Document of The World Bank STAFF APPRAISAL REPORT ARGENTINA ENTERPRISE EXPORT DEVELOPMENT PROJECT

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1 Public Disclosure Authorized Document of The World Bank Report No AR Public Disclosure Authorized STAFF APPRAISAL REPORT ARGENTINA Public Disclosure Authorized ENTERPRISE EXPORT DEVELOPMENT PROJECT Public Disclosure Authorized NOVEMBER 2, 1995 Public Sector Management and Private Sector Development Division Country Department I Latin America and the Caribbean Regional Office

2 CURRENCY EOLTVALENTS Currency Unit = peso US$1.00 = 1.00 peso GLOSSARY OF ABBREVIATIONS AE = Account Executives ANA = Customs Administration (Administraci6n Nacional del Aduanas) AOP = Annual Operating Plan CEM = Country Economic Memorandum CET Common External Tariff CPI = Consumer Price Index CNCE = National Trade Commission (Comisi6n Nacional de Comercio Exterior) DGI = General Tax Directorate EU = European Union FONPLATA = Fondo para el Desarrollo de la Cuenca del Plata GATT = General Agreement on Tariffs and Trade GDP Gross Domestic Product IASCAV = Argentine Institute for Plant Health ICADS = Institutional Capacity Analysis and Development System ICGs = Institutional Capacity Gaps INAL = National Food Institute INTA = National Institute for Agricultural Technology INTM = National Institute of Industrial Technology IRAM Argentine Institute of Materials Rationalization LlB = Limited International Bidding MERCOSUR = Common Market of the Southern Cone MPP = Manual of Policies and Procedures MSA = Management Service Agreement MSC = Management Service Contractor MSTQ = Metrology, Calibration, Standards, Testing, Certification and Quality Control NCB = National Competitive Bidding NTC = National Trade Commission OECD = Organization for Economic Cooperation and Development SDOE = Subsecretaria de Desregulaci6n y Organizacion Econ6mica SENASA National Service of Animal Health SF = Superintendency of Frontiers SMEs Small and Medium Enterprises SOEs = Certified Statements of Expenditure TA = Technical Assistance TORs = Terms of Reference UAP = Program Administration Unit UCPFE = Coordinating Unit for Export Promotion Policies UNDP = United Nations Development Program VAT Value Added Tax

3 ARGENTINA ENTERPRISE EXPORT DEVELOPMIENT TABLE OF CONTENTS Page, No. I. COUNTRY AND SECTOR BACKGROUND... 1 A. Country Context Argentina Before the 1991 Reforms... 1 Development Strategy since B. Evolution of Trade C. Characteristics of Argentine Exports... 3 II. PROJECT SETTING AND GOVERNMENT STRATEGY... 5 A. Constraints on Firmns... 5 Characteristics of Export and Non-Export Firms... 5 Demand for Export Services... 8 B. External Constraints... 8 Export Procedures and Certification... 8 Standards and Quality Certification System Local Export Services Export Financing C. Export Policy Framework Export Promotion Protection Against Unfair Practices D. Government Strategy and Bank Role Government Strategy Bank Role Lessons Learned m. THE PROJECT A. Project Origin and Formulation Project Origin Project Formulation B. Project Objectives and Description Project Objectives Project Description C. Project Costs IV. IMPLEMENTATION AND SUPERVISION ARRANGEMENTS A. Institutional Responsibilities... 23

4 Table of Contents (Cont'd) Page No. B. Organization and Management C. Implementation Plan D. Procurement E. Disbursements F. Project Monitoring and Supervision V. PROJECT JUSTIFICATION A. Project Benefits B. Project Risks VI. AGREEMENTS REACHED AND RECOMMENDATION LIST OF ANNEXES: 1. Trade Statistics.. 41 H. Selection Procedures and Terms of Reference for the MSC..45 Im. Institutional Strengthening Component: Summary of Work Document IV. Summary of Annual Operating Plan.. 63 V. Implementation Schedule.. 70 VI. Procurement Arrangements.. 74 VII. Estimated Schedule of Disbursements.. 75 VIII. Selected Documents and Data Available in the Project File Map: IBRD No This report was prepared by Mariluz Cortes (Task Manager), with the contribution and teamwork of Mmes./Messrs. Alain Tobelem, Stefan Alber, William Mayville (LAlPS), Prajapati Trivedi (CFSVP), Kalyan Baneri (CFSPF), Michael Finger (IECIT), Andrew Singer, Matt Moran, and Robert Toth (consultants). Messrs. Paul M. Meo, Orville Grimes and Gobind T. Nankani are, respectively, the managing Division Chief, Projects Adviser and Department Director. The peer reviewers are Sarath Rajapatirana (OPRPG) and Paul Holden (LATAD).

5 Argentina Before the 1991 Reforms STAFF APPRAISAL REPORT ARGENTINA ENTERPRISE EXPORT DEVELOPMENT I. COUNTRY AND SECTOR BACKGROUND A. Country Context 1.1 For decades, Argentina's industrial development strategy was based on import substitution. Production essentially was oriented to the local market, while export sales typically were reactive, driven by weak demand in the domestic market. This economic model became increasingly unsustainable during the late seventies, which in Argentina were characterized by persistent macroeconomic instability, weak economic growth, widening fiscal deficits, and skyrocketing inflation. Average yearly inflation between 1975 and 1980 was 189%, peaking at 444% in Average GDP growth during this period was only 1.6% per year. Then, between 1981 and 1989, the average inflation rate increased to 355% and average GDP growth dropped to minus 0.9% per year. During this period, investment's share of GDP declined from 23.6% in 1981 to 15.7% by Finally, between June 1989 and January 1991, Argentina experienced an episode of hyperinflation, with an inflationary spike reaching 4,934% in 1989 on a December-to-December basis. Development Strategy since The Government that took office in 1989 adopted a development strategy based on opening the economy, state reform and modernization, and privatization of state enterprises. In the area of trade policy, the reforms progressively applied since April 1991 went much deeper than any previous attempts to liberalize the trade regimes. The result was Argentina's nominal tariff level fell to 15 % in 1991 compared to 42% (including surcharges) in Currently, Argentina's average tariff is lower than that of Brazil, Uruguay, Ecuador, and Paraguay, though higher than those of Chile, Mexico, and Colombia. " 1.3 Before the 1991 reform, the import regime was characterized by a wide tariff range, from 0% to 55 %. Forty-two percent of tariff lines were subject to licensing, with a 15% across-the-board import surcharge. Tariffs were lower for imported inputs and progressively higher for consumption goods; additionally, many goods were exempt from tariffs. The cumulative result was high tariff levels and wide dispersion of effective 1. This section is based on a study by S. Rajapatirana, entitled "Argentina: Trade Policies in Perspective," dated March 15, 1994.

6 - 2 - protection. In 1991, Argentina adopted a three-level tariff range: 0%, 11%, and 22%; replaced all quantitative restrictions with tariffs (although such restrictions were maintained for cars, sugar, and some paper products); and converted all specific tariffs to ad-valorem tariffs. The number of tariff levels has increased to seven since the initial reform and a surcharge on all tariff items has been restored--but as a fiscal measure rather than for protectionist reasons. Under the MERCOSUR agreement, Argentina adopted a CET of 20% on January 1, 1995, covering 85 % of the harmonized tariff lines, with the remaining tariff lines scheduled to converge to the CET over time. Just recently, the Government accelerated the convergence of tariffs with the CET. As a result, the average nominal rate of protection has increased to 14% by the end of March 1995, compared to 9.1 % at the end of December There also was an increase in the statistical tax (tariff surcharge), which applies equally to all imports. However, these changes have not changed significantly the variance in nominal protection. The export regime has been liberalized as well. Before the reforms, exports were subject to taxes and licensing and there existed a vast array of export promotion and subsidy schemes. The reforms of the early 1990s eliminated most export subsidies and taxes. 1.4 Generally, the results of the new economic strategy have been positive, fostering: Greater economic growth. Between 1990 and 1994, GDP grew by 34.4% for an average growth rate of 7.7%; An increase in the level and efficiency of investment. Gross fixed capital formation increased from 14.2% of GDP in 1990 to 23.3% of GDP in Since market mechanisms have been the determinants of this investment, allocative efficiency has increased; Elimination of fiscal deficits. In the period 1990 to 1994, the public sector primary surplus (not including the proceeds of the privatizations), ranged between 0.5% and 2% of GDP; Greater price stability. The annual growth rate of the CPI dropped from 4,393% in 1989 to 3.9% in The evolution of the combined price index (50% wholesale and 50% retail) has been: 13.4% in 1991, 12.4% in 1992, 5% in 1993, and 4.5% in 1994, which indicates a tendency towards the convergence of local and external inflation; and An increase in the ratio of exports and imports to GDP. This ratio of exports to imports relative to GDP increased from 10.7% in 1991 to 13.3% in 1994.

7 - 3 - B. Evolution of Trade 1.5 The economic reforms initiated in 1991 also have generated the conditions for greater access of Argentina's economy to international trade and financial flows. The initial effect of liberalization was an import boom fed by a strong consumer response to stabilization. Imports more than doubled between 1991 and 1993, while exports grew by less than 10 percent. In 1994, exports picked up steadily, with growth rates increasing from 6% in the first quarter to over 25 % in the fourth compared to the same periods the previous year. On the other hand, imports decelerated from growth rates of over 50% in the first quarter to only 13 % in the fourth compared to similar periods the previous year. On a yearly basis, however, exports grew by 20% and imports by 28%, increasing Argentina's trade deficit from US$3.7 billion in 1993 to US$5.8 billion in 1994 (see Annex I, Table 1). However, in 1995, exports took off, growing by 47% in the first quarter, while imports increased by only 3 % compared to the same period in As a result, since March 1995, Argentina's trade has registered surpluses. Several factors are behind these trends: sales to the local market slowed as the consumption boom came to an end--by May 1995 local sales were one-third below the level six months earlier and industrial production contracted by 4.1 % in June 1995 compared to June 1994)--while sales of agroindustrial products and fuel to Brazil increased in response to the consumption boom that followed Brazil's Plano Real. 1.6 Despite rapid growth of both exports and imports since 1991, the openness of Argentina's economy (measured as exports plus imports as a percentage of GDP) is still low (13%) compared to other open economies of comparable size (Korea, Chile, Australia and Spain), where the degree of openness is generally over 30% (see Annex I, Table 4). C. Characteristics of Argentine Exports 1.7 Argentine exports exhibit the following characteristics: Concentration on Traditional Products. Exports of commodities and agroindustries account for over 60% of Argentina's exports. Exports of industrial manufactures have experienced rapid growth since 1993, but they start from a relatively low level, and a significant share of them are exports of auto parts made under a special agreement with Brazil (see Annex I, Table 5). Concentration on a Few Markets. In 1995, half of Argentina's exports went to five countries: Brazil, the US, the Netherlands, Italy, and Germany. Exports to these countries accounted for 42% of total exports in The biggest expansion has been exports to Brazil, which doubled the share of total exports from about 1 1% in 1989 and 1990 to nearly 23 % in Exports to Brazil and the rest of MERCOSITR, particularly of manufactures, are more diversified than

8 - 4 - exports to other markets, which are comprised mostly of commodities exported by a few large enterprises (see Annex I, Table 6). Concentration on a Few Enterprises. While enterprises with prior export experience are taking advantage of a liberalized trade regime, there are few new entrants into the export market. This has resulted in a concentration of exports in relatively few enterprises. In 1994, only about 9,000 enterprises--out of over 60,000 enterprises producing tradeables--exported goods for US$15.7 billion; however, only 10% of these enterprises represent 92% of the export value. Despite the strong export growth in 1994, these figures show no change from those of In other words, the increase in exports in 1994 basically came from the same group of firns that were exporting in Different Composition of Exports in Regional and World Markets. Exports to MERCOSUR (mostly to Brazil) are much more diversified and involve more enterprises and products than exports to the rest of the world. Exports outside MERCOSUR are mostly commodities and involve only a few large exporters. These traditional exports require little effort to penetrate their intended markets; moreover, the marketing experience gained by the exporters is not applicable to other nontraditional export products. Importantly, the marketing experience of firms that export within MERCOSUR is also insufficient to prepare exporting fimns to penetrate more demanding and competitive world markets. TABLE 1.1: Concentration of Exports DECILE(%) NUMBER OF EXPORT CUMULATIVE ENTERPRISES PARTICIPATION PERCENTAGE TOTALS % , , Source: Administraci6n Nacional de Aduanas (ANA). 1.8 Even though there are favorable macroeconomic conditions for private sector activity, there are imperfections or rigidities inherited from the previous economic model that constrain a faster response of private agents to export opportunities. The slowness of the export response has adverse short-term effects on the levels of employment and the trade balance, which have social and political ramifications and possibly could compromise the viability of the reforms. The implementation of public policies to

