Announcement of the Bank Granting Loan to Brazil on January 27, 1949

• FOR 'filE PRESS INTERNATIONAL BANK FOR RECONSTRUCTION AND DE~OPI'-1ENT Washington FOR INMED;IATE RELEARE Press Rele~se No. 126 January 27, 1949 The International Bank for Reconstruction and Development today granted a loan or $75 million to the Brazilian TraQtion; Light & Powe:r Company, Ltd. The purpose of the loan is to assist in financing the expansion of hydroelectric power facilit1es and telephone tnstallat~ons in Brazil. The loan is guaranteed by the United States or Brazil. The loan is for a term of 25 year~ and carries an interest rate of Jt%. The Bank will al~o charge a comJDission or 1% annually to be set aside in its special reserve ~d, in accordance with the Bank's A~ticles of Agreement. Amortization or principal will begin on July l, l953, and is calQulated to retire the loan by maturity. The lQan is in accord with one of th~ Bank'o main purposes--namely, to encourage the development of p;roductive faciJ.ities an~ resources ·in me.rnber coun~ tries. This is the third time the ~ank ~s granted loans for development purposes in the American Rep~blice~ Previously the Bank paq approved loans of $16 np.llion fQr hydroelectriQ and agricultural development in Chile, and loans of $J4,lOO,OOO for electric power develol)Dlent 1n Mexico~ The Brazilian Traction, Ligbt & Fower Company, Ltdo ipten4s to purchase with the l0$n proceeds substantial amounts of equipment in the United States, Canada, the United Kingdom and Contj.nental E.urppe. The Canadian Government has • given its approval to the use by the Bank in ·1ts loan OJ)eratiQns of -µp to 8 million , , Canadian dollars out or CanaQ.a 's subscription to the Barik' s capital~ The Govern- ment of the United ~ngdom has given its approval to th$ use by the Bank or up to 1,500,000 out of th~ United Ungdoni•s subscription to the Bank's capital. It is  - 2 - •• the intention ot the Banlt to disburse these amount$ in connection with purchases eligible· under the loan agreement to be made by the Company in Canada and in the United Kingdom respectively. With these authorizations a total of four member nations, includ!ng the United States, have approved the u~e of their currencies paid in as part of' their capital subscriptions~ In August, 1947, the Belgian Government agreed to the Bank's use of the equivalent of $2 million in Belgian fr&ncs. The Bank hopes to obtain in the ,future further authorizations from it~ members, thereby broadening the international cha~acter of the Bank's operations. The B~azilian Traction, Light & Power CoJnpany, Ltd., a Canadian corpora- tion, will use the proceeds of the loan to finan~e the major part of the foreign exchange costs of an e~an$ion program now being undertaken by its Brazilian subsiqiaries in the Rio de Janeiro and Sao fauJ.o areas, the most highly It industrialized and populated part of Brazil. the expansion program provides for increases of more than 50% ~n the presently over-loaded power generating capacitJ in those areas, involving large""'sc,ale additions to tran~mission anc. distribution equipment and to water supply facilities for power purposes. In addition, local t.elephone serviqes 'Will be increased 1;,y about 40% and long distance traffic capacity will be e~nded to meet tpe 11+gent needs for th~se ~ervices& The total cost of the e:,cpansion program is estimated at the equivalent of about $182 million during the next 4.to 5 years of 'Which about $107 mtllion (almost entirely for. local expenditures) i~ b~ing financed by the Company f~om its own reso~ces. As evidence of the indebtedness of tbe Company, the Bank will receive Collateral Trust Bonds of the Brazilian Traction, Light & Power Compa;ny, Ltd. which will be secured by the p;J.edge of debentures of the parent Company's principal operating subsidiaries and by a floating c1-rge on the assets of the • Brazilian Traction, Light & Power Company, Ltd!I The Collateral Tr~st Bonds will bear the guarantee 0£ tne United St~tes of Brazil.  •.. ,, I • ·.3 - • After being approved by the Bank's Boar~ of Executive Directors, the loan agreement was signed today by John J. McCloy, President, on behal,..f of t,he International Bank for Reconstruction and Development; and by Henry Borden, President, on beh$lf or the Brazilian Traction, Light & Power Company, Ltd. The guarantee agreement between the United States of Brazil and the Interna M.onal Bank for Reconstruction and Development was signed today by John J. McCloy, on behalf of the Bank; and by Mauricio Nabuco, .Ambassador of Brazil, on behalf' or the Brazil1$n Government • • • . .. • i r: • - 4·- January '2,7, l949 • SUPPLEMENT!L STATEMENT ON LOAN TO BRAZILIAN TRACTION, _ _ _ __.L... GHT......