Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, March 30, 1971 : Argentina - Third Road Project and Railways Project

STRICTLY CONFIDENTIAL 1 INTERNATIONAL BP.NK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Joint Meeting Tuesday, March 30, 1971 A joint meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10 o'clock a.m., in the Beare Room, 1818 H Street, Northwest, Washington, D. C., Mr. Robert S. McNamara, President, presiding as chairman. I I! ;( ji i STRICTLY CONFIDENTIAL 2 C O N T E N T S J\genda Item 3• Proposed Loan - Argentine Republic (Third Road Project) and 4• Proposed Loan - Argentine Republic (Railways Project) .. .. . . . . . . . . . . . . . . . . 4 Mr. Lajous-Martinez . • . . . . . . . . . . . . 8 Mr. Wieczorowski . . . . . . . . . . . . . . . 13 Dr. Chen . . . . . . . . . . . . . . . . . . . 15 Mr. Barco . . . . . . .. 22 Dr. Lieftinck. . . ... 23 Mr. Lynch . . . . . . . . .. 28 Mr. Mey . . . . . . 32 i\ 11  STRICTLY CONFIDENTIAL 3 LV/er P R O C E E D I N G S STRICTLY CONFIDENTIAL 4 Hearing none, we will move to Agenda Items 3 and 4, both of which relate to the Argentine. I would suggest that we have them introduced to you together and then discuss them separately, taking the proposed road project in the amount of $67.5 million first, to be followed by a discussion of the proposed railroad loan of $84 million. If that is agreeable to you to have them introduced together and discussed separately, I will ask Mr. Moini of the South American Department to introduce both to you. Go right ahead, sir. MR. MOINI: Mr. Chairman, Members of the Board, Bank lending to Argentina has in the past primarily been for electric power projects. The two loans presented for your consideration today reflect the increased attention the Bank has focused on the transport sector. It is proposed to continue this new emphasis in our future operations in STRICTLY CONFIDENTIAL 5 Argentina and to extend its scope to cover ports and urban transport. We propose at the same to seek an expansion of ou activities in the agricultural, educational and industrial sectors. Argentina is a vast country whose external trade is significant for its economy, and the provision of efficient transportation is therefore critical to the country's develop- ment. Highways are today the most used mode of transport. The railways have not retained their share of the increase in traffic in the last decade, largely due to a cycle of inadequate services, declining revenues and investment. They nevertheless possess distinct advantages in carrying bulk freight over long distances and passengers in the greater Buenos Aires area. Modernization and financial recovery are therefore considered essential to enable the railways to fulfill their proper economic role. The two loans presented for your consideration are the result of a close cooperation between the Bank and the Argentine roads and railways organizations since 1968. They represent Bank support for a strategy which aims at: (a) developing a system attuned to the present and future transport demands of the Argentine economy, and (b) establishing a system of investment planning STRICTLY CONFIDENTIAL 6 within each transport rnode and coordination of decisions for the sector as a whole so that an optimum use of resources can be obtained. After a Bank review of the transport sector, late in 1968, the Argentine Government agreed that the desirable level of transport facilities could be achieved most efficiently by: Firstly, operating existing services in an efficien manner, Secondly, pricing transport services to reflect the true economic costs, and Thirdly, basing investment decisions on sound economic criteria. In the last two years Argentina has made commendabl headway in the pursuit of these objections, especially regard ing the national roads system and the railways. Organization 1 improvements have been started to make the agencies more effi ier and better equipped for their responsibilities. The railways have reduced their operating deficit considerably during this period. Decisions regarding public investments in roads and railways are increasingly based on study of the feasibility and economic priority of the projects and the alternatives. Recent improvements in planning have resulted in the STRICTLY CONFIDENTIAL 7 comprehensive plan for modernizing the railways and the surve~ to identify the higher priority works from ·which the two projects being considered today have developed. The coordination of studies and decisions relating to more than one mode of transport has still to be establishe . The Government has, however, re-affirmed its intention to take steps in this direction by strengthening and utilizing the planning office in the Secretariat of Transport. The two loans proposed today are designed both as a response to the progressive policies of the Government and to lend support to the Government's future efforts. Moderniz ~ tion of the railways is regarded as a major national endeavor in ARgentina and the proposed loan should be viewed as a notable step in Bank assistance in Argentina's development. The recent political developments in Argentina are not expected to affect the carrying out of these programs The Minister of Economy and the .Minister of Public Works are continuing in office, and the latter has assured us that the Government intends that the railways and the highway departme t will carry forward their programs in accordance with the unde standings reached