Transcript of joint meeting of the Executive Directors of the Bank and IDA, held on Tuesday, September 21, 1976 : Argentina - Electric Transmission and Distribution Program Project

STRICTLY CONFIDENTIAL 1 PS/er.... INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Washington, D. c. Tuesday, September 21, 1976 The joint meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10 a.m., in the Board Room, 1818 H Street, N.W., Mr. Robert S. McNamara, President, presiding as chairman. STRICTLY CONFIDENTIAL 2 C O N T E N T S Agenda Item Proposed Loan - Argentina (Electric Transmission and Distribution Program) c_ 56  56 STRICTLY CONFIDENTIAL If not, we will proceed with it then, and that brings us to the last regular item on the Bank agenda, a proposed loan in the amount of $115 million for a power 'transmission and distribution program in the Argentine. I will ask Mr. Kikuchi to present this to us. MR. KIKUCHI: Mr. Chairman, Members of the Board: The proposed loan will contribute to Argentina's development in a number of important ways. First, it will assist Argentina to finance one of the key projects in the economic reconstruction of the country. The project will provide SEGBA with the facilities necessary to utilize effectively the energy produced by new hydroelectric plants which are under construction. It will enable SEGBA, which serves the largest industrial center of the country, to meet the power demands of Argentina's industry and conunerce which are again beginning to increase production and sales. Under the proj c ,  57 STRICTLY CONFIDENTIAL about 260,000 new consumers will be connected including 25,000 dwelling units in low-cost housing developments. Arrangements will also be made to provide electricity service to about 250, 00 persons living in about 110 shanty towns. The improvements in the syst~ under the project would enable SEGBA to provide reliable electric service to over 10 million people living in its concession area. Second, this project will provide an important step for the Government to reorganize the hitherto fragmented electric power sector as a result of which major investment decisions have been taken haphazardly. The national power sector organization study to be carried out under the project could lead to significant improvements in sector organization. Third, the Government will prepare a national electric .power sector development plan. The assistance of specialized consultants and the application of sound economic principles to develop the plan would undoubtedly enable the Government to reduce potentially wasteful investments. Such a plan will also identify and establish economic priorities including a number of binational hydroelectric projects which would provide low-cost electric power not only to Argentina but to its neighboring countries as well. Finally, and perhaps most importantly, the proposed  58 STRICTLY CONFIDENTIAL loan would act as a catalyst to enable SEGBA and Argentina to obtain additional funds from other international lenders. We are in close contact with a group of private banks who are considering, under the private co-financing scheme, a Euro-dollar loan of up to US$50 million in addition to the Bank loan. We are also hopeful that this loan, which is the Bank's first in over five years would lead other financia sources to participate likewise in the economic reconstructio of Argentina. Thank you. MR. McNAMARA: Thank you, sir. Mr. Ryrie. MR. RYRIE: Mr. Chairman, I support this project. I would like to make three comments. The first is simply to say how pleased I am about the economic improvements which have taken place in Argentina and which bring us to a point where we feel we can resume lending program. There have been, everybody knows, very great difficulties, and there are still very l arge problems. But the Government has shown a lot of courage and made a great deal of progress in the last half-year or so. The report on current projects in Annex II shows the delays and cost overruns that have occurred in Bank STRICTLY CONFIDENTIAL 59 projects, and I hope that the improvement means that we shall not have so much of that in the future. The second point is a point about the role of the World Bank in lending to Argentina in the future, and I woul like to pick up what is said in paragraph 17 of the report where it says that private sources are not now prepared to offer Argentina financing in a sufficient amount and at appropriate terms, and that it will take some years of successful economic management before Argentina can make adequate use of the capital markets. Argentina is a country with a pretty high per capita income of some $1600, and I would think that it is for this reason essentially that it is right for the Bank to be involved in Argentina and that the whole of the program of lending to Argentina should be seen in this light as a catalyst leading towards a situation in which it is no longer necessary for the World Bank to be a major supplier of capital, and with good economic management, one would hope that that situation could be reached in a fairly short span of time. I would hope that that is the way the Bank managem t would also see the situation, bearing in mind that there are quite a number of projects in the pipeline, as the report says.  60 STRICTLY CONFIDENTIAL The third point is a point on the project itself and on the procurement arrangements which are described in paragraph 48, which do seem rather unusual with this provision that one-third of the procurement should not be ope to international bidding, but should be reserved for domestic suppliers. I would like to know what the justification for tha~. It does seem a rather special arrangement. I hope that it's an unusual and one that won't be repeated in other cases, either in Argentina or elsewhere. Thank you. MR. McNAMARA: Thank you, Mr. Ryrie. On the first question you asked, your second point, we do see the role of the Bank in relation to the Argentine situation exactly in the terms you do. It is a high-income country. We feel justified, however, in lending to it despit that relatively high income level in order to serve as a catalyst and in order to help it move to the point where it can obtain its financing from the international capital markets. On your second question, Mr. Knapp, perhaps you would comment on the procurement process and . the procurement procedures here, first perhaps describing them to refresh the memory of each of the members of the Board, and then,  61 STRICTLY CONFIDENTIAL secondly, commenting on past practices. Is this a unique situation? Have we done it before? Do we do it commonly? What is the outlook for the future? MR. KNAPP: It is , to begin with, an unusual formulation which was worked out to fit the particular circumstances of Argentina, and is, in my opinion, a very interesting and imaginative and constructive approach to the problem. It is often misunderstood, and I would like to therefore, if I may, spend a minute or two describing the rationale of this proposal. The SEGBA, our borrower, has a very large program, and we are supplying a relatively small part, $115 million out of a total of $500 million investment. The Argentina approach originally and there are precedents for this in Argentina, and when this formula was originally contrived the Argentine told us that they did not want to borrow from the World Bank for more than a fraction of their requirements They understood that we would insist upon a maximum 15 percen margin of preference, and they feared that a good deal of Argentine industry which was set up and had the physical capacity to supply the SEGBA requirements could not meet that competition. So the starting position was, well, we will reserve  62 STRICTLY CONFIDENTIAL a part of our procurement for domestic suppliers, and we will only come to the World Bank for a fraction of the requirement$ and that fraction will, of course, be handled by the World Bank on the conventional basis, imported or maximum 15 percent for domestic suppliers. This was, in other words, a case of reserve procurement. We are always a little cautious about reserve procurement because it can add substantially to the costs of the project and infringe upon the -- if domestic procurement is very high-priced, infringe upon the economic justification for the project. But we do accept it, and we were inclined to accept it in that case. But then both SEGBA and some of the elements in the Argentine Government began to worry about the fact that this might result in very extensive domestic procurement. And it was they, and particularly SEGBA, which as an institution wants to get their procurement as cheaply as possible, that conceived the idea of putting a ceiling on the amount of premium that would be paid for domestic procurement and worked out this particular formula which says that in no case will domestic suppliers be paid a premium of more than 38 percent, or the going international price as established by the first round of bidding.  