Transcript of meeting of the Executive Directors of the Bank, held on Tuesday, December 29, 1959

STRICTLY CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT i: One Hundred Ninety-eighth Special Meeting t' l' ii or n l'. I! EXECUTIVE: DIRECT.ORS .; , Ii q L I! '! li ,j Board Room I! International Bank Building ii: Washington, D. C. Tuesday, December 29, 1959 l ,I The meeting was convened at 10:00 a.m., W. A. B. 11 l Ii Iliff, presiding. n ;, l ,, 'I ii ii q 1, II ~i iJ :1 :I ii I ,1 ,, n ll II H 11 ! STRICTLY CONFIDENTIAL 2 CONTENTS 1: 1 Agenda Item II I; \I Proposed Loan to Uruguay: 'I L !i I. 11 Mr. Acheson ...... • • • 0 • .... 3 Ii !! 11 Mr. Adler. .. . . . ... • • • • • . . 5 • . . . . . . . . . !l II ii Mr. Reid • • • • • • • . 7 1,' 1 Proposed Loan to Fomento and Endesa in Chile 1 !I Mr. Sandelin ......• • • • • • • • 15 Mr. Ross • • • • • • • • • • . . . .. ... 18 I Mr. Finne. • • .. .....• • • • • • 20 Ii I• Proposal to Borrow from the Deutsche Bundesbank. 32 II j! i I' 11 •l 11 11 ,l I! ., 11 II 1' I' 11 I! :! If ii l' jl ii . jl !' d 1· .I !l I! j: 1! !I 11 1! i! " II ii STRICTLY CONFIDENTIAL 3 PROCEEDINGS ----------- THE CHAIRMAN: Gentlemen, I would first of all ., !1 ,I like to welcome Mr. Hazera as a temporary alternate tor d p, Mr. Machado. And also, we are glad to see Mr. Mansour here 1 11 I again, acting as temporary alternate tor Mr. Shoaib. Ii ii The first item on the agenda for this special 11 p ,, I! meeting is a proposed loan to Uruguay, and I will first of j} all call on Mr. Acheson. It I 1· I MR. ACHESON: Mr. Chairman, Gentlemen: The pro- I ject now before you is one that all who have worked on it I I: II have felt would make a major contribution to the develop- I l I I.11 ment of the economy of Uruguay. The proposed loan, equivalent! ! I' .I to $7 million, would cover the foreign exchange cost of the II II first three years of a program for the improvement of II pastoral production in Uruguay. 1, 11 This first stage will cover some 600 farms. The Ji IiI' loan would be for twelve years, including a four-year period ii 'I of graoe on principal payments and would carry an interest l! rate of six per cent per annum. The amortization schedule is jl 11 roughly tailored to repayments of credits made to farmers il I! participating in the Livestock Development Program by the 11 L Banlc of the Republic from the special livestock fund which \\ I!I has been established for this purpose. ,, Ii ,, 11 Up until now, all the loans the Ba.rue has made in d ·1 !1 Ii Uruguay have been for power projects and all to one borrower, I) L i I' I' d lj STRICTLY CONFIDENTIAL 4 UTE., the Government power and telephone agex,1cy,. This would be the first loan for agriculture which is the mainstay of ,, the Uruguayan economy and which accounts for over 80 per !• )i ;j cent of Uruguay' s exports. I Ii I 11 It was in 1950 that., at the request or the Uruguaya~ II 1l I ii Government., the Bank and FAO jointly sponsored a mission to I l i review the need and scope or pastoral and agricultural I I i development in Uruguay. The project now before you stems 1i from that Mission's recommendations. There has been general agreement in Uruguay that I this project would be carried forward most effectively if it Il I were directed by a quasi independent organization established I I' l I: ., for that particular purpose on which representatives of II l! 11 private rural associations would play an important role. In order to bring this about., legislation was I l \\ j I And while everyone was agreed on the need for it., l,, necessary. passage or the legislation took a long time because of changes\ I 11 1n Government. As a result, the basic law creating the 11 '! livestock development plan and the machinery for its execution! I 1 II I II (I was not enacted until 1957., and the commission that would l II 1' administer the project was not created until the following II year. The whole scheme then had to be reapproved by the new I 1: II Government which took office early this year. ! !1 A point or special interest is the nonpolitical i! composition or the commission that will direct the operations I !l'! I I' I ! STRICTLY CONFIDENTIAL 5 or the livestock plan. A majority or the cooun1ssion represent private tarm organizations. The members of the connnission are appointed for staggered tenns in order to provide tor continuity in the management or the plan. This staggering of terms is, I believe, an innovation in Uruguayan admin- istrative practice. l Mr. Adler will review for you some or the high- ,.1 lights of Uruguay's economic position and prospects, and j Mr. Reid will discuss the project which this loan would help 1 I I to finance. 1 i 1 i Thank you. I I I, I' THE CHAIRMAN: Thank you, Mr. Acheson. \ l Ii Mr. Adler. \ lj MR. ADLER: Mr. Chairman, Gentlemen: The economic \ ,! I section of the President's report and the report or the i j \! Monetary Fund prepared in connection with this year 1 s con- ! 1 II sultation have been circulated to you to provide information 1 1 11 about the current poa:l.tion or the Uruguayan economy. I I I' should like to bring this information up to date and add a j I ! 1 II !1 few remarks about the long-term prospects of the economy. I I 11 I !,,1.i Since the documents submitted to you were prepared, 'i. 1 the new exchange law has been approved by the Senate and : II 11 signed by the President, and the first regulations under the II I' new law have been issued. They provide for a specific export 11 lj duty on wool, which leaves to the exporter a somewhat higher 11 ii II H 1· II STRICTLY CONFIDENTIAL 6 peso amount than he obtained under the old exchange regime. On the import side, the law provides for a single rate, but permits surcharges and prior deposits. No I J information is yet available about the regulations pertaining ii j! to imports, but it is clear that the objectives or the law 11 ,I II I\ are to simplify the exchange rate system and to establish " 1i and maintain a stable balance in the country's international I',, payments. It may be expected that the exchange reform will 11 ,I lead to a more normal set or relations between Uruguay and " Ii p ii the Fund. I! ii As to Uruguay's long term prospects, it must be 11 r recalled I that until a few years ago, the Uruguayan economy I i, was generally considered soundly managed and in good shape, lr I: with promising prospects for its major exports. The quality I I I or economic and financial management, and with it the p \l formance of the economy, deteriorated sharply during the II II term of the Colorado Goverrunent. 