Transcript of three hundred eleventh regular meeting of Executive Directors, held on Tuesday, June 9, 1959 : South Africa - Sixth Transport Project

STRICTLY CONFIDENTIAL 89491 McLaughlin INTERNATIONAL BANX FOH HECONSTHUCTION AND DEVELOPMENT THHEE HUNDRED ELEVENrH HEGULAR l·1EETING of EXECUTIVE DIRECTORS Board Room International Banl\'.' Building Washington, D. c. •rues day, June 9, 1959 The meetinc; Has convened at 10:07 a.m., Mr. Eugene Black, President, presiding.  2 STRICTLY CONFIDENTIAL CO N TEN T S ~ g en da I t em Pa o.: e -~ Propos ed Loan - Union of South Africa . • . • • . • •• • . • . • • .. 3 •: i: I i' ,, •.  ".) •.J STRICTLY CONFIDENTIAL P R 0 C E E DI NGS THE CHAiffi<lAN: The first item of business the minutes of the 310th Regular and the 187th Special Meetincs of the Board held on May 19th and Jviay 26th. If there are no corrections, the; stand adopted. 'rhe next item is the proposed loan to the Union of South Africa. I'd lil:e to call on Mr. Calika. MB.. CAI.D\A: Mr. Chairman, Gentlemen: At the time of :rour consideration of the earlier transport loan to the ,i Union about six months ago, you were informed of the under- standinc wlth the Government that the Bank would be ·willing to consider a program of lendin.::; to South Africa, up to a total amount of ~p50 million, which ·would match similar amounts raised the Union in the market. At that time,, the Bank 1 s loan of' ;;:,25 million for the I railways was made concurrcntl~r with a public :issue in the New Yurk marlcet b::,r South d.frica. Since the Union has succeeded in establishing its 1 credit in the financial markets of both America and Europe, the Bank's understanding v,rith the Government included borrowins in Europe as well as the United States. At that tirn.e it appeared that the Union itould i ... aise ,I ' about :p25 million equlvalent by public sues in German:i i and Switzerland, but so far only $11. 6 million of this, ;1 :! i, '  l.[ STRICTLY CONFIDENTIAL representing the proceeds of a Government-guaranteed public issue by ESCOM in S1:1itzerland, has actually materialized, and the proposed loan before you is to match the Swiss borrowing. As in the case of the earlier transport loans, the proposed loan would help to finance the continuing program of the expansion and modernization of the South Africa railway s;;/stem. It would, in fact, help to finance the same project for which the Bank 1 s earlier loan of 025 million 1: was made. As vras pointed out on the occasion of ~'our considera- tion of the earlier transport loan, in an effort to enable the railwa;.rs to meet all demands made upon them by 1962, the Union Government has since 1958 accelerated the execution of the railways' invextment program. This is a large program, in terms of both physical , and human resources involved and of the finance required, and is of great importance for the Union's continuing economic growth and progress. In the present state of the Union 1 s economy, it is not lilrnl~r to exert undue pressure on the resources. Private investment w·ithin the country has recently declined somewhat, and the rate of economic growth has fallen from the high levels previously attained. Because of lower world prices, export proceeds have declined appreciably in 1958. To protect the Unionts  5 STRICTLY CONFIDENTIAL balance of payments position, the Government has imposed a credit squeeze which helped to lceep imports in that year at just below the previous ~;ear's level. The present situation provides a good opportunity for the railways to catch up with the rest of the econom~r. Over the period of the Banl{' 1 s continuing active support , of the Union's economic development since 1951, the !' Executive Directors have had opportuni of following closely the economic progress of the country and are familiar v-rith its various economic and social problems, includlne: the difficult questions of race relations. In their appraisal of the Union's economic position and priospects the Banl:.: missions which have visited the country have consistently concluded that the Union was able to service additional external borrowing. Since the latest economic report which was presented to the Executive Directors about six months ago was pre- pared, South Af'rica 1 s balance of' payments position has improved. The growth of the economy should be reswned soon, although the rate crm·1th ma;r vvell be somewhat slower than Has achieved previous l~r. There is no reason to modify the conclusion of the , last economic report that South Africa should be able to service the borrowing contemplated. The nattern of t proposed lending operation is  0 STRICTLY CONFIDENTIAL quite familiar to the Executive Directors. As before, the loan proceeds would be used to finance imports of capital goods, consisting of locomotives, rolling stock, permanent way mater>ials and electrification materials. The proposed 1oan agreement is alon1:~ the lines of the earlier transport loans to the Union and has no novel features. THE CHAIRMAN: Thank ~rou, sir. Mr. van Helden. MR. van HELDEN: Mr. Chairman, Gentlemen: On five previous occasions the Ban1{ has made loans for the South African Railvmys and Harbors Administration Hhich operates tl1e country 1 s railwa~7s, harbors, airlines, some road trans- 11 port services, and coastal shippinc;. I I I ,I The last loar; of' <125 million, made :ln November, has already been disbursed for about half. Since the present loan is to be used for essentially the same project as the one set ~orth in the last technical report, it was felt that no new field investigation and technical report were required. It is known that the Railways Administration is capable and alert in its dealine;s