9 - 5 - remove such constraints could well become critical for keeping the reform process on track. HI. PROJECT SETTING AND GOVERNMENT STRATEGY 2.1 Argentina has not been able to develop rapidly a more diversified, nontraditional export base. Argentina's exchange rate regime of keeping the local currency pegged to the US dollar is not considered a major reason for the slow response of nontraditional exports. Similarly, the trade regime is not a constraint to faster export developments, since the anti-export bias arising from the remaining import restrictions is likely to be low. Since the beginning of the Convertibility Plan in 1991, the real exchange rate has appreciated significantly; however, part of this appreciation may have been offset by several factors. These include tax measures and deregulation (including increases in indirect tax reimbursement for exports, elimination of the gross asset tax from agriculture and industry, and of the prepayments against VAT of the agricultural sector); and the decline in value of the US dollar with respect to other currencies. 2.2 However, there are other factors that cumulatively work against a rapid expansion of non-traditional exports. These include: lack of export experience and knowledge of sources of export-related information, especially among small and medium-size enterprises; prevalence of outdated production technology, low product quality and deep-seated attitudes that work against exports (encouraged by decades of import substitution); poor availability of export-related services in the country; and slow and inefficient govemment procedures governing exports. This section discusses some of these constraints and the manner in which the proposed project would address them. A. Constraints on Firms 2.3 An important factor in the slow export response of nontraditional exporters is the absence of export skills and motivation among Argentine firms, for which traditionally exports were vehicles for capital flight or a temporary solution for shortfalls in local demand. While enterprises with prior export experience now take advantage of a liberalized trade regime, there are few new entrants into the export market, especially among small and medium-scale firms; moreover, even large exporters may be unprepared for a global trade environment within the context of MERCOSUR experience (see para. 1.8). Characteristics of Export and Non-Export Firms 2.4 Many entrepreneurs who survived in the past because of their financial skills, generally suffer from a lack of awareness and knowledge of what is required to engage in the modernization and technological upgrading of their plants, let alone to search for

10 - 6 - export opportunities. Furthermore, there is strong resistance to investing in export startup activities because of uncertainties about financial returns. Nevertheless, the forces of competition are inducing a structural transformation of some industries that, in due course, should contribute to a rise in nontraditional exports. For examnple, capital goods are the fastest-growing imports, accounting for about a fourth of total imports, with about 40% of imported capital goods going to the industrial sector. 2.5 The behavior of Argentine firms is not atypical. International experience suggests that trade liberalization policies alone are not sufficient to elicit rapid export responses in countries with deep-seated attitudes that work against exports and where outdated production technology, low product quality, and poor services to customers are prevalent. In this climate,- it is increasingly necessary to complement improved policies with support packages targeted to overcome knowledge deficits and perceptions of risk. 2.6 To ascertain the characteristics and specific problems encountered by small and medium-scale exporters as well as potential exporters, interviews were conducted with 20 export focus groups. In addition, during project preparation a survey of 339 small and medium enterprises (SMEs) was conducted. Within this universe, 186 finns exported some of their products while 153 produced only for the local market. The interviews revealed a number of deficiencies among enterprises that limited their ability to export: SMEs in Argentina tend to be family owned and relatively old. Most firms in the sample are family-owned. Two-thirds were established by individuals who eventually incorporated other family members into the business. In general, management is by family members and not by qualified professionals. Also, most firms are relatively old: about 50% were in business more than 30 years, while only 15% were created in the last 1O years or less. Exporters and non-exporters respond similarly to increasing competition. Two-thirds of the firms in the sample reported increasing competition in the internal market because of new competitors or new imported products. More fins in Buenos Aires, Santa Fe and Mendoza reported more competition in their businesses than in the rest of the provinces. The response to increasing competition is similar for exporters and non-exporters: one-third of the firms lowered their prices and about 20% reduced production costs; 44% improved their products; 60% reduced delivery times; and 35 % extended payment conditions. Exporting is a relatively new and secondary activity. Independently of the age of the enterprise, export activities tend to be a recent phenomenon: 45% of the exporters in the sample began exporting in 1990 or later. Most exporters export only a fraction of their production: 63 % export 5 % or less of their production, while only 10% export 40% or more.

11 Few firms make organizational changes before entering foreign markets. Only 5 % of the firms that export have created a separate department to handle their export business, and almost all firms lacked a strategic export plan. Most exporters report only small adjustments in their way of doing business as a result of engaging in export activities, while 31 % report no change at all. Firms overestimate their managerial capability relative to exports. Both exporters and non-exporters tend to overestimate their managerial capabilities: 70% of firms indicated that managerial aspects do not affect either positively or negatively their capacity to export. In fact, a majority of exporters (64%) indicated they have the capacity to plan, organize, and implement their export strategy without external help, while 40% of non-exporters believe those skills are already present in the firm. Similarly, about half the firms indicated that training--of either management or staff--would have no effect on exports. In contrast, active exporters--firms that export 20 % or more of their products--have a quite different view of the importance of improving their capabilities to export. About 56% of them reported that their exports were affected by entrepreneurial skills and 62 % replied their exports were affected by the general skills of their personnel. Few exporters seek professional advice before entering export markets. In many cases, the beginning of the export activity was the result of chance such as a trip abroad, where an opportunity for marketing their products arose. In fact, personal trips and attendance at trade fairs were the main sources of information used in their decision to export. Only 12% of exporters reported using professional help in market research to enter an export market, 11 % for product adaptation, and 8 % for strategy and export procedures. The explanation given for the slight use of external advice was the desire to do things internally as well as budgetary constraints. Nevertheless, firms that used consultants in areas related to exports generally were satisfied with the results. Those who never used consultants had little knowledge of the types of services available or their cost. In general, active exporters made greater use of external consultants than marginal exporters. Firms believe most constraints to exports are external to the frm. Only a few exporters reported initial difficulties with product quality (5%), lack of knowledge (2%), and lack of skills (1%). On the other hand, 44% of the enterprises in the sample reported problems with state agencies involved in exports. In general, firms revealed a lack of knowledge about how competitive they would be in export markets.

12 -8- Demand for Export Services 2.7 Although few firms have used external services to develop their exports, firms showed a positive attitude toward the use of external services to improve their firms competitiveness. Up to 69 % of exporters and 67% of non-exporters indicated they would use the services of consultants. 2.8 Exporters and non-exporters gave somewhat similar ranks to the types of external services that would help a firm enter export markets. For exporters the main services are production technology, financing, and quality control. For non-exporters, the main services are market information, production technology, and financing. Information on production technology is of major importance to 67% of exporters and to 60% of nonexporters. This reflects the concern of Argentine enterprises about the need to reduce production costs, not only to export but to face competition in the internal market. Market information was important to 68% of non-exporters and 53 % of exporters (free access to market information was considered highly important to 88% of exporters and 90% of non-exporters). Quality control was important to 55% of exporters and 52% of non-exporters. Services concerned with product design, management improvement, and packaging were considered less important by both exporters and non-exporters. The minor importance given to these services may reflect the fact that a large share of the exports made by the firms in the sample went to Brazil, which is a market not very different from that of Argentina in terms of products and packaging standards. B. External Constraints 2.9 There are a number of constraints to faster export response that are beyond the capacity of the firm to address. The main constraints, according to the firms themselves, relate to the time and costs involved in export procedures. Another impediment is the lack of credit--not only export credit but also credit for fixed investments. The surveyed firms were less aware of problems caused by deficiencies in the supply of local consultant or quality control services. Export Procedures and Certification 2.10 Exporters view export procedures as a major obstacle: 44% of the enterprises in the sample reported problems with state agencies. Although Argentina in the last few years has made important advances in the deregulation and simplification of export procedures, it still has a long way to go, particularly in improving the performance of agencies that provide the certifications required by Customs. For example, the Sistema Maria, which is being implemented by the Customs Administration, will offer services to facilitate quick resolution of export procedures; however, there still are problems concerning the prior-intervention regime. This regime includes numerous procedures

13 - 9 - exporters must follow based on type of product and tariff position, and requires interaction with various agencies of fiscalization and control As part of project preparation, export procedures were analyzed following every step of an export operation. The institutional capability gaps of the main agencies involved were analyzed using the Institutional Capacity Analysis and Development System (ICADS) recommended by the Bank (see Annex EII). The main problems detected regarding export procedures are the following: General Problems of Agencies Involved: - low quality of services, poorly qualified staff, and absence of a common strategy and unified criteria among agencies; - practice of direct payments to personnel in these agencies creates an opportunity for corruption; - unclear export regulations, making them subject to differing intexpretations; and - incompatibility of service hours among agencies. Customs Administration (ANA): - excessive time involved in checking products at border posts; - location of customs offices at different locations increases the time involved in custom procedures; - high cost of services for small exports; and - excessive time to process tax reimbursements. Argentine Institute for Plant Health (IASCAV) (phytosanitary certification): - excessive time to establish norms for import inputs to be used in export products; and - slow services because only few laboratories test samples for the whole country. National Animal Health Service (SENASA) (certification of animal health): - slow response to issue quality certificates. Response is slower for nontraditional products because of lack of knowledge about requirements in importing countries. Higher fees are requested for faster service.

14 Undersecretariat of External Trade (Imports Directorate) and National Institute of Industrial Technology (INII): - procedures to import a product under the Temporary Admission Regime requires about two months because of excessive paperwork and verification procedures; and - slow and complex procedures for issuing certificates of origin. - excessive time in providing verification of imported products. Final verification can take up to a year and a half, creating problems with bank guarantees. General Tax Directorate (DGI): - excessive time (about 30 working days) to reimburse VAT to exporters The Institutional Strengthening Component of this project would allocate funds to finance technical assistance to streamline export procedures. Standards and Quality Certification System 2.13 The adoption of internationally accepted quality standards and certification by exporters has become increasingly a prerequisite for entering foreign markets. At least 55 countries have adopted the International Standards Organization IS09000 series for quality standards. These standards are complementary to those pertaining to the function of the product or service and refer to the organizational structure, responsibilities, processes and procedures, and resources for the optimization of quality control in relation to risks, costs and benefits. The IS series includes environmentally focussed standards that will be required by the EU and other countries after Firms that adhere to these standards receive certificates of registration acknowledging that their quality control systems meet specified requirements. Quality system registration by exporters is becoming mandatory for doing business internationally The state has an important role to play in the development of the standardization and certification system for exporters. This includes the following key elements: (a) services of metrology and calibration; (b) development and implementation of standards; (c) testing and certification of products; and (d) quality services. These services collectively are known as MSTQ. Although most of the services are provided by private sector organizations, the public sector assumes the following roles: (i) promoting awareness of MSTQ issues, particularly globally; (ii) establishing a regulatory framework to assure that competition prevails among service providers; (iii) seeing that effective mechanisms exist to assure all service providers possess the requisite technical competence; (iv) providing services where social returns are high but private returns low, such as the area of training, primary metrology, and specialized testing in public

15 health and safety areas; and (v) negotiating mutual-recognition agreements and similar instruments with national, regional, and international governmental bodies. The latter refers to mutual recognition of test results and laboratory accreditation, which is important in the prevention of technical trade barriers Although over 30,000 firms worldwide have received certificates of registration acknowledging that their quality systems meet specified requirements, only 17 firms in Argentina have received such certification compared to 410 in Brazil, 133 in Mexico, 25 in Colombia, and 22 in Venezuela. In spite of a general awareness of the importance of quality control in Argentina, few producers use quality control measures in their plants, particularly among small and medium-sized firms. Nevertheless, Argentina is in a better position than many developing countries to implement MSTQ initiatives. There is wide recognition in industry and government that quality is an important factor in global competitiveness, as well as an appreciation of the role the private sector can play in implementing a national MSTQ system. In addition, unlike other counties in an early stage of developing their MSTQ system, the most important "quality control" organizations have established cooperative arrangements to avoid conflicts of interest and more efficient use of resources Some of the basic problems affecting the deployment of an MSTQ system are: - Quality control practices are managed by inadequately qualified personnel, even among individuals who identify themselves as quality assurance consultants. Although there are numerous courses and seminars about quality control, both the qualifications and experience of trainers are low. There is a need to improve the teaching of quality control in terms of curricula development, training of teachers, and developing criteria for academic qualification; - Official laboratories in charge of quality certification of export products are highly centralized, creating bottlenecks that hinder exports. A system of accredited laboratories able to provide these certificates would alleviate the bottlenecks. A system of laboratory accreditation was approved in August 1994; however, its implementation has been delayed because of the high costs involved in training coupled with improving laboratory practices and administration; and - IRAM, the main developer of norms and standards in the country, requires technical assistance to modernize outdated procedures and develop a long-term strategy The technical assistance component of this loan would provide funds to improve the MSTQ system in Argentina, particularly with respect to the types of certification and accreditation required by exporters.

