The World Bank Group Country Assistance Strategy (WBG CAS) for Argentina (15 April 2004) is geared towards reducing the extent and severity of poverty, as the country recovers from the recent economic crisis, and places a major emphasis on sustained growth coupled with enhanced equity, social inclusion and improved governance. IFC is seeking to implement these strategic priorities by:
- working with existing clients to secure their financial viability;
- supporting export-oriented clients to alleviate credit shortages facing them; and
- selectively provide long-term financing, primarily focusing on export oriented companies or projects that enhance the country’s export potential.
The project will support sustained macroeconomic growth by increasing hydrocarbon production, thus helping mitigate Argentina’s :
- falling oil output and
- natural gas shortage which is causing energy rationing and acting as a constraint on macroeconomic growth.
Furthermore, it will enhance the country’s export performance by underpinning the continued production/exports of PAE, which in 2004 sold internationally 47% of its Argentine oil production and 12% of its Argentine gas output.
IFC’s role will be to:
- Provide otherwise scarce long-term bank financing;
- Mobilize significant parallel bank lending (expected to provide the longest commercial bank tenor to an Argentine corporate since the crisis); and
- Enhance the company’s Environmental and Social Management System (ESMS), e.g. through streamlining/formalizing its numerous social/community development initiatives and programs.
The project is expected to contribute to the benefits provided by PAE’s overall operations as described below:
- Promoting Renewable Energy and Cleaner Fossil Fuels
PAE’s activities in Argentina are aligned with the WBG’s support for the renewable energy and cleaner fossil fuels. With large undeveloped gas reserves (60% of net proved reserves as of end-2004), the company is well-positioned to increase its level of gas production and play an important role in satisfying the growing local and regional energy demands with a clean energy source. The project will help underpin the company’s planned raise in gas output from 214 billion cubic feet (bcf) in 2004 (representing approximately 12% of the Argentina’s total gas production) to 273 bcf in 2009.
- Benefits to the Community
PAE has been working throughout Argentina for many years and has developed a strong positive relationship with the local communities in each of its areas of operation. The company has in place a well-structured support program covering a range of social development activities including healthcare, job training, income generation, education, and technical agricultural assistance. PAE has invested about $1.6 million in these programs over the period 2001-2004, with a further $1.3 million budgeted for 2005. Furthermore, the company is seeking to develop innovative new initiatives, such as the recently launched Small and Medium Enterprise (SME) program which focuses on sustainable economic development in the Golfo San Jorge area through supplier development, capacity building and access to finance. PAE has committed approximately $1.3 million to this program over the next five years. In addition, the company has contributed $0.7 million toward a Reciprocal Guaranty Trust used to support SMEs nationwide. All these programs grew out of consultation with a range of local leaders, NGOs, and communities in the different areas of operation.
- Local Purchasing
The company procures about 85% of its purchases nationally. In 2004, PAE spent $550 million on Argentine investments, goods and services. Based on its 5-year plan, PAE is expected to maintain this level of local spending over the next several years.
- Employment
PAE generates significant employment benefits in the regions in which it operates, especially in its Golfo San Jorge basin operations where the majority of its planned investment activity is concentrated. As of December 2004, PAE had 828 direct employees and approximately 5,440 contractors, over 95% of whom are national hires. About 50% of the company’s own staff and 80% of its contractors work in its operations in the Golfo San Jorge basin. The company’s program of continued significant investment is expected to help maintain this level of employment for the foreseeable future.
Benefits to Government
PAE is an important source of fiscal revenue for both the federal and the provincial governments. In 2004, the company paid to the federal government $254 million in taxes. Royalties and turnover tax of approximately $160 million were collected at the provincial level. PAE’s oil and gas export proceeds totaled $615 million in 2004, which accounted for about 2% of Argentina’s total exports. Even after allowing for the costs of imported materials and services and external dividends and interest payments, the net balance of payments contribution is substantial. The company is expected to continue contributing to Argentina’s foreign currency earnings and to remain a significant contributor of tax revenues for both the federal and regional budgets over the life of the IFC loans.
- Disclosure
The company discloses on a quarterly basis all of its payments to local, provincial and federal authorities as part of its ongoing reporting obligations to Argentina’s National Securities Commission in conjunction with its fixed income securities. These disclosures are available to the public at http://www.cnv.gov.ar/.
- Environmental and Social Benefits
The company has a detailed, well-established HSE policy which is integrated into the operational and performance measurement systems of the company, and is tied to executive and staff remuneration. PAE is one of few Latin American oil and gas companies to be ISO 14001 certified. The IFC team met with local representatives in several of the company’s areas of operation who, in each case, indicated a high level of satisfaction with PAE’s operations and local development activities.
- Country Governance Context
The benefits of the project come in a number of forms: jobs, business for suppliers, the supply of gas (a clean source of fuel), and revenues paid to the government. Government policies in Argentina in recent years have introduced particular distortions into the market – low gas prices, differential export taxes and so on. However, it appears that the key market distortion relating to low gas prices will be ameliorated over the next few years. Total taxes paid to the government by PAE are sizeable, and under IFC’s base case are projected in the range of $300-500 million p.a. On balance, given the governance context, the expected developmental impact and benefits, including to the community and local governments, IFC believes that this is a Project in which it should invest.
IFC plans to monitor the following developmental impacts: employment, local/national purchasing, payments to regional and federal governments, environmental indicators (accidents, gas flaring, greenhouse emissions and oil spills) and investment in community development programs.
