Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, June 24, 1969 : Argentina - Second Road Project

STRICTLY CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION JOINT MEETING Washington, D.C. Tuesday, June 24, 1969 A joint meeting of the Executive Directors of the International Bank for Reconstruction and Development land the International Development Association was convened at 10:00 o'clock, a.m. in the Board Room, 1818 H Street, N.W., I I 1 r. Roberts. McNamara, President, presiding as Chairman. J, iiI ii ,, !\ STRICTLY CONFIDENTIAL 2 C O N T E N T S page STRICTLY CONFIDENTIAL 127 I i II MR. McNAMARA: I Gentlemen, we will turn next to Item 7 of the I i agenda, the proposed loan in the amount of $25 million to Argentina for a road project. Here Mr. Glaessner will join us at the table and introduce it to you. MR. GLAESSNER: Mr. Chairman, Members of the Board: The loan proposal presented for your considera- tion forms part of a comprehensive approach to improvements in the planning, investment and operations of the trans- portation sector of Argentina, which the Argentine authorities have been developing in close collaboration with the Bank. This approach focuses especially on the country's road and rail facilities. Argentina is a highly urbanized and industrialized country with about a third of its population and close to 80 percent of its industry concentrated in the greater Buenos Aires area. Its exports consist primarily of relatively bulky primary commodities, which have to be I ,1 shipped over fairly long distances to processing plants II or ports. In such a setting, the importance of road and rail facilities is evident. Investment in road and rail improvements accounted for at least one-fifth of all STRICTLY CONFIDENTIAL 128 1968 investments by the Central Government and a sub- stantially higher proportion of the investments by the provinces and municipalities. Despite significant improvements in management and operations, and substantial staff reductions during the last two years, the operating deficit of the State railr ads will in 1969 still account for one-third of the projected total Government deficit. When budget transfers for indispensable railroad investment are added, an amount equivalent to 88 percent of the deficit will be spent on the railroads. Improvements and better coordination in the planning, investment, pricing and operations of road and rail facilities are thus of great importance for attain- ment of both economic stability and more rapid economic growth. These are some of the reasons why the Bank in the fall of 1968 sent a special transport mission to Argentina to work closely with the authorities on the technical aspects of transport coordination, planning, investment and operation. We hope that the work of that mission will have a numberof tangible results, of which this project is only the first. THeproject, besides financing sections of three key roads, is designed to lay the basis for more orderly planning of Argentina's highway investments through STRICTLY CONFIDENTIAL 129 the study of the prospective economic return of alternative road const uction projects. The Argentine authorities will thus be able to move away from the crash programs which were largely motivated by the need to reactivate economic activity and create employment during the disin- flation period of 1967-68. They will be able to carry out a well-designed and financed, longer term program of improving key sections of their highway system. We expect that the Bank can be associated over the corning years with this program through several loan operations, although an overwhelming bulk of resources will, of course, be mobilized internally. The Bank's action will also support development of irnproved~coordination in the planning and operation of all means of transport. One interesting aspect of our collaboration with Argentina concerns the planning and financing of access roads in the greater Buenos Aires area. A special technical group within the Government which brings together representatives of the national administration with those of the municipality and province of Buenos Aires, has been working on urban development problems, inclu,- ing urban transport. At this moment, a small mission is in Buenos Aires to see in which way the Bank can best STRICTLY CONFIDENTIAL 130 collaborate with these efforts. In the railroad field, the Argentine Government is well advanced in developing a medium-term program, designed to modernize the system and reduce it to a size appropriate to present and foreseeable demands, taking account of the fact that the highway sector has greatly expanded and competing modes of transportation have developed since the railroads were first constructed. Through adjustments in freight and passenger rates and operational improvements, a good many steps towards making the railroads more efficient and improving their economic and financial situation have already been taken. Some of these steps have been politically difficult. At this time, a railroad mission of the Bank is in Buenos Aires, evaluating progress made to date and discussing with the ARgentine railroad authorities the shape and timing of their program which aims at putting the railroad system on a financially self-sustaining basis with four to five years. If progress continues to be made, we hope withif the next year to be able to propose that the Bank support I thisprogram financially. I The proposed road loan should, finally, be viewed in the context of economic developments in Argentina which are described in the report on "Recent Economic STRICTLY CONFIDENTIAL 131 Developments and Prospects of Argentina" distributed to you a few days ago. This report was completed and discussed with the Argentine authorities, prior to the recent student and labor unrest and the ensuing Cabinet changes. As pointed out in the report, one of the key features in the success of the Argentine Government in reducing the rate of inflation from levels in excess of 30 percent to the very moderate rate of increase of ! 