Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, October 7, 1969 : Argentina - Power Project

STRICTLY CONFIDENTIAL INTERNATIONAT, BANK FOR RECONSTRUCTIO~ AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION JOINT MEETING Washington, D.C. Tuesday, October 7,1969 A joint meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10:00 o'clock, a.m. in the Boar~ Room, 1818 H Street, N.W., Mr. Roberts. McNamara, President, presiding as Chairman. STRICTLY CONFIDENTIAL 2 I 11 II 'I ,, 11 1: 11 Ii CONTENTS I page 1. Proposed Loan - Argentina (Power) 3 STRICTLY CONFIDENTIAL 3 P R O C E E D I N G S MR. McNAMARA: The first is a proposed loan to Argentina in the amount of $60 million for a power project. I'll call on Mr. Fajans to come to the table and introduce it to you. Go right ahead, sir. MR. FAJANS: Mr. Chairman, Members of the Board: When the Bank made its latest loan to Argentina on June 24, Dr. Dagnino Pastore had just succeeded Dr. Krieger Vasena in the key post of Minister of Economy and Labor, and had expressed his determination to follow his predecessor's policy. The success of the Argentine Government's stabilization effort and the performance of the Argentine economy during or. Krieger's 2-1/2 year tenure of office had been impressive. The change in economic leadership in June has not to date significantly affected the continuation of the Government's economic program. While the present phase of collective wage bargaining does, as indicated in the President's Report, represent a sensitive test, the outlook seems reasonably good that the Government STRICTLY CONFIDENTIAL 4 will be able to pursue its incomes policy. The emphasis of the Bank's lending activity in 11 Argentina is at this time shifting from the power sector ii I to the transport sector. The third loan to SEGBA, now 1. 11 being submitted for your approval, is the culmination of i a major lending effort made by the Bank in the Argentine power sector. With this loan, the Bank will have lent nearly 200 million dollars for power development since the beginning of 1968. In the past few years, the power sector has made considerable progress. The men in charge of the responsible Government department and the Government-owned power entities are highly competent and experienced. Labor- management relations have greatly improved and management authority in labor matters has asserted itself. of steadily expanding service. Better efficiency in operations has been achieved in the context The power companies supplyin i 1 Buenos Aires are now coordinating their operations and J investment, and the possibilities for interconnecting the Buenos Aires Litoral system, by far the largest in Argentina, and the Buenos Aires Province system are under study. Adequate finance has been available for expansion from self-generated funds and from borrowing on favorable terms. STRICTLY CONFIDENTIAL 5 fl 1' II ,' SEGBA is the most important power entity in II Argentina and, given approval of the proposed loan, will 'I become one of the Bank's largest individual borrowers. I In the context of general progress in the power sector, SEGBA has greatly improved its efficiency and strengthened its financial position. The time has clearly come for placin greater reliance on the capital market as a source of funds. In the past several months, SEGBA has discussed with the Bank its plans for issuing bonds in the private market and for paying cash dividends to attract private equity I capital. We expect that, in due course, the private investors will replace the Bank as SEGBA's main source of outside capital. In the transport sector, we have also been witnessing some institutional, operational and financial improvement and modernization. Last June, when the Bank lent $25 million for a road project, we expected that loan to be the first of several for the Argentine Government's road and railway investment programs. This expectation still holds. As the President's Report indicates, work is proceeding on the formulation of a road project and a railway project, which may be ready for appraisal in a few months. The road network reconnaissance, which forms part of the last road project, should be completed before the end of the STRICTLY CONFIDENTIAL 6 year. The Government will rely on its findings in determinin construction priorities, thus giving more weight to economic criteria in road investment planning. The Argentine railways have succeeded in the past three years in reducing their operating deficit by one-half and are about to put into effect staff retirement regulations which will permit further reduction in personnel. Last month the Government enacted a new statute for the railways to provide a basis for their businesslike administration and operation. In the light of these developments, we are planning a major lending effort in the transport sector in t~e next few years. In concluding, I should make one comment on the documents before you. In Section 3.02 of the Loan Agreement, the reference will be