Transcript of two hundred ninety-first regular meeting of Executive Directors, held on Thursday, September 12, 1957 : South Africa - Fourth Transport Project

STRICTLY CONFIDENTIAL 89487 Bubley INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TWO HUNDRED NINETY-FIRST REGULAR MEETING of EXECUTIVE DIRECTORS Board Room International Bank Building Washington, D. c. Thursday, September 12, 1957 The meeting was convened at 11:30 a.m., Mr. Eugene R. Black, President, presiding.  2 STRICTLY CONFIDENTIAL -------- C 0 N T E N T S I, ;: Agenda Item ii ij 11 :1 I Proposed Loan to the Union of South Africa •••••••• 3 I Mr. Mr. Lejeune - Loan Aspects ••••••••••••••••••• Paterson - Economic Aspects •••••••••••••• 3 7 I Mr. de Leeuw - Technical Aspects ••••••••••••• 11 ** ** **  3 STRICTLY CONFIDENTIAL MR. BLACK: The next l ter:l of business t s the proposed loan t o the ;I Union of South Africa. I would like t ·o cal 1 first on Mr. 11 11 Lejeune. MR. LEJEUNE: Mr. Chairman and gentlemen: As you know, the proposal before you is one for the Bank to . participate in a joint borrowing by South Africa from us and from the New York market. The latest situation is that the proposed  4 STRICTLY CONFIDENTIAL issue of ten-year bonds in the amoWlt of $15 million will be put on the market about the 2nd of October. This requires that the registration statement in connection with this issue be put with the Securities and Exchange Commission, and it is proposed to do this this afternoon, provided, of course, the ; result of this meeting is that the Bank feels it wishes to go ahead. The $25 million loan which is put in the papers before you today will be signed, provided it has been approved by you by then, at the time that the Wlderwriting agreement is entered into between the South African Government and a group headed by Dillon Reed. This is expected to take place on October 1st. The reports which are before you set out the Bank's part of this joint proposal in full detail, with, however, three important exceptions. These are the interest rate, which has yet to be determined, the premiums on early redemption which have also yet to be determined, and the amortization schedule which likewise has not yet been settled, although in principle it will be geared to the sinking fWld ot the 15-year bonds in such a way that the South African Govern- ment will have an equal semi-annual installment to pay to us and the market together. Recommendations on these specific points and a formal recommendation on the loan as a whole will be put to you for  I' 5 STRICTLY CONFIDENTIAL your consideration in the form of supplements to the Presi- dent's Report nearer the time of issuing bonds. This is the sixth South African loan proposal to be put before the Board over the last six and a half years. The members of the Board, I think, by now are pretty familiar with South Africa and the railways which have formed the basis for three previous loans and are the basis for the pro- posed loan before you now. South Africa is a very rapidly developing country with great natural resources, both in terms of physical resources and human resources. Financially and economically it has an enviable record of sound management and administrative effi- ciency. Its business leaders and its business community are capable people and have imagination. But we must not blink, and we do not blink, at the fact that the Union of South Africa is beset with acute racial problems. These are deep-seated problems the product of the history of South Africa as well as the product of the re- cent history of our times. The desire for self-expression and self-improvement is welling up in Africa as it has welled up elsewhere in the world in recent years, and in South Africa this fundamental urge comes up hard against the vested I interests of the white race there. l! The problems facing any South African government would be extremely difficult. Much, of course; depends on how the  6 STRICTLY CONFIDENTIAL are handled on a day-to-day, year-to-year basis, and if the government is flexible, sensitive, and is able to use a prag- matic rather than a doctrinaire approach, obviously the feel- ings between the races are less. Unfortunately, in South Africa the problems are mainly problems of the future, the distant future, that is. They seem more ominous than those which are immediately at hand. I think it is fair to say that most people, regardless of thei race and regardless of their color, fear more for their child- ren than they do for themselves. While the risks of lending to South Africa do not, as far as one can see, seem greater than lending to other mem- bers, you will appreciate that the future is somewhat clouded and one can not see very far ahead. Rapid repayment of loans that we make to South Africa seems to fit this case. It is perhaps a matter of interest that during the time that the proposed loan would be disbursed, we would, in fact, receive payments on old loans in excess of the amount we are disburs- ing. If I have, in this rather brief statement, emphasized the uncertainties