Transcript of two hundred and ninety-third regular meeting of Executive Directors, held on Tuesday, November 19, 1957 : India - Second Tata Iron and Steel Project

STRICTLY CONFIDENTIAL 89704 McLaughlin INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TWO HUNDRED AND NINETY-THIRD REGULAR MEETING or I' 1! i EXECUTIVE DIRECTORS ii Ii ii i ii !i:I Board Room International Bank Building Washington, D. c. i Tuesday, November 19, 1957 II II II The meeting was convened at 10:05 a.m., Mr. Eugene R. 11 II !! Black, President, presiding. II 11 Ii 'I 11 11 t! 'i 1, 11 I! Iii ii ll I' d ii " :j 11 11 ii 1! :! !! ,I  11 2 STRICTLY CONFIDENTIAL CONTENTS ------- - Agenda Item Minutes of Previous Meetings ...•.••..••.•..•••.••.... 3 Proposed Loan to India ..•....••..••.•.....••.•..•••.. 3 II 'i ·' 'I II 1: ji I' i! 11 II II !I II 1! I iI l II II II ., II i! 11 i! 11 I h 11 11 i I i :i II I! !j ii !i B ii !1 li 11 I' I i i I !1 II  3 STRICTLY CONFIDENTIAL P R 0 CE E DI NGS THE CHAIRMAN: The first item of business is the minutes of the 292nd Regular and the 142nd and 143rd Special Meetings of the Board. If there are no corrections, they stand adopted. we will next take up the proposed loan to theTata Iron and Steel. I'd like to first call on Mr. Goodman. MR. GOODMAN: Mr. Chairman, sir, I should like to begin by summarizing the financial requirements of the Tata J iii Company 1 s current expansion and modernization program. 1: ;: !I It was estimated last year at the time the first loan, 1, i: !I first Bank loan, was made that the amount of funds required !i (! ii by the company during a period of five years ending in 1960 ',i II 1, I: would be of the order of $250 million or their equivalent. ii 'i H ,, This estimate has remained firm, virtually firm, since that Ii ii !i time. i It Of this sum, approximately a half, nearly a half, was ii :1 :1 11 to be raised by the company from its own earnings and an 11 1i 11 issue of new shares amounting to about $28 million. The first Bank loan, which was an amount in various currencies equivalent to $75 million, was to cover the bulk of the main construction program contained in this program of works being carried out by Kaiser engineers. There therefore remained a gap of approximately  4 STRICTLY CONFIDENTIAL $55 million. And this sum the company expected or hoped to be able to raise in India, though they undertook to con- sult with the Bank from time to time about their financing plans. Since that time, the new share issue has been success- fully made, and the company has also arranged with its bankers to extend its credit facilities by an additional $20 million or thereabouts . . However, the growing stringency in the Indian capital market in the last 12 or 18 months has made it extremely unlikely that the company could raise the remain:1.ng $35 million in India on reasonable terms. At the same time, the Government of India, in view of the strain on the country's balance of payments, has been anxious that any investment involving a substantial amount of foreign exchange should be financed, so far as possible, i! il abroad. 11 !i" And for these reasons, the chairman of the Tata Iron i! 11 li I' and Steel Company came to Washington in February last for Ii ll ii consultations with the Bank. 1' !1 i As the Board will recall, you, sir, proposed at a meet- ing in July that further Bank lending to the company should be considered in the present year provided that the company could raise as much as half the remaining requirement from other sources. Armed with this promise, the company has  II 5 STRICTLY CONFIDENTIAL been successful in arranging through the intermediary of First Boston to borrow a total of $15 million from a nwnber of United States and Canadian commercial banks and trust companies. This is the largest swn which has yet been raised by Indian enterprise in the North American market. The balance of $2.5 million which is required to make up the total of $55 million has been provided by the State Bank of India. The proposed loan is, therefore, in essenceJ a joint operation by the Bank and the market. However, it has been judged convenient by all parties to the loan that the commercial banks should make their contributions avail- able as participations in a Bank loan rather than separately, and the Bank loan would therefore be for a total of $32.5 million or the equivalent in other currencies. The main reason for this was the desire on the part of the commercial banks that their contributions, their loans, should have equal security with that of the Bank and that in particular there should be a Government guarantee. It is proposed that the first five maturities of the loan beginning in 1960 should be sold to the com~ercial banks at a rate of interest of 5-3/4 per cent per annwn. The World Bank has agreed not to call on the contribu- tions of the banks until the middle of next year, but since the company will be in need of funds before that time to  6 STRICTLY CONFIDENTIAL complete its program, the Bank has agreed with the company to make its contribution available as soon as the loan is declared effective, though with the proViso, as in the case or the first loan, that there would be a limit on withdrawals in the interval between the making of the loan effective and the completion of security arrangements. In other respects the new loan and the loan docwnents il follow the pattern of the first loan, and certain amendments !i !