Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, February 21, 1978 : Argentina - Grain Storage Project

STRICTLY CONFIDENTIAL 1 ARC/er INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Washington, D. C. Tuesday, February 21, 1978 The meeting of the Executive Directors of the IBRD and IDA was convened at 10:03 a.m., in the Board Room, 1818 H Street, N.W., Mr. J. Burke Knapp, Senior Vice President, Operations, presiding as chainnan.  2 STRICTLY CONFIDENTIAL C O N T E N T S Item  3 STRICTLY CONFIDENTIAL P R O C E E D I N G S MR. KNAPP: Item 3 on the agenda relates to a proposed loan to Argentina for a grain storage project. Mr. Kikuchi, of the Latin America/Caribbean Region will introduce the proposal. MR. KIKUCHI: Mr. Chairman, Members of the Board: Two years after the worst economic and financial crisis in its history, Argentina has made impressive progress in stabilizing the economy. Faced with hyperinflation, complete depletion of foreign reserves, and a sharp contraction in economic activity, the new Government adopted STRICTLY CONFIDENTIAL 4 far-reaching changes in fiscal, monetary, and exchange rate policies. Tight budgetary targets have been met and international reserves have been rebuilt. The economy has rebounded to a brisk pace of growth. The rate of inflation has decelerated greatly, albeit less than had been hoped. Unemployment has been kept at an impressively low level; a major achievement in view of the earlier recession. Thus, hardships were shared more evenly than is common under drastic stabilization programs. The Argentine Government is now turning its attention increasingly to achieving the country's longer term objectives. It has initiated a recovery program to redress the profound deterioration of key institutions, productive capacity, and supporting infrastructure that has taken place since the late sixties. A vigorous export secto is essential if the Government is to succeed in opening up the country's economy to outside competition and improvin its efficiency. The project which we are presenting to you today is an important element in the Government's strategy. Agriculture will continue to be the backbone of Argentina's export capability and at the same time play a critical role as catalyst of economic recovery. The propose project would strengthen the infrastructure for marketing STRICTLY CONFIDENTIAL 5 i 'I I 11 grain abroad and thus help mitigate recurrent pressures on tht 1 balance of payments, one of the main factors underlying I I Argentina's erratic growth pattern and the consequent social ! I and economic burden on the country's population at large. The project would also help increase Argentina's role as a reliable low-cost producer and low-price supplier I of food in the world market. At present, about 80 percent of Argentina's wheat and about 50 percent of its sorghum and I j corn exports are delivered to third world countries. Argentita has the potential to contribute significantly more towards meeting the increasing demands for food. The Argentina Pampas, with an area of almost twice the size of the United Kingdom, constitute one of the most fertile agricultural regions in the world. Today, less than half of its total are I is planted annually for grain production, while the remainder is used for grazing or forage crops. The Argentina Government, aware of the shortcomings of previous policies, has introduced a package of credit, tax, tariff, and marketing policies to make better use of the country's rich agricultural resources and thus induce increas d and sustained production. By 1985, Argentina is expected to produce about 38 million tons of grain and oilseeds and to export about 23 million tons annually, compared to an average  6 STRICTLY CONFIDENTIAL production of 23 million tons and only 8 million tons of exports annually during the past 10 years. The projected increase in production and in exports is already taking place. In 1977, Argentina exported about 17 million tons of grain. The inadequacy of existing facilities for handling grain, however, has made further increases difficult to achieve. In particular, the largest production gains have been made in areas which were recently converted from livestock to grain production and therefore lack the necessary infrastructure. Farmers, cooperatives, and grain merchants had to contend with insufficient storage and conditioning facilities, shortage of transport facilities and long delays at the ports. The need to ship out grain immediately after harvest severely depressed grain prices and reduced the incentive for farmers to increase production. The proposed project would help lay the foundation for an orderly and efficient grain marketing system. For the first time in Argentina, large-scale silos would be located in the production areas. At present, Argentina's total storage capacity is less than 50 percent of annual grain production, compared to 