16 Local Export Services 2.18 As part of project preparation, an investigation was carried out to identify the universe of suppliers of export services in Argentina. A total of 378 consulting firms were identified and 56 subsequently interviewed. The investigation showed that local consulting firms have the following characteristics: Relatively new and small. A majority of these firms (60%) were established in the last 10 years, with 20% of them created after The average staff size is two employees. They, in tum, hire outside staff to meet the requirements of contracts won. Limited knowledge about nontraditional markets. Most consulting firms concentrate their services on traditional markets. Charge widely different fees for similar services. Few provide services in the areas of quality control and certification, product design or packaging. Of 378 consulting firms identified, only 9 work prinarily in the area of quality control, and only 13 in packaging Given the scarcity of local consultants specialized in the types of export-related consulting services that would be financed under the proposed Cost-sharing Grant Scheme, consultant's services would have to be provided mostly by specialized foreign firms. However, the project would help promote the establishment of export-related consulting services in Argentina by stimulating the demand for such consulting services. Also, local promotional activities would ensure that local service suppliers are aware of the demand for consulting services. Export Financing 2.20 Only 15% of enterprises surveyed indicated they used trade financing, although access to credit was considered the most important factor in facilitating exports. Export financing is little used because existing systems of export finance in Argentina are inadequate. New exporters and enterprises planning to expand exports encounter acute difficulties in securing preshipment export finance. Exporters need this kind of finance to meet the costs of producing goods under an export order. Such loans are considered self-liquidating, as repayment is expected to come from specific export proceeds. However, commercial banks in Argentina generlly do not provide finance tied to specific export transactions, but rather as part of general domestic working capital granted on the basis of net worth and overall creditworthiness of borrowers. This makes it difficult for small and new exporters to gain access to preshipment financing from banks. On the other hand, banks find it difficult to evaluate, on the basis of available

17 information and analysis, whether firms will be able to process export orders on time and meet product standards required by buyers abroad. One way to overcome this constraint is to develop a mechanism for a privately-run preshipment export finance guarantee. Such a guarantee would enable banks to provide preshipment export finance by dealing with risks in three major ways: pooling of exporter risks; developing an information and evaluation system about small and new exporters; and fostering the development of collateral substitutes. There is greater availability of postshipment export ftnance, although the mechanism for postshipment export credit insurance to cover exporters against "foreign buyer" non-payment risk lacks credibility and capacity to assume risks A review of export financing in Argentina carried out during project preparation recommended two actions to improve trade financing: (i) conduct seminars on state-ofthe-art trade financing for commercial banks, and (ii) finance a feasibility study of a private export credit insurance scheme. Export Promotion C. Export Policy Framework 2.22 Argentina has a number of export promotion agencies and programs at the federal and provincial level. In general, these programs overlap in their functions, are underfunded, and ineffective. One of the main export promotion programs has being carried out since 1992 by Fundaci6n ExportAr, in the Ministry of Foreign Affairs. Its main activities are direct promotion, market studies, and participation in international trade fairs (paying 50% of the cost of the booth). Fundaci6n ExportAr coordinates the activities of commercial attaches in seven or eight embassies in charge of providing information to potential customers and Argentine exporters. The information provided by the attaches on market profiles and lists of importers is available to enterprises through a computerized network; however, this information is general in nature and is not the type of information required to develop and implement an export plan. The provincial governments also run export promotion programs that take the form of maintaining offices in a few US and European cities and organizing trade fairs A Coordinating Unit for Export Promotion Policies (UCPFE), comprised of the Secretaries of the Ministry of Economy and External Relations, was created through an Interinstitutional Resolution, signed November 1994 by both ministries. It is headed by the Secretary of Commerce and Investments and is responsible for the coordination and rationalization of public sector agencies and programs dealing with export promotion. Its objective is to reduce the role of the state to functions such as regulation and oversight of the proposed project. During project preparation, a systematic institutional capacity diagnosis of export promotion agencies (public and private) was carried out. The results of this diagnosis are expected to help UCPFE carry out its role.

18 Under the Institutional Strengthening Component of this project, technical assistance funds would be provided to UCPFE to help it rationalize and streamline existing export promotion entities. Those entities whose roles overlap or provide services that could be supplied more efficiently by the private sector would be gradually phased out. Also, technical assistance would be provided to Fundaci6n ExportAr to improve its information system. Protection Against Unfair Practices 2.24 The National Trade Commission of Argentina (CNCE) was created in May 1994, and modeled after the US International Trade Commission. It determines how the Government will respond to an industry that requests exceptional protection in the form of safeguards, antidumping, and countervailing duty actions. The CNCE is exemplary among such national agencies, in that it has a mandate to evaluate such requests from the perspective of national economic interests--weighing the interests of domestic users (consumers) of imported goods against the interests of domestic producers who ask for protection CNCE would be assisted through the Bank's research program, which, among other things, provides assistance to develop methods by which an agency such as CNCE can respond in an economically rational way to industry requests for exceptional protection. A conference would be arranged, funded by the Bank's research budget, but jointly organized by the Bank and CNCE, concentrating on studies of how user interests are incorporated into the procedures of other agencies. Government Strategy D. Government Strategy and Bank Role 2.26 The policy reforms adopted since including opening the economy to external competition--are oriented towards a growing presence of Argentina in the world economy. The Government views exports as the engine of growth in the next few years, and the private sector as the center of this effort. The role of the Government is envisaged as complementary to the private sector, anticipating changes in the international arena and promoting activities domestically and externally that would facilitate the development of export activities. The Government is aware, however, that firms with no export experience find it difficult to break into the export business because they do not know what information or assistance they need or where to find it. The Government wants to assist these enterprises, while avoiding the shortcomings of promoting exports through tax incentives or by providing services to exporters through government agencies. The Government thus has asked the Bank to help reorient exporter support programs in the following areas: assist potential exporters to obtain export-related services from private sector providers instead of from government

19 agencies; simplify export procedures; improve the efficiency of public certification agencies; and rationalize public sector agencies and programs that deal with export promotion. Bank Role 2.27 By helping accelerate and broaden the export development process in Argentina, the proposed project fully supports the Bank's country assistance strategy for Argentina, discussed by the Bank on May 4, 1995 with the Provincial Bank Privatization project, to assist in the consolidation of the comprehensive reforms now underway. The Bank has been and remains a strong supporter of the ambitious reform program begun in Major challenges are to sustain the liberal trade regime and maintain macroeconomic stability. To this end, it will be necessary to increase productivity and accelerate the export response of Argentine firns. The Bank is particularly well-positioned to provide the authorities with lessons learned worldwide on export support schemes. Also, the Bank has the capacity to proceed rapidly in project design and implementation based on experience in the preparation of similar projects in several countries. Lessons Learned 2.28 The experience in Latin America as well as in other developing countries is that traditional export promotion rarely has been effective in expanding exports. Promotion schemes usually have failed when the macroeconomic conditions and the overall policy environment were not conducive to exports. Also, the design of past projects appears to have been flawed. First, promotion services were provided through a single public service supplier that tended to suffer from rapid turnover in leadership as well as from inexperienced staff. Second, the services provided were supply rather than demand driven. Third, external assistance rarely was focused directly on the enterprises themselves. Other countries, however, have been successful in stimulating exports by providing support and assistance to enterprises in export marketing and related tasks, particularly by facilitating the finance of export-related services provided by private sector firms This innovative approach has been used in the Great Britain and Ireland, and with Bank support in India, Kenya, Indonesia, the Philippines and Mauritius. Similar programs have been designed for Jamaica, Trinidad and Tobago, Senegal, South Africa, Bangladesh and Uganda. A small Cost-Sharing Grant Scheme is being implemented in Argentina to stimulate the export of nontraditional agricultural products. A review conducted by OECD on the British scheme shows that from a sample of 420 firms that received cost-sharing grants over a 3-year period, half of them were later able to use consultants at market prices, and 82% had begun implementing consultant recommendations. A group of 180 firms that received cost-sharing grants in India achieved exports worth 25 times the grants disbursed within three years. Another group

20 of 210 firms in India that received cost-sharing grants between 1987 and 1991 achieved a 25 % average growth rate in exports. Information from a sample of 36 activities supported in Indonesia shows that the first year of implementation garnered additional exports of US$36 for every US$1 of grant received. The cost-sharing grant scheme for agricultural exports in Argentina recently has begun disbursements; thus, it is too early to evaluate its impact on the firms' exports. Nevertheless, some lessons already can be derived from this scheme: namely, the importance of good publicity campaigns to reach potential exporters, and the need to have a continuously open window to receive proposals. The proposed project would apply the lessons from these experiences. Another important lesson is that the success of the scheme depends on the delivery system. For this reason, the project proposes that the administration of the scheme be given to a private sector fuim under a management service agreement. Project Origin m. THE PROJECT A. Project Origin and Formulation 3.1 In Argentina various administrations have tried to promote exports through tax incentives and by providing services to exporters through government agencies. This assistance has not been successful because the agencies providing the services tend to suffer from inexperienced staff and limited budgets; moreover, the services customarily provided were supply-oriented rather than demand-driven. Adding to the problem for exporters, a number of agencies at the federal and provincial levels provide overlapping services with little measurable impact. The current Administration recognizes the shortcomings of the previous approach and with Bank assistance has agreed on a phased strategy to reorient its support to exporters in anticipation of the challenge of both regional and world market opportunities, especially targeting small and medium-scale enterprises and the areas of nontraditional exports. Project Formulation 3.2 A delegation of the Argentine Government visited the Bank in the fall of 1994 to request Bank support for an export development project. In response to this request, Bank preparation missions visited Argentina in December 1994 and April A preappraisal mission, later upgraded to appraisal, visited Argentina in July The Argentine authorities have been heavily involved in project preparation. A strong project preparation team operates under the Deputy Minister of Economy. Members of this team have visited the Bank and travelled to several countries, including Ireland, Great Britain, South Korea, and Japan to review exporter support schemes. The Argentine team has been involved in all aspects of project design and subsequently

21 produced a comprehensive background report that has been integrated into the appraisal effort. Project Objectives B. Project Objectives and Description 3.3 The primary objectives of the proposed project are to help increase the international competitiveness of small and medium scale enterprises in Argentina and to improve the performance of export-related public agencies, thus facilitating export growth. The project would help firms to become more internationally competitive through three avenues. First, the project would help increase awareness among entrepreneurs about export opportunities through the provision of basic information about foreign markets and profitable export strategies. Second, it would prompt a limited number of enterprises to invest their own resources in productivity improvements and export development expenditures through the incentive of a one-time grant to share these costs. Third, the project would help to improve the performance of agencies providing quality control and certification services. The project would also facilitate export growth by supporting the simplification and reduction of export procedures. Project Description 3.4 The project would have two main components: an Enterprise Assistance Program to develop export competencies in the private sector in manufacturing and service industries; and Institutional Strengthening to help improve the performance of export-related public agencies. (a) The Enterprise Assistance Program Component 3.5 The Enterprise Assistance Program would be in the form of: (i) cost-sharing grants to cover up to 50% of the cost of consultant's services required to improve the international competitiveness of enterprises, particularly small and medium enterprises (SMEs); and (ii) the services of a worldwide Directory of Consultants and Market Information Suppliers to ensure easy access by Argentine exporters to information about the availability of export-related services worldwide. 3.6 The Cost-sharing Grant Scheme would offer its services solely in response to private sector demand on a non-discriminatory basis, and firms would be attended on a first-come-first-served basis. The assistance would be provided once an export program has been developed at the finr level and the entrepreneur has committed its own funds to implement it. The support envisaged under the project would be available to any potential exporter of nontraditional exports. Consulting services would be cofmanced for:

22 (i) (ii) (iii) (iv) exploration and development of export opportunities; product adaptation or development of new products for export, including technology upgrading and quality certification; improvement of productivity/efficiency to compete in an export market; and strategy and actions to enter the foreign market either directly or indirectly through associative organizations. 3.7 The Cost-sharing Grants would finance consultant services, acquisition of information, (including software and reference material), trips by entrepreneurs or their staff to explore export opportunities, mailing of samples, promotion materials, and other miscellaneous expenses if they are identified in an export plan. 3.8 Initially, the grant would be set at up to 50%, but it could be reduced gradually as the use on consultants and specialized services becomes more widely accepted. To this end, the program would be subject to a yearly review to assess the possibility of reducing the level of cofinancing. To stimulate the use of consulting services, the program could provide financing for up to 80% for the first US$2,500 spent in the identification of the export project. The effectiveness of this level of concessional cofmancing would be assessed after one year of project implementation. The average grant size is estimated at US$30,000. The maximum grant size would be US$75,000 for an individual program and US$125,000 for a firm. One export plan could involve several consulting services. A firm could submit more than one export plan if different markets or products are involved. 3.9 Detailed eligibility criteria to gain access to the Cost-sharing Grant Scheme would be delineated in a Manual of Policies and Procedures (MPP). The list of eligibility criteria would include, inter alia, the following: (i) (ii) (iii) (iv) the firm should have an export plan previously designed or a commitment to cofinance the services needed to produce an export plan; the firm should demonstrate that it has the financial resources to implement its export plan; a negative list of export products not eligible under the program would include: exports of arms, tobacco and tobacco products; only the cost of consulting and specialized services would be eligible. The program would not finance investment costs. Travel costs to export

23 markets would be eligible for cofinancing at a rate of up to 50% of the cost of an economy class ticket and the per-diem established by UNDP, plus 10%; (v) (vi) suppliers (indirect exporters) of exporters assisted under the program would be eligible for assistance; exporters who use trading companies would be considered direct exporters; and (vii) work undertaken by a firm using its own resources would be eligible for purposes of visiting export markets, international fairs, etc, provided that such activities take place in the context of a written export plan Size of the Cost-sharing Grant Scheme. The number of firms assisted by this program would be determined by the demand from the firms themselves. As part of project preparation, an estimation was made of the potential demand for this type of assistance. The estimations are based on two sources of information: (i) the Customs Administration, which has a universe of about 9,307 exporters, and (ii) the DGI, which has a universe of 297,000 taxpaying firms. After a process of elimination that included culling exporters and producers of commodities, the target group was reduced to 12,200 firms, of which 3,500 are exporters exporting over US$50,000 per year, 500 exporting less than US$50,000, and 8,700 non-exporters. The Argentine authorities would like to reach about 3,000 of these firms over a period of four years. However, since there is little international experience in the use of cost-sharing grants, and most of the schemes are too recent to be able to fully assess their success in stimulating exports, it was decided that this project would finance the first stage of the scheme, with the objective of assisting about 900 firms over 30 months Second-Phase of the Program. The Bank would consider initiating the preparation of a follow-up operation a year after effectiveness or when half of the funds have been disbursed, whichever comes first. Negotiation of the follow-up operation would be contingent on a positive evaluation of the scheme by the Bank and the Borrower 18 months after effectiveness or after two-thirds of the funds have been disbursed (whichever comes first). Early preparation of a follow-up operation would make new funds available to continue the scheme without interruptions. The evaluation of the success of the scheme within 18 months of its launching could be difficult because it would be too early to measure its effects in terms of additional exports generated. Therefore, the evaluation would center on the effectiveness of the management arrangements and evidence of changes of behavior at the firn level as a result of the consulting services received. Some criteria for this Mid-Term evaluation are presented in para

24 Directory of Consultants. Firms that apply for a cost-sharing grant would have access to a Directory of Consultants and Market Information Suppliers. The Directory would be in a format to ensure easy access by Argentine exporters to information about these services worldwide. It would provide some basic data about consultants and information brokers, provided by the consultants themselves, on qualifications, experience, and level of fees. The program would be publicized to service suppliers worldwide and interested consultants would be able to register. The Directory would remain in operation, on a self-financing basis, after the cost-sharing grant scheme has ended. (b) Institutional Strengthening Component 3.13 The Institutional Strengthening Component would support the Government's efforts to simplify procedures and improve performance of government agencies involved in the export process (see Annex E). During project preparation, the Government undertook a systematic analysis of the key agencies involved in export procedures and certification (public and private) to identify their institutional capacity gaps (ICGs), utilizing a methodology proposed by the Bank. The results of this analysis are the basis for the specific institutional strengthening programs in the following three areas: (i) (ii) (iii) Simplification of Procedures. Procedures would be streamlined and time reduced in processing an export order, an import (temporary admission regime) order, and in obtaining the reimbursement of taxes. Agencies involved include: ANA, DGI, SENASA, IASCAV, INAL, and INTI. The expected results of this subcomponent would be a reduction of time involved in customs procedures from an average of 8 days to 2 days by end of 1997; a reduction of time involved in certification procedures from an average of four days to one day by the end of 1997; elimination of some certification requirements; and reduction of the time involved in the devolution of taxes from 30 to 3 days; Strengthening the Ouality Control System. This would involve the improvement of public and private laboratories that provide quality control certifications for exports. It would finance curriculum development, training and laboratory accreditation (for IS09000 certification). The agencies involved would be INTI and IRAM and selected private laboratories. The expected results would be the accreditation of 4 laboratories for quality control during 1996 and of additional laboratories during 1997; and Strengthening Policy Formulation in Export Promotion. This subcomponent would provide technical assistance to the Coordinating Unit for Export Promotion Policies (UCPFE). The expected results would be the rationalization of export promotion agencies and programs by the end of 1997.

25 (iv) (v) Strengthening Commercial Services provided by Fundaci6n ExportAr. Technical assistance would be provided to Fundaci6n ExportAr to improve the quality of the support it gives to exporters through exhibits (booths or stands) for Argentine exporters and products in international trade fairs. Streng-thening the Administrative Capability of the Program Administration Unit (UAP). Technical assistance would be provided to the UAP to improve its capability to carry out its coordinating, controlling and evaluating functions Under this component, funds would be made available to finance consultants, training, computer equipment and software, and printing of informational or didactic material to improve the capacities of these agencies. The expected results would be: a simplified export process measured by reduction in the quantity and complexity of procedures and the time taken to process exports: and sharper focus on the needs of exporters by better qualified staff. An institutional strengthening program to overcome the identified ICGs would cost about US$11.4 million, to be implemented over a fouryear period. The proposed project would finance the first two years of this program at an estimated cost of US$8.4 million. Some of the ICGs identified would be addressed in coordination with other ongoing Bank projects. The simplification of procedures for the devolution of the VAT to exporters by the General Tax Directorate (DGI) would be coordinated with an ongoing Bank project: Tax Administration [I (Loan 3460-AR). The ongoing Capital Markets Technical Assistance Project (Loan 3710-AR) would act upon the recommendation of providing training of commercial banks in state-of-the-art trade financing techniques. C. Project Costs 3.15 The project cost is estimated at US$74.2 million, with a foreign exchange component of US$33.5 million. The project would be financed by the proposed Bank loan of US$38.5 million equivalent (52% of total project cost); US$8.7 million by the Government of Argentina (12% of total project cost); and US$27 million by the beneficiary firms (36% of total project cost). The Cost-sharing Grant Scheme would amount to US$54 million--us$27 million from the program and US$27 million from the enterprises themselves (to meet the needs of about 900 enterprises during a 30-month period, at an average cost of US$60,000 per export plan). The Cost-sharing Grant Scheme and the Directory of Consultants would be administered by management service contractors (MSCs) through management service agreements (MSAs). The cost of the MSAs is estimated at about US$6.0 million and US$1 million, respectively, including contingencies. The Institutional Strengthening Component would cost about US$7.3 million in technical assistance to key agencies involved in the export process, and US$1.1 million to strengthen the project implementation agency. Total administrative costs of the project (without the MSA) would amount to about US$2 million. The Govemment would finance these administrative costs from counterpart funds. The

26 Govemment would also finance the advertising and promotion costs of the Cost-Sharing Grant Scheme. Table 3.1: PROJECT COST (USS Millions) LOCAL FOREIGN TOTAL Progrsm Administration UAP Advertising/Promotion Enterprise Assistance Program: Cost-Sharing Grant MSA 1.30* Directory of Consultants Institutional Strengthening Strengthening of UAP Policy Fonnulation UCPFE Fundaci6n ExportAr Sinplification of Procedures ANA/DGI INTI SENASA IASCAV INAL Quality Control INTI/IRAM Sub Total Base Cost Price Contingencies L.S0 Total * This includes Value Added Tax (VAT) for about USS1.3 million. Table 3.2: FINANCING PLAN (US$ Millions) Local Foreign Total %_l Government Beneficiaries Bank Total

27 IV. DIPLEMENTATION AND SUPERVISION ARRANGEMENTS A. Institutional Responsibilities 4.1 The overall responsibility for project implementation would be in the Program Administration Unit (UAP) created within the Secretariat of Commerce and Investment (SCI) of the Ministry of Economy. The UAP would be responsible for implementing the project in accordance with the Project Implementation Plan (PIP) and with policies, criteria and methodologies specified in the Manual of Policies and Procedures. The UAP would have the following main responsibilities: - oversee the work of the MSC managing the Cost-sharing Grant Scheme; - provide the no-objection of export plans proposed by the MSC - oversee the work of the MSC managing the Directory of Consultants; - oversee the implementation of the subprograms of the Institutional Strengthening Component; - make arrangements for the transfer of the Government's counterpart funds; - ensure that budgetary, procurement, contracting, disbursement, administrative, accounting, auditing and reporting arrangements are carried out in accordance with the Loan Agreement; - prepare detailed Annual Operating Plans (AOP) for the Cost-sharing Grant Scheme and each subcomponent of the Institutional Strengthening Component, in coordination with the implementing agencies; - assemble and send to the Bank Semi-Annual Project Implementation Reports; and - subcontract, in coordination with the Bank, impact assessment studies. 4.2 The Subsecretariat of Economic Organization and Deregulation (SDOE) would be responsible for the coordination of technical assistance programs under the Simplification of Procedures subcomponent. This involves the following beneficiary agencies: ANA, DGI, SENASA, IASCAV, INAL and INTI. To this end, the UAP would enter into an Implementation Agreement with the SDOE and, in turn, the SDOE would enter into individual implementation agreements with each of the beneficiary agencies for the execution of this subcomponent.

28 The UAP would directly coordinate the technical assistance programs under the other subcomponents of the Institutional Strengthening Component, involving INTI (for quality control), UCPFE, and Fundaci6n ExportAr. The UAP would also sign implementation agreements with these agencies. 4.4 The policies and procedures guiding the implementation of the Project would be spelled out in a Manual of Policies and Procedures (MiPP), with two sections: one for the Cost-sharing Grant Scheme and the other for the Institutional Strengthening component). An advanced draft of the MPP was reviewed during negotiations, when it was agreed the final version, approved by the Bank, would not be amended without the Bank's prior consent. 4.5 The UAP would be responsible for the preparation of the AOPs for each subcomponent of the institutional strengthening component, in coordination with the respective beneficiary agencies. Each AOP includes a detailed description and timetable for delivery of outputs, activities, and technical assistance inputs. The first-year AOPs and the tenrs of reference for the consulting work involved were discussed during negotiations. A revised version of the first year AOP for the UCPFE and of the terms of reference for the consulting work involved would be agreed with the Bank prior to signing the Loan Agreement. The second year AOPs would be discussed and agreed with the Bank during the mid-term review. B. Organization and Management 4.6 The UAP would be headed by an experienced project coordinator and have administrative structures, processes, and staffing conducive to an efficient administration of the project. An international consultant has been selected to assist in the design of the UAP's organizational structure, processes, staffing and budgetary requirements. During negotiations, it was agreed that the formal establishment of the UAP and an agreement between the Borrower and the Bank on the staffing and budget of the UAP would be a condition of loan effectiveness. Assurances were obtained during negotiations that the Government would support the UAP in the implementation of its responsibilities under the Project. 4.7 Management of the Cost-Sharing Grant Scheme. The administration of the Cost-sharing Grant Scheme would be contracted out to a private MSC, through an MSA. The Bank would approve the selection procedure, the terms of reference, the short list, and the contract with the MSC (see Annex II). Retroactive financing would be provided to cover the costs of selecting the contractor. The draft terms of reference for the selection of the MSC would be agreed with the Bank prior to finalization of the documents for approval by Bank management. During negotiations it was agreed that signature of the MSA would be a condition of loan effectiveness.

