Southern Rhodesia - Power Expansion Project

4 iv 6 d- U4< P-30 F E CORESTRICTD INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOAN to SOUTHERN RHODESIA Februaiy 19, 1952 CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPIENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS COMOERNIRG A LOAN TO SOUTERN RHODESIA 19 I submit herewith the following report and recommendations with regard to an application by Southern Rhodesia for a loan of $28 million,. PART I - HISTORY OF NEGOTIATIONS 2. In June 1951, the Prime Minister of Southern Rhodesia, with the concurrence of the Government of the United Kingdom, invited the Bank to send a mission to review the development plan of the Southern Rhodesia Government, with a view to working out a loan to further that plan, In response to this invitation, the Bank agreed to send a mission in the second half of the year, 39 After preliminary discussions in London, the mission arrived in Salisbury, the capital of Southern Rhodesia, on October 22, and spent some three weeks discussing the economy of Southern Rhodesia, the Government's four year development plan and the extent and form of any Bank financing, Since it appeared that electric power expansion, which formed part of the four year plan, was of high priority, the Bank seat a member of its engineer- ing staff to Southern Rhodesia in November to examine plans for this expansion. The mission returned to tashington early in December. b. Negotiations for a loan of $28 million were opened in Washington on January 29, 192. The authorized negotiators were: For the United Kingdom: The Rt. Hon. Sir Oliver Franks, G.C.11.G,., K.C.B., C.B.E., Ambassador to the United States For Southern Rhodesia Mr. D. H. Cummings, E..., Under Secretary ta the Treasury, Government of Southern Rhodesia PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower 5, The Borrower would be the Colony of Southern Rhodesia. The loan would be guaranteed by the United Kingdpmj a member of the Bank, - 2 - Amount 6. The loan would be in the amount of 628 million, or the equivalent in other currencies. Terms of the Loan 7. The loan would be amortised by 42 equal semi-annual payments, the first of such payments being due on November 1, 1956 and the last on May 1, 1977. 8, The loan would bear interest, including 1% commission, at the rate of 4 3/4% per annum. A commitment charge of 3/4% per annum has been provided for. Purpose 9. The purpose of the loan is to assist in the financing of the four year plan for the development of Southern Rhodesia. PART III - DESCRIPTION OF THE SOUTHJRN RHODESIAN DEVELOFTENT PLAN -D. Report on the Economy and Development Plans of Southern Rhodesia, dated January 17, 1952, (E-200 A), was distributed on January 21, 1952, (R-554). 11, The current development plan of the Southern Rhodesia Government covers the four years April 1, 1951 to March 31, 1955. The public investment by the central government, the Rhodesia Railways and local authorities planned for this four year period totals about 1OO million ($280 million). Over two-thirds of the investment is to be in basic services (transportation, electricity, communications, water supply) and the remainder is to be for public buildings, municipal and other social services, agriculture and industry. Railways and electricity receive the largest amounts (one-third and one-fifth of the total) and expansion in both of these services is vitally important to keep pace with and make possible the further growth of the country, 12. Of the total of a1O million ($280 million) required by the public investment plan, almost half is to come from the United Kingdom and not quite a third from local sources. Southern Rhodesiats credit standing on the London market is good, but the authorities in the United Kingdom find it necessary to lmit the amounts raised by public issue in London and the Southern Rhodesia Government can count on only ;,0 million (112 million) to be raised in this way. Some ;7 million (020 million) is expected to come from other sterling resources. The Southern hhodesia Government is attempting to stimulate local saving and is encouraging a local money market: internal loans, loan recoveries and so forth over the period are currently expected to yield T32 million ( 89 million), The remainder, some 121 million ($58 million), -3- has still to be found. Southern Rhodesia hopes to secure one-third of this sum from ECA and Swiss banks, and has asked the Bank to finance Tolf-million ($28 million) of the rest. 13. The development plans assume that investment by private interests will be fortheoming to take advantage of the opportunities opened up