South Africa - Fifth Transportation Project

.R E S T R I C T E D R e p o r t N o. P-177 This report was prepared for use within the Bank. In making it available to. others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PRELIMINARY REPORT OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE UNION OF SOUTH AFRICA November 4, 1958  PRELIMINARY REPORT OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE TUNTON OF SOUTH AFRICA 1L. I submit the following preliminary report on a proposed loan of $25 million equivalent to the Union of South Africa for the expansion of its transport facilities. PART I - HISTORICAL 2. On the occasion of my visit to South Africa last year the Union Government explained their external capital needs over the next year or so, and, as you know, I told them that I would be willing to recommend to the Executive Directors loans up to a total amount of $50 million, matching amounts raised by the Union in the financial markets of the world. Subse- quently, in discussions both with the Union Government and with their New York bankers, Dillon, Read & Co., Inc., a proposal for a joint operation was worked out. The Union would raise $25 million by a public issue in New York, and the Bank would match the amount raised in the market. 3. A mission from the Bank wfent to the Union in October 1958 to exam- ine the economy and the proposed project and to discuss the terms of the operation with the Government and with representatives of Dillon, Read, who were in the Union at the same time. 4. The Bank has already made loans aggregating the equivalent of 4,160.2 million to t-he Union rr ' --ring the Union's guarantee. The status of the loans in as follows: No. Borrower Purpose Armount 1/ in $ millions) 4OSA Union of South Africa Expansion of transport facilities 20.0 4lSA Electricity Supply Electric power development 30.0 Commission 77SA Union of South Africa Expansion of transport facilities 30.0 78SA Electricity Supply Electric power development 30.0 Commission 134SA Union of South Africa Expansion of transport facilities 25.2 178SA Union of South Africa Expansion of transport facilities 25.0 Total 160.2 Amount sold 49.6 110.6 Amount repaid 33.1 Less repayments to third parties '7.9 5.2 Net amount held by the Bank 105. 1/ As of September 30, 1958.  - 2 - 5. The last twno loans were made in conjunction with borrowings by the Union Government in New York. PART II - DESCRIPTION OF THE FROPOSED FINANCING 6. As now envisaged, the proposed financing would have the following main characteristics: The Public Issue The Bank Loan Borrower Union of South Africa Union of South Africa Amount $25 million The equivalent in various currencies of $25 million. Purpose To provide funds for a portion of To meet part of the foreign the capital requirements of the exchange costs of the current Union. development program of the South African Railways and Harbours Administration. Interest To be determined. To be determined. Rate Maturity $h million Three-Year bonds, due Ten years, with amortization December 1, 1961 in sixteen semi-annual pay- ments beginning on dune 1, 1961 $3 million Four-Year bonds, due and ending on December 1, l968. December 1, 1962 Each paymentJ of principal and interest taken together would $3 million Five-Year bonds, due be approximately equal. December 1, 1963 $15 million Ten-Year sink.ing fund bonds, due December 1, 1968. Semi- annual sinking fund payments would begin on June 1, 1961 and would be sufficient to retire the bonds by maturity. Commitment 3/ of 1% Charge PART III - APPRAISAL OF THE. PROPOSED BANK LOAN The South African Railways and Harbours Administration 7. The South African Railways and Harbours Administration is a Government department, operating the entire railroad system in the Union, the main ocean ports, road transport services, domestic and international air services, and some coastal shipping. Its properties represent a total investment of about $1.5 billion equivalent (valued at original cost), of which railroad properties account for more than nine-tenths.  - 3 - 8. The Administration is competently run in accordance with policies laid down by the Minister of Transport. Its financial position is sound. 9. M4ost of the capital needed by the Administration for new investment is obtained from the Government in the form of perpetual interest-bearing loans. On funds borrowed specifically for it by the Government, the Admin- istration pays interest during the life of the loan at the same rate as the Government, and thereafter at a rate adjusted to conform to the current cost of internal Government borrowing. 10. The Administration is required by law to administer its properties on business principles so as to yield enough but not more than enough revenue to cover operations, renewals, betterments, and interest charges on Govern- ment loans. Rates are set so as to yield sufficient revenue for all these purposes. In the fiscal year 1957-58 the Administration's revenue was the equivalent of some $450 million (gross). 11. The Bank has already lent $100.2 million for the general development program of the Administration and investigations by the Bank staff show that these funds have been effectively used. The Need for the Loan 12. In recent years the Administration has invested very substantial amounts in modernization and expansion. But so great has been the increase in traffic - measured in net-ton miles, freight traffic has risen by two- thirds since the end of the war - that the railroads have not succeeded in meeting the needs of the expanding economy. A substantial volume of coal now has to be transported by truck - at rates subsidized by the Adminis_ra- tion and to the detriment of the Union's roads - while exports of mang:mese and other export products have from time to time been hindered by ina6Lquate railroad facilities. 13. In this situation the Government has decided to speed up the rate of investment in the railroad system in an effort to catch up by the end of 1961 with the demands placed upon it. This is a very ambitious program, since it involves completing the major part of the capital and betterment program originally expected to run through 1965. Its very size - it implies invest- ment at a rate of about