29 The MSC would be required to establish offices in Buenos Aires and in other major industrial centers of the country. In more distant areas, enterprises would be able to get in contact with the program through "attention centers" located in other public or private institutions. The Directory of Consultants would be accessible from all MSC offices. These offices also would be connected to other national and international data bases related to exports. The MSC would have a Manager and a team of Account Executives (AE) who would work directly with the enterprises in developing their export plans and in selecting the specialized service contractors needed to implement such plans. The AEs would do the follow-up of the assisted firm's export plan until the firm is able to export. The main functions of the MSC would be to: (i) (ii) (iii) (iv) (v) (vi) (vii) promote the program among potential beneficiaries; help the firms in the diagnosis of their assistance requirements and in the preparation of their export plans; review and submit for its no-objection to the UAP the firm's export plan and the information and consulting service requirements identified in it-- following the established eligibility criteria; assist the firms in the selection of the consultants and approve the terms and conditions of the contracts between the firm and the providers, ensuring that the firm finances its share of the cost; submit its recommendations to the UAP for its no-objection and oversee the formalization of the contracts with the selected consultants and service providers; request disbursement of the grants to reimburse the firm; and monitor the implementation of each firm's export plan. 4.9 The administration of the scheme by a private MSC is a prerequisite for its success. Vital to the effectiveness of this type of schemes is a high degree of trust in the technical capability of the administering agency, active promotion of export opportunities among managers of prospective client firms, as well as provision of "free technical assistance" by staff administering the scheme to prospective clients in the development of export plans, how to organize the process of selecting and contracting specialized services, and how to obtain the most from these services. The use of an MSC would allow the scheme to draw on the resources of specialized international consultants for the provision of the above elements, while avoiding permanent expansion of the public sector to implement a transitory program. During negotiations it was agreed that failure of the MSC to perform any of its obligations or undertakings under the MSA would be

30 cause for suspension of disbursements, unless such failure has been remedied by the MSC, the Borrower, or any agency designated by the Borrower Management of the Directory of Consultants and Service Providers. The task of compiling the Directory, putting the information on a "Windows-type" program, checking references, and running it would be awarded to a private MSC under a MSA. Retroactive financing would be provided to cover the cost of selecting the contractor. The intention is to continue the supply of that service by a private sector operator after the Cost-sharing Grant Scheme has been phased out. C. Implementation Plan 4.11 The Government of Argentina, through the UAP, would implement the Project in accordance with the PIP and the Implementation Schedule (see Annex VI) agreed with the Bank. The main elements of the PIP are the following: (a) Establishment/Strengthening of the UAP (i) (ii) (iii) (iv) (v) The SCI will select an international consulting firm to help define the organizational structure, processes, procedures, and staffing for the UAP, The Government of Argentina, through the SCI, will formally establish the UAP, confirm the position of Project Coordinator and agree with the Bank, prior to loan effectiveness, on the UAP's staffing and budget, The UAP will establish an efficient project monitoring system to oversee project implementation effectively, The UAP will contract technical assistance to help launch the Cost-sharing Grant Scheme and ensure that informnation about the scheme reaches potential beneficiaries. The UAP will establish the Special Account and adopt fund transfer procedures as agreed with the Bank. (b) Cost-sharing Grant Scheme (i) Selection of the MSC: The UAP, with the help of an international consulting firm, will initiate selection procedures for the MSC, in accordance with Bank Guidelines for the Use of Consultants. The terms of reference, the short list and the draft contract with the MSC will be submitted for Bank approval. The selection would be made on the basis of technical and economic criteria.

31 (ii) (iii) After Bank approval of the contract award, and after Loan signature, the UAP wifl sign the contract with the MSC. The contract will be for 30 months. The UAP will ensure that the MSC is promptly established in the field with the staff and facilities required to do its work. (c) Directory of Consultants and Service Providers (i) (ii) (iii) Selection of the MSC: The UAP wi initiate selection procedures for the MSC, in accordance with Bank Guidelines for the Use of Consultants. The terms of reference, the short list, and the draft contract with the MSC will be submitted for Bank approval. The selection would be made on the basis of technical and economic criteria. After Bank approval of the contract award, the UAP wi sign the contract with the MSC. The UAP wi ensure that the MSC is promptly established in the field with the staff and facilities required to do its work. (d) Monitoring of the Cost-sharing Grant Scheme (i) (ii) (iii) The UAP will approve, on a no-objection basis, a list of the cost-sharing grants reviewed and approved by the MSC during an agreed period. The UAP will have 10 days to approve the list. If the UAP does not respond within this period, the MSC will assume that the list has been approved. The UAP will inform the Bank about cases of disagreement between the UAP and the MSC on the approval of cost-sharing grants. The UAP wifl submit, for prior Bank approval, contracts between the beneficiaries of cost-sharing grants and consultants or service providers of US$50,000 or more involving individual consultants and of US$100,000 or more involving consulting firms. The MSC will ensure that contracts with consultants under the cost-sharing grant scheme follow the standard models agreed with the Bank, consistent with Bank Guidelines. The UAP wil review contracts from time to time, on an ex-post basis, to ensure that the Bank Guidelines are being followed. The UAP will assemble and send to the Bank a Semi-annual Project Implementation Reports on the Cost-sharing Grant Scheme, describing progress against targets established in the AOP. The UAP will also

32 coordinate the work of the consultants in charge of the impact assessment reviews 12, 18 and 36 months after effectiveness. Semi-annual reports that coincide with the impact assessment reviews would focus on the findings of the impact assessment review. (iv) The projected schedule of cost-sharing grants approval is as follows: by 06/30/96: 100 grants by 12/31/96: 200 grants by 06/30/97: 250 grants by 12/31/97: 350 grants (e) Siaplification of Procedures (i) (ii) (iii) The UAP, in coordination with the beneficiary agencies, will prepare and agree with the Bank, the first year AOP, and the terms of reference for the consulting work identified in the AOP. The UAP will sign an Implementation Agreement with the SDOE. The agreement will be backed by the SCI, under which UAP operates, and the Subsecretariat of Economic Programming, under which SDOE operates. The agreement will specify the following: that the SDOE will have a major role in the design and coordination of the assistance provided to the beneficiary agencies under this subcomponent; the obligation of the SDOE to follow the procedures established in the MPP, including procurement requirements; the obligation of the SDOE to maintain records and submit progress reports; and the right of the UAP and the Bank to supervise and review the work of the SDOE. The SDOE will sign similar agreements with each of the beneficiary institutions: ANA, SENASA, IASCAV, DGI, INAL, INTI. These agreements will indicate that the agencies will be responsible for the adoption of the agreed new procedures under the coordination of the SDOE. (iv) The UAP will ensure that the SDOE executes the following during 1996: (i) assembles a team to coordinate the work with the beneficiary agencies; (ii) undertakes, through consultants, a detailed diagnosis of the work and procedures of the agencies and proposes new or simplified procedures; reaches agreements with the beneficiary agencies on the adoption of new procedures; and hires consultants to elaborate new procedural manuals. During 1996, most of the consulting work will focus on detailed diagnosis of the agencies involved and the elaboration of proposals for new

33 procedures and administrative arrangements, the development of manuals and guidelines incorporating these changes. (v) The UAP, in coordination with the SDOE, will prepare the second year AOP to be agreed with the Bank. Implementation of the reforms proposed during the first year of execution of this subcomponent, training of the staff, and acquisition of equipment will take place during the second year of project execution. The targets at the end of the second year will be: (i) reduction in processing an export operation from 8 to 2 days on average; (ii) reduction in the devolution of taxes from 30 to 3 days on average; (iii) reduction in the time required to issue certificates from 4 to one day on average; and (iv) elimination of the number of certifications required. (f) Strengthening the Quality Control System (i) (ii) (iii) (iv) The UAP, in coordination with INTI, will prepare and agree with the Bank, on the first year AOP and the terms of reference for the consulting work identified in the AOP. The UAP will sign an Implementation Agreement with INTI for the execution of this subcomponent. The UAP, in coordination with INTI, will take the following actions during 1996: (i) hire a consulting firm to do a diagnosis of INTl's laboratories; (ii) based on the diagnosis, implement a training program for laboratory auditors and technicians; and (iii) invite and fund an international accreditation agency to valuate and subsequently accredit 4 of INTI's labortories The UAP in coordination with the INTI will prepare the second year AOP to be agreed with the Bank. Assistance to IRAM and accreditation of additional laboratories would take place during the second year of project implementation. (g) Strengthening Export Promotion Policy Formulation (i) (ii) The UAP, in coordination with the UCPFE, will prepare and agree with the Bank the first year AOP and terms of reference for the consulting work identified in the AOP. The UAP will enter into an Implementation Agreement with the UCPFE for execution of this subcomponent.

34 (iii) (iv) The UAP will ensure that the UCPFE assembles a qualified team to work on this subcomponent. The UAP, in coordination with the UCPFE, will hire consultants to review existing export promotion programs (at the federal and provincial level) and propose a rationalization of these activities in accordance to the objectives of the Government of Argentina in this area. (h) Strengthening Commercial Promotion Services Provided by ExportAr (i) (ii) (iii) (iv) The UAP in coordination with Fundaci6n ExportAr, will prepare and agree with the Bank the first year AOP and the terms of reference for the consulting work identified in the AOP. The UAP will enter into an Implementation Agreement with Fundaci6n ExportAr for the execution of this subcomponent. The agreement will be backed by the SCI and the Ministry of External Relations under which Fundaci6n ExportAr operates. Fundaci6n ExportAr will hire consultants to assist the participation of ExportAr (and private exporters) in two international fairs in the USA and South Africa, in The consultants would provide assistance with the participation strategy, design and construction of exhibits, running of the exhibits, and preparation of information material. The UAP, in coordination with Fundaci6n ExportAr, will prepare the second year AOP to be agreed with the Bank. This will envisage support for participation of Fundaci6n ExportAr in international fairs in D. Procurement 4.12 Procurement carried out by national agencies follows the Constitution and applicable federal laws: the Financial Management Law (Ley de Administraci6n Financiera), which supersedes the General Accounting Law (Ley de Contabilidad) and the Public Works Law (Ley de Obras Publicas). Procedures set out under this legal framework have been found to be broadly generally consistent with Bank Guidelines (January 1995) The Borrower, through the UAP, would be responsible for ensuring the use of procedures agreed with the Bank for procurement of all goods and services aimed at obtaining competitive quality and price. The UAP has experience in procurement under several large IDB and FONPLATA loans and has hired the services of a procurement specialist. The UAP would receive assistance under the project on procurement issues,

35 particularly with respect to the selection and drafting of the contract with the MSC. Furthermore, arrangements are under way for assistance of UAP staff to future Bank procurement seminars The project would finance the following: - under the Enterprise Assistance Program: consulting services, acquisition of information (including software and reference material), trips by entrepreneurs or their staff to explore export opportunities, mailing of samples, promotion materials and other miscellaneous expenses, provided they are identified in an export plan; and the MSAs to manage the grant scheme and the Directory of Consultants. - under the Institutional Strengthening Component: consulting contracts; computer equipment and software; training; seminars, and promotion and didactic material The selection and hiring of consultants under the Cost-sharing Grant and Institutional Strengthening Components would be done according to the Bank Guidelines for the Use of Consultants (August 1981). Also, the selection and hiring of the MSCs to manage the Cost-sharing Grant Scheme and the Directory of Consultants would be done according to Bank Guidelines for the Use of Consultants of August 1981, with prior Bank review of the terms of reference, short list of consultants, the letter of invitation, and the draft contract agreement. Since the Argentine authorities wish to advance the implementation of the project, part of the initial cost of the MSAs would be covered by retroactive financing The procurement of goods under the project would be limited to computer systems and software to support the technical assistance provided to six government agencies under the Institutional Strengthening Component. Given that computer hardware and software contract packages would have an estimated cost between US$40,000 and US$150,000, such packages would be procured through LIB or national or international shopping procedures following Bank procurement guidelines. LIEB among equipment manufacturers with established servicing facilities in Argentina would be used for packages valued at US$100,000 or more, and national or international shopping would be used for packages below US$100,000, up to an aggregate value of US$0.6 million. Bank standard bidding documents would be used for Limited International Bidding (LIB) Review by the Bank of Project Documentation. Prior review by the Bank of all documentation would be required for LIB contracts for computer equipment and for consulting contracts estimated to cost US$50,000 or more for individual consultants and US$100,000 or more for consulting firms. Prior review would cover about 25% of all contracts. The Cost-sharing Grant Scheme would finance a large number--between