\ 1, ii have been made to the old loan agreement to put the two I: :, i agreements on all fours. ' \l Among other things, these changes will permit the com- [: I !! I! pany to use the balance of the first loan, or which a con- i :1 Ii !I siderable amount remains undisbursed, to meet foreign ex- I' ii \! 1. change expenditures on any part or the program as a whole. !I ii ,, As regards economic conditions in India, a full report ji ,1 ii was presented to the Board in May of this year following the !j 11 ii !i visit of an economic mission to India in the spring. There 11 11 has not been any major change ~n the situation since that 11 Ii :1 !, time. I! H As the report foresaw, there has been a continuing decline in the reserves of the central government, though this decline has been somewhat slower since the middle of the year. In fact, the latest figures which we have for the last week in October show an actual gain in foreign exchange reserves, though it's too early to say whether this  7 STRICTLY CONFIDENTIAL represents a turn of the tide. We do know that there were exceptional strains on the reserves in the middle of this year owing to the drawing of the Burma loan and the drop in value of sterling securities, and it is possible that a change in the trend is now taking place. In the course of last month the reserves began to approach the minimwn level required by law in India, and the minimum was thereupon reduced by government ordinance. The reason given by the government in its announce- ment was that this would give it the necessary freedom of maneuver to bring the foreign exchange problem under con- trol. Dr. Basch, who took up his appointment as representa- tive of the Bank in India last month, is following the situation closely and keeping the Bank fully informed. We understand that instructions were sent out some little time ago by the Ministry or Finance to central ministries and to the state governments giving them the criteria on which they should base their estimates for the coming budget year, an indication of which we have. These estimates, which are to be presented in the course of the next few weeks, will be incorporated in the budget, and we expect that by February of next year sufficient material will be available for the Bank to be able to judge the effect or  8 STRICTLY CONFIDENTIAL the measures of the last few months aimed at curbing loss in reserves and the new measures which are proposed in the budget. Meanwhile, we understand that an investigation is being carried out by the Planning Commission on the direct instructions of the Prime Minister, with the aim not of assigning responsibility but of finding out why the situation with regard to the reserves has gone the way it has, and the findings are expected to be announced quite shortly. It•s expected that as a result of this inquiry there will be a new set of conventions governing the relations between the Planning Commission and the central ministries which should help to prevent a similar situation from occurring in the future. THE CHAIRMAN: Thank you, sir. Mr. Ripman. MR. RIPMAN: Mr. Chairman, it is now about 18 months since the existing loan to the Tata Steel Company was pre- sented to the Board. During that time the company•s earnings have improved and have, in fact, exceeded the esti- mates made then by some 25 per cent. Mr. Goodman has explained to you the financial situation in which the company finds itself. As far as the project is concerned, I am glad to be able to report to you that the progress or construction has  9 STRICTLY CONFIDENTIAL been extremely well maintained in the face of what have been quite considerable difficulties. There was early in the program the various delays in transportation arising out of the closing of the Suez canal. There were actual or threatened delays in the manu- facture of certain important items of equipment, in particular I crucial cranes from Japan and rolling mill equipment from There has been a continuing and serious congestion in the port of Calcutta which threatened to be a bottleneck for the transportation of the very heavy volume of imported equipment to the site of the project, but all these diffi- culties have been overcome. The company and their consultants working in the closest and most harmonious cooperation have managed to foresee and to avert and overcome these difficulties. The consultants working in their offices in California and ln thelr field offices at the site in Jamshedpur, in Calcutta, and in Germany, all of which I have visited at least once during these last 18 months, have performed their duties in a remarkably efficient manner, and the com- pany in its offices in London and in New York particularly has played no small part in overcoming these difficulties. Thanks are also due in this respect to the Executive i Directors for Germany and for Japan who assisted the company  'I 10 STRICTLY CONFIDENTIAL in reducing the delays in deliveries which were threatened from those two countries. In consequence, today, when the work of erection or machinery at the site is at its peak, we find ourselves able to foresee that the whole job, all the main elements at any rate, is likely to be finished pretty well on time