Docment of

The World Bank

FOR OmFIAL USE ONLY

AJi 32Q7- A2Repot No. P-5428-AR

MEMORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$33.5 MILLION

TO THE

ARGENTINE REPUBLIC

FOR THE

AGRICULTURAL SERVICES AND INSTITUTIONAL DEVELOPMENT PROJECT

JANUARY 29, 1991

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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gURRENCY EQUIVALENTS

Currency Unit - Austral (A)

EXCHANG- RATE(as at January 10, 1991)

US$1.00 * A 5,800A 1.00 - U8$0.0002

FISCAL YEAR

January 1 to December 31

WEIGHTS AND HEASURES

The metric system has been used throughout the report.

ABBREVIATIONS AND ACRONYMS

EC European CommunityFAO/WB CP Food and Agriculture Organization/World Bank Cooperative ProgramFMD Foot- and-Mouth DiseaseIDS Inter-American Development BankZICA Inter-American Institute for Agricultural CooperationNEC Ministry of EconomySSAgyP Subsecretariat of Agriculture, Livestock and Fisheries

FOR OMCIL USE ONLY

AROBSTt

AGRICULTURAL SERVICES AND INSTTUTIONAL - DPUM PROJECT

1. LOAN AND PROJBCT fUMf ART

Borrower: The Argentine Republic

Executing Aaencv: Subsecretariat of Agriculture, Livestock andFisheries (SSAGyP).

Seneficiariess Public institutions providing services to theagricultural sector, farmers andagroindustrialists.

Loan Anuoutt US$33.5 million.

Terms: Seventeen years, including five years of grace,at the standard variable interest rate.

Financina Plan:

IBRD US$33.5 million JIDB US$30.0 millionGovernment of Japan US$ 1.0 millionLocal Counterpart USS18.7 million

Total US$83.2 million

Economic Rate of Return: Not applicable.

Staff Amoraisal Reoort: Report No. 9138-AR.

M2:s IBRD No. 22436.

I/ Includes US$O.5 million to refinance PPF 119-AR used to prepare project.

This document has a restricted distribution and may be used by recipients orn.y in the performanceof their official duties. Its contents may not otherwise be disclosed witk...:t 'World Bank authorization.

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MEMORANDUM AND RECOI n OF T RSIDNTor TME INTERNTIONAL MmN FrOR RUOSRCION AIND DEVEOPUMEN

TO TSE ZEXECUTE DIREORSONl A PROPOSE LOAN

TO TIM AtGENTIU REPUBLICFOR THE

AGRICULTURAL SERVICLS AND INST DIONAL 2EVEM PRJC

1. The following memorandum and recommendation on a proposed developmentloan to Argentina for US$33.S million equivalent is submitted for approval. Theproposed loan would be on standard Bank terms with seventeen years' maturity, afive-year grace period and variable interest rate, and would help to finance anagricultural services and institutional development project. The project wouldbe cofinanced with the Inter-American Development Bank (1DB) and the Governmentof Japan.

2. Background. It is well known that Argentina has a significantcomparative advantage in agricultural and agroindustrial production. Thec_^ntry's rich soils and varied agro-climatic conditions permit the productiono3. - wide range of commodities. This ensures self-sufficiency in mostfoodstuffs, provides low-cost zaw material for a developing agroindustrialcomplex, and allows the country to be a significant factor in world markets fora number of products, especially cereals and oilseeds.

3. Agriculture contributes about 15% to GDP and is a major contributorto export revenues. Crops represent about 65% and livestock about 35% of sectorGDP. Agricultural products and manufactured goods of agricultural origin provideabout 7S% of total exports. Historically, however, domestic policy has beenoriented towards using the agricultural surplus to finance industrialdevelopment. During the last decade, agriculture transferred an average of 45%of its gross product to other sectors of the economy and to the Government. Thelong-term consequence of these discriminatory policies, which have also includedexport taxation and an overvalued exchange rate, has been to decapitalize theagricultural sector. A low-cost, extensive form of agriculture has resulted,with little capital stock or debt, and a lack of incentive to improve technology.Of all the major agricultural producers, Argentina's agriculture is by far theleast protected and yet has continued to grow. The implication is that withstronger positive signals, the potential for new investment and growth is good.In this context, recent initiatives on trade liberalization, reduction of exporttaxes and freeing of the exchange rate are important steps in the direction ofcreating confidence at the farm level.