36 - 32-1,500 and 2,000--of small consulting contracts valued below US$50,000 in most cases. To facilitate Bank review, the Bank would approve: (i) generic terms of reference for consultant's services related to exports; (ii) standard conditions for contracts; (iii) standard model of contract; and (iv) qualification matrix for the Directory of Consultants. During supervision, the Bank would review all the documentation of contracts on a sample basis. Also, there would be an Audit Program for grants carried out by an independent auditor. The audit program for the Grants would include specific opinions on the procurement procedures followed by the beneficiaries and the reasonableness of contracted prices. Table 4.1: PROClUREENT METHOD BY CATEGORY (US$ million) PROCUREMENT METHOD CATEGORY N.B.F. TOTAL ICB NCB OTHER COST Consulting Services ' Cost-sharing MSA (5.0) (5.0) Grants (27.0) (27.0) Directory MSA (0.7) (0.7) Technical Assistance (5.2) (5.2) Training (0.1) (0.1) Goods bl l (0.5) (0.5) Recurrent Admin. Costs Total Costs l (38.5) (38.5) Note: Figures in parentheses are the amounts to be financed by the Bank loan. N.B.F.- Not Bank-financed; ICB - International Comipetitive Bidding; NCB - National Competitive Bidding; a/ Selected according to Bank Guidelines for the Use of Consultants b! LIB - Limited International Bidding (US$400,000); Other - National or International Shopping (US$300,000).

37 Table 412: SUMMARY OF PROCUREMENT REVIEW PROCEDURES CATEGORY PROCEDURE PRIOR UAP PRIOR BANK REVIEW REVIEW Goods Less than USS100,000 Shopping AD N.A. US$100,000 or more LIB AD AU Consulting Services a) Individual Less than US$50,000 Contract 1/ I/ US$50,000 or more Contract All All b) Firms Less than USS100,000 Contract 1/ 1/ USS100,000 or more Contract All All Training Contract All N.A. 1/ Contracts would be based on Bank pre-approved models of TORs, contracts, and qualification matrix for eligible consultants. E. Disbursements 4.18 The expected completion date would be January 31, 1998 and the Closing Date July 31, Forecasts of expenditures and disbursements are shown in Annex VI. Allocation of Loan proceeds are shown in Table 4.3 below The UAP would monitor disbursements over the life of the project. To facilitate Project execution, a Special Account in US dollars would be established in Banco de la Naci6n Argentina. This Special Account would be managed by the UAP and have an authorized allocation of US$3.5 million. However, this allocation would be limited to an equivalent to US$2.5 million until the aggregate amount of withdrawals from the Loan Account plus the total amount of all outstanding special commitments entered into by the Bank are equal to or exceed the equivalent of US$7.5 million All disbursements against contracts for less than US$100,000 for goods, for less than US$100,000 for consultant firms, and for less than US$50,000 for individual consultants, and for all training expenditures would be on the basis of Certified Statements of Expenditures (SOEs). The documentation for SOEs would not be sent to the Bank but would be retained by the UAP and made available for inspection by Bank staff. Other disbursements would be made against standard documentation. The UAP would submit to the Bank a monthly statement of transactions of the Special Account.

38 The procedures for use of the grant funds would be as follows: First, after approving an export plan presented by the enterprise, the MSC, on behalf of the Borrower, and with the no-objection of the UAP, would sign an agreement with the enterprise specifying the consulting services that would be contracted by the firm, including terms and conditions of the contracts. The firm would send a copy of the contract signed with the consultant to the MSC. The MSC would obtain the necessary funds from the UAP to reimburse the firm for the cost of the consulting services, subject to the Bank's prior-review requirements specified in para If the contract with the consultant stipulates two or three payments, the MSC would reimburse the firm for up to half of each of the payments made to the consultant. The MSC would submit to the UAP monthly reports on the use of these funds. All disbursement procedures would be specified in the Bank's Disbursement Letter. Table 4.3: DISBURSEMENT OF LOAN PROCEEDS (in US$ millions) Category Amount in USS % of expenditures I million to be financed Consultants' Services Cost-sharing grants % Institutional Strengthening % Management Services Agreement Cost-sharing MSA % Directory MSA % Goods % procured locally 100% foreign Training % Total Given the interest of the Government in an early implementation of the project, retroactive financing for expenditures incurred after July 1, 1995 (but not earlier than 12 months before loan signing) in an amount not to exceed US$2.0 million (5 % of the Loan amount) is recommended The time required to commit and disburse the loan would depend on the demand from the enterprises. The key to implementation success and timely disbursement would depend on the effectiveness of the management arrangements for the cost-sharing grant component and the institutional capacity to develop and implement the AOPs by the institutions involved. These disbursement arrangements would be incorporated into the

39 Manuals of Policies and Procedures that would guide the implementation of the project. F. Project Monitoring and Supervision 4.24 Accounting. The UAP, the MSC administering the Cost-sharing Grant Scheme, and the MSC administering the Directory of Consultants would maintain separate Project records and accounts, including for the Special Account, adequate to reflect the operations and financial situation of the Project, in accordance with accounting principles consistently applied and in a form satisfactory to the Bank Auditing. These accounts would be audited annually by independent auditors acceptable to the Bank. Audit reports on project accounts and the MSCs' financial statements would be submitted within six months after the end of the Government's fiscal year. They would include opinions inter alia as to the reliability of SOEs to support claims for disbursements and to properly reflect the expenditures eligible for financing under the Loan Agreement Supervision and Reporting. The UAP would be responsible for the supervision of the implementation of all Project components; for reporting to the Bank; and for the disbursement arrangements. The UAP would assemble and send to the Bank the Semi- Annual Project Implementation Report, prepared with the collaboration of each implementing agency. The Implementation Reports would describe progress against targets established in the AOP and give particular attention to indicators regarding the results of the Cost-sharing Grant Scheme, the simplification of export procedures, and the rationalization of export promotion programs. The Implementation Reports would include calculations of agreed Key Indicators of Project Perfornance. The implementation schedule for the project is presented in Annex V Impact Assessment. The effectiveness of the Cost-sharing Grant Scheme would be subject to reviews at specific stages of implementation (see para. 3.9). The review schedule for the scheme would be as follows: A Mid-Term Review would be carried out 12 months after effectiveness or after half of the cost-sharing grant funds have been disbursed, whichever comes first. At this early stage, it would be difficult to assess the effect of the scheme in increasing productivity, product quality, or in generating additional exports; therefore, the assessment would focus on the effectiveness of the management arrangements. A firn level survey would be carried out as part of this assessment to confirm that the grant funds are being used for the purposes intended and to receive feedback from the firms concerning the operation of the scheme. The detailed performance indicators and the weight that each of them would have in the assessment would be agreed beforehand with the Bank. Based

40 on the results of this review, the Bank would consider initiating the preparation of a follow-up operation, as indicated in para Another review would be carried out 18 months after effectiveness or when twothirds of the funds have been disbursed, whichever comes first. The evaluation of the scheme at this stage would focus on the effectiveness of the management arrangements and evidence of behavioral changes in the firms that have received the assistance as compared to a group of similar firms that have not been assisted by the program. Indices used to measure impact at the behavioral level would include the adoption of measures to improve competitiveness such as costreduction programs, hiring specialized staff, establishing quality control procedures, improving product quality, and adopting a formal export programming process. The detailed performance indicators and the weight that each of them would have in the assessment would be agreed beforehand with the Bank. A full impact assessment would be carried out three years after effectiveness. At this stage, the main indicators of the success of the cost-sharing grant scheme would be in terms of competitive improvements, improvements in product quality, and export growth. The assessment would be conducted based on a survey of firms including assisted firms and a control group of similar fimns. As for the previous assessments, the detailed performance indicators and the weight that each of them would have in the full impact assessment would be agreed beforehand with the Bank. (i) (ii) (iii) Competitiveness Improvements: the survey would compare competitiveness indicators of assisted firms with those of a control group, including productivity indicators (such as output per unit of labor); market share; and production costs. Other indicators of would include the adoption of new management processes, new price setting methods, new distribution channels, launch of new products, and use of consultants as a method of solving problems. Quality Improvements: the survey would compare secondary indicators of quality improvement among assisted firms and the control group, such as the number of assisted firms that have obtained quality certifications, including IS09000, compared to the control group. Increased Exports: this would be measured using two indicators: - the achievement of an average annual export performance equivalent to a multiple of the cost of the grants paid to the firms (dollar of additional exports/dollar of grants provided). The grant multiplier

41 should be no less than seven per year, allowing at least a year and a half after the grant has been awarded; and - a larger average increase in exports among firms in the program as compared to the control group The MSC would monitor the productivity and product quality improvements and the export performance of assisted firms every six months after approval of a grant for a three-year period. However, the impact assessment based on sample surveys would be carried out by independent consultants The Bank would hold a project launch workshop in Buenos Aires shortly after loan signing to review start-up actions in order to avoid delays. Bank staff would supervise project implementation through receipt and review of the AOP, and monitoring of Semi-Annual Implementation Reports against such Plans, including regular supervision missions to Argentina. Inputs needed to supervise the Project are estimated at about 12 staff-weeks per year and to require the involvement of Bank staff specialists in trade and institutional development, as well as outside expertise in export promotion. V. PROJECT JUSTIFICATION A. Project Benefits 5.1 The main benefit of the project would be greater international competitiveness of Argentine finns that would lead to an accelerated and broadened export response. Important benefits of the Cost-sharing Grant Scheme would be product quality improvements through the adoption of internationally recognized quality standards, and productivity improvements through the adoption of intemational best practices in production, management, and marketing know-how. Another benefit would be the development of a more structured approach to exports by Argentine frins, which would allow them to move up in the value chain. In the longer term, however, the project would be evaluated in terms of the incremental benefits it would generate in the form of additional exports. Although the program would assist a limited number of firms, it would have a spillover effect on other firms through indirect exporter links and demonstration effects. The Institutional Strengthening Component would help create a better business climate for exporters by reducing remaining institutional constraints to exports and improving the efficiency of govenmment agencies involved in the export process. 5.2 A scheme of direct and indirect support to exporters can be seen as an insurance for policy reformers that they will be able to continue in the same direction. A robust export response would reduce the demands for policy reversals and special protection--

42 particularly as local demand begins to slow down--and thus help support the reform agenda. Also, in the face of rising international interest rates, a strong export performance would signal a greater efficiency of Argentina's economy and help reduce the country risk premium. 5.3 The proposed Cost-sharing Grant Scheme does not contravene the Uruguay Round's agreement on Subsidies and Countervailing Measures. First, the proposed scheme parallels the infonnation provided to potential exporters by most countries as well as many states, provinces and even municipalities. These foreign commercial services are widespread and are not subject to GATT intervention. Second, given the one-time nature of the grants for any enterprise, it would be unlikely that they would be subject to countervailing duty action. Third, restrictions on export subsidies will not apply to Argentina until eight years from the date of entry into force of the WTO, and the project and its possible extensions will cover a maximum of four or five years from the beginning of Finally, the Uruguay Round Agreement's "stand-still" provision, which stipulates that export subsidies may not be increased, uses 1986 as its base, a time when Argentina had in place an extensive program of export subsidies. These subsidies have been largely dismantled; hence, the minor sums involved in the grant program would not violate the terms of this agreement. B. Project Risks 5.4 The main risk for this operation is that the administrative arrangements could fail and that subsidies would be granted to anyone who asks, independently of whether they support feasible export plans. This risk is being addressed by giving the management of the Cost-sharing Grant Scheme to a private sector contractor with knowledge of the export business and by basing part of the contractor's remuneration on performance indicators that measure results other than the number of grants awarded. This risk is being addressed also by supporting only the first stage of the government's program under this project and linking Bank support for subsequent stages to a positive review of the administrative arrangements. Other risks are that firms may not be willing to pay for export-related consulting services, and that the grants could fund activities that firms might have undertaken anyway. The first risk could come about if there is a resurgence of local consumption and firms that are not export-oriented become less interested in finding export opportunities. Although this risk is outside the control of the project, it is reduced by the size of the first stage of the Cost-sharing Grant Scheme, which would cover only a fraction of the expected demand. This risk is reduced also by the evidence provided by the enterprise survey, which indicates a willingness to pay for part of the costs; by amply publicizing the program; and by establishing an efficient delivery mechanism that would provide access to information on services available worldwide to a large number of firms. The second risk would be mitigated by requiring firms to provide significant cost-sharing, by making payments on a reimbursement basis, and by adopting strict evaluation and monitoring procedures. Successful project implementation