to the procurement guide- lines dated August 1969 and not to those of February 1968. MR. McNAMARA : Thank you , sir. Gentlemen, I believe Mr. Rice has asked to speak first, am I correct? MR. RICE: Yes. MR. McNAMARA: Go right ahead, sir. MR. RICE: Not necessarily first, Mr. Chairman. Mr. Chairman, we are glad to support this loan to finance part of the foreign exchange costs of a project STRICTLY CONFIDENTIAL 7 which will have the effect of expanding the transmission and distribution system in the greater Buenos Aires area, but as usual, Mr. Chairman, whenever novel procurement arrangements are proposed, I am obliged to say that we have some reservations. In this case we are concerned that these procure- ment arrangements may tend to erode the international compe- titive bidding principle. We recognize that in the absence of these arrangements, particularly in this case, the cost of this project might well be higher than it will turn out to be. However, we still, despite the fact that for the one-third of the relevant procurement, the possible ceiling will be 138 percent of the lowest bid of the foreign supplier, despite this, we still have to recognize that this arrangement will add significantly to the cost of this project, and in this case it is the cost of power, the effects of which will be felt throughout the cost structure of the economy. This addition to the cost of a basic resource to the Argentine economy, we feel, may have especially undes·r- able effects. With these reservations, Mr. Chairman, we are glad to give our support to the project. STRICTLY CONFIDENTIAL 8 MR. McNAMARA: Thank you, Mr. Rice. I might ask Mr. Knapp to comment briefly on the procurement provisions which Mr. Rice is alluding to, and the effects of those, and the reason why we believe they are in the interest of the parties. Burke. MR. KNAPP: Well, Mr. Rice is correct in saying that these arrangements are somewhat unusual. They stem back, really, to the position in Argentina that SEGBA, on the one hand, was very anxious as an institution to have ace ss to the cheapest possible sources of supply. The Government, on the other hand, was anxious to see that existing indus- tries in Argentina which produce electrical equipment got a sufficient volume of orders to keep them active, to employ capital invested in them, and to keep up employment. We have tried to work out here, as is stated in the papers, a compromise formula which, while bowing in the direction of keeping some local industry employed, first of all puts limits on the degree of protection which these local industries should enjoy, even though the financing of the orders is being completely financed by Argentina. We are not involved in financing of domestic procurement at any margin of preference above 15 percent. Nonetheless, the Government has been prepared STRICTLY CONFIDENTIAL 9 to compromise this with us and accept those limits, thereby at least establishing some standards, enforcing some standards of enforcement by the domestic suppliers; and at the same time we are assuring that the overall cost of the project by these various limits that are fixed on the two-thirds and the one-third will not be unduly burdensome. I think it is to be viewed against the alternative that we might have faced, had they simply come to us and said, "We want you to finance the forei!A exchange costs of this project, and here is certain equipment•: and we would have financed that, and wholly ignored this domestic procurement problem. We moved into that area, allied with SEGBA, who also wanted to see something done about this, and .truck this compromise position. I wish personally that that 38 percent figure could have been smaller; and as a matter of fact, we did some bargaining to get it smaller, and next time, if we have another loan, we may insist on it a little more strongly, but it does provide some protection in an area which other- wise might be just wide open. MR. McNAMARA: Thank you, Burke. Mr. Maude. STRICTLY CONFIDENTIAL 10 MR. MAUDE: Thank you, Mr. Chairman. I think my position in this is very similar to that! of Mr. Rice; that is to say that I think this is basically a sound project, and I have no hesitation whatever in giving it my full support. I was, however, somewhat disturbed by the procure- ment arrangements proposed in the paper in the same way that Mr. Rice was. I recognize that the 38 percent margin pro- posed for the possible one-third of procurement does not directly affect the Bank or the Bank loan, but nevertheless the 38 percent did seem a somewhat high figure, and I was not very clear when I first read the paper exactly how one justified it. Well, Mr. Knapp has been frank enough to tell us that in fact it was a negotiated compromise, and like most compromises, not wholly satisfactory maybe to either side. At least we have to accept something we recognize as not ideal, but something on which agreement has been reached, and on that basis I am content to go along with it. It does, of