Northern Rhodesia - Railway Development Project

P-47 RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to THE TERRITORY OF NORTHERN RHODESIA February 20, 1953 CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A LOAN TO THE TERRITORv OF NORTHERN RFDESIA 1. I submit the following report on the application of the territory of Northern Rhodesia for a loan of $14 million to finance in part a program for expanding the capacity and improving the-facilities of the Rhodesia Railways. PART I - HISTORY OF NEGOTIATIONS 2. In the spring of 1952, the Bank was informed that Northern Rhodesia and Southern Rhodesia wished to discuss with the Bank the possibility of obtaining a loan to finance part of the development program of the Rhodesia Railways. A Bank mission visited the Rhodesias in July and August to examine the econorqy of the area and to investigate the development program of the Railways. This mission also discussed the proposed borrowing with the United Kingdom Government in London. 3. In October the Bank informed the governments of Southern Rhodesia and Northern Rhodesia that it was prepared to enter into negotiations with both or either of them for a loan for railway development and it invited them to send negotiators to Washington at their convenience. These govern- ments replied that they wished Northern Rhodesia to be the borrower and they offered to send negotiators in January 1953. 4. Negotiations opened in Washington on January 26, 1953. They were conducted by Mr. R. M. Taylor, Financial Secretary to the Government of Northern Rhodesia, acting for the Borrower, Mr. J. B. Ross for Southern Rhodesia, and Mr. A. Mackay for the United Kingdom Government as Guarantor. Mr. L. A. W. Hawkins represented the Rhodesia Railways. PART II - DESCRIPTION OF THE PROPOSED LOAN The Borrower 5. The Borrower would be the Territory of Northern Rhodesia, a pro- tectorate for which the United Kingdom is responsible. The Guarantor 6. The Guarantor would be the United Kingdom, a member of the Bank. The United Kingdom has an existing contingent obligation to the Bank - 2 - under its guarantee of a loan of $28 million made by the Bank to Southern Rhodesia in February 1952. Purpose 7. The purpose of the loan would be to assist the Rhodesia Railways in carrying out the 1952-5 program of re-equipment and new construction, which is designed to increase its capacity and improve its facilities. The estimated cost of the,program is about £28 million ($79 million). Amount 8. The loan would be in the amount of $14 million or the equivalent in other currencies. Terms 9. The loan would be amortized by 33 increasing semi-annual payments designed to retire the loan by its maturity. The first payment would be due on February 1, 1956, and the last on February 1, 1972. The sum of the interest and repayment due each half year would be about $617,oo. 10. The loan would bear interest, including 1% commission, at the rate of .3/4% per annum. The first date for the payment of interest and other charges would be August 1, 1953. 11. There would be a commitment charge of 3/4% per annum. PART III - DESCRIPTION OF THE PROJECT 12. A full description of.the Rhodesia Railways and the project will be found in a "Technical Report on the Rhodesia Railways Development Program", dated February 18, 1953, which has been distributed. 13. The Rhodesia Railways operate in the two Rhodesias and in Bechuana- land. From Bulawayo in Southern Rhodesia, they reach out in three directions--northward 800 miles to the Belgian Congo, eastward 463 miles to Portuguese East Africa (Mozambique), and southward 580 miles to South Africa. The main port serving this area is Beira, in Mozambique. 14. What are now the Rhodesia Railways were largely built between 1894 and 1909. In 1949 they were nationalized and thenceforward controlled through a statutory authority by the three countries in which they operate. Since nationalization they have been engaged in a great effort to expand and improve their facilities in order to keep abreast of the continually increasing traffic offered. The program for the three years April 1952 to March 1955 calls, among other things, for heavy purchases of locomotives and rolling stock and the construction of a new line, two hundred miles long, which will connect with a line being built by the Portuguese leading - 3 - to the port of Lourenco Marques, in Mozambique. This new link will relieve the pressure on the port of Beira and on the railway from Beira to the Rhodesias. In addition to these two items, the program provides for the improvement and enlargement of workshops, an increase of capacity of the main lines, and the'construction of housing for staff. It is-an indication of the size of this program that during the three years the fleet of rolling stock is to be increased by about a half. 15. The estimated cost of this program is about E28 million, of which almost half will be for locomotives and rolling stock and about a fifth for the new southeast line. Finance for this program is to be provided mainly by borrowing. Since nationalization, capital for the Rhodesia Railways has customarily been provided by loans raised by one or the other of the Rhodesias and relent to the Railways. It is contemplated that most of the new capital required will be raised in this way. Of the E28 million needed, all but 17 million has been or will be covered by existing commit- ments or arrangements. These are: Z million An ECA loan raised by Southern Rhodesia in 1951 5 The balance of a loan raised in London by Northern Rhodesia in 1951 A series of borrowings from the Railways'pension funds totalling An appropriation from Northern Rhodesia's govern- mental revenue 2 The Railways' share of a loan raised in London by Southern Rhodesia in 1953 5 The Railways' share of a second loan to be raised in London by Southern Rhodesia in 1954 (permission for which has been assured by the United Kingdom) 5 Total 21 The