basic Universal Benefit (PBU), only available for those who completed all their contributions to the system, with three new benefits which aim to redistribute public expenditures to low-income workers. These three benefits are: * Universal Benefit (mentioned previously). * Proportional Benefits (PP) for those beneficiaries with at least 10 years of contributions to the system and for whom the value of the benefit increases with every additional year (up to 26 years). * Supplementary Benefits (PS) for those beneficiaries whose pension allotment does not exceed the ceiling set by the Budget Law. With respect to Non-contributory Pensions (PNC) (asistenciales for special needs and graciables, special discretionary grants ), a strong emphasis has been placed on the simplification of the allotment of this benefit. For the first type of PNC, the possibility of transference to family members after death was eliminated, rosters of beneficiaries have been drawn up using information from other organizations, and unification of the representation of the beneficiaries has been achieved. The 2001 Budget limited the granting of graciables pensions by the legislative branch, by establishing new eligibility criteria and ceilings for individual and collective amounts. In addition, the executive branch will propose that the requirements for granting graciables pensions in the 2002 Budget be the same as those for pension payments to the elderly and disabled. Although advances have been made, the introduction of the BU and PP and the proposal to extend the family support system has made the PNC framework redundant. Thus, it is necessary to consolidate these programs with those previously initiated and to develop improved eligibility criteria to increase the coverage, efficiency, and impact of poverty alleviation efforts aimed at the lowest-income sectors. The National Social and Taxpayer Identification System (SINTyS) is responsible for the development of the RUB. The RUB is expected to be an indispensable tool for understanding the level of effective coverage of social programs and for controlling beneficiary eligibility and incompatibility, thus minimizing errors of inclusion/exclusion. To complete this task, SINTyS is defining a group of critical variables to be input, and developing a common methodology with an important number of public agencies, with the Annex A Page 10 of 14 final objective of developing a unique protocol for input and identification which will then be obligatory for all organizations responsible for carrying out social policies. D. Modernization of the State As the federal government has been streamlining, simplifying, and redefining its role, as well as transferring many of its functions to the provinces and municipalities, there remains a need to improve productivity and increase the quality of public sector production. However, the current situation is highly complex and the government faces many obstacles to attain this goal. The bureaucratic public sector apparatus is weak, due to inefficient and irregular strategic planning and burdensome and low-quality operational procedures. This institutional weakness is further worsened by the preponderance of the budget as a management tool. Furthermore, the budgetary process (preparation and execution) is not linked to strategic plans, even when such plans exist. Consequently, although budgetary policy is aimed at achieving public sector macro-equilibrium, it is not supported by an adequate process for budgetary planning. Such a process needs to give the various public entities a means to define, within a framework of efficiency, efficacy, and economy, measures to be taken and objectives to be fulfilled by their annual budgets. These weaknesses often cause serious deficiencies in the quality of services provided by the government, in its regulatory capacity, and in its role as guarantor of equal opportunities. Congress approved Law 25.152, the Public Administration and Fiscal Solvency Law, to combat such deficiencies. Two very important objectives are set forth in this law. Firstly, it presents the commitment to achieving equilibrium in public accounts, i.e., the elimination of the fiscal deficit, while maintaining each govermmental entity's commitment to increasing its quality standards and productivity. Secondly, it sets down the administration's commitment to making the allocation of resources more flexible, to facilitate their more efficient use. This new, "flexible" resource allocation mechanism is firther elaborated in the Program Agreements, negotiated and signed by the heads of the ministries and the heads of each government organization involved. Given the work already underway, the executive branch, through Decree 103/01, has made the decision to carry out the national Plan for Modernization of the State. This plan will allow the public sector managers to prioritize those functions which are necessary to confront new realities. These managers can determine which functions should be centralized/decentralized, eliminate multiple decision-making layers, eliminate functions which are redundant or no longer pertinent, transfer functions to local governments, and put within reach greater amounts of information to the citizenry. This plan supports the design of a new macro-structure for the national public sector and is based on the Program Agreements. It will make operational a Management by Results Model and a Letter of Commitment to the Citizenry, both begun in 2000. The successful experience garnered thus far has allowed for the definition of key management areas that need to be strengthened with the implementation of the Program Agreements in participating entities. These areas are: strategic planning, financial management, procurement and contracts, human resources, auditing accounts for results, and social responsibility. Annex A Page Il of 14 The Management by Results Model can be defined as an instrument which allows the management of public resources to be based on the fulfillment of defined, strategic actions in a specific period of time. In this manner, it allows for the management and evaluation of actions undertaken by State institutions, based on public policies aimed at fulfilling the needs of the society. The macro-reform of the national public sector has several strategic objectives: definition of functions to be carried out by the State, decentralization, redefinition of decision-making levels, elimination of unnecessary or redundant functions, information management, and contracting-out of third parties. Within this framework, the macro- reform will act as a crucial input to determine whether the Program Accords are necessary or not for each institution. The Program Agreements aim to increase the level of flexibility in resource allocation as management capacity shows improvements, as measured by objective, external auditors. The Agreements promote a culture of Management by Results, which constitutes a mechanism for strengthening the planning capacity and optimizing critical organizational processes through process re-engineering. For the participating institutions, Management by Results is the ideal instrument for ensuring the existence of internal capacity, and thus makes the hoped-for results all the more viable. These results include commitment to increased efficiency and efficacy of management and an increase in product quality as perceived by client-citizens. The general design of the Management by Results Model and the Letter of Commitment to the Citizenry, and the viability of the implementation of both, were put to the test with a Pilot Management by Results Model (PGR) in 2000. The results from the pilot were very positive and the PGR was set up in three different organizations: the Education Ministry's General National Union (SIGEN), in the Executive Coordinating Unit for Infant and Maternal Programs in the Office of Maternal and Infant Health (DISAMI), and the Maternal and Infant Nutritional Program of the Health Ministry. Finally, another instrument that improves the possibilities for the Plan's implementation is Law 25.414, which gives the executive branch special powers to merge, centralize or transform autarchic entities, decentralized or deconcentrated units into public enterprises, state companies, or other legal associations that would improve efficiency. The actions to be taken within the framework of the national Plan for Modernization of the State are described below, and will be carried out by three key organizations: the Federal Administration of Public Revenues (AFIP), the National Social Security Administration (ANSES), and the Education Ministry. The Federal Administration of Public Revenues Although the Federal Administration of Public Revenues (AFIP) has made recent progress, several persistent problems continue to affect its efficacy as a tax-collecting agency, and thus cause even greater difficulties when it comes to its ability to combat evasion and smuggling. Included among these problems are: the absence of an effective tax collection plan, low tax-base coverage and manual selection, weak information systems and complex, transparency-reducing procedures, complicated coordination with other government agencies, independent databases, lack of homogeneity in the rolls, Annex A Page 12 of 14 excessive information requirements placed on the taxpayers, long delays from penal procedures against evaders, etc. In order to effectively respond to these aforementioned problems, AFIP has already put into place an ambitious strategic plan for 2001-2003, and some of its more important objectives are as follows: * Increase the perception of risk for smuggling and tax evasion activities through more extensive and rapid internal audits of more than 100,000 taxpayers; the preparation and implementation of an Annual Revenue Plan which will aim to increase coverage and effectively apply sanctions for non-compliance. In the short run, norms will oblige financial institutions to block the bank accounts of taxpayers against whom lawsuits have been made for overdue taxes. * Give better incentives for voluntary compliance by taking the following actions: creating a consolidated current account per taxpayer, automating the monitoring of small and medium taxpayers, inserting various electronic links to reduce the need for physical inspection and revision of documentation. * Offer more and better services to taxpayers to minimize the cost of compliance with tax obligations. To this end, the Bank Collection System (OSIRIS) will put into operation the presentation and payment of various taxes in banks and via the Internet for all taxpayers. In addition, it will develop the use of digital signatures for the various procedures and will incorporate the customer service mechanisms to attend to client complaints and suggestions. * Initiate the improvement of managerial and administrative controls on financial and material resources with the development of an integrated decision matrix; centralize the supervision of the global administration; facilitate the de-bureaucratization of internal documentation by using digital signatures; and establish automated banking reports with which to adequately close the cycle of tax collection and registration. In addition, a system will be developed to utilize the new Tax on Financial Transactions. * Develop a methodology to calculate the increase in tax revenues (as a percentage of GDP) brought about by the management reforms. * Prepare a semesterly plan for the collection of overdue taxes. * Fill the vacancies in the Federal Courts for Tax Matters to promote the resolution of tax controversies and become a fundamental weapon against tax evasion. The National Social Security Administration The functions of the National Social Security Administration (ANSES) are linked, among others, to the public "pay-as-you-go" system. As in many other Argentine institutions, ANSES is facing many important goals, while facing many obstacles in the path of their attainment. Albeit progress has been made in recent years, most of ANSES' efforts have been aimed at the creation of systems that can detect improper benefits payments, improve services to beneficiaries, and absorb pension systems passed on to the federal government. This still leaves much to do, such as the processing of incomplete Annex A Page 13 of 14 files, the important number of legal suits pending in the courts (which cause strong economic losses), and the large number of gaps which allow information to be manipulated. The proposed reforms aim to generate greater confidence and reduce the potential for fraud and corruption in the payment of pension benefits. This leads to the