4. The Government is also currently in the midst of a public sectorreform process which aims tos reduce the size of the public sector apparatuswhere approprLates establish mechanisms to reduce costs by charging the end-userfor certain services which to date have been provided free; delegate moreresponsibility to provincial authorities; and increase the role of the privatesector. As part of these reform initiatives, the 8ubsecretariat of Agriculture,

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Livestock and Fisheries (SSAGyP) was one of the first institutions to present itsproposal for restructuring to the Ministry of Economy (MEC). As such it is seenas a model for other institutions. The proposal relied heavily on the guidelinesset out during preparation of this project.

5. tationale for 8ank Involveaent. The economic and structural reformsnow under way, which are aimed at creating a more open and competitive economy,will undoubtedly benefit agriculture, a sector which relies heavily on externaltrade. Long-term sustainable growth, however, will not occur without majorInvestments, even if an appropriate economic and structural framework is inplace. Years of neglect in the public sector and disinvestment by the privatesector have left serious bottlenecks in: (a) physical infrastructure(irrigation, drainage, flood control and rehabilitation of rural roads)) (b)capital for primary production, processing and marketing; and (c) agriculturalservices. The Bank's lending strategy for the sector over the next five yearswill aim therefore to stimulate growth by targeting resources to each of theseareas.

6. The proposed project addresses the third of these areas. Thecapacity of the agricultural sector to exploit its comparative advantage iscontingent on the strength of the institutions which serve it. The need forimprovement covers a wide range. Many of the problems are familiar--related topoor funding and lack of direction. The total resources needed on an annualbasis are not particularly large, but they are fundamental to the long-termproductive and marketing potential of the sector. They deserve high priorityand, since agricultural technology is advancing rapidly on an internationallevel, they are particularly suitable for external financial and technicalassistance.

7. The proposed project would be consistent with the findings of the1989 Agricultural Sector Review which has been endorsed by the Government and theBank. In that review, it was stated that the principal components of a strategyto develop agricultural services would be: (a) strengthening of animal healthand plant protection services; (b) provision of market research, varietaldevelopment and export promotion for fruits and vegetables; (c) setting of clearpriorities for agricultural research; (d) development of a more autonomous meatmarketing board; (e) strengthening of forest management services; (f) support tothe fishing industry; and (g) increased emphasis on the control of soil erosionand on pasture improvement.

8. Through involvement in the preparation and appraisal o' the project,the Bank has already had an important impact on the structure and organizationof the agencies involved, and this impact would be deepened during projectimplementation. In preparation for the project, each agency had to define itsstrategy, role in the sector, priorities, competence and ability to developeffective cost recovery mechanisms. This has led to a keener awareness of skillgaps, which have been critical constraints to the management of public sectorinstitutions. Great emphasis has been placed on sustainability through costrecovery and, as a result, the fiscal impact of providing these services woulddecline over the life of project. Furthermore, priority incremental staffing

4

needs would be offset by reductions in SSAGyP's overall personnel quota throughelimination of low priority activities. The project focuses heavily on field-level staff, given the weakness of the federal bureaucracy and the need for.service infrastructure to become more ccm.rcially-oriented, with greaterinvolvement of producers and provincial agencies.