course, raise, Mr. Chairman I mean this is one example of a class of problems that goes rather widely. You yourself, I think I remember, made some remarks on this subject in your speech at the Annual Meeting, STRICTLY CONFIDENTIAL 11 and it may be, perhaps, thatit would be helpful if sometime in the not too distant future we could have a more general look at this question. We have had some discussions in the past, but these problems are always likely to arise and may indeed arise ·with greater frequency, I suppose, in the future. I think myself that a further general review of the whole subject might be helpful, but as far as this particular project goes, Mr. Chairman, as I say, I am not entirely without reservations in my mind about it but I'm quite happy to support it. Thank you. MR. McNAMARA: Thank you, Mr. Maude. I think your suggestion that there be a more general review of the problem of protection of local industries is a very pertinen one and perhaps it would be appropriate to use the review of our preference procedure, particularly the 15 percent guideline that we are applying now as a basis for such a more general review. As I believe I mentioned to the Board before, we are continuing our study of the alternative to the present 15 percent preference policy, and I very much hope to bring to the Board before the end of this year our STRICTLY CONFIDENTIAL 12 analysis of that, and I believe we will recommend an alternati e In any event, at that time I think we might broaden the discussion to cover some of the issues that Mr. Maude and Mr. Rice have alluded to. What may not be clear to you, and what Burke might havef n mind mentioning himself is that in this particular case, the Government has provided complete protection. I mean it's actual prohibition, as I understand it, of imports to much of the industry, much of the local industry operating in this field; and secondly, that that industry's pricing is substantially above world pricing and in most cases by amounts far in excess of 38 percent. The 38 percent therefore represents a major concession by the Government to apply additional competitive pressure to this segment of their industry, and we considered it, therefore, a major step forward in reducing undesirable tariff protection and therefore have recommended it to you. This I think ought to be the basic policy this Bank follows, as circumstances permit, to permit comparative advantage to operate in the interests of both parties, and that is the_policywe believe we have followed here. Burke. MR. KNAPP: Well, I thought I would add just one  13 STRICTLY CONFIDENTIAL :i 'I !1 11 I\ thing which might interest the members of the Board, for i! :I them to be thinking about. The Argentines made to us a point which is that in this framework -- this goes to why 38 percent, rather than some other figure or why a figure something in that area -- they made the point to us that we accept the principle of 15 percent margin of preference to domestic suppliers. Then they said, "Why don't you accept a system such as this system which would assure that the average addition to the cost of procurement in this area that is covered by these arrangements would not exceed 15 percent?" On the face of it, that seems rather plausible, although as I say, we rejected that and said we hoped to see a figure lower than 38 percent fixed. Let me point out why this pattern means that the average cannot be more than 15 percent. With respect to the two-thirds of the orders, the worst that can happen in terms of the cost of the project is that all of those go to domestic suppliers with the 15 percent margin. I mean, this is the worst thing that can happen, the worst from the point of view of SEGBA, and the worst from the point of view of the cost of the project. And then the worst that can happen in the other area is that two-thirds goes to foreign suppliers. The one-third procurement at 38 percent margin STRICTLY CONFIDENTIAL 14 of preference only occurs if accompanied by two-thirds procurement abroad, so the Argentine argument was that this means the 38 percent applies to one-third of the amount, therefore approximately 13 percent, so that the maximum additional cost laid on the project in that one-third area would be 13 percent, and overall the maximum additional cost to the project within the cost of this area of procurement we're talking about, would be 15 percent. I think it is a point that is perhaps worth keeping in mind for the future. We, as I say, still try to get lower figures. MR. McNAMARA: Yes, Mr. vom Hofe. MR. VOM HOFE: I have a more technical question. Aren't there any limitations to this new formula? If you take cables.it might make no big difference whether you take European cables or Argentine cables, but if you take machinery, turbines or compressors, then you have two different types. Two-thirds are delivered by somebody els~, in Germany, France, Italy, England; and the other one is an Argentine turbine, so you have to have spare parts and