need for a profound transformation of ANSES, accompanied with a rapid computerization of principal payment systems and procedures (a key factor for success). The short-term objectives of ANSES aim at achieving the reduction of annual commissions paid to the banks for the processing of pension benefits, and the reduction in the number of pending transactions. ANSES will sign a Program Agreement with the heads of the ministries in August, and it will cover the following areas: * Operational Strengthening. A big effort will be made in a broad number of areas, including the re-engineering of key administrative processes, the resolution of all pending legal suits and actions, the updating of the benefits registry, the transfer of beneficiary and contributor information from hard copy to electronic files, the standardization of criteria for determining eligibility for and granting of benefits (to increase transparency, reduce discretionality, and avoid lawsuits), as well as the transfer of the payment of benefits to the banking system. * Management by Results. The objective will be to improve the functioning of the organization by decreasing existing bureaucratic obstacles. Among the most important actions to be taken are the approval of a new organizational structure, to include a Strategic Planning Unit (with a 40% reduction in management positions and staff adjustments), the strengthening of human resources management, the development of administrative careers, the open recruiting of managers, the implantation of commitment to results by the management, and the definitive implantation of a financial management system based on the SIDIF model. * Collaboration with Other Institutions. ANSES will promote the establishment of "strategic associations" to increase cooperation and the diffusion of best practices in common tasks. These associations will be made between ANSES and AFIP, the National Register of Persons (to rapidly eliminate deceased beneficiaries from the rolls), provincial governments, the legislative and judicial branches (to facilitate legal coordination and promote many necessary legal changes), and SINTyS (to permit improved sharing of information). * Improved Services for Beneficiaries. The management reforms, ANSES' operational strengthening, and the Letter of Commitment to the Citizenry will improve beneficiaries' access to account inforrmation and permit the optimal presentation and resolution of complaints and the provision of other services. The Education Ministry The changes that have already transformed the national education system (the decentralization of secondary education to the provinces and the passing of the Federal Education Law) have allowed the Education Ministry to propose new and exciting Annex A Page 14 of 14 goals for the future. The Ministry's modernization project incorporates the development of various areas for action, including: * The installation of a Management by Results Model with which to review various structures and processes, and to establish commitments to results between each Director/Head and his superior. The model will put into place a planning methodology which will allow for the generation of various products, such as: strategic plans, operational plans, budgets, supervision and control matrices, etc. * The re-engineering of key support processes, including the following: recommendations to improve input processes, the implementation of proposed changes, the implementation of new computer processes, and a new procurement system. * The re-engineering of human resources through the input and re-design/optimization of tools and processes linked to the management and development of human resources. Emphasis will be placed on the formulation of a human resources matrix containing the strategy for change, as developed and agreed to with the unions, and a program for staff relocation. - The implementation of a new procurement system for textbooks. The old system of direct purchasing will be replaced by a new system which will incorporate open bidding mechanisms to promote greater competition amongst sellers, and thus result in lower book prices for the ministry. 3. The International Bank for Reconstruction and Development Within the context of the reform program of the Argentine Government, the support of the World Bank and other international credit institutions will contribute to strengthening the government's credibility with other multinationals, and permit it to consolidate the short- and long-term financial program aimed at improving the profile and composition of its external debt. Sincerely, Dr. Domingo F. Cavallo Minister of Economy (English Translation) Signed Copy On File Annex B Medium-Tenn Refonn Program Page 1 of 3 SUMMARY OF MEDIUM-TERM REFORM PROGRAM Policy Area SAL Actions Expected Future Reforms Parallel Reforms Appropriate Short-Tern * Fiscal Deficit Reduction * Implementation of Labor Reform Macroeconomic Macroeconomic by Federal Government Framework Framework in Place * Provincial deficit reduction in 2001; * Further provincial deficit reduction; * Bank PRL loans support fiscal Federal-Provincial adjustment and implementation of Fiscal Relations * Progress in the implementation of the * Continued implementation of Federal Agreement; Bank/Federal Federal Agreement; Federal Agreement; Government fiscal eligibility criteria for access to investment * Improved coordination between * Reduced distortions in provincial loans; federal and provincial tax agencies. taxation; * Continued policy dialogue on * Regulatory system for future provincial tax reform and debt market-based borrowing by the regulations. provinces. * Further reform the SNSS, including * Reform of provincial public * Additional reform of the National its legal framework, to increase health service delivery via PRL Health Insurance System (SNSS) insurer competition and strengthen loans; within the given legal framework, insurance schemes and regulation. Health Sector seeking to enhance consumer choice, * A comprehensive reform of the * Health Insurance for the strengthen solidarity, expand coverage INSSJP assuring beneficiary choice, Uninsured (LIL) and improve efficiency. integrated capita, financial equilibrium, reallocation of social programs and integration to the SNSS. Annex B Medium-Term Reform Program Page 2 of 3 Policy Area SAL Actions Expected Future Reforms Parallel Reforms * Increased social security * Consolidation of federal social protection * Public employment coverage among elderly poor strategy to focus on interventions for key programs (TRABAJAR) (SIJP reform) vulnerable groups (elderly, children, and in place, with Bank the working poor) support; * Consolidation and improved * Increased efficiency via unified federal Social Protection poverty targeting of non- system of beneficiary identification and * Other well-targeted contributory pensions (PNCs) benefit delivery programs continue to * A national system of child and household receive Bank financing * Reduced fraud and improved welfare following the established (Maternal-child health, as coverage of per-child family principles is in place, the Regimen de one example) benefit (Asignaciones Asignaciones Familiares is consequently Familiares) reformed, and other national social programns reaching the same target population are consolidated within such a system. * Significantly reduced tax evasion; * Tax administration * Initiation of a major reform components of PRL loans program in macro-structure of * Reduction in waste and fraud in and ongoing Provincial central government, agency government spending through elimination Development Loans; Modernization of management, key processes and consolidation of agencies, expanded the State (procurement, data matching), use of IT data matching and e-government * Ongoing SINTyS and and core fiscal agencies (tax initiatives, and staffing adjustments; State Modernization TA and social security loans. administration). * Expansion of institutional restructurings to all federal agencies. Annex B Medium-Term Reform Program Page 3 of 3 Policy Area SAL Actions Expected Future Reforms Parallel Reforms * Dialogue on reform of higher Education education through the Higher Education Project, including support for accreditation, quality improvements, and budget reforms; * Support for curricula reform and introduction of monitoring and evaluation systems for basic education under PRODYMES I and II; * Development of new management and administrative systems under PRODYMES I and II; * Introduction of full day schooling at high risk schools under the Second Province of Buenos Aires Secondary Education Project; * Support for provincial education reforms, including teacher conditions of employment, control over medical leave and absenteeism, teacher assignments and teacher- pupil ratios, teacher training institutes, subsidies to private schools, etc via PRL loans. Annex C: SAL Policy Matrix Page 1 of 8 Policy Areas/ Actions Completed Second Tranche Goals Macroeconomic stability Appropriate Macroeconomic framework in place. Appropriate Macroeconomic framework in place. and growth FISCAL RELATIONS WITH THE PROVINCES Policy Areas/ Actions Completed Second Tranche Goals Provincial Fiscal * Compromiso Federal (Federal Agreement) ratified by the national Congress Stabilization and by 21 provinces. * Fixed transfers in place, by law (Law 25.400), for 2001-2002. * Actual transfers during 2001/2002 follow the rules established in the Federal Agreement. Fiscal sustainability, * Agreement between the federal government and 21 provinces to establish creation of medium-term targets for provincial spending - at a minimum freezing primary expenditures in fiscal plans, and restraint on provinces that face fiscal imbalances. (Clause 8 of the Federal Agreement) wage bills * Aggregate provincial fiscal deficit less than ARG$1.45 * Twelve Provinces enacted fiscal solvency laws compatible with the federal billion for first semester of 2001 (data available August law. {See Annex D.} 15*) and aggregate provincial fiscal deficit less than ARG$2.08 billion during first three quarters of 2001 (data * Eighteen provinces enacted various forms of legislation either limiting or available November 15'), and ARG$2.76 billion for the eliminating automatic wage adjustments. (See Annex D.} entire calendar year 2001. * Debt authorizations issued by Ministry of Economy consistent with fiscal deficit targets of the macroeconomic framework. * Federal government publishes regular reports on aggregate provincial fiscal performance and provinces' * Federal fiscal and financial restructuring program with eleven provinces compliance with the Federal Agreement. includes progressive compliance with Federal Agreement as condition for access to funding. Reform of Revenue-Sharing * Agreement between the federal government and 21 provinces to establish guidelines for permanent reform of the system of revenue-sharing: simplification of the system to include all major federal taxes, single pool of funds, and moving- average to determine future provincial shares. (Clause 7 of the Federal _______________ Agreement) Annex C: SAL Policy Matrix Page 2 of 8 Policy Areas/ Actions Completed Second Tranche Goals Provincial Taxation * Agreement between the federal government and 21 provinces to harmonize * Tax payment information systems (OSIRIS) taxes, coordinate tax administration across the levels of government, implement established in the three (largest) provinces, and collection Improve efficiency of the compatible tax payment information systems (like OSIRIS), share data on tax via these systems is initiated. tax system admninistration issues, and reduce economic distortions in provincial tax instruments. (Clause 15 of the Federal Agreement) Fiscal Transparencv * Agreement between the federal government and 21 provinces to disseminate fiscal and financial information (Clause 13 of the Fiscal Agreement). Progress in numerous provinces, as reported in Annex D. Improve quality of budget planning, expenditure * Federal government (in conjunction with the Central Bank) established a control and accountability system to monitor provincial fiscal deficits on a "cash basis" by tracing the of provincial governments evolution of assets and liabilities "below the line." Improve the public's access * Agreement between the federal government and 21 provinces to implement to information multi-year budgeting at the provincial level. Budgeting and Planning * Thirteen provinces have financial administration laws, compatible with the Provincial Public national law. Administration Annex C: SAL Policy Matrix Page 3 of 8 HEALTH SECrOR Policy Area Actions Completed Second Tranche * Increasing