Austria - Second Industrial Credit Project

RESTRICTED Report No. P,-2o5 FILE CiPy This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON,A PROPOSED LOAN TO THE OESTERREICHISCHE INVESTITIONSKREDIT A.G. September 17, 1959 REPORT AND RECOM4ENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE OESTERREICHISCFE TINVESTITIONSKREDTT A,G. 1. I submit the following report and recommendations with regard to a proposed loan in an amount in various currencies equivalent to $9,000,000 to the Oesterreichische Investitionskredit A.G. PART I - HISTORICAL 2. The Oesterreichische Investitionskredit A.G. (IVK) was established in July 1957 with an initial capital of one million Austrian schillings ($38,500). This capital was subscribed by the Oesterreichische Kontroll- bank A.G., an institution which is owned by the most important commercial banks in Austria and which performs various services which the commercial banks find it useful to have carried out by a central organization. The immediate purpose of IVK was to act as an intermediary for a loan from the Bank for the expansion and modernization of a number of industrial enterprises in Austria. The loan (Loan 192 AUA) was made in April 1958 and was for $10,765,000. The proceeds of the loan were to be re-lent to a number of industrial enterprises. All the projects had been selected and appraised by the Bank and the loan agreements between IVK and the beneficiary enterprises were worked out in consultation with the Bank. 3. In the first loan, therefore, the IVK had a limited role. It was always intended, however, to strengthen the IVK's capital structure by obtaining more equity funds and thus build it up into a full-fledged independent investment institution. The first step in this direction was taken in August last year when IVK obtained a loan of Sch. 80 mil- lion ($3.1 million) of counterpart funds repayable over 60 years with interest at 1%. The second step came in December 1958, when an issue of shares increased its capital to Sch. 42 million (about 81.6 million). Of the present share capital, about 70% is held by banks (33% is held by the Kontrollbank), 20% by industrial enterprises and the remainder by insurance companies, co-operative credit organizations and private individuals. 4. In April of this year, IVK requested the Bank to consider a fur- ther loan and a Bank mission visited Vienna in June to discuss the ques- tion with the management of IVK. Negotiations were completed early in September. 5. The proposed loan of $9 million would be the Bank's eighth loan to Austria and would increase the total amount of Bank loans to Austria to $99.9 million net of cancellations. The status of the previous loans at August 31, 1959 was as follows: -2 - No. Borrower Purpose Amount (equivalent in $ million 102 AUA Verbundgesellschaft/ Electric Power 12.0 Draukraftwerke 118 AUA Vorarlberger Illwerke 10.0 148 AUA Verbundgesellschaft/ 10.0 Draukraftwerke 149 AUA Verbundgesellschaft/ 21.0 Donaukraftwerke 179 AUA Vorarlberger Illwerke 3.6 192 AUA Oesterreichische Financing of 9.3 Investitionskredit Private Industry 213 AUA Verbundgesellschaft/ Electric Pnwer 25.0 Donaukraftwerke Total (Net of cancellations and refundings): 90.9 1/ of which has been repaid: 0.2 Total now outstanding: 90.7 Amount sold: 4.5 of which has been repaid: - 4.5 Net amount now held by Bank: 86.2 1/ Includes $28.5 not yet disbursed. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The loan would be in the form of a line of credit, and would have the following features: Borrower : Oesterreichische Investitionskredit A.G. Guarantor : Republic Pf Austria Amount $9 million equivalent in various currencies Purpose To assist in the financing of industrial projects in Austria - 3 - Interest Rate : The proposed loan would not have a single interest rate, but the part of the loan allocated for each project would carry its own interest rate, which would be the Bank's current rate at the time that part of the loan was credited to the Loan Account Amortization There would be no single amortization sched- ule. Instead, separate amortization sched- ules would be determined for each project and would reflect the amortization schedules agreed upon between IVK and the borrowing enterprise. However, the Loan Agreement would provide that the loan must be fully repaid by October 1, 1974 Commitment Charge : 3/4 of 1% per annum to accrue from the dates on which amounts are credited to the Loan Account. PART III - LEGAL INSTRUNEFTS AND AUTHORITY 7. Attached are a draft Loan Agreement between the Bank and IVK (No. 1), a draft Guarantee Agreement between the Republic of Austria and the Bank (No. 2), and the report of the Committee provided for in Article III, Section 4, paragraph (iii) of the Articles of Agreement (No. 3). 