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Resetting relations with the provinces

Article - September 22, 2017

Buenos Aires works with the governors to fulfill the constitutional promise of federalism and develop regional economies


As the world’s eighth-largest country, Argentina is as varied as it is vast. This land of many contrasts has terrain spanning Pampas grassland, rainforests, the Andes mountain range and glacial lakes, and each of its 23 provinces – and autonomous city, Buenos Aires – boasts its own unique identity. While the provinces and the capital have their own constitutions, they exist under a federal system, and the relationship between them and the central government has often been fractious. But under President Macri’s administration, a new focus on establishing an open dialogue between the national government and the provinces has been made a priority in order to ensure the development of Argentina’s regional economies.

“This is a federal country,” points out Rogelio Frigerio, Minister of the Interior, who is charged with representing the national government in its relations with the provinces. “In recent years, this had been forgotten and Argentina has in-effect become a unitary state with power concentrated in the central government in order to subdue politically those jurisdictions with which it disagreed.” As only five of the 23 provinces are governed by the Cambiemos (Let’s Change) coalition, building political consensus around the country is key to maintaining stability.

Miguel Lifschitz, the governor of Santa Fe province, who is not a member of Cambiemos, explains that, “we have political differences with the government, but we believe that that cannot be in any way an obstacle when it comes to coordinating policies with the state and when it comes to us having a cordial and respectful relationship.”

Today, the government is working to recover the principle of federalism. “Part of this recovery comes about because the provinces have greater autonomy and a direct link with the rest of the world,” says Minister Frigerio. For him, greater autonomy comes with greater responsibility. “We have brought back a very important instrument, the fiscal responsibility law, where the provinces commit themselves to gradually decrease the deficit along with the national government.”

Little by little, the central government is devolving powers to the sub-national governments, enabling Argentina’s regions to make decisions in their own best interests. “One of the first decisions President Macri made after being elected is the transfer of the management of the Federal Police to the City of Buenos Aires,” says Horacio Rodríguez Larreta, the city’s mayor. “This is a huge challenge and opportunity for us.” Security has long been one of the most contentious issues for the city, and the citizens of Buenos Aires eagerly received this move. Cooperation with the national government has also granted Mayor Larreta greater authority through the transfer of previously federal land, untying his hands to develop infrastructure projects, and urbanize city slums.

The country’s largest province, Buenos Aires, home to 40 percent of Argentina’s population, was on the verge of bankruptcy when current Governor María Eugenia Vidal came into office.  Her daunting task of fighting organized crime, cleaning house in the government, and building much-needed infrastructure has been one of the most watched political stories of the new administration.  Previously deputy mayor of the city of Buenos Aires and a trusted confidant of Mauricio Macri, Vidal is the first non-Peronist to govern the province in a generation. “For the first time in 25 years, the national government has started to work as a team with the provincial government. They no longer see us as political adversaries and are working alongside us toward common goals. This gives the Province of Buenos Aires an enormous potential,” says Ms. Vidal. Through coordination with the national government, the Buenos Aires has been able to issue $4.5 billion in foreign debt to finance public projects province-wide.  

All of these decisions are helping Argentina to combat the inequities brought about by its geographical divide. The country, which simplistically speaking is made up of a poor, moderately populated north, a middle-income, densely populated center, and a wealthy and lightly populated south “boasts very strong natural resources across various sectors – from mining to agribusiness to energy – however has been very under-penetrated in terms of investment over the past ten years,” as Juan Procaccini, President of the Argentina Investment and Trade Promotion Agency points out.

“The result is a relatively new market, which at the moment has less competition.  Very few countries can compete with such bullet points for investment.” By driving regional economic development, the country hopes to lift more people out of poverty and boost trade.

“As 75 percent of the population in Argentina is concentrated into five cities, this leaves the ‘interior’ of the country anemic. We must populate the cities in the countryside to offset this imbalance. If the agricultural sector grows, this is positive for the whole country as it stops the flow of people migrating to the big cities,” says Roberto Urquía, Director of AGD, one of the country’s largest value-added agribusinesses.