solidarity * A decree has been issued by the Executive (a) ordering in the Sistema Nacional AFIP, ANSES and the SSS the elaboration of a complete de Seguro de Salud enrollment database for the SNSS (including gender, age (SNSS). and address data for all affiliates and beneficiaries) in no more than 90 days; and (b) establishing, in the same time period, a new compensation procedure for the Fondo Solidario de Redistribuci6n (FSR) that is proportional to the number of beneficiaries (per capita). * Enhancing consumer * A decree has been issued modifying the Decree choice and increasing 504/1998 (and other related norms) enabling all employees, insurer competition in the regardless of their income level, to freely choose their SNSS. insurer (obra social) since their first day of employment. NOTE: This free choice is within each of the two tiers of the current system: Obras Sociales Sindicales and Obras Sociales de Personal de Direcci6n. . Promoting * The SSS is complying with Resolutions 109/2000 and 117/2000. This implies * A decree has been signed eliminating all financial institutional development, that the SSS has notified all insurers in crisis of their situation (certified letters have subsidies given by the Administraci6n de Programas transparency and been sent) and has requested from them (the insurers) their corresponding Especiales (APE) to insurers (obras) due to chronic accountability in the restructuring plans. operating deficits. NOTE: A definition of "chronic SNSS. operating deficit", satisfactory to the Bank, will be established in this decree. * A decree has been issued establishing the legal framework for excluding from the National Registry of Health Insurance Agents any insurer that is not complying with minimum mandatory economic, financial and service delivery standards (as established in Resolutions 109/00, 117/00 and 232/01) In addition, a procedure will be defined for transferring affiliates and beneficiaries from those health insurers being excluded from the Registry to other health insurers that do comply with the standards. Annex C: SAL Policy Matrix Page 4 of 8 SOCIAL PROTECTION SECTOR Policy Areas Actions Completed Second Tranche Pension Reform * Decree issued that: (SIJP) (i) Replaces PBU with a targeted BU (Universal Benefit), a proportional benefit (PP), and a supplementary benefit (PS); and (ii) Establishes a minimum guaranteed benefit. {Please note: The government has expressed its commitment to implement the above decree, as discussed in paragraph 66 of the main report.} * ANSeS administrative reforms (see Modernization of * ANSeS administrative reforms initiated (see Modernization of the State below). the State below). Reform of non- * Pensiones graciables eligibility criteria tightened and profiles of current recipients * Proposal of consolidation of existing PNCs contributory pensions reviewed, resulting in 15,959 pensions canceled, reduced amounts of pension benefits of (Asistenciales and Graciables) with new and existing (PNC) an additional 8,517 beneficiaries, and generating savings of $10.5 million, of which $5 national income transfer programs (e.g. the Beneficio million was allocated to poverty targeted pension (pensiones asistenciales), and another Universal) covering same target population. $5 million to cancel a debt to war veterans. Child & Household * Agreement that a national system of child and household welfare will be established Welfare that follows the following principles: (i) the use of per-child cash allowances paid on a monthly basis through a cost-effective means; (ii) universal coverage based on objective and easily monitorable indicators that guarantee that the weakest households in society are covered; (iii) the use of a single registry of all beneficiaries following a standard protocol; and (iv) the implementation of a decisive outreach effort to facilitate claims of these benefits by vulnerable groups. Delivery of Social * Establishment by Jefatura de Gabinete and Gabinete Social of protocol for program * Protocols for the unified system of identification and Assistance monitoring and evaluation for all national social programs. registry of beneficiaries are developed, approved, and an implementation plan is in place. MODERNIZATION OF THE STATE Policy Areas Actions Completed Second Tranche Fiscal Performance * Financial transactions tax implemented, (Law 25.413)aiming, in part, at * Increase revenues via reducing tax evasion. improved tax {Please note: additional measures to increase revenues via irnproved tax administration administration are initiated via actions listed below under "AFIP".} Annex C: SAL Policy Matrix Page 5 of 8 Policy Areas Actions Completed Second Tranche Emergency Law (No. 25.414) giving the executive branch powers for one year * Decree issued to regulate/restrict on a comprehensive Streamlined Government (through March 1, 2002) to issue decrees with the status of law covering a wide basis public sector employment by government retirees. variety of reforms including the consolidation or elimination of federal entities, * Fiscal strengthening changing certain public employee contracts, modifying organic laws of ministries through streamlining the and agencies, and adjusting public sector administrative policies and procedures central government, subject to specified restrictions. increasing accountability, and improving service * Seven of 68 decentralized agencies merged, and seven of 37 Boards of Directors delivery of decentralized non-financial public sector agencies eliminated. Reforming public sector * Presidential Decree 103 issued, establishing the Plan for Modernization of the * Decrees issued to create and regulate the position of purchasing to promote State, and providing the legal framework for signing Program Agreements - the key Program Manager for hiring of middle managers on contract fiscal strengthening, element for Results Management. {Please note: for the next tranche, "Program basis, and such managers hired in at least 5 agencies. improved transparency, Managers" will be hired on a fixed-term basis, their contracts will include specific and reduced transaction targets for results, and contract renewal will depend upon achieving the targets of costs to private sector the results agreements specified in their contractual Terms of Reference.) * SINTyS Coordination Committee established and functioning, including * Data sharing agreements reached among ANSES, representatives from ANSeS, AFIP, National Registry of Citizens (RNP), the AFIP, and SINTyS and at least two key databases from Ministry of Justice. each of AFIP and ANSES transferred to SINTyS. * New procurement law issued (as a delegated decree * Bill of Law presented to Congress for enabling electronic signatures. power under Emergency Legislation). Annex C: SAL Policy Matrix Page 6 of 8 Actions Completed Second Tranche Tax Administration) Operational Tax Compliance trenhening * Issuance of norms that mandate banks not to permit withdrawals of finds Strengthenig core tax by any taxpayer, after notification of attachment (embargo) of taxpayer's administration accounts. operations by expandin tax auditing, improving use of information echnology cross Strengthening Information Technology (IT) matching of data, creating a taxpayer current account, * Informatics Users Committee established to provide AFIP * Extension of existing "2000" taxpayer monitoring system from 250,000 to reengineering customs agency-wide oversight of information technology operations. active taxpayers, except small businesses paying the Unified Tax rocedures, and (Monotributo) and self-employed service sector workers (Aut6nomos). improving use of the banking system for tax * Completion of conceptual design of reengineered "2000" including collection. taxpayer current account feature. Audit and Inspections * 45,000 audits completed by mid-July in line with revised audit 62,000 audits completed by end September plan based on greater use of information matching. 70,000 audits completed by end October -Report submitted to the Bank on tax obligation adjustments made, as a result of the audits. * Implementation of a system to utilize information from new financial transactions tax for audit purposes. Investigations initiated for the 350 pending alleged cases of Ethics Code for AFIP employees approved and published. internal misconduct. Annex C: SAL Policy Matrix Page 7 of 8 Customs * Imports selected for physical inspection on the basis of * 25% maximum "red channel" (on-site, port-of-entry) physical inspections standardized risk assessments, and 30% maximum red channel (on- (excluding inspections initiated by other agencies). side, port-or entry) physical inspections (excluding inspections required by other agencies - e.g., agriculture/health departments, firearms control, etc.). * 100 post release inspections performed jointly by Tax Directorate * Number of monthly post-release inspections performed jointly by Tax and Customs Directorate inspectors, establishing a minimum monthly Directorate and Customs Directorate inspectors increased to: base for joint inspections (see second tranche). 121 in September, 133 in October. mproved collaboration * Process of selection ofjudges for new Tax Fraud Courts initiated. with partner agencies _____________________________ _________________________________ ANSeS Policy Area Actions Completed Second Tranche Strengthened * Decree issued to reform the administrative structure, including * Internal regulations issued to eliminate at least 40% of operating units in administration the elimination of at least 40% of management units and the creation ANSES's central administration. of a Strategic Planning Unit. * Total fees paid to banks ($70m annually) for processing benefit payments * Integrated fnancial management system (SIDIF) in operation in reduced at least: ANSeS. 10% by end September, 15% by end October. * Reduction of stock of pension requests pending (85,000) 30% by end September, 50% by end October. Annex C: SAL Policy Matrix Page 8 of 8 Fraud reduction and * Anti-fraud program initiated including: transoarency 1) Norms issued for a new system of direct family allowance * New family allowance payment system: payment aiming to eliminate fraud including the issuance of: (a) a 20% of families incorporated in the data base by end-September, decree for the elimination of automatic payments to PYMES; and (b) 40% of families incorporated in the data base by end-October; a decree for the elimination of automatic family subsidy payments for and payments made through new system to 20% of families by monthly wages reported under ARG$ 100. end- October. 2) Elimination of unemployment benefits to detected current workers (in a sample of 48,000 beneficiaries, 300 irregularities were detected, and these 300 individuals were removed from the beneficiary roll). 3) Agreement signed with the National Citizen Registry to cross * Extend information crossings, and eliminate ineligible payments where information on births and deaths. detected to at least: 7 provinces by end September, 12 provinces by end October. Annex D Federal-Provincial Fiscal Relations Page I of 18 ANNEX D: FEDERAL-PROVINCIAL FISCAL RELATIONS AND THE FEDERAL AGREEMENT 1. The performance of the provincial level of government in Argentina is critical to overall public sector performance. As described in the main text, the provinces are the main providers of a variety of social services in Argentina. The provinces also have a role to play in determining Argentina's long-term fiscal and external solvency. The consolidated provincial governments fiscal deficit averaged 0.9 percent of GDP over the 1991-2000 period. The debt stock is estimated to be about 9 percent of GDP. After registering a primary deficit in 2000 of 0.6 percent of GDP, it is estimated that an adjustment of 1 percent of GDP is required to assure fiscal solvency at the provincial level. 2. Revenue-sharing ("Co-participation"). The current system of federal-provincial revenue sharing, or "co-participation", as it is known in Argentina, is a complex mix of one large revenue-sharing pool fed by the VAT and income taxes (generating $10.7 billion or about one-third of provincial current revenues in 2000) and a series of separate transfer programs funded by federally collected taxes (mostly fuel taxes). Many of the latter, although distributed automatically, are earnarked legally for financing specific sector expenditures, like housing projects or home mortgages (FONAVI -- $900 million), or providing electricity service to remote, rural areas (FEDEI). These latter tax-sharing programs sum to about $5 billion. There are also a number of discretionary transfers funded out of national general revenues: the special national treasury transfers (ATN) as well as some social sector assistance programs and investment programs which are specifically destined for the provinces. All of the latter discretionary transfers summed to nearly $2 billion in the year 2000. Total budgetary transfers to the provinces were $18.2 billion in the year 2000 (6.4 percent of GDP) -- financing about half of total provincial government expenditures. Aside from the three or four largest provinces, the rest of the provinces depend on transfers for 70 to 90 percent of their revenues. 