with us. Thank you. MR. McNAMARA : Thank you, sir. STRICTLY CONFIDENTIAL 8 Gentlemen, may I have your comments or questions? Mr. Lajous. MR. LAJOUS-MARTINEZ: Mr. Chairman, it is gratifying to observe the role the Bank has played in stimulating and aiding Argentina to coordinate its transport policy, look at the sector· as a whole in planning. I know that the Bank is doing this in other countries, and I think that this is a very important function of the Bank. I have always said, and I will never tire of repeating, that more than money, things of this sort are the most important contribution of the Bank toward development. Having said that, Mr. Chairman, I would want to look at page 13 of the appraisal on the road project. Paragraph 4.08 says that TAMS' estimate of the foreign exchange component of construction costs, as adjusted by Bank staff, is ahout 29% for work carried out by local contractors and about 45% for work carried out by foreign contractors. I asked before coming here just what was represente by that difference of some 16% of the cost of the road, and I was told that principally i t consisted of profits and the part of salaries of supervisory personnel that was exported, that is, supervisory personnel who comes into Argentina from abroad, brought in from abroad by foreign contractors, will, STRICTLY CONFIDENTIAL 9 of course, spend part of their salaries, but one part will be exported. Mr. Chairman, I think that fundamentally standaras have been set for the roads and proper supervisions carried. There should be absolutely no difference between a road constructed by an Argentine company and a foreign corporation. It should be the same end result. And yet to Argentina there is a difference of 16 percent of the cost in foreign exchange. This is provided, of course, by the Bank, but it will have to be paid back and it will have to be paid back as foreign exchange. In other words, the foreign exchange earnings of Argentina will be affected to that extent when it does pay this back. Now, this has obviously been accepted by the Government of Argentina since i t is presented to us here, but since we are making policy on a case-by-case hasis, I thought it was necessary to bring this matter up. It would seem to me that in the cases of civil contracts, civil works, we cannot really say in international competitive bidding that the circumstances are equal at the same price, or even at the 15 percent protection for local contractors when one, a foreign contractor, requires a larger amount of foreign exchange than the other. Foreign exchange STRICTLY CONFIDENTIAL 10 is an important factor, so I don't think they are really comparable, the two bids for the same amount, or even, when i t is 15 percent higher by a local contractor. So much so tha somewhere along here it specifies that the Government of Argentina has reserved 50 percent of the contract for its own local contractors. I think that this point should be studied carefully, Mr. Chairman, and my own impression is that whenever and wherever there are capable local contractors, these should be preferred well over and above the 15 percent preference that is involved here because that difference in foreign exchange is important to a poor country. Now, Argentina is a country that obviously has all the technical personnel necessary to build roads. Argentina is a country that exports scientists. There are Argentine scientists trained in Argentine universities, working in the United States and in all of the major industrial countries of the world. So there is no doubt that they do have the trained manpower necessary. So it does seem that this is a waste of resources, that is, of foreign exchange, to bring in a foreign corporation that is going to bring in foreign supervisory personnel that is going to take foreign exhcnage out of the country. STRICTLY CONFIDENTIAL 11 I do wish that this problem will be kept in mind, and I'm not proposing any policy decision at this moment, but that for the future, this be a continuing problem, that it be studied in a continuing fashion as to the effect of the drain on foreign exchange of developing countries and somethin that is entirely unnecessary, that is, to bring foreign personnel and foreign contractors into countries that are obviously capable of doing their own construction work. Thank you, Mr. Chairman. MR. McNAMARA: Thank you, Mr. Lajous. Perhaps Mr. Aldewereld will make a brief comment now, and then we may want to discuss this more widely with the Board at some later meeting. Siem. MR. ALDEWERELD: Well, Mr. Chairman, I basically agree with what Mr. Lajous says, namely, that if at all possible, local contractors should get the job. As a matter of fact, when you look at this project in a somewhat wider context, not only looking at the contract, and look at the development of our involvement in road investment in Argentina you see two most interesting things: In the first place, with respect to the engineering, whereas originally several years ago a smaller loan that we STRICTLY CONFIDENTIAL 12 made for road investment the engineering was done exclusivel by foreigners, you will have to observe from this project that the bulk of the engineering is done by local engineers. As a matter of fact, the foreign engineers who play a role in here don't play exclusively a role as engineers, but as trainers, · so · to speak, of the local engineering industry. With respect to the contracting of the roads, true, we always