nm STRICTLY CONFIDENTIAL 1 NM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Thursday, June 3, 1993 Washington, D.C. The meeting of the Executive Directors was convened at 10:36 a.m. in the Board Room, 1818 H Street, N.W., Washington, D.C., Mr. Lewis T. Preston, Chairman, presiding. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 run STRICTLY CONFIDENTIAL 2 C O N T E N T S ITEM PAGE 1 Proposed Loan - Argentina (Road Maintenance and Rehabilitation Sector Project) 3 Mr. Carneiro s~ Mr. Castellanos 9 Mr. Al-Assaf 26 -- MN.LER REPORTING CO., INC. ,01 C Sucet, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL nm 3 P R O C E E D I N G S MR. PRESTON: Item one is a proposed loan in the amount of $340 million to the Argentine Republic for a Road Maintenance and Rehabilitation Sector Project Mr. Auzmendi of the LAC Region will introduce the proposal. Mr. Auzmendi. MR. AUZMENDI: Thank you, Mr. Chairman. The project is Argentina Road Maintenance and Rehabilitation Sector Project. Ladies and gentlemen: A key objective of the current Argentine Government is to increase public sector efficiency. This is being achieved through a major macro- economic and state reform that has both reduced the size of the public sector and promoted private participation in the provision of services formerly provided by the government. The reform of the road sector is a key part of this overall strategy. Road transport in Argentina represents the dominant mode of internal transport. However, economic and fiscal difficulties experienced by Argentina in the recent past and the lack of adequate or planned maintenance led to rapid deterioration of the road system. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL run 4 The government, aware of the need to arrest further system damage, as well as to curb economic losses for the country, has decided to give the highest priority to road maintenance and has launched an ambitious road sector reform program. The proposed project will support this reform program. The government policy in the road subsector is founded on four building blocks. First is increased private sector participation. This is being brought about by letting concession contracts for road maintenance to private firms and contracting virtually all maintenance for the remaining national road network to private contractors. Second is decentralization through strengthening th capabilities of five regional offices of the National Directorate of Roads and through delegation of responsi- bilities to provincial highway authorities. Third is delegation to the provinces of engineering design, construction supervision and maintenance management compatible with local capacity. This would be accompanied by appropriate technical assistance and training in the province to strengthen incrementally local capacity. Fourth and last is modernizing and streamlining the MILLER REPORTING CO., INC. ,07 C Street, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL nm 5 National Highway Department itself to carry out its new role in a decentralized setting. One additional and vital aspect of this project is that it will help the Argentine Government to enforce further environmental standards for road construction and maintenance The proposed project is consistent with the Bank's overall government strategy of promoting efficiency in the public sector and reducing the fiscal deficit, which the Bank actively supports. We believe that this project will be a key element in advancing this strategy and is worthy of your support. Thank you very much. MR. PRESTON: Thank you, Mr. Auzmendi. Are there any comments or questions? Mr. Carneiro. MR. CARNEIRO: Thank you, Mr. Chairman. This is a very large loan of $340 million, larger than the total volume of lending to the highway sector so far, and the equivalent to 34 percent of the high case annual lending program. We also believe that this project is very important and addresses a very critical bottleneck, which if left unchanged, may seriously affect the performance of important MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL run 6 segments of the economy. The Bank's contribution to the project is with no doubt important, not only financially but also by strengthen- ing the institutional capacity of the goverrunent in the management of the sector, the sector, which by the way in the recent past has experienced major changes in the right direction. While acknowledging the importance of this project and the importance for the Bank to be part of it, the type, amount and phasing of our financial contribution still raises some doubts. They stem mainly from both the way in which the project financing package has been structured and, more general, considerations on the macroeconomic outlook of the country. I will refer to these three points. First, on the nature of the costs financed: The major project component, civil works, which accounts for around 91 percent of the total loan amount, includes a significant