100 percent in the United States, Canada, and Australia. In addition to the provision of much- needed storage and conditioning capacity, the project would  7 STRICTLY CONFIDENTIAL I help strengthen the administrative capacity of the Government'r Grain Board and improve the transport infrastructure related most critically to the grain trade. We are confident that the proposed project will help Argentina realize its agricultural potential more fully. Thus, it would contribute to the well-being of a large part of Argentina's population and to increasing the reliable supply of food for the world market. Thank you. MR. KNAPP: Thank you very much, sir. Mr. Franco. MR. FRANCO: Thank you, Mr. Chairman. I believe that it is an excellent project. It woul assist Argentina in the expansion of its grain production, allow for the possibility of greater exports, and assist in the resurgence of the country as a major grain exporter. All this is in line with the Government's shift in its development strategy from industrial import substitution to export-oriented growth. The introduction of large-scale silos in grain production, that is, would eliminate supply bottlenecks and particularly increase the reliability of the country as a supplier of grain. All of these factors should contribute  \i 11 STRICTLY :ICONFIDENTIAL 8 !1 Ir II II /I significantly to strengthening the country's balance of payments and may assist in reducing price fluctuations in the world market for grain. The project is technically feasible. It looks as if it is financially sound and would effectively assist the very commendable efforts of the Argentine Government to ~ redress the economy. In these circumstances, we give our full support to the proposed loan. Thank you, sir. MR. KNAPP: Thank you, sir. Mr. Pesqueira. MR. PESQUEIRA: Thank you, Mr. Chairman. I would like to support the project under discussio. There are several and important reasons for which I think the loan will be a helpful one to Argentina's economy. Most of these reasons are very well condensed in the report and in this regard I would like to mention some of them. I believe that from the Bank's point of view, a project that will contribute to increased export capacity and set up an infrastructure for the future production expansion is one of our most important goals. Taking into account that the grain export is about 30 percent of Argentin 's total exports and the storage capacity of all the sectors jus  9 STRICTLY CONFIDENTIAL reaches 45 percent of the production, this new project will be a key to stimulate grain production with a reduced cost of marketing and exporting grain. These two circumstances will have a favorable effect in reducing the rate of inflatio and therefore ameliorating the balance of payments position of the country. Finally, as is mentioned in paragraph 22 of the report, the Bank would serve as a catalyst to stimulate long-term lending, and this would allow the country to regain its position as an important borrower of long-term capital in private markets. Thank you, Mr. Chairman. MR. KNAPP: Thank you very much, sir. Mr. Drake. MR. DRAKE: Thank you, Mr. Chairman. I agree with the previous speakers that this project is technically sound and certainly there should be a good rate of return. As one who grew up on the Canadian pampas, I certainly am very much aware of the importance of grain storage. In fact, I am amazed to learn that our Argentine colleagues who have been our competitors for years have such a small percentage of grain storage capacity in relationship to their total crop. To me it is a mystery why  ,, ri ii 11 1: 10 STRICTLY iiCONFIDENTIAL I this has persisted so long~ this situation. I 11 I also must agree that this project is not only Ii technically sound, but is consistent with the export-oriented growth strategy of the current government. Therefore, I conclude that it is a viable project which should easily attract financing. But I do have two questions. First of all, why World Bank financing? It does seem to me that this project is so attractive that it should be reasonably easy to attract I commercial financing or at least a stronger blend of commercitl financing and financing from other sources. We are told that Argentina is now internationally creditworthy, it has an excellent rating, its foreign reserves have swollen -- I see figures of $4 billion. It seems to be particularly attractive these days to foreign bankers. The project itself, not only is it technically sound, but most of the purchases will be made locally so one would think it would be attractive to local commercial bankers in Argentina, and this would be consistent with the Government's strategy, I understand, of trying to stop the flight of capital and are trying to attract local capital. Moreover, it is not just commercial banks that are interested. We know that the IDB has been in the field. The  11 STRICTLY CONFIDENTIAL