_U~ CO~ANY, LTD. I ... Current Trends in the Brazilian Econom,y Internal Economic SituatiQ!l. Two features of the internal economic situation or Brazil are particularly significant. ln the first place, Brazil, partly as a result of the war, has made notable progress in diversifying her production. lfrom having been, a few decades ago, al.most exclustvely a prodqce~ of coffee and cotton, she is· gradually becoming tpe supplier, in increasingly important quantities, of other valuable raw materials, such as iron ore, manganese, mica, hides, vegetable oils and lumbe~o Simultaneously, Brazil has ~eveloped, often with the assistance of foreign capital, a sizeable consumer goods industry. She has 1also made a s·tart in the development or the steel industry. In the second place, th~ Feder~l Government hae made a ge,nuine effort to limit the e~q,ansion of credit and ~oney eupply and to arrest. the riee in prices and wages which were partly induced by the world inf.lationa~y situation. The Federal. budget was balanced in 1947 and during the fi~st half of 1948. The recent enactment of a bill providing ro~ substantial increases, retroactive to • August l, in the salaries of Federal employees will place an additional burden on the budget but will not necessarily result in a deficit for 1948 in view of the substantial s1.2rpl1,1~ accum'Ulated during tha first eight mpnths. However, the added expenses for personnel will make the balancing of th~ budget more diff~cult and it now appears that e~enditures in 1949 may be somewhat in excess of budgetary revenues• The Government has declared that it iptends to continue to pursue anti~inflationary polioiee, b~t reali;ation of its objectives is hompered by the insufficiept formation of sa~ngs in relation to investment needs, as in the case ot most unde~-developed countries. External Financial Relations The immediate difficulty· facing Brazil is the situation created for her in her e~ternal financial relation~ by the inconvertibility of the currencies of the countries which normally take about 50% of her exports-, The over-all balG:noe pf payments is almost in eql;lilibrium, but the balance of payments with the United States is in substantial deficit. This is likely to continue until the full recovery of Europe is completed, because, in present c!rcumstanoes, Brazil has still to rely to a large extent upon the U.S.A. and other dollar countries for her essential imports of :raw mater:;i.als and ca:pital goods. The Government has, however, taken measures to reetrict ;i.mpc;,rts of non-essent;Lals and to stimulate e~rts, and to d!rect ~~d balance the.flow of B~azil's international trade eo as to guard against depletion of hel;' gold and convertible exchange r$s~rveso On the other hand, Brazil benefits by favorable prices for many of her export pr.Qd~ct~ and is likely to contin~e to do so fop at least the next few • years. In the long run, the futther developme~t of he~ a~icultural ~n~ mineral  • , - 5, . '' • resources,, as ~11 as· her growing manufacturing industries,. e..buld provide siz&-1 able earnings through increased exports, and :reduce the need to import certain essential conunodities (for e:x;ample, coal, steel, oil, wheat and certain manu- factured goods).. Both tendencies will operate in· the direction. of a balance in Brazil's internation.al payments• ~razilian Developmen:t_f,elicy Bra~il has great possibilities for development in agriculture, mining, and manufaoturing. She has large expanses o:f' apparently fertile land and enormous forest resources. She is rich in many minerals and in potential water power. The economic development of the country during the postwar period, however, has been seriously hampered by ij notable defiQiency ip. fuel and power, ipadequE. te tra:m,port i"acilities, ii)sufi"ieient techi:11.ebl arid adnµ_uis c1·a t.i.v~ personnel, and lack of capital. · The Government and public opinion in Brazil are conscious of the need for development, and signif!cant beginnings have already been made. A steel mill, (partially financed through a loan from the Export.Import Bank of Washington), is nearing completion; the federally-owned Central do Brasil Eailway has embarked on a comprehensive improvement program; the Government has shown great :tnterest in the atte~pts of the Brazilian Traction, Light & Power Company to obtain abroad the capital needed for extension of tts power and telephone facilities; large • loans have been mad~ by the Ban~o do Brasil for development of tne livestock industry; and tariff protection and tax exemption have been accorded to numerous industries to foster their development. A comprehensive 