Guinea - Boke Bauxite Project

RESTRICTED rF ILE COPY Report No. P-634 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GUINEA September 5, 1968  INTERiATIONAL BANK FOR RECONSTRUCTION AND DEVELOPNENT REPORT AND RECOMEDATION OF THE PRESIDENT TO THE EXECUTIVE DIRBCTORS ON A PROPOSED LOAN TO THE REPUBLIC OF GUINEA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $64.5 million to the Republic of Guinea for the Boke Project. PART I - HISTORICAL 2. In June 1964, the Government of the Republic of Guinea first asked the Bank to consider financing the foreign exchange cost of a railway, port and township necessary for the exploitation of the Boke bauxite project. Prior to that, the Government had in October 1963 entered into an agreement granting rights for the mining of bauxite in the Boke area with a company now called Halco (Mining) Inc., a Delaware corporation. After preliminary study of the proposed project, the Bank decided that more detailed engineering for the contemplated railway and port was required before the Bank could determine whether to proceed with the financing of the construction of the project. Subsequently, on March 30, 1966, the Bank made a project preparation loan of $1.7 million to Guinea (Loan No. S-1 GUI) to finance an engineering study. That study was completed last year and has provided the basic engineering data for the analysis of the present project. This loan has been completely dis- bursed, and it would be refunded by the proposed loan. 3. As originally presented, the Bok6 project contemplated the annual shipment of 1 to 1-1/2 million metric tons of bauxite from the mining operation. In late 1966 and early 1967, partially at the instance of the Bank, the Government of Guinea induced Halco, then wholly con- trolled by Harvey Aluminum Conmany, to expand the size of the operation. At that time, agreements were concluded with other major aluminum com- panies providing for an increase in the annual sales of bauxite to approximately 5 million tons. The other aluminum companies were then given a minority interest in Halco, but Harvey retained voting control. Finally, in early 1968, Harvey and the other stockholders agreed to a sweeping reorganization of Halco which had the effect of making stock ownership conform to the proportion of purchases of bauxite which each stockholder had undertaken to make (see paragraph 9 below). A new  -2- participation agreement has been drafted and is satisfactory to the Bank; it will enter into force, and the reorganization will become effective, at the time of the effectiveness of the proposed Bank loan. 4. On March 29, 1968, the Republic of Guinea, the Bank, Halco and each of the stockholders signed a Memorandum of Understanding which, in summary, stated that the President of the Bank would recommend to the Executive Directors that the Bank finance the proposed railway, port and township provided certain conditions were met and appropriate agreements reflecting those conditions were reached between the Government of Guinea, the Halco group and the Bank. In the course of discussions over the past several months, satisfactory agreements were worked out among the parties; these will be signed at the time the Bank loan documents are signed and will be made effective prior to the effectiveness of the proposed Bank loan. Negotiations of the Loan Agreement between the Republic of Guinea and the Bank and the Project Agreement between the Bank and the Office d'Am6nagement de Boke (OFAB) were held in Washington, from August 13 to August 22, 1968; The Guinean negotiators were: Lansana Beavogui, Minister of Foreign Affairs; Ismael Tour6, Minister of Economic Development; Ousmane Baldet, Secretary of State for Finan- cial Control; Mohamed Kassory Bangoura, Ambassador at Large; Karim Bangoura, Ambassador of Guinea to the United States.; and Marcel Cros and Keita Kabassan, Officials of OFAB. 5. The Republic of Guinea became a member of the Bank on September 28, 1963, and has applied for IDA membership. The only previous Bank loan to Guinea is the loan (Loan No. S-1 GUI) referred to in paragraph 2 above. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. BORROMER: Republic of Guinea BENEFICIARY: Office d'Am6nagement de Boke (OFAB) APDUNT: Equivalent in various currencies of $64.5 million. PURPOSE: To assist in financing the construction of a railroad, a port and a township in connection with the development of bauxite deposits near Boke in north- western Guinea. AIORTIZATION: In 24 years including a 5 year period of grace, through semiannual install- ments beginning October 1, 1973 and ending October 1, 1992 INTEREST RATE: Six and one-half per cent per annum COi.2ITMENiT CHARGE: Three-quarters of one per cent per annum  -3- PART III - THE PROJECT Boke Project 7. A report entitled "Appraisal of the Boke Bauxite Project" (TO-672a) is attached. 