share of full recurrent costs, around 30 percent, a small share of the investment costs, around 8 percent, and the large share of periodic maintenance, 55 percent, whose split between investments and recurrent type of costs is very unclear. MILLER REPORTING CO., INC. )07 C Strett, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL run 7 The policy letter attached to the report mentioned that $14 million will be allocated for routine maintenance for non-concession network roads, and we deem it extremely important. It is our strong recommendation that these funds will most, if not entirely, be devoted to this project. This will not only show commitment of the goverrunent to the project, but would also ensure that routine maintenance will be sustainable after our loan has been fully disbursed. If this is the case, then we can focus on periodic maintenance costs, which, although over a cycle of several years, will have to be sustained through government budget. We will have to be reassured that, once the loan is fully disbursed, the revenue generation effort in place will be adequate to cover also these costs. Second, on relative shares in the project: Of the total financing of $416 million, if we deduct what will go for taxes, which constitutes ultimately a transfer within the goverrunent, the government contribution to the project appears to be lower than the one of the World Bank. Furthermore, if we look at the total national road sector program over the period 1993-97, as it is stated on page 9, the share of external financing is as high as 23 percent, of which the Bank's share is 17 percent. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, O.C. 20002 STRICTLY CONFIDENTIAL nm 8 These figures do entail a significant external budget support to the national road sector, and half covers yet commercial rates not only for investments, which in principle is logical, but also insubstantial in this case for recurrent expenditure. This fact may raise a couple of questions or a couple of points, and I will concentrate on one. What are the domestic sources of funds available to support this project on a larger scale instead of resorting to external debt whose servicing is already 40 percent of exports and will not fall below 30 percent until the 2000? And second, how does this project fit into Argen- tina's overall budgetary framework? Is it in line and current with the target to achieve a primary budget surplus in the order of 2.5 percent of GDP as referred in the country assistance strategy? Finally, on disbursement pattern: This is a relatively quick-disbursing loan, almost 90 percent over three years. And, it comes at a time when the Argentinean economy is facing large inflows of capital, $8 billion last year, which is already constraining the room for its macro- economic policies. The question is whether, given the balance of MILLER REPORTING CO., INC. )07 C Street, N.E. Wi!Shingron, D.C. 20002 /202) ,41,.r,r,r,r, STRICTLY CONFIDENTIAL nm 9 payments situation of the country, a slower disbursement schedule will not have been more in line with the current large inflow of foreign exchange besides increasing the government's own commitment in the early stage of the project rather than at the end of it? In conclusion, Mr. Chairman, we think that this is an important project, and that it is important that the Bank is part of it. However, we also believe that such a large loan, quick-disbursed, might unnecessarily increase the external debt burden of the country and reduce the govern- ment's own effort in raising resources domestically. On these two specific points, I would like to have some comments from management. Thank you, Mr. Chairman. MR. PRESTON: Thank you, Mr. Carneiro. Are there any other questions or comments? Mr. Castellanos. MR. CASTELLANOS: Thank you, Mr. Chairman. The failure to maintain roads is tantamount to an act of this investment, for it implies the sacrifice of past investments in roads. It often has been mentioned in this Board that in the past two decades in the developing countrie an amount of road infrastructure has been lost or went to MILLER REPORTINO CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL run 10 inadequate maintenance, an amount that is three times higher than the amount that could cost a preventive maintenance program, that, independently of the fact that bad roads seldom curb the volume of traffic. Having said that, Mr. Chairman, we express our sympathy for the project under consideration, but we have the following concerns. First, Mr. Chairman, in the project we don't see a coherent policy to be applied in relation to the activities of the DNV and the DPV, and in relation to the activities of the goverrunent and the activities of the unities acting by concession in this field. Secondly, Mr. Chairman, we have concerns that the overvalued exchange rate of Argentina can be a factor that can increase unnecessarily the cost of the project. Third, we have some concerns in relation to the institutional capacity to implement in the program. As we see, for example, on page 10, we see many loans still undisbursed; for example, Loan 2854, there is still undis- bursed an amount of $162.5 million; Loan 3280, still .is undisbursed an amount of $184.7 million; Loan 3281, still is undisbursed an amount of $99 million, and so on. And that causes us concern. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 11 Finally, Mr. Chairman, we would like to ask on page 8, we see that the amount of loan, part of the amount of the loan will be directed to consultants, training, supervision of works, et cetera, and the amount if $31 million. And, to us, it seems a very high amount. On the other hand, we would like to ask the staff what is the detail of these unallocated expenses of $38 million U.S. Thank you, Mr. Chairman. MR. PRESTON: Thank you, Mr. Castellanos. Are there any other comments or questions? ( No response. ) MR. PRESTON: Mr. Auzmendi, Mr. Husain. MR. AUZMENDI: Okay. I am trying to summarize the answers to the points that have been raised. And, I think I will start with the financing of recurrent costs. That was a question that was raised by the first speaker. I think I would like to emphasize that the conditio of the road system in Argentina -- although we say it in the report but I think it comes to the discussion. The condition of the road system in Argentina has deteriorated very, very much; 60 percent, about 60 percent of the roads are in poor to bad condition. MN.LER REPORTING CO., INC. 507 C Street, N .E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 12 Now, the roads system has a characteristic. The characteristic is that there starts deteriorating the pavement and there is not really a very significant impact to the economy. In fact, some roads that are at the beginning of the deterioration stage are still able to provide a good and reasonable service. But then, it reaches a point when the deterioration starts going down very, very fast. What we are afraid of is that that is the case in Argentina for different reasons, because there has been a certain neglect in the past years; there has been a crisis. There have been institutional problems also. For all these reasons, I believe this is the situation. So, therefore, we attach a very strong importance to the maintenance, routine maintenance of the network. Now, the routine maintenance of the network requires a significant amount, as has been pointed out. we believe it is justified on the grounds of the needs in the country and the capabilities, the financial capabilities of the institution itself. But, at the same time, the financing of the recurrent costs is done on a declining basis. The financing on page 8 is 60 percent until a certain amount has been MILLER REPORTING CO., INC. )07 C Street, N.E. Washington, D.C. 20002 (202) ~46-6666 STRICTLY CONFIDENTIAL nm 13 disbursed, and this certain amount is in the order of one- and-a-half, two years; 40 percent the second stage; 20 percent and zero thereafter. In other words, the idea is that, first, we recognize the importance of the recurrent costs. We recogniz the importance at the present moment, and we are helping them in accelerating all this process that later on is declining with time. And, therefore, the country is going to take over MR. HUSAIN: And, this is in accordance with the Bank policy on the financing of recurrent costs, which means financing of recurrent costs has to be a declining basis and this is provided for in the project. Can you go on to the budgetary issue? MR. AUZMENDI: Yes. A second point that was mentioned is the budgetary issue, and this is, I think, illustrated on page 9 of the staff appraisal report. In there, the first line is for 1993 and the amount in the budget that has already been approved for this year is the number that is quoted there, $281 million. The other numbers are, of course, estimates. We know that Argentina is moving year by year in the budgetary exercise. So, for the following years they are estimates. MILLER REPOFITING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 14 But, what the table is trying to point out are two things. One, with these amounts that we have here -- the first column, of course, is the project of the Bank; the second one is IDB. With these amounts that we have here in the following years, we are covering the needs for the local counterpart for the Bank project as well as IDB, and as well as some other works that the government is doing on its own without any external financing. One thing that I would like to point out is that the amount that we estimated for the five years at the most is 20 percent more than what was already allocated for Year One, in other words for 1993. I am trying to say with that that we believe it is feasible that this is going to be allocated, especially considering the big importance and the high priority that the government has given to the road sector. Then, the other column in