have the policy to foster local industries, and as a matter of fact, our experience has shown in the previous road project that although a few bids were received from foreign contractors, all of it was on the basis of internatio al competitive bidding adjudicated to local contractors. And paragraph 4.08 also indicates that with respect to this one, we expect all, or if not all, the bulk of the contracts to be awarded to local contractors. Now,.it is indeed true that if one has a bia from a non-local contractor, that in the nature of things because they have their own supervisors, et cetera, it is in the nature of things that the foreign exchange cost, the foreign exchange component of the bid is bound to be somewhat higher tran if one has a bid from a local contractor. But what should not be overlooked in such a case, if it were to happen, is that the total bid price of the foreign STRICTLY CONFIDENTIAL 13 contractor would be by definition lower than the local contractor .. So what one would save - - and I don't think i t is a saving by way of less foreign exchange, one would indeed save by less investment. I myself feel that what we are doing in Argentina, we are on the right track. Events have shown that we have fostered local industry, and I think that is the way to do it. MR. McNAMARA: Thank you. Mr. Lajous, if at some future date you want a more comprehensive discussion of this, we can schedule it. But I · myself support Mr. Aldewereld's conclusion in the Argentine case. Mr. Wieczorowski. MR. WIECZOROWSKI : Thank you, Mr. Chairman. I am referring particularly to the road loan. We support the loan, but I would like to make some comments. We would have liked to have been able to study this loan as well as the larger railroad loan against the backgrou d of a more recent country economic report. The last report dates from mid-1969. This would have been particularly helpful in the case of the road loan because of the conclusio in the loan. document that a certain amount of local cost financing within the Bank's total lending program in Argentin II STRICTLY CONFIDENTIAL 14 is justified by the Bank's projections of foreign capital requirements and availabilities over the next few years. The staff's report does not present balance of payments projections to support this conclusion. Rather, only historical data. In the latter, it tends to show a rathe strong position during the last several years. The point that I am making is simply that we continu to see a need for more timely and detailed presentations. We consider local cost financing based on considerations very similar to program lending, which is the reason we discussed t e two together when they came before the Board. So I think in summary I would just say that I think it would be helpful if we can have more relevant data availabl for projects of this type. MR. McNAMARA: Thank you. I agree with that, Mr. Wieczorowski. The problem in the Argentine has been that data have been shifting so rapidly we haven't been ahle to get out the report of the Mission that went there in mid-1970. There is a summary, of course, of that Mission's tentative conclusion attached to the schedule, but the formal report is not out, and I think you are auite correct in drawing attentio to that. Dr. Chen. STRICTLY CONFIDENTIAL 15 DR. CHEN: Thank you, Mr. Chairman. In general principle, I would like to give my slpport to these two proposed loans to the Republic of Argentin . They are a&nittedly very large, in the range of practically $150 million or over. I would like to associate myself with Mr. Wieczorows i that perhaps it would have been much more informative if some of the data were hrought more up to date. Nevertheless, based upon the report, I think we have sufficient background to justify the loan to Argentina, even in that magnitude, because if I remember somewhere in the report it is stated that generally speaking, the Government of Argentina has carried out a relatively successful stabilizing program from 1967 through 1970. And then we can cite many factors in stpport of that. The GNP per capita has increased from $793 in 1967 to $865 in 1969. The external trade in 1969 was a lmost balanced with $2 billion each way. What is more important is the external debt service ratio has dropped from 27 percent in 1967 to 25.8 percent in 1969. And according to your report, Mr. Chairman, paragraph 21 on page 6, it is stated that in the context of spending national income in export, Argentine's large public debt service would steadily fall to the range of 17 to 21 percent STRICTLY CONFIDENTIAL 16 of foreign exchange earnings in the next six years. It goes on to say that in fact, the two proposed loans will assist Argentina to improve the maturity of her external debt and so prove manageable. Therefore in my opinion, Argentina is credi t--worthy for loans, and therefore, as I said, I give my up!