8. The project financed by the Bank loan includes a railway, port and township required in connection with the development of bauxite resources near Boke in northwestern Guinea. These facilities cannot be justified independently of the mining operation,and, for purposes of appraisal, the Bank has considered the entire scheme as one project. 9. The bauxite mine will be located at Sangaredi near Boke and will be constructed and operated by Compagnie de Bauxite de Guinee (CBG), owned jointly by the Guinea Government (49%) and Halco (Mining) Inc. (51%). Halco is in turn owned jointly by Alcan (27%), Alcoa (27%), Harvey Aluminum Company (20%)) Pechiney-Ugine (10%), Vereinigte Aluminum Wlerke (10%) and Montecatini-Edison (6%). The mining part of the project consists of the mine and township at Sangaredi., certain handling, pro- cessing and storage facilities and part of the township at the port of Kamsar, and the provision and operation of ore-carrying trains. The total cost of the CBG investment is estimated at $99 million. The six stockholder aluminum corpanies have entered into contracts with CBG in which they promise to purchase specified amounts of bauxite, initially 4.7 million tons per year and from the sixth year of operation to the twentieth year, 5.1 million tons per year. CBG expects to sell some 1.5 million additional tons either to the stockholders or to other consumers. 10. The railway, port and township, which will be owned by the Guinea Government and for which Bank funds will be used, includes a 136 km railway between Sangaredi and Kamsar and the port and township of KIamsar. The total cost of this project, including interest and other charges during construction, is estimated at $83.5 million. The railway and port could handle up to about 8 million tons of bauxite annually. The proposed loan ($64.5 million equivalent) would finance the foreign l exchange cost of this project, including engineering and other professional ervices provided, in consultation with the Bank, prior to and during =egotiations. Included also is the refunding of Loan No. S-1 GUI. The local currency costs of the project financed by the Bank (including about $2 million for possible local cost overruns) will be covered by a loan of up to $21 million equivalent from the U. S. Agency for International Development, which will employ for this purpose local counterpart funds derived from sales of agricultural products under the PL 480 program. ll. OFAB, a government agency set up in 1965, will be in charge of constructing and operating the project financed by the Bank. Under OFAB's technical assistance arrangements with Halco, which have been reviewed by the Bank, Halco will designate personnel to assist OFAB to run the railroad and port and to train OFAB's Guinean employees. All operating  -4- and maintenance costs incurred by OFAB in providing the railroad, town- ship and loading jetty and wharf for the transport and loading of bauxite will be recovered by OFAB from CBG in accordance with agreed formulae for distribution of costs. Costs of maintaining and operating the har- bor facilities will be recovered from port users, and a port user tariff has been established by agreement between OFAB and CBG. The Guinean Government has agreed to provide OFAB with any additional funds it may requilre to carry out its responsibilities. 12. In consideration for extending the mining concession and pro- viding the supporting infrastructure, the Government will receive 65 per cent of the net taxable profits of CBG. It is in effect from these revenues that the Government will service the proposed Bank loan (see also paragraph 16 below). The net increase in income to the Government after debt service is expected to be about $4 million in the first year of operation and to increase thereafter reaching about $17 million in the fifteenth year. The discounted financial rate of return to the Government on its investment of $83.5 million in the infrastructure facilities will be about 14.5 per cent over the 20 year period of the bauxite contracts. 13. The economic rate of return to Guinea is estimated at 18 per cent. The net annual increment to national income is expected to be $7.5 million in the first year of operation and to increase thereafter reaching about $20 million in the fifteenth year. The net foreign exchange accruing to Guinea as a result of the project would be approxi- mately $7.7 million in the first year, and $20.8 million in the fifteenth year of operation, after debt service and repatriation of profits to the stockholders of Halco and of part of the salaries of expatriate staff. 14. Detailed design work on the project has been completed, and prequalification procedures for prospective contractors are wiell advanced. Procurement for all contracts financed in whole or in part out of the proceeds of the Bank loan will be subject to international competitive bidding. To ensure maximum economy, procurement procedures envisage the possibility of combining OFAB and CBG contracts for identical or similar facilities. OFAB and CBG will employ the same consulting engineer. 