11 ii 11 In an attempt to avoid basic adJustments, which I l\ would have been necessary, it resorted to a system of I I I controls and restrictions which became increasingly compli- 11 cated, cumbersome and unworkable. Due in large part to the '1 ! consequences of this policy of expediency and improvisation, ·1 Ii the Blanco Party, which had been in opposition for 95 years, l ii was voted into power on the basis or an economic reform 11 11 program. l 1! 11 iIi STRICTLY CONFIDENTIAL 7 The revision of the exchange system is the first major reform it has enacted. If it succeeds, and if this !\ reform is followed by other measures along the same line, I ;1 H the Uruguayan balance of payments problems will be easily Ji !l resolved since Uruguay's position as a major exporter of wool.! 11 II !I and meat is basically favorable. The loan project before j\ ! , you, if approved, would further improve these prospects. i ·1 I II I• i THE CHAIRMAN: Thank you. I\ Ji I will now ask Mr. Reid to say something of the technical aspects of this loan. I MR. Mr. Chairman, Gentlemen: I would like to comment on three aspects of this project only point is that the agronomic basis of the ,\ ii project ia particularly good. Uruguay ia one of about five . II cowitries whose econcmies depend very largely on agriculture 1 1 ·1 I Ii ·I and where agricultural production is mainly from livestock ! i 1 1 1[ grazed the year row,.d on pasture. In three or these countriesi, I \1 I 1 ! New Zealand, Southern parts of Australia and Uruguay, the ! JI conditions of climate and soil are such that the productive I j capacity of pastures can be greatly increased by techniques I 11 that have been developed just during the last 20 to 30 years. I II By way of short explanation there, there are various! II species of grasses which provide the bulk of the forage and I 11 I !Ill,. pasture, and their growth -- the grass growth -- is usually I, limited by the amount of nitrogen in the soil. In well 11 ·I ! I Ii 111 STRICTLY CONFIDENTIAL 8 balanced pastures, you have also got clovers which have the Ji ability to take nitrogen from the air and make it available :1 \! for the grasses. But the growth of these clovers do not JI thrive unless there are enough phosphates in the soil,(. II And phosphates themselves are deficient in many natural !! i II pastures. I I' \\ So when you get these conditions, the techniques I \ of pasture improvement is to apply phosphatic fertilizers, I which are relatively cheap, and seed clovers where necessary. I In that way it is possible and quite easy, if conditions are I, \\ right, to build up the nitrogen in the soil and stimulate the ! Ii growth or pastures and to do this at a cost which is only I I about one-fifth of what it would cost to apply nitrogenous l I I fertilizers directly to the soil, which would give the same I 1 I 1 I '1 result, b u t i s usual l y very uneconomic. ! I 11 I ! 11 Pasture improvement along these lines has been the Ii predominant influence in increasing an already high 18vel I '1·1 of pastoral production in New Zealand by 60 per cent during ! 1 JI the last 20 years. In Australia, these techniques have been ! j I' applied.._·. to only about 30 million of about a billion acres ! i that are used tor grazing sheep. And yet, that has been the ! i\ma1n influence in increasing production by 50 per cent within ll 1! 10 years. I' !! In Uruguay itself, the conditions are quite a lot li II Ii better than Australia, and they are very nearly as good as ii ii 11 I· q STRICTLY CONFIDENTIAL 9 in N~w Zealand for this technique or pasture improvement. The second point I would like to make is the long delay in developing this project for your consideration has : not really been Iost f'rom the technical viewpoint. At the i ii time the project was first proposed, there has been practical- Ii Jl ij ly no direct experience of pasture improvement in Uruguay, 1, and it was necessary to rely just on judgement as to what II II would be the results of applying these techniques developed II II overseas. 11 q 1, ·1 Since then, a very small number of the most pro- ll p gressive estancieros have been experimenting, and they have Ii very successfully developed improved pasture. FAO has 11 .j 11 Ii lI] at this stage, we can be much more confident about what the li 11 d results of' this pasture improvement will be. I n 1, ll In addition, the success of the development work 11 l to-date has attracted a lot or attention in Uruguay. Many I I l .farmers are now keen to develop their own propertieso Howeve~, il ll they are prevented from doing this by lack or technical 11 I ! Iiii knowledge on just how to go about it and by shortages of i equipment and of' credit. I 1 ! II The third point of conunent relates to the manner I \! ll in which the project is designed to make good these deficienc-i l II I il ies. Essentially, this would be done by providing special l i1, extension services which would be directly supported by the !I L ii !l STRICTLY CONFIDENTIAL 10 credit necessary to implement the plans for technical im- provements worked out by the extension officers in the field ii \I with the individual farmer. This direct association of technic- I \i al advice with the finance necessary to put the farm II ii development plans into effect would be an ideal method of I! 11 !1 extension, and I am very sure it will be noted with envy by Ii I! the extension services in very many other countries. I i think, however, the success of this project depends very, I: very largely on the efficiency of the technical staff which r l I the Commission is to employ. I I The