Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 15868

IMPLEMENTATION COMPLETION REPORT

Public Disclosure Authorized ARGENTINA

SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN (PERAL II) (LOAN NO. 3556-AR) Public Disclosure Authorized

JUNE 21, 1996

Public Sector Management and

Public Disclosure Authorized Private Sector Development Division Country Department I Latin America and the Caribbean Region

This documenthas a restricteddistribution and may be used by recipients only in the performance of their official duties. Itscontents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Currency Unit = Argentinean Peso

Exchange Rate

I US Dollar = I Peso

(Since April 1, 1991, the exchange rate has been established by law)

GOVERNMENT OF ARGENTINA FISCAL YEAR

January I - December 31

ABBREVIATIONS AND)ACRONYMS

AFNE Astilleros y Fabricas Navales del Estado AMC Area Material Cordoba AHZ Altos Hornos Zapla DDSR Debt and Debt Service Reduction DGFM Direccion General de Fabricaciones Militares ECA Fabrica Militar de Vainas y Conductores Electricos EFF Extended Fund Facility FM Fabrica Militar FMAS FM de Acido Sulfuirico FMRT FM Rio Tercero FMSF FM San Francisco FMSM FM San Martin FMTS FM Tolueno Sintetico HIPASAM Hierro Patagonico de Sierra Grande S.A.M. MV Monomeros Vinilices PBB Petroquimica Bahia Blanca, S.A. PE Public Enterprise PERAL Public Enterprise Reform Adjustment Loan PEREL Public Enterprise Reform Execution Loan PGM Petroquimica General Mosconi, S.A. PRT Petroquimica Rio Tercero SECAL Sector Adjustment Loan SEGBA Servicios Electricos del Gran Buenos Aires SIGEP Sindicatura General de Empresas Publicas SOMISA Sociedad Mixta Siderurgia Argentina TAMSE Tanque Argentino Mediano YPF Yacimientos Petroliferos Fiscales IMPLEMENTATION COMPLETION REPORT FOR OFFICIALUSE ONLY

ARGENTINA

SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN

(PERAL II)

TABLE OF CONTENTS

Page

PR1EFACE ...... ii

EVALUATION SUMMARY ...... iii

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE ...... 1 A. GENESISOF THE LoAN ...... 1 B. LOAN OBJECTIVESAND DESCRIPTION ...... 2 C. LOANIMPLE NTATION...... 3 D. RESULTS ANDASSESSMENT ...... 7 E. BANKPERFORMANCE ...... 8 F. BORROWERPERFORMANCE ...... 9 G. SUSTAINABILITY...... 9 H. FuTuREOPERATION ...... 9 I. LEssoNsLEARNED ...... 10 PART H: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE...... 13 EconomicFramework ...... 13 SteelSector ...... 14 OtherDefense Companies ...... 15 PART m1: STATISTICAL TABLES...... 20 A. Summary of Assessment B. Related Bank Loans C. Project Timetable D. Cumulative Estimated and Actual Disbursements E. Project Financing F. Tranche Disbursements G. Bank Resources: Staff Inputs H. Bank Resources: Missions

Vice President: Shahid J. Burki Director: Gobind T. Nankani Division Chief: Paul Meo Task Manager: Anil Kapur

Ths documenthas a restricteddistribution and maybe usedby recipientsonly in the performanceof their officialduties. Its contentsmay not otherwise be disclosed wiihout World Bank authorization.

IMPLEMENTATION COMPLETION REPORT

ARGENTINA

SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN (PERAL I)

LOAN 3556-AR

PREFACE

This is the Implementation Completion Report (ICR) for the Second Public Enterprise Reform Adjustment Loan (PERAL II) to the Argentine Republic, in the amount of US$300 million. PERAL II (Loan No. 3556-AR), a quick disbursing sector adjustment operation, was designed to support privatization of the Argentine Government's military- industrial complex enterprises. The Loan was approved on January 5, 1993 and closed on December 31, 1995. It was fully disbursed in two tranches -- the first, released on effectiveness and the second on December 31, 1994. The Export-Import Bank of Japan (JEXIM) co-financed PERAL II.

This ICR was prepared by the Public Sector Management and Private Sector Development Division of Country Department I of the Latin America and the Caribbean Regional Office. The ICR is based, inter alia, on the Initiating Memorandum, the Report and the Recommendation of the President, the Loan Agreement, mission and supervision reports, correspondence between the Borrower and the Bank, internal Bank memoranda, and other background papers and reports.

- iii -

IMPLEMENTATION COMPLETION REPORT

ARGENTINA

SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN (PERAL m'

LOAN 3556-AR

EVALUATION SUMMARY

i. The US$300 million PERAL II Loan to the Argentine Government, approved on January 3, 1993, was designed as an integral component of public sector reform efforts for sustained fiscal improvements. PERAL II supported the Government's scheme to extend its program of privatizing public enterprises to encompass defense industries. The underlying aims were to: (a) end Government budget relief of these enterprises' losses and debts plus their indirect subsidies; (b) improve the environment for private sector competition; and (c) reduce and maintain military expenditures at 2% of GDP. It was the first Bank loan to address the privatization and conversion of defense industries. ii. The Bank's role was to provide the necessary financing and technical assistance that enabled the Government to undertake the defense reforms. The resources from PERAL II and the complementary US$200 million loan from the Export-Import Bank of Japan (JEX[M) permitted the Government to replace domestic borrowing (on onerous terms) with foreign loans. It used the counterpart from the loans to indemnify workers displaced by the defense enterprises' restructuring, consolidate or close some of the firms, and carry out environmental clean-ups. Further, US$100 million each of the IBRD and JEXIM loans were used as set-asides for the Government's simultaneous debt and debt service reduction operation.

iii. PERAL II was the fourth adjustment operation directly supporting the Government's reform programs for the public sector. It was complemented by independent technical assistance operations, i.e., the Public Enterprise Reform Execution Loan (PEREL) for US$23M, and a Japanese Grant Facility for US$1.8 million equivalent. These operations helped finance consultants and other advisors to assist in the implementation of the defense reform program supported under PERAL II.

iv. PERAL II was disbursed against import receipts following prevailing guidelines in two tranches. The first tranche was made available at the time of loan effectiveness; the second was available for release when specific conditions were met. All but one of the - iv - latter conditions were satisfied, permitting the second tranche to be released on December 31, 1994. The condition for the sale of Petroquimca Bahia Blanca (PBB) was waived by the Board, though the Government did privatize PBB later the next year. v. Overall, the Government more than achieved the objectives set forth under the loan. For instance, the Government sold or closed more PEs than were previously included under the loan; has capped defense expenditures at 2% of GDP; and exceeded the level of reduction for the "military staff' under the program. In addition, the loan was also conditioned on evidence of progress on the macroeconomic program, and the attendant macroeconomic indicators were strong. The authorities similarly were successful in rationalizing fiscal incentives for steel producers and in advancing environmental audit and remedial improvements in selected PEs that were closed; vi. These achievements were reached despite continuous organizational changes in the Ministry of Defense, relatively weak technical depth in the counterpart teams and poor financial conditions. In large part, the success of the loan can be attributed to the strong political commitment of the Government and the heavy utilization of Bank resources. In addition to financing, the Bank continuously coached and guided the Government's teams on the restructuring and privatization process in the Defense sector and provided for the necessary analytical underpinnings for the reform in the steel sector by undertaking a steel sector report (that was not published at the Government's request). Without these conditions, it is doubtful that the project would have achieved the objectives under the loan. vii. A few governmental actions were less than fully satisfactory. First, due to lengthy arbitration disputes between the upstream and downstream producers and the unfavorable global conditions prevailing in the petrochemical industry, the Government was unable to sell Petroquimica Bahia Blanca (PBB), a relatively small-scale petrochemical plant, in a timely manner. This loan condition was waived by the Bank's Board in December 1994, in view of the overall progress made by the Government. PBB was in fact sold, though after the loan closed. Secondly, although the Government satisfied the second tranche condition of submitting satisfactory legislation on competition policy to the Congress, this proposed law still remains pending in the legislature. And finally, due to the absence of the proposed law for competition policy, SOMISA (the large steel manufacturer) was sold to a consortia of regional steel producers. Addressing these problems was difficult because of repeated organizational changes and inter-ministerial jurisdictional difficulties which obstructed the privatization process and its enforcement. viii. The project's successful structural reforms helped improve the fiscal balance through reductions in parastatal deficits and staffs along with the proceeds of asset sales. Moreover, military expenditures were kept at the reduced level. While it is too early to determine if the industrial sectors involved are definitively more efficient and profitable post-privatization, preliminary data shows that average labor productivity and capacity utilization in steel increased considerably in 1990-93. The consortium that purchased SOMISA expects a positive net income from the steel plant in 1996. Also, the civilian industrial component of Argentina's defense complex has been transformed.