different engineering and everything else. MR. McNAMARA: Mr. Aldewereld. MR. ALDEWEFELD: Well, this is a question that is not only particular to the Argentine. The question applies STRICTLY CONFIDENTIAL 15 in the case of equipment; this performance characteristic applies to practically all projects. Therefore what you get in a case like that is what we call an evaluated bid. In other words, the performance of this particular type of machinery is compared with how it will fit into the whole system, and the question of spare parts will also be taken into the account, so it is therefore always a very difficult but I would say quite commonly accepted procedure to compare the performance characteristic of specific type of machinery and whether or not it's compatible with other types of machinery. MR. McNAMARA: Gentlemen, are there other comments or questions? Mr. Shroff. MR. SHROFF: Mr. Chairman, I am very glad to support this project, and since the discussion has gone on, on the procurement aspect, if I may make two comments: One is I didn't quite understand the arithmetic which was just presented; namely, that the average cost cannot go up more than 15 percent. If, out of the total procurement, two- thirds can at worst be 15 percent higher, and one-third can at worst be 38 percent higher, I think the average has to be between 15 and 38. MR. McNAMARA: No, it is the latter that is not  16 STRICTLY CONFIDENTIAL Ii ' the case. Let Mr. Knapp explain it again. The one-third cannot be 38 percent. MR. KNAPP: No. The area of procurement where the 38 percent arises is a blend between two-thirds foreign II ' procurement and one-third domestic procurement; the two- thirds foreign procurement has zero additional cost, the domestic procurement has 38 percent additional cost, and the average therefore for that area of procurement is one-third of 38 or 13 percent. MR. SHROFF: Am I right, therefore, in presuming if there is any domestic procurement under the two-thirds category, with the 15 percent margin, then no domestic supplier has then the right to ask for 38 percent for the same equipment? He will then have to supply it at 15 percent? MR. KNAPP: Oh, yes. MR. McNAMARA: Exactly. MR. SHROFF: The point I really wanted to make I 1 was that in one sense we welcome this provision. It is an encouragement provided for local industry, quite ,I consistent with the Bank's policies in this regard; and we 11 I hope that we will find a way over time to take a view about what_is a reasonable degree of protection in various STRICTLY CONFIDENTIAL 17 countries. Here I think the Bank for the first time has taken a view by negotiation or by looking at the situati n prevailing in the country, and decided that 38 percent is in some sense reasonable, so that we should not shy away in future from taking such a view, about what is a reasonabl degree of protection, and if we are able to take such a view I don't see why we should not also be able to finance such procurement. MR. McNAMARA: I don't think we have said 38 percent is the reasonable protection in the Argentine at least we didn't mean to say that. Burke? MR. KNAPP: No, certainly not. All we said was that it was better than no limit, and we negotiated hard to get it lower, and we are not prepared to finance procurement undertaken on that basis. MR. McNAMARA: That I s the point. On what we are financing, we allow only 15 percent; on the non-Bank financed procurement, which as I understand it from past actions by the Bank and from what I have observed during the 11 year, we have a variable policy on. To take the extreme 'i case, in cases that we don't finance in the Argentine that I are not part of Bank projects, we say nothing about local I preference. We have not negotiated with the Argentine a STRICTLY CONFIDENTIAL 18 ,I 'I ij Ii 11 whole tariff structure, in other words, so there is excluded II :1 procurement of tremendous amounts. '.i 1, /i Now in other cases we exclude the procurement on 11 Bank-financed projects from preference discussions. Where II we can make progress in negotiation with a country to I. reduce the tariffs to more acceptable levels in their long-run interest and interests of the trade of the world, we do so, and this is an illustration of how it has been done. I think it is a pragmatic policy and one that is rather difficult to describe but once one examines it case by case, I think we'll have to agree it is very much in the interests of all parties, and I think the Bank over a period of time has accomplished a great deal by this pragmatism. Now we'll bring these issues up again for your consideration in connection with this local preference paper, which we are working on, and which we will hope to have before you before the end of the year. Dr. Machado. DR. MACHADO: Mr. Chairman, everyone of my colleagues 11 II who has spoken before has praised this project as one that 11, is worthy of Bank support. It actually will complete the full utilization of the electricity that we have helped with