Commission has arranged to employ a very well I \: qualified and experienced man to be in full charge of this 1, \\ technical work. After very wide experience in research and· II extension work in this same sort of pasture development, 1 .I 1 \I he has for some years been pastural advisor to one of the 1 1 1' largest pastural and wool Qroking fir.ms in Australia. His 11 li duties there have been to advise farmers on how to go about I\ j developing their farms, to appraise these plans of farm l development and recommend their finance to his company and Ii'i then to supervise it. In effect, the same duties that he \ 1! be doing for the Commission. h H II We have no doubts at all about his technical com- !I \l petence, and we believe that he will prove adaptable to jl Uruguayan conditions and that he will successfully manage ,I Ii .! this project. l, l· H II I: II i. p STRICTLY CONFIDENTIAL 11 THE CHAIRMAN: Thank you., Mr. Reid. Is there any discussion., gentlemen., or any question? Dr. Donner. DR. DONNER: I have no comment on the project it~f., which seems to be an excellent one. Also., no comments on the situation of the country to which., I take it from Mr. Adler., what he said., is on its way to improvement. Only a few minor points. i: The other day when we had the draft for the IDA j; j! articles before us., we had a terminological discussion about ii ti ii what project loans and so forth are. I am curious to know., 'I I. i in the Lingo of the Bank and of the staff., would this loan 1· ,I here in financing agricultural imports be termed a project Ii 11 loan or not. ,I Ii!1 THE CHAIRMAN: I think the answer is., 11 Yes., 11 Dr. 11 11 Donner. II DR. DONNER: Yes. I expected this answer. And., 11 at that time., I expressed the opinion that there 1s hardly I anything in the world which the Bank ~ould finance which is not a project. ,I 'I (Laughter. ) Ii " ,, d Then., I have another remark to make. 1· .j As far as I 11 Ii1! see., the adding of an IMF report to a Bank document is an I innovation., and I think a good and fine innovation. However., t i I in the future., would it not be possible -- reading would be STRICTLY CONFIDENTIAL 12 so very much facilitated -- if either instead or in addition to what the IMF call the part II document there would also be added the part I document. Part I document is, in practice', a slUDI1lary of the type of document we here have. And in addition, it brings the most recent and freshest information on the basis of the discussion the I.MF staff has had with the goverrunent concerned. If the objection would be made that those discussions and the doctnnent is confidential, it may be remarked, of course, every single one of us has the possibility to get those documents. It is just a matter of expediency, but whether you have them altogether or whether you have them I i!i separately. I' 11 'i THE CHAIRMAN: I am ignorant. What does part I I: ii I! docwnent cover, by the way? !i 11 DR. DONNER: The same ground, only on the basis of " Ii i the discussions the so-called IMF Mission has had with the " 11 government concerned. i I' THE CHAIRMAN: I see. 1! I' 'I 11 !I DR. DONNER: This doctnnent we here have is the Ii :1 part II docwnent. That is put together in a preparatory I' 11 11 stage to prepare the mission going to the country for the II !1 discussions we have with the government in particular. This '1 11 i other document, part I document -- I always want to be more 11 11 succinct -- is shorter, which is an advantage. It is more 11 ;1 ii ii STRICTLY CONFIDENTIAL 13 succinct and brings out the controversial points. THE CHAIRMAN: We will look into that, Dr. Donner, and see if it is possible. Mr. Garland. MR. GARLAND: Mr. Chairman, I think this is a very good project,indeed recommendable. From my Austrailian experience, it should be, I think, extremely valuable. One question, I would like to ask. That is as a matter of interest. What will be the security arrangements between the farmer and the honorary commission and, in JJ particular, how will the security be split between the 1: I! l, existing debt of the farmer and the new debt he incurs to the ij Iid Conunission? ii ii ii THE CHAIRMAN: Mr. Acheson, can you deal with that, II 1: ii or Mr. Reid? II MR. ACHESON: I think I can. I t1 I' The credits to farmers will be made by the Bank :I 1, II of the Republic under arrangements under the project. Under 11 II those arrangements, the Bank has a right or refusing the 11 II credit on the grounds or credit worthiness or the security r that the farmer can offer. Otherwise, vf:-goes ~ ahead with 11 the financing as recommended by the technical staff of the 11 ii 11 Cornmission,or by the Connnission from the technical staff. 11 /I So the security offered would be the normal 1; II security the Bank or the Republic takes, which is, I understa~, II II Ii I 11 ,I I I STRICTLY CONFIDENTIAL 14 very largely mortgage over the land in the form of security. THE CHAIRMAN: Does that answer you? MR. GARLAND: Yes. THE CHAIRMAN: Any other questions? Mr. Aragones. MR. ARAGONES: Mr. Chairman, I think the proposal on Uruguay is very good. It is a good report. Of course, it has taken a little long. I think it was started in 1950. i !I I; So the sheep and cattle that were hopefully looking at this Ii li. 1: loan for improvement of the project were looking to the next generation. I It II II ii (Laughter.) II I' But I must say that this loan is good for two Ii 11 1! reasons. One, because it increases the productiveJ:resources d And in another I! of Uruguay, which I think they need,~hal: 11 aspect, it supports the new government that was always d Ii waiting, patiently waiting, for 95 years to launch a stabi!- Ii ization program. And this means that the Bank is supporting ii II ,! and gives international confidence to this program. Ii ji This will enable the government to restore sound 1: it 1! I! 1 moni tary practices. And, therefore, I believe, being a :1 ii !i worthy project, I am willing to support it. " " Ii i' li 11 Thank you, sir. THE CHAIRMAN: Thank you. Any other question? STRICTLY CONFIDENTIAL 15 Well, there will be no participations in this loan. So, could I have a motion, please, that the Executive Directors adopt the draft resolution attached to the President's report? {The motion was made by Mr. Mejia.) Thank you. Is it seconded? {The motion was duly seconded by Mr. Aragones.) 