by the expansion in basic services. The amount of private investment anticipated is roughly equal to the amount of public investment programed, i.e. a10O million ($280 million) of which around 40 percent may be expected to come in as new capital from the United Kingdom over and above the reinvestment of earnings of U. K. controlled companies. The rate of flow of this investment will clearly be influenced by developments in the sterling area, and particu- larly in the United Kingdom, over the next few years. The steps discussed at the London conference of Commonwealth Finance 11nisters in January 1952 might slow down the flow of private capital into Southern Rhodesia, and it is possible that the public investment contemplated in the four year plan might also be spread over a somewhat longer period. 1.4- In the public services as well as in private enterprise, the general level of ability is high and it is expected that the development plans will be efficiently executed, At present, most skilled trades are limited by trade union rule or custom to Europeans, but with the gradual rise in the level of native education, it may be expected that Africans will not merely become more efficient in the occupations they at present follow, but will tend to be employed on more responsible work. Although progress will be slow, there are great potential reserves of industrial skill in the African people. 15. The measure of the success of the public investment plan will be the expansion of the whole Southern Rhodesian economy. Assuming (a) a continuance of favorable world demand conditions, (b) that expansion is not crippled by shortages of imported equipment, and (c) that the inflow of private investment capital continues, total exports valued at constant prices should increase by around 50% by 1956 and total output by around 60%, PART IV - DESCRIPTION OF THE ELECTRIC PMIER EXPANSION PROJECT 16. "Technical Report on Southern Rhodesian Power Project" dated February 1, 1952, (R4660), which was to be Appendix I hereto, was distr*buted on February 5, 1952. 17* The most useful and urgent of the projects within Southern Rhodesials development plan appeared to be railway improvement and extension and electric power expWnson. As it appears that the cost of the first could be met out of funds already provided or to be provided the Bank has focusse4 its attention on the electric power expansio4 program, 18, Apart from industrial concerns wh4ch generate power for their own use, there are only three undertakings in Southern Rhodesia which generate electricity, viz., the Electricity Supply Commission (ESC) and the municipali-. ties of Salisbury and Bulawayo, and of these, ESC accounts for about 37% of the total output. Capacity and output for the year ending June 30, 1951, were as follows; -4- Effective Generatng dapacity Output (KW) (millions of ITH) Eectricity Supply Commission- 70,500 240 Salisbury 36,000 156 Bulawayo 39,000 181 Industrial Plants 22,900 72 168,A00 649 19. In the tthirties, the demand for electricity increased steadily, but suppliers were able to keep abreastof demands. After the war, the influx of European immigrants and the unprecedented expansion in industry and mining made itself felt in a sharp increase in the demand for electricity, while at the same time it was difficult to get delivery of new equipment required to meet the expanding demand. The demand for electricity generated for sale is likely to continue to rise, although at a slower rate than during the last six years. By 1955 peak demandpexclusive of industrial plants, is likely to have risen from 143,000 I to 286,000 IT: by 1957 it is estimated to reach 383,000 Ki and by 1961, 592,000 K. These expectations are based on the assumption of a continued expansion of population (because of natural increase and inmigration) and of mining and industry, particularly for the extraction and processing of asbestos, phosphate rock, chrome and iron ore. 20. The work now being carried out is part of an expansion of electric power facilities which has been in progress since the end of the war and which can be expected to continue with the expansion of the Colony. Mach of the equipment for it has been on order for a long time and much of the construction work has been carried out already. The work still to be completed consists substantially of the installation of about 230,600 10 of new thermal generating capacity, the erection of some 2,022 miles of 11 KV to 88 EV transmission lines and the installation of distribution equipment. 