ix. As a result of the strong vested role of the Argentine military and the Bank's limited historic involvement in the defense sector, this program had to be innovative and creative to succeed. There are few examples of its kind in the world and therefore, comparative lessons learned are not easily available. However, the single most important factor was the strong personal comrnitment of President Menem, without whom these reforms might not have taken place. In addition there were some specific lessons from the Ministry of Defense experience. These had to do with the special complexities of addressing civilian tasks under often dissimilar military administrative rules and systems. Addressing these aspects under project preparation is key when designing defense reform programs.

ARGENTINA: SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN

IMPLEMENTATION COMPLETION REPORT

PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

A. GENESIS OF THELOAN

1. While Public Enterprises (PE) in Argentina did not account for a disproportionate share of the economy compared with other Latin American countries, their inefficiencies and heavy losses had a profound economic impact. Furthermore, during the past 50 years, government policies created uncertainty as they varied -- from nationalization, creation, growth, to an eventual reduction of the public sector. The PEs under the ownership of the Federal Government were concentrated in three major activities -- Hydrocarbons and Energy, Transport and Communications, and the Industrial and Service sectors. The PEs in the last category were principally under the Ministry of Defense due to their perceived strategic importance and the evolving role of the past military governments.

2. In the mid- I 980s, after the election of the first democratic government, the Ministry of Defense had on a number of occasions announced the privatization of its two biggest defense enterprises -- Sociedad Mixta Siderurgia Argentina (SOMISA) and Petroquimica Bahia Blanca (PBB), years before a broader privatization program became successful. Due to numerous changes in the Ministry, lack of political commitment and inertia, and strong labor union opposition--especially in the steel sector-- there were a number of false starts. The early defense teams' reform programs, which had launched the privatization effort, lay dormant until the early 1990s.

3 . However, periodic fiscal crises, continued bouts of hyperinflation and inefficient expenditure programs, shifted the focus of reforms from the military to economic sphere. This change was primarily due to the PEs' increasing burden on the economy. In 1978- 91, PEs' overall financial balances (before budget transfers) were consistently negative (reaching as high as -4.9% of GDP), requiring Government financing that averaged 2.5% of GDP. When the Menem Government took control in 1989, PEs had an operating deficit of US$3.8 billion and were increasingly being criticized for waste and poor services.

4. In response to the severity of the economic situation, the Menem Administration implemented the divestiture of nearly all its PEs at a record-breaking pace. It moved first on the largest PEs in order to quickly reap the biggest potential welfare gains and demonstrate its commitment and seriousness. It sold the major national airline and telephone company (efforts initiated under the previous government), followed by similar sales of the state's petroleum, power, and railroad industries. Simultaneously, the - 2 -

administration eliminated PE price setting and deregulated the supply of numerous goods and services. These measures were fortified by the "ConvertibilityPlan," which converted the Central Bank into a virtual monetary board, and killed inflationary expectations rapidly.

5. After putting some key economic reforms into place, President Menem transferred the then Minister of Economy and his team to the Ministry of Defense in early 1991, with the mandate to implement badly needed reforms in the defense sector. Close prior working relationships with the Bank, proven credibilityin implementing reforms and the Bank's institutional and sector knowledge was among the principal factors that contributed to the genesis of the Bank's first loan directed to defense reforms.

6. Of the 45 PEs under the ownership of the Ministry of Defense, the Bank's loan focused on 23 industrial PEs (1 PE was subsequently dropped from the original list), which accounted for more than 90% of the Defense complex's economic activity in terms of employees, assets, and sales. The remaining PEs were excluded from Bank support due to past liquidation actions and their defense orientation (in which the Bank did not have a comparative advantage). Amongst those PEs covered under the Bank's loan, the PEs in the steel and petrochemical sectors were the most important and complex, in terms of labor unions, vested private sector interests, and sector policy distortions.

7. At the end of 1991, PEs under the Ministry of Defense accounted for losses of almost US$478 million, over 16% of total government borrowing needs. The new team set out to stem these losses, cutting defense expenditures and thus reducing the role of the military. The Government decided to sell or otherwise dispose of 23 of the 45 enterprises within the Defense Ministry complex. These PEs, in terms of their economic importance, were led by steel companies, followed by petrochemicals, shipyards and other manufacturing enterprises. Less than a third of these PEs were profitable; they were generally not subject to the rigors of the marketplace; and most of their senior managers were not commercially oriented.

B. LoAN OBJECTIVESAND DESCRIPTION

8. PERAL II was the fourth adjustment operation in support of the Government's public sector reform program. The Loan sought mainly to assist in privatizing/ restructuring Defense PEs (excluding purely military plants) and improving the environment for private sector competition.

9. These goals were part of a broad World Bank effort to help sustain the 1991-92 Argentina's major structural adjustments. PERAL II aimed at ending Government budget relief of the Defense PE losses and debt obligations plus their indirect subsidies. It was also intended to support the Government's attempt to reduce and maintain military expenditures at 2% of GDP.

10. The arrangements for the US$300 million loan called for a first tranche of US$200 million to be made available at effectiveness, with a second tranche of US$100 million. - 3 -

The Export-Import Bank of Japan cofinanced the project with a US$200 million loan. The first tranches of both loans included US$ 100 million set-asides in support of a Debt and Debt Service Reduction (DDSR) operation. The remainder of the loans was to finance general imports except those defined by the usual small negative list of ineligibleitems. Their local currency counterpart proceeds were to finance severance payments of displaced workers, the closure of facilities, consolidation of plants and environmental clean-ups.

11. The macroeconomic underpinning for PERAL II was elaborated in close coordination with an IMF Extended Fund Facility. A medium-term framework and financing plan were agreed with the Government, predicated on the assumptions underlying the DDSR loan (presented to the Board on the same date). Specific policies and performance monitoring criteria were spelled out in the agreed Letter of Development Policy, with special attention to sustaining open trade policies.

12. Moreover, for enhancing private sector development, PERAL II's emphasis was on supporting the revision of the anti-trust legislation in order to bolster competition incentives. The market share of both the petrochemical and steel plants to be privatized was large enough to have led to oligopolistic distortions without a clearer anti-trust policy. Other provisions included the pursuit of a stronger deregulatory framework, lower import barriers for steel products and removal of entry barriers. Further, the project plan called for rationalization of fiscal incentives to steel producers in the interests of leveling the playing field for private and public agents alike. Another focus was on improved environmental safeguards, for which there were to be enterprise audits and clean-ups.