11 All in favor please say, Aye. 11 11 {Chorus of Ayes. 11 ) Contrary, "No. n {No response.) l declare the loan in various currencies equivalent to $7 million to Uruguay approved. We propose to sign the loan documents tomorrow )l afternoon at 4:00 o'clock. 1, l\ " The next item of business, gentlemen, is a proposed 1; Ii loan to Fomento and Endesa in Chile. I .first o.f all call i Ii: on Mr. Sandelin to speak on the general aspects of this 1 I: Ii,, loan. 1, Ji I(. MR. SANDELIN : Mr. Chairman, Gentlemen: It is with much pleasure that I speak on the proposal before you for a loan of $32.5 million to cover the foreign exchange cost of installing 295,000 kw of additional generating capacity in Chile. STRICTLY CONFIDENTIAL 16 For many years, Chile has suffered a shortage of generating capacity particularly in the central area which includes the main industrial cities of Santiago, Valparaiso and Concepcion where restrictions on energy consumption have been in force. Projects now under construction together with the project which would be financed by the proposed loan :1 I' :t would provide sufficient capacity to meet power requirements l\ during the next five or six years. ij 'i I, ii This would be the third Bank loan for electric 1: :i " 'I power development in Chile and would bring the total installed 11 r electric generating capacity financed with Bank assistance 1! l to 542.,000 kw. As a rough measure ot the contribution the II Bank hasmade;:1n this sector., you may be interested to know that the total installed capacity at the time the Bank made II 11 its first loan to Chile in 1948 was about 450.,000 kw and 1l I li that the capacity since built or to be built with Bank 11 financial assistance represents about 120 per cent of the I total installed capacity in the entire country in that year. l i 11 The proposed loan would be for 25 years, including a 3-year period or grace., and would carry an interest rate II !' 11 of 6 per cent per annum. It would be made to Endesa and Ii Ii Fomento as co-borrowers. The loan would be guaranteed by ·I II 1' the Republic of Chile. d !, Jj Before Mr. Ross speaks on the Chilean economic I ii ij situation and Mr. Finne tells you about the project to be I: I' ,I 1, I! ll Ji \l STRICTLY CONFIDENTIAL 17 financed by the proposed loan, I would like to mention a very significant step taken by the Chilean Goverrunent since our last loans were made in 1957 to that country. Just a few months ago, the Chilean Government !l promulgated a ; General Law for Electric Services" which !, ,, 1, ,, permits public utility companies to earn a net profit of 10 iIi! per cent on the replacement value of their operating assets. i! II This law provides that the value of a company's operating 1: " Ii assets may be adjusted annually in accordance with variations Ii in the cost of living index. The enactment of this law, 'I together with a new basic understanding between the Government/ I and Cia. Chilena de Electricidad, a subsidiary of American \ I and Foreign Power, has encouraged the private utility companie~ 1! to make substantial investments to expand and improve their II facilities. 11 I should also like to say that the Bank's relations 1! 11 with Endesa have always been good and that work on the ii II projects financed by the first two Bank loans to Endesa for li power development have been very satisfactory. !1 In addition to the two loans for power development, l ii the Bank has made five other loans to Chile totalling $45.2 11 'I 11 million for agricultural development, the construction of a 11 II chemical pulp mill and a newsprint plant, and for the I i Ii development'and expansion or the Schwager and Lota coal mines., :I On the whole, these projects are proceeding well. The j II 11 11 I II I' I STRICTLY CONFIDENTIAL 18 newsprint plant came into operation over a year ago and now, not only supplies all domestic requirements, but exports a substantial tonnage. The chemical pulp plant has only recently started up opei'ations and before long, this plant should be able to satisfy domestic requirements for chemical :, pulp and kraft paper and should also have a substantial tonnage available for export. Completion of the project to be financed by the ,, 1, :: proposed loan of $32.5 million to Endesa and Fomento would ,, ii 1! ! contribute materially to the solution of the power shortage 1: I! 1: in the industrial area of Central Chile and should provide J! 1: II much needed power facilities in the Huasco area of northern 11 Chile where iron ore deposits are being exploited for export 11 Ii ii at an expanding rate. II Ii THE CHAIRMAN: Thank you, Mr. Sandelin. I' 1! Ii Mr. Ross. II 1! :1 MR. ROSS: Mr. Chairman, Gentlemen: The report 11 III' distributed on December 16th summarizes the salient features Ji ,1 of the economic position and prospects of Chile. The key ! i issue is the ability of the new Goverrunent to manage effectiver I I ly Chile's financial affairs. During the past year, the I I I Chilean authorities have taken a number of steps in the right I I I direction, which are described in the report. I I The report also points out that success to-date has been limited. Given the magnitude of the problems which STRICTLY CONFIDENTIAL 19 the new Government inherited, this is not unexpected. The budget deficit, although financed by loans from abroad, continues to be the chief source of inflationary pressures in the economy. It is on this issue of establishing and maintaining fiscal discipline that the Government will face its major challenge. The external financial position of Chile has 1 improved during the past year, and foreign exchange reserves 1' have increased. The external debt service requirements during !I Ii 11 the next several years are very burdensome, largely because i! ii of the high level of payments due on short