63 STRICTLY CONFIDENTIAL Now, we feel as compared with an open-ended reserve procurement that's very constructive,to limit the premium that will be paid. And the Argentine Government, as is explained here, puts out two-thirds of the order, a body of equipment that they are going to produce, more or less homogeneous equipment, puts out two-thirds of the bid for international bidding, and two-thirds of it is handled on our conventional basis, and the remaining third is then put u for bid. If domestic bidders can get within that 38 percent margin, they are awarded the contract, but we don't finance it. It's outside our financing. It's reserve< procurement. But it does put a ceiling on the premium that will be paid for domestic suppliers. And if domestic suppliers cannot come within that 38 percent margin, then SEGBA and the Argenti e Government agree that the full procurement will go to externa sources. So I think it's much better than if there had been reserve,, procurement without these restrictions, and it represents a step toward reducing the premium that might otherwise be paid to inefficient domestic producers. MR. McNAMARA: Mr. Ryrie. MR. RYRIE: Mr. Chairman, I am gratefui for that explanation, and I can see some advantage in having moved the STRICTLY CONFIDENTIAL 64 authorities a bit in that direction, but 38 percent still strikes me as a pretty high premium. Do I understand Mr. Knapp to say that this sort of arrangement is justifiable in circumstances where the Bank is providing a fairly small part of the financing of a much larger program? wt!ll~ I can see that that raises a certain difficulty about how procureme t is going to be arranged, but he also said that this was an unusual arrangement. But I assume there are quite a number of other cases where the Bank is providing a limited part of the finance of a large program. Are we always going to be in this situation of limiting the amount of procurement which is available to international competition in this way? I would be a bit concerned if this was a precedent. MR. McNAMARA: Mr • Knapp, how of ten do we accept reserve procurement, and under what circumstances? MR. KNAPP: Well, on the matter of reserve procure- ment generally, we accept it in only a few cases and only where we are pressed to accept it by the Government and only where we feel that the premium price resulting from this procurement does not threaten the integrity of the project or the economic justification of the project. On this particular mechanism for sort of qualifying reserve procurement, it's a unique case. We haven't had any  65 STRICTLY CONFIDENTIAL proposals like this from anywhere else, and Argentina invented this case, and it has not become generalized. MR. McNAMARA: Yes, Mr. Ryrie. MR. RYRIE: I am sorry to go on, but I would like a little more explanation of the circumstances in which we accept reserve procurement and what precisely reserve procurement means, because there are two different concepts, aren't there? One is the rules governing the expenditure of the money the Bank itself is providing, and then youlre broadening it to the rules governing .the procurement under the project as a whole. But by reserve procurement, the bit we are interes d in is what the Bank's money is used for. Do you mean by reserve procurement the arrangement we have here for the one- third reservation to domestic suppliers? And in what circumstances, as a matter of principle, would you think that kind of arrangement to be justifiable. MR. KNAPP: First, let me just correct one thing. By definition, if it's reserve procurement, we don't finance it. We don't finance that particular procurement. And our concern is when it is advanced -- and it's advanced rarely. I mean, I suppose it arises in one percent of the cases we deal with. But a country will say that we have domestic STRICTLY CONFIDENTIAL 66 suppliers that can't meet this competition. We want to reserve part of the procurement on this project for these domestic suppliers. And we accept it if it's minor and doesn't make a -- well, as I say, does not threaten the integrity or economic justification of the project. MR. McNAMARA: Mr. Sigurdsson. MR. SIGURDSSON: Thank you, Mr. Chairman. I would like to express concern about the Bank's renewed involvement in Argentina. After many years of inactivity which has been a time when the Argentinians have had great economic difficulties and more· or less unsuccessful stabilization programs have been replacing each other, the Bak is now planning to resume its lending based on another stabilization program, the success of which is far from being certain. If it is successful, however, the assumption is very optimistic as regards recovery. Already during the reconstruction period, the economy is, for instance, projecte to grow at a rate of 5 percent per year, which is much more than many countries can expect, even under more normal circumstances. As an institution concerned with long-term development, the Bank is supposed to support countries on the  67 STRICTLY CONFIDENTIAL · basis of such a development program with the objective ot improving the living condition's of the masses of the popula- tion. Argentina 1acks any sucn kind. of a development strategy, ana I reter nere to paragraph 12. More specifically, this is a large loan tor electri transmission and distribution in the greater Buenos Aires region. So in the absence of such development strategy of tne kind whicn I previously mentioned, the project itself is not appealing in terms ot the Bank's general policy. Another cause for concern can be founa in the economic report which very well describes notn Argentina's problems of today and its great potential ot tomorrow. It aoesn't even try to estimate tne ettec~s ot tne present snort-term stanilization programs on tne well-being ot tne people. In view of the Bank's limited resources and tne reservations I nave been recounting nere, I therefore wonaer ~ wny this is the right time to take up lending to Argentina, and in particular to this kind of a project. ·1:nan.K you, Mr. en airman. MR. McNAMARA: '.l'nank you • .Mr. Wiese, would you comment on that? Why initiate 1enaing to Argentina now, and wny this proJect? STRICTLY CONFIDENTIAL Ml<. WIESE: '!'he Argentin; economy is c.Lear.ly in a state where as a stabi.lization program, it is more tnan a stani.tization program; it is rea.t.ly a reconstruction program necause purposeru.t economic ac~ivity haa almost ground to a .na.tt early tnis year. Practica.l.ly a.L.L par~s or tne pUb.lic and tne private sector are faced with ~emenctous investment requirements whicn nave neen created Dy tne fact tnat tor years tne investment nact ctroppea to a very .tow level, anct ~s you re~, tne economic report states tne public sector .,,,. haa reacnea a savings .Leve.l wnicn was aeeply in tne negative. ln o~er woras, "C..rlere was neavy aissaving. e 'l'ne Argentin.