remainder is covered by: The proposed loan from the Bank 5 An undertaking by Southern Rhodesia to provide .the balance if the Railways cannot find it out of their own revenues 2 Total funds required 28 16. The Bank's loan would be a participation in the whole 1952-5 Railways development program, but the particular goods which would be paid for out of the proceeds of the loan would be imports from outside the Rhodesias. It is contemplated that most of these Imports would come from the United Kingdom. PART IV - APPRAISAL OF THE LOAN The Need for the Loan 17. The Rhodesia Railways serve an area which is developing rapidly. Its natural mineral and agricultural wealth has attracted, and continues to attract, many immigrants and induces many native Africans to leave their subsistence economy for the money econony based on this natural wealth. The economic activity generated since the war has put an immense burden on the Railways. The tonnage carried in 1952 was 70% greater than in.1946. Imports set the pace, but internal traffic (mainly coal) and exports (minerals and tobacco) follow close behind. At present long delays in transporting all classes of goods are common. There is, therefore, a pressing need for improved and expanded facilities throughout the system. One of the most urgent necessities is increased port capacity and an alternative both to the port of Beira and to the difficult railway line which serves it. The new line giving access to the port of Lourenco Marques will overcome both these difficulties. 18. The Railways' development program is designed to meet these needs and is,soundly conceived. I am satisfied that the Railways are technically and administratively competent to carry it out effectively. 19. Most of the capital required to carry out the development program can be obtained within the United Kingdom and the Rhodesias. But about tS million remains to be found and it would be appropriate for the Bank to make a loan of this amount. The proposed loan would be made in foreign exchange. 20. Customarily British colonies and their public authorities seek capital in London for their expansion. In recent years, the colonial governments (and this does not include Southern Rhodesia) have borrowed between E20 and E30 million ($56-$84 million) each year and the amount has been progressively increasing. The total demands for capital on the United Kingdcm from all quarters, including the colonies, can be satisfied only at the cost of inflationary effects or of a loss of foreign exchange by the United Kingdom or,both. It might be artificial to attempt to relate with numerical precision a particular colonial project's need for capital to a specific need for foreign exchange by the United Kingdom. But it can be said that the provision by the United Kingdom of large amounts of capital for the colonies, coming on top of its domestic needs for capital, is suf- ficient justification for the Bank to make the proposed loan in foreign exchange which, to the extent that the loan is spent on British goods, will flow to the United Kingdom. Prospect of Fulfillment of Obligations by the Rhodesias and the United Kingdom 21, A report on "The Economy of Central Africa" dated February 10, 1953, describes and appraises the econony of both Rhodesias. 22. Northern Rhodesia is the largest producer of copper in the sterling area. It is on this commodity that its econor rests. The mining industry is now extremely prosperous, since copper prices are high and the mines are comparatively low-cost producers. The annual revenue of the government, which depends to a very large extent on the profits of the industry, has for several years shown a large surplus over its current expenditure. Most of the recent investment in the territory, which apart from the mining industry is little developed, has been financed from these surpluses. The public debt, much of which has been incurred on behalf of the Railways, is still small. 23. Production of copper in Northern Rhodesia is steadily increasing and is likely to continue to do so, but the price may very well fall. Moreover, the commitments of the government for both current and capital expenditure are likely to increase. Provided that it continues to take advantage of its present good fortune to build up reserves and to develop the territory as much as possible out of its own resources, there is no reason to believe that Northern Rhodesia should encounter any difficulty in repaying its debt in sterling. But, as Northern Rhodesia has at present virtually no dollar earnings, it will have to rely on the dollar resources of-the United Kingdom, for a number of years at least, to exchange sterling into dollars. 24. Southern Rhodesia's obligations in ponnection with this loan are confined to undertakings to see that the project is carried out, that finance for it is forthcoming, and that the Bank has its customary right to inspect the project and to obtain information. Since Southern Rhodesia. holds two of the four seats on the Higher Authority which controls the Rhodesia Railways, she is in a strong position to ensure that the project is carried out. As to finance for the project, in the light of commitments which have been or will be made by other parties, Southern Rhodesia's remaining obligations are unlikely to exceed an obligation to borrow a further E5 million on behalf of the Railways and to provide, if necessary, another E2 million. It is reasonable to suppose that Southern Rhodesia can raise the ES million in London without undue difficulty. Southern Rhodesia's annual revenue is now about E28 million; it would, therefore, also seem reasonable to assume that as much as E2 million could be appro- priated from it if necessary. 