IDB has made one loan in this field. I understand it was prepared to present a second phase loan to its board in the same field, another $60 million. That has been delayed because of disbursement difficulties, which I am not aware of. So my question is why is the World Bank rushing in here? The IDB is involved, it is prepared to do more, but it can't move ahead faster. Commercial banks are said to be interested, and potentially I think more would be interested. So what is the unique role for the World Bank? The second question, or broad question, is who are the beneficiaries? We are not told who the beneficiaries are. Unlike the other projects we have before us today, we are told very clearly in the case of Malaysia and Colombia, the beneficiaries are specified. Here they are not specified Now, I suppose it's obvious that one set of beneficiaries would be the silo operators, but I can't think of a less-deserving crew than the silo operators if we read the past history. We are told that their main interest has been in maximizing profits, often to the disadvantage of the farmers, that they periodically cheated farmers in weighing and evaluating grains. So they seem an undeserving crew. Who will be the beneficiaries? And if we can't be too specific, if it simply contributes to the general economic  12 STRICTLY CONFIDENTIAL strategy, what can we be told about the aims of the Governmen~ in its economic development program? I I Now, some features of the Government's program are I clear here -- the emphasis on bringing down inflation, on promoting exports, that side of it seems to be sensible. But there is very little in here about the objectives of the Government in insuring that all segments of the society benefit from this overall program. And I wonder if we can't be told who the direct beneficiaries are, what provisions there are in the economic development strategy to insure that there is indeed a trickle-down to benefit all segments of the society. Thank you. MR. KNAPP: Thank you, Mr. Drake. Mr. Kikuchi, would you respond to these two questions? MR. KIKUCHI: I would like to refer the question to Mr. Scherer. MR. KNAPP: The first question? MR. KIKUCHI: Yes. Actually on both counts. MR. KNAPP: All right. Mr. Scherer. MR. SCHERER: Mr. Chairman, Members of the Board, the Argentine Government was equally well aware, as you are,  13 STRICTLY CONFIDENTIAL that commercial financing might be available for a project of this type, but the Argentine Government has decidedly expressed its interest to have World Bank financing because financing as such is only a minor part of this project. The World Bank assistance in this project in the design and preparation has been valued extremely highly by the Argentine Government, and the project as such has undergone many changes in the preparation which has not been fast, it has taken some time. And you also are well aware that there is not only financing for grain silos as su~, there is related investment to improve the entire marketing structure for the grains. There is something for the railways, there is some improvement for the ports, there is certainly a strong improvement for the Grain Board, which is the main institutio handling the grains. We would expect once the economic and financial feasibility of the large silos has been established, becaus this is the first time it would have such large silos upcount y in Argentina, private financing, commercial financing, could be forthcoming because there is a large need, as you yourself have pointed out, to increase storage facilities. This argument to some extent also applies to the involvement of IDB. IDB has typically financed small silos  14 STRICTLY CONFIDENTIAL which are complementary to the World Bank silos, in the range of 10,000 to 15,000 tons. So the two concepts very nicely complement each other. MR. KNAPP: How much coordination has there been wilh the IDB in the course of this project? MR. SCHERER: We have discussed with the IDB our concept and the concept of the IDB. We are aware that IDB is going ahead with the second phase in their program, and we think there is a clear separation of the approach taken which, however, fits into the overall strategy of the Government to provide additional badly needed storage capacit. MR. KNAPP: Would you comment, then, on the second question about beneficiaries? MR. SCHERER: Yes. If I am allowed to just rephras one or repeat one sentence you said, how the Government would insure that all segments of the population would benefit. Now, this is a central focus of this project. As was mentioned both in the presentation and in the President's report, Argentina in the past has suffered greatly from recurrent balance of payments constraints, and it is of prime importance for the Government now to strengthen its export sector. The strengthening of the export sector in turn will STRICTLY CONFIDENTIAL 15 depend on the energy it