Argentina: World Bank's Ambitious Riachuelo River Basin

1. (SBU) Current World Bank (WB) priorities in Argentina include
reforming and rationalizing the Argentine social safety net in
anticipation of greater needs during this economic downturn, and
finalizing a major $2 billion, ten-year loan project to clean-up
Greater Buenos Aires' heavily polluted Riachuelo river basin. The
Riachuelo is Argentina's most contaminated river basin and home to
over 3.5 million, Argentina's largest concentrations of urban poor,
and some 4000 industrial facilities. WB Country Director Pedro Alba
hopes to propose to the WB Board in February/March a large $840
million first tranche Riachuelo project loan to lock in a GoA
commitment of political capital. The Supreme Court has recently
mandated a Riachuelo clean-up and Alba said President Kirchner hopes
to announce the project prior to mid-term October 2009 elections.
Presentation of the Riachuelo project to the WB Board has been
delayed by squabbles between GoA federal and municipal stakeholders.
Key outstanding issues to be resolved include negotiating a
concession contract to appropriately channel and supervise GoA
public works spending; notifying Uruguay that Argentina will
discharge treated domestic and industrial sewage to the Rio de la
Plata waterway; and finalizing a GoA commitment to raise water
tariffs and to cover any shortfalls in required project
contributions by the municipal waterworks authority. No WB policy
based or fast disbursing lending to Argentina is under consideration
in light of the GoA's heterodox policy framework and absent a
reconciliation and GoA accord with the IMF. Current WB exposure to
Argentina has stabilized in the $5 billion-plus level, with $1.1
billion in new commitments per year anticipated over the next few
years. Alba asked the Ambassador to seek support for the Riachuelo
project in Washington. Comment: Alba appears to Embassy to be
seeking the right GoA commitments for this cleanup project. It
appears to us to be a valuable and high profile WB initiative which
could have significant positive impact if carried out well. End
Summary



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World Bank Focus: Social Safety Net, Environment


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2. (SBU) World Bank Country Director Pedro Alba met December 12 with
Ambassador Wayne. The WB is working on a new 5-year 2009-13 Country
Assistance Strategy (CAS), Alba said, that will define those areas
where the World Bank can have a significant and visible impact. He
outlined current WB priorities as re-working the Argentine social
safety net (in cooperation with the IDB) in anticipation of greater
needs during this economic downturn, and finalizing a major $2.9
billion ten-year project to clean up the greater Buenos Aries
Riachuelo river basin. No policy based or fast disbursing lending
to Argentina is under consideration in light of the GoA's heterodox
policy framework and absent a reconciliation and GoA accord with the
IMF.



3. (SBU) Current WB exposure to Argentina has stabilized in the $5
billion-plus level, with an anticipated $1.1 billion in new
fgexposure given
that demand has multiplied in the wake of the international
financial crisis. Crisis-related WB portfolio expansion is
anticipated in Eastern Europe, Mexico, Brazil and India. In 2008 to
date, the WB has disbursed US$350 million to Argentina, versus a
projected full-year total of $500 million.



4. (SBU) WB priorities in Argentina in the coming months include
addressing Argentine project implementation risk. Things move
slowly through the GoA bureaucracy, Alba explained, with little
value added by the GoA during an average one-year lag from final WB
proposal submission to GoA signing. Another priority, according to
Alba, is to address fiduciary risks; the WB's integrity unit is
currently investigating alleged procurement fraud in a number of
health projects.



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Riacheulo Basin Cleanup Mega-Project


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5. (SBU) Alba described the Riachuelo basin as the most contaminated
river basin in Argentina and home to Argentina's largest
concentrations of urban poor. Of 3.5 million basin residents, 1.2
million live below the poverty line. Some 4,000 industrial
facilities located in the basin discharge untreated effluents into
the drainage system or directly into the Riachuelo river. In
addition to high levels of organic pollution, these industrial
discharges contribute toxic contaminants such as heavy metals from
petrochemical industries, tanneries, and meat processing facilities.