15. To ensure proper coordination and completion of the construction of the whole project, the Government and I{alco have agreed to set up a Construction Coordination Committee. The Committee will be composed of representatives of OFAB, of CBG and an independent Chairman, satisfactory to the Bank, writh experience in the construction and administration of major works. This Committee will recommend the approval of contracts, certify applications for withdrawal of loan funds, coordinate the work of the consulting engineers, ensure progress of the works and maintain direct liaison with the Bank. The Bank has approved the consulting engineers and the Terms of Reference for the proposed Construction Coor- dination Committee and its Chairman. The costs of the services of the Chairman and his staff and the consulting engineers will be divided equally between OFAB and CBG.  Security for the Bank's Loan 16. In view of Guinea's lack of creditworthiness and the size of the proposed investment, the Bank at an early stage of discussions made it clear that the service for the Bank loan would have to be assured by the stockholders of lIalco either in their role of purchasers of bauxite or by some other satisfactory form of security. After the reor- ganization of Halco in early 1968, the stockholders made certain proposals which were accepted as a basis for negotiation by the Bank in the Memoran- dum of Understanding of M4arch 29, 1968. In the ensuing negotiations, the parties and the Bank have agreed to arrangements which will provide security for the Bank's loan and for the physical completion of the entire project. These arrangements are incorporated in a proposed Financial Assurances Agreement to be entered into among Guinea, CBG, Halco, each of the stockholders and the Bank of America as Trustee and a proposed Trust Agreement to be entered into among Guinea, the Bank, CBG, Halco, each of the stockholders and the Trustee and may be summarized as follows:* (a) CBG will make payments to the Trustee in amounts and currencies required to cover the entire debt service on the Bank loan, and the amount of these payments wzill be credited against the taxes payable by CBG to Guinea. CBG will make these payments prior to the dates required by the amortization schedule to the Bank's loan agreement. (b) If CBG does not make any payment 20 days prior to the date the payment is due, Halco will advance the reouired funds for CBG1s account. (c) If the Trustee has not received the necessary funds ten days prior to the required payment date, each stockholder is required to make a payment to the Trustee as an ad- vance to Halco in proportion to its stockholding in Halco. If the Trustee has not received payment by the day payment is due, it is authorized and directed to collect frcm each stockholder the amount such stockholder was required to provide. (d) In the event that the Trustee is for any reason unable or refuses to make any required payment, each stockholder agrees to pay directly to the Bank its proportionate share of the payment due. (e) These obligations, and other obligations of CBG, Halco and the stockholders with respect to overrun loans, con- struction of the mining project, etc., are subject to suspension only upon conditions making it impossible for 180 days to construct or operate the project when such conditions arise from political causes within, or acts of war directly relating to, Guinea or its territories. * The texts of these Agreements are available, upon request, from the Secretary's Department.  -6- These obligations would be subject to termnination only if a suspension for the reasons stated above continues for 600 days, if the Bank loan were accel- erated solely for such reason,or if there were compul- sory deprivation by Guinea of the stockholders' fund- amental rights of ownership or their effective control of CBG. 17. The Financial Assurances Agreement also makes provision for loans by CBG, Halco and the stockholders through the Trustee to cover any overrun of foreign exchange needed to complete the railway, port and township. These "overage" loans would be made when it appears that proceeds of the Bank loan are insufficient to finance the foreign exchange costs of the project. The Financial Assurances Agreement also contains assurances by CBG, Halco and the stockholders relating to the construction and finan- cing of the mining project. Financing of the 1qining Project 18. The equity capital of CBG of $37 million (including $20 million of subordinated non-interest bearing advances from Halco) will be contri- buted in accordance with an agreed schedule over the period of construc- tion of the mine. In addition to this equity contribution, CBG will have to borrow at long term about $62 million to complete the mining project. Halco has engaged the baniking firm of Kuhn, Loeb & Co. to assist in obtaining this long term