9. fPolect Obieotives. The project's aim would be to improveArgentina I a capability to produce, certify and maintain high quality agriculturalproducts for export. It woulds (a) strengthen the effectiveness of publicsector institutions responsible for quality control services while reduclng theirdependency on budgetary allocations by charging user fees for services renderedtand (b) diversify agrLcultural exports by strengthening support servLces, exportpromotion and technical and research services through joint public and privatesector efforts. Purthermore, lt would bulld on the ongoing Public SectorManagement Technical AssLstance Loan (Ln. 2712-AR) whlch is attempting tostrengthen the planning and policy-making function ln publlc lnstltutions,ineluding SSAGyP. The proposed project would extend thls support to agrlculturalservLces with an important focus on exports.

10. Proiect Descroltion. The project would strengthen the agriculturalservices managed by SSAGyP through investment ln physLcal facilitLes,institutional development, tralning and technical assistance activities.Specifically it would: (a) strengthen animal disease control, primarily forfoot- and-mouth disease (PMD), brucellosis, mange and tick-borne diseases throughconstruction of a reference laboratory, a quarantine station and promotion ofintenslve vaccination programs; (b) strengthen phytosanitary programs to createand maintain plant disease- and insect pest-free zones, and establlsh quarantineand reference laboratory facilitles to certlfy levels of chemical resLdues andphytosanitary standards in agrlcultural produce; (C) improve wool grading andclassifLcation to provide improved market transparency; (d) strengthen analysisand monitoring of maximum sustainable fish catches; (e) promote export of highervalue-added meat products jointly with the private sector (f) improve researchon wool, biotechnology, post-harvest physiology of fruits and vegetables, andforest plantatlon management; (g) provlde specialized training and assistance tostrengthen technical and marketing skills ln the Meat Board and FisheriesInstitute; and (h) assist the private sector to venture into new export marketsby partly flnanclng marketing studies, technical assistance, and overseas visLtsand export promotlons.

11. The efficiency and impact of SSAGyP's agricultural services would beconsiderably improved by developing greater managerLal and flnancial autonomy forkey implementing agencies. The institutional analysis already carried out hasalso identified improvements needed in admLnistration and accounting.Furthermore, cost-recovery mechanisms whlch are to be put in place would aim torecover up to 80% of total project costs. Specific implementing agencies wouldalso be responsible for debt service on their respectlve parts of the Bank andIDB loans.

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12. The total cost of the project is estimated at US$82.7 millionequivalent (net of taxes excluding US$0.5 million to refinance PPF 119-AR whichwas used to prepare the project), of which about 38% would be foreign exchange(US$31.6 million). The Bank would finance US$33.0 million of project-relatedcosts (about 40% of total project costs) plus US$O.S million to refinance PPF119-AR. The ID8 would co-finance the project (US$30.0 million, 36% of totalcosts), and the Government of Japan would finance technical assistance, trainingand studies in the project's forestry and fisheries subsectors (grant of USS1.0million). Project costs and the proposed financing plan are shown in Schedule A.

13. Amounts and methods of procurement and disbursement and the proposeddisbursement schedule are shown in schedule B. A timetable of key projectprocessing events and the status of Bank-group operations on Argentina are givenin Schedules C and D, respectively. The Staff Appraisal Report No. 9138-AR datedJanuary 16, 1991 is attached.

14. Key Actions Aareed Durtina Neaoutitons: (a) the final draftagreement on the Export Promotion Component was agreed; (b) all agenciespresented revised draft Statements of Policy outlining their strategy for futuredevelopment which will become integral parts of subsidiary agreementsl and (c)key indicators of performance were agreed as part of the Loan Agreement.

15. Conditions of Effectiveness and Disbursement. For effectiveness ofthe loans (a) the project coordinating unit would be established and staffed;(b) the Export Promotion Component documents would be signed, the ExportPromotion Fund would be established, and the Executive and Technical Directorshired; (c) the IDB loan has been approved; and (d) SSAGyP would have signedsubsidiary agreements with autonomous agencies and the National Meat Board wouldhave adopted a Statement of Policy satisfactory to the Bank. As key conditionsof disbursement of the respective componentes (i) cost-recovery mechanisms,including tariffs to be charged, and 8ank-approved cost accounting procedureswould be put in place; (ii) establishment and staffing of the project componentmanagement units would be completed; and (iii) tender documents for all first-year contracts (by component) would be prepared.