and that the plant will in all probability begin to make its important contribution to the Indian economy the middle of next year. This is a very fine achievement indeed. And what is no less remarkable is that this big con- struction program is going to be finished virtually without exceeding the cost estimates which were made two years ago. And this is indeed a tribute to the accuracy or those original estimates and to the efficient way with which the program has been carried out in all its phases. When it is finished, the total capitalization of this plant w1ll be less than $125 a ton equivalent or annual ingot capacity, and if one had tcday to build a new plant of this capacity, the capital cost would be more than twice as much. The cost or production of finished steel from this plant will be of the order or $55 a ton, which makes the company one of the lowest-cost producers of steel products in the world.  11 STRICTLY CONFIDENTIAL Every ton that the company can produce will be urgently needed for India's development program and will save that country a ton or imported steel which would cost about twice as much in foreign exchange. The financial projections show that the company should be comfortably able to service its debt, including the loan now proposed, and we have no hesitation at all in recommending this project for further financing. THE CHAIRMAN: Thank you, sir. Before I ask for any questions, you were told that nine banks have agreed to participate in this loan in the first five maturities. These banks and the amounts are as follows: The First National City Bank or New York, the Bank of America National Trust and Savings Association, and the Chase Manhattan Bank are taking $3,500,000 apiece. The Royal Bank of Canada, New York Agency, $1,500,000. The Royal Bank of Canada Trust Company, New York Agency, $200,000. The Chemical Corn Exchange Bank and the .Manufacturers Trust Company or New York, both $1,000,000 each. Northern Trust Company of Chicago -- this, incidentally, is the first time this bank has ever participated in any foreign transaction -- $300,000. The Philadelphia National Bank, $300,000.  12 STRICTLY CONFIDENTIAL The National Bank of Washington, $200,000. That makes a total of $15,000,000. There are ten banks. The currencies that will be required by the borrower for the project of the first loan and also thia loan are as follows. As far as the first loan is concerned, I 1 m talking about undisbursed currencies, not talking about those that have been disbursed, but the currencies that will be used for undisbursed parts of the first loan and this loan will be about $31 million, $10 million of pound sterling, $27 million in German marks, and $2.9 million in Japanese yen. Now, are there any questions? Mr. Donner. i I I MR. DONNER: I have two questions. Referring to what Mr. Goodman told us and what in I substance I found put down on page l of the President•s report~ I ! I wonder about the following: I I ! The additional financing needed by Tata was estimated to be $55 million. Then Tata came and told the Bank that they would be able to procure in India from the State Bank of India 20 millions only, so that there would be the rest to be financed in the magnitude of $35 million. The Bank said the Bank would take one-half of that pro- vided the other half would be contributed by private in-  13 STRICTLY CONFIDENTIAL vestors. Later on then THE CHAIRMAN: I 1 d like to correct that. We said we would participate in half or it if they 1 d get the other half somewhere else. MR. DONNER: Yes. THE CHAIRMAN: We didn 1 t say "private. 11 We said 11 some- where else. 11 MR. DONNER: Excuse me. Yes. Somewhere else. Later on, then, it turned out that Tata was able to procure $31.5 million from the State Bank. The Bank remained at its offer, as far as I see, to take $17.5 million if others would contribute as much. As things now stand, therefore, the money scratched together for Tata does not add up to 55 any more, as was originally envisaged, but adds up to 64 million dollars. Later on I believe, in the technical report or some- where, or toward the end of the President's report, it was pointed out that due to the fact that the State Bank of India has supplied more than the $20 million originally en- visaged the company has come into a snug cash position, liquidity position. And this, of course, is a good effect and maybe this was the purpose of why the $35 million to be financed -- that figure -- was left. But I wonder. Has there then taken place during the  ,, 14 STRICTLY CONFIDENTIAL course of the negotiation a change in mind to the effect that then later on it was considered to be good for Tata to pro- vide additionally not only 55, the original figure, but the higher figure of 64? To continue just my sentence, just this one sentence, I would have thought the State Bank of India coming out with 31 instead of the 20 would have had the result of re- ducing the margin to be financed both by the Bank and private investors or by this Bank alone. MR. GOODMAN: I agree, sir, that the figures are a little difficult to put together, but, in fact, the explana- tion is that the credit from the State Bank of India, 150 million rupees, or approximately $31 million, was originally designed as working capital, and the total finance available to the company when