13. In addition, PERAL II supported privatizing or closing all three steel PEs (notably SOMISA, which had about 60% of the country's total capacity), the two most important petrochemical enterprises (PGM and PBB), and eleven other industrial companies. It was likewise agreed that seven defense-related companies would be converted to civilian purposes. These collectively accounted for 97% of all Defense Ministry sales and 91% of its employment.

14. The Loan was prepared with the help of a Japanese Grant and the Public Enterprise Reform Execution Loan (No. 3292-AR). In addition, the Defense Ministry (the executing agency) needed technical assistance to carry out the scheme in the light of its managerial deficiencies. Accordingly, the project plans envisaged the employment of a substantial number of consultants for advising on and helping carry out the privatization's. However, the Loan did not contain provisions for such assistance, relying instead on the projected availability of a second Japanese Grant and the further reallocation of proceeds under another ongoing Bank loan.

C. LOAN LMPLEMENTATION

15. The Government's strategy for this operation called for the privatization--sale or closure--of all PEs within the Ministry of Defense's purview. The then newly appointed Minister of Defense delegated day-to-day management responsibility to the Secretary of - 4 -

Defense Planning, the former Vice Minister of Economy. His office was assisted by the Office of the Under-Secretary of Restructuring and Asset Control (IJRA) and a small inter-disciplinary team of advisors, financed under available technical assistance funds. In addition, the Minister of Defense appointed "Interventors" (trustees) to oversee the restructuring and privatization efforts in some of the more important PEs; e.g., SOMISA and PBB.

16. In spite of these efforts, the project unit was relatively weak with limited technical ability to undertake complex and broad-based restructuring and privatization programs.. This, coupled with the lack of cooperation at the PE level, the poor financial performance of most PEs and their relative unattractiveness, made for a difficult, challenging working environment. However, strong commitment and technical support (provided mainly by the Bank) resulted in considerable up-front actions taken towards achievement of the project's goals. Before Board approval, the Government had passed enabling legislation, promulgated a deregulation decree for the steel sector, sold one of the steel PEs, and closed the biggest provincial steel PE under difficult political circumstances. Prior to privatization, the Government restructured SOMISA -- reduced the labor force from 14,500 to 5,500, rationalized the product mix from international to the domestic market, and closed certain unprofitable product lines --based on the Bank's recommendations as detailed in a sector report. In addition, the PEs' sales memoranda were well advanced for SOMISA, PBB and PGM, and five other PEs had been divested and another closed. In all, nine of the 23 targeted PEs were sold or closed and advancements were undertaken in the sales process in a number of others by this early juncture. On the sectoral framework, the authorities drafted revised anti-trust legislation and issued a decree eliminating fiscal incentives for steel firms. In addition, Argentina and it's MERCOSUR partners had effected two regional tariff cuts in compliance with the Loan's macro-economic objectives. This impressive record permitted the release of the loan's first tranche immediately after effectiveness.

17. However shortly afterwards, a number of politically motivated reorganizations in the Ministry of Defense and the replacement of the Secretary of Defense Planning, slowed the impetus for concerted change. As a result of these changes, the closing date of the loan ultimately had to be extended by one year and the Bank needed to allocate additional supervision resources to ensure that the actions in the remaining PEs were undertaken according to Bank procedures. Despite these circumstances, almost all the actions under PERAL II were completed. 22 of the targeted 23 companies were sold or closed and many of the sectoral policy actions identified under the loan were also completed satisfactorily.

18. In the case of the last remaining PE--PBB-there was less progress. Its sale was persistently delayed. At the outset, this was mainly caused by the enterprise's contractual disputes with downstream firms. Unsuccessful arbitration of these differences set back the Government's initial sales efforts in 1992. Due to economic policy and legal issues surrounding PBB, the Ministry of Defense transferred the privatization responsibility to the Ministry of Economy. Subsequently, the legal and economic issues were resolved and the Government retained a merchant banker to conduct the sale. In view of this and the - 5 - overall progress on other aspects of the loan, together with the sector liberalization that put PBB into a more competitive market situation, the Bank ultimately waived the requirement for its sale. PBB was eventually sold in late 1995, almost a year after the waiver. In hindsight, PBB's privatization could have been expedited if its sale had been undertaken jointly with the gas conversion plant of General Serri (the sole provider of ethane to PBB).

19. In addition, the Government perceived that, for some PEs and industries it needed to take complementary policy measures for averting or minimizing monopoly concentration and otherwise obtaining greater competition. Argentina's market mechanisms had many distortions because of unduly rigid rules governing labor markets, oligopolistic producer pricing and retailers' mark-ups, etc. These concerns were especially relevant for the Defense complex's largest industries, particularly those in the increasingly concentrated steel sector.

20. At this time as well, Argentina's fiscal position was still fragile, suggesting the need to buttress the "ConvertibilityPlan." The economic team consequently set out to press the new privatized enterprises to achieve more efficient production by stimulating greater competitiveness in the economy. It decided to supplement the constructive steps already taken for this purpose by further opening of the trade regime and deregulation. Similarly, it committed itself to strengthening the anti-trust legal framework since the existing law enforcement machinery was inadequate.

21. During this period, moreover, the Government launched a campaign for reducing its external debt interest obligations to commercial banks to levels sustainable with its projected fiscal performance. Although Argentina was only paying 28% of interest due, debt service encumbered public finances. The economic team thus set out to obtain debt and debt service reduction, and it requested IBRD, IDB and IMF assistance for this effort'.

22. While generally rapid, Argentina's privatization process was uneven and occasionally marked by delays. In addition to some PEs not being very commercially attractive, there was limited interest in their purchase because of the prevailing perception among foreign investors of high country risk . Unfortunately too, these constraints were exacerbated by persistently thin Defense Ministry implementation capability and the lack of enthusiasm for privatization among some enterprise managers. There were furthermore progressive weaknesses in the executing agency's direction of the project, especially with the departure of its main sponsors.

23. URA's small staff encountered difficulties, therefore, especially in contracting and supervising of the substantial, diverse experts engaged in preparing and assessing many bidding documents. This was compounded by the over one year delay in the Government's approval of a Japanese Grant designed to mobilize substantial technical and

1 ICRReport No. 13885,dated January 20, 1995 (Loan3555-AR, Debt & Debt ServicesReduction) details the DDSRloan and process,as well as evaluatedthe Bank's performance. - 6 - administrative support for the executing agency. Even after that action was completed, the Defense Ministry was frustrated by delays in paperwork processing, mainly within the Ministry of Economy, which hampered employment of the needed advisors.

24. In the important SOMISA case, the management of the process also suffered from excessive pressure for rapid progress vis a vis careful screening of alternative sales strategies. The merchant bank charged with preparing and processing the sale first was given very limited time to prepare the bidding documents. It also was later directed to proceed on a "one option" basis, at variance with instructions. These contributed to the eventual presence of a single bidder (Propulsora Siderurgica S.A., a consortium led by Argentina's largest steel company).

25. Other problems reflected larger policy issues, notably the compatibility of the sales with the desire for a more competitive business environment. Most of these issues also centered on SOMISA. Early on, the authorities were mindful that opening the larger Defense industries to private sector ownership made it important to block moves from interested firms which could cause even more industrial concentration. The Loan arrangements therefore included provisions to incorporate the general principles of the Government's competition policy in the sales memoranda for privatization of the PEs. The Government also promptly began defining how to strengthen the anti-trust law. Moreover, the Presidential Decree that accompanied the SOMISA sales memorandum prohibited major local producers from jointly participating in the privatization.