with traffic fluctuations resulting from changes in economic condition. The recent slm·r-down of the economic activities in the Union has caused some decltne in revenues, and the Railways  '' { STRICTLY CONFIDENTIAL Ac1"'!1inistration has immediately adjusted their rates accord- :;Jurthermore, the development program has been reduced slightly for the two ;rears ending March 1960 and about ten per cent for the two years thereafter. rrhese reductions do not need to affect the ject as a v1hole and the proposed Banlc lendinr; since Ban1~ contribu- 'cions amount to onl:.r a small part of the total cost of the development proGram. It has been the Administration's practice to place order~ and contracts on the is of internat5.onal competitive biddlng, although sometimes some slight; preference is given to South African suppliers to stimulate local industry. The current development prof:;ram for expansion and modernizat:Lon of the railvn:.i.ys was ini tiatecl about 12 years ago to meet the fast-growin; demand for transport resultj_ng 'I, from South ,~frica 's gr·owing economy. In the past years this l f;rowth has been hampered b;.' the railways 1 occasional inabilit;y_ll, I i ! during peaJ.c demancl periods to move all traffic offering, including export tra~fic. Much has already been achieved to eliminate these shortcominc;s, and the railways' management is aiminr; to be abJ£ 'co accommodate all traffic offering by 1962. The problem of the relation between rail and road traffic and other means of internal transport is under STRICTLY CONFIDENTIAL active study, both in Government and private circles" It is recognized that liberalization of road transport regulations may affect the railways' revenues. Meanwhile, it should be kept in mind that about nine-tenths of the volume of frei transport is for bullc commodities, such as coal, grain and ores, which is not likel~r to affected b~,- road competition, and this ln its elf justifies the considerable capital expenditures for physical improvements to meet the demands of this traffic. I ~l'he program as a whole is economical justified, and the current tHo-year project is considered a suitable bas for a further Bank loan in the equivalent of :(;Il .6 milliono rrHE CHAIRMAN: Than1c ;';ou, sir. Any questions'? Mr. T hUl"'n ·: 1v'IR. THtmN: Mr. Chairman, I read this paragraph 10 of 1 this report that the revenue vTas not quite sufftcient to cover the expenses of the Administration of Railwa~rs in 195B, that there was an operating defici.t. Well, I'm t:.;lad to learn that this deficit is considered to be in the Union of South Hfrica a function of the business cycle and not inherent to the s;1s,cem of public ovmership. I'm also reassured to hear that appropriate measures have been tal{en i.n the wa;; of increase of efficienc;:7 to  9 STRICTLY CONFIDENTIAL 0alance the accounts of the Administration. Furthermore, I share the view expressed in the report that the :lnterracial difficulties will not impair the caoacit:r of the borrower to carry out its oblii:;ation. This seems to be the general opinion. If it were not so, how could one explain the very strong inflow of foreign pri- vate capital into the Union of South Africa? In view of all this, I'm very happy to give this loan m:r warm support • 'rlill CHAiitMAN: Any other questions? (No response.) Well, if there are no other questions or further discussion, a very interesting thing has happened on this loan. We have had applications from 12 banks to participate, and the7 applted for ~.;6.5 million of this loan. Un- fortunately, we could only supply about ~p2,, L~8o,, 000, because they wanted the f'irst .five maturities, and there weren 1 t enough to go around. But that is an unusually large number of banlrn. The~r are the Chase Manhattan Bank,, the Philadelphia National Bank, New York Trust Company, the Bank of America, the National Shavnnut Bank of Boston, the l?irst National City Bank of New Yorl:, the Swiss Bank Corporation in Basle, the Morgan Guaranty Trust Company, and -- l1ere 1 s somethinc  10 STRICTLY CONFIDENTIAL very unusual -- the Continental Illinois Bank of Chicago, First National Banlc of Chicago, and the Northern Trust Company of Chicago. It 1 s unusual to have three Chicago banks. Plus the South African Reserve Bank. 'rhe South African Reserve Banlc, as :,rou know, have been substantial buyers of South African loans from the Bank f'or its portfolio, and this time they aI'e tal{ing a small amount of this loan. As a matter of fact, the largest amount any of these banks got was half a million dollars, and most them were cut down to $100,000. The South African Reserve Ba.nk, all they set ~)103, 000. 'rhese names will be in the newspaper except the South African Heserve Banli: 'rill not be in the paper. Well, can I have a motion to approve the resolution'! (Motion duly made b;f Mr. Donner, dul~r seconded b;/ Mr. Larre.) In favor, :i aye. 11 (Chorus of "ayes. 11 ) Opposed, 11 no. 1' (No response.) 1! I declare the motion carried. Mr. Callaghan'? MR. CALLAGHAN: It 1 s very pleas inf;, Mr. Chairman, to hear that list of Lanks that are participating in this loan. ' ·'  11 STRICTLY CONFIDENTIAL I'm sure it will be gratifying to the South African authorities . In thanking the Board I need only say what I have said on a previous occasion with r espect to a loan of this nature that t he di f ficult ies of a countr~~ such as the Union openinc; up and getting its minerals to marl<:et , to the ports, are qui te a pr oblem . This l oan and the Hhole prior program are a ver y useful t hine from the Union ' s point of vtew . -l Thank y ou . '1 THE CHAIRJvJAN : Thank you , sir . i ''\ "I 1' .•I i-• .. ~! l ,I 'i .f •t ; ·! ·' I I •; .. i