WORLD BANK LOOKS TO INCREASE FOOTPRINT IN

C O N F I D E N T I A L SECTION 01 OF 03 BUENOS AIRES 002080

SIPDIS

SIPDIS

TREASURY FOR CLAY LOWERY, NANCY LEE, AJEWEL, WBLOCK, LTRAN
NSC FOR JOSE CARDENAS, ROD HUNTER
PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE
ROBITAILLE
PASS EXIM BANK FOR MICHELE WILKINS
PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER

E.O. 12958: DECL: 10/21/2017
TAGS: EFIN ECON EINV AR
SUBJECT: WORLD BANK LOOKS TO INCREASE FOOTPRINT IN
ARGENTINA, WHILE GOA QUIETLY PUSHES FOR RETURN TO
ADJUSTMENT LENDING


Classified By: Economic Officer Chris Landberg for Reasons 1.4 (b,d)

Summary
--------------

1. (C) New World Bank Country Director Pedro Alba told
Ambassador that he will wait to see what reforms the next
Argentine government implements before deciding whether to
develop a new country assistance strategy (CAS) or just issue
a progress report on the current CAS. The existing CAS is
focused on human development, governance, and non-energy
infrastructure projects. However, Alba is discussing with
the IDB how the Bank can complement IDB energy sector
projects. Alba also commented that Economy Ministry
officials have informally inquired about the possibility of
resuming structural adjustment lending. Alba responded that
IMF endorsement would be a prerequisite -- and would require
high-level GoA commitment to more orthodox reforms -- and
also urged GoA interlocutors to negotiate a Paris Club deal.
End Summary.

Reforms will Determine Direction of World Bank Engagement
-------------- --------------

2. (C) During an October 5 courtesy call on the Ambassador,
new World Bank Country Director Pedro Alba emphasized his
interest in improving the relationship with the Argentine
federal government, speeding up disbursements under the $3.8
billion 2006-2008 CAS, and analyzing ways to improve and
expand the World Bank's project portfolio, including into the
area of energy policy. The Bank is in the middle of its
three year CAS, and to date has disbursed or committed $1.9
billion of the total program. Alba noted that at this midway
point he has two choices with regards to the CAS: 1) prepare
a progress report to the World Bank Board; or 2) prepare a
new CAS.


3. (C) Alba thought it premature to determine which way to go
prior to Argentina's October 28 Presidential elections.
Rather, he planned to wait to see what kind of economic plan
the next government put in place. Alba said that if the new
government's economic reforms were limited, "what we call in
Spain a 'weak gazpacho'" (Alba is Spanish),then he would
just go forward with a report on the current CAS to the
Board. However, if the new government indicated a
willingness to be more serious about changing course from the
current mix of heterodox and interventionist policies, Alba
would raise the possibility of negotiating a new CAS with
World Bank Vice President for Latin AMERICA and the Caribbean
Pamela Cox.

Relations Should Improve under Cristina
--------------

4. (C) Alba assumed that current front-runner, Senator, and
First Lady Cristina Fernandez de Kirchner would win the
elections and become the next Argentine President. He said
that Cristina had given the impression during a recent
meeting with Pamela Cox that she was interested in improving
the GoA's relationship with the World Bank. The meeting was
pleasant, though not detailed, and Cristina outlined her
social vision (more inclusive and better distributed economic
development).


5. (C) Alba said that officials on both sides worked to
recover from the fallout from Cox's trip to Argentina earlier
in 2007, during which President Kirchner lashed out publicly
at the World Bank and other IFIs following Cox's mildly
critical comments about poverty levels and the lack of clear
and stable rules for investment. Alba agreed with the
Ambassador's comment that Cristina Fernandez de Kirchner
seemed to have a limited understanding of economics, but was
working hard to learn. He thought that the composition of
her economic team would be crucial; if she kept most of the
current GoA officials in place, Alba expected only minimal
change.