=S)rt to your recommendation. Mr. Chainnan, notwithstanding the comment made by the staff indirectly conveying to us the assurance given by the two Ministers in the new Cabinet who are directly concerne with these projects that there will be no change in their basic policy, nonetheless I have some misgivings because as reported in the press over the weekend, there is some disturbi g element, you might say. According to the morning press disseminated by the Information Office yesterday, there are strong rumors that the Argentine peso may be devalued from the current 4 pesos per U.S. dollar to between 4.5 to 5. The same source commented that "Today the Argentine peso is far weaker than i t was a year ago because a sl:arp drop in beef export has potentially eliminated a quarter of Argentina's foreign exchange.n Last Friday the New York Times reported the ? ? modern day support of the powerful labor and business leaders, STRICTLY CONFIDENTIAL 17 of General Lanusse. The following is a direct quotation: "General Lanusse, the new President of Argentina, may move to a policy of a ceiling on wage increases and may readjust price control to reflect wage settlements." As I said a while ago, notwithstanding the assurance aiven by the staff, I would still like to ask the question if these reports were true, how would the inevitable infla- tionary pressure affect our staff projection of the future economic trend of the Argentine in general, and more specifically, the projected rate of internal economic rate of return of the two loan projects? Acco~ding to these two papers, in the case of the railway project, the internal economic return of the investment is said to be in the neighborhood of 20 percent, while that of the road project is estimated to be ahout 24 percent. Would these projections be affected by these, you might say, contemporary measures of radical change in the new economic policy of General Lanusse? MR. McNAMARA: Mr. Moini, perhaps you would start by answering this, and then if you wish, we can call on Mr. Wiese or others to comment. MR. MOINI: There has been wage and price pressures in Argentina in the past, and we expect them to continue and STRICTLY CONFIDENTIAL 18 oerhaps increase in the future. But our conversations with the Minister of Economy, Dr. Ferrer, reassures us that the Argentine Government is prepared to take all measures to see that these pressures don't affect the balance of payments too adversely. And we also have been assured that all measures will be taken to see that the exchange rate doesn't result in serious over-valuation of the currency. While we will continue to watch the situation and report to the management, we feel that these assurances are worth relying on. MR. McNAMARA: Mr. Wiese, you might come to the table on this. We should respond to two points, both the point that Dr. Chen specifically asked about, the possible effect on economic rates of return of the project of recent changes in the Argentine economy, and also the related questio associated with po~sible changes in the economy of the credit-worthiness of the country and the assurance of repaymen . MR. WIESE: As Mr. M6ini has already stated, there is no question that very recent developments in Argentina poin to the possibility of further inflationary pressures or acceleration of inflationary pressures. However, in the con- versations that we have had, that the office had in February, the Government indicated that if it were to be confronted with STRICTLY CONFIDENTIAL 19 such inevitable pressures, it would respond by trying to keep key economic variables as flexihle as possible in order to avoid that the inflationary process creates more than a minimum of economic distortions. This applies to the exchange rate field. And what you quoted, sir, and rumors about possible change in the exchange rate, would have to be construed as the Government acting in accordance with this emergency plan of countering inflation or reacting to inflationary pressure by moving key variables. At the same time they have given us assurance that they would continue to follow proper pricing policies for public services, in this case through railway tariffs. And so long as this is done, the rate of return on these projects would have to remain, would have to be accepted and would remain unchanged. MR. McNAMARA: · Mr. Knapp was in the Argentine a week or two ago. Perhaps he would wish to add to this. MR. KNAPP: Well, I think that the very recent turn of events in the Argentine has threatened to break. through some of the ceilings which had been used bv the Government for planning purposes on the rate of inflation. The inflation has proceeded more rapidly than had been expected, I II STRICTLY CONFIDENTIAL 20 and they have a very difficult problem to contend with now. As for the peso being devalued, of course, basically we think i t ought to be devalued if internal inflation takes place in order not to distort the economy through a fixed exchange rate in the face of rising internal prices. And we have encouraged the Government to be guided by the Brazilian experience in that respect, and it seems to be their intention that is to say, they don't want to let steam build up and have massive devaluation from time to timer but rather have a flexible policy of adjusting the exchange rate currently to requirements. Now, they have not moved in that direction yet, and there has been substantial internal inflation not compensated by a change in the exchange rates. On the return on the projects, I think it should be said this is essentially unaffected by all of these financial changes. It's an economic rate of return. It ,;,·muld be affected only if in some fundamental way these balance of payments difficulties and inflationary difficulties affected the project in the sense of basically reducing the transporta tion requirements and very basically reducing the utilization of these facilities. But that we don't expect. MR. McNAMARA: The risks associated with these two STRICTLY CONFIDENTIAL 21 projects are three: First, the one Mr. Knapp