in lending to South Africa, I have done it really as a matter of duty. In fact, South Africa is in many ways, in most ways, an excellent borrower, and it is meeting the test of the United States market, has met it in the past, is probably about to meet it again, which, as you know, is a  7 STRICTLY CONFIDENTIAL tough test for any foreign country to meet. MR. BLACK: Thank you. Mr. Paterson. MR. PATERSON: Mr. Chairman,, gentlemen: The most inter- esting development since you last considered South Africa is probably that the growth of output, except for mining, has slowed down as compared with the rapid growth of earlier years. The causes of this are various, and in part, at least, transitory. Previous growth strained the supply of skilled labor and of transport facilities, and thus created shortages which helped to impede further growth. Another cause has been increasing trade liberalization which has exposed domestic manufacturers to increasing compe- tition. South Africa hopes to completely liberalize in 1958. This does not pose a serious threat to South African industry as a whole, which is generally competitive, but it may weed out a few marginal producers. Probably the principal reason, however, for the decline in the rate of growth is that the protracted boom stimulated by the opening of new gold mines and supported by very large i private capital inflow, largely for the mines, is ending. I Over the years the progress of mining development seems generally to be uneven and at present there are no large new fields awaiting development.  8 STRICTLY CONFIDENTIAL The decline in capital inflow is probably also due in part I to tight money in the United Kingdom which has been the source I:, 1 1 of most overseas private investment in the Union, to the ef- 1i!i 11 :1~ feet on the foreign investor of the racial situation and the :ii II Government's racial policies, and to the lessening appeal of !I 11 gold mining, whose costs of production steadily rise and the I prospects for the increase in price of gold seem to the in- vestor to recede. Some account must also be taken of the in- creased investment opportunities elsewhere, and of increased demand generally for investment capital. Some slowing down had in fact been desired, and monetary and fiscal policies were tightened in 1955 and 1956 with a view to curbing excess demand. The inflationary threat which was pointed out the last time you considered South Africa is, however, not now a concern of the Government. Another noteworthy development of the last few years has been that despite the sharp fall in capital inflow, foreign exchange reserves have not been depleted. The reasons for this lie in a slight decline in investment, and more important ly in the considerable improvements in the Union's current balance of payments due to the sharp growth in export earnings especially from gold and uranium. The third significant development of recent years is a corollary of the second. It ts that investment which, though below earlier levels is still high, has come to be financed  9 STRICTLY CONFIDENTIAL almost entirely from domestic savings. This is due, no doubt, in part to the increasing economic maturity of the Union. It is also probably due in part to special circumstances. The recent growth in domestic savings reflects an unusual increase in private corporate savings, which will probably level off • or even decline as the recently established mines pay out more , of their earnings to stockholders. The present position is that the South African population as a whole is about able to maintain its present standard of living without foreign capital. South Africa, however, J should be capable of increasing her real national income fas- j: l ter than the steady 2 per cent annual increase in population~ ! l1 provided funds for investment can be found. But it can not I• be ! assumed that domestic savings will continue to grow as be- l , fore, and they may not be enough to finance the potential future development. It could, perhaps, be argued that in view of the present magnitude ot domestic savings, the Government could finance its capital needs by increasing taxation or domestic borrow- 1ng. The Minister of Finance feels that domestic borrowing at the present rate fully absorbs the market for government paper, and beyond this, it has been the government's policy to resort to roreign borrowing rather than to distract domes- tic funds from private investment. It is a policy that seems justified by its past successes.  