World Bank Considers Entry Into Energy Sector
--------------

6. (SBU) The 2006-2008 CAS provides investment loan

BUENOS AIR 00002080 002 OF 003


operations only, since no adjustment lending is possible
without some kind of IMF program or approval. With total
exposure of $6.5 billion, including the current CAS, net
transfers have been negative in recent years -- a logical
consequence of increased adjustment lending during the crisis
and lower lending as the economy has improved. Alba stated
that the World Bank currently has 29 open projects in
Argentina, with roughly 30% focused on human development
(social programs, education, health),60% focused on
non-energy sector infrastructure (roads, water treatment),
and 10% technical assistance (TA) on governance issues. The
Bank is using its TA program to help the Provinces with
Financial Management, helped finance the creation of the
GoA's relatively new Investment Promotion office (headed by
Beatriz Nofal),and also supports public investment planning
at the Economy Ministry.


7. (C) The World Bank has limited its engagement in
Argentina's energy sector mainly due to its concerns with the
GoA's current energy policy framework, i.e., the GoA's
various interventions in the area (upstream export tariffs,
downstream export controls, frozen electricity and natural
gas tariffs since 2002). The GoA's 2005 decision to pre-pay
a World Bank loan funding the Argentina/Paraguay bi-national
Yacereta hydro-electric project, rather than abide by World
Bank conditionality, also raised red flags within the World
Bank bureaucracy. However, Alba noted that Energy Secretary
Cameron had recently approached him requesting World Bank
re-engagement on energy issues. Alba said he was willing to
have a dialogue with the GoA on energy issues, and also
recently organized a joint World Bank/IDB staff meeting to
discuss the sector. Alba speculated that the IDB was working
in the energy sector in part because it offers so many
potential projects. He also thought that the IDB liked the
idea of the World Bank acting the role of "tough guy," a
division of labor with which Alba did not have a problem.


8. (C) Since the IDB is already planning to provide
substantial TA to Energy Secretary Cameron's outfit, Alba was
not yet sure how World Bank assistance would complement
existing projects. However, he specified that any World Bank
TA or financing would be policy-oriented. Therefore, he
plans to move carefully, first working to understand the
sector and GoA policies and then engaging with the IDB and
government authorities. Key, in his opinion, was answering
the following questions: what are the GoA's priorities, what
is the current policy framework, and what structural measures
will the next administration be willing to take in order to
attract investment to the sector?

GoA Interest in World Bank SAL
--------------

9. (C) Alba commented that Economy Ministry officials had
approached him informally about the possibility of resuming
quick disbursing loans, i.e., "Development Policy" or
"Structural Adjustment" loans (direct budget-support),which
typically support policy and institutional reforms. The GoA
officials were aware that this would require IMF written
endorsement of the lending program (and GoA macro policies),
although Alba clarified that it would not require a formal
IMF program.


10. (C) Alba said he had responded to the GoA officials that
it would be much easier to negotiate a new adjustment lending
program if the GoA were to improve its relationship with the
IMF and reach an agreement with the Paris Club. Alba also
noted that possible access to World Bank budget support would
give the GoA another incentive to develop realistic proposals
for a Paris Club deal. He said he had advised his Economy
Ministry contacts that the best option was to pay the GoA's
roughly $4 billion Paris Club arrears up front, and then
engage with official creditors on restructuring the
remainder. However, he said he had also emphasized to GoA
officials that it would be difficult for them to do so
without a formal IMF program.


11. (C) Alba envisioned a World Bank adjustment lending

BUENOS AIR 00002080 003 OF 003


program as functioning to move the GoA away from price
distortions and improving both fiscal and monetary policies.
He thought both the Bank's Board of Directors and the IMF
would be amenable to such a program if the next
administration appeared committed to achieving such
objectives.

Comment
--------------

12. (C) Behind the GoA's recent quiet inquiries to the World
Bank regarding adjustment lending and energy sector
engagement is a growing GoA concern that Argentina is not
attracting the infrastructure investment it needs.
Investment levels overall have stagnated and new
("greenfield") investment is not materializing, especially in
the crucial public utilities sectors. This lack of
investment is a consequence of heavy-handed government
intervention in a number of economic sectors, particularly
energy, and ongoing concern by domestic and foreign investors
at the lack of contractual sanctity and the GoA's propensity
to change the rules of the regulatory game on short notice,
as further evidenced by Argentina's steady decline over the
last few years in the World Bank's "Doing Business" rankings.
In light of GoA pronouncements this year of $10 to 15
billion in new energy projects, GoA officials are desperately
looking for financing. The World Bank is a potential source,
but only if the incoming GoA administration demonstrates a
willingness to break with past interventionist policies. End
Comment.
WAYNE