26. However, SOMISA's fast pace towards privatization indicated that the new legislation could not be in place before the sale. The Bank therefore cautioned the authorities that this circumstance could interfere with the application of the desired competition policy. But despite these efforts, none of these would-be safeguards proved to be effective. After SOMISA's sale, there was a purchase of minority shareholdings (7%) by another major local steel company, effectively linking the two largest Argentine steel companies in the new operation. The Bank questioned this action on the grounds of incompatibilitywith the sales memorandum's aforementioned ban on such collaboration. It also noted that the Letter of Development Policy had stated that the Government would avoid the transfer of public to private monopolies.

27. After examination, the Government concluded that it lacked the authority to forbid such events, i.e., there was then no legal barrier to "inside trading" among private groups. Following its own review, the Bank agreed with that judgment on the limitations of the existing legislation. It also concluded that the sale was consistent with the agreed bidding documents and there were inadequate grounds for demonstrating that the 7% share purchase had effectively produced a monopoly. The Bank therefore acquiesced in SOMISA's sale.

28. In this connection, the Development Policy Letter stated that the Government "..intends to improve the existing competition law to avoid undue ownership concentration and be more proactive to ensure a dynamic and competitive private sector." The submissionof agreed new anti-trust legislation to the Congress was a second tranche - 7 - condition. However Theadmrinistration requested the Bank's comments on the text of the new competition law only after it had been passed, and the Bank found it faulty. Subsequently, after the incorporation of -&mendmentsincorporating some Bank sugges :ons, the erec 'tive bra; .h sent a later version to the Congress. This satisfied the trancht-eoonditio.. altho-ughthe iriproveA text still provides only a limited autonomy and authority for the oegulaltoryagency.

29. On other project aspects, the Government successfully rationalized its fiscal incentives for steel p'oduce.rs. ft issued tax credits to the new private companies (after they had undergone tax audits), and later eliminated future investment tax credits in the sector. The plareA e-nvironimental diagnoses and clean-ups were performed satisfactorily.

I}. PESIJLTS ANDASSESSMENT

30. T'he execution of the project resulted in the attainment of a considerable part of its goals. After a relatively brief operation, the civilian industrial component of Argentina's defense complex was radically trafnsformed.The Argentine state has completely departed from both steel and petrochemical production. Overall, the targeted enterprises were mostly closed or their asstets sold

31. In the process, there was a large impact on public finances, with favorable long- term effects fromr.reductions ;n Pt-,deficits (more than offsetting reduced income from their operations). Another importanitconsequence has been the reduction in public employment by aboitr I ,000. The privatization's also generated over US$1.0 billion in asset sales, one third.0$ which h!elpedthe Government directly to reduce its public debt. (The actual enterprise sales however were generally closer to 10% of original book value rather than the 20-30% that was considered possible earlier). Moreover, military expenditures were kent to the targeted reduced level. All these provided welcome breathing room in con olidatir'g putblicfinances, at the heart of Argentina's successful adjustment program2.

32. An ancillary qiuestionis whether the privatized enterprises substantially improved and have provided better services and products. It is too early to make any detailed judgments on increases in p!roductionefficiency, financial profitability, improvements in the quality o-f services, etc However, some partial, short term data is noteworthy. A Bank-commissioned study onilabor markets and productivity in Argentina reported that average labor productivity in the steel sector grew at 12.0% p.a. in 1990-93 for crude product, and 22.1% for laminates (the latter practically doubling productivity in the three years). During the same period, capacity utilization in steel production increased from 53 to 60%, and in laminates fromn60 to 79%. Further, a Bank assessment of productivity trends during 1991-94 reported a 13.9% rise in ethylene output. Its cost meanwhile fell by over one third as a result of lower producer prices and the greater opening of the economy. I'he consortion that. purchased SOMISA reported operating profits in 1995, and has so far (i.e., in 1 996) reported positive net income for a complex that in the 1980s had required major subsidies simply to stay open. -8 -

33. The project was less successful though from the standpoint of the management of the privatization transactions. It did move the Government's processes for developing and directing these activities forward, and thus helped set the stage for further programs of this type. However, the Bank's assessment of project risks had underscored the need for ensuring transparency and objectivity in the process. It cannot be said that the Government's institutional capacity to meet these essential criteria were strengthened through the project.

34. The same applies to the goal of transforming the rules of the game in Argentina so as to establish meaningful norms and enforcement machinery for a more competitive business environment. To be sure, this was a difficult and delicate matter for the authorities under the political conditions that then obtained. However, with the limited legislative action taken, the Government achieved considerably less than its intention "...to avoid the transfer of public to private monopolies...(and) undue ownership concentration" (Letter of Development Policy).

35. Moreover, the privatization program in fact increased the concentration of asset ownership. But this was not surprising as, in fact, the Government had relatively low expectations about the prospects of selling all the targeted PEs. Further, it certainly would have been difficult to carry off the program without Argentine entrepreneurs' participation. On balance though, while these conditions mitigate what occurred, the resulting condition is undesirable and remains to be remedied.

E. BANK PERFORMANCE

36. The operation was notable for the Bank's strong and close participation with the Government at very detailed levels, which entailed a major resource allocation. In the process, the Bank effectively brought together and monitored on a timely basis a large array of technical, legal and financial specialists. These services were incalculable in the vacuum within and instability of public sector management at the time. The Bank staff became the "memory" of the Government, as well as technical advisers to frequently changing officials. These accomplishments incidentally were influential in leading the way to the subsequent request for IBRD counsel on rationalizing other military complex activities (airports).

37. Another impressive Bank Group contribution resulted in the sale of the Altos Hornos Zapla steel plant within a record 9 months and with a three-fold rise in the sales price from the successful purchaser's original bid. This was largely the product of the IFC's active promotion of the sale under its advisory services to the Government (although fear of competition among the bidders was also a factor). As a result of this work, IFC was asked to, and also successfully, managed the privatization of Defense's electric equipment manufacturer cable plant (Fabrica Militar de Vainas). Close Bank-IFC collaboration helped ensure consistency and transparency in the process. - 9 -

F. BORROWER PERFORMANCE

38. Nevertheless, this close and detailed Bank assistance ultimately reduced the ownership of the reform within the Ministry of Defense and led to a dependency on Bank staff and advice that contrasts poorly with other collaborative reform approaches with other Ministries.

39. The Government's performance was exceptional at the outset but diminished in quality during the remainder of project implementation. It's substantial "up front" actions were commendable, reflecting strong political will combined with managerial drive and technical competence. And the administration merits praise for meeting most of the Loan conditions with a high level of commitment. However, the latter waned rather rapidly. This was most significantly manifested in the after-the-fact consultation with the Bank on the revised anti-trust legislation and the administration's failure to win it's Congressional endorsement later.

40. There also were equally serious institutional shortcomings. These were mainly manifested in the lack of resolution of the inter-ministerial differences that deprived the executing agency of badly needed services and support. These shortcomings were inconsistent with the Government's strong political commitment to and the imperatives of the privatization program. Greater managerial discipline was needed in order to obtain the requisite collaboration.

G. SUSTAINABILITY

41. The privatization program of the seven-year Menem administration remains in force and has encompassed most other areas of the public sector. It's more recent aspects included reductions in the state's role in the nation-wide banking sector and additional asset sales of federal power and transportation systems. There have moreover been widespread privatization measures at the provincial level as well. Officials at both levels are now planning still further actions in addition, accompanied by initiatives in strengthening regulatory frameworks. Regarding only the project's achievements, the transformation and closure of the former Defense Ministry PEs appear irreversible, with no foreseeable development threatening alter their new status. Memories of hyperinflation and the PEs' degradation make it unlikely that public perceptions would change so drastically as to undermine the reforms of the failed parastatals. Thus, the PE privatization achievements have robust chances of being fully sustainable.