and mediwn-term I ,I ii !j debts. In its letter to the Bank, the Government has in- I, I! q dicated its intention to reduce the level of its short and 11 mediwn-term debt and further to strengthen its international 11 11 financial position. This should result in a substantially !I11 11 lower debt service burden by 1964. I! II !l The outlook for Chile's main exports is favorable, r ,I and the proJections presented in the report envisage a sub- Ii stantial increase in foreign exchange earnings. Sound fiscal l! I! and financial policies should keep the level of imports IId within manageable proportions. These balance of payments 'I prospects, together with the outlook tor improved financial 11 II management, provide the basis for recommending this loan jt II ,1 ,I at this time. I' Il 11 Thank you, gentlemen. II ij Ii ii STRICTLY CONFIDENTIAL 20 THE CHAIRMAN: Thank you, Mr. Ross. Mr. Finne. MR. FINNE: Mr. Chairman, Gentlemen: At the time the previous Bank loan was made for Endesa, the early planning or the Rapel plant had already been started, and it was included in the ten-year construction program which Endesa i ,, had prepared for meeting the increase in power demand. The 'i ;! ,, Bank has, therefore, followed the development of this project ij over a number of years. I, II I! ii \\ A main feature of the project is the 90 meter high Ii ii 'i dam designed as a thin concrete arch structure. The detailed ' II l1 design of the dam is at present being reviewed by Endesa Ii I'11 and its consultants and due consideration will be given to 1, II the results of the investigation now being carried out to 11 11 establish the reasons for the recent arch dam failure in 'i I 1· ,I France. \1 I',I Although we have no specific reason to be concerned II ,, regarding the soundness of the design of the dam, ii it would nevertheless be prudent to have the final designs and geo- Iiil ,I logical conditions checked independently, and we intend to Ii !! I, do this. Endesa has assured us that construction work on the ii 11 dam will not be started until this check has been made. II q The potential hydroelectric capacity in Chile is !1 jl 1' :I 'I estimated at nearly 20 million kw of which only some 3 per Ii I! cent has been developed so far. Nearly half of this capacity ,I 'I I STRICTLY CONFIDENTIAL 21 is located in the central part of the country, which already is served by an interconnected transmission system. It is, therefore, natural that Endesa is concentrating on the development of this resource which for many years will assure the supply of power at a reasonable cost. The Rapel plant is particularly attractive because '.l the maximum flow of the river is caused by rain during the winter months. The plant will, therefore, operate at full Ii ,I output during the period of maximum demand on the system. ii 1· ,I i: This is not the case with most of the other hydro plants :\ !i ii in Chile located on rivers which have a maximum flow caused /I 1:1 by melting snow during the summer months. 1 ii I' ii The Huasco plant, which also would be financed by ll 1, Ill the proposed loan, is a thermal plant of conventional design, Ii located in the dry northern part of the country. The J1 i additional supply of power in this part is important because 11 of the mining development and, in particular, of iron ore. 11 ii 11 The financial position of Endesa is reasonably sound :I ii Ii 11 and can be expected to improve further as a result of the I! I! rate regulation incorporated in the new law of electric .; I! services which recently came into effect. Ii Thank you. THE CHAIRMAN: Thank you, Mr. Finne. Any questions, gentlemen? Dr. Donner. STRICTLY CONFIDENTIAL 22 DR. DONNER: Mr. Chairman, I would think that the cost estimates and, therefore, the loan here might not be final in case the investigation about the advisability of a thin darn construction would come out wi:th the result that it would be advisable to redesign the dam. And, of course, the question of the costs would be done over, wouldn't it? ;i THE CHAIRMAN: Fr. Finne, would you? MR. FINNE: In the cost estimates, they are on the low side, which would be mainly expected on this thing. i We have included 30 per cent contingency item in addition to j: engineering contingency between 10 to 50 per cent, which is i ,I i! already included in the original cost. So I think we are 11 1! 11 i! on fairly safe ground on the cost. ii 11 DR. DONNER: Thank you very much. Ii ,, 11 'i" Otherwise, the part here in what we heard has Ii impressed me in various waua. First, Mr. sandelin talked 11 II about -- and the report also spells it out --that the 11 II Government, the Chilean Government, has considered it wise 11 11 to establish the rate policies, allowing the power companies 11 to earn 10 per cent on their capitol, computed at replacement I I costs. 11 Ii Now, Mr. Sandelin also referred to the fact, and II ,, I! I think it is a fact, that there is expectation that given II this law private power companies will now invest much more i I' than they had done so far and would otherwise have done. 11 ii :1 11 11 '1 STRICTLY CONFIDENTIAL 23 If the results of these are clearly visible, I could imagine that the Bank, putting out a second pamphlet showing the results or wise rate policies, might have some effect, might serve some useful purpose. The second fact which impressed me in this loan is the managements willingness to be bold. Now, the Bank at various occasions has been accused of being overly cautious, of insisting that a country put itself back to good shape before the Bank would be willing to risk this money. And here they formalize on various occasions that ' the decision to grant this loan was based primarily on the determination of the Government to deal effectively with the country's problems. I noted with particular interest that the language 11 runs, Is based primarily on the Goverrunent 1 s determination.,." i' i1 :I I not yet on the results achieved so far. So, therefore, ·' 11 i somebody going through the books and the records and looking I at the present situation could say, "Well, now, here