- economy has a tremendous potentia 1 f or following a sharp upward growth course because eeuaaee, ~s one of the rew economies in tne world wnere ~e basic ~elationship netween resources and tne population .are very ·t avorab.le, but it has a.tways ne.ld tnis promise tor many years a na never succeedea in maKing the savings ettort necessary ·to get an investment program roi.ting which after three years ·a£ time will oring tne economy to a selt-sustaining growth p atn and enanle tne economy to necome very largely independent £ rom external capita! int.low. Tne reasons why this hasn't nappened are spe.lled ~ tin the report, but it nas largely been an economy whicn  69 STRICTLY CONFIDENTIAL over 15 or 2u years nas attacned great importance to .promotin a consumption ot urban classes ana neglected tne agricultural ' investment program, agriculture being tne sector wnere the basic strengths ot tne economy is found. Tnis government, unl1Ke any of i~s predecessors, as tar as I know, has placea tremendous emphasis on a snift in tne investment priorities to maKe come true the promise inherent in the structure o:r tne country that it could oecome one of the grain baskets of the wor.id. We feel it is important for tne Bank to support this ef:rort and to participate in this rehabilitation program whicn, as was pointed out oetore, we expect to be of a durati of only a few years. But during that period, the capital requirements are so great and the debt service obligations of Argentina are so tremendous because of the sins of the past when a tremendous amount of short-term debt was contracted in the last several years, essentially to finance an ever- growing stream of consumption, particularly in the urban centers, that the Bank's help is needed particularly, togethe with the IMF, as we hope this loan is going to be a signal which is going to accelerate the already slowly emerging flow of private capital in international financial markets into th country. It is my personal hope that a few years down the STRICTLY CONFIDENTIAL 70 road should this policy continue, and it is difficult, of course, to predict, and my crystal ball is not any better than anybody else's, but should these policies continue, I would personally hope that a decade down the road the Argenti e may become eventually a contributor to the resources of this institution. MR. McNAMARA: Mr. Sigurdsson. MR. SIGURDSSON: I thought I listened closely, but I didn't quite get why this loan now but not, let's say, one year ago or two years ago. The answer indicated that the previous governments have neglected agriculture and here we are financing electricity for the urban area around Buenos Aires. I don't see the logic of the argument. MR. McNAMARA: Let's take it in two parts • Why not this loan before? MR. SIGURDSSON: To put it simply. All right. MR. McNAMARA: Chaos. Economic chaos, a very low probability that our lending would have had any significa t effect in reducing the chaos and a very low probability that the lending would have yielded benefits to the economy and the majority of the people. Therefore, the loan not in the past. And I think with hindsight, we were right. I doubt very much that this loan two years ago would have been STRICTLY CONFIDENTIAL 71 activated. I just can't see the economy utilizing the funds for this purpose in an orderly way. Now, having said that, why this particular project now? How is this going to contribute to the reconstruction of the economic order in the Argentine? MR. WIESE: Whatever lending we may propose to you in the next few years for Argentina will be very heavily oriented to one objective, the re-acceleration of growth in exports. Now, the exports, of course, are going to be agriculture produce in its original form and in its fabricate form. There is situated in Buenos Aires, I think, well over half of the country's export capacity and a very,alrnost heavy, a very high percentage of the country's industrial capacity which is processing agricultural raw materials. In order to expand that capacity, there is a need, of course, to provide additional energy to the urban area of Bu8'nos Aires, and the primary beneficiary, of course, of this loan I think is going to be the industrial capacity. It will probably be possible, if there was no further industrial growth, to maintain the use of energy for consumptive purposes. So this loan is part and parcel of what I envisage to be a package addressed to the promotion of exports. You STRICTLY CONFIDENTIAL 72 may have noted in the report we mention this project for the expansion of grain storage facilities which are at the moment another bottleneck confronting the expansion of agricultural exports. If I may only add one comment to your first questio, this project has been appraised, I think, two or three times over the last several years. It didn't come to fruition because during our discussion with the Govermnent there was never a financial it was never possible for the Government to put together a financial plan which would have assured us that the local resources and foreign resource needed to carry out the project, of which we finance only a relatively small part, would be in existence. So it happens to be from this point of view the first one of an export package because it happened to be more advanced than some of the others we refer to in the President's report. MR. McNAMARA: Mr • Cooper • MR. COOPER: It is a great pleasure to welcome a lost sheep back into the World Bank fold. I think that at this point I feel that the Bank decision to resume lending to Argentina is a very sound one, for a number of reasons, but I think basically because it's important for tnis institution to make its relatively scarce funds count,. and  7j STRICTLY CONFIDENTIAL this is an opportunity for lending to a country with the c hance for a potential economic return which I think is perhaps greater than in many other cases. And I think that t,his kind of productivity response to Bank involvement in a country, for a variety of reasons, is something that should lie sought out. So I am particularly pleased that the Argentinian Government and the Bank have been able to work out mutual arrangements under which it is possible to resume Bank lending to Argentina. I certain!y also hope that as Argentina continues to follow an economically wise path, tnat its progress will 'JPermit it to move, as Mr. Wiese so appropriately said, into a position where it can help finance other countries through G is institution. And I think tnat that is something we all want to see, is that normal process of graduation continue. But this aoes not mean that before tnat position has arrived, we should shy away from supporting countries whic need Bank support in return for increasing their output ana .. :~ auctivity . As far as !ending for the power sector in an economy tbat is emphasizing agricuiture, I must say I see no ilieonsistency. I suspect that there is room tor investment in power as we!! as room for investment and emphasis in agricu!tu e ,  74 STRICTLY CONFIDENTIAL and I thinK tnat the case made for lending to the power sector in tne project documents before us is really -- and also, the somewhat difterent version of it presented by Mr. Wiese just a minute ago is very persuasive indeed. So for all these reasons, I strong.Ly support tnis I project, and 1,- am very p.leased to see that the Bank has tound itseLt able to resume lending to Argentina. r wouLd liKe, however, to join Mr. Ryrie in saying that tne particular procurement provisions that are made under tnis Loan -- ana tney rea.LLy were, 1 think, tne same procurement provisions carried under the Last S~GBA Loan are somewhat~bOthersome. As I look at tnose provisions, it seems to me that tney might nave been particularLy appropriate at a time when, in those baa o.ld aays when you haa tixed excnange rates and you naa an overva.luea excnange rate and you are trying to tigure out some way in whicn a country witn an overvaLued excnange rate couLd nevertneLess put a .Litt.le support into its domestic industry. •1•nat situation nas changed. I think the -- I'm not going to go into tne detai.ls of it oecause I wouia nope that we aon't nave to tace tnis issue again. But r wou.ld .liKe to just ask two questions. une, as r understand Mr • .Knapp's expianation, he said that we don't tinance tne reserved portion of the loan, STRICTLY CONFIDENTIAL 75 ana I am a litt~e contused on -cne procuremene regu~ations nere wnetner i~ a loca~ supp~1er were to come in at ~ess than lS percene above the low foreign bid, would the Bank also be willing to finance part of that one-third reserved for that same supplier? That seems to be what the provision in these particular procurement regulations are. The second question I would like to ask is why there is that half a percent of special inspection