alluded to which is the least likely, that is to say, the level of economic activity would be so low as to result in lack of adequate use of these facilities financed by the loans in front of you. That is a relatively low risk. The second is that the institutional changes that Mr. Lajous referred to as a major element of these loans would not he carried through. And that is absolutely fundamental. We would not be presenting these loans to you today unless we had received renewed assurances that these institutional changes would be carried through. The railroad loan carries with it a continuation of a revolutionary reform of the railroad system. From our point of view, that's the only justification for the loan. If that were not to continue, we would feel that the loan had failed even though i t might have some economic advantage. And the third risk, of course, is that Argentine would be unable to repay the loans on the terms incorporated in them. And that risk is affected hy your outlook and our projection of the advance of the Argentine economy. We have taken account of all three of these risks and recommend them to you. But I don't want you to believe STRICTLY CONFIDENTIAL 22 that they are not to be considered and not to be considered as greater than risks associated with other loans that we present to you from time to time. Are there other questions or comments? Mr. Barco. MR. BARCO: Mr. Chairman, I wish to express my full support for these projects, and particularly for the feature of financing part of the local currency requirements of the projects. I would like to point out, however, that in fact the $19.5 million indicated for purely local cost financing is not really for financing local currency requirements. A substan- tial portion of the so-called local currency requirements consist of indirect foreign exchange component which I believe should be eligible for Bank financing as a matter of standard policy. And the expenditure in local currency of that amount would result in a drain on Argentina's international reserves which this amount should absorb. I would also like to point out that 45 percent of total project costs is not too large a percentage to be financed. The Argentine Government, as indicated in the President's report, has done a most remarkable job of reducing fiscal deficit and increasing public savings to meet part of 11 STRICTLY CONFIDENTIAL 23 the necessary public investment program. It has, therefore, been exerting its best efforts to achieve its development program despite facing domestic political difficulties. Notwithstanding such commendable efforts through tax reforms, tax administration and fiscal restraint, however there still remains in the face of present investment require- ments a resource gap as you, Mr. Chairman, rightly indicated which cannot be eliminated overnight and which would not he appropriate to cover with short- term credits. In the context of Argentina's development requirerne ts and efforts, therefore, I even feel this assistance is somewha too timid. The constraint which prevents the Bank from providing more local currency financing is our present policy. I think it is time for the Board as was proposed in a different but complementary view by Mr. Lajous to take a fres er look at its local cost financing policy with a view to making it more responsive to the prevailing situation in developing countries. Thank you very much. MR. McNAMARA: Thank you, sir. Gentlemen, are there other comments or questions? Dr. Lieftinck. DR. LIEFTINCK: Mr. Chairman, I would like to give 11 STRICTLY CONFIDENTIAL 24 my strong support to the proposed loans, but I would like to make some comment on the local currency financing. As you know, sir, I support the policy of the Bank to cover in special circumstances by its lending part of the 7 foreign ex~hange requirements of projects. So I have no '·· .. quarrel with the principle. And I do not object to the present proposals. But nevertheless, I feel that there is r oom for some comment . It is stated in the report on the road project wher the local cost financing is supposed to he the largest, in paragraph 3.09 that "A major problem during the execution of the first Bank highway project was lack of funds to meet the local costs. The new administration of Vialidad ... has remedied this situation and during the execution of the 1968-70 Three Year Plan financed almost entirely from local funds, there was no such problem, nor is one expected during the execution of the second and third Bank projects," which means that for this particular road project, there is no local currency problem and there is no need to cover by our loans part of the local currency requirement. The justification given in the Economic Report for the local currency financing is that there is a resource gap with respect to the execution of the development plan which ·1 I STRICTLY CONFIDENTIAL 25 requires about 10 percent local currency financing by foreign loans. I am referring to paragraph 18 of the memorandum on the economic situation in .Argentina. Now, if one looks at the basic data, after page 6 of the Presidential report, one finds under percent of GNP in constant '69 prices a third item "Resource gap " . In 1967 there was a positive gap. Local savings, gross domestic savings were larger than those invested. In '68, again there was a declining one, a positive gap. In '69 there developed a small negative gap, a real gap, of the surplus. Now, the question