6. (SBU) The GoA, under pressure from a July 2008 Supreme Court
order to clean up the basin, has adopted a policy of "progressive
withdrawal of all known points of discharge" to clean up the river.
This will require a 90-95% reduction in industrial organic pollution
via the connection of industrial effluents to the Greater Buenos
Aires area water and sanitation utility AySA's sewerage network.
After suitable pre-treatment, this would be discharged via
underground pipeline to the middle of the La Plata River.


7. (SBU) The cost of this project will total some US$2.9 billion
over 10 years (2009-2019), of which the WB will lend approximately
$2 billion. Of this amount, the Bank will shortly propose to its
Board a large $840 million first stage loan. The WB strategy here,
Alba explained, is to ensure up front that the GoA (and the various
municipal and provincial stakeholders) buys into and commits
political capital to the project. The Supreme Court has recently
mandated a river clean-up and Alba said that President Cristina
Fernandez de Kirchner hopes to announce the project prior to
mid-term October 2009 elections.
8.(SBU) Alba emphasized the large variety of stakeholders in the
river basin, including the Secretariat of the Environment (SAyDS),
the Basin Agency (ACUMAR), the water utility (AySA), the Ministry of
Planning, Public Works and Services, and the Chief of Cabinet's
office as well as a host of sub-national actors, including
slum-dwellers living along the river bank. Beyond financing, Alba
said, the WB's true value-added in this project will be measured in
terms of its ability to craft a shared vision among these diverse
stakeholders.


9. (SBU) Presentation of the project to the WB Board has been
delayed by squabbles between stakeholders, Alba said. Key
outstanding issues to be resolved before the loan can be reviewed by
the Board (hopefully in the February/March timeframe) are: (1)
finalizing GoA internal agreement on arrangements for fund flows,
packaging of major works and supervision arrangements for those
major works, including hiring an independent consulting engineer to
supervise contracting to limit tender and procurement corruption;
(2) negotiating and finalizing a concession contract linking AySA
and the GoA (Alba said that Chief of Cabinet Massa supports the
concept of a detailed concession contract while Minister of Planning
De Vido opposes any constraint on GoA public works spending); (3)
notifying Uruguay under the WB's International Waterways Safeguard
Policy that Argentina will discharge treated domestic and industrial
sewage to the Rio de la Plata waterway; and (4) Water and sewage
tariff increases. While the GoA agrees on the need to increase
water and sanitation tariffs (AySA is currently unable to cover even
operations and maintenance expenditures from its revenues), it is
sensitive about the timing of a tariff increase as the economy slows
and users adjust to higher tariffs in other sectors. Alba said that
Minister De Vido has privately assured him and WB V.P. for Latin
America Pamela Cox that the GoA will commit to cover the difference
between tariff revenues and project working capital costs.



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Comment - Seeking USED Support


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10. (SBU) Alba noted some WB staff and Executive Director (ED)
concern about implementation risk given the size and complexity of
the project and allegations of malfeasance in large GoA procurement
exercises. He asked that the Ambassador seek support for this
project in Washington, given its positive impact on the wellbeing of
over 3 million Argentine citizens. If approved, this clean-up
project will define much of the World Bank's medium term engagement
here.



11. (SBU) A Riachuello cleanup has been a contentious political
football since President Menem's Environmental Secretary, Maria
Julia Alsogary, famously committed in the mid-1990s to clean up the
river in 1,000 days and subsequently served a prison term for
malfeasance. The WB's current Riachuelo cleanup project is large,
bold, and, with billions to be spent on primary sewage
transportation and treatment, a tempting target for stakeholder
procurement corruption. Post ESTH Counselor has met with World Bank
implementation officials and will follow and report on Riachuelo
basin project development in the run-up to a Board vote. If handled
well, this project could have a very valuable and positive impact.


Wayne