21. The program may be summarized as follows: Cost in Millions of Dollars Transmisn. on Generating 11iles of Generating and Capacity Transmission Plant and Distribution (in KE) Lines Buildings Network Total ESC 110,000 1,848 14.8 11.7 26.5 Salisbury 60,000 159 94 6.4 15.8 Bulawayo 60,000 15 7.5 2.0 9.5 230,000 2,022 31.7 20.1 51,8 22, Of the total expenditure, equivalent to $51.8 million, $11*8 million is local, and $40 million is for equipment purchased abroad. The Southern Rhodesia Government has asked the Bank to provide $28 million (610 million) of this latter amount and proposes to cover the balance of $1W million (;4.3 million) from other funds. 23. By far the greater part of the equipment bought abroad will come from the United Kingdom. Of total imports of $40 million, $34.7 million will be from the United Kingdom, S4.5 million from the Union of South Africa, 0.4 million from Europe and $0.4 million from the United States. As equip- ment already has been ordered to an amount of $22.4 million, and as the generating units are in the relatively small sizes for which manufacturing capacity is still available, no great difficulties are anticipated in getting deliveries within a reasonable time, 24. Plans for the expansion of the electric power capacity of the Rhodesias include the development of hydroelectric power on the Zambezi River (at the Kariba Gorge) or on the Kafue River, or possibly at both. By 1961 or 1962, if these plans are carried out, there may be hydroelectric capacity available for supplying Southern Rhodesia with 200,000 W, 25. By that time thermal capacity, which will be about 400,000 IW in 1955 when the current expansion program has been completed, will have been brought up to about 600,000 &N to take care of the further expansion in demand expected between 1955 and 1961. If to this, 200D000 W of hydroelectric capacity is added, the total capacity available will be 800,CO0 K, compared with an estimated load of 600,000 LW. Since the hydroelectric energy will be so muc4 cheaper than thermal energy, some 200,000 MI of thermal capacity will be in excess of reqcuirements. Mbch of the thermal plant will by then be reaching the end of its useful life and could be scrapped and the remainder could be held as standby or sold, 26, Of the capital expenditure included in the current expansion program, about 37% would be for transmission and distribution equipment which would still be required if hydroelectric power becomes available, Of the remainder, about 17% would be for generating equipment to be installed in areas which would not initially be connected with the hydroelectric plant. Thus, less than half of the Bank financed equipment is likely to be affected by the hydro project. In any event, since it would be newer and more efficient much of it would probably be retained and older equipment would be disposed of, PART V - APPRAISAL OF THE PROPOSED LOAN TO SOUTHERN RHODESIA The Need for the Loan 27. The development plan of the Southern Rhodesia Government requires that about ;100 million (0280 million) be raised in the four years 1951 to 1955. There are good grounds for assuming that all but some ;41 million ($39 million) of this amount can be raised in the ways described in paragraph 12 above. A loan from the Bank of ,28 million would thus cover most of the remaining needs of the four year plan.. - 6 - 28. This plan requires substantial imports of goods from the United Kingdom which would be paid for by means of loans raised by Southern Rhodesia in London or by other transfers of capital from the United Kingdom to Southern Rhodesia. Hence it has a substantial foreign exchange impact on the United Kingdom. That part of the proposed loan which would be used to pay for purchases in the United Kingdom would therefore be disbursed in dollars so as to offset a part of the impact on the U. K. which is felt in gold and dollars. The impact arises directly because of the diversion of exports from other countries to Southern Rhodesia and the need to import raw materials and other components entering into the manufacture of the goods exported to Southern Rhodesia, and indirectly because of the increased economic activity and incomes in the United Kingdom which result in larger imports into the United Kingdom of raw materials and consumer goods, and in the diversion into the home market of goods which might otherwise be exported to other countries, I am satisfied that the dollar impact on the United Kingdom of her contribution to the development of Southern Rhodesia is at least as great as the amount which the Bank may be disbursing In dollars in respect of purchases in the United Kingdom. Prospects of Fulfillment of Obligations 29, Southern Rhodesia has developed rapidly since 