10 STRICTLY CONFIDENTIAL The immediate prospect is that the output of the mines will increase, but more slowly than recently, that industrial I i growth will pick up, although probably not at the extraordina y i I rate of earlier years. Agricultural income should continue :[ to increase. In the long run, industry seems to be the key 1! I' 11 to development of the Union, and both in the production pro- 1: I' :I ,I cess and in the enlargement or the domestic market, much will i '1 depend on the role of the non-European. Despite impediments, II I the lesson to be drawn from the past is that the non-European is gradually rising to high levels or skill in industry, and that he is benefiting from a growth in the national income. The conclusions which emerge are that resources provide the basis ror more rapid economic growth than at present, but probably not for sustained growth at the unusually rapid rate of early-post-war years, and that foreign capital would pro- vide a useful supplement to domestic savings in contributing to a revival of the pace of growth. The most serious, most controversial, and least pre- dictable problems are in racial relations. So far it would seem that the racial situation in the Union has intensified labor shortages and may also have helped to discourage immi- grants and foreign investors. However, it would appear that Africans will, like all other South Africans, benefit from further economic development. Today, in a material sense, the Africans of the Union are as well off as Africans in most  11 STRICTLY CONFIDENTIAL other parts of the Continent, and better off than most. It should also be mentioned that the carrying out of racial policies has not so far imposed a difficult financial burden on the cowitry, and that in the post-war years the Union has had an enviable record of freedom from industrial stoppages. Finally, the Union's technical position as a borrower is good. The burden of its public external debt is relatively light. It has an excellent debt record, and it enjoys a pre- eminent position as a gold producer. There seems little doubt that the Union can afford the additional foreign debt now contemplated. Thank you. MR. BLACK: Thank you. Mr. de Leeuw. MR. DE LEE'UW : Mr. Chairman and gentlemen: On three former occasions the Bank has made loans for the development program of the South African Railroads and Harbor Administra- tion which operates the railways, harbors, and airlines of the Union, together with some road transport services and coastal shipping. The funds provided under the previous loans .1 equivalent to $75 million, have been efficiently utilized. The Bank has now been asked to provide the equivalent of $25 million for the same purpose as a participation in a total overseas borrowing of about $40 or $50 million. The development program has been under way since 1947 in  12 STRICTLY CONFIDENTIAL order to meet the growing pressure on the transportation system, and particularly on the railways, caused by the dema s of the rapidly expanding economy of the Union. Good progress has been made in freight, and mileage on the railways has in- creased by almost two-thirds since the end of the war. (I However, the railways are still not able to satisfy all 1! l:il transport demands. Potential exports, in particular or coal, j! 11! i,I iron ore, manganese, and chrome, are still being held back fo 111 lack of railway capacity. Bank assistance has now been asked II I tor the part of the program scheduled for execution during th I three years ending March 31, 1960. I The emphasis of this program is on a further increase in :11 :1 ,, line and yard capacity, which is at present the principal im- i pediment to increased traffic. The program is well planned I and properly engineered. Based on past performance, we ex- pect it will be carried out efficiently. Gross capital expenditures for this program are esti- mated at the equivalent of 196 million pounds, of which 140 million would be spent for new works and betterments, and the balance for renewals. The equivalent of 102 million pounds will be spent abroad. Financing will be provided by the Government in the form of perpetual-interest-bearing notes in the equivalent of 135 million pounds, while the administra- tion would provide 61 million from its own funds. In accordance with established policy, orders and contrac s  13 I STRICTLY CONFIDENTIAL I are placed on the basis or international competitive bidding. I Some preference is given to South African suppliers in order to encourage local industry. The South African Railways and Harbors Administration is a government department under the policy control of the Minister of Transport, advised by railway and harbor boards. The Administration is conducted by a general manager, assis- ted by a well-organized staff. Management and staff are com- petent. The Administration is required by law to administer its properties on business principles so as to yield enough revenue but not more than required to cover operations, re- newals, betterments, and interest charges. Under this restriction, returns after adequate depreci- ation have generally been limited, but through the years the Administration has remained self-supporting. Since the Bank has been participating in the program, the returns or the railways before interest have averaged 4.6 per cent or the investment, and interest charges were equivalent to 1.4. The program is economically justified and is considered suitable basis for the contemplated borrowing overseas of some $50 million, including a Bank loan in the equivalent or $25 million. MR. BLACK: Thank you. This loan is the same