16. Benefits. Project benefits would be derived from: (a) improvedservices provided by participating institutions; (b) increased quality andquantity of product available for export by the private sector; and (c) greaterexport diversification. The overall strengthening of key SSAGyP services wouldcontribute to maintaining Argentina's comparative advantage as an agriculturalproducer. A stronger SSAGyP would also be in a better position to help formulatesound public policies.

17. An economic rate of return has not been calculated since precisequantitative estimates of benefits are difficult to make in an institutionaldevelopment project. However, animal disease control campaigns would bringdirect benefits in terms of reduced losses, improved productivity and increasedaccess to export markets. The impact of phytosanitary control is especially

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difficult to estimate, since statistics on potential losses due to crop pestsand/or rejected products (pesticide contamination) are not available inArgentina. The magnitude of the potential problem can, however, be estimated onthe basis of experiences elsewhere. ror examples (a) the potential directlosses from the Introduction of fruit fly to the Rio Negro valley (70,000 ha ofapples and pears) would be about US$30 million per year in direct losseat. and (b)the introduction of cotton weevil into northeastern Argentina would increasepesticide costs by raising the number of applications from three to about eightper growing cycle. In addition, yields could decline by about 30%, asdemonstrated when the weevil appeared irs previously uninfested areas of Brazil.

18. Without the project, Argentina would Incur serious losses inagricultural export markets. Failure to comply with the increasingly strictrequirements of most importing countries on pesticides and other residues wouldhave a strong negative impact on exports. In addition, phytosanitary standardsin the European Community (SC) will become even stricter after 1992 when Spanishregulations banning fresh fruit imports from regions with fruit fly or citruscanker become the standard for the entire EC. The opening of markets in EasternEurope could also be threatened if SC standards are adopted throughout Europe.Regarding meat exports, as the EC moves towards eradication of FMD, Argentinawill have to move towards FMD-free status. The objective during projectimplementation would be to create gradually certified FMD-free zones withinArgentina, with the longer term objective of total eradication. As regards wool,the International Wool Secretariat establishes the industry certificationstandard and, unless Argentina can meet this standard, its wool will continue tofetch low prices in world markets.

19. Risks. In addition to Argentina' general macroeconomic uncertainty,the most important risks could stem from the availability of counterpart funds,the level of managerial capacity and the low level of commitment by publicservants due to low salaries. The local funding risks, which affect all proposedBank investment operations in Argentina, would be mitigated to a large extent bythe project's proposed cost recovery mechanisms. The lack of managerial capacityin public institutions w'ould be mitigated by the project's strongly focussedinstitutional strengthening programs. The issue of inadequate compensation inthe public sector is being tackled by Government through public sector reformmeasures which would also be assisted by the Bank in a proposed new loan. Sinceproject design encourages financial autonomy, this should also provide means tosupport competitive staff salaries over time.

20. Environment. The project would have a positive environmental impact.The animal health and phytosanitary components would provide mechanism tocontrol disease, pests and levels of chemical residues in all foodstuffs, notonly those for export. The fisheries component would prevent over-exploitationof maritime resources.

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21. R*gg c^stion. I am satisf ed that tho proposed loan would complywith the Articles of Agreement of the Bank, and recommend that the ExecutiveDirectors approve it.