finance. Pending completion of arrangements for the permanent financing of CBG, Halco has entered into a five-year standby commitment with a bank syndicate headed by the Bank of America whereby the banks have agreed to make available a revolving credit facility of up to $75 million. This credit, which will be guaranteed proportionately by each of the stockholders of Halco, will assure avail- ability of capital to CBG during the construction period. The credit agreement will be signed prior to or at the time of the signing of the Bank loan. 19. Discussions relating to most of the permanent financing of CBG are reasonably well advanced. Under the Financial Assurances Agree- ment, Halco has undertaken to take such action as may be required to cause CBG to carry out the mining project. The completion of arrange- ments, satisfactory to the Bank, for the long term financing of the mining project is established as a condition of effectiveness of the Bank loan.  -7- PART IV - LEGAL INSTRU1EIOTTS Ai' AUTHORITY 20. Drafts of: (a) the Loan Agreement between the Republic of Guinea and the Bank; (b) the Project Agreement between the Bank and OFAB; and (c) the Report of the Committee provided for in Article III, Section L(iii) of the Articles of Agreement are being distributed to the Excecutive Directors separately. 21. The following features of the Loan and Project Agreements are of particular interest: (a) the Bank would draw from the Loan Account the amount required to refund Loan S-1 GUI and amounts required to pay interest and other charges during construction of the Project (Section 2.03 of the Loan Agreement); (b) the Bank would have to be satisfied with the professional qualifications and experience of any future Directeur Gen6ral of OFAB (Section 5.03(a) of the Loan Agreement) and the senior staff of OFAB (Section 2.06(c) of the Pro- ject Agreement); (c) the Borrower would take all action necessary to permit CBG to complete the M1ining Project and begin deliveries of bauxite 90 days after completion of the Project or the Mining Project, whichever will be the later, and to maintain and operate the lwining Project (Section 5.04 of the Loan Agreement); (d) the Borrower would make funds available to OFAB if such funds are needed to enable OFAB to carry out the Project, and would protect OFAB against any loss resulting from the operation of trains for non-bauxite traffic (Section 5.07 of the Loan AgreEment); (e) the Borrower and OFAB would duly perform their respective obligations, and take all reasonable action to secure the performance by the parties concerned of their obligations, under the Financial Assurances Agreement, the Trust Agree- ment and the technical agreements between the Borrower, OFAB, CBG and Halco, and would exchange views with the Bank in respect of any arbitration proceeding thereunder (Section 5.08(a) of the Loan Agreement, Section 2.09 of the Project Agreement); (f) during the period of construction of the Project, OFAB would not undertake arn major projects or developments other than the Project; thereafter, such projects or developments could be undertaken by OFAB only if the Bank were satisfied that such undertaking would not  - 8 - interfere with the performance by OFAB of its obliga- tions under the Project Agreement (Section 2.11 of the Project Agreement); (g) if the Borrower were to prepay any part of its indebted- ness under the AID Loan Agreement, it would simulta- neously prepay a proportionate amount of the Loan (Sec- tion 5.09 of the Loan Agreement); (h) the Bank would have the right to suspend, cancel or in certain circumstances premature the Loan if the instru- ments and agreements affecting the Project were modified without the approval of the Bank or if certain other designated events were to occur (Section 6.02 of the Loan Agreement). 22. The Financial Assurances Agreement, the Trust Agreement, the Participation Agreement and the various technical agreements between Guinea, OFAB, CBG and Halco, and the AID Loan Agreement are all con- ditional on each other and are all conditions of effectiveness of the Bank Loan. The effectiveness of the Bank Loan is also conditional upon the appointment of the Chairman of the Construction Coordination Committee, the execution of the Credit Agreement between Halco and the Bank of America National Trust and Savings Association and the conclu- sion of arrangements satisfactory to the Bank regarding the long-term financing of the iining Project. It is contemplated that all these agree- ments would be executed at or about the same time in Washington and that, after all necessary action (including ratification by the President of the Republic of Guinea and by the Board of OFAB) has been taken, all the agreements would be made effective at a simultaneous closing. PART V - TIHE MCONU0MY 23. An economic report (No. AF-63b, dated September 1, 1967) was distributed on January 22, 1968. 