H. FUTURE OPERATION

42. The Government has moved to deepen privatization reforms, including remaining federal and provincial public enterprises and is acting more decisively in other key areas such as privatization of public banks. Bank dialogue with the government on these matters has been continuos and is ongoing. Bank assistance to Argentina has been, and is projected to continue, strongly focused on consolidating structural reforms, including - 10 - substantial operations with sub-national governments in pursuit of further privatization activities. This is intended to meet the Government's requests for still broader application of Argentina's privatization program and its refinement for additional maximization of the project and its similarly oriented predecessors' benefits. With regard to the ex-Defense PEs, the success of their future operations will hinge largely on the success of the Government's plans to strengthen economic reforms. Beginning in mid-1994, officials implemented a major reform of the national social security system. Provincial reforms -- privatization of banks, utilities, etc. as well as fiscal downsizing-- accelerated in 1995. It is now undertaking additional efforts directed at reforms of labor and financial markets, as well as health financing, and the transfer of provincial pension systems to the national system, mostly with Bank support.

1. LESSONS LEARNED

43. Argentina is the only country in the hemisphere, and among only a handful of countries in the world, which has undertaken a major reform covering its defense complex. As a result of its uniqueness, the strong vested role of the Argentine military, and the Bank's limited historic involvement in the defense sector, the PERAL II program was innovative and creative. There are few examples of its kind in the world and therefore, comparative lessons learned are not easily available. However, the single most important factor was the strong personal commitment and support of President Menem, without whom these and other reforms might not have taken place.

44. There have been many lessons learned, both by the Government and the World Bank, from the Argentine privatization process. Some of these lessons are common to the overall approach (as documented in the World Bank publication entitled, "Argentina's Privatization Program: Experience, Issues, and Lessons" dated 1993). Others are more specific to the institutional arrangements, and privatization techniques used and process undertaken by the Ministry of Defense (the focus of this ICR).

45. The lessons learnledfrom the privatization of defense industries in Argentina can be grouped under two broad areas:

Di) Institutional Aspects:

The privatization niomentuin peaked while the defense reform program was still underway. Argentina's privatization program peaked in 1992 while the defense initiative was still underway. In late 1993, the Office of the Under Secretary for Privatization (the central coordinating body within the Ministry of Economy) was dissolved. This, coupled with continues reorganizations in the Ministry of Defense, left a major coordinating gap within the Government to ensure consistency and continuity of the process. As a result, a number of sales transactions within the Ministry of Defense were delayed, set off-track, and lost their inertia. The resulting lesson is that significant achievements should not be expected --and perhaps large - I l -

privatization investments not launched--after the Government's focus on key management has shifted.

A key requirement of the privatization process for oligopolistic industry is the enforcement of laws that effectively promote competition and protect consumer rights. Although these laws existed, there institutional and enforcement capability was minimal. With this inadequate framework, it was almost impossible to intervene solely through bidding documents. Therefore, there was further concentration in asset ownership, especially in the steel and petrochemical sectors. In retrospect, this was probably to be expected, since it stemmed from the speed of the privatization effort, the limited interest of prospective international bidders, and the desire to prequalify bidders on their financial soundness. Nevertheless, one of the conditions of this loan was that the Government submit a proposed competition and consumer protection law (which would overcome some of the institutional and enforcement shortcomings) to Congress. This was undertaken subsequently by the Executive Branch, but a year and a half later, and has not yet been approved by both houses of Congress. The lesson is that statements of competitive principles in sales memoranda may not be appropriate in enforcing anti- monopolistic behavior during the privatization process. Therefore, strong laws and institutions need to be wvellin place.

Managing cross-ministerial relationships and multiple objectives are complex under a single loan. This loan's principal objective was to privatize PEs under the Ministry of Defense. However, since a large number of PEs were in the tradeable sector, there was a need to modify the prevailing laws for competition policy and consumiierprotection, which was the primary responsibility of the Ministry of Economy. As the proposed loan did not provide direct incentives for the latter Ministry and large vested groups lobbied against passage of the new law, the result was a lack of cooperation within the Executive Branch for the proposed reforni. In retrospect, this condition would have been better served if such general policy aspects were more directly charged to the agency responsible for overall regulatory issues.

* The appointment of Interventors and their results were mixed for Defense PEs. The larger PEs entering the privatization process had "Interventors" (appointed trustees) whio had full executive power-sto operate the company until the privatization was completed. The appointment of these interventors helped, in principle to expedite the privatization process, but offered limited incentives to improve the operations of the PE during the interim. In the case of SOMISA, after the appointment of three interventors in a period of one year. the management finally focused onlv on the sales process; its chief goal was speed Unlike restructuring specialists, an interventor focuses largely on the speed of transfer. As a result, knowing that the company would soon be under different managemenit,there was limited - 12 -

incentive to take decisions or embark on new initiatives during the interim sales phase. In the case of smaller PEs, where there was a need for such an interventor, the Government could not fill their appointments due to limited management and privatization depth. The lesson is that arrangements to expedite privatization's through the appointment of special executives need to be accompanied by well designed provisions for managing enterprises efficiently during the interim.

(ii) Techniques and Process Aspects:

* The successful sale and/or the transfer of selected defense industries is generally more prone to private placement as opposed to international competitive bidding procedures. There are few potential defense industry players, especially those who are permitted to operate overseas, and therefore, competitive bidding may not always be either feasible or desirable. In many cases, in spite of international and local sales efforts, the Argentine government could not find any prospective private buyers. For instance, Domecq Garcia, an assembler of deep sea submarines, could not be sold without the participation and involvement of Thyssen Industries, the original manufacturer. However, current Bank procedures require a lengthy and sometimes expensive process that fosters only international bidding. The lesson is that these procedures may not be universally suitable, and need to be altered for the particular context of the country and industry.

* A number of potential sales transactions may not be successful due to enterprises' small sizes, unattractive market and financial conditions, and environmental unsoundness. Unattractive public enterprises, especially in military industries (e.g., which are relatively small, operating poorly, functioning for "strategic" more than productive purposes) might better be closed rather than subjected to privatization efforts. The lesson is that greater focus should be devoted to developing prior analyses of small PEs, whose privatization could prove to be unviable from economic, financial, and environmental aspects. - 13 -

IMPLEMENTATION COMPLETION REPORT

ARGENTINA

SECOND PUBLIC ENTERPRISE REFORM ADJ1USTMENTLOAN (PERAL m) LOAN 3556-AR

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

46. Within the framework of the State Reform Program undertaken by the Argentine Government, agreement was reached on February 2, 1993 between the Argentine Republic and the International Bank for Reconstruction and Development on the Second Public Enterprise Reform Adjustment Loan (PERAL II). The objective of this Loan was to assist the Borrower in carrying out the reform of state enterprises under the responsibility of the Ministry of Defense, in order to reduce the State's financial deficit and improve the conditions for private sector activity and investment and for the implementation of the Debt Reduction program.

47. In order to evaluate the proposed objectives and the achievements reached in Project implementation, the completed actions and those arising from Schedule 5 of the Loan Agreement are described below.

Economic Framework

48. The proposed objectives under this point consisted of reducing inflation and stimulating growth as well as achieving a public spending program that was consistent with income and with the potential to obtain loans.

49. In this regard, it should be noted that the actions carried out include: (i) approval of the Consumer Protection Law by the Executive Branch, with the agreement of the National Congress; and (ii) the issuance of fiscal credits to the steel sector following the corresponding audit by the General Tax Bureau, whereby this sector's tax system was consolidated.