Barber B. ConablePresident

Attachments

Washington, D.C.January 29, 1991

§gbgftl- A

rtimated Costs and lFfinan Plan

Estimated Coats:Local For Lo

Us$ million

Animal Health 8.4 9.1 17.5Phytosanitary Services 8.s 4.1 12.6Fisheries 7.4 3.6 11.0Meat 6.0 4.4 10.4Research 4.7 4.4 9.1Export Promotion 5.4 2.0 7.4Information System 0.9 0.2 1.1Project Coordination 4.4 0. iA4

Total Baseline Costs 45.7 28.1 73.8contingencies S.4 3.5 -Li

Total Project Costs S1.1 31.6 82.7

Vinacins Plans

IERD 17.4 15.6 33.0IDS 14.4 15.6 30.0Japanese Grant Funds 0.6 0.4 1.0Local Counterpart IL.7 QO1L.Z

Total 51.1 31.6 82.7

}t Excluding US$0.5 million to refinance PPF 119-AR used to prepare project.

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Procrat Netd d Disbursamts

ICE LU Other Jsues TotalGat

Cfvfi works 7.7 4.6 - 12.3C 0 ) (4.6) ( 4.6)

Equipment/Vehicl es/Ichinery 11.0 8.0 2.2 21.2(6.0 (2.0) (1.0) C 9.8)

Tr.iningtA/Consuttants - 23.1 1.0 24.1.4.0) ( 4.0)

other - 25.1 - 25.1(14.6) (14.6)

Total 2.7. I S 0. 4 1.0 82.7(6.0) C 7.4) (19.6) (33.0)

Note: Values in parenteses show munts to be f*inaned by the Sank.

DiS

CAnr MWet of Tam)CUSfltiUin)

Civil Works 4.6 (1002 of etigible)Veh1cle ard Laboratory EquIpment 9.8 (1002 of elfgible)Technical Assistance Studies, Training,Export Promotion 9.5 (1002 of eligible)

(502 of exp. promo.)Incremental Operating Expenditures

9.1 (50S of eligible on adeclining basis)

Refinancing of PPF 119-AR 0

33.5

Estlmrotd *R DjyhVMEgtM MUS sUilon):

EBRD FT 191 M 19 19 1S 1 l 9Anmsat 325 2.8 -.7 -5.5 6.8 -6-.1 -2.-6 1Cumulative 3.5 6.3 10.2 15.7 22.5 29.4 32.0 33.5

1J/ Includes the initial deposit in the Special Account of USS2.0 million equivalent.

- 10 -

Scedule C

AGRICUMA Boweg AN_NT M

Ymtsable of Xv Vraeesin@a ftets

1. Time taken to prepares 20 months (March 1989-Movember 1990)

2. Prepared by: FAO/lBRD CP, followed by SSAyP and SICA

3. First SBRD Mission: May 1989

4. Appraisal Mission Departure; April 1990

S. Negotiations: December 11, 1990

6. Planned Date of Effectiveness: April 1, 1991

7. List of Relevant PCRes N.A.

Schedule DTHE STAIS OF SAW( CP OPEATIQNS Page 1 of 2

STATEM1V4T oW DAW LOANS

(As of S-ptombor 30, 1090)

F; est Amount Lose

Leon Me. Y-ee Dovwou. Purnsos Cancl 1attoos Undlsbuweyd(USI attloI")

Fully dsbturued loans (21) 2,11t.12

2032 1982 Yaci;msntos Rof n;ry 200.0 0.2Ptteolifeios Flscates Convvrs;on

2293 1903 Argectmno 14ghw.y 100.0 9.6

Sebctor

2192 19111S Y.cltmbnto O UtiIxatt en 160.0 97.9Pstrolif,eo FPinal* & Tech. Asolot.

2641 1Me6 Argentina Water Supply 60.0 47.3

2732 1966 Argentin- Publtc Sector 18.S 4.1

Mgt.