25. The United Kingdom's primary responsibility arising from this loan would be to provide the dollars or other foreign exchange required for paying the debt service. This, together with the service on United States and Canadian loans and the Bank's loan to Southern Rhodesia, would bring dollar payments for her own debts and debts guaranteed by her to about $190 million a year in the mid-1950's. The United Kingdom's capacity to service debt on this scale is considered, among other things, in the report on "The International Economic and Financial Position of the United Kingdom" dated February 25, 1953. The general conclusion of this report is that to be able to continue to export capital to the Comnonwealth, to maintain the level of home investment and to build up her gold and dollar reserves the -_6 - United Kingdom will have to increase production to the point where it can sustain a substantial surplus on her over-all balance of payments, and will have to make special efforts to earn or save dollars. The regular achievement of these objectives is likely to be easier five to ten years from now than in the years immediately ahead. For the next few years the pursuit of all these objectives simultaneously will impose severe strain on the econony and they may have to be modified. But when the necessity has arisen, the United Kingdom has always shown herself capable of a degree of self-discipline which inspires confidence that she will make arW sacrifices which may be necessary to fulfill her obligations. PART V - LEGAL DOCUMNTS AND AUTHCRITY Loan Areement and Subsidiary Agreement 26. While the commitments to be made and obtained by the Bank would be the usual commitments, particular circumstances have caused them to be set forth in two documents instead of the usual one. Much of the project is located in Southern Rhodesia and the Southern Rhodesian Govern- ment has a strong influence--stronger than Northern Rhodesia's--over the actions of the Rhodesia Railways. Both Rhodesias and the United Kingdom prefer, however, that Northern Rhodesia be the borrower and the Bank has no reason to object. It is proposed, therefore, that there be a Loan. Agreement between the Bank and Northern Rhodesia covering the financial aspects of the loan (disbursement, bonds, repayment and the like) and a Subsidiary Agreement between the Bank and both Rhodesias containing the usual covenants concerning the execution and the financing of the project, the giving of information, and the Bank's right to visit the territories of the Rhodesias. Drafts dated February 10, 1953, of both a Loan Agreement between the Territory of Northern Rhodesia and the Bank and a Subsidiary Agreement between Northern Rhodesia and Southern Rhodesia on the one hand and the Bank on the other are attached. Both these agreements incorporate Loan Regulations No. 4, dated October 15, 1952, to the extent applicable and with certain amendments made necessary by the special features of the loan documents and the governmental status of both Rhodesias. 27. Except for modifications required to provide for Southern Rhodesia's participation in the Subsidiary Agreement, the form and language of the agreements are substantially the same as those of the Loan Agreement between Southern Rhodesia and the Bank, dated February 27, 1952. The Borrower is required to make the proceeds of the loan available to Rhodesia Railways on terms and conditions satisfactory to the Bank (Section 5.01). The negative pledge clause of the Loan Agreement (Section 5.02) covers sterling indebtedness as well as indebtedness in foreign exchange, but does not include indebtedness in the local currency of the Rhodesias. As in last year's loan to Southern Rhodesia, because of the Rhodesia Railways' peculiar legal status as an instrumentality of two countries other than the Borrower, it is proposed to advise the Borrower by letter that the Bank will not apply this clause to the borrowings of the Rhodesia Railways. 28. In last year's loan agreement with Southern Rhodesia the Loan Regulations were modified so that the rate of withdrawal would remain geared to the rate of total expenditure in the United Kingdom on Southern RhodesiaAs over-all development plan. It is proposed in this instance to adhere to the Bank's normal practice of disbursing the loan as the goods being financed are delivered. The Guarantee Agreement 29. Also attached is a draft Guarantee Agreement between the Bank and the United Kingdom. This agreement is in substantially the same form as the agreement made last year guaranteeing the loan to Southern Rhodesia. The only changes are those required to provide for a different borrower and for reference to the Subsidiary Agreement and the inclusion (in Section 3.02) of the customary sentence referring to information on the Guarantor's financial and economic position and balance of payments. 30. As in the guarantee of the Southern Rhodesian loans the United Kingdom undertakes to allow the Rhodestas to borrow in London to the extent necessary to finance the project (Section 2.02). 31. The negative pledge clause of the Guarantee Agreement (Section 3.01) is in the form used in 1952. Authorizations 32, Northern Rhodesia'is authorized to obtain the loan by its Inter- national Bank Loan (Rhodesia Railways) Ordinance, 1952. 33. The United Kingdom is authorized to guarantee the loan under the Colonial Loans Act, 1949, as amended. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 34. The report of the Committee provided for in Article III, See- tion V(iii) of the Articles of Agreement of the Bank is attached. 35. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VII - RECOMMENDATIONS 36. 1 recommend that the Bank at this time make a loan to the Territory of Northern Rhodesia, guaranteed by the United Kingdom, in the amount of $14,000,000 or the equivalent in other currencies for a total term of about 19 years, with interest (including commission) at 4-3/4% per annum, and on such other terms as are specified in the form of Loan Agreement, Subsidiary Agreement and Guarantee Agreement attached hereto. R. L. Garner Vice President February 20, 1953