50. Another relevant issue under this point is the environmental audit carried out in the former METEOR factory and in HIERRO PATAGONICO DE SIERRA GRANDE S.A.M. As a consequence of the high level of toxicity contained in the sulfuric acid waste accumulated in the building, the Argentine Government ordered an environmental assessment of the former factory's installations and on the grounds of HIPASAM.

51. AMBIENTAL S.A. was selected for this purpose. The environmental audit was completed in July 1993 but, due to the high risk stemming from harmful residue, the - 14 -

Terms of Reference were expanded so that the consulting firm could assist the Ministry of Defense in preparing the technical specifications for residue removal.

52. Consequently, the firm TECNICA Y SERVICIOS S.A. was hired under Ministry of Defense Resolution N° 1338/93 to clean the building. The firm has recently completed the environmental clean-up of the former METEOR factory.

Steel Sector

53. When the Project began, the proposed objectives were to reduce the State's role in this sector, on the one hand, and to improve the sector's competitiveness, on the other. The actions carried out refer to the following companies:

SOCIEDAD MIXTA SIDERURGICA ARGENTINA (SOMISA) (Argentine Steel Joint Venture)

This company was declared subject to privatization by Law N° 24.045; the General Bidding Conditions were approved by Ministry of Defense Resolution N° 1054 dated July 10, 1992.

Only one bid was submitted, that of bidder PROPULSORA SIDERUJRGICAS.A. that offered US$140 million in cash and US$12.1 million in public debt notes. Once awarded to this company, the name was changed to ACEROS PARANA S.A.

As stipulated in Ministry of Defense Resolution N° 546 dated August 9, 1993, SOMISA was declared to be in a state of liquidation in accordance with the regulations of Law N° 19.550 and its respective amendments.

Finally, responsibility was ordered to be transferred to the Subsecretariat of Asset Regulation, under the Secretariat of the Treasury of the National Ministry of Public Works and Services.

HIERRO PATAGONICO DE SIERRA GRANDE (HIPASAM) (Patagonian Ironworks of Sierra Grande)

The Ministry of Defense transferred the assets of this company, whose production was suspended, to the Province of Rio Negro which agreed to comply with the provisions of Laws N° 23.696 and N° 24.045.

The Transfer Contract was ratified by the Executive Branch under Decree N° 2007/93. - 15 -

Responsibility for the residual entity was transferred to the Subsecretariat of Asset Regulation, under the Secretariat of the Treasury of the National Ministry of Public Works and Services.

Other Defense Companies

54. Continuing the objectives proposed in the above points, the following companies were privatized, liquidated or transferred to other jurisdictions:

PETROQUIMICA GENERAL MOSCONI (General Mosconi Petrochemical Company)

As stipulated by Ministry of Defense Resolution N° 1283/92, P.G.M. was transferred to YPF S.A. for US$10.2 million.

On March 31, 1993, a contract was signed with YPF S.A. for the purchase and sale of certain assets and liabilities belonging to Petroquimica General Mosconi that basically constituted the Industrial Complex located in the city of Ensenada, Province of Buenos Aires.

Thus, P.G.M. S.A.I. y C. is now comprised of only a few assets such as buildings, DMT - PET equipment and credits with the General Tax Bureau. In addition, liabilities are basically comprised of debt to the D.G.I. stemming from the granting of promotional benefits in accordance with Executive Branch Decree N° 1156/88 and allowance for lawsuits; most of this debt may be consolidated.

PETROQUiMICA BAHIA BLANCA (Bahia Blanca Petrochemical Company)

This company was declared to be subject to privatization by Executive Branch Decree No 1398 dated July 27, 1990, approved by Law N° 24.045.

On January 12, 1994, and under Ministry of Defense Resolution N° 29, authorization was granted for the transfer from P.B.B. S.A.I.C. to the Banco de la Naci6n Argentina of ownership of 17% of the equity shares owned by said Ministry, in order to partially cancel the debt arising from advances of funds made under the Financial Assistance Contract signed with said entity on January 14, 1992.

Executive Branch Decree N° 1318/94 ordered the transfer of responsibility to the Ministry of Economy and Public Works and Services in order to carry out privatization management. - 16 -

FORJA ARGENTINA S.A. (Argentine Foundry)

Ministry of Defense Resolution N° 381 dated March 16, 1993 declared the company in a state of liquidation due to its technical, operational, economic and financial status. The company was unable to operate normally and its accumulating losses were leading it to a state of virtual cessation of payments.

On August 11, 1993 the Forja C6rdoba factory was sold; a bill of purchase and sale was also signed for the factory's machinery and furniture. On August 24 of the same year, a bill of purchase and sale was signed for the offices in the Federal Capital.

Joint Resolution N0 116 of the Ministry of Economy and Public Works and Services and N0 1499 of the Ministry of Defense ordered the transfer of Forja Argentina S.A. (e.l.) to the Subsecretariat of Asset Regulation; the Transfer Certificate signed on May 11, 1995 and the Supplementary Transfer Certificate signed on June 7, 1995 made the transfer effective.

CARBOQUIMICA ARGENTINA S.A. (Argentine Carbon Chemical Company)

Ministry of Defense Resolution N° 880 dated July 3, 1992 authorized Local Competitive Bidding for the company. Two bids were submitted, one by PITTMETAL S.A., and the other by SAFETY S.A. together with PROCAMET S.A.

Based upon the bids submitted, the contract was awarded to SAFETY S.A. - PROCAMET S.A. after S.A.I.C. RAGOR, the major private shareholder, was informed so that it could exercise its right of pre-emption.

SAFETY S.A. - PROCAMET S.A.'s bid consisted of US$331,500 in cash, US$425,425 in internal debt notes, and US$348,075 in external debt notes.

ASTILLEROS Y FABRICAS NAVALES DEL ESTADO S.A. (State Shipyards and Naval Factories)

The Ministry of Defense transferred to the Province of Buenos Aires the assets, staff and third-party contracts that were in the process of being implemented. This act was carried out in order to ensure the preservation of sources of employment and the continuity of ongoing contracts, as well as to take advantage of the geographic conditions of the location of these installations through the creation of a free trade zone.

The Province of Buenos Aires assumed the commitment of carrying out the privatization process as stipulated in Laws N° 23.696 and N° 24.045, and of maintaining the continuity of production until the moment of definitive - 17- privatization, thereby providing a harmonious solution to the complex social and economic interests involved.

AREA DE MATERIAL CORDOBA (C6rdoba Material Area)

Law N° 24.045 declared this company subject to privatization. Ministry of Defense Resolution N° 1364/93 transferred all of the company's assets, liabilities and contracts from the Argentine Air Force to the Ministry of Defense.

In view of progress in the privatization process being undertaken for the C6rdoba Material Area, and under the framework of the provisions of the State Reform Law, several invitations were sent in December 1993 to the principal international firms involved in this field so that they could express their interest in this privatization. Of the ten companies invited, only LOCKHEED AIRCRAFT SERVICE CO. (LAS) expressed its wish to participate in the privatization process of the C6rdoba Material Area.

In addition, during the selection process conducted by the Ministry of Defense and the Argentine Air Force for the purpose of reconditioning and modernizing 36 A- 4M airplanes purchased by the Argentine Republic from the United States Navy, LAS was the only qualified company that expressed interest in handling the A-4M Program and in reconditioning fifty percent of said planes in the C6rdoba Material Area, as well.