situation that has prevailed on the Belgian transaction, where we want your approval in  14 STRICTLY CONFIDENTIAL principle in order to give the underwriters time for a regis- tration statement to be filed on the issue. As Mr. Lejeune said, they propose to offer this issue on the 2nd of October, and they have to file registration state- m.ents about two weeks, isn't it MR. SOMMERS: Twenty days. MR. BLACK: Twenty days before the public offering is made. In that connection, the Belgian issue went according to schedule, and we signed this on Tuesday in New York, and the offering was made yesterday of $30 million, and this was quite a success. The bonds were over-subscribed and the bankers were~le to get a somewhat better rate than they thought possible a few weeks before. The bonds were offered at 97-1/2, to yield 5-3/4 per cent. There was a good demand for these bonds in this country, and in Europe, too. The bankers were afraid that they would have to charge 6 per cent, but the market improved a little bit and they were able to offer the bonds at 5-3/4. This is the same kind of transaction, and they haven't fixed the rate yet, as to south Africa, but it will be some- what comparable to the Belgian rate. Are there any questions on this? MR. LIEFI'INCK: Mr. Chairman. MR. BLACK: Yes, sir.  15 STRICTLY CONFIDENTIAL MR. LIEFTINCK: Mr. Chairman, on reading the Technical Report, and particularly paragraphs 40 and 41 of it, on page 9, I get the impression that the staff is not too happy about policies pursued in South Africa in some respects. They say the railroads are highly protected and private truck compe- tition is very restricted, even on the short-haul lines. And the staff sums up, in paragraph 41: 'The above comment does not imply that the SAR develop- ment program as a whole is not justified economically." May I ask the staff what is the exact meaning of the 11 words as a whole n? Does it mean that parts of the program seem not to be justified? What is the meaning? MR. DELEEUW: Mr. Chairman, our opinion is that the development program of the south African railways is justified because it is the only means of long-haul transportation in the Union. It needs expansion and we reel that we should help l 1 finance this expansion. We have our reservations about their 1 l 1: pol1c1es on short-haul traffic, but that should not detract from the fact that the long-haul traffic needs expansion of capacity which has to be financed. Would that answer the question? MR. LIEFI'INCK: Thank you. MR. BIACK: In Hamlet there is a famous passage that has 11 been disputed by the Shakespearean scholars 1 about a dram of eel," which means that if there is just one little thing wrong  16 STRICTLY CONFIDENTIAL it may ruin everything. You didn't mean that, did you? Any other questions? Mr. Callaghan. MR. CALLA.GHAN: Before we leave it, Mr. Chairman, I think it would be unfair to the Board, and certainly unfair to South Africa, if someone did not make some comment on the emphasis that has been placed on the subject of race relations. Nobody needs any prompting to be reminded that this is a very difficult question, and that there are problems in the case of South Africa can not be denied on the subject or race relations. The papers before us have given some emphasis to it. The speakers at the table have given some emphasis to it. I think; that for my part all I need say is that when one reads the South African side of the case, one is reminded of the magni- tude of the problem which, incidentally, is not the same prob- lem as the one that exists in this country. Now, I would not have spoken, Mr. Chairman, had not Mr. Lejeune used the phrase "vested interests or the white race." He probably didn't mean that in all the ugly impli- cations that that phrase "vested interests" sometimes carries. I should just like to say to the Board that South Africa is deeply conscious of the problem. I do not profess to be able to understand the problem in all its details myself, nor do I say to the Board that South Africa is handling the probl m  17 STRICTLY ..CONFIDENTIAL :: properly, but I do say this to the Board, that so far as a Bank loan is concerned I think the question has been over- emphasized. MR. BIACK: Any other questions? Well, if there are no other questions and no further discussion, may I have a motion to approve in principle the loan along the lines that I asked you for. MR. THOROLD: I so move. MR. DRECHSLER : Second • MR. BI.ACK: All in favor say aye. (Chorus of ayes.) Opposed, no. (No response.) I declare the loan approved. MR. CALLAGHAN: If the loan is approved as such, may I, notwithstanding my earlier comments, thank the staff very much for the work they put into the loan, and, of course, thank the Management and the Board. MR. BLACK: Well, in answer to your point a minute ago, I don't think that we planned to over-emphasize this, but on the other hand, it is the policy of the management that if there are any questions that are of concern they be brought before the Board, and that was the object. MR. CALLAGHAN: Quite right, quite right.