1923, when the colony secured responsible government, and lorld lar II provided a further stimulus to economic progress. Since 1946, real output has increased by 60% and the volume of exports by 50%, and as stated in paragraph 15 above, these trends are expected to continue. This growth has been made possible through a substantial inflow of capital, partly as immigrants' funds, but mostly as new external investment, resulting in a rate of investment of nearly one- third of total available resources, Further considerable expansion is to be expected within the next few years, based on programs of production expansion which have already begun, 30, T-e colony will remain largely dependent on exports of raw materials and agriculttiral products in unfinished or semi-processed form, and her creditworthcicss will be influenced by levels of world demand, even though gold producIUA provides a welcome element of stability, 31. The Government has pursued a sound fiscal policy. The national debt, now about equal to the annual national income of ;94 million (264 million), has been incurred mainly to finance the basic services required by an expanding economy, and it is expected to rise at about the same rate as national output. About three-fourths of the national debt has its counterpart in interest bearing loans made by the government for productive purposes, and the interest and sinking fund payments received on these loans help to offset the debt service charges in the government budget. The government charges against current revenue not only interest but also the sinking fund contribution -, usually 1% per annum, The net burden of these charges repre- sente some 8% of the total budget revenues. 32. Southern Rhodesia has at present no central bank, though one is likely to be created in this decade; in the meantime, the ability of the banking system to increase the money supply in the country is severely limited. In these circumstances, it is impossible for the government to finance a defi- cit which is not covered by borrowings from local savings or external sources. -* 7 - 33. External public debt, some three-fifths of the total, is wholly in sterling, and its service has never exceeded 5% of export earnings and it now requires only 3%, If the growth of the economy over the next 10 years fulfils expectations, external debt service may be doubled or even tripled, but even then debt service would still be less than 10% of export earnings if they remain as they are. In fact, however, the volume of exports is likely to rise substantially, thus providing an additional margin to cushion the effect of any fall in export prices. Ak Before the war, Southern Rhodesia usually had a gold and dollar surplus, For a brief period after the war, when goods could not be obtained in the United Kingdom, she had a dollar deficit. Since 1947, trade and exchange controls have been used to cut down dollar imports and more goodo have become available in the sterling area, with the result that dollar expenditures have been kept below gold and dollar receipts. In 1950, gold sales and dollar receipts exceeded dol1Ar payments of $12 million to show a surplus of ?1$ million, and a surplus of k65 million a year should be attain- able over the next few years without imposing crippling restrictions on dollar imports. 35. The outlook for exports to the dollar area is good. From 199 to 1950s exports to the U. S. increased from 3% to 6% of the total, while in value they increased eight times. As long as the United States enjoyp high levels of employment and its economy grows, the mineral products of Southern Rhodesia, particularly chrome and asbestos, should be assured of a growing market. Over the next five years alone, exports of these two commodities are expected to increase by 80% and 50% respectively, Dollar earnings of Southern Rhodesia, apart from gold, are now running around $10 million a year, Over the next decade, this figure should double. 36. Southern Rhodesia has a gold production which is currently valued at around $17 million a year. If the world price level does not fall, this production will probably continue to decline slowly owing to rising costs.- If world prices fall, some small increase in production may be expected, Gold production is liklcoy for some years to come to surpass what might be considered the ninim4m dollar needs of the country. 