charge for foreign equipment? Don't you have to inspect domestic equipment? Having asked those two questions, I would like to ask a third where I think I know the answer, which is if the Bank is really reasonably confident that only a small proporti n of this procurement is going to be covered by these special provisions as it was the last time a loan was made to SEGBA, I think the issue is not all that serious. But I am a little uncomfortable with it. I certainly don't think it's a good precedent, and I would like to ask for a little further explanation on it. MR. McNAMARA: Mr. Knapp, would you conunent on it? We say we don't finance reserved portion, but assume that it would be placed locally at less than 15 percent premium. MR. KNAPP: Yes. It no longer becomes reserved the STRICTLY CONFIDENTIAL 76 moment it is subjected to our rules under international competition. MR. COOPER: .... pick up the third that·is reserv I can't tell from this whether if a local bid comes in and it's no more than 15 percent ~ove, the Bank would finance the award to the local firm on the third that was not subject to foreign bidding to begin with. MR. KNAPP: If I understand it correctly, subject to correction here, if I understand it correctly MR. COOPER: I just can't tell. MR. KNAPP: On that reserve procurement, that reserve third, if the domestic bidder comes in and fixes a price on that which is within 15 percent of the foreign offer, then indeed he does get the business. I would say by definiti n that is no longer -- MR. McNAMARA: He gets the business, but do we finance it? MR. KNAPP: we are prepared to finance it if he is within the 15 percent margin. MR. McNAMARA: But there is still a limit of foreign exchange, so some part of it, two-thirds, didn't get financed on that basis. MR. KNAPP: That is the interesting part about this. STRICTLY CONFIDENTIAL 77 Of course, our loan is limited. MR. McNAMARA: That is my point. MR. KNAPP: But the Argentines are still agreeing that they will procure abroad, if necessary, with their own reso rce s. MR. McNAMARA: That is my point. You can argue what the Bank is financing, but in any event we are financing two- irds of the equipment, and it will ultimately all be abroad. Now, next, why -- Mr. Kikuchi, perhaps you would to this -- why one-half percent inspection charge for oreign equipment? MR. KIKUCHI: Well, the Argentinian public sector y is subject to certain statutes, I understand,. which extent to which they have to inspect equipment they purchase. SEGBA argued at the time we negotiated the loan, and this was applied many years ago, that has to bear the cost of inspecting equipment purchased d, whereas the domestic manufacturer bears the cost of insp cting equipment by SEGBA officials manufactured by him, and erefore, there was a true cost differential approximatel y to 0.5 percent at the time, which should be taken into l 1 nt in comparing local and foreign bids. I think we will STRICTLY CONFIDENTIAL 78 to use the experience we gain~ from this loan to whether this is indeed still the case. We are a little bit handicapped in making predictio s as the cost will be because there have been changes inside the Argentine economy over the last ral years, and we will have to try to see what these cost be, which also applies to the other questions as to extent will local suppliers win bids within the 15 We have some guesses, but we haven't had any ience on bidding in quite some time. So I think the 0.5 percent will be subject to revie, used to be the true cost differential at the time the loan was negotiated, and we have no basis for otiating it at this time. MR. McNAMARA: Are there any other questions or yes, Mr. Khelif -- I beg your pardon, Mr. Rigaud next and then Mr • Is lam, Mr • Knetschke, Mr • Drake, and then Mr • Khel'f. Mr. Rigaud. MR. RIGAUD: Thank you, Mr. Chairman. I am of course very pleased today to see again a loan to Argentina. I have two concerns on which I would lie to get some explanation. STRICTLY CONFIDENTIAL 79 The first one is that we have stopped for almost five years lending to Argentina, and the reasons were, one, that projects were not really available, that there was economic chaos, and so on, and I believe the second one was, and it is pointed in the ~eport, was creditworthiness, becaus default on some external debt seemed very ' likely for this year before the change happened. And since we are now starting again, I would like to get some bit more about creditworthiness. I know that is very difficult always to see if a country is creditworthy or not. In the long term there is no question that Argentina is a creditworthy country. I think the only problem is whether during the short term of '7 - '77, and in the very short term, that is, till the end of the , year, the manufacturer to know if Argentina will be credit- worthy or not will be if the very large bank loan which is at the present time under negotiation, commercial bank loan · is presently under . negotiation is concluded or not. I was wondering if we had some information on that, if we know what maybe --- in this paper is the amount spoken ~ about,$_8.70 million, and if there was one kind of condition in the loan according to which if such a loan at least for a certain amount was not possible to agree with the cornmercia  80 STRICTLY CONFIDENTIAL a bank on such a loan, is that/condition of effectiveness of our own loan? Also, to have some more idea about creditworthiness it may be interesting to know if we get some idea about the real spread of this loan, that is say, what is the interest LlBoR~ charge above the loan ••• lending rate. And the third point about creditworthiness is to know how other lenders, so this will give us some idea about commercial banking, and also what other bankers may have, what ideas they might have about creditworthiness. And for that I would like to know what at the present time is the position of the major industrial corporations specialized in suppliers credits. That is to say, for example, the Eximbank in the States. Have they decided to start again studying projects or not? I know that they have stopped for many years completely to lend any money to Argentine or to guarant e. Has it decided to start again or not? That is the first point about creditworthiness. My second point, as you may expect, Mr. Chairman, is about the procurement arrf\ipement, and I must say that I have some reservations about this procurement arrangement. Just first I would like to come back to answer of Mr. Knapp to Mr. Ryrie about this arrangement and reserve procurement. STRICTLY CONFIDENTIAL 81 The answer of Mr. Knapp about reserve procurement was, if I understand correctly, that we never finance from Bank money reserve procurement. Is that right? MR. KNAPP: That's right. MR. RIGAUD: Because my understanding, I think it was just before the recess, we have a loan to India in the telecommunications sector in which a procurement was entirely reserved. There was no competitive bidding at all and the procurement was entirely reserved, however it was financed by the Bank. MR. KNAPP: Well, that is a different case again. What we were financing was the importation of materials and components. We weren't financing the procurement of the finished equipment. It's a sort of a program or sector loan. MR. RIGAUD: Yes. But we financed reserve procurement. MR. McNAMARA: No. Wait a minute. This is an important distinction, gentlemen. We shouldn't get lost in semantics here. When we are talking about reserve procuremen we are talking about procurement of manufactured items, as is referred to here in the case of the Argentine. We frequen ly finance the foreign exchange imported materials of locally manufactured equipment when that locally manufactured equipme t STRICTLY CONFIDENTIAL 82 is not exposed to international competitive bidding. MR. RIGAUD: That is to say we -- MR. McNAMARA: That is not technically reserve procurement. So I think we need to distinguish these two cases. You can argue we are wrong in both cases. I am not trying to settle that. I am simply trying to settle definitions. By definition, reserve procurement relates to locally manufactured pieces of equipment, not the situation in which we are financing the foreign