Argentina: World Bank's Ambitious Riachuelo River Basin

UNCLAS BUENOS AIRES 001703 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EFIN EIND SENV AR SUBJECT: Argentina: World Bank's Ambitious Riachuelo River Basin Clean-Up Project Ref:(A) 07 Buenos Aires 2080 (B) 07 Buenos Aires 2059 This cable contains sensitive information - not for internet distribution. -------------- Summary -------------- ¶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 -------------- --- World Bank Focus: Social Safety Net, Environment -------------- --- �0A;¶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. -------------- Riacheulo Basin Cleanup Mega-Project -------------- ¶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. -------------- Comment - Seeking USED Support -------------- ¶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