added up, including that element, comes to more than the total cost of the pro- ject. In fact, the cost of the project in dollars is about 260 million. They would have available more like 263 million dollars in one form or another, part of which is working capital. Now, the arrangement made in regard to the State Bank is that the company already had facilities at the time the first loan was made of 40 million rupees, or about $8 millioni i and that was increased as stated in the report to $31 million~ ! or that $31 million, $2.5 million has been earmarked as a  'I 15 STRICTLY CONFIDENTIAL loan to match the contributions by the private market here -- rather, to make up the shortage between the amount contributed from private sources here and the amount of the Bank loan. And the remainder of the $31 million remains as working capital on a demand basis. So that there•s about 20 millions of additional credit available to the company, credit facilities, plus loan of $2.5 million. MR. DONNER: So then it has always been the idea that i the $55 million were meant to refer only to the investment I of fixed capital needs? I I MR. GOODMAN: That's right, sir. I I I I MR. DONNER: And beyond that there were always considera~ tions and negotiations under way to increase the working I capital? I I :MR. GOODMAN: Yes. It is, of course, facilities availab~e to the company which they may or may not use • There ' s a margin there. The company has, quite rightly I think, made provision for drawings up to an amount greater than they think they will need, and that is the margin represented by the 150 million rupees facilities. In fact, they will only draw a part of that for the construction program in addition to the amount subscribed by the Bank, by the private banks, and from their own resources.  16 STRICTLY CONFIDENTIAL MR. DONNER: Then I have a second question which prob- ably also refers to Mr. Goodman. The arrangement with the ten private banks is a very intricate one. May I ask is that the first time that this Bank has entered an arrangement like this? Here the banks have taken over the first five years of maturities. The arrangement of the schedules is obviously very much dovetailed to the needs, to the wishes, the desires or those private banks, whereas on other occasions there is set up an amortization schedule and the banks then just take over what they like in this amortization schedule. This time the amortization schedule has obviously been tailored to their needs. That 1 s one point. And the other point is the understanding which exists about the World Bank paying in first and the private banks making available their contribution only beginning July 1958, so that thereby the maturities they take over are shortened by about a year in comparison to what would be the situation if they would pay in right away. Now, I think if these arrangements are weighed to entice private capital or private ban~ to participate, which \ otherwise they would not do, it's an ingenious way. And my question refers to the problem, to the fact, whether maybe,  \! 17 STRICTLY CONFIDENTIAL with the Bank now being flexible, as has been so often stated, that might indicate another scheme, a new scheme, of working out relationships with participants. THE CHAIRMAN: I can answer that. First of all, you say we tailored this loan to some extent to meet the requirements of the banks. That•s true. We tailored it without Jeopardizing the loan. We think that the Tata Iron and Steel are perfectly capable of repaying it in the schedule. MR. DONNER: Oh, yes. That•s pointed out in the report. THE CHAIRMAN: This isn•t the first time we•ve done this Yes, we did it in order to attract banks. The banks are short of money. Money is ve'l!'J' tight. And we found that if we could agree to make disbursements first and allow the banks to delay their disbursements it would make it more at- tractive to them when they didn't have any money. And the fact that they don•t make disbursements until six months from now, which makes the maturities shorter, makes it all the more attractive to them, because they want short paper. Yes, we did this to lure the banks or woo the banks, whatever you want to call it -- to get them in because of the tight money situation. MR. DONNER: I also would congratulate the banks. These negotiations were under way before the rediscount rate  18 STRICTLY CONFIDENTIAL was reduced, so they obviously entered the engagement en- visaging on their part there might take place in the future decline in interest rates. Now all the winds seem to indi- cate their judgment was quite right. THE CHAIRMAN: I don 1 t think they did it because they knew the discount rate was going to be changed. MR. DONNER: Knew not, no, but one has a hunch. MR. CALLAGHAN: Five and three-quarters for four years isn 1 t bad anyway. THE CHAIRMAN: Any other questions? Mr. Lieftinck? MR. LIEFTINCK: Mr. Chairman, I also have a few ques- tions to ask, but first I would like to congratulate both you and the Tata Company for having been successful in getting ten American and Canadian banks and trust companies in for such a considerable amount. I think it is a great achievement. It proves that Tata Company is inspiring confidence not only in the sight of the Bank but also in the sight of the conmercial banks in this country and Canada. It