parentheses is an indication of the required counterpart funds. In there, the highest percentage of the Bank requirement is in 1994, and that is 44 percent. And again, we believe that 44 percent is a figure that is still acceptable in terms of what is the requirement by the government. MR. HUSAIN: Can you talk about user charges? MILLER REPORTING CO., INC. )07 C Street, N.E. Washington, D.C. 20002 (202) )46-6666 STRICTLY CONFIDENTIAL run 15 MR. AUZMENDI: Yes. MR. HUSAIN: And then, the issue of consultants and the unallocated amounts. MR. AUZMENDI: Fine. The road user charge system in Argentina has been changed or changing over the years. In general, what I am saying is supported by studies, they didn't have any problems with having produced or having generated enough funds to contemplate or to finance the road expenses. There have been some problems, on the other hand, with the allocation among different vehicles. And, as has happened in many countries, the tracks are normally paying less than what they should as compared to the vehicle. In other words -- MR. HUSAIN: In other words, the overall user charges are adequate in Argentina, and the last year or so has significantly raised the GATT-linked prices substantially above the border prices. So, the flow of revenues from fuel taxes and charges were sufficient. MR. AUZMENDI: Yes. And, there is another element that is also user charges, and this is the toll that is being collected. So, with the toll, with the previous experience that I mentioned, MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL run 16 and what Mr. Husain was saying about the increase in the gasoline, it is covered. Consultants, yes. In the project we have $31 million for consultants. Practically, in every project that you approve here in the Board, there is a significant, an important component for technical assistance. In this particular one, I think it is essential. Why I say that? Because the institutional componen of the project is very, very significant. By the institutio- nal component, I mean the delegation, for example, of responsibilities from the National Highway Authority to the provinces, the Highway Department of the provinces. Why we say that? Because in Argentina, there has been some kind of duplication of exercises. In other words, after all, in a certain way, the classification of roads between national and provincial in a certain way, in certain cases is, I would not say arbitrary because there are reasons for that, but clearly the provinces are able to handle that kind of work. In other words, what we are trying to say, .and we say it in the original presentation, is that that kind of delegation is going to help in improving efficiency. But, at the same time, we recognize that the provinces in Argentina - MILLEA REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666 STRICTLY CONFIDENTIAL nm 17 - I am talking about highways only, of course -- the province in Argentina are not at the same level of capacity. There are three, four, five -- I don't know the number -- but they are in a good condition that they can handle these type of things, but there are the risks that that is not the case. For those provinces, we are developing a significan and quite ambitious technical assistance program. Now, the $31 million -- and I would like to go to the table here on page 45 of the staff appraisal report includes $13 million, $13.6 million to be precise for technical assistance studies and training. I mention that, but also there is a significant component of technical assistance for DNV (Phonetic) itself, especially to help DNV in fulfilling a new role, a new role in the country not so much as the executor of works but as a general planner, as a leader in the sector, in research and so on. But, that is $13.6 million. Then, supervision is $11 million. Supervision: This has to do again with the role of DNV. DNV for years has been doing the road supervision works, supervision of road works. Now, at the present time, the government decided to reduce the size of DNV and, therefore, they need for these activities the help of consultants to do the supervision of MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666 STRICTLY CONFIDENTIAL run 18 works. And, this is $11.2 million. And, the same applies to the technical engineering that is 4.9. Now, if you add these numbers, this is about 28. To go to 31 is because of price contingencies and physical contingencies that have to be added, but this is the $31 million. Now, finally, and I think this is the last point that I would like to cover, is with respect to unallocated. Well, the unallocated amount is basically the price contingen cy and physical contingency that we have in the calculation. And, therefore, it was put aside with the understanding that it is going to be needed because there is going to be an increase in physical works. MR. HUSAIN: This is normal in estimation of project costs to provide for physical contingencies. A lot of