I STRICTLY CONFIDENTIAL 19 our previous loans to generate in Argentina. There's no point in generating electricity if you have no way of distributing and actually reaching the consumer. The only cloud in this otherwise quite beautiful sky is the eternal problem of the interest of the exporting countries who, you might say, corner the entire field of supply. Some day this Bank is going to make up its mind whether this is a Bank to promote exports or a Bank to promote develoment. It seems to me in a country like Argentina where i t is already fairly well advanced in its capacity to produce some of the equipment required for capital investment, we should recognize that this general rule of thumb we have of protecting industry only to the extent of 15 percent has to be subject to variations and I congratulate the management and staff for coming out with what I consider a very ingenious formula which has been able to compromise, if not satisfy,the interests of everyone - concerned. I might say that the firms that are manufacturing electrical equipment in Argentina are not one hundred percent Argentine; they are in association with American manufacturers, European manufacturers and are in fact the children doing the supply that the mother or the  20 STRICTLY CONFIDENTIAL grandmother used to do, and it seems to me that if Argentina came here and asked for a loan amounting to 15 percent of what is being discussed, to promote industry, we certainly would give it to them. Now, why can we not in financing a project like this, which is essential for the development of the country, take into account the fact that this Bank has been created and organized to develop industry? Would any government anywhere tolerate that a factory be idle and firing its workmen for lack of work, and see the supplies coming just 10 or 15 percent cheaper from elsewhere? This would create a tremendous political problem and it does. We havo a problem of unemployment or not sufficient employment in our countries, and I think the Bank in a very small way is helping the industrialization of Argentina, while helping to solve a very serious problem in the public utility field. I welcome your suggestion that we are going to have a full discussion on this problem before the end of the year. I have been asking for it for very opposite reasons that my colleague would like to have it, but I think it is time we had a real showdown and know whether this is a Bank to promote exports from developed countries alone or a development Bank. STRICTLY CONFIDENTIAL 21 MR. McNAMARA: Thank you very much, Dr. Machado. Mr. Rice again and then Mr. Reid. MR. RICE: Mr. Chairman, I just wanted to be sure I understood what you said a moment ago correctly. Am I correct in thinking that you said that it is not the policy of the Bank to require international competitive bidding on the entire amount of procurable equipment and goods on again the entire project? MR. McNAMARA: No, I said that the procurement in developing countries excluded from international competi- tive bidding and on which the·Bank does not negotiate for a reduction of protection is very, very large, and it ranges all the way from procurement on projects that the Bank has nothing to do with but which is excessively protecti e in many, many cases, contrary to long-run interests of the <leveloping country and certainly contrary to the interests of the trading nations of the world -- ranges all the way from procurement on projects that the Bank has no association with to procurement on projects that the Bank is financing a portion of but to all of which the Bank has not applied international competitive bidding. As I have examined the projects of the Bank in the past, the Bank has followed varying practices in varying STRICTLY CONFIDENTIAL 22 projects in varying countries at different periods of time. This is what I would call a pragmatic approach, and I think has considerable advantage, great skill and wisdom, and I, today is an illustration of it. I Perhaps Mr. Aldewereld would comment further on this matter. MR. ALDEWERELD: Mr. Chairman, I have very little to add to what you said. It is indeed, as you indicated, a picture which is a varied one. If I recall, for instance, one of the first cases which came up many years ago, the Kariba project, we financed about one-third the total project, but the whole procurement for everything was subject to international competitive bidding, so also there were things we did not finance. On the other hand, there are cases, and maybe one case that comes to my mind is the Spanish railway, where the investment program and I could be wrong by $100 million -- over a number of years is of the order of $1,000 million. We finance, say, a loan / of $50 million. Now, in this particular case, it would go I too far to say that we are financing $50 million out of a II total of $1,000 million, that everything should be on the lj basis of international competitive bidding. So what we are really doing is consider -- and it has been developed over STRICTLY CONFIDENTIAL 23 a period of time is consider the proportion of our participation in the total, and how far we can go -- of course we're pushing, pressing for as much international competitive bidding as we can, but there are certain cases where, let me put it this way, our leverage is too small to achieve it. MR. McNAMARA: Mr. Reid. MR. REID: Mr. Chairman, first on the procurement issue, I am looking forward to a review of our policies on preferences for domestic suppliers, and I intend to look at this matter with a completely open mind when we come to this review. In this particular case, I can go along with the procedures that are incorporated in this loan on the basis of your comments and the comments of Mr. Knapp, so I think that we should really approach this question of preferences with a pragmatic case-by-case basis, and I suspect here in this case that this rather ingenious procedure will have a beneficial long-term effect on the industrial development of Argentina. I say that I suspect this because I have one suggestion;I think in such cases it would be helpful if perhaps in reaching a judg- ment, if perhaps ther~ were a few paragraphs in the project  24 STRICTLY CONFIDENTIAL document which sort of set a bit of background on industrial policy. MR. McNAMARA: Yes, I think you're absolutely right on that. It would have been interesting here for you and the other members of the Board to be told the approximate amount by which the prices of industries in Argentina would be affected by this, exceeded the world's market price; and some other facts relating to it. We will try to do that~n the future. You are quite right. MR. REID: Yes. And also perhaps some flavor of what the Bank's general strategies are towards approaching the industrial problems of Argentina. MR. McNAMARA: Yes. MR. REID: Secondly, in this fiscal year, in the last two 1tscal years, the Bank would have lent about $240 million to Argentina, almost all of it in the power sector. There was, however, one loan in the agricultural sector in 1967, which is a relatively small loan compared to the amounts that have' been spent on power: a livestock loan of $15 million. I think we agreed at that time in the Board that it was important to do something about the agricultural sector in Argentina, particularly livestock and STRICTLY CONFIDENTIAL 25 beef exports, so I would like to express a little bit of disappointment at the fact that this particular livestock i loan is not going very well, as noted in paragraph 5. /1 Perhaps the staff is not in a position at the moment to expla n i/ I, I. why this livestock loan is not going well. ,I There is reference here to an apparent lack of demand for credit from the producers, and I think very few disbursements. In fact, there have been no disbursements to speak of to date, so I would be grateful for some informa-\ tion on the problems there, either now or at a later date. Finally, in the economic memorandum, the end of paragraph 27, page 8, there is reference to the fact that Argentina has borrowed recently $50 million from a consortium of U.S. banks on a five-year basis, and the memo- randum notes this had been a lower maturity period than the Government had hoped, given the Government's policy of seeking to lengthen the average maturity on its external debt. Of course it is very important to improve the debt structure in Argentina, bearing in mind the debt service ratio is 29 percent in Argentina, so I'd just like to draw attention to this particular issue. I'm a bit disturbed at this increase in the Argentine short-term debt. STRICTLY CONFIDENTIAL 26 The only question I have is does the staff know the approximate interest rate that Argentina had to pay for this kind of money or other countries like Argentina have I to pay for this kind of money today? II Thank you. MR. McNAMARA: First perhaps Mr. Fajans would answer the point on the livestock loan and comment also perhaps on other agricultural projects that we are working on. MR. FAJANS: I think, Mr. Chairman, that there is a natural and logical answer to Mr. Reid's question, and we all share his concern with the lack of progress of this project. The project was appraised at the beginning of 1966. We negotiated the loan in the middle of 1966, but due to the change in Government, we only signed the loan in the spring of 1967. It took quite a time to organize the project, and it was only in August 1968 that the project was officially launched in a ceremoney at Balcarce. In the meantime, the situation has changed on two counts: availability of medium- and long-term credits to ranchers and expectations with regard to the general economic and financial situation in the country. STRICTLY CONFIDENTIAL 27 When we appraised the project in a negotiated loan, there was a shortage of medium-term and long-term accommodation for ranchers, and our loan seemed to be very badly needed. This situation has changed between '66 and 1 68- 1 69, and by the time