3. The distribution of the general revenue-sharing fund is according to a fixed percentage for each province that was set in place by a 1988 law, and these percentages were determined by historical patterns and political debate. Some of the smaller specific transfer programs follow need-based criteria, while others do not. The final result is a large diversity in transfers per capita -- a nine-fold difference in total transfers per capita for the highest and lowest provinces. This dispersion is difficult to justify in terms of needs and/or cost differentials. The 1994 Constitutional Reform called on Congress to enact a new co-participation law by the end of 1996. Congress later extended this deadline by two years, and it has been delayed again and again. One issue that makes the reform so difficult to enact is that the Constitution requires the reform to be promulgated not by a federal law, but rather by a Law-Agreement (ley-convenio) which must be approved unanimously by the provinces. This is generally interpreted to imply the sanction of every provincial legislature. 1 See Bank Report, Argentina: Provincial Finances Update IV, February 12, 2001. Annex D Federal-Provincial Fiscal Relations Page 2 of 18 4. A series of Bank reports on provincial finances in Argentina dating back to 1989 have analyzed provincial finances and problems in the system of fiscal federalism. The most recent effort was the 1999 report Argentina: Provincial Tax and Revenue-sharing Reform. The ESW involved cooperative efforts with the government to develop reform proposals that were supported by Special Structural Adjustment Loan (SSAL) approved in November 1998. 5. These proposals for reform reflect a number of consensus views that have emerged from the series of Bank analytical work, IMF reviews and Argentine academic papers. They identify the three problems that need to be addressed by any reform of intergovernmental fiscal relations: (1) to simplify the complicated multiple tax- sharing/revenue-sharing system, consolidating most programs into one fund, to improve transparency; (2) to introduce a rational formula -- almost any rational formula -- for distributing these resources across provinces; and (3) to increase the degree of correspondence between provincial tax payer and the provincial services he/she receives. 6. Among these three problems, there is the greatest clarity and assurance on the first one as it is the least complicated. The second one entails very serious political consequences as no one province or the federal government wishes to lose resources from the change. On the third problem, there are only two ways to accomplish this (assuming a fixed assignment of expenditure responsibilities): either to increase the share of provincial revenues raised by provincial own taxes or make the distribution of revenue- sharing across provinces based largely on the origin of where federal taxes are collected - or some combination of these two approaches. The advantage of decentralizing additional tax powers to the provinces is that it would give the provinces the ability to raise revenues at the margin (or reduce revenues) by changing the provincial tax rate. Demands by the provincial population for increased levels of government expenditures could be met, and financed through own tax revenues. Similarly, in the absence of discretionary federal transfers at the margin, political leaders would need to face the local taxpayer with the bill any time they wish to increase expenditures at the margin (or present a future bill, in the form of increased indebtedness). 7. There is another complication to the above question since the main own-source revenue of provincial governments is the gross receipts (ingresos brutos) tax which is considered distortionary. It is a traditional turnover sales tax applied to the sale of goods at all stages of production - without crediting producers for the tax paid on inputs, as would occur under a VAT. The result is that the incidence of this tax accumulates over the stages of production, providing an incentive for companies to integrate vertically, and leading to differential final tax rates on consumer goods, depending upon the degree of vertical integration involved in the production of those goods. The government and the provinces have already recognized the need to change this tax to a more efficient form of sales taxation. The last government proposed a federal-provincial dual VAT, with provinces setting their own rates on the provincial share. This tax could provide a buoyant and efficient source of tax revenues. This tax instrument could first be used to substitute for the gross receipts tax, but it may be powerful enough to be used for the additional decentralization of tax powers referred to in the preceding paragraph. The Annex D Federal-Provincial Fiscal Relations Page 3 of 18 current government is also considering the dual VAT as one of the possible alternatives for the gross receipts and stamp taxes. Another possibility would be a retail sales tax. 8. Regulations on Provincial Borrowing. The debt question in Argentina confronts both the federal and provincial governments. At present the total level of debt of the provinces - at 9 percent of GDP-is not extraordinary. But there are important differences among the provinces, with the resource-rich and some well-managed provinces able to manage their debt burdens. The issue is much more difficult for some of the smallest and poorest of Argentina's provinces that have exceeding high levels of debt given their debt service capacity. The fact that these debts are guaranteed with the province's revenue-sharing -- collected by the federal government -- means that the creditors do not suffer, as they receive debt service automatically and the provinces are forced to curb public spending, including salary payments, causing serious social conflicts. All borrowing provinces-large and small -- share with the federal government the need for continuous access on reasonable terms. 9. In the past, access to borrowing using the co-participation guarantee has been relatively easy for most provinces. According to the Constitution, provinces are allowed to borrow so long as it does not interfere with the Nation's foreign relations or national credit. Legislation exists requiring that the provinces inform the Central Bank and submit paperwork to the federal Ministry of Economy to receive authorization for borrowing in foreign currency. Certain information reporting requirements are specified in law. The Government has been using this authority over the past year or two in order to limit borrowing by provinces to levels consistent with the fiscal deficit targets of the consolidated public sector. The Government has also exercised this authority as a means of avoiding that provinces borrow at exorbitant interest rates during periods of financial volatility. 10. Over the medium-term, it would be advisable for the Government and the provinces to reach agreement on how best to coordinate borrowing by the provinces, and what technical criteria could be used for regulating the process. There are a number of options that could balance the constitutional autonomy of the provinces, sound prudential regulation in the banking sector, and the desire to use market-based instruments more than discretionary administrative rules. 11. One option is via the regulatory framework for market-based borrowing. In particular, one could adjust Central Bank regulations along the lines of reforms enacted in Mexico and supported by the Bank's Mexico Decentralization Adjustment Loan. For loans not secured with coparticipation collateral, the capital requirements in Argentina are the same as for loans to private companies. Argeintina has been a leader among emerging markets in applying Basle recommendations on capital requirements. However, the risk weighting is not a function of the credit rating of that province - an innovation introduced in Mexico. Another option is the possibility of imposing a differential risk-weighting -- even when the co-participation collateral is in place -- that would be a function of the fraction of future co-participation revenues that have already been pledged. This would create a disincentive for banks to continue lending to a province whose future co-participation has reached a dangerous level of commitment. Annex D Federal-Provincial Fiscal Relations Page 4 of 18 12. When a province uses coparticipation2 as collateral, Central Bank regulations treat the loan, in terms of capital requirements, in the same way as a loan to the federal government. (This year, the capital requirements for counter-party risks were raised from zero to 1-5 percent depending on the duration of the asset.) If a province were to borrow without co-participation (or oil royalty) collateral (e.g., Buenos Aires bond issues in recent years), then the standard CAMEL risk-weighted capital requirements would apply. 13. The latest regulation from the Central Bank (August, 2000) actually forbids local banks from lending without co-participation or natural resource royalties as collateral. So this puts the full burden on the Ministry of Economy's regulatory policy. This Central Bank regulation was implemented out of concerns for fiscal policy, and not out of concerns for prudential regulation of the banking system. In the short-term, the Government is engaged in a process of limiting indebtedness authorizations to levels consistent with the fiscal targets of the IMF program. Over the medium-term, with appropriate reforms in the basic rules (including information disclosure) administered by the Ministry of Economy and with appropriate adjustments to capital requirements for banks (as discussed above), then it might be possible to loosen this latest regulation and allow provinces to borrow in a more open market-based manner. This innovation, however, would depend upon a consensus-building process among the provincial and federal authorities. In addition, a more stable fiscal situation may be a prerequisite for enacting this reform. 14. The Government's Medium-Term Reform Proeram and the Federal Agreement (Compromiso Federal). The Federal Agreement (Compromiso Federal) of November, 2000 establishes a number of important changes for federal-provincial transfers over the 2001-2005 period. The Agreement also establishes fiscal expenditure targets to lead to fiscal equilibrium over the period. In addition, the agreement establishes the provinces' conmmitment to enact a variety of reforms in provincial public administration, budgeting and tax administration. Finally, it establishes an agreement on some of the characteristics of a permanent reform of revenue-sharing in the future, and there is a renewed commitment to eliminate distortionary provincial taxes in the future.3 15. The government's program, to be supported by the proposed SAL and possible future adjustment lending, involves actions in five areas: 16. (i) Provincial Fiscal Stabilization. The introduction of a moving average into the provincial share of revenue-sharing is a key to provincial fiscal stabilization, and this is set in place for the 2003-2005 period. The government is committed to establishing this system as the permanent rule. 2Note: the use of coparticipation as collateral also involves an automatic payment mechanism. The provinces maintain accounts at Banco de la Naci6n for receiving their transfers. The creditors receive their debt-service payments deducted directly from the stream of federal transfers. 3 The Provincial Finances Update IV Report provides a description and analysis of the Agreement. Annex D Federal-Provincial Fiscal Relations Page 5 of 18 17. The Federal Agreement includes commitments by the provinces to freeze primary expenditures until reaching fiscal balance over the 2001-2005 period. To disseminate information on the provincial performance, the federal government plans to publish quarterly reports on provincial fiscal results and compliance with the Federal Agreement. The provinces have promised in the Agreement to seek legislative approval of Fiscal Responsibility Laws that would set in place the general framework for achieving fiscal balance. In a later section, below, detailed administrative measures that the provinces have promised to enact that would support this process are discussed. 