5-year plan, known as "Salte'', for the development of the Brazilian econo~ was recently proposed by a committee representing the two principal politiqal parties and endo:rsed by President Du,trs of Bradl. The name "Sal~e" is taken from the Port-uguese words for health, food, transport and power, as the plan is designed to foster improvement in these fields as well as to increase production or petroleum an~ steel. A joint United States-Brazilian Commission, sponsored by the two Governments, was also recently established f.or the PU+POSe of assisting in the form~ation ot development plans for Brazil. There appears to be a solid basis for further major d.evelopment in Brazil. Int~rnational Bank Loan and_1roj~~ of CO!!m!,J!l The loan from the lnternational Bank is expected to bring important benefits to the Brazilian economy and make a conaiderable contribution to the f'utU+e development of the CQuntry's resources., The loan will assist the B:razili~·n Tractton, Light & Fower Company, Ltd~, .in putting into effect tts 4-5 yeer project far expansion or ey-dro-eleQtric power And telepho;ne facilities in the most highly industrialized area of Br~zil. In view of Braziit$ notable deficiency tn fuel and power, the Company's project is certain to increase the productivity or the count17. · • Completion ot the hydro~el~etri~ development progrsµi ts expected to increase th, total producti9n of hydro~eleqtrio energy in Braiil by about 25%, and permjt  • -· 6 - ,. the increase in n~tional consumption ot energy from all sources other than wood by about 6%. There are, moreover, clear indications that foreign exchange sa,,ings may be expected from this development. Brazil 1s dependent upon foreign sources for a substantial part of her fuel·supply. Domestic wood for fuel is becoming less acce$sible and more costly; coal productio~ is increasing, but slowly, and petroleum productiop in significant volume is unlikely in the near future. The compaJlY's program envisages an increase, by 1952, or l.2 billion kilowatt hours annually in the production or electrical energy in the Rio de Janeiro and Sao Paulo areas. or this, at least 55%, or 660 million KWH, will be used for industrial purposes if recent trends are maintained. Approximatel.)- 5CO,OOO tons or good coal, or its equivalent in fuel oil, would be required to yield the addi- tional energy to be applied to industry under the. proposed program. If imported, as most or it would have to bf!,!+; wQuld cost Eit present prices about 10 mi1lion United States dollars, or ita equivalent, annually from 1952 onward -- fa~ in excess of the service req~irements on the International Bank loano Sao Pa~lo and the Federal District account fo~ about 55% 0£ industrial employment and for over two-thirds of the value of' industrial output in Bradl. In 1946, the Companyta power sales t.o industry in these two areas amounted to more than lo5 billion kilowatt ~01.Ws. The major industrial uses of power in 1946 were in textiles (24%), railway electrificatiQn (14%), iron and steel (8%), paper mills (7%), and machine shops and fQodstuffs (6% each). These six groups accounted e for 65% of the total; the remaining 35% was distributed among a wide variety of industrial categories. Similarly, a ~ubstantial portion of the new telephone facilities to be in- stalled will be commercial uses. This will be especially true in the case of the long distanc9 lines to be erected. Brazil at the present time ~s one telephone for 150 inhabitants, a ratio that compares with l:6, 1:30, 1:47, 1:58 r.md l:?O for the United States, Argentina, Urug\'\8y 1 Chile and Cuba, respectively. The country's postal service is unsatis- · factory except in the largest cities. Accordingly, a substantial amount or commercial communication is carried on through messengers and is very costly, Even though precise measurement of the econo~Q benefits to the country of the proposed telephone development is impossible, it should accelerate the tempo of ~cono!Jlic life. The financial condition of the borrowing Company is excellent. It has a long ~ecord of compete~t and $Ucceaeful management and consistent growth. It is now the largest.private enterprise in Brazil. Its present earning capacity, increased by tbe proposed expansion program, shotild be adequate to provide local cn?Tenoy in the amo'1Iits necessary to finanoe the local costs of' the project and to service the International Bank loan. The Company7s failure to obtain its finanoial requirements in the priv~te investment market has ari~en from no other cause than the reluct~nce or private capital to move abroad in the existing un- settled cc~d!ticns of international trade ~nd finanoe. ,