37, SoutherM Rhodesia, although a young country, has a good debt record and enjoys excelent credit standing in London, the only market in which phe has borrowed, On the assumption that wqrld levels of demand remain highs Southern Rhodesia can be regarded as predtiworthy in her own right for a dollar loan of more than the amount now proposed. In view of this conclusion and the smallness of the loan in relation to the size of the U. K.ts dollar' paypents, reqeipts and reserves, tt has not belm felt necessary to sub;4t a separate study on the creditwoithiness of the tited Kingdom. 38, I am satisfied that due regard has been paid to the prospocs that the Colony of Southern Rhodesia as borrower and the United Kingdom as guarantor will be in 4 position to meet their obligations under the proposed loan, and that in making #A the Bank will be acting prudently in the interests of the Colony of Soihern Rho¶sia, of the United K p&4om* and of the Bankls meners as 4 whole, - 8 - PART VI , IEGAL INSTRUIENTS AND AUTHORITY 39* There are attached hereto as Appendices II and III respectively drafts of the following documents; (a) Loan Agreement between Colony of Southern Rhodesia and the Bank, and (b) Guarantee Agreement between United Kingdom and the Bank 40. Exeept for the points mentioned below, the agreements follow sub- stantially the general form of the Bank's lman and guarantee agreements, and they incorporate Loan Regulations No. 4. 41. Under Section 5.n2 of the Loan Agreement the Borrower must make the proceeds of the Loan available to the bodies charged with carrying out the Project, on terms and conditions satisfactory to the Bank. 42a. The negative pledge clause of the Loan Agreement (Section 5.0$) covers sterling indebtedness as well as indebtedness in foreign currencies, but not indebtedness in Southern Rhodesia currency. It is proposed to advise the Borrower by letter that the Bank will not apply this clause to borrowings of the Rhodesia Railways, because their peculiar legal status as an instrument- ality of Northern Rhodesia and Bechuanaland as well as of Southern Rhodesia would make it difficult for the Government of Southern Rhodesia to accept the negative pledge clause without this exception. 43. The description of the Plan in Schedule ? of the Loan Agreement con- templates that amendments of the Flan must be made by agreement between the Bank, the Borrower and the Guarantor; in other guaranteed loans the Guarantorts agreement has not been required. 44* Paragraph (b) of Schedule 3 of the Loan Agreement amends the with- drawal provisions of the Loan Regulations so as to ensure that the rate of withdrawal. of the loan remains geared to the rate of total expenditures on the Plan as in the two Belgian Congo loans and the Italian loan. 45o In 1,949 negotiators for the Bank and the United Kingdom had agreed on the text of a guarantee agreement in connection with the then proposed loan to the Colonial Development Corporation. Since it seemed desirable not to re-open questions of wording at this time, the wording of the draft Guarantee Agreement deviates in a few instances from the wording currently used in other agreements. 46, Secause of the near-Dominton status of the Borrower, it would be impossible for the Guarantor to ensure the carrying out of the Plan and the Project, and the usual covenant to that effect has therefore been omitted from the Guarantee Agreement. However, in Section 2.02 of the Guarantee Agreement the Guarantor does covenant to permit the Borrower to borrow in the London market to the extent necessary for the financing of the Plan and the Project, W 9 - 47. The negative pledge clause of the Guarantee Agreement (Section 3.01) is in the form agreed upon between the Bank and the United Kingdom negotiators in 1909. The clause does not specifically refer to borrowing by agencies, but the representatives of the United Kingdom have confirmed the Bank's understanding that gold and foreign exchange reserves are covered. 48 The Borrower will obtain parliamentary ratification of the Loan* 49. The United Kingdom is authorized to guarantee the loan under the Colonial Loans Act, 1949. 50. Appendix IV, attached hereto, contains the Report of Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement. PART VII - CO1FLIANCE WITH ARTICLES OF AGREEIVZNT 51. I am satisfied that the proposed loan will comply with the requirements of the Articles of Agreement of the Bank. PART VIII - RECOMMNDAT IONS 52. I recommend that the Bank at this time grant to the Colony of Southern Rhodesia, with the guarantee of the United Kingdom, a loan of $28 million for a term of 25 years, with interest (including comission) at the rate of 4 3A% and commitment charge at 3/4%, and all other terms as are specified in the form of Loan and Guarantee Agreements attached hereto. W7 T. .1 ff Assistant to the President for President Washngton, D. C. February 18, 1952