18. Projections show that the provinces, on aggregate, could achieve a fiscal balance by 2005, if every province enacts the primary expenditure freeze. The problem is that this balance would depend upon a large surplus in some provinces in order to offset a persisting deficit in a few others, most notably the Province of Buenos Aires.4 Recognizing this situation, the federal government and the province have signed an agreement establishing fiscal targets to begin to resolve this particular problem. 19. (ii) Reform of Revenue-sharing. A reform of the primary distribution -- the division of revenues between the federal government and the provinces -- is now in place through 2005. Instead of setting the provincial share as a certain percentage of federal taxes collected (actually various percentages of various different taxes), it will now be a fixed nominal amount for 2001 and 2002. In 2003, the provinces will receive a moving- average of the three most recent years hypothetical amounts (if the percentages of revenues had been applied instead of the fixed amounts). But, also, the provinces are guaranteed a minimum over the 2003-2005 period with this minimum increasing by about 2.7 percent per year in nominal terms. The introduction of this moving average concept is the most important step in terms of ending the boom-bust cycle of social spending in the provinces. This reform is also, in practice, a simplification of the system, since it amounts to a fixed amount for the provinces over this period. The complicated old system still exists: at present, it acts as a shadow system determining what the provinces would have received according to the percentages of actual revenues from the variety of taxes and these amounts need to be tracked in order to calculate the moving average starting in 2003. 20. The Federal Agreement also establishes guidelines for the permanent reform of the system. It states that the permanent reform would include the moving average concept and the simplification of the system, ending all the side tax-sharing and "pre-co- participation" earmarking, and forming a single fund fed by all the major federal taxes. The Agreement also states that the secondary distribution (the distribution across provinces) will be applied only to the increment in revenues to smooth the transition. In any case, the Agreement establishes that the government will submit a new law to Congress to effect a permanent change in the revenue-sharing system, defining both the primary and secondary distribution by the end of 2003 -- that is, if a new ley-convenio is not established before then. 4 See Provincial Finances Update ITV, for more details. Annex D Federal-Provincial Fiscal Relations Page 6 of 18 21. (iii) Provincial Tax Reform. The lack of strong tax instruments at the provincial level and the distortionary nature of some of the current instruments (gross receipts and stamp taxes) have long been a part of the unfinished reform agenda in Argentina. The Fiscal Agreement called for the provinces and the federal govermment to establish a new Pact for Fiscal Harmonization. One objective of the Pact would be to establish a mechanism for eliminating distortionary taxes; however, this will be a gradual process. A proposal from the last government (with Bank technical assistance) laid out some of the features of how a federal-provincial dual VAT might function. Another proposal on the table (since the early 1 990s) is to convert the gross receipts tax into a retail sales tax. In past ESW, the Bank has emphasized the dual VAT or "piggy-backing" on the federal personal income tax (although the latter.is very small in Argentina). All of these alternatives, or some mix of them, would improve the efficiency of the tax system. Over the short-term, the government's objective is to limit the distortionary impact of the gross receipts (turnover) tax by reducing rates on stages of production that are prior to the commercial stage. Simultaneously, the Government has intensified efforts to assist the provinces in tax administration, including technical cooperation agreements with the large provinces to implement new computer systems used by the federal level that could then enhance information exchanges between the levels of government. In brief, the short-term strategy is to reduce distortions in the existing tax instrunents, while improving administration so as to maintain provincial own revenues. 22. (iv) Fiscal Transparency. In the Agreement, the provinces committed to publish on a regular basis a long list of financial and fiscal information. The list includes 12 items, ranging from budget execution to list of assets (including properties, etc.). The information dissemination system should be fully operational within one year. The twelve items that the provinces have committed to include in their reports are: (a) budgetary execution of expenditures and revenues, up to the latest level of disaggregation available; (b) list of purchase orders registered; (c) list of payment orders realized by the provincial treasury; (d) list of payments effectively made by the provincial treasury; (e) financial and employment data from the Integrated Human Resource System of each province (system still to be implemented in most cases); (f) list of beneficiaries of pensions and disability benefits; (g) up-to-date balances of debt, time of profile of debt service, and list of guarantees issued; (h) list of payments to receive; (i) inventory of property and financial investments; (j) status of tax compliance by businesses in that jurisdiction; (k) information on regulation and control of public services; and (1) all other information relevant for compliance with existing financial administration laws. The first item on the list above is perhaps the most important first step. 23. (v) Reforms of Public Administration. In the 2000 Federal Agreement, there are a variety of measures that the provinces have agreed to implement over the next 12 months. They also agreed to establish additional measures via a Pact for Public Sector Modernization by May 2001. Some of the measures include: the implementation of multi-year budgeting, the elimination of laws that grant automatic seniority pay increases to provincial workers, the implementation of the national taxpayer/social beneficiary identification system (SINTyS, under a Bank-financed project), and the implementation of tax administration software compatible with the federal government's software. Annex D Federal-Provincial Fiscal Relations Page 7 of 18 24. The administrative and fiscal actions agreed to in the Federal Agreement all require follow-up by the provinces, and the successful implementation by the provinces will require assistance and support by the federal government. The federal government has already specific fiscal agreements with eleven provinces for restructuring of their debts following improved fiscal management.5 The participating provinces are those with the worst debt-service levels and tend to be among the poorest: so far, they have been able to reduce their aggregate deficit from $ 1.3 billion in 1999 to about $ 500 million in 2000. The government has included conditionality in the 2001 fiscal programs for those provinces that would require them to comply with their commitments of the Federal Agreement. Similar commitments are included in those provinces participating in the latest series of Bank-supported Provincial Reform Loans, supported by the Bank. 5 See Provincial Finances Update IV for a description of this Program. Note: the Province of Corrientes is also under a federal intervention - with the local Governor removed from office and replaced by an administrator named by the federal Government. Annex D Federal-Provincial Fiscal Relations Page 8 of 18 Notes on Each of the Clauses of the Federal Agreement of November 2000 FIRST: This commitment is a supplement to the Federal Agreement of December, 1999. SECOND: Renewed commitment by all parties to submit for legislative approval a new general revenue-sharing law that would be consistent with the financing needs of the general public sector and fiscal solvency requirements of both the federal and provincial governments. THIRD: If a new revenue-sharing law is not approved during 2001, then CLAUSES 5 and 6 below will apply (regarding the primary distribution and renewing the old secondary distribution). FOURTH: The federal executive branch will propose to the National Congress that all the applicable old coparticipation laws and old fiscal pacts (that determine the distribution across provinces) will be renewed for five years, unless a new coparticipation law is approved before then. They list specifically the following laws: --Law 24.977 and modifications. This law created the new "Mono-tax" on small businesses and established the sharing and distribution of revenues from this tax. --Law 25.067 --A modification on the above law. --Law 24.464--The 1995 law that regulated the decentralized administration of FONAVI housing funds, as well as the distribution of fuels taxes for that fund. --Law 20.628 and modifications--The old 1973 law that established the national income tax. --Law 23.966 and modifications---The law governing the personal wealth tax and establishing that 90 percent go to the federal social security system and 10 percent to the provincial pension systems. --Law 24.699 and modifications--1996 Renewal of the second "Fiscal Pact"(1993). Main features of Pact: gradually eliminate gross receipts and stamp taxes, tax reform and deregulation agreements, plus federal commitment to accept provincial public employee pension plans. In addition, this law established "pre-coparticipation" earmarking of part of the fuels tax to go to social security, plus some changes in the distribution of the personal wealth tax. --Law 24.919 of 1997. It extends the law on income tax and its distribution through the year 2000. --Law 25.063 --Extension of Law 24.699 above through the end of 1999. --Law 24.130--The original Pacto Fiscal of 1992. Established some fixed sum additional tranfers to particular provinces, commitment to tax reforms, plus new netting out of 15 percent of gross coparticipation pool to go to federal social security system -- and coparticipation law applies to net coparticipation pool, etc. --Law 25.082 of 1999. Establishes that the new taxes on interest and "presumptive" income would be shared with the provinces according to the standing coparticipation law -- with an additional complication beyond the scope of this note. The complication is now eliminated with the new Federal Agreement. Annex D Federal-Provincial Fiscal Relations Page 9 of 18 --Law 25.239 of 1999. Prior Fiscal Pacts extended (and this is the law with the income and other tax increases implemented early on in the De la Rua administration). FIFTH: Once again, this clause makes clear that all the old laws apply until a new general coparticipation law (ley-convenio) is approved. (Ley-convenio implies that it must be approved by federal government and all provincial governments -- i.e., usually interpreted as ratification by all provincial legislatures). In other words, the distribution across provinces will remain the same. Only the total amount received by the aggregate of provinces will be altered, as described in the sixth clause below. SIXTH: This clause lays out a floor and ceiling on the "primary distribution" (amount to go to the provinces) through the year 2005. For 2001 and 2002, the provinces will receive a fixed monthly amount equal to $1.364 billion. This figure was the guaranteed minimum for 2001 that had been stated in the previous 1999 Agreement (where the actual amount was to be an average of the two most recent years). Now it's both a floor and ceiling for both 2001 and 2002. The amount itself implies an increase of $14 million, or about I percent, over the amount received during 2000. A couple of comments are in order. The moving average starting in 2003 is based on the average of the what the provinces would have received in the preceding 3 years if no guarantees and fixed amounts (e.g. the $1.364 billion per month) had been applied. The calculation will be based on the federal tax collection for last three years, then calculate what the provinces would have gotten under the old coparticipation, pre-coparticipation, tax-sharing laws (clause 4) and take the average of the three annual provincial shares. Comment: in terms of limiting the