43 will depend on continued borrower ownership. Borrower ownership is anticipated given the heavy involvement of the authorities in project design and the widely shared view of the priority of increasing exports. 5.5 A risk to the success of the institutional strengthening component would be resistance of the agencies involved to the proposed reforms, which involve changes in attitudes, procedures, and staffing. This risk is reduced by giving the management of the most sensitive reforms to SDOE, which has a track record in implementing sweeping deregulations at different levels of government. Also, the implementation plan contemplates the organization of consensus-building seminars with the agencies involved to discuss proposed organizational and staffing changes. Finally, there is a risk that policy reversals could produce a more protected trade regime, in which case there would be little justification for an exporter support project. As part of the Mid-Term Review, the Bank would assess the Government's performance in maintaining an open trade regime. A substantial departure from this objective would reduce the justification for a fouow-up operation. VI. AGREEM1ENTS REACHED AND RECOMMENDATION 6.1 Agreements. During negotiations, agreements were reached on the following: (a) the Project objectives and description (paras. 3.4 to 3.14); (b) the Project costs and financing plan (para. 3.15); (c) that the UAP in the Ministry of Economy would continue to be adequately staffed, as agreed with the Bank, and otherwise supported in the implementation of its responsibility under the project (para. 4.6); (d) that the UAP would sign implementation agreements with the SDOE and the agencies participating in institutional strengthening programs (paras. 4.2 and 4.3); (e) that the national government would open and maintain a Special Account in US dollars to be managed by the UAP (para. 4.19); (f) that the project accounts would be audited with audit arrangements acceptable to the Bank (para. 4.25); (g) that the project would be subject to periodic evaluations under terms of reference satisfactoiy to the Bank (paras and 4.27); and

44 (h) the reporting arrangements, including the obligation of the UAP to prepare Annual Operating Plans and Semi-Annual Implementation Reports to be adhered to and sent to the Bank for approval (para. 4.29). Condition of Signature of the Loan Agreement: (i) the AOP and terms of reference for the Institutional Strengthening subcomponent of the UCPFE agreed with the Bank (para. 4.5). Conditions of Loan Effectiveness: (j) the formal establishment of the UAP and the agreement between the Borrower and the Bank on the staffing and budget of the UAP (para. 4.6); and (k) signing of a contract with an MSC for the administration of the Cost-sharing Grant Scheme, under terms and conditions satisfactory to the Bank (para. 4.7). Events of Suspension of Loan Disbursements: (1) that the Manual of Policies and Procedures (MPP), or any provision thereof, shall have been amended, suspended, abrogated, repealed or waived without prior agreement of the Bank (para. 4.4); and (m) that the MSC for the administration of the Cost-sharing Grant Scheme, shall have failed to perform any of its obligations or undertakings under the respective MSA and such failure shall not have been remedied by said MSC, by the Borrower, or by any agency of the Borrower or other party designated by the Borrower (para. 4.9). 6.2 Recommendation. With the above assurances and conditions, the proposed project would be suitable for a Bank loan of US$38.5 million equivalent to be repaid over a period of 15 years, including a grace period of five years, at the Bank's standard variable interest rate and fees. Retroactive financing for expenditures incurred after July 1, 1995 (but not earlier than 12 months before loan signing) in an amount not to exceed US$2.0 million (5 % of the Loan amount) is recommended.

45 - 41- ANNEX I TRADE STATISTICS Table 1: IMPORTS. EXPORTS AND TRADE BALANCE ( ) (USS Mil.) Year Exports Imports Trade Balance Source: Instituto Nacional de Estadistica y Censos (INDEC). Table 2: VOLUME OF TRADE WITH MERCOSUR AND CHILE ( ) Export to Import from Export to Import from Year Mercosur Mercosur Chile Chile (US$ MUl.) (USS Mil.) (USS Mil.) (USS Mil.) ill Source: Instituto Nacional de Estadfstica y Censos (INDEC).

46 ANNEXI Table 3: EVOLUTION OF INTERNATIONAL TRADE ( ) Year (USS Mil.) % GDP Source: Secretaria de Programaci6n Econ6mnica del MEOSP; Insatuto Nacional de Estadistica y Censos (INDEC) and Estadisticas Financieras Internacionales (FMI). Table 4: OPENNESS OF THE ECONOMY COUNTRY * % GDP Korea 50.2 Chile 46.6 Australia 31.1 Spain 30.4 Argentina 13.3 Brazil 13.0 I (Exports + Imports)/GDP. * For Argentina the information corresponds to 1994, for the rest of the countries to 1993.

47 ANNEX I Table 5: MAIN EXPORTS Products % of Total Exports Fuel 10.3 Oils 9.7 Residual Food Products 8.5 Cereals 8.4 Seeds and Fruits 6.0 Meat 5.8 Transport Materials 5.7 Machinery and Electrical Equipment 5.4 Metals and Manufactures 5.0 Skins and Leather 4.8 Sub Total 69.8 Other Products 30.2 TOTAL Source: Instituto Nacional de Estadistica y Censos (INDEC).

48 ANNEX I Table 6: MAIN EXPORTS BY DESTINATION ( ) Destination Share in Total Export Value Brazil USA Netherlands Italy Germany Subtotal Others TOTAL Source: Instituto Nacional de Estadistica y Censos (INDEC).

49 ANNEX H SELECTION PROCEDURE FOR MANAGEMENT SERVICE CONTRACTOR MSC) I. Selection Procedure Step 1: Invitation of Esxpression of Interest The Ministry advertises in the international media and sends out letters to a targeted group of potential candidates. At this stage only the broad details of the project and the scope (TORs) of the tasks involved are outlined. Step 2: Preparation of a Short-list of MSCs From the list of interested MSCs, a short list of technically capable parties is prepared. This list will be based on a set of eligibility criteria such as the firm's experience in undertaking similar projects, quality of personnel available for this project and the proposed methodology for achieving the project objectives. Step 3: Request for the Base Management Services Agreement (MSA) The short-listed MSCs will be asked to prepare a base (prototype) MSA to achieve project objectives using the guidelines provided by the Ministry. In addition, a brief write up on the proposed strategy for achieving the project objectives will be required from the short-listed candidates. The key element of this base MSA will be a performance evaluation system which will be used by the Ministry as a basis for the incentive scheme. At the minimum, this evaluation system will have to specify the criteria for evaluation, their relative importance (criteria weights), targets (criteria values). Step 4: Finalization of the Final Management Service Agreement The Ministry (with the assistance of the consultants) will decide on the final MSA based on the suggestions contained in the base MSAs of the short-listed candidates. The ministry may also discuss the draft of the proposed MSA with the short-listed MSCs before finalizing it.

50 ANNEX 1I Step 5: *nvitation of Bids for Award of the Contract The Ministry will invite the short-listed parties to make offers containing two separate parts: Financial: Management: Specifying the (minimum) management fee acceptable to them to achieve the project objectives as imbedded in the performance evaluation and accountability system of the MSA. Outlining the exact strategy to achieve the project objectives. Step 6: Selection of Management Service Contractor First, the Ministry will decide which "Management" proposals are acceptable. There will be no ranking of this list of proposals. Second, the "lowest" financial bid will be accepted from this list of finalists. II. Rationale for the Proposed Selection Procedure 1. The process will not only be transparent but will also be seen to be transparent: It is important that a project of this size be widely publicized to ensure that the best possible management service contractors (MSCs) compete for the contract. 2. The process will ensure access to the widest possible range of inputs in the design and implementation of the Project: By involving the leading MSCs in the design of the MSA, the Ministry will be assured of having considered all possible ideas from competent parties. These ideas are likely to be more practical and realistic as they would come from MSCs who have to implement the project and not merely design it. 3. Simple criteria for the final selection will prevent any controversy: The selection of the MSC from the list of finalist will be based on a single number (the minimum amount of money acceptable to execute the proposed project and be held accountable to the embedded performance evaluation system). 4. The embedded performance evaluation system in the MSA will ensure high degree of accountability for the contractor: Every aspect of performance evaluation would be quantified and decided in conjunction (and consultation) with the MSCs.

51 -47- ANNEX..I m. Brief Description of the Proposed Performance Evaluation System for the Management Service Agreement (MSA) 1. The proposed performance evaluation system for the MSA will consist of the following four parts: Part 1: Criterion Selection Part 2: Criterion Weight Selection Part 3: Criterion Value Selection Part 4: Decision on the Scoring System: Calculation of Composite Score. 2. First three parts are designed at the beginning of the year and the last part is executed at the end of the year. Part 1: Selection of Performance Criteria In this part, the criteria for evaluating performance of the MSA are specified. In order to select an appropriate set of criteria, one needs to ensure that they are "fair" to the MSC and "fair" to the Government (country). Part 2: Criterion Weight Selection Whenever there is more than one indicator, we must decide what are the relative priorities so the MSC can allocate its time more effectively in achieving those priorities. Part 3: Criterion Value Selection The third part in the performance evaluation system relates to criteria value selection, i.e., the level of performance expected with respect to different indicators. One way to do so is to have a 5-point scale, where: I = Excellent 2 = Very Good 3 = Good 4 = Fair 5 = Poor

52 ANNEX Part 4: Performance Evaluation at the End of the Year The fourth and the final step is taken at the end of the year, when we look at the achievements of the MSC and compare them with the criteria values and determine the composite score--reflecting overll performance.

53 ANNEX U SUMMARY OF TERMS OF REFERENCE MANAGEMENT SERVICE CONTRACTOR (MSC) (COST-SHARING GRANT SCHEME) The draft terms of reference for the Management Service Contractor in charge of the Cost-sharing Grant Scheme are in the Project File. The main elements of the terms of reference are the following: 1. Description of the Program 1.1 Basis of the Program 1.2 Components of the Program 1.3 Description of the Enterprise Assistance Program a) Objectives b) Description c) Steps in the Assistance to the Enterprise d) Cofinancing modalities e) Eligibility Criteria for the Enterprises f) Evaluation of Impact g) Strategy of Implementation h) Maximum Size of Grants 2. Organizational Context and Relations 2.1 Organizational Context 2.2 Functional Relations Description of the Principal Processes Characteristics of the Principal Processes Subprocesses 3. Functions and Responsibilities of the MSC 3.1 Functions of the MSC 3.2 Responsibilities of the MSC 4. Minimum Technical Requirements of the MSC 4.1 Enterprise Assistance Capacity Geographic Coverage

54 -50 - ANnEX Information Infrastructure Staff Productivity Management Information System Administrative Support Data Processing Communications Organizational Structure Human Resources General Manager Account Executives 4.2 Proposed Work Plan 4.3 Implementation Schedule Sections 1 and 2 reflect the design of the project as described in the SAR. The subsequent sections are summarized in this Annex. 3. Functions and Responsibilities of the Management Service Contractor (MSC) 3.1 Functions of the MSC * Promote the Program among the target group of SMEs in accordance with its business and marketing strategy, but following the basic guidelines established by the UAP. * Collaborate with the firms's management in the diagnosis of the firm's export opportunities and needs for technical assistance and associated commercial promotion. If this function scapes the capacities or possibilities of the MSC, the Program contemplates the possibility of subcontracting the services of a consultant with a subsidy of 80% of the cost up to a maximum of US$2,500. * Assist the firm to access the Directory of Consultants and orient it in the selection of the service providers (consultants, information brokers, etc.) to request price estimates. * Assist the firm in the forrnulation and presentation of its Export Plan. Evaluate the firm's Export Plan and propose its approval or rejection to the UAP. * Assist the firmn in hiring the service providers and facilitate the relations between the firm and the service providers until the services have been provided * Assist the firm to prepare the Closing Document (schedule of actions/targets to be met by the firmn in order to export. Will be an instrument to evaluate the effectiveness of the Program in the medium term).