arises, on what rate of growth of GNP has the calculation resulting in the 10 percent unfilled gap of project loans mentioned on page 6, on what calculation is that based, on what rate of projected growth? The report says that the rate of growth of GNP in '69 was 6.5. Then there developed a small negative resource gap. In '70 it slackened to 5 percent. One wonders whether in '70 there was a negative gap with a lower rate of growth. Now, what is the basic projection on which this unfilled gap of roughly 10 percent of project loans has been based? It may he a rate of growth of again 6.5 percent or I II STRICTLY CONFIDENTIAL 26 even higher. That raises the problem, what is the appropriate rate of growth for a country of Argentina under the present conditions? If i t were true that a higher rate of growth than say between 5 and 6 percent would result inevitably in view of the prevailing political and social circumstances and high rate of inflation, one could come to the conclusion that a somewhat lower rate of growth would be more appropriate for the conditions prevailing in the country. I think this is a real problem and I should not in my opinion too easily associate ourselves with a high rate of growth and derive therefrom a considerable resource gap without having made sure that the rate of growth that is hasic to such calculation is the appropriate r~te of growth. Now, this is a very difficult matter to solve, very difficult, and I don't think we yet have the instruments developed, the practices and procedures developed, perhaps not even the philosophy developed, to give a straight answer to that question. But here is a real problem, and I would suggest that we be very cautious in associating ourselves with a particular rate of growth based perhaps on historical performances without taking into consideration the full impact of a certain rate of growth on the total economic II STRICTLY CONFIDENTIAL 27 performance of the country, including inflation distortions, exchange rate, et cetera. Thank you. MR. McNAMARA: Thank you, Dr. Lieftinck. I will ask Mr. ~!oini in a moment to respond to your question which I think we can answer of what is the specific rate of growth on the basis of which a 10 percent gap was c alculated. But the broader question of what should be our philosophy with respect to supporting a particular rate of growth, either with local currency financing as you have suggested, or more broadly with foreign exchange financing because exactly the same issue arises in connection with a country that does not require local currency financing but does require large amounts perhaps disproportionate to the 1 imited amounts of scarce foreign capital available in the world for this purpose, a country that does require large amounts of foreign exchange financing to support high rates of growth. What should our philosophy be? Quite frankly, we don't have a good answer to it, but we can answer the specific question, I believe, of what rate did we assume here as a basis for determining a 10 percen gap estimate. STRICTLY CONFIDENTIAL 28 I said Mr. Moini. Perhaps Mr. Pilvin would resoond to that. MR. PILVIN: Yes, sir. Mr. Chairman, the assumption underlyinq our projec-· tions here is that Argentina can with appropriate policies grow at 5.5 percent per year over the next six years. And that is the assumption that underlies the projection. This is considerably less, · incidentally, than the assumption in the draft official development plan. MR. McNAMARA: We felt reasonably justified in using such a rate here, Dr. Lieftinck. But we have some other cases that I could mention where local currency financing one or two of which involve local currency financing and others which do not with a rate of growth planned at 7 or 8 pQrcent, and it's a very, very important question and we do not have a clear technique for determining the answer. Gentlemen, are there other questions relating to either one of these projects? Mr. Lynch. MR. LYNCH: Thank you, Mr. Chairman. I don't wish to address myself only to the railway project, but only to one aspect of it, though it is I think quite an important one. STRICTLY CONFIDENTIAL 29 We have discussed with the staff before this meeting the question whether, since this is so large a.nd so complicate a project, i t would not have been possible to appraise distinct parts of it separately. It covers, for example, potentially, I assume, quite profitable commuter services in the capital and also freight services and so on in rather more remote areas. It's really a highly complicated project. We would think that it would have been possible to appraise the project separately and to arrive at conclusions as to whether all of them necessarily by their rate of return justified proceeding. In one part of the project document we are told that an analysis was made to check the feasibility of an investment at one·-half the amount now proposed plus replacemen expenditure, and it was found that even if this first half of the investment produced two-thirds of the total benefits for the whole plan, the second half ·would still be justified. But the conclusion could really be drawn the other way around, that if one-half produces two-thirds of the benefits, then there is a presumption that the other half must have a much lower rate of return. I entirely appreciate that this project and its companion that we are considering this morning are the result STRICTLY CONFIDENTIAL 30 of an encouragingly