On April 19, 1994, the Ministry of Defense and LAS signed a letter of intent in which LAS agreed to submit or obtain a proposal for the A-4M Program together with a long-term financing proposal for said Program, contemplating that the reconditioning and modernization of half of the above-mentioned A-4M airplanes would be performed in the C6rdoba Material Area, as well as a plan to privatize and revitalize this Area.

The countersigned Contract between the Argentine Republic and Lockheed Aircraft Co. became effective on July 1, 1995; under the Contract, this company is in charge of operating the C6rdoba Material Area for a period of 25 years.

PETROQUIMICA RiO TERCERO (Rio Tercero Petrochemical Company)

After the competitive bidding carried out in compliance with the provisions of Decree N0 1385 dated July 23, 1990, dealing with the transfer of the company's Government-owned shares owned, was declared void due to lack of bidders, a new invitation to bid, without a cost estimate, was issued by means of Joint Resolution N0 1262 of the Ministry of Defense and N0 626 of the Ministry of Public Works and Services dated October 9, 1990. - 18 -

The same was ordered by Joint Resolution N° 1306 of the Ministry of Defense and the N° 635 of the Ministry of Public Works and Services dated October 16, 1990.

On December 6, 1991, the only bid submitted, that of EGERTON FINANCE S.A., was declared admissible and was awarded for a total amount of US$7,300,000, including notes and cash.

FABRICA MILITAR SAN MARTIN (San Martin Military Factory)

Ministry of Defense Resolution N° 1795/92 ordered the privatization of this factory for US$8.5 million. Later, Ministry of Defense Resolution N0 463 dated April 2, 1993 ordered that the International and Local Competitive Bid be awarded to TALLERES SUDAMERICANOS S.A.

Joint Resolution N° 974 of the Ministry of Defense and N0 783 of the Ministry of Economy and Public Works and Services ordered the transfer of this military factory's residual assets to the latter Ministry.

FABRICA MILITAR DE ACIDO SULFURICO (Sulfuric Acid Military Factory)

Ministry of Defense Resolution N0 1280 dated August 29, 1992 ordered a new call for International and Local Competitive Bidding, with a cost estimate, for the sale of assets of the Fabrica Militar de Acido Sulfurico, attached to the General Bureau of Military Manufacturing. Said Resolution also approved the General Bidding Conditions.

Ministry of Defense Resolution N0 384 dated March 16, 1993 awarded the Competitive Bid for the sale of the factory to MASPRO S.A. for US$1.6 million.

Joint Resolution N° 974 of the Ministry of Defense and N0 783 of the Ministry of Economy and Public Works and Services ordered the transfer to the latter Ministry of this military factory's residual assets.

FABRICA MILITAR DE TOLUENO SINTETICO (Synthetic Toluene Military Factory)

Ministry of Defense Resolution N° 1190/92 ordered the sale through Local and International Competitive Bidding, with a cost estimate, of the assets of the Fabrica Militar de Tolueno Sint&tico,attached to the General Bureau of Military Manufacturing. Said Resolution also approved the General Bidding Conditions.

Ministry of Defense Resolution N° 163 dated February 9, 1993 awarded the Bid to RUTILEX HI[DROCARBUROSARGENTINOS for US$2.6 million. - 19 -

Joint Resolution N° 974 of the Ministry of Defense and N° 783 of the Ministry of Economy and Public Works and Services ordered the transfer to the latter Ministry of this military factory's residual assets.

FABRICA MILITAR DE VAINAS Y CONDUCTORES ELECTRICOS (ECA) (Military Factory for Electrical Sheathing and Conductors)

Resolution N° 1523 dated October 1, 1992 ordered the sale through Local and Competitive Bidding, without a cost estimate, of the assets of the Fabrica Militar de Vainas y Conductores Electricos "ECA".

Since there were no bidders, Resolution N° 2117 dated December 29, 1992 ordered a second a call for Local and International Competitive Bidding, with a cost estimate, for the sale of ECA's assets.

Ministry of Defense Resolution No 243 dated February 22, 1993 awarded the Bid to the METACAB Consortium, comprised of the firms GUILLERMO DECKER S.A.I.C.A.F.I., METALURGICA E INDUSTRIAL S.A. and INDUSTRIAS ELLECTRICASDE QUILMES S.A., for US$15 million.

Joint Resolution N0 974 of the Ministry of Defense and N0 783 of the Ministry of Economy and Public Works and Services ordered the transfer to the latter Ministry of this factory's residual assets.

FABRICA MILITAR PILAR (Pilar Military Factory)

Ministry of Defense Resolution N0 1131 dated July 28, 1994 awarded this company to Industrias Argentinas de Material Pirotecnico S.A. (IAMP), under the terms of the General Bidding Conditions that governed the call for competitive bidding ordered by Ministry of Defense Resolution N0 971 dated October 25, 1993 for the company's privatization. The bidding price was $2,820 million.

55. Now that the Project is concluded, the Ministry of Defense is pleased to state that PERAL II has been of fundamental importance in the achievement of the objectives proposed at the beginning of the Project and which implied significant progress in the State Reform Program implemented by the Argentine Government. - 20 -

IMPLEMENTATION COMPLETION REPORT ARGENTINA SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN (PERAL II)

LOAN 3556-AR

PART mI: STATISTICAL TABLES

Summary of Assessments

A. Achievementof Objectives Substantial Partial Neali-ible Not applicable

(*) (*) (*) (*)

Macroeconomic policies * Sector Policies * Financial objectives * Institutional development * Phvsical objectives Poverty reduction * Gender concerns * Other social objectives * Environmental objectives * Public sector management * Private sector development Other (specify) Competition Policy

B. Project sustainability Likely Unlikely Uncertain N~~~~~~~~~~~ *

C. Bankperformance Highly Satisfactory Deficient satisfactory (*) (*) (*)

Identification * Preparation assistance * Appraisal * Supervision *

D. Borrower performance Preparation * Implementation * Covenant compliance * Operation (if applicable)

E. Assessment of outcome * -2 1-

ARGENTINA IMPLEMENTATION COMPLETION REPORT

SECOND PUBLIC ENTERPRISE REFORM ADJIUSTMENTLOAN PERAL II (LOAN 3556-AR)

PART Iml: STATISTICAL INFORMATION

A. Related Bank Loans (in US$ millions)

Loans approved prior to or concurrent with Loan 3556-AR

Loan # Fiscal Purpose Amount Less Undisbursed Year Cancelations 3015 1989 Tax Administration TAL I 6.5 0.00 3280 1991 Provincial Development 200.0 110.75 3291 1991 Public Enterprise Reform Adjustment 300.0 0.00 Loan (PERAL) 3292 1991 Public Enterprises Reform Execution 23.0 0.14 Loan 3362 1991 Public Sector Reform TA (PSRTAL) 23.0 1.00 3394 1991 Public Sector Reform Loan (PSRL) 325.0 0.00 3460 1992 Tax Administration TAL II 20.0 2.80 3555 1993 Debt and Debt Service Reduction Loan 450.0 0.00 Total 1,347.5 114.69

Loans approved after Loan 3556-AR

3558 1993 Financial Sector Adjustment Loan 400.0 0.00 3709 1994 Capital Markets 500.0 500.00 3710 1994 Captal Markets TA 8.5 7.18 3836 1995 Provincial Reform Loan 300.0 200.37 Total 1,208.5 707.55 -22-

B. Project Timetable

Stage of Project Cycle Date Planned Date Actual Identification March 1991 (First IBRD Mission) Appraisal Mission March/April, 1992 March 23-April 6, 1992 Loan Negotiations July 1992 July 13, 1992 Board Approval January 1993 January 5, 1993 Loan Signature February 2, 1993 Loan Effectiveness March 1993 February 16,1993 Loan Closing June 30, 1994 December 30, 1995 Loan Completion December 31, 1993 April 14, 1995

C. Loan Disbursements

Cumulative Estimated and Actual Disbursements (US$ million) IBRD Fiscal Year FY93 FY94 FY95 Appraisal Estimates 200 300 0 Actual Disbursements 200 0 300 Actual as % of Estimate 100 0 l Date of Final Disbursement: April 14, 1995; but only a residual $25,984 that remained in loan balance.