boom-bust cycle of spending at the provincial level (including periodic disruptions in social services), this clause is an extremely important reform. SEVENTH: This clause states that if a new ley-convenio is not in place by the end of 2003, the federal government (with the agreement of the Governors) would go ahead and submit a new coparticipation law to the National Congress. Then, to become effective the proposal would have to be submitted to the provincial legislatures, since the Constitution explicitly calls for a ley- convenio that would be approved by the national Congress and "approved by the provinces." The rest of this clause states that whatever proposal presented to Congress would have certain features: simplification of the system, the new secondary distribution would be applied to marginal amounts only, instruments for smoothing spending across the economic cycle (i.e. fiscal stabilization fund) would be contemplated, etc. It is important that the federal government has now succeeded in getting provincial agreement to these features (some of which were proposed under the Bank's SSAL). EIGHTH: Freeze on primarv expenditures. The provinces and City of Buenos Aires agree to not increase their primary expenditures to the extent that they have "current or potential fiscal imbalances." They also reassert their willingness to pass fiscal responsibility laws similar to the national law -- as promised in the 1999 Federal Agreement. NINTH: The provinces can limit the earmarking of the transfers from special laws (e.g. FONAVI, FEDEI, Roads Fund, etc.) and instead use 50 percent as general untied transfers. The freed up funds do not have to be shared with the municipalities, even though they are now like regular untied coparticipation. TENTH: The federal government promises that the current debt restructuring program will continue and be expanded, using the Provincial Development Fiduciary Fund, Banco de la Annex D Federal-Provincial Fiscal Relations Page 10 of 18 Naci6n, or other instruments including perhaps what might come from multilateral development banks. ELEVENTH: This clause resolves a financial claim, regarding the amount of FONAVI housing fund transfers that the provinces were supposed to receive during the 1999 recession. (A floor on the level had been set, but the federal transfers under this category did not comply with the minimum monthly amount.) The federal government now recognizes that they owe $78 million to the provinces (the amount is not in the text, but the Ministry of Economy has confirmed this amount). Now the federal government will pay back this amount in two phases -- half will be paid back during 2001. The other half will be paid no later than March 31 st, 2003. Instead of receiving the second half in cash and waiting until 2003, provinces can choose to receive social and employment programs during 200 1of an equal amount. TWELFTH: The provinces will present 3-year budget plans to their legislatures. Then there is a list of the minimum content: projection of revenues, spending by function and economic category, investment plan, multilateral development bank borrowing plans, general criteria for financing sources, program agreements reached and the amounts of each, and a description of the budget policies that back up the projections. THIRTEENTH: Transparency and Access to Information. The parties involved make a commitment that within a year a long list of items will be made easily accessible to the public. General budget information is on the list as well as treasury transactions, payment orders, etc. FOURTEENTH: Commitment to publish information on the geographical distribution of government expenditures -- as detailed as possible. FIFTEENTH: The parties reaffirm the prior 1999 Agreement's clause that promised harmonization of tax administration. In this new Agreement, there are more concrete and specific commitments. Within four months, the provinces would sign agreements to implement the National Tax Payer and Social Identification System (SINTyS). Within 12 months, they should incorporate the identification codes in the registries laid out by the most recent (October) federal tax administration law. Finally, within 12 months, they should sign agreements for implementing OSIRIS or similar information systems for tax collection. SIXTEENTH: The provinces will administer $225 million in employment and other social programs during 2001. The federal government transfers the funds to the provinces, but it is earmarked 80 percent for employment programs and 20 percent in other social programs. For 2002 and beyond, the provinces will continue to be able to administer the final spending of some employment programs. SEVENTEENTH: The parties make commitments to austerity and transparency. Then, there's a tough clause that states: the provinces and feds agree to eliminate any clauses and statutes that imply automatic wage increases for public employees (e.g., automatic seniority increases, etc.). Since the Judicial and Legislative branches are "autonomous" in these matters, this clause also "invites" those branches of government to adhere to this new rule. EIGHTEENTH: Agreement to sign (within 120 days) a Federal Pact for the Modernization of the State. NINETEENTH: Agreement to move ahead with the Federal Infrastructure Plan, adjusted to the agreements reached in the Interprovincial Council of Minsters of Public Works. Annex D Federal-Provincial Fiscal Relations Page 11 of 18 TWENTIETH: With regards to Clauses 5 and 6 above, there continues to be a special regime for Tierra del Fuego (Decreto 702/99). There was a question as to the amount that had been fixed in place in the general revenue-sharing law and the transition of Tierra del Fuego from national territory to a province. The percentage share increased for Tierra del Fuego through the Decree cited here. This clause of the Agreement makes it clear that the secondary distribution is still affected by the special decree for Tierra del Fuego. TWENTY-FIRST: The fixed amount of $157 million that the City of Buenos Aires receives every year is not included in clauses 5 and 6 above. (The City historically and currently receives this fixed amount, in accordance with Article 8 of the 23548 - General Coparticipation Law). But the City does get the FONAVI payback mentioned above -- and are treated just like a province in that regard. TWENTY-SECOND: A statement of mutual political support to assist each other (Nation- Provinces) in securing the required legislation both at the national and provincial level to make all these agreements take effect. TWENTY-THIRD: Language that states that there will be an attempt to get municipalities to subscribe to the principles of this agreement (essentially implying an attempt to stabilize provincial to municipal transfers in a manner similar to the relevant clause for federal-provincial transfers of this Agreement). TWENTY-FOURTH: The parties will send this Agreement to their respective legislatures, but: TWENTY-FIFTH: States that this Agreement takes effect immediately. The immediate effect is expressed in the following clause on the new provincial share of coparticipation. TWENTY-SIXTH: The content of clauses 5 and 6 (primary distribution) will begin to take effect as of January 1 st, 2001, and it will last for 5 years, unless a new coparticipation "ley-convenio" takes effect. Note: Since the fixed amounts can be interpreted as earmarking on the part of the federal government of federal revenues, then this modification in the general revenue-sharing regime can occur, due to item 3 of Article 75 of the 1994 Constitution. This item allows earmarking in this way, without resorting to a ley-convenio that would have to be ratified by all provincial legislatures. A general reform of the revenue-sharing system would require a ley-convenio. Annex D Federal-Provincial Fiscal Relations Page 12 of 18 Provincial Fiscal Solvency Laws (Article 6 of the Federal Agreement) Below is a summary of the Fiscal Solvency Laws approved by the Provinces of Catamarca, Cordoba, Chaco, Formosa, Mendoza, Misiones, Rio Negro, Salta, San Juan, San Luis, Tucuman y Tierra del Fuego. Three criteria are discussed for establishing a minimum degree of compatibility with the federal Fiscal Solvency Law: the path towards fiscal balance, expenditure controls, and borrowing/debt limits. The laws should comply explicitly with at least one of these criteria. Also, note that most of these provinces are now working to accelerate the path towards fiscal balance, in accordance with the recently enacted federal zero-deficit policy. The Path Towards Fiscal Balance Annual, gradual deficit targets similar to the National Law (annual reductions until reaching zero deficit in 2005): * Chaco. * Tierra del Fuego (zero-deficit in 2003). - Catamarca. (Zero deficit in 2005, with annual target deficits as a percent of revenues as opposed to a number.) * Rio Negro. There is an annual deficit path towards "balance;" however, instead of using the overall fiscal balance, the indicator used is the primary current balance (current balance excluding interest payments). - Misiones. An annual path is not specified, but 2005 is established as the target for reaching a balanced budget. - C6rdoba, Salta, San Juan and Tucuman. The respective laws establish that the province should not have a negative current balance, except under extraordinary circunstances. • Formosa and Mendoza. The annual path of the deficit is not specified, but 2003 is set as target year for reaching a balanced budget execution. * San Luis. The local fiscal responsibility law does not specify deficit targets. {Note: the province has achieved surpluses in recent years.} Expenditure Controls * C6rdoba and San Luis. Limit growth of real expenditures to the growth of provincial GDP (primary expenditures in the case of C6rdoba and current expenditures in the case of San Luis). Provisions are made for declines in GDP. * Formosa and Misiones. Following the federal model, the real growth of primary expenditures cannot excede the real growth of federal revenues (federal transfers). If revenues fall, then primary expenditures must remain constant in nominal terms. Annex D Federal-Provincial Fiscal Relations Page 13 of 18 * Tucuman. Current expenditures cannot exceed the growth in current revenues, except for emergency circumstances. If revenues fall, then expenditures must remain constant or fall, in real terms. There are also limits on personnel expenditures. * Chaco, Salta and San Juan. Limits on personnel expenditures. * Catamarca, Mendoza, Rio Negro and Tierra del Fuego. No specific expenditure limits. Borrowing Limits * Chaco and Formosa. Similar to the federal law, in that borrowing must be consistent with the deficit, plus interest capitalization (really should be included in the deficit), plus on-lending to municipalities. The only exception would be borrowing to cancel/restructure debt coming due in the next year. * Misiones and San Juan. The stock of debt should not exceed annual expenditures and should tend to fall gradually. * C6rdoba. The increase in debt in any given year cannot exceed 1 percent of provincial GDP, with the exception of financing reforms (e.g., provincial bank privatization). * Rio Negro. Public debt cannot increase more than the sum of the authorized annual deficits through the year 2005. * Salta. Debt outstanding should not exceed 70 percent of annual current revenues. Debt cannot be contracted to finance regular current expenditures. * San Luis. Total debt cannot exceed 3 percent of GDP, nor 1.5 years of own-source tax revenues. * Tierra del Fuego. No borrowing allowed for regular current spending and debt service should not exceed 25 percent of revenues. * Catamarca, Mendoza and Tucuman. No specific limits. Annex D Federal-Provincial Fiscal Relations Page 14 of 18 Provincial Fiscal Information on the Internet (Clause 13 of the Federal Agreement) Municipality of Buenos Aires www.buenosaires.gov.ar / Information on procurement (Contracts, Legal Norms, Types of Contract, Inscription information) V General Directorate of Public Debt (Economic Situation, Year 2000 Budget Execution, Evolution of Public Debt, Credit Ratings) v Citizens' Guide to the Budget V 2000 Budget V Tax Schedule v Statistical System of the City v Proposed Budget Law of 2001 V Procurement Law Law 539, 2001 Budget (Message, Law, Tables, Multi-year Investment Plan 2001/2003, Functional Distribution of Expenditures, Description of Public Services) V Statistical Yearbook 2000 Province of BUENOS AIRES www.2ba.sov.ar / v Statistical Yearbooks 1996,1997,1998,1999 and 2000 V Annual Legislation. V General Financial Information (Prospectus for Past