that the project was launched, credit on medium-term was available to ranchers in the area from other sources and was available without the technical assistance which goes hand in hand with the Bank's loan. The ranchers in that area are fairly sophisticated, and quite a few of them are saying, "I know from my father and grandfather how to run my ranch. I do not need technical advice. I can borrow at the same interest rate from another source, and I will not be taking advice which I have to take if I participate in the Bank project." That is one point. The second point is that at the time when the project was appraised and when we negotiated the loan, the expectation was that the Argentine peso would further shrink in volume, and the rancher was very interested in borrowing medium- and long-term because he knew he would be paying in a peso which was worth very much less in terms of purchasing power by the time he has to repay. STRICTLY CONFIDENTIAL 28 Now, this situation has, as explained in the President's Report and mentioned in the presentation, basically changed and the rancher today knows that he has to repay in a peso of which the value is not shrinking or at least not shrinking in a way it was shrinking several years ago. MR. McNAMARA: And would you also comment or perhaps Mr. Glaessner would comment on the second question, that relating to short-term debt and the interest rate paid with respect to it. MR. GLAESSNER: Mr. Reid, the original hope of the Argentine Government, of course, had been to place during this year loans, if possible, with a maturity of ten years or over, but insofar as possible, not less than eight years. The market conditions of course have been extraordinarily difficult. The operation referred to was an operation which was placed through a consortium of banks for $50 million at five years, and to the best of my recollection, at 9 percent. Now the operation in fact involved a redeposit of the funds which earn 8-1/4 percent, so that for the ti8e being, the actual spread is _3/4 percent, with the foreign exchange not being used. This enabled budgetary financing to be done in Argentina, and appears in the reserves of the STRICTLY CONFIDENTIAL 29 of the country. To some extent, I suppose one might call it a window dressing operation. This is the $50 million operation I think that you referred to. There has been another i>peration which took advantag X of the fact that certain foreign credits from both United States private interests and Germa~y' interests had been been obtained for the telephone system which, over the long run, would of course have to be used for procurement. These funds, which were not immediately needed, were borrowed. In the case of the U.S. component, $25 million at 8 years, a 9 percent interest; and in tne case of the German component, my best information is $20 million equivalent in marks at 10 years, B percent interest. The Argentine authoritf€s, moreover, secured early in the year an advance from the Deutsche Bank against n issue to he made in Germany which we understand the intentio is to try to place at 10 years later in the year. They still hope to go to the market, either in October or Novembe , although this has been, of course, very much dependent on finding the right moment. They are also still intending, according to what we haveNlard from them, to finally place the issue which had ?. STRICTLY CONFIDENTIAL 30 been publicized here in the United States at just about the time when conditions in the capital market became extremely difficult and which would be placed to the extent of $15 million at 10-1/2 years, when it can be placed, with the interest rate of course not clear at this moment; and a further $10 million at five years. As you said very well, I think both the Argentine Government and the Bank staff have agreed, I think, all along, it is extremely important for them to lengthen the average maturity of the debt. So far this year, of course, while the five-year placement has been disappointing to them, they have repaid a very substantial amount of relatively short- and medium- term debt, so that in actual fact at this moment the structure is probably better than it has been for quite a few years. MR. McNAMARA: Thank you very much. Gentlemen, are there other comments or questions? If not, we will consider the project approved, and Dr. Caram, go right ahead. DR. CARAM: I wish to express my appreciation to the Board for approval of this important loan; to the STRICTLY CONFIDENTIAL 31 1! JI II I officers and staff for their efficient conduct of th€ nego- tiations; and to you, Mr. Chairman, for your interest. I want to assure you that the Government I represe t is well aware of the need to increase the efficiency of the industrial sector. Appropriate measures were taken and will be taken in the framework of comprehensive economic programs. The procurement.procedures now approved will help to reach that objective. Thank you very much. MR. McNAMARA: Tha-.lL you very much, sir.