11 recent months, has been on incomes policy which appeared rj to have been relatively well accepted by labor, business and agriculture. This has, of course, been of special importance because the acute conflict between various social and economic groups had over the last two decades been a root cause of inflation, stagnation and structural dis- tortions in the economy. '1 i ·I Upon assuming office, the new Minister of Economy and Labor, Dr. Dagnino Pastore, stressed the government's determination to continue to carry out the 1969 economic program as planned. He stated that the present incomes policy, under which both wage and price increases are limited, would{ be continued until the end of 1970 and that, as announced by the government in December 1968, a gradual return to free collective bargaining would begin in September 1969. We will, of course, follow the situation STRICTLY CONFIDENTIAL 132 closely. In evaluating the possible economic consequences of recent political events, it should be noted that the Argentine authorities enjoy a considerable margin of flexibility in dealing with the situation because price increases have been very small in recent months and gross foreign exchange reserves constitute the equivalent of eight to nine months' imports. I I' Thank you. 11 I MR. McNAMARA: Thank you, sir. Gentlemen, may I take your comments and questions on this proposal? Yes, Mr. Ali. MR. ALI: THank you, Mr. Chairman. I had just one small point relating to paragraph 1.01. The report shows that a special UN study was made of the transport sector back in 1962, and then after this rather long interval the government seemed to become interested again in this sector last year, as a result of which there were two Bank missions, one just preliminary and explonitory, and the other conducted a review, detailed review of the situation as to road and rail transport. I see that a number of shortcomings were pointed out by the Bank mission, which have been under discussion with the STRICTLY CONFIDENTIAL 133 government. Now, in paragraph 1.01 it appears that part of the project is the provision of consulting services, which, among other things, will look into the improvement of transport coordination. I just wanted to know if we are quite clear in our minds that this part of the project will not be duplicating what has already been done, either in 1962 by the Special Fund study or by the BAnk mission last year? MR. McNAMARA: Mr. Paijmans, would you speak to this, and in particular discuss the job that rei,mins to be done in this whole field of highway and railroad planning and coordination? MR. PAIJMANS: Yes, sir, very glad to. The Argentine Government has actually furnished us with a letter of intention, very recently received, in which they clearly set out their policy intention with respect to coordination. ,They have taken our recommendations, which were strongly made to them by the last mission, very seriously; and they are at the present time, in fact, engaged on joining the Ministries of Transport and Public Works. II One of the inherent problems that have arisen over the years is that whereas highway development and planning and STRICTLY CONFIDENTIAL 134 execution were under the Ministry of Public Works, the railroad were in fact responsible to the Ministry of Transportation, and the coordination was administratively extremely difficult. The same Minister has now been given both portfolios, and he is at the present time at work in trying to create the administrative structure for a unified ministry. In addition, for the first time, really, in our experience in Argentina, the Argentine govermnent has set up a specific department which will function in this joint ministry, which will handle coordination on a really systematic basis, and the technical assistance which is contemplated here is very much more a technical assistance of making this operational, rather than giving advice on the concept which is well accepted. I This is te help the Argentines do the 1 I basic planning in terms of data collection, policy formulatid~, which will enable them 1oo plan. their entire transport I I II sector investments in a way which is fully coherent, which i fully takes into account respective costing, respective i! pricing, which are based on a sound factural basis as to I density of traffic an itype of traffic. This is the sort STRICTLY CONFIDENTIAL 135 of information which has never been systematically coord- inated or formed the basis for policy conclusions and policy recommendations. MR. McNAMARA: Gentlemen, are there other comments or questions? Mr. vom Hofe. MR. VOM HOFE: Mr. Chairman, in this case there is again a considerable part of the credit for financing I ., 11 local costs. Though I know we will come back to this ! question somewhat later, in this case we are so fortunate as to hive the other report on Argentina from June 3, which answers some of the questions I always have in this connection. Here is only on page 