is a country whose balance of payments as a project situation, price development, still, in spite of all, is in such a : I bad shape. Why does such a country get a loan whereas other l I I countries which might not be even in as bad shape stat1stical1JY I do not get the approval or receiving a loan?" The whole difficulty being that in the first case, in this case here, the determination of the country and the STRICTLY CONFIDENTIAL 24 trust of the Bank, the management, is in existence that the Government will pull through. Whereas, in the other case, such a confidence in the determination of the government concerned does not exist. A third point which struck me very much, Chile 1 s recent history demonstrates a very clear case of the devastat- ing effects of inflation. The economic report talks about stagnation in production over the decade, or considerable period of time -- stagnation of per capita production. Though there was price increases, a situation which, in the opinion of some, enhances capitol formulation and enhances investments and so forth. Here, in the case of Chile, it is a textbook case, almost, as I read it. We find demonstrated that all this is not so, but exactly the opposite follows. The production, as I said, being stagnant per capita production, that the aggregate amount of domestic saving was very, very low -- 4 per cent only -- which 1nID way corresponds- to the needs of the development under this. I guess it can be expected it will change if the Government can stand through the seriousj I and dangerous pressures that it is exposed to at the present time and which, as far as I can see from the outside, result greatly from those ideologies which have resulted -- linking procedures, linking everything to the price development and which, therefore, make for an accelerated rushing through STRICTLY CONFIDENTIAL 25 or any inflationary mishap which may take place, including the economy as a whole. I would wish that Chile has good success in its policies. Thank you. THE CHAIRMAN: Thank you. Mr. Knapp. 1: MR. KNAPP: I want to thank Dr. Donner for his !,i :i comments. It is very interesting. And Just to offer one 11 ii ,1 response to your second point, I think it is true that 11 11 ii Chile is still not over the hump at all of this stalJtJization i ll program on which they are engaged. But I do want to emphasize I I! I that we have been very, very well impressed with the leader- I I l ·I 11 ship in the country and with their program and with their I 11 I ii i I \\ efforts and have confidence that if this leadership continues, j i' i 11 they can achieve something very substantial. ' I• ii !i I think perhaps the main risk that we are taking 1: I ii i is that this leadership is presently operating under a I: I' I! regime granted by Parliament to go ahead and carry out this Ii ·11 economic program and that regime expires in April. And it ii II could be that there would be a relapseat that time if these II I\ powers were not renewed or if there were some change in the I' Ii II II Parliamentary attitude toward the whole program. But we are Ii \\ betting against that; we are hoping that the Government will Ii ii \\ be allowed to pursue this program. 1, !!. THE CHAIRMAN: Any other? !! 1: \! STRICTLY CONFIDENTIAL 26 Dr. Mejia. / DR. MEJIA: Mr. Chairman, I want to congratulate the staff for this loan, these two loans, to Latin America. In approving them, I feel some kind of relief because for six months, we haven't done anything hardly. Those are the first loans in this fiscal year. I want to refer to the question raised by Mr. 11 1: Donner. I think it is a very good sign that this loan to 1! Chile has got granted under a program of good conduct in 1,I i! 11 the future. But we have to understand the Latin American i II program is more complicated, and I think the Bank cannot •I 11 11 apply the traditional, orthodox, rules in this type. ·1 I. jl In Latin America, we are having a difficult time II,, now when other countries are enjoying the biggest prosperity 1· 11 1' in their history -- prosperity, and at the cost of the poor 11 11 countries, paying less for prime products and charging more \1 " for manufactured products. In this way, the rich countries II q are getting more rich, and the poor countries are getting ,I 1· 1' more poor. d 11 When in the United States am in Europe, they are ii 1, 1' l d launching the second family car, in La.tin America, we are I' ll ii postponing the first one, even for the richest people, just I! I i to save foreign exchange. In order to prevent inflation like I ,I in Chile and Col()mbia and Peru, we are creating unemployment 11 ii I! and big social prop1ems -- social problems that sometimes I! I!. il STRICTLY CONFIDENTIAL 27 complicate with political problems. Others prefer to suffer inflation in order to avoid a human crisis. In this particular class of cornmoditie~, the only thing we can expect is the foreign help, economically, from private and from public sources. But we have not looked at that. The common European markets, the six and the seven and et cetera, are the big attraction for private capit11.1 [;_ now in Europe and in America. And eve~the traditional oil c,S investments in Latin America who are in doubt that they can v keep the same level in the future because of the opening of the Sahara and the tremendous repercussion in Europe and the obvious disruption of the oil market. The other source is the United States. But they have helped to take, or to put moreof its help in solving old balance of payments problems. The third one is the International Bank. As I said before, according to the history of the Bank, in the first nine months or this year, January to September, Latin America, the twenty countries of Latin America, got from the Bank $47 million and paid $44 million, $25 million in ,, J prlncip:a and $19 million in interest. So the balance in favor of Latin America is extremely good. y/ ' At the moment, they need more money. I agree that we don't have the problems both in nature and in magnitude that several other underdeveloped countries