exchange cost of import d materials later incorporated into locally manufactured equipment. So let's treat the two cases differently. Argue each if you wish, but let's distinguish carefully the terminology. Go right ahead, Mr. Rigaud. MR. RIGAUD: OK. Thank you, Mr. Chairman. After that, I must say that I have been a bit disappointed that before going to negotiation and before writing this report the staff has not read more carefully the minutes of the last loan to SEGBA, because there were two important points, I believe, because there was some discussion about this procur_ement, too. The first point was that we will have a large  83 STRICTLY CONFIDENTIAL paragraph on the external protections, the level of external e protection of the Argentinjl' industrial sector, and especially of this sector, of its competitiveness, and so forth, and I have not seen this paragraph. And the second point was that,if I am right, during the discussion Mr. Knapp expressed his personal view that you wish that the 38 percent figure could have . been smaller, and that by this time the Bank did some bargaining to get ? it smaller. And Mr. Knapp indicated that next time if we have another loan , we will insist much more strongly for this percentage to be reduced, and I see that although we have been stronger, we have ·not been very successful. On a technical si~e of this procurement, there is also, at least if I well understood it, one part of the procedures that I don't really like, apart of the general fact of the preference, is that if you look on page 16, one paragraph 48, and there is explained how the t:tL.J.Ml third will be given to Argentine suppliers. It is said that the Argentine supplier will have -- starting on page 15, paragraph 48 -- it is said that separate bids from Argentine suppliers would be opened and a contract would be awarded to the lowest bidder if his price were below 138%, and so on. If all Argentine suppliers' prices were above STRICTLY CONFIDENTIAL 84 138 percent and they were not willing to reduce their prices and that is the sentence I am a bit puzzled about, because I think, at least as far as I know, for much of the equipment which is supposed to be purchased, the internal competition is not very strong. That is to say, for many of the equip- ment there is only one or two possible local corporations. And if you permit this corporation to put on the table, to put in an envelope a very high bid and say after the opening we will see if you are within the 138 percent or not, but if you are not, you will be able to modify your offer to reduce it to 138 percent. I think with such a procurement, we are almost sure that there will be nothing under 138 percent, because at least for the third third, because they will have no competition and no particular advantage for them to put into tJ:>.e envelope a bid with something which is supposed really to be around less than 138, and they put 160 and say, well, we are very high, and if we are too high we shall see and come back later in negotiation with the buyer to be just in 138. I would like some comment on this. MR. McNAMARA: Yes, surely. A number of points on creditworthiness. Perhaps, Mr. Ross, you would comment on this. All of the points relate basically to the commercial bank loan and the prospec s STRICTLY CONFIDENTIAL 85 for it. What are the prospects so far as you know? MR. ROSS: The information that I have as of yesterday from the Argentine authorities is to the effect ; that the loan has not yet been signed. It will probably be signed in a week, but it had committed,both the Argentine authorities and the banks are committed to the loan. In fact, the interest rate that you asked about will probably LIBOR. be 1.78 above~, and as far as the amount is concerned, it isn't final as yet, but including Europe, Canada, and the U.S., the amount is not likely to be very different from that mentioned in the economic report. MR. RIGAUD: And the loan was supposed to be signed in about one week. Are both the U.S. loan, the and the European? ·,"'s Because my understand was that u.s. one, the loans were not as well reaiiJ"for the two other lenders. MR. McNAMARA: Mr. Ross. MR·. ROSS: It is my understanding that they are all pretty much in the same stage of preparation, although the documents, I understand, in the case of the U.S. and Canada are further advanced. The interest rate, I was told, would be the same in all three cases. MR. McNAMARA: Thank you • 11 STRICTLY CONFIDENTIAL 86 And the position of U.S. Eximbank; what is their attitude toward financing of -- MR. ROSS: I am sorry, I cannot answer that question. MR. McNAMARA: Would you check that and send Mr. Rigaud a note on it? MR. ROSS: I will be glad to. May I add, Mr. Chairman, that the size of the loan may be even somewhat greater than that indicated in the economic report if Japan also joins the three lenders that I have just mentioned before. MR. McNAMARA: Now, turning to procurement arrangements, Mr. Rigaud referred -- let me go to a question first and then we will come back to the minutes of the last discussion of the Argentine procurement pattern. Mr. Kikuchi, would you respond to this? Is it planned, and if it's planned, is it proper, that domestic suppliers bidding on the reserve procurement should be permitted to reduce their bid after foreign bids are known to no more than 138 percent of the foreign bid? MR. KIKUCHI: Well, we have to start with the whole package in that the local manufacturers also bid on the first two-thirds. Now, there is a great incentive to wio  87 STRICTLY CONFIDENTIAL that package. So in the first instance they would submit bids which are as low as possible. If at that point they are not below 115 percent, then they open the remaining one-third package. If their prices at that point are ridiculously high, let's say, then they have to come down. If they do not come down, then that portion would be given to the foreign supplier who had even bid below, of course, the 115 percent. So I think this is a very ingenious and also fair system. MR. McNAMARA: There have been so many questions raised about that. Let me ask Mr. Knapp to go back in the past many years and say, in effect, why at that time -- and I don't know when this happened; it must have been five or ten years ago -- what is the economic justification for this reserve procurement, economic and political, I guess? How is it an advantage to both the Argentine and the OECD manufacturers, if it is to their advantage, to have a system such as this? MR. COOPER: Mr. Chairman -- MR. McNAMARA: Let me just ask Mr. Knapp to coiranen • .MR. COOPER: On that point. MR. McNAMARA: All right, go ahead. MR. COOPER: Could I ask if we could get a better STRICTLY CONFIDENTIAL 88 understanding, too, in response to the same question, whether this set of procurement arrangements was renegotiated at this time or simply carried over from the previous time? Because it seems so inconsistent with the general lines of economic changes and so forth that have been set forth in other areas of Argentinian economic policy. I am not sure whether it was for a variety of technical reasons carried over or whether this was really something that seemed essential given the present situation. MR. McNAMARA: All right. Let's go back to the origin of this. What is the logic of this, if there is any logic, using two sets of interest, one the internal interests and the other the interests of OECD. Why should the Bank, being responsive to both parties, or responsible to both, enter into such a progedure? MR. KNAPP: I want to start answering that by repeating something I think we should all keep in mind all the way through here. The question is whether we were going to place some restrictions and whether the Argentine Government was going to place some restrictions on the premiu paid on this reserve procurement. MR. McNAMARA: May I suggest first, it is not just a question of restrictions on reserve procurement. Why a  89 STRICTLY CONFIDENTIAL reserve procurement? Why would we ever agree to that? And then the relationship of the restriction to it. MR. KNAPP: It started from the fact that there existed domestic capacity perfectly technically able to meet the SEGBA requirements . for some of their