Bond Issues) V Provincial Bonds CATAMARCA www.catamarca.2ov.ar V Calls for Bids, Employment Competitions, and Procurement V Information on the monthly provincial non-financial public sector budget execution for 2000 and through June 2001 (according to national budget format, expenditure details by economic and functional classification, revenue details by type of revenue and revenue source) CORDOBA www.cba.g,ov.ar V Investment account for 1999 V 2000 Budget (Message, Programs, Tables) V 2001 Budget (Message, Programs, Tables) V 2000 Budget Execution through September (Revenues, Expenditures, Treasury Balance, Public Debt, Transfers to municipalities) V Reports on own-source tax revenues CORRIENTES (none) Annex D Federal-Provincial Fiscal Relations Page 15 of 18 CHACO www.chaco.gov.ar (no fiscal information) CHUBUT (none) ENTRE RIOS (none) FORMOSA www.formosa.com.ar ./ 2000 Budget (text, tables) V Statistical Yearbook 1999 V Provincial Tax Office (Tax Revenues 1996, 1997, 1998y 1999; Tax Law; Tax Code) JUJUY (none) LA PAMPA www.layamva.eov.ar V Budget Executions 1989-1998 V 1999 Budget (Expenditures, Revenues and Financing) V 2000 Budget (Expenditures, Revenues and Financing) V 2001 Budget (Expenditures, Revenues and Financing) V Information for taxpayers LA RIOJA www.larioia.Lov.ar (no fiscal information) MENDOZA www.mendoza.eov.ar V Legislation in place V Procurement MISIONES www.misiones.eov.ar (no fiscal information) NEUQUEN www.haciendanqn.siov.ar v General Investment Account of 1998, 1999 and 2000. V 2000 Budget Execution and through March 2001 (according to national format, revenues and expenditures, statement of variation of assets and liabilities, public debt, payroll, number and position of public employees, detail of political appointees) V Proposed Budget of 2000, 2001 y 2002. Annex D Federal-Provincial Fiscal Relations Page 16 of 18 RIO NEGRO www.rionegro.gov.ar (website under construction) SALTA www.gobiernosalta.aov.ar v Provincial Tax Directorate (legal norms, own tax revenues of 1999, 2000 and January 2001) SAN JUAN www.saniuan.aov.ar / Monthly own tax revenues of January-May 2001. v Procurement bids / 2000 Budget SAN LUIS www.sanluis.eov.ar V Procurment V 2001 Budget (Law, annexes, Multi-year plan 2001-2003) V Provincial statistical information SANTA CRUZ www.scruz.gov.ar (no fiscal information) SANTA FE www.santafe.gov.ar / 1999 Budget O/ wn tax revenues of 1997, 1998, 1999, 2000 and January 2001 SANTIAGO DEL ESTERO (none) TIERRA DEL FUEGO www.tierradelfue2o.eov.ar TUCUMAN www.tucuman.com.ar V Monthly own tax revenues 1992/2000 Annex D Federal-Provincial Fiscal Relations Page 17 of 18 Eliminating or Reducine Automatic Wage Adjustments (Status of Clause 17 of the Federal Agreement) Municipality of Buenos Aires: Automatic adjustments are eliminated, except for the health sector. Province of Buenos Aires: In the Budget Law (Law 12575) for the year 2001, Article 24 sets at I percent the seniority adjustment for the year 2001, and suspends all other legislation that would grant additional seniority pay. Catamarca: Reduction of 10 percent in the amount of all salary supplements, permanent or transitory, of all the Public Administration of the Province - a measure implemented since early 2000 via the Provincial Economic Emergency Law (Law 4.988). C6rdoba: All automatic salary supplements are frozen, and the legal norm that supports this administrative action is the Provincial Legislature's ratification of the Federal Agreement of November 2000. Chaco: Provincial Law 4.725 established the freezing of seniority supplements for all employees whose gross monthly wages are above $ 700. This action is in effect until the end of 2003. Chubut: All automatic salary adjustments are suspended by Law 4665 of December 2000 that extends the Provincial Emergency Law (4154) until the end of 2001. Entre Rios: The province has a draft law that would freeze seniority adjustments, but it has not yet been approved by the legislature. Formosa: By Decree Number 4 of February, 2001, the seniority supplement is frozen. Jujuy: Through "Agreement-Decree" 413 of January, 2000 the seniority supplement is eliminated. Through extension of the province's Emergency Law, this measure will continue in effect to the end of the year 2000. La Pampa: The only automatic adjustment in place is the seniority adjustment. The province has not decided yet whether to suspend this automatic adjustment. La Rioja: All seniority adjustments are suspended except for teachers and workers of some decentralized agencies that have union collective bargaining agreements in place. Mendoza: Since 1996, the Province has not granted any automatic seniority adjustments. The province proposed in its 2001 Budget Law to eliminate all these adjustments in the future. The issue is currently being contested in the provincial courts. Misiones: The seniority supplement is frozen by Decree Number 8 of 1994 Law Number 2723 of 1991. Neuquen: Salary increases based on seniority are suspended by Law Number 4665 of December 2000 that extends the Emergency Law (4154) until the end of 2001. Annex D Federal-Provincial Fiscal Relations Page 18 of 18 Rio Negro: Through Provincial Law 3482 Article 4 of provincial Law 3238 is extended through 2005. This article prohibits promotions and/or automatic grade level increases for public employees. Salta: Law Number 6929 of December 1996 revokes Article 21 of the Public Employee Statutes that had established seniority supplements. San Juan: "Decree-Agreement" Number 5 of January 2001 eliminates all forms of seniority adjustments from the civil service statutes. San Luis: Automatic adjustments were suspended by Law 5198/2000 of Labor Emergency. Santa Fe: Supplements suspended by the Economic Emergency Law (1196) through the end of the year 2001. Santiago del Estero: Automatic seniority adjustments are currently in place. Currently, there are no plans to suspend these adjustments. {Please note that the province has achieved fiscal equilibrium in recent years.} Tucumfin: Through Law 7000 of December 1999, all automatic adjustments are suspended from the start of 2000 through the end of 2001. Tierra del Fuego: All automatic wage adjustments suspended in 2001 via the Budget Law; however, the suspension has not been fully implemented. Note: The only jurisdictions not reported above are Corrientes (currently under federal intervention) and Santa Cruz (the only province where the Governor did not sign the Federal Agreement). Annex E Gender Issues Page I of 5 ANNEX E: Mainstreaming Gender Concerns 1. The gender assessment did not find that the reforms would have negative gender impacts. On the contrary, the reforms when implemented would have important effects on reducing intra-gender disparities in the access to and benefit from public services and subsidies, and enhancing opportunities for achieving gender equity in civil service. To guarantee the consolidation of these benefits, a set of recommendations in gender to be integrated into the SAL reform actions were prepared for the following reform components: health, social protection and modernization of the state (see matrix). These recommendations took into consideration the main gender issues in Argentina identified by previous works conducted by the LAC Gender Team. Also, responding to the fact that the SAL reforms are part of a broader reform program, the recommendations of the gender assessment include concatenated actions that could be implemented by future loans. For example, most of the recommendations for the Social Protection component facilitate the integration of gender into the conduction of preparatory work for next loans. 2. These recommendations were discussed with the President of the National Council of Women who have manifested her interest in supporting the implementation of the recommended gender actions, by using the resources of the PHRD grant to mainstream gender into Bank projects. Next steps will entail the following: (i) preparation of a gender support strategy based on the recommendations gender matrix to be discussed with the National Council of Women and the sector counterparts. The strategy should delineate the approach (e.g., horizontal vis-a-vis customized interventions), methodologies and instruments (e.g, studies, workshops, dissemination campaigns); (ii) Definition of an implementation action plan, which details the chronology of the actions to be conducted. Following is a brief discussion of the assessment's findings for each of the sectors. Health Sector Reform 3. Health reforms could have positive and important impacts on eliminating gender gaps in the access to and benefit from health insurance services. The revision of the subsidy redistribution criteria and mechanisms and the increase of consumer choice instruments provide good opportunities to address potential disparities in access to health care due to the influence of gender roles, and to make the system more responsive to the differences in health needs and risks of men and women. However, to guarantee that gender issues are properly addressed, the gender assessment recommends that specific actions in gender should be undertaken during reform implementation. In first place, all analysis on subsidy distribution should be disaggregated by sex in order to assess whether subsidies take into account gender differences in health needs and risks. The enrollment database being carried out would make possible the conduction of these analyses. Second, actions oriented to strengthen consumer choice -e.g., information dissemination campaigns-- should take into account differences in the access to and in the capacity of processing information on health care standards and the mechanisms to access to them. Annex E Page 2 of 5 Social Security and Social Protection Reform 4. Similar to the case of health, the reforms on social security protection could also have an important impact on enhancing gender equity in the access to and benefit from subsidies. For example, the fact that reformns comprise the establishment of a targeted universal benefit may reduce potential gender gaps in pensions. Likewise, the introduction of proportional and supplementary benefits to reward past contribution efforts, introduce incentives for women to retire later with the corresponding higher accumulation of pension funds. Accordingly, a good opportunity arises within the implementation of reform to conduct impact evaluation studies of these new measures on men's and women's income levels. Also, the consolidation of different types of transfers to improve transparency of targeting mechanisms -to be supported by a well-functioning registration system-- enhance the opportunities to identify potential gender bias in subsidy allocation. Among specific actions in gender, the assessment recommends the analysis of the effects of different eligibility and targeting criteria on the opportunities of men and women to be benefited by these transfers and of potential differentiated impacts on their well-being. Finally, the changes in subsidy administration, in particular the establishment of protocols for program monitoring and evaluation, will permit to integrate a gender approach within these lines. Modernization of the State 5. The reforms at this component will allow to integrate two methodologies on operationalizing gender into public sector reform: (i) integrating a gender approach into public sector service delivery; and (ii) promoting gender equality in human resource systems. The sector counterpart, the Subsecretariat of Public Function (SFP), proposed to carry-out these methodologies under the Program of Letter of Commitment to the Citizen (Carta Compromiso con el Ciudadano) and the Federal Council of Public Function. The SFP proposed to integrate gender into the design of the letter, which entails a four-month diagnostic on service delivery issues, and in the impact evaluation of the Carta on the quality of the agencies' service delivery. The SPF proposed to pilot the integration of gender into agencies which are in the process of drafting or signing the letter. These are the following: Health Service Superintendency, National Citizen Registry, Council of the Child, Youth and Family, and Migration Office. 