unforeseen events might arise, and to be allocated as that project moves to specific works as the cost estimates become more settled. Perhaps, I should come back to the broader issues raised by Mr. Carneiro. MR. PRESTON: Mr. Aris. MR. ARIS: On the question of flood emergency works, is that a regular occurrence? Flood? MILLER REPORTING CO., INC. 507 C Sueet, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL run 19 MR. AUZMENDI: Yes, flood. MR. ARIS: Is that a regular occurrence, because you don't have -- MR. AUZMENDI: No. The flood is an amount of money that we included in the project to take care of a flood that happened a year or so ago, and you approved some time ago a loan for the provincial works damaged by the flood. Now, this is for national road works damaged by the same flood. So, it is not an event -- well, I mean, it could happen. But, I mean, we are trying here to address the issue of the damage caused by that specific flood. MR. ARIS: So the emergency does not cover future floods? MR. AUZMENDI: No; no. MR. HUSAIN: On broader issues, Mr. Chairman, Mr. Castellanos and Mr. Carneiro raised the issue of the broader economy and the Bank's cost sharing and the Bank's role. The Argentinean situation remains a difficult one, despite the progress achieved. A Fund mission has just come back, and found Argentina to be in compliance with the Fund's program and targets, but expressing the concern that I have expressed in the Board about the exchange rate, about continuing inflation and, therefore, the difficult issue of MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 20 any transition that should take place from here. I don't think any of us has a clear-cut answer to it. But, both the Fund and we emphasized the need for continued, very firm fiscal management, which is still in place in Argentina. There are some concerns about the impact of the social security reform on the fiscal situation, and that is the subject of continuing dialogue between the Fund, the Bank and the Argentine authorities. The question that was raised was that our lending, whether it is for this project or any other project, would add to the problem of stabilization that Argentina may have. I am not so sure how long this problem of stabilization will continue, which means that a lot of these funds are short- term funds; they are hot money. They are partly the result of the interest differentials between the United States, Europe, on the one hand, and Argentina, on the other. And, these interest differentials might narrow before too long. Our project lending basically has to take a longer view. In this case, the project funds are going to be disbursed over a seven-year period, although most of the funds will be disbursed over a shorter period. But, in project funding basically we have to look at that sort of horizon and cannot be guided by the short-term flows which MILLER REPORTING CO., INC. ~07 C Street, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL run 21 are extremely volatile in the case of Argentina. The other issue that was raised is whether the claims of this project will be consistent with the continuanc of a very austere fiscal management in Argentina. The answer is that Argentina has to continue to sort of cut back expenditures on non-essential issues, which they have done. There is some resurgence of some subsidies and we are going to take that up with the Argentineans, but our dialogue is a continuing dialogue on the shape of the overall public program and overall adjustment and overall fiscal management. And clearly, we shall keep this issue under review from year to year with Argentina in regard to the overall fiscal management and the priorities for different types of work. Cost sharing: We are financing 45 percent of the project here. We are well within the Bank guidelines on this project, and the average of projects for Argentina. On the overall lending to Argentina, our lending to Argentina this year is particularly high, $2 billion nearly, largely as a result of the adjustment loans and the support for the debt agreement. But, we fully expect to remain within the overall amounts we indicated to the Board on the country strategy, which means about $5 billion over a five- MILLER REPORTING CO., INC. S07 C Sueet, N.E. Washington, D.C. 20002 /2011 ~4(,.