24. Guinea has had serious economic difficulties since achieving independence in 1958. These hiave been partially due to the almost com- plete break of economic relations with France, after independence, which led to the immediate cessation of all French assistance to Guinea and the exodus of most expatriates. These measures abruptly deprived the modern sector of the economy of its markets, its source of long term capital and of its most experienced cadres. To a considerable extent, however, Guinea's slow economic progress has also been the result of the economic policy followed by the Government since independence, especially of the largely uneconomic public investment program financed to a considerable extent by short and medium term borrowing from abroad, resulting in an accumulation of external debt of over $300 million. Due to the uneconomic selection of investment projects and the lack of abil- ity to manage these projects properly after completion, the high invest- ment rate did not lead to economic growth but instead resulted in a serious  - 9 - foreign debt problem and increasing balance-of-payments difficulties. As a consequence, imports had to be restricted, causing, inter alia, a severe shortage of imported consumer goods, particularly in rural areas, which reduced farmers' incentives to produce cash crops and in turn reduced agri- cultural production and exports, already hampered by the departure of most of the expatriate cadres and the loss of assured markets in France. 25. In November 1967, the economic position was discussed in Guinea with the Government. The latter agreed in principle wTith the Bank's eco- nomic assessment and declared its willingness to try to follow the main policy recommendations formulated by the Bank. Since then a small part of the public foreign debt has been rescheduled and additional negotia- tions are presently well advanced. In addition, the Government has declared its willingness to apply economic criteria in selecting new public investments, to give high priority to the better utilization of existing investments, and to keep overall public investments within fi- nancially reasonable limits. 26. A gradual improvement of the balance of payments situation may be expected, enabling the import of more consumer goods which in turn should increase the incentives to farmer's to produce more cash crops for export and for import substitution. IWith sufficient determination by the Government leaders a gradual improvement of the country's economic performance can reasonably be expected. Expectations should not, however, be placed too high; basically, Guinea has not yet been able to build a properly functioning system of public administration. Even with the best will in the wiorld, good policies may not be adequately implemented. The new approach towards economic problems now emerging in Guinea is also demonstrated by the Government's recent initiation of discussions with the International iIonetary Fund with a view toward a possible standby arrangement. 27. The proposed financing of the local costs of the Boke Project by PL 480 funds presently deposited with the Cent,ral Bank of Guinea gives concern regarding the potentially inflationary impact of such a measure. The Government is well aware of this danger and has. indicated, during negotiations, that its overall public investment program during the coming years, including Bok6, wjill be financed by non-inflationary sources. 28. In the absence of special arrangements for servicing the proposed Bank loan as outlined above, Guinea could not be considered creditworthy for borrowing from the Bank. More generally, in view of the already high level of debt service on its other external obligations (in the range of 35-4550 of export earnings), the Government should not incur additional external debt except for projects which will clearly make a very substan- tial net contribution to the country's foreign earnings. During nego- tiations, the Government has declared its intention not to accept new foreign credits with amortization beginning before 1972.  - 10 - PART VI - COAPLI.0JCE WITH ARTICLES OF AGREE1ENT 29. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOi1EIDATION 30. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO.__ Approval of Loan to the Republic of Guinea in an amount equivalent to U.S.$64,500,000 RESOLVED: THAT the Bank shall grant a loan to the Republic of Guinea in an amount in various currencies eouivalent to sixty-four million five hundred thousand United States dollars (u.s.$64,50o,ooo), to mature on and prior to October 1, 1992, to bear interest at the rate of six and one-half per cent (6-1/25Z) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Boke Project) between the Republic of Guinea and the Bank and in the form of Project Agreement (Boke Project) between the Bank and the Office d'Amenagement de Boke, which have been presented to this meeting. Robert S. McNamara President Attachment Washington, D.C. September .5, 1968