6. The SFP proposed to integrate those gender methodologies into the technical assistance to be provided to the provinces under the Federal Council of Public Function. Since the provinces comprise 1.7 million of a total of 2 million of public sector employees in Argentina and are responsible for providing most of the public services, including education and health, the impact of integrating gender methodologies into these efforts will be substantial. Main action lines in which these methodologies could be integrated are into the design phase of the technical assistance, and into the elaboration of the performance indicators matrix. Annex E Page 3 of 5 Policy Areas/Objectives Programs Outputs Possible Gender Impact Actions to Integrate Gender Gender Performance Policy Areas/Objectives 7I gra Into Future Reforms Indicator Health Increasing solidarity in the - A complete beneficiary database - Enhancement of the capacity of - Conducting analysis in health - Subsidy allocated Sistema Nacional de (including sex, age and address data the SNSS to identify gender and coverage from a gender per women and men Seguro de Salud. for all affiliates and beneficiaries. intra-gender differences in perspective. broke down by age coverage including plan quality. range. - Reform of the compensation - Correction of potential gender - Monitoring the distribution of mechanisms of the Fondo Solidario disparities within subsidies subsidies considering the de Redistribucion. allocation. differences in gender health needs. - Guaranteeing gender equity - Integrating mechanisms that among insured citizens in the ensure that both men's and access to a benefit package women's main health risks are (Paquete Medico Obligatorio) by being properly addressed into the making it financially feasible. PMO Monitoring Commission Enhancing consumer Norms defining consumer mobility Increasing the opportunities of - Establishing and disseminating Proportion of men and choice and increasing processes have been reformed to men's and women's to choose health care quality standards, using women who have insurer competition in the make the process simpler. better health coverage options. the health benefit package (PMO) changed Obras SNSS as main reference. Sociales. - Designing a communication campaign that address gender- related obstacles to access and benefit from information, including the association with other public and private institutions (NGOs). Social Protection Pension Reform - Establishment of a new system that: - Eliminate possible gender gaps - Conducting studies that measure Proportion of men and (i) guarantee targeted payment for the among the elderly without the impact of pension coverage women benefited from * Greater coverage elderly with no documented pensions. and pension amounts on men's and the new pension against risk of old age contribution nor source of income; (ii) - Provide incentives for women to women's of different socio- regime. indigence. a proportional benefit; and (iii) a save for their retirement. demographic profiles. * Fiscally sustainable supplementary benefit. retirement safety net. I I Annex E Page 4 of 5 Reform of Non- - Increase of poverty targeted - Reduction of possible gender and - Conducting gender impact Proportion of female Contributory Pensions pensions by tightening of elegibility intra-gender disparities in poverty- analysis on men's and women's and male recipients (PNC) criteria and revision of current reduction subsidy allocation. well-being of using income levels benefited from the . A consolidated & recipients profiles for Pensiones as a suitable criterion for targeting increase of poverty- unified system of Graciables. poverty-reduction subsidies. targeted pensions. federal targeted - Consolidation of existing PNC with income assistance for new and existing federal income key vulnerable groups. transfer programs covering same target populations. Child & Household A national system of child and Reduction of gender disparities in - Carrying out impact analysis of Proportion of female Welfare household welfare will be established the access to and benefit from the new subsidy regime on and male children to * Alleviation of poverty that follows the principles of: (i) the these subsidies. household's well-being (including be benefited by the in households with use of per-child cash allowances; (ii) time-allocation issues), new susbisdy. children. universal coverage based on differentiating by household * Greater efficiency and objectives and easily monitoring structure and composition. lower costs in benefit- indicators that guarantee that the delivery. weakest households in society are - Design and implement a covered; (iii) the use of a single communication campaign which standard registry of all beneficiaries; guarantee gender equity in the and (iv) the implementation of a access to subsidies, including the decisive outreach efforts to facilitate use of mechanisms such as claims of these benefits by vulnrable partnerships with NGOs. groups. Delivery of Social - Establishment of protocol for Guaranteeing equal opportunities - Integrating a gender approach in Inclusion of an Assistance program monitoring and evaluation for men's and women's in the the program monitoring and explicit gender * Efficient delivery of for all national social programs. access to and benefit from to evaluation protocol in terms of approach in the social assistance. - Protocols for the unified system of social assistance. integrating the variable sex as an monitoring and * Effective targeting of identification and registry of category of study. evaluation protocols. benefits to the poor. beneficiaries are developed, approved, I and a implementation plan is in place. _ Annex E Page 5 of 5 _Modernization Of The State Streamlined Government - A packet of reforms implemented to - Better opportunities to promote - Introducing policies, measures - Number of * Fiscal strengthening consolidate or eliminate federal gender equity in human resource and mechanisms that guarantee organizations that through streamlining entities, change public employees management. gender equality in the recruitment, have integrated an the central contracts, modifying organic laws of hiring, payment and promotion of approach into their govermment, ministries and agencies, and adjusting human resources. civil service regime. increasing public sector administrative policies - Improving the capacity of public - Integrate methodologies and accountability and and procedures subject to specified institutions to better address techniques for integrating gender - Number of improving service restrictions. female and male needs in the into public service delivery (e,g. organizations that delivery. delivery of public sector services. GINO) into policies and have integrated a mechanisms aimed at improving gender approach into the quality of service delivery their service delivery (Carta Compromiso al Ciudadano) strategy. Annex F, Page 1of 2 Argentina at a glance Left' Upper- POVERTY end SOCIAL -mer. A rl6- 199e Development diarond' Popuation; Mid-year (milhoms) 365 S9 573 GNP per capita (Atlas method, US ': 7;550 3,84D 4,900 Life expectancy GNP (Atlas methoa US$Itifnt .' 27?1 . 1,965 2,811 Population 6) - 1.3 160 1.4 N Labot rJWre{) 2.1 2.6 Zt GNP , \ G21 L.a rorca ~~~~~~~~~~~~~~~~~~~~~~~~... GNP Gross Most recant esinste/lt vwwatt 11004111) per I pimely Poverty (% ofpop ahon bedwnto At*poveltly#ne) 18 - capit a enrollment Urban populationt (9 of totlpopuaron) ....0 75 78 Life expectancy at bitth 1ye) 73 70 70 Infant mortality Ij,r 1,000 live birt&s) 19 31 27 Child malnutrition (95 dfchildrenunder$) 2 8 - Access to safe water (% of populatton s : 76 78 Access to sat water Illlteracy I9$ of population age 15k) 3 12 10 Gross primnary enrollment (f of school-age poOulahion) 111 f13 t09 Male 1 ... Argentna Female 1 t 1 Upper-middle-income group KEY ECONOMIC RATIOS end LONG-TErn TRENDS lo". 1990 199 2000 Esonomis retios' GDP (US$ billions) 77.0 141.4 283.3 285.0 Gross domestic irvestment/GDP -263 - 14.0 I -.9 1-9 Exports of goods and sernicesGD1P 5.1- 10.4 9.8 10.8 Trade Gross domesic savingalGDP 23. 197 18.6 17.0 Gross national savings/GDP 228 1 S.4 14.0 14.3 Current account balance/GDP -64 1.2 -4.4 -33 Interest payments/GDP a34 4.6 4.0 44 Domestic Investment Total debt/GOP 35.3 44.0 S1.6 51.4 Sewrgs Total debt servicelexports 47.4 19.7 ".8 9sas Present value ot debttGOP 50.3 s Present value ofdebtexports 403.7 Indebtedness 1tl04019040 "9Do 20M0 210044 (average annual growth) GDP --0.7 4,4 -3.4 4t5S 3,7 ?---Aigantnd GNP percapita 2.s 3,7 -419 -1.4 - at U Upper-middle -income group Exports of goods and seMces 3,8 8.2 -1.4 2. 0 2 6 STRUCTURE of the ECONOMVY G190 1960 l90 2000 Growth of Invetment and GDP (Y4 (9$i of GDPJ Agriculture 6.4 8.1 4.4 4.6 20 Industry 41.2 36.0 26.0 25.9 1h . Manufacturing 29,5 25.8 17.0 16.7 Serivces 52.4 65.9 76.5 76.9 .X 9s 57 sr n go Private consumption 78.2 77.8 69.6 e9.2 .20 General government consumption 16.1 17.2 13.7 13.8 Imports of goods and services 6.5 7.4 11.5 11.4 "'01 -3DG_DP (average annual growth) 190 1tt 1900 2000 Growth rete. of exports end Imports (t4 Agriculture 0.7 3.6 1.8 -2.5 4 Industry -1.3 3.9 -8.7 -3.2 30 Manufecturing -0.8 2.9 -7.7 -3.0 20 Services 0.0 4.5 -1.5 0,5 1n Private consumption -0.4 5.2 -2.7 -04 General government consumption 2.6 2.2 0.8 -0.4 is 97 w srr,o Gross domestic investment -8.3 9.2 -12.8 -8.6 20 Importsofgoodsandservices -1.5 12. -11.7 -0.5 Eisorts _lnport Gross national product -0,9 4.0 -3.6 -0.5 * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete Annex F, Page 2 of 2 Argentina PRICES and GOVERNMENT FINANCE 1980 1990 1999 2000 Inflation (%) Domestbc prices 0 . , . .Y (% change) Consumer pnces 100.8 2,314.0 -1,2 -0.8 Implicit GDP deflator 90.8 2,076.8 -1.9 1.1 Government finance (% of GDP, includes current grants) Currentrevenue 32.2 25.1 24.4 -20 Current budget balance 4.0 -1.8 -21 tGDP deflEtor _41CPI Overall surplusideficit -3.7 -3.1 -3.4 TRADE (US$ millions) 1980 1990 1999 2000 Export end import levels (US$ millions) Total exports (fob) 12,488 23,315 26,244 3ss,oo Food 1,374 2,063 2,322 ao,000 Meat 873 829 933 25,000 Manufactures 3,364 6,952 7,825 20.00 rflx-, Total imports (cif) 4,197 25,538 25,157 rses 4,-f, Food 366 4,522 4,455 10.oe ! I '1 Fuel and energy 423 730 719 ".0s Capitalr4oods 1,338 11,902 11,724 y4 ff 0r 7 985 9 00 Export price index (1993=100) 87 96 Import price index (1993=100) 91 89 r Exports O imports Terms of trade (1993=100) . 95 108 BALANCE of PAYMENTS (US$ emillons) 1980 1990 1999 2000 Current account balance to GDP rtio(%) Exports of goods and services 9,893 14,727 27,764 30,828 o + imports of oods and serMces 13,081 6,954 32,630 32,594 [ [,1 Resource balance -3,188 7,773 -4,866 -1,766 - ., Net income -1,609 -6,203 -5,247 -5,061 -2 Net current transfers -101 71 -2,331 -2,533 -3 i [j Current account balance -4,896 1,641 -12,444 -9,361 - Financing items (net) 6,776 1,352 13,645 8,921 s Changes in net reserves -1,878 -2,993 -1,201 439 -e Memo. Reserves including gold (US$ rnillons) . 10,814 27,831 26,465 Conversion rate (DEC, local/US$) 0.0 0,5 1.0 1.0 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ millions) Com potton of totel debt, 2000 Total debt outstandinp and disbursed 16,774 48,676 145,994 146,395 (USS mi.) IBRD 367 2,281 8,314 8,789 476 1e1 IDA 0 0 0 0 2009 Total debt service 3,190 4,953 23,140 24,343 IBRD 60 423 998 1,239 IDA 0 0 0 0 Composibon of net resource flows ... Official grants 2 21 6 6 3274 Official creditors 58 456 1,538 1,957 7017 Private creditors 6,038 -974 3,977 -3,752 Foreign direct investment 678 1,836 8,236 10,696 369 Portfolio equity 0 1 3 -112 15 World Bank program Commitments 27 0 132 441 A - IBRD E - Bilateral Disbursements 71 405 1,573 1,019 5 - Z G - Shrri-term Principal repayments 34 233 445 538 C - Netflows 37 172 1,128 481 1 2 Interest pavments 37 181 553 701 Net transfers 0 -9 575 -220 LCC7 7/27/2001 IBRD 29348 20 \7 BOLIVIA 60 0 20 IK 02-ytPARAGUAY Sa> n jalv d'r B R A Z I L I ®~~~Salto / \ ?--t -_ SA L TA; C' ~~~j'TuLm6n *,~~Formosa/ Is j uIuman CHACO P 4 f ) ') 71-1 TUCU/AINsNjG Resistenciaa4L --_-.'.>r +\< tw -T ~~~SANTIAGO Reite o...-PSc ˘mr L ssS , SSntiodel] tero Corrientes7 U.J gt -',qS mESTERO _ -- I~~~~~~~~~~~~~~~ ti ~~ J > L. Rioa ._ . .. . ; ~~~ RIOJA\ ~~~~~; SANTA _. _.- _30, I r SAN \ / : FE 30) u JUAN C6rdoba Santa; ( SanJu'n F6 ,Son ParEnTR -.-. ,CORDOBA Eh~arn Mendoza~~ San RIO S ANi s - N URUGUAY 7 O f A \LUIS * SAires JMENDOZA: 5 ; 9 Santa Rosa® UEN S I - \ ~~~~~LA . AIRES r (.NEUOUWI PAMPA X C) iNEUOUEN; ../ Neuu\ e C E A AN 2 RIO -4P ! (-/ ~~~~~NEGRO -A-O4 (7 NG _a _ - ;;--- -ARGENTINA CHUB UT L'- - P~ROVINCE CAPITALS ,. NATIONAL CAPITAt " . --'- PROVINCE BOUNDARIES ii- .- INTERNATIONAL BOUNDARIES SANTA ( tr< C R U Z ; . . 1 . FALKAND fSLANDS I' X . i. i - -; -;f+MALVINAS) *h~0~s/Ia~se 0 100 200 300 A00 S0 60 KILOMETERS 0 too 20t 300 400 Miles -- %.:-, ,-sroduw sy the MDestgn Unit of The Wortd sonk. T; u ;he bovtsdoriee$ lobrs,oes~notionxond onyother information .hown onthis wpdono im*, on the port of The World6onkGroup, any 'A4'msent an the elgos of any territoy, or ony endorseme or APRIL 1998