equipment. This was installed; employment depended upon it; tax revenues depended upon it. And the Argentine Goverrunent started from the proposition that they wanted to, if possibl, employ this local capacity which would otherwise be idle. Yet the Argentine Goverrunent, and particularly SEGB, having an interest as an institution, wanted to limit the cost of activating this local capacity. I don't think looked at from the point of view of the foreign suppliers they lose anything, if you once accept that we are prepared to accept an application from Argentina for a part rather than the whole of their requirements. MR. McNAMARA: Let me stop there just one second. I think that is the point. The Board many years in the past in recognition of this particular situation believed that (a) it was in the interest of the Argentine to move forward with accepting the reserve procurement, particularly with the limitation, because there was a restriction on the cost to the society of the reserve procurement; and (b) it was in STRICTLY CONFIDENTIAL 90 the interest of, I am going to call it, the OECD suppliers because unless the Bank moved in this direction, they weren't going to be exposed to any competitive bidding for these items. This was the logic that underlay the Board's decision at that time. And I think it was reasonable logic. In any event, that's what lay behind it. Now, Mr. Cooper asked, and I still have to go back to Mr. Rigaud's questions about the minutes, and I will come to that in a moment. But Mr. Cooper asked was this procedure just followed without further examination because it had bee handled that way once bafore? Or did we reexamine the situation today? Mr. Wiese, perhaps you would comment on that. MR. WIESE: This formula was several years ago imbedded in Argentinian legislation. So it forms part and parcel of the laws that govern industrial production. We had some discussion with the Government officials during and shortly before negotiations about the possibility of modifying this, but the Government is very reluctant to change this law unless it first has an experience about the implications any such change would have. The Government is as uncertain as we are about what the true cost structure STRICTLY CONFIDENTIAL 91 of industry really is at this moment. They have just had a dramatic move on the exchange rate front, and many other variables that had been frozen in the industrial cost structure have just very recently, weeks and months ago, been freed. So they are very uncertain as to what the impact of any modifications would be, and we sort of agreed to discuss this matter again on the occasion of negotiating a further operation in Argentina where we would be confronted with the existence of a sizable high cost of domestic industrial manufacturing capacity, which could be, for instance, in the transportation field. Now, you will all recall with hindsight, on February 27, 1976, we sent to you a report which was in the project performance audit report on the power project, and it has a table in there which shows that essentially the amount retrospect of equipment .in / . procured in Argentina between about 15 percent but below the ceiling of 38 percent turned out to be 5 percent of the total. This was substantially less than ? we had expected. At the time the Maoliform -- this·_is the name of the particular procurement form -- was negotiated and approved by the Board, the 38 percent was selected because it was estimated that 38 percent was taken rather than 34 percent or 42 percent, that the total costs for SEGBA of  92 STRICTLY CONFIDENTIAL carrying out its investment program would not exceed 115 percent of the hypothetical costs that would exist if all the equipment had been procured abroad. It turned out in retrospect only 5 percent was procured., so it was much, much less. But we don't quite know what it will be in the future because of the turmoil that has existed and the many changes in the cost variables and that is why it was left. I personally sympathize with the Government it would be difficult for it to change legislation without being able to explain to the public what the implications of the change would be. MR. McNAMARA: Then, is the response to Mr. Rigaud's questions about why was there not a paragraph on the level of external protection and why was there not a discussion of a lesser percentage than 38 percent? And the answer is that in the uncertainties as to costs, it is very difficult to comment on either one of those. There is a very interesting series of data in this report that shows some 6f the problems and points to some of the weaknesses in the current Argentine situation. It refers to the reduction in real income, in effect, in real wages, in reduction in production. And the cost STRICTLY CONFIDENTIAL 93 structure of industry, I think, is very uncertain today in the Argentine. So, quite frankly, we weren't able to penetrate it, and neither was the Government. Under these circumstances we either go ahead with something like this or we don't go ahead at all. Now, that doesn't in any way foreclose the Board's decision that we should not in the future pursue this kind of a procurement formula. But I think under the present circumstances, you either had this loan on this formula or you have no loan. That's the situation. We have not been able if I may digress just a second -- we have not been able to fully calculate unemploy- ment rates, as an illustration, because there is clear evidence that unnecessary employees remain employed, and this is a sharing of the burden, if you will, and perhaps a very wise one, as a matter of fact. I don't wish to imply other- wise. As a matter of fact, my personal preference in certai circumstances would be for that. But the impact on costs and cost structure and protection is very, very difficult to ascertain. And I am a little uneasy about it. I just don't know what the effect is. I am not sure I understand the incidence of the burden. Mr. Sigurdsson made an implied reference to that. STRICTLY CONFIDENTIAL 94 Who is bearing the cost in the Argentine of adjustment. is . not clear. ~It is very clear there is a heavy cost,but it's not clear in my mind as to who is bearing it or whether it could be borne more equitably. Well, let's get back to the subject. Mr. Islam. MR. ISLAM: Mr. Chairman, we have support for the project, and also support for the financing of the infrastruc ture development which we consider very important. However, we have a question on the financing plan of the disbursement period covering FY77 to FY80. May I draw attention to page 1 of the Appraisal Report where the financing requirements have been given, and for FY77 to FY80, is estimated at $828.6 including this project of $425.4 million. And in the financing on the next page, on page 20, the requirement is put at again $828.6 million. It is mentioned here that out of the. ' $425 million through has been shown as available 1 internal cash generations. I would like to know, Mr. Chairman, how realistic is this estimate, because up to 1975 SEGBA has suffered 3 million losses and had accumulated losses to the tune of $12_ Of course, the Go-ernment has taken over this loss, but even then, to insure a contribution of more than $100 million STRICTLY CONFIDENTIAL 95 annually on an average over the next few years for an organization which so far has been running at a loss and has just been able to break even in FY76 appears most optimistic. I also see in Appendix 8 of the Appraisal Report, and it seems to me that the total revenue prediction is also rather unrealistic. It appears from here, Annex 8 really, of the Appraisal Report, FY75 the total revenue was $161.9 million, and raised to $289.7 in FY76, and $477 in 1977. And it seems to me that the target of·internal cash generatio, if it cannot be fulfilled, will jeopardize the total revenue production that has been made. And if the projection does not come true, the financing of the Bank project and also the investment plan would be jeopardized. So I would like to know, Mr. Chairman, to have some comments about it, especially whether there is any contingen y plan which could be used in the event there is a shortfall of resources on this account. This is my