have. Being STRICTLY CONFIDENTIAL 28 new countries with natural resources of all sorts, good land and active population, our poverty is less spectacular than the poverty of many other countries. But if we have not reached the stage of real poverty, we are on the way 'i and not so far from it. The population is increasing at a rate only com- li i1 parable to Pakistan and India. By 1975, we expect 200 million i\ !I ii peop 1 e. And if we don't provide means of sustaining all of ,, ,I I! them, it will be possible to see on the streets of our big Ii Ii ci t;ies like Mexico City or Rio ..De Janeiro or Sao Paulo or f 11 i I,I Buenos Aires the same big crowds of miserable and desperate 11 11 pec,ple we can see now in Bombay and in Karachi or in Calcutta 11 11 So it seems to me that we have to have a different I' ·I approach to these problems. I have been very well impressed 11 with the approach of Mr. Black personally, which he has 11 taken in the India problem. He is trying to coordinate, 11 I: ., successfully, the foreign help, economic help to India, 11 and providing a normal amount 0£ £unds every year £or the 11 success of the five-year plan. Ii When we were discussing IDA, it was one of the Ii i ideas I tried to introduce in the new Association to sustain I! I! I the, economy of the countries in order to keep a rate of I: H 1, p development. That is what they are trying to do in India. j! ,· I: '11I With these several meetings of the countries that are helping ii I' India and the new committee, they are going to investigate i, i I! 11 STRICTLY CONFIDENTIAL 29 the conditions and to see by themselves what is going on there. I think this is a good approach to the problems of the country. And we will be very grateful if something ii Ii can be done in this way, a different approach. Not this ii d II loan here for one project here and another project there, but J! 11 something more coordinated, something that we can rely on II I, II it and make plans at long term, that we feel we are assisted II continually in good times and bad times. Now we:are in bad 11 ·1 11 times, and we need more help. l These two loans are going to contribute, especially I ! Chile and Uruguay in a good manner, and I know there are I other loans coming. But I think we must plan a different ! policy, different approach, to that problem. And the Latin ' I American countries will be very grateful to the Bank if they i11 take this undertaking. l' 11 ,I Thank you./ 'I 11 I! THE CHAIRMAN: Thank you, doctor. I! jl Well, gentlemen, we will draw Mr. Black's attention !l to your remarks as soon as he comes back, and I a:rn sure he 11 will read them with interest. Thank you. 11 H Any other discussion? I, ll ,, There will be one small participation in this loan. , ', The Grace National Bank of New York is taking up $50 thousand,! ,i !I I· q which is part or the first maturity due on the 15th or April, 1., II 1! I, 11 I' STRICTLY CONFIDENTIAL 30 1963. The rate of interest will be 5! per cent. Could I have a resolution? DR. DONNER: Mr. Chairman, before you go on, the fact that the small participation only is attached to the Chilean loan and none to the Uruguay one, is that an accident or due to the rate structure? THE CHAIRMAN: I don't know. I think it is just the preference of the participant, Dr. Donner. MR. ARAGONES: Possibly because they work in the 1 Pacific Coast. THE CHAIRMAN: Could I have a motion to approve the resolution? (The motion was made by Mr. Aragones.) Is there a second? (The motion was duly seconded by Mr. Ismail.) All in favor please say, "Aye." (Chorus of, "Ayes.") Contrary, "No. 11 (No response.) I declare the resolution approved. I We propose to sign this loan tomorrow afternoon at 3:00 o'clock. Mr. Brignone. i MR. BRIGNONE: Mr. Chairman, aren't these two loans I that we have approved today the first loans that have been I ! I STRICTLY CONFIDENTIAL 31 approved for countries since I am here at the Bank. So I am especially happy about the coincidence that we have, not only one., but two loans at the same time. This enables me to say a few words about the region in general, 100 per cent ,if --aJCtcl. tbat it is mostly the only nontropical part of Latin America 'f. and have special problems. ! i H All the region in general have had a long history Iiii of inflation and what we used to call financial indiscipline i! .1 iJ ll here. All of these countries are making efforts to improve d 11 11 th,~ir situation. 11 'I Chile, for instance, has been making a serious ' ( I ,l effort to get rid of inflation that was almost, say, chronica~- ,1 ! ly existing in Chile, having been in effect for several l 11 .I 11 !: decades. And I think that the good intentions of the Chilean I ii Government that have been taken in account for this loan are 1 II I! lj p reaffirmed by the fact that, not only this Government, the 1 Ii l: Ii present Government, but since the preceding Government, the I! ',1 i Chileans are making a serious effort to live within their I Ii Ii I I' means. I 1: If And they have had the problems of the low price of l! II the copper that is the main export material. And they are 11 d making an effort to diversify their economy, very successful !' 1! ,, effort. Ii So I think that we have here more than a promise, H I than just a promise. 