One example of agricultural development is that of Grupo Lucci. Based in Tucuman, long amongst the most underdeveloped Argentine provinces, Lucci has become one of the largest producers of lemons in the world. Currently 80% of the world’s lemons originate from this province, putting it on the global investment map for global executives like Muhtar Kent of Coca-Cola, who visited in 2016, and later followed up with a $1 billion investment. The company is currently going through a diversification process contributing to the development of other provinces in the North of the country. “Because of the inelasticity of lemon demand, it was not easy for us to continue to grow in Tucumán, says Daniel Lucci, Director of the company. “We have diversified, but in keeping with the typical activities of the region. We started with sugarcane in Tucumán and then went on into livestock in Santiago del Estero and Catamarca. In parallel, we developed agriculture: soy, wheat and corn. Undoubtedly with this government it has become easier to reach the U.S. market, which is our objective.”

In the southernmost province of Tierra del Fuego, economic diversification has become the new norm. “We have consolidated a strong industrial hub which enables us to produce products for the rest of the country and for exports as well. 

We are working on regional and sectorial growth, complementing other sectors of the country, and integrating our producers in the value chains,” says Governor Rosana Bertone.

With ever-strengthening ties between the provincial and national governments, the economic development of the “new” Argentina is set to reach every corner of the country.

San Juan
Located in the Cuyo Region in the west of Argentina, the mining province of San Juan shares a long border with Chile. As one of the few provinces to have fully approved open pit mining, San Juan is a major draw for extractive industries investors, although as Governor Sergio Uñac is keen to point out, San Juan doesn’t accept just any mining company. “We do not tolerate irresponsible mining. Our government is present in the sector and we ensure that regulations are implemented.”  On more than one occasion, provincial authorities have halted production when informed of cyanide leakage to ensure public safety.

San Juan celebrated when, late last year, the national government moved to unify mining regulations under a proposed federal law as part of an effort to jump-start investment in the sector. The regulations included the elimination of foreign export tax on minerals that rendered projects in other countries more attractive.

However, a proposal by the opposition party, of which Mr. Uñac is a member, to reinstate mining taxes and export duties, looked set to dampen investor enthusiasm for Argentina’s mines, potentially setting San Juan back. In a move widely seen as indicative of the new Argentine ethos of respect for the rule of law and open dialogue, Mr. Uñac went to the central government, bringing in his party and other stakeholders, and was successful in pushing the Upper Chamber to decline the opposition’s proposal. “The role of the provinces is transcendental. We live in a federal country, as established by the Constitution, but nonetheless we have to make this a reality.”

San Juan stands out among Argentine provinces in that it has been running a fiscal balance for the past several years, with numbers for the first quarter of 2017 its best yet. As a result, it is not looking to the international capital markets to help with further growth. “In principle, given that we have a balanced budget, we are not considering issuing bonds,” says Mr. Uñac.

It is, however, receiving foreign investment in its transformative infrastructure projects. “We are currently undertaking the bidding process for an energy generation project, where dual-purpose dykes will be built to irrigate our agricultural land and generate energy for the province.” The province will also be home to the Agua Negra Tunnel, which will connect Argentina with the Chilean coast via the Coquimbo Port, joining the Atlantic and the Pacific trade routes. As Mercosur moves closer to signing a free trade agreement with the Pacific Alliance, this $1.6 billion investment by the IDB will revolutionize commerce in the region, with benefits reaching as far as Brazil, Paraguay and Uruguay.

“The Agua Negra Tunnel and the Port of Coquimbo will enable us to reach the Asian market, which is growing both in population and purchasing power. As a result of this tunnel, San Juan is going to undergo substantial changes,” says Mr. Uñac, adding that the increased goods transport through the province will bring with it employment and investment.

But beyond mining and infrastructure, this province, dotted with vineyards, has diversified its economy into tourism and agroindustry. “San Juan has a lot to offer. Tourism is still underexploited, and there is the potential to double the growth it has had so far,” says Mr. Uñac.  And with a world-class university with over 15,000 students studying degrees from engineering to the Arts, architecture and social sciences, San Juan’s human resources are among the best in the country, making it an obvious choice for investors.  

In the north of the country, the province of Chaco seeks to inject foreign and domestic capital to grow its economy, with its governor Domingo Peppo prioritizing development over politics. While a member of the Peronist opposition to the President’s Cambiemos coalition, Mr. Peppo is cooperating to attract private investment, which he hopes will be lured to Chaco by the public investment he has put in infrastructure to make the economy more competitive, as well as the province’s natural advantages for logistics.