(,Y,(, STRICTLY CONFIDENTIAL 22 nm year period. And, next year there will be a sharp decline in our lending to Argentina. MR. PRESTON: Mr. Carneiro has a follow-on. MR. CARNEIRO: First of all, thank you very much, Mr. Husain. You reduced by 50 percent my follow-up now. (Laughter.) MR. CARNEIRO: I will try just to underline a couple of points on the three main areas that I have stated. But, first of all, I think that I stated three times that we believe that road maintenance is extremely important, in general, and specifically in this case. And, that is not at all a point that I would like to put in any kind of doubt. On the recurrent costs, what I have said and apparently has not been exactly the answer that I got, I didn't anyhow complain about the system. What I said is that this project generates a lot of recurrent costs. They will be phased out, as the guidelines of the Bank suggest. My doubt is that we have in the project made two types of recurrent costs. One is connected to routine maintenance and the other is connected to periodic main- tenance. It is referred in the project that at least the MILLER REPORTING CO., INC. ~07 C Street, N.E. Washington, D.C. 20002 STRICTLY CONFIDENTIAL run 23 routine maintenance will be covered by funds from the budget, that specific $40 million fund. My doubt is that we have to guarantee that the other one on the periodic maintenance, although I am sure that they are not yearly costs but periodic, that means every two years or every three years they will be there, that the budget will have also to cover them. So, I have not stated specifically that they are not covered. It is a concern that we have to be reassured that, given the periodic maintenance costs, they will have to be covered in the budget. Otherwise, all the effort or all the importance that we have given to road maintenance will be definition.disappear because we are making it work in the three or four or five years which afterwards, if it is not followed up, including the periodic maintenance, sooner or later will disappear. So, that was basically my concern. I have no doubt about routine maintenance because at least the goverrnnent has stated that they will create a fund for that routine main- tenance, although it quite awkward. The conditionality that we have in our project refers to the period after we have disbursed. But anyhow, we have to be reassured that even the periodic maintenance will be included. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666 STRICTLY CONFIDENTIAL run 24 Second, Mr. Husain answered mostly to the budget and the debt that I had. Nevertheless, my doubt is that, of course, in cost sharing we know that the Bank's share is totally under the limits of the guidelines, and that is not a problem. So, the problem is that we have an Argentinean scenario which is quite a tight and difficult one, specifi- cally on the external debt. And, I have expressed a concern that in the way that we are increasing, we are having quite an important share in a very heavy program and a very large program, this is ultimat~ly of course affecting that same scenario. And, if other kinds of alternatives could be found, mainly because part of the costs are local costs, in order to finance them without having such a large implication on the external debt and on the budget surplus in the sense that has been discusse in the country assistance strategy some time ago. This also connects with the other point on the disbursement pattern because it is not, of course, a quick- disbursing loan but 90 percent of the loan is going to be disbursed in the first three years. And also, of course, this will affect the scenario that has been given by Mr. Husain, although we are aware that the inflow of capital, most of it, is short-term and it is MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL run 25 not a situation that is a stable one. The doubt is if we could spread our own disbursemen in a way as not concentrating it so much in the first years when exactly there is that large inflow of capital and affecting apparently the capabilities of the goverrnnent to keep the macroeconomic stabilization. And, at the same time, because if we could spread it and have a larger amount of budget funds in the first years and not concentrating all the budget funds in the last years, that would show at the same time a larger commitment of the government for this specific sector. But, we are aware that it is not a quick-disbursing loan, although 90 percent is disbursed in the first three years. Thank you very much for your explanation. MR. PRESTON: We have another follow-on from Mr. Castellanos and then one from Mr. Al-Assaf. MR. CASTELLANOS: Thank you, Mr. Chairman. It is just a very brief question to the staff. What is the estimated cost of maintenance per mile or. per kilometer included in this project? And my question is whether in comparison with similar types of costs in other countries we should consider these costs normal, more MILLEA REPORTING CO., INC. ,07 C Street, N.E. Washington, D.C. 20002 (202) H6-6666 STRICTLY CONFIDENTIAL nm 26 expensive or less expensive. Thank you, Mr. Chairman. MR. PRESTON: Mr. Al-Assaf. MR. AL-ASSAF: Mr. Chairman, a brief comment. I think this is a very good project and I strongly support it. And, I hope to see more of these projects related to operatio and maintenance of roads. I have a feeling that we have neglected this area as a Bank, and we often see that huge funds have been committed to investments in infrastructure but not enough money being spent on maintenance and operations. And, of course, this is related to the issue of the sustainability that we dealt