first question. Another question relating to financing is the draw- down of existing loan to the tune of $39.8 million to finance this Bank project. Where does this loan come from? Because I should imagine that this existing loan must have be n contracted for some specific purposes. So the question is is this money being diverted from its original purpose to be use STRICTLY CONFIDENTIAL 96 I here? And I would also like to get some comments on this. Thank you, Mr. Chairman. MR. McNAMARA: Mr. Kikuchi, first, are the cash generation estimates realistic? If they don't prove realisti, what will be the effect? MR. KIKUCHI: First of all, the projections are realistic. It's in combination with substantial tariff increases that are being implemented right at this moment and will continue to be increased until the rates are up to the level of what we call a concession agreement whereby a return of 8 percent on the investments on SEGBA would be obtained. Also, as you know, there is an element of loans, both local and foreign, included in the financing plan, and the amount of the loans are consistent with the borrowings which SEGBA has been able to obtain even during the last two or three years. So when all those things are combined, the currnet financing plan is very realistic. MR. McNAMARA: On that point of loans,. existing loans, are funds being diverted? Is a priority purpose not being met as a result? MR. KIKUCHI: No, there is no diversion of funds in STRICTLY CONFIDENTIAL 97 that sense. MR. McNAMARA: Mr. Knetschke. MR. KNETSCHKE: Thank you ' Mr • Chairman • I have a question concerning paragraph 37 on page 2 of your report. I can support the intended reduction of employees. It is a particular employment, or better, unemployment effect, but I think this policy is a good and appropriate policy. But I am unsure if it would be really possible to reduce the number of employees. I think it would mean employees would have been fired. My question is: Are the opportunities for these fired workers to find other jobs? That is my question. Thank you very much. MR. McNAMARA: Mr. Kikuchi, would you respond to that? Is it practical to assume the number of employees can be reduced from 26,300 to 22,800? What will happen to the employees? MR. KIKUCHI: I think it is very possible. For one thing, the question is why are there 26,300 today? And this is because of the employment policies which bloated the number of employment in SEGBA way beyond which is practical,. economic for the operation of the company. Certainly there will be firings in the sense that it would go down from  ~===:::::=:=====---=------~------~~~~-. STRICTLY CONFIDENTIAL 98 26,300 to 22,800. But, again part of that could go into natural attrition or retirement, and so forth, and also it's general practice that SEGBA would look to alternative employments. MR. McNAMARA: It's over a two-year period. This is an important point. Mr. Drake. MR. DRAKE: Mr. Chairman, Mr. Ryrie has already mad my three points and others have repeated them, so I will be brief. But I would like to just underline them. First, we join others in welcoming and conunending the speed and political courage with which the new Government , and I am encouraged has tackled its very difficult problems _ to see that they are already beginning to bear results. Secondly, I very much endorse the role of the Bank as a catalyst. And I hope here that the Bank can be active in promoting cofinancing. I think that our objective here should be to help Argentina by, · wherever we can, minimizing the amount of Bank resources and trying to maximize the amount of external resources which the Bank can attract. I appreciate that in order to do this, to be convincing, the Bank will have to put in some seed money. I am not disagreeing with that. But I do think that as confidence in STRICTLY CONFIDENTIAL 99 Argentina returns, that it should be possible for us to rever e our role and that the World 1 Bank's share in the external financing should progressively get smaller, and it should be possible for us to be active in attracting other sources, a variety of commercial banks and suppliers' credits. And I hope -- we have already done some of this in Brazil. I hope that this can be a demonstration case. This is a countr where this is quite appropriate. The third point, and I won '.t belabor this because others have, is the procurement question. I must say that Mr. Rigaud and Mr. Cooper mentioned earlier the presentation problems they would have at home in the case of Korea. But I would have much more trouble presenting or explaining this at home than the Korean one. The Korean one I could explain, but this one it would be just about impossible to explain to exporters of my country. I just hope that we are very cautious about using this as a precedent. I really still do not understand the rationale for 38 percent, and I am not sure from what I have heard that there is any very scientific basis for it. I would certainly caution you to the use of th s as a precedent in the future. Thank you. MR. McNAMARA: Thank you, Mr. Drake. STRICTLY CONFIDENTIAL 100 Mr. Khelif. MR. KHELIF: (Speaking in French) , ••• (Through interpreter) And this was agreed during summer last year. I remember the problem that we discussed at the time a few months earlier. Now, were there other loans to other countries with an income per capita of about this size? I must admit that I have not followed very closely the general policy of e Bank in this respect. Can we say that countries with more than $1,000 per capita income are eligible for a Bank aid, and under what conditions are they eligible? I would not think that the implicit conditions to which Mr. Sigurdsson seemed to refer would be a criterion overall, but I think it's an important questionr maybe not quite as much as the case of the countries with a lower per capita incane, but I would like to be better informed. It is about two weeks from the annual General Assembly, and I would like to be able to answer more objectively to this question, and I would like to say that this maybe is not necessarily aid in form of loans, but would the Bank consider other forms of aid to developing countries, countries that have development problems? And, Mr. Chairman, I would like to have some information in this respect. STRICTLY CONFIDENTIAL 101 Thank you. MR. McNAMARA: Mr. Knapp, would you respond to the question of levels of income per capita in relation to eligibility for Bank borrowing? MR. KNAPP: We have, as the Board is aware, been phasing out many countries in the highest income levels among our borrowers. At the level of, say, $1,500 as a rough figure, we have several borrowers that are continuing. Romania, Yugoslavia, Portugal, I suppose both Spain and Greece; Spain, of course, is phasing out, would fall in that category. And we don't have any formula by which lending is continued or phased out. It depends upon the judgment of the country about its access to other external resources, about its particular situation and capacity to absorb capital effectively. The only clear rule in this category recently reaffirmed by the Board in terms of the countries over $1,075 per capita, is that the maturities would be shortened up. And we have in this case a 15-year maturity, three-year period of grace, which conforms to the country standards the Board reviewed recently. MR. McNAMARA: Thank you, Mr. Knapp. Mr. Kiribuchi. STRICTLY CONFIDENTIAL 102 MR. KIRIBUCHI: Thank you, Mr. Chairman. I would like to be brief. Although this becomes a repetition, I would like to be recorded in three points: Number one, I am also glad to see this country making great efforts and that efforts are showing the results in its improvement in the economy. Also, secondly, I would like to join with others in welcoming the Bank's resumption of its activities in this country with emphasis as a catalytic role. Thirdly, I share the concern expressed by other colleagues in the exceptional aspects of the procurement procedures. Since there are two basic procurement policies of international bidding and 15 percent differential, I don't like to see the exceptions to these rules. In this connection, I have one question. What is the Bank's participation ratio within the