can develop for its agriculture because that is the main component of it. Now, if the export sector is strong, this will I enable the Government to help revitalize the economy and hencl redress these trends of the crisis in the past which have badly eroded real salaries of the majority of the population./ So in this context a project which aims at strengthening the j structure of the economy of the country will benefit the I large majority of the population, more than any other project which would be geared specifically to any pocket of poverty I in the country. And there I might mention that Argentina, I with a ~ coefficient, just to mention one technical ~ figure, of .45 has clearly one of the most desirable or evenl balanced income distributions of any developing country. Now, the report as such does not mention any specific distribution of benefits because this is not the objective of the project. The objective of the project is clearly to strengthen the export capacity of the country and not to benefit any particular group other than the population at large through revitalizing the economy. But we can say that some of the benefits can be easily identified, like redu - tion in spoilage, which clearly go to the farmer. There are certainly benefits accruing from the increased efficiency in STRICTLY CONFIDENTIAL 16 I ii !I II transport, which most likely will go to the railways,~nd to a large degree the increased efficiency of large silos will go to the Grain Board, which is a government-owned entity. We have made some calculations, but it is very difficult to give any precise figure because there is a market mechanism which will determine which prices are paid, hat the supplier and what the demander will get, but we would think that the large part of the benefits would accrue in fact to the farmers, but nearly an equally large part would accrue to the Government through the Grain Board and through the railways. The farmers as such do not have excessively large incomes in the Argentine context. We calculated that they are roughly in line with the average figure of national income, they are higher but not out of line with the national per capita income figure. One might mention, too, that over the recent past, incomes in agriculture have been depressed because prices have been very unfavorable. There has been an unfavorable trend in the terms of trade to agriculture, and these figures on which we based our calculations are fairly recent. ones which take already into account the improved terms of trade following the Goverrunent's strategy to revitalize the  u STRICTLY CONFIDENTIAL agricultural sector. There are, I want to repeat this, very few, or we would expect that there would be very few participating fanns which are really large. We would think that typically the beneficiary of the project is a medium- sized farm with an owner-operator. The man has all his money invested in the fann, no outside interests. This would be th main beneficiary. MR. KNAPP: Thank you very much. Dr. Sen. DR. SEN: Mr. Chairman, I would like to give my support to this project. Technically and financially it is an excellent project. It helps promote exports from Argentina; as such it would help the Argentine economy. And any project which helps add to the world supply of foodgrains is desirable, not only from the standpoint of the exporting country, but also from the standpoint of importing countries in which many of the poor people live and many of them are in need of food. Mr. Drake has mentioned some of the undesirable features of some of the beneficiaries. Now, I am not a great believer in classical economics, but I thought it is one of the tenets of classical.economics that private vices lead to public virtue through the market force.  18 STRICTLY CONFIDENTIAL Thank you, Mr. Chairman. MR. KNAPP: Thank you very much. Are there other -- Mr. Johnston. MR. JOHNSTON: Thank you, Mr. Chairman. I would just like to join with those who commend the technical focus of this project. I think that the marketing pipeline is an absolutely essential part of reaping the benefits of grain production. I had a question, a minor question, a philosophic one, I guess, that probably Dr. Sen has already answered. I wasn't clear what to read into -- if I can find it now -- one of the conditions. Yes, in Annex 3, condition (c), that the Grain Board would lease the project silos to groups qualified to operate them; whether one is to understand from that that there is a view that silos are better operated in the private sector or whether simply we are to understand when they are leased, they should be leased to qualified peopl • I don't wish to be doctrinnaire, but I can see a case for pretty close regulation of the performance of silo operators. They can make or break the whole process. It is a question of where the emphasis is to be put in that sentence. Thank you. MR. KNAPP: Mr. Kikuchi, would