comprehensive view of transport in Argentina, and that I don't want to dispute at all. But when it comes to railways in the modern world, I think you have to be rather careful that you are securing the maximum rate of return from every part. Thank you, Mr. Chairman. MR. McNAMARA: Let me ask Mr. Jaycox to come to the table. Let's address the question in two parts: (a) Could it have been appraised separately, and (b) whether i t could have been appraised separately or not, are there elements of it which carry lower rates of return than we would normally finance? MR. JAYCOX: I think, Mr. Chairman, it might have been possible to come up with some isolated subproject rates of return. However, we feel in general that this is not progressive in terms of really understanding a project such as a railway project. We do not have the tools in the way of simulation tools and so forth to really capture the inter- relationships with investments. In this case we consciously chose not to put up what I think are essentially strawmen of subproject rates of return in order to analyze this project. we felt the comprehensive view was far and away the most appropriate view. Ii STRICTLY CONFIDENTIAL 31 On the question of whether there are parts of this project which may earn low rates of return, I think it's quite possible that we do not have an optimal project, this comprehensive project is not optimal. The tools are really not available to optimize railway programs, I am afraid. But we are confident, and we used sensitivity analysis, as you cited, too, to get the confidence that this project as a whole makes a lot of sense and there are no obviously wasteful elements in it. MR. McNAMARA: There are no elements which we know of as carrying a low rate of return. MR. JAYCOX: And from a technical and common sense point of view, we have gone through this program over the last two or three years very, very carefully to weed out anything which smacked of waste or submarginal return. MR. McNAMARA: Mr. Lynch. MR. LYNCH : I think it's a somewhat negative assuran e, Mr. Chairman, but nevertheless an assurance. MR. McNAMARA: Mr. Knapp. MR. KNAPP : I understand how you might have got that impre ssion, but I think a much more positive sense should be communicated here. I think what Mr. Jaycox is saying is that this has been very carefully scrutinized by experts on the STRICTLY CONFIDENTIAL 32 basis of a judgment as to whether it was appropriately balanced ancl whether there was over-investment in any category. And this has been done from a con~~rvative point of view. I think all he is saying is that we have not sought to attribut particular rates of return to particular segments of this program, which really conceptually is almost impossible. If you are, for example, putting some obsolete locomotive through a shop in order to rehabilitate them, you can have a judgment whether this is worth doing or not, but to isolate that particular thing and calculate the economic return is a very complex and almost impossible operation. But I think that really what we are saying is that we haven't got the statistics to demonstrate it, but a lot of very careful expert judgment has gope into the selection of this investment program. MR. McNAJvT.ARA: Gentlemen, are there other comments or questions? On either project? (No response.) ·7e will consider them both approved then. ~ Dr. Mey. MR. MEY: 1'.1.r. Chairman, Members of the Board, you have just approved two very important loans for Argentina. Both are important because of the amount and their objectives. STRICTLY CONFIDENTIAL 33 But the railway loan has a very special significance for the Argentine Repuhlic. This is what our Vice President Mr. Burt Knapp said in Argentina in different meetings with high officials a few weeks ago. He stated that the Bank had been sending missions to Argentina for the last ten years and that the railways had always been a key point of weakness in the Argentine economy, that many plans for adjusting management operations and results have been developed, but until now the decision to cut definitely into that structure had not been taken. "This is the most important accomplishment~ Mr. Knapp said,"and I congratulate Argentina for it and the group of men that ha~ prepared the plan and taken the de~ision. Our loans to Argentina can follow in the future, but we think that the railway operation will always be outstanding. " These words, Mr. Chairman, made a deep and favorabl iBpression in Argentina. I am sure that this leading project regarding the railways and the third highway project are both great contributions to the Argentine development. Let me add, Mr. President, that after the politica events in Argentina during the last week -- I was there at the time -- expectations have increased. There seems to he a consensus under the main interest and pressure groups regar - STRICTLY CONFIDENTIAL 34 ing the new power structure and the new President which could be taken as a positive input in the development of these two projects. Mr. Chairman and colleagues of the Board, I thank you for your approval. Mr. Chairman, let me finally add that the different missions to Argentina that worked on these two projects left an excellent impression on my country. They were extremely demanding but constructive. Let me congratulate them for the work done and express the gratitude of the people they dealt with in Buenos Aires. Thank you, Mr. Chairman. MR. McNAMARA: Thank you very much, Dr. Mey. II