2715 1987 Argentin Powee Engineer ing 14.0 2.12793 101T Argentina Small and Medtum 126.0 -1.4

Sale Zad. Cedit

2906 1987 Argentina Poat 160.0 43.4

2611 1907 Argentina Trede Policy 496.3 0.4

2164 1967 Sorvictos 9lectrlsov Power Dist. 276.0 240.3

2920 196 Argentina munlcipal 0ev. 120.0 111.02"7o 1969 8nce do la Naclon Agelc. CredIt 106.6 16.2

2964 191i Argentina Sec;-l Sector 21.0 22.6

2997 1969 Argent;ns Housing Sector 300.0 24.12996 1019 ArgentIna 1Itctric Power 252.0 3.6

0$16 1989 Argentina Tax Admn. T.A. 6.6 1.2

TOTAL 4,444.0

of which has bot repaid 1.141.0

Total now eUtatendlng 8,303.0

Amount Sold 12.6of which bha bew "pId 12.8

Totel new held by Sank 3,290.2

Total Undisbuared 973ZL

10/24/90

Schedule D

11TATUIU4 0M !C lWC$rWMI

(As of Septembr 80, 1990)

dro,ntLn.

Yenv~ flkLLrn I01S.i±iM1LObU I gISL £ud Leo

19C0 cinder Induestor Arg. S.A.** Stool Produt 8.7 - .

19O Pp91ore Rlo Puern*, S.A.8. Pulp end Paper .J0 - JC0

1901 Pedege S.A. Autoestl s 2.3 - 1.5

1962 P.- - 8.01966/72 Clfulosa Argentina, S.A. Pup end Paper 12. t 12.5

1069/76 Oelamt Sider&.. S.A.* Stool Products 17.0 - 17.0

1969 Editorloel Codex, S.A.* Printing 7.0 2.0 5.0

1971/7r Calera Avelgenodo, S..* Cet 3.s ,. 977/34 Aipergatts S.A.1.C. Tentilte A Fibes 30.3 3.0 43.6

t97l loy x S.A. Soybean Preocecug 21.0 - 21.0

1907 tosugh, S.A. Pulp end Popr 29.9 2.4 27.3

i97 Juan Ulnotti, S.A. comet 103.0 - 108.0

1978/79 Ip.ho-Induntriee Chemicals sod 20.8 2.0 19.8

19" ASTRA P9troehomisele 17.4 - 87.4

1979/03/34 Alp.. S..A.d Fishertis 0.9 1.6 6.2

1964/U6 Potroqulmlse Cuyo S.A.Z.C. Potrochoealelo 46.1 4.0 42.1

19a6/07 RNWASA/SOICAlt Capital weekets 2.0 2.0 -

19036 Atner S.A.W. Cholcolt 6.0 1.0 7.0

1987 Hidc. Oil Chembicle VWd 107.6 - 107.4

19617 0.rVog I lIo/ZoeIr qIn Fewd A Fed Fe". 13.0 - 18.0

I"? Terminal 6 Port, Strep. .3 - 6.3

1936 eung. y Sore Food & Peed Pr"e. 40.0 - 40.0

19m Areer Feod & Food Pro@. 12.0 - 12.0

1t" RP Sew. Pin 0.0 -80

193 Chiret. Chemicals 3.2 3.2 -

i9t" gride Chomlesel 20.0 - 20.0

it" sogen comenrel de Nl4gels, Fine"* 20.0 - 20.0

lo9 AIC Cpitot works" 2.0 2.0 -

l96 Chlbeide Chsme.le sad 6.0_Petrchest so I

1939 C.O.I mony & Cp. U.rkth .1 .1 -19 Saneo Francee 0et. Finonee I3.0 - 16.0

96/9" USA Money A Capital 20.0 - 20.0

199 Potrhese Chical. 20.0 - 20.0

1990 CIP Services .1 .1

ToteI r..se Cowltso to 69.8 82.4 "04.00

Less CancwlIItlow, Tritat tionw

Repoymena and SlI. l1j.4 *.0 816.4

Total Coemitmnets ow held by IFC 1J7.9 2.4 14s.6Total Ulnlasreed (?FC only) 41.6 1.7 1j.9

10/81/90

IBRD 22436

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