“The province has numerous strengths,” says Mr. Peppo. “First, a strategic location with respect to Mercosur and great accessibility to the Paraná-Paraguay Waterway.  We have two fully operational ports: Barranquera and Las Palmas, the latter of which we have recently renovated in an infrastructure overhaul. Second is our human capital, with our three universities that attract students from outside the province and the region. Finally, our government’s commitment to accompany private investments with our support.”

With Argentina’s aperture to global capital markets and federal reforms granting greater autonomy to the provinces, the international investor faces a palette of opportunities. “The perception of Argentina is positive. Argentina was closed, but it has now opened up to the world. We are conscious that we need to maintain our identity and our autonomy in order to benefit,” says Mr. Peppo.     In 2016, Chaco went to the debt market for the first time, taking out a $250 loan at 9.5 percent. Governor Peppo’s successful execution of his public works projects will be key if the province wants better rates in the future. While the difficult task will take time, light began to show in March, when Moody’s upgraded the provinces investment rating from Caa3 to B3. Still an unfavorable rating, but Mr. Peppo is quick to point out that Chaco was the only province to receive such an upgrade, and outlines his plan. “Our foreign debt will be used to finance public infrastructure projects to ensure long-term growth, not to cover administrational costs such as paying employee salaries.” Currently, there are 200 infrastructure projects underway throughout the province to install basic services to fill the gaps for citizens and businesses alike.

Primarily known for producing cotton, this is one sector where Chaco has been able to create a fully integrated value chain: from the design to the finished product. The Governor now wants to emulate the success with other products.  “Our objective is to incorporate added value and transform raw materials into products that can be sold domestically or exported,” he says, adding that his government is putting in place training programs to improve the level of human resources to meet the needs of investors. For him, Chaco’s strength comes from its plurality. Regional and national migrations of workers and families have given the province a unique character, made up of a mix of cultures, from Spanish to Italian, Paraguayan and native peoples.

Although officially opposed to Mr. Macri’s party, Mr. Peppo has argued for working with the national government to achieve common goals, and believes that “the possibility of creating dialogue and building relationships with the national government has permitted to some extent the implementation of a program of activities of which we can meet achieve common ground. I believe in a tripartite partnership: the public sector, the private sector, and the education and knowledge institutions. The relationship between the three parts has to be fluid in order to generate opportunities.”

One of Argentina’s smallest provinces, Misiones is arguably its most international, with 91 percent of its territory bordering Brazil and Paraguay. As a result, as Hugo Passalacqua, the province’s governor, points out, Argentina’s newfound focus on external relations is very much in Misiones’ interest. “Although Argentina itself is a cocktail of ethnicities, Misiones is unusual. It’s a large confluence of diverse ethnic realities. We understand very well what international relations mean.”

Mr. Passalacqua has played an active role in Argentina’s recent forays into international relationship-building, accompanying President Macri on his state visit to Brazil in February and travelling with Minister Rogelio Frigerio to Washington D.C. as part of the IDB meetings.

“We have travelled to various countries around the world showing them the opportunities Misiones has to offer. For example, we have managed to get a Polish company to come and invest here, creating employment for the people of Misiones. We will keep on travelling and demonstrating the favorable conditions of Misiones in order to attract more investment and more and better jobs,” says Mr. Passalacqua.

For him, attracting foreign investment is now easier because the nation is opening up to the world, but he cautions that the public sector now needs to work quickly to put in place the right infrastructure and security environment to smooth the path for new business. “We need to work together,” he says. “I believe that the President has a historic opportunity to finally unify Argentina.”

The economy of Misiones is based around agriculture and tourism. Indeed, the province is home to fully half of Argentina’s biodiversity, which the government sees as an important responsibility. Its star attraction is the world-famous Iguazú Falls, and with the deregulation of air transport, Misiones hopes to see an increase in local and international tourists. “We have always dreamed of being able to increase the connectivity of our province; therefore, we got started working with the national government on in this initiative in March 2016. Now that it has been passed, we are very satisfied this is the key for the tourism sector and to generate jobs for the people of Misiones,” says Mr. Passalacqua. Misiones will increase the number of flights from 11 to 24 including low-cost airlines. Nonetheless, the plan now is for Misiones to diversify its economy into industry. “We have recently put out a tender for the port, which is going to be very important for the south of Brazil. We have a 100-hectare industrial park and we are expecting to see foreign investment there,” adds Mr. Passalacqua. “Our aim is to work in conjunction with the public and private sectors, as two parts of the same society.”