foreign exchange components? What I am getting at is is it possible to come to the same results by raising the Bank's participati n for the remaining portion, excluding the reserve portion? In other words, it can be a circumventive method, and I would like in that sense, too -- I don't like to see the reserves to be used very frequently. STRICTLY CONFIDENTIAL 103 MR. McNAMARA: Mr. Knapp, what is the Bank's policy regarding the participation in foreign exchange procurement costs? MR. KNAPP: The normal pattern, if you take most of our loans, and if it's a particular project that we are discussing, we tend normally to finance the foreign exchange component of the budget. We are not in this case. We are financing substantially less than the total foreign exchange content. I think the amount of the loan in this instance was determined with an eye to country considerations and how biga loan we wanted to make at the present time as the first loan in Argentina. It d~pends also -- it comes to how you define the project. As our discussion has proceeded here, I have become increasingly aware -- of course, we are doing this all the time. We finance a railway project, a telecommunica tions project, which is part of a nationwide program, and we are asked to finance a certain portion of it. We finance a railway project, we finance so many : locomotives, so much rolling stock and so on • .Meanwhiie that railway is engaging, especially if it is a national railway, like, say, the Indian railway, to take the extreme case. They are engagin~ in all kinds of additional activities and procureme t.  104 STRICTLY CONFIDENTIAL You can call that reserve procurement if you want to treat the whole railway program as the project. We define the project more narrowly in these cases. If it's not one of those sort of big infrastructure things in which we are picking out some portion of it to finance, which is rather like what this case is, if it's a normal project, the foreign exchange content of the project tends to become the amount of our loan, if that can be acconunodated within the country program and suits the country considerations. MR. McNAMARA: This is the last meeting before the Annual Meeting. Many of you are anxious to pursue your travels. I know some are leaving tonight and some tomorrow. Hence, I really don't want to prolong this discussion by an intervention of my own. There is work we have got to finish today. We have a problem of Vietnam. We have some IFC matters to come before us. But I simply want to say on this particular point that if you are interested in pursuing this issue further, I would be happy to schedule it after the Annual Meeting. I want to suggest to you what I tried to imply before, in the fonn of a question. I want to suggest the answer. I think if one were to say is this Argentinian STRICTLY CONFIDENTIAL 105 formula, in the case of the Argentine, not some other country but in the case of the Argentine, is this in the interest of the economy? Will it lead to greater efficiency? The answer to that is definitely yes, and we could argue why, but I think we could prove that very clearly. Secondly, is it in the interests of OECD nations interested in extension of the principle of international competitive bidding? Now, this is what you are really questioning. And the answer to that.is yes. Now, why that is yes is really the question that perhaps should be discussed at a later date ·. I don't want to involve you all into a long discussion of it now. I think this is almost a unique case. We have very few examples of it. It isn't all that important. But it is rather complicated, and it would take more time, I think, than we have today to explore that fully. If you wish to explore it fully after the meeting, I would be very happy to schedule a discussion of it for you. Now, there is one remaining speaker on the list. Mr. Cheek. MR. CHEEK: Mr. Chairman, two points. One was just to refer to the per capita income question, and the other is to the role and scope for agricultural exports from STRICTLY CONFIDENTIAL 106 Argentina. In the first place, Mr. Khelif's question in terms of our income levels and where we are lending and the new papers we have discussed recently, an interesting exercise any of us can do, and I think it's useful, is to take the monthly summary of operations and look through the 700 report d projects scheduled for the future, about 723. And you can split them up and see about 18 countries above the $1,075 level where we are planning a certain number of projects. This is one way of getting a feeling of the ways in which we are trying to work with these countries, and I notice, for example, that Spain is fifth in the pecking order of income levels -- I am sorry, Argentina is -- in which we are planni at least several more projects, not just one. They are in two regions; apart from Singapore, they are in two regions of the Bank, as you would expect. I very much welcome this activity and the remarks that have been made, for example, by Mr. Drake on the questi n that with such countries there are perhaps two roles that we can play. One is the question of facilitating capital access, whether it's co-financing or independent financing, and the other is dialogue and institution-buildin And this is where I want to come into agricuiture, through  107 STRICTLY CONFIDENTIAL the point that in working with this country in 1973 I was well aware that they didn't want to indulge in dialogue, particularly in education matters. It's a sensitive field and they felt to keep out of that one. But looking at the world food scarcities and problems, the point of my question really is, Mr. Chairman, that there are connnents in here where the Bank wants to go with Argentina out of the resumed discussion and, indeed, the continuing ones. I am thinking of cereal and grain exports and the whole beef situation as well, and I am also well aware, which interested me and is a completely different subject but deserves only one sentence, that Australia is chosen in this case as the objective country because of comparable resource endowment and economic structure. And in both countries we have low proportions of the people, 7 percent and 15 percent, working in agriculture. But I know my country has a large grain export potential and will improv~ even more as the fruits of agricultural research are applied in Australia. What I wanted to touch base on was in terms of ? the Bank's dialogue on general economic policies and center emphases. I notice the grain storage project. Am I under illusions that Argentina can be again, if you like, one of th  108 STRICTLY CONFIDENTIAL great grain cereal reservoirs of the world? Most of the food needs in the LDCs has to be produced in the countries them- selves, but Argentina is one of the very few, out of North .America, that I imagine does have potential for sustained exports. Is this scope really existent, and are we working with them on this? I would like to know that this is being kept, if you like, as the prime objective. I appreciate the points on procurement and capital access and so forth, but for me the prime objective and the prime benefit in working with Argentina is to restore this country to what I will call a superior agricultural position. And there is where I would see a contribution by the Bank. MR. McNAMARA: Mr. Ross, would you comment? MR. ROSS: I think as the economic report points ou and Mr. Cheek mentioned, the objective is to try and bring Argentina back to her role as a great exporter of agriculture products. At one point in time, it's a long time ago, admittedly, in the 1920's Argentina exports constituted roughly 25 percent of her gross domestic product; which is roughly the present Canadian ratio. If I am not mistaken, the present Australian ratio is about 16. The policies of the Government are intended to bring Argentina back in that direction. I do not believe tha STRICTLY CONFIDENTIAL 109 it's going to be a task which can be accomplished overnight, but our own projections are that by 1980, to raise it from 8 to 10, ~and by .'85 from 10 to 12, but definitely in that direction. MR. McNAMARA: Thank you, sir. Are there others who wish to speak to this subject? If. not, we will proceed with the loan.