with with regard to the Wapenhans Report. But, one comment related to the user fees. This is an important issue, but I hope that we don't over-emphasize it. We should look at the overall cost and benefit of the, in this example, the roads to the economy rather than the direct user fees of the project itself. Thank you. MR. PRESTON: Thank you, Mr. Al-Assaf. Mr. Auzmendi, Mr. Husain. MR. HUSAIN: Mr. Chairman, let me just address some of the issues raised by Mr. Carneiro. MILLER REPORTING CO., INC. 507 C Sueet, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL run 27 The recurrent costs and the whole issue of periodic maintenance, periodic maintenance basically almost comes like sort of capital works when it is postponed and delayed, and in this case we are trying to take care of the periodic maintenance, which means postponed maintenance through this project. And, if this program is implemented, as we expect it would be implemented, then there should not be any further sort of postponed maintenance; it should be routine main- tenance, which will be a part of the normal program and the budget of the Highway Departments of the federal goverrunent and the states. On the whole issue of disbursement pattern, Mr. Chairman, we did not start this project by sort of targeting disbursements and then tailoring the projects around that, but the disbursements came as a result of the project. And, at this stage, in public sector transportation, in our view, the highest priority is maintenance, is deferred maintenance, and the disbursements flow from that and sort of laying those disbursements until three or four or five years later which basically would frustrate the purpose of this project. I would also like to remind you that the high reserves in Argentina are not because of the borrowings of MILLER REPORTING CO., INC. 507 C Sueet, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 28 nm the public sectors. They are the result of the flows between private and private sectors. And, the funds from this loan will not have to be stabilized, but they will have to be spent. So, they would not add to the reserve problem or the maintenance of the reserve problem. But, I do take Mr. Carneiro's broad concern about managing our flows and portfolio in Argentina. And, we are very careful. I would also like to remind that, as our adjustment lending in Argentina declines very sharply, the net flows from the Bank to Argentina will decline very sharply in the coming years also. I think that is all. There was a question by Mr. Castellanos. MR. AUZMENDI: Yes. The question was raised about the cost per kilometer and maintenance on this kind of road, and how this compares with other conditions. Well, the only thing I want to say is that the cost per kilometer that we included here is not the result of fixing a certain cost per kilometer. In other words~- and it is described here -- we did a quite elaborated system with the use of the Asian model and so on. So, this is a result. Now, is the result higher or lesser than in other MILLER REPORTING CO., INC. S07 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666 STRICTLY CONFIDENTIAL nm 29 countries? I would say that even in the same country, in Argentina, the maintenance per kilometer could be very significant different in the northern or in the southern part. The southern part, La Plata Gojia (Phonetic), a very dry area, basically it is gravel roads. The northern part is a rather tropical area. So, it is very hard to answer that question. What I could say is that the results we have there are reasonable. In other words, our results are that even on a per kilometer basis we believe are adequate to maintain the roads properly. I don't know if that satisfies -- MR. HUSAIN: You don't have similar figures for other countries. We will try to find figures and come back to you later. MR. AUZMENDI: But really, it is very hard because the conditions are different. MR. HUSAIN: We will see if we can find something. MR. AUZMENDI: I don't know if there was another question. MR. PRESTON: There is going to be one. Mr. Carneiro has a follow-on. MR. CARNEIRO: Yes, I have. I am sorry, but it is very short on what Mr. Husain has said about disbursements MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL run 30 costs. My remarks didn't intend in any way to suggest decrease disbursements in the way of decreasing or postponing the program. What I have said is keeping the program, as having a better balance between the disbursements and the costs that are financed by the budget in order to have, let us say, a more even load from both sides. And, I am sorry if you didn't understand, but I didn't refer in any way to delay our disbursements with the objective of delaying in any way the project. Thank you. MR. PRESTON: Thank you, Mr. Carneiro. Are there any other comments or questions? (No response.) MR. PRESTON: The loan is approved on the terms proposed. - MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666