is a pity that the background of the general financial conditions of the country involved, of India, is not as good as one would like it to be. I don't think there'4 any doubt that the Indian foreign exchange reserves are getting somewhat on the low side.  19 STRICTLY CONFIDENTIAL After deduction of the Indians' liabilities to the International Monetary Fund, which would be considered as short-term obligations, the last of October India 1 s foreign exchange reserves had almost come down to the level of its external public debt, and the government seems to be prepared to let them drop further as indicated by the draft ordi- nance on the currency backing provisions of the Reserve Bank of India. Now, in my opinion, there must be somewhere a limit to be adaptable to deterioration or this ratio between foreign exchange reserves and external debt from the point of view of confidence in India's financial policies and its capacity to pay and repay. And I wonder whether this limit is not rapidly approaching. Therefore, I would like to ask whether the management of the Bank is attaching.any significance not so much to India•s external liquidity position at present but to the philosophy of the Indian Government with respect to the country•s external liquidity as such. From the statement made by Mr. Goodman, I am inclined to take it that the management is fully aware of this problem: and has it constantly in mind. But I would like to ask whether this ratio between foreign exchange reserves and the external debt is considered of real significance in  '! 20 STRICTLY CONFIDENTIAL granting additional loans to India. THE CHAIRMAN: My answer to that is: Yes, it is. MR. LIEFTINCK: Now, with your permission, sir, I have another question to ask which relates more to the technical report. The discussion in the technical report, which is a very good one on the whole, is not too clear with respect to the impact of government policies on the utilization or re- sources generated by the private steel companies for the financing or their future expansion. It appears that the prices of steel products are con- trolled and that retention prices have been established which enable the government to retain part of the margin between cost and prices to be used for the equalization fwid which subsidizes import steel and provides funds for the expansion of the industry. This policy must in some way or other have reduced the possibility or internal financing by private companies. But, on the other hand, the government is granting considerable tax facilities in respect to new investments. It has been allowed to run in arrears of payments due to the equalization fund. And the government has made an advance or 100 ~illion rupees which is considered as equity. My question is: What does this mean on balance? On one hand, the retention of part of the margin between cost  21 STRICTLY CONFIDENTIAL and profits to implement the equalization fund, and on the other hand the tax facilities and financial assistance given. If we drew a balance, could one say that the government policies expressed to this company have facili- tated internal financing or have hampered their internal financing? MR. RIPMAN: Up to a certain point the company was obtaining, as a result of this limitation of the proportion of its selling price which it might itself retain, a return which undoubtedly discouraged further investment in the company. It represented that to the government, and in consequence the government changed the retention prices after the Tariff Commission had studied them. And on balance there is no question at all that during the last years the government•s policies have helped the company to manage, to finance, and to construct its new facilities. There•s no question about that at all. MR. LIEFTINCK: But is it correct that as a consequence of such assistance the government has now in hand a certain equity participation in the company•s capital? MR. RIPMAN: I would hardly call it an equity partici- pation. It is a loan which is granted on terms which do not affect the company's profits either with regard to the payment of interest or with regard to the repayment of capital. It is only repayable out of additional retention  22 STRICTLY CONFIDENTIAL earnings permitted to the company which do not come into question for some time yet, so that it would not affect the company•s profits or its credit standing when it canes to be repaid or when interest comes to be paid on it. We have treated it as equity. ! ' i MR. LIEFTINCK: Does it not give the government a certaid I influence in the company? I MR. RIPMAN: Yes, that is true, but at the same time one can say it 1 s not at all a predominating influence. I MR. LIEFTINCK: May I just ask one final question, Mr. Chairman? THE CHAIRMAN: Yes. MR. LIEFTINCK: In paragraph 48 or the technical report a discussion is devoted to labor productivity. And there it appears that labor productivity has fallen since the be- ginning of the war. The average output or finished steel per employee fell by about 20 per cent and has since then not increased. At the same time, considerable investments and modernizations have taken place. But from this paragraph it appears that the reason why labor productivity has not risen has been that there are certain legal and social difficulties involved