D. Proiect Financing

Source (US$ million) IBRD 300.0 Export-Import 200.0 Bank of Japan Total 500.0 -23-

E. Tranche Disbursements

Tranche |BRD Export-Import Bank of .. ______.. _ Japan US$ million Date US$ million Date First 100.0 Feb. 24, 1993 133.3 Apr. 1, 1993

100.0 Mar. 25, 1993 Second 100.0 Dec. 31, 1994 66.7 Dec. 31, 1994

F. Bank Resources: Staff Inputs (in staff weeks)

Stage of FY91 FY92 FY93 FY94 FY95 Total Project Cycle Preparation 3.1 51.9 55.0 Appraisal 13.8 13.8 Negotiations 26.2 26.2 Supervision 4.2 9.8 2.2 16.2 Total 3.1 65.7 30.4 9.8 2.2 111.2 -24-

G. Bank Resources: Missions

Stage of Date No. of Days in the Specialization Performance Project Cycle Persons Field 1/ Represented Rating Status Preparation 6/91 5 16 a,b 9/91 4 16 a,c,d 12/91 5 18 a,c,e,h 1/92 1.5 7 a,f

Appraisal 3/92 9 16 a,c,e,f,g,h,j through 5/92 1 3 f Effectiveness 6/92 1 7 a 9/92 2 4 a,c

Supervision 4/93 1 2 f - 5/93 1 10 a 1 6/93 1 10 a 2 9/93 6 12 a,h,i,j 2 10/93 1 10 e -- 1/94 1 8 a 2 5/94 1 7 a -- 11/94 1 8 a

I/ Refers to Task Manager/MissionLeader. -- Not Available. a. Task Manager b. IndustrialSpecialist/Economist c. Lawyer/LegalSpecialist d. Economist e. Environmentalist f. Division Chief g. Macro Economist h. RegulatoryFramework Specialist i. Private SectorDevelopment Specialist j. Reseacher/Consultant ARGENTINA IMPLEMENTATION COMPLETION REPORT

SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN PERAL 11 (LOAN 3556-AR)

STATUS OF ACCOMPLISHMENT OF POLICY MATRIX

ACTIVITY ACCOMPLISHED BY BOARD PRESENTATION SECOND TRANCHE CONDITIONS SECOND TRANCHE CONDITIONS 1. ECONOMIC FRAMEWORK ACCOMPLISHMENTS

A. Macroeconomic Program Agreed to 3-year macroeconomic program and Maintenance of 3-year macroeconomic Govenmmentcontinued maintaining agreed external financing plan in context of EFF and program, including fiscal targets, open macroeconomic framework and financing plan. adjustment lending programs, reviewed public trade policy, and agreement on use of expenditure program. privatization sales proceeds. Counterpart proceeds from privatization of defense enterprises was used for voluntary staff retirement and l Agreed to maintain open trade policies. debt reductions.

B. Sectoral Economic Reformsl B petoai Eonoi R Issued decree on deregulatory framework; import Forward satisfactory Competition Law for Competition Policy forwarded to Congress. Competition Law barriers lowered for steel products, barner to entry Legislation to Congress for approval. removed.

Submitted analysis to Bank of steel and petrochemical structures.

Submitted to Bank consultant's study on Draftl Competition Legislation.

Establish transparancyof fiscal Developed program for the issuance of the fiscal Issue tax credits to steel producers after Tax audit of SOMISA, AHZ, and HIPASAM were Egishin steel sector, bonds for steel PEs in accordance with Industrial accounts have been audited by Direccion undertaken, future investment tax credit eliminated and a regime m steel sector. Promotion Control Program. General de Impositiva (Tax Office). final credit to newly privatized firns were issued. Later, all investment tax credit aimed at industrial promotion were eliminated.

Environmental Assessment Sent letter of invitation and TORs to consultants for Commence work on environmental clean- Environmental diagnostic study of METEOR and site clean-up of two closed PEs. up of closed PEs. H[PASAM were undertaken. The clean up of the former - For closed PEs, i.e., had commenced and the latter did not pose an METEOR, HIASAM environmental issue.

- For PEs to be sold. Incorporated environmental clauses in sales memoranda

- Distribution of selected PEs to be sold.

- Generation Sold distribution facilities. Sold Central Puerto and Costanera generation centers. ARGENTINA

IMPLEMENTATION COMPLETION REPORT

SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN PERAL 11 (LOAN 3556-AR)

STATUS OF ACCOMPLISHMENT OF POLICY MATRIX

ACTIVITY ACCOMPLISHED BY BOARD PRESENTATION SECOND TRANCHE SECOND TRANCHE 11.STEEL SECTOR CONDITIONS CONDITIONS ACCOMPLISHMENTS

A. Privatization of Steel PEs:

SOM1SA Downsized SOMISA and issued sales memorandum cosistent with open Sell and/or otherwise dispose of SOMISA was sold to a competition strategy. SOMISA's assets. consortium of steel producers.

Two steel PEs

- Altos Hornos Zapla (AHZ) Sold AHZ.

- HIPASAM Closed HIPASAM. ARGENTINA

1MPLEMENTATION COMPLETION REPORT

SECOND PUBLIC ENTERPRISE REFORM ADJUSTMENT LOAN PERAL II (LOAN 3556-AR)

STATUS OF ACCOMPLISHMENT OF POLICY MATRIX

ACTIVITY ACCOMPLISHED BY BOARD SECOND TRANCHE SECOND TRANCHE CONDITIONS mII.ALL OTHER PEs WITHIN DEFENSE PRESENTATION CONDITIONS ACCOMPLISHMENTS COMPLEX

A. Privatization of PEs

*PGM/PBB Issued PGM's sales memorandum; prepared Sell PGM and PBB. PGM was sold to Yacimientos Petroliferos draft sales memorandum for PBB consistent with Fiscales (YPF). competition policy. Requirement for PBB's sale was waived.

Eleven other PEs in industrial sector (Polisur, Sold six PEs (Polisur, Inductor, Petropol, Carboquimica, FM Acido Sulfurico, FM inductor, Petropol, Monomeros Vinilicos, Monomeros Vinilicos, Tandanor, and Tolueno and FM Pilar, which replaced FM i Tandanor, Petroquimica Rio Tercero, Petroquimica Rio Tercero). Rio Tercero, were sold. Forja was closed Carboquimica, Forja, FM Acido Sulfurico, FM and its assets liquidated. Tolueno, and FM Rio Tercero). Issued sales memoranda for three PEs; and Sell/close five PEs. evaluated bids from private investers.

B. Convert Defense Activities to Civilian Use ECA and San Martin were sold and TAMSE and Domecq Garcia closed. AMC; AFNE; Domingo Matheu; TAMSE; FM Signed decrees for AMC, TAMSE, Domingo Sell/close at least five PEs Moreover, DGFM sold six military San Francisco; FM San Martin; and ECA Matheu and AFNE for legal conversion from (including ECA). properties for commercial uses. defense to civilian use; issued sales memoranida for ECA, San Francisco and San Martin.

Source: PERAL 11,President Report (# P-581 I-AR); and Memo on PERAL 11Release of Second Tranche, Dec. 23, 1994.

IMAGING

Report No: 15868 Type: ICR