55 ANNEX II 3.2 Responsibilities of the MSC * Provide adequate accessibility to clients, with emphasis on continuous improvement. * Provided the information requested by the firms about the scope and characteristics of the Program. * Facilitate to the firms that so request models of Export Plans. * Evaluate the firm's Export Plan, and inform its recommendation of approval or disapproval to the UAP. If the UAP has not reacted within a five days period, the MSC will assume that the UAP has no objection to its recommendation. * Provide models of the standard contracts and terms of reference for the use of consultants to the firms whose Export Plans have been approved by the UAP. * Provide to the firms models of the Letter of Commitment to Provide Information (to the MSC and the UAP) and of the Closing Document. * Reimburse the cofinanced funds to the firms on behalf of the UAP against presentation of the following documents: - payment receipts on completion of services by the service provider. - Closing Document - Letter of Commitment to Provide Information * Submit monthly reports with the information necessary to calculate the MSC's remuneration: - Amount of Grants provided (as reimbursements made) Minimum number of Grants approved in the first 12 months: 300; minimum number of grants approved after 24 months: Regional diversification - Diversification according to previous export experience - Diversification according to export markets * Submit quarterly reports on the advances of the Program. 4. Minimum Technical Requirements of the MSC 4.1 Enterprise Assistance Capability The MSC should have all the elements and conditions needed to provide adequate assistance to the enterprises, including: - Geographic coverage through a net of offices. - Information infrastructure, including communication between offices. - Organizational Structure - Human resources

56 ANNEX I Geographic Coverture - The MSC should open at least 4 offices in different provinces, each of them headed by an Account Executive. In provinces not covered by the regional offices, the MSC should make arrangements for the provision of the following services: - Reception of expressions of interest from the firms. - Distribution of basic documents about the Program. - Direct communication between the entrepreneur and an Account Executive when needed Information and Data Processing Capability - The MSC should provide the technological infrastructure to support the activities of the MSC in the following areas: - Office technology and equipment: the MSC will provide its staff with the adequate instruments to promote its productivity such as word processing, calculators, etc. - Management Information System: the MSC will provide the appropriate software for the analysis and presentation of information to support management level decisions. - Administrative Support: The MSC will have the application tools (software) to guarantee efficiency in the following functional areas: accounting financial analysis human resources management project evaluation marketing/client administration - Data Processing Capability: The MSC will necessary equipment to process information and run the above applications. - Communications technology: The MSC will provide the hardware and software to: link its network of offices, to access the information of the Directory of Service Suppliers, and link electronically with the UAP (the costs of this linkage would be shared with the UAP) Organizational Structure The MSC should describe the proposed organizational structure to carry out the above described functions, including:

57 ANNEX H - Initial and projected organigram of the MSC for the duration of the Program. - Definition and description of the functional areas specifying objectives, allocated resources, and activities in each of them Human Resources The MSC should present a description of the staff required to carry out each of the activities necessary to carry out the Program expressed in men/months. The MSC should describe the profile of the staff it would assign to the Program indicating the following: Manager of the MSC: - Academic credentials in relevant areas - Professional experience in the formation and management of working teams made of highly qualified professionals. - Professional experience in the area of assistance to SMEs. - Additional experience in the following areas would be considered valuable: Specific experience in the area of exports Specific experience in the area of technical assistance to SMEs. Specific experience in the area of export promotion. Knowledge of languages. Account Executives: - Academic credentials in areas related to the types of services required by potential exporters. - Professional experience in the elaboration and evaluation of projects. - Experience in enterprise management - Experience in the area of exports - Experience in consulting services in the areas of commercial promotion and technical assistance - Additional experience in the following areas would be considered valuable: Academic experience in business administration, trade, export projects. Work experience in international corporations Knowledge of languages. 4.3 Proposed Work Plan The MSC should carry out the activities described in the Terms of Reference following a Work Plan agreed with the UAP. This Work Plan

58 ANNEX II will detail the approach, the methodology and the resources that the MSC will use to meet the objectives of the Program. 4.4 Proposed Implementation Schedule The MSC should be ready to initiate operations in Buenos Aires no later than 40 working days after the signature of the contract. Attention offices in Cordoba, Rosario and Mendoza (in that order) should be established every two months.

59 ANNEX m INSTMTTIONAL STRENGTHENING COMPONENT A. Summary of Institutional Capacity Analysis' 1. The main objective of the Institutional Strengthening Component of the Enterprise Export Development Project is to strengthen the institutional capability of the agencies directly involved in the export process. This strengthening would involve the simplification of export procedures and the reduction of processing time for exports. 2. The institutions that have been identified as having critical roles in the export process are the following: Customs Administration (ANA), the Tax Administration (DGI), the National Animal Health Service (SENASA), the Argentine Institute of Vegetal Health and Quality (IASCAV), the National Institute of Industrial Technology (INTI), the Superintendency of Borders (SF), and the National Institute of Food (INAL). Other agencies involved in policy formulation such as the Unidad Coordinadora de Fomento a las Exportaciones (UCPFE) and of promotion such as Fundaci6n ExportAr, also have important roles in the types of assistance provided to exporters. 3. The Institutional Development Analysis and Development System (ICADS) methodology has been applied to identify the agencies' institutional capacity gaps (ICGs) as the basis for the design of institutional strengthening programs involving technical assistance, training and the introduction of computerized systems to improve their efficiency. The ICADS methodology consists of a number of systematic steps to identify the ICGs, starting from the identification of the tasks and resources necessary to achieve the objectives of the project; comparing them with the actual capabilities of the institutions (ICs). The differences are the institutional capacity gaps (ICGs), task by task. The ICGs are the result of five types of causes: a) ICGs resulting from the rules of the game in an ample sense (laws, norms, and regulations); b) ICGs resulting from the inter-institutional relationships among the agencies involved; c) ICGs resulting from the internal organization and the distribution of functions within the institutions; d) ICGs resulting from personnel policies and remuneration systems; and e) ICGs resulting from the skills at all levels of management and staff involved, including the private sector. 1. The Work Document is part of the Project Files.

60 ANNEX mi B. Summary of Identified Institutional Capacity Gaps 4. The ICADS Working Document (WD), in the Project Files, includes a complete listing of the identified ICGs. This Annex presents some of the most important ICGs. The references in parenthesis corresponds to the sections and annexes in the Working Document. a) ICGs resulting from rules of the game 5. The Argentine legislation contains the figure of "custom brokers" as an obligatory agent to mediate in the relationships between ANA and the exporters. This is a monopolistic relationship that generates an additional layer of intervention with added costs and processing time and that provides the opportunity for rent seeking. (see WD. El: D1.05 and para. 19). 6. Some export products are subject to reference prices established by different agencies (such as the Secretary of Agriculture for agricultural products) to calculate the value of exports and the tax reimbursements of ANA and DGI. The norms guiding the determination of the reference prices and the calculation of the reimbursements are unclear and some times contradictory, which generates uncertainty among exporters about the profit margin of their exports (see WD. El: D1.03 and para. 19). 7. ANA maintains a system of "extraordinary services" that allows custom agents in charge of inspections to work outside the normal working hours. However, these services are regulated by a collective contract that reduces the flexibility of ANA to provide services during hours that are more convenient for the exporters (see WD. El: D1.02 and para. 19). 8. The information requirements and procedures to obtain certificates from control agencies (SENASA, INTI) are unclear or not widely known by the exporters which cause delays in the obtention of the certificates. (see WD. E2: D%.02, Annex C No. 3,4, and 8 and Annex E, No. 5). b) ICGs resulting from interinstitutional relationships 9. Custom brokers are the ones that submit applications for tax reimbursements to ANA. They often make calculation errors on the shipment permits and the reimbursement amounts that delay the payment of the reimbursements (see WD. El: D2.01; Annex C, No. 10 to 13 and Annex D, No. 1 and 2). 10. Under the Temporary Admission Regime, the exporter provides a guarantee for the unpaid duties on imported inputs. This guarantee is liberated by ANA once the Secretary of Commerce and Investments issues a certificate based on a ruling by [NII

61 ANNEX m certifying the technical relationships between imported inputs and the exported output. INTI often lacks the technical expertise for issuing this certification and the Secretary of Commerce and Investment issues a temporary certificate which is used by ANA to liberate the guarantee, bypassing INTI. This increases the risk of tax evasion. (see WD. El: D2.02, Annex Al No. 14 and Annex C No. 10 to 13). c) ICGs resulting from the internal organization 11. The issuing of fitosanitary certificates for exports of animal origin by SENASA involves a process in which four departments participate before the definitive certificate is issued. Often offices in widely dispersed areas are involved requiring different documentation. This complex process produces delays. (see WD. El: D3.01 and Annex C No. 1 and 2). 12. The sanitary control agencies: SENASA, IASCAV and INAL lack adequate administrative procedures and the necessary equipment to carry out verifications in the frontier posts, which results in bottlenecks and delays that affect exporters of perishable products. (see WD. El: D3.01 and D3.02, Annex C, No. 4 and 20 and Annex E, No. 1 and 4). 13. Many of the institutions (SENASA, INTI, IASCAV, ANA) lack adequate information and communication systems and technical software to be able to process quickly the issuing of sanitary certifications, shipment permits and tax reimbursements. (see WD. El: D3.04, Annex E, No. 7,6,12,2,3,10 and 11). 14. Tax reimbursements to exporters by ANA and DGI are delayed by problems in the internal processes involved. In ANA the processes of verification and control (through Commission 75 and Commission 332) may take several months before payments are authorized. (see WD. El: D3.05, Annex C, No. 10 to 13). 15. Some control units within ANA lack personnel (guards, verificators, custom police) and transport equipment to carry out the verifications efficiently. (see WD. El: D3.03, Annex C, No. 10 to 13 and Annex E, No. 3). 16. The Superintendency of Frontiers lack adequate infrastructure and procedures and its working hours are incompatible with those of ANA, which results in delays in the passage of products through the frontier posts. (see WD. El: D3.07, Annex C, No. 21). 17. The IASCAV lacks enough personnel to carry out the habilitation procedures, checking and auditing of private laboratories able to issue fitosanitary certificates. (see WD. El, D3.08 and Annex C, No. 21).

62 -58- ANNEX m 18. The UCPFE lacks the procedures and systems to carry out the tasks of rationalizing the export promotion programs (see WD. D3.09 and Annex C, No. 16 and 17). d) ICGs resulting from personnel and remuneration policies 19. Restrictions on the level of remuneration of public employees affect the ability of all the agencies analyzed to hire and retain high quality staff. There are normative restrictions to hiring of new staff and contracts have to be approved by exceptional decrees. 20. Low salaries of inspectors and guards in some agencies (ANA, IASCAV) pose problems of moral hazard when exporters have to provide transportation, meals and other additional payments to accelerate the provision of services. (see WD. El: D4.01, para 19 and Annex C, No. 10 to 13). e) ICGs resulting from skills of management and staff 21. INTI lacks the technical expertise to issue input-output certificates for many industrial products (foods, plastics, metal products, cars, paper, chemicals and electronic products). (see WD. E2: D5.01, Annex C, No. 5 and 9). 22. INTl and IRAM lack expertise in international quality control standards. (see WD. E2: D5.04, Annex C No. 19 and Annex D, No. 4 and 5). C. Institutional Strengthening Component 23. An institutional strengthening program to overcome the identified ICGs would involve technical assistance, training and the adoption of computerized systems at an estimated cost of about US$11.4 million, to be implemented over a four year period. The proposed project would finance the first two years of such program at an estimated cost of US$8.4 million. Some of the ICGs identified would be addressed by other ongoing Bank projects. The simplification of procedures for the devolution of the VAT to exporters by the General Tax Directorate (DGI) would be supported by an ongoing Bank project: Tax Administration II (Loan 3460-AR) and training of commercial banks in state of the art trade financing techniques would be provided by the ongoing Capital Markets Technical Assistance Project (Loan 3710-AR). The following paragraphs present the identified consulting, training and computerization needs, whether they would be coverd by this proposed project, by a follow-up project or by other ongoing Bank projects. 24. A management service contractor (MSC) would manage the project's cost-sharing grant component, under a management service agreement (MSA). Conceptually, the MSA is part of the institutional strengthening component, since this administrative