you comment on this?  19 STRICTLY CONFIDENTIAL MR. KIKUCHI: I would like to refer the question to Mr. Ringlien. MR. RINGLIEN: The criteria for putting the silos back into the private sector is based on the Government polic to return the grain trade to the private sector. And, number two, the mission thought that observing the silos operated by the Grain Board and those operated by the private sector, the I private sector was more efficient and had better turnovers of their silosr and the Grain Board silos were more to receiv grain that was already conditioned and treated by the private sector rather than doing the commercial operation of going out, finding farmers, bringing the grain to the silo, conditioning it, and then storing it. MR. KNAPP: Thank you, sir. Mr. Fried. MR. FRIED: Mr. Chairman, under instructions from my authorities, I wish to be recorded as having abstained on this loan. Thank you. MR. KNAPP: Thank you, sir. Mr. Thavil. MR. THAVIL: I wish only to be recorded that I support this project. The reason for my supporting this  20 STRICTLY CONFIDENTIAL project was already given by the previous speakers. MR. KNAPP: Thank you, sir. Mr. Khelif. MR. KHELIF: (Through interpreter) Mr. Chairman, merely to say that this project appears to be economically justified nationally and internationally. This is why I wish to support this project. Thank you. MR. KNAPP: Mr. Magnussen. MR. MAGNUSSEN: I will be very brief, Mr. Chairman. I will only inform the Board that if a formal vote had been taken on this project, the Nordic countries would not have been able to support the project. Thank you, Mr. Chairman. MR. KNAPP: Thank you, sir. Mr. Murayama. MR. MURAYAMA: I just want to say that I support this project. Thank you. MR. KNAPP: Thank you, sir. Mr. El-Naggar. MR. EL-NAGGAR: Mr. Chairman, I would like to join those of my colleagues who expressed strong support for this STRICTLY CONFIDENTIAL 21 project. It is an excellent project in every way, addressing I itself, as it does, to the export sector of this country, of I I ' Argentina, which has a tremendous potential in food productio1 I for export. I think it is a project which is worthy of our strong support. However, Mr. Chairman, anyone who reads this report cannot be oblivious to the tremendous remarkable progress brought about to the Argentinian economy by the present Government. I think this is a very important consideration which we have to take into account. I was really gratified on reading the report to see in every direction the progress and improvement. In the case of inflation we are told that the present Government has managed to bring down the rate of inflation from 740 percent during the last year of the previous administration to about 150 percent. It has taken some measures still in mid-1977 to deal with inflation further, and there is every hope and reason to believe that the rate of inflation may still be reduced below the present level. We are told in the case of balance of payments that there has been tremendous progress in the balance of payments that in 1976 there was an improvement in the current account of $1.9 billion over 1975, and in 1977 there was an improveme t STRICTLY CONFIDENTIAL 24 in curbing inflation. But do we consider and does the Government consider that last year's inflation rate of 150 or 160 percent was satisfactory? I mean, if we are talking about the effect on the people, what does this do to real wages? This is improvement, but we have a long way to go. Isn't that in fact above what the Government's own target was? So, although I don't want to be too negative, I just think maybe some of the praise was a little too glowing. MR. KNAPP: Mr. Kikuchi, would you comment on the Government's objectives in the field of inflation and what the latest experience is? MR. KIKUCHI: I would like to refer that question to Mr. Peter Wogart. MR. KNAPP: All right. Mr. Wogart. MR. WOGART: Very briefly, when we look at the stabilization program, it is really important to look at two phases. The first phase really has been to a large extent what we call corrections. What has happened indeed are large-scale distortions in the previous Government policies, particularly in the field of price controls, both in agriculture and in industry. So part of the reason for a still fairly high rate of inflation of 150 percent last ye r  25 STRICTLY CONFIDENTIAL is due to adjustments, both in the public sector, which are now continued quarterly, and in the private sector, too. The Government obviously is not able to have any kind of price forecast in 1978. However, with restricted fiscal policy and now also a more restricted monetary policy which really has affected the higher interest rates, one can expect that they will try to have it less than 100 percent. MR. KNAPP: Are there other questions or conunents? If not, thank you very much. I have pleasure in declaring this proposal approved.