'i We have just a beginning or the H I realization of the problems. p 11 Ii II I', STRICTLY CONFIDENTIAL 32 The case of Uruguay, the effort is not so long, has not been in effect so long. We are just beginning to implant an austerity program and to make an effort to diversi~ ' fy the economy, which is not always too industrialized. And there in Uruguay, I think we have also more than a promise. In regard to the loan to Uruguay, I am very happy of the kind of loan it it because we, several times, were afraid that the stress, the accent, on the development was given mostly to industrial projects, being the developed and integrated affairs, being the development, a thing that has to be done in the country as a whole, not in part of the country. And Uruguay being a country that is especially apt to cattle raising, I think this loan, this project, is a specially adequate project, specially adequate loan. And I repeat, I am very happy about it. I wish to thank the staff of the Bank that I know have worked very much on both these loans and are not to be held guilty of the delay of them. I know there were many circwnstances relating to them. Thank you very much. THE CHAIRMAN: Thank you, Mr. Brignone. The next item on the agenda, gentlemen, is the report of 59-105, which asks your formal approval of the proposal to borrow DM200 million from the Deutsche Bundesbank. STRICTLY CONFIDENTIAL 33 Mr. Black informed you about this proposal last week. This loan from the Bundesbank would become effective on the 31st of January, 1960, and from then, we would have a year within which to draw down the funds. The instalments of the drawdown would be in multiples of DM 5 million, and the timing of the drawdown would be at the discretion of the Bank. The loan would mature in instalments, each maturing i; instalment being three years from the actual date of the The interest rate would be 4 3/4 per cent, and there would be a commitment fee of a quarter of 1 per cent like in our previous borrowings from the Bundesbank. That would mean that no interest would be paid until an amount is actually withdrawn. And instead of full interest, we would be paying a connnitment fee on the undrawn balance. Now, this transaction is another evidence of the cooperation we are receiving from the German authorities in the Job that the Bank is doing. Is there any discussion, gentlemen? If not, could I have a motion to approve? I Mr. Read. I MR. READ: Mr. Chairman, just a couple of questions .1 This is a short-time borrowing. I wonder whether I I the objective is to maintain the cash position along the I lines of the current cash position in the recent past, and, STRICTLY CONFIDENTIAL 34 secondly, whether the decision to go ahead with this type or loan reflects a Deutsche Mark requirement by Bank borrowers, or, to put it another way, whether it reflects the fact that ! the Bank has had no difficulty in respect to past or Deutsche Mark borrowings in having borrowers take them up. THE CHAIRMAN: Mr. Cavanaugh? :1 ,1 Ii I! MR. CAVANAUGH: I think the answer to the first i question is that the Bank needs money, and short-term :1 I, ii borrowing at this time appears Just as desirable as a long- ii term borrowing at a much higher rate. !f I\ As far as Deutsche Marks themselves are concerned, lJ '! 11 we will use part or this in Germany. But primarily, we II expect to convert it and use it for the purpose of currencies 11 11 in other areas. In view of the fact that we have had an I' 11 additional 18 per cent release from Germany, we have at the ,1 present time enough Deutsche Marks to cover our needs there • ! .i I'I MR. READ: Thank you. i THE CHAIRMAN : Could I have a motion to approve Ii the resolution? 11 ji (The motion was made by Mr. Hooker.) Ii I ,.! A seconder? II 1· (The motion was duly seconded by Mr. Patel.) l• j: All in favor please say, "Aye. 11 Ji ( Chorus of, "Ayes. 11 ) 1' !: 1 : · Contrary, "No. n i: i: l! /; i] ,, " I! il STRICTLY CONFIDENTIAL 35 (No response.) I declare the resolution approved. Well, gentlemen, this is the last meeting of the ;I Board of the Bank during this year as such, and on behalf ii !I of Mr. Black and the rest of the staff, I think we would :1 Ii ii like to wish all the Executive Directors a very happy New i )I 11 Year. !\ 11 The only other thing I have is to announce there ! 11 will be a meeting of the Committee on Financial Policy 1! Ii tomorrow, December 30th at 2:30 p.m. jl Is there any other business, gentlemen? 11 DR. MEJIA: Mr. Chairman, are we going to have the 11 ,j I letter a: trans -- I THE CHAIRMAN: Transmittal. 11 ii Ii p MR. MENDELS: You mean on IDA? Are you referring ll ii /! to the explanatory memorandum, Mr. Mejia? The explanatory 11 memorandum is under preparation. It hasn't been completed : quite as early as was expected, but we do hope that we can [! make it available before the holiday, possibly for discussion I just after. , l DR. MEJIA: I thought tomorrow will be -- 1 MR. MENDELS: Tomorrow will be on the charter which you have, and not yet on the explanatory memorandum. There is just a chance it may come around before the meeting, but we are not certain. STRICTLY CONFIDENTIAL 36 DR. MEJIA: But do you think it is useful to secure the charter without the memorandwn? - ~ MR. MANDELS: We do think so. DR. MEJIA: Because most of the substance of the charter will depend on its interpretation. MR. ~DELS: I think it is our understanding, Mr. Mejia, that the explanatory memorandum will support the Ii provisions of the charter. We can still have a discussion 1: ii !1 to insure the provisions of the charter are in accordance II ii with our discussions which we had re-0ently. II Ii I' DR. MEJIA: Yes, but you know that interpretations 1 11 are so different that in some cases we have to have the 1 II memoranda. I l I iIi & MR. MJNDELS: All I can say, Mr. Chairman, is that il 1! in some cases I think the Executive Directors may want to ''f II wait before sending the new charter back until they see the ,I explanatory memorandum. ii In other cases, they may not Ii II consider that is necessary. 1! 11 The explanatory memorandum is being rushed as l I rapidly as it can be. 11 ji THE CHAIRMAN: Mr. Knapp. I, 'I I: MR. KNAPP: I only want to say this: Although Ii1! in general I think we deplore tendencies sometimes to make Ii too much about the rate of lending of the Bank in different I\ Ii I thought as a statistical curiosity, II fields and so on, ii i 11 ii 11 Ii STRICTLY CONFIDENTIAL 37 you might be interested to know we have been talking about the Bank going at a rate of something like $700 million a year total loans. ;; With the loans passed today, the figure for. the i1 I! ll first half of the fiscal year is $349.1. I' ii 1! (Laughter.) i IiI! THE CHAIRMAN: Any other business, gentlemen? II ii The meeting is adjourned. Ii 11 I, Thank you. fl (Whereupon, at 11:04 a.m., the meeting was i; j! adjourned. ) J, i I * ** I Ii