5, No. 19, said, "AS indicated in the latest report, the scale of Argentina's gross external borrowing requirements is such that the borrowing will have to include in it an element of local cost finance. The Bank is therefore justified in financing some local costs on high-priority projects." Well, this surely says there is a need, but the question that I always put is that so many other countries have a need for money, but they can't get it because the ,j whole economy is not so far and here my question is always, can we give them these foreign exchange if they need only STRICTLY CONFIDENTIAL 136 I. local exchange to build roads and so on? !j Now here we can get an answer from this report. On page 25 of the report about Argentina it is said I, about the service on the external debt, and here 11 I. it is close to 30 percent of estimated foreign exchange receipts. Well, if this would be the same in the future, I would certainly say there's no opportunity for us to give I them dollars when they only need their own local currency; i! but it goes on here that the debt service will go /i down in the next years, the debt service as a percentage I A:/ of export would decline to about A-6" percent in 1974. But in the next paragraph it says that in the meantime, Argentina took up some money in the U.S. and on the Eurodollar market in 1968, so the debt service would rise again to about 17 percent in 1974. Then under No. 26 at the end it says, "On balance, however, it seems inad- visable to borrow large sums abroad on such terms, all the more so since a relatively modest additional public saving effort would make it unnecessary." So there might be the ~ttestion now, will the Argentines do so? Did anybody talk with them? Did they give their word they would not take up much more foreign exchange? STRICTLY CONFIDENTIAL 137 I 1, ti Ii I 'l'he last sentence of this report says, "The /I ·1 long-term growth and balance of payments trends outlined in this section of the report anticipate a relatively high level of performance which, while not easy to achieve in ;I II practice, is well within the country's capabilities. ·1 In light of these relatively favorable long-term prospects and the remarkable success achieved thus far by the goverrnnent in carrying out its program of economic I Ii I, !I stabilization and reactivation of the ecoru.,my, it may be I J1 concluded that Argentina should be creditworthy for a substantial volume of the additional lending it requires." Well, this is the sentence I am always looking for, and I would prolong it here, and in this situation, as we think they will have the money when they have to repay it in dollars, we think they could take such a credit. Well, that would be justified, but it is not justified if it's only said that they need it, and nobody says it, and when we give it to them, whether they can repay it. I wanted to say on this example what I mean [I because here we have all the figures all together. 11 jl MR. McNAMARA: Your point is that we said in 1/ \/ one report that they need it, but we did answer your 11 basic question, can they repay it in the other report. I STRICTLY CONFIDENTIAL 138 MR. VOM HOFE: Yes, here it's in the other report, this time, so I could find it myself; but if I had only a report like this other one, I wouldn't find this answer. I MR. McNAMARA: Gentlemen, are there other comments. II or questions on the proposal? Mr. Samarakkody. MR. SAMARAKKODY: Mr. Chairman, now I find that in paragraph 3.07 of the Appraisal Report, there is mentione4 I difficulties they seem to have i.11 the shortage of engineers. As against a requirement of 220, and 175, they have only 90 engineers available. This is attributed to the difficulty that Argentina has in increasing salaries, but it's not clear whether the staff is available in the country and the difficulty is in paying salaries or is it that there's a shortage in the country, and engineers are ot produced from the Argentine population? MR. McNAMARA: Mr. Paijmans, would you respond, please? MR. PAIJMANS: Very glad to. No, there is no shortage in the country. In fact, there is a very good supply of excellent highway engineers in Argentina. A good many of them have tended of course to work for private consulting firms, for private construction firms, and industrial activities; and STRICTLY CONFIDENTIAL 139 it has been very difficult for the government in recent years to attract and hold them because of the very real decline in the real level of salaries of the government service. Now this year, beginning in March, the government started to raise public sector salaries selectively, in order to reestablish a reasonable degree of seniority, and it gave special emphasis to professional salaries and our latest discussions made it clear that Vialidad has been able to recruit some excellent people and to strengthen itself quite considerably, so we really are quite reassured on this ground. As for your basic question, the country is in no way short of good highway engineers. MR. McNAMARA: THank you. Are there other comments, gentlemen? If not, we will consider it approved. Mr. Brugada, would you care to comment? MR. BRUGADA: 1tUr. chairman, on behalf of the Argen ane Government, I wish to express my appreciation to my colleagues for the approval of this loan; to the President for recommending it; and to the Bank officers and staff for their excellent report and their efficient STRICTLY CONFIDENTIAL 140 conduct of the negotiations. Thank you. MR. McNAMARA: Thank you, sir.