8. Attention is drawn to the following provisions in the Loan Agreement: (a) The matters described under "Interest Rate" and "Amortization" in paragraph 6 above are covered in Section 2.02, 2.05, and 2.07; (b) Except as the Bank shall otherwise agree, the total of indeb- tedness incurred, assumed or guaranteed by IVK should not ex- ceed three and one half times the sum of its capital, surplus and general reserves plus the outstanding amount of the coun- terpart funds loan from the Government (Section 5.05). PART TV - APPRAISAL OF THE PROPOSED LOAN The Borrower 9. An appraisal report on the Oesterreichische Investitionskredit A.G. is attached (No. 4). At present, the management (Vorstand) of the Kon- trollbank is acting as the management of IVK but it is expected that another director will shortly be appointed who will devote all his time to the business of IVK. The Board of Directors (Aufsichtsrat) of IVK consists of six people representing banking, insurance and industry, one lawyer and its chairman, Dr. W. Teufenstein, of the Ministry of Finance. Purpose of the Loan 10. The loan would be re-lent by IVK for the expansion and moderniza- tion of industrial projects in Austria. The projects would be selected and appraised by IVK, subject to final approval by the Bank. Judging from the number and size of applications so far received, the loan would cover IVKts needs until about the end of 1961. Disbursement 11. The loan will be disbursed to cover a proportion of total expendi- ture on each project without reference to the foreign exchange component in each case. Austria has an industrialized economy and manufactures a substantial proportion of its requirements of capital goods. Consequently, the average Austrian firm's need for long-term capital bears no particular relation to its need to use imported goods in its expansion plans. 12. The eventual beneficiaries, and not Investitionskredit, will bear the exchange risk on the sums borrowed from the Bank. It is therefore pro- posed that the loan be disbursed uniformly in dollars, rather than in a number of currencies, in order to avoid the problem which would arise if exchange risks in several different currencies had to be allocated to the different beneficiaries. This procedure was also used for the previous loan. Amortization 13. As noted in paragraph 5 above, there will be no single amortization schedule for the whole loan. Instead, separate amortization schedules will be agreed upon for each project and will be determined in accord- ance with the circumstances of the beneficiary enterprise concerned. Hence repayments from the ultimate borrower to IVK will be paid immed- iately to the Bank without any time lag. This arrangement is, in prin- ciple, the same as that used for the first loan to IVK, except that, in the case of the first loan, the terms of all the separate loans for the projects had been agreed upon at the time the loan was signed so that a combined amortization schedule for the whole Bank loan could be included in the loan agreement from the outset. Justification of the Loan 14. The loan will help to provide Austrian industry, particularly small and medium-sized enterprises, with long-term capital which, under present conditions, is available to industry in Austria only in restricted amounts. The Austrian capital market is almost wholly confined to issues by the Government, government agencies and public utilities. Private industry has to be financed largely by retained earnings, sup- plemented by some credit from commercial banks, and there is a real need for a source of long-term capital for industry. It is hoped that, with the support provided by the proposed loan, the IVK will be able, in time, to attract additional capital from private sources and gradually to in- crease its role in the Austrian capital market. Prospects of Fulfillment of Obligation 15. The additional resources provided by the increase in share capital and by the Sch. 80 million counterpart fund loan have provided IVK with a sound financial base. The counterpart fund loan constitutes additional equity from the point of view of senior creditors such as the Bank, since its terms expressly provide that, in the event of liquidation, any amount still outstanding shall be treated in the same way as share capital. Fur- thermore, Austrian tax laws permit TVK to place substantial amounts to re- serve before taxation, thus enabling it to accumulate reserves rapidly during the next few years. It is expected that by the end of 1961 the total of the capital, reserves and counterpart fund loan will amount to Sch. 138 million (85.3 million) while the total of the two Bank loans will be Sch. 464 million ($17.8 million equivalent). The ratio of debt to equity would therefore be about 3.36 to 1. 16. The management of IVK is satisfactory and its staff, although small, is being built up. For the year 1958, IVK suffered a small operating loss but is expected to show an operating profit for the current and subsequent years. The Austrian economic situation is healthy and it should be pos- sible for IVK to develop a sound industrial loan business. The company does not intend to distribute any dividends until adequate reserves have been accumulated. Economic Situation 17. In the last few years, Austria has participated in the economic ex- pansion and prosperity which has characterized most Western European coun- tries. Like Germany and Italy, Austriats national product has expanded at a rate much above the Western European average, while price increases remained moderate. Full employment, increasing productivity of labor and greater efficiency in industry were among the factors responsible for the continued increase in output. The high level of economic activity was maintained alternately through high exports and high internal investment and consumption. Small surpluses on goods and services account as well as a steady inflow of foreign capital enabled foreign exchange reserves to increase to a comfortable level. 18. Austria has fared well through the mild 1957-1958 recession. Through timely fiscal measures the Government was able to stimulate internal de- mand sufficiently to sustain economic activity, without impairing the bal- ance of payments. That phase of Austria's economic development was des- cribed in the last report on "The Present Economic and Financial Position of Austria", (Report N7o. R58-120) which was circulated to the Executive Directors on November 24, 1958. 19. The rate of growth slowed down in 1958, but was still higher than in most other Western European countries. Real gross national product is estimated to have increased by 3.4% compared with an increase of 5.8% in 1957. Austrian exports, which rose by 15% in 1957, declined by 6% in 1958. The effect on the economy as a whole was, however, offset to some extent by a deliberate increase in public investment. In the first half of 1959 the economy recovered quickly from the seasonal low of the winter months, owing to rising exports end continued high public invest- ment. By mid-year industrial production and employment were well above their levels of a year ago. Private investment, which had been slow to recover, also showed some improvement. Exports for the first half of 1959 were about 2% above the corresponding period of 1958. It is expec- ted that, if present trends continue, the rate of real growth of G.T.P. may be around 5% for 1959. 20. The balance of payments position has remained strong even during the period of declining exports. Gold and foreign exchange reserves have continued to rise substantially as a result of receipts from tourism and capital imports and reached the equivalent of $7C6 million at the end of June 1959, compared with $524 million equivalent a year ago. Although they are now sufficient to cover nearly eight months imports, there is no reason to regard them as excessive. Austria, while not a member of the Common Market, sends over 50% of her exports to common market coun- tries. The "Little Free Trade Area", which Austria proposes to join, takes only about 11% of her exports. The prospect of reduced trade bar- riers between the common market countries makes it likely that Austrian exports will encounter increasing competition. Hence adequate reserves of foreign exchange are of special importance in that they can provide time for the economy to make any necessary adjustments. 21. The expansionary fiscal policy of the Government included both tax reductions and higher expenditures for investment. As a result, there was an over-all deficit of Sch. 5.4 billion which was the largest for several years. The deficit for 1957 was Sch. 1.2 billion and the bud- get estimates for 1959 provide for an over-all deficit of Sch. 4 billion. The gradual strengthening of the Austrian capital market and Austria's ability to borrow abroad enabled the deficit to be covered by long-term borrowing. Since at the same time credit expansion remained moderate, monetary stability was not endangered and the cautious monetary policy pursued by the Austrian authorities could be relaxed somewhat. In April 1959 the rediscount rate was reduced from 5% to 4 1/2%. Except for minor adjustments, prices and wages remained stable during the period under re- view. 22. Although the external debt of Austria has increased by $119 million equivalent since the beginning of 1958, to reach an estimated $323 mil- lion equivalent on June 30, 1959, service payments are still less than 3% of Austria's total foreign exchange earnings at the 1958 rate. This total does not include the deliveries of goods and crude oil to be made to the Soviet Union under the State Treaty, of which the equivalent of about $110 million remain to be paid by 1965. These deliveries amounted to $45 million equivalent in 1958 compared with service payments on the normal debt of just under $40 million equivalent. PART V - COMPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VI - RECOMM1ENDATIONS 24. I recommend that the Bank at this time lend to the Oesterreichische Investitionskredit A.G. an amount in various currencies equivalent to $9 million for a term of up to 15 years, on such terms as are specified in the form of the Loan and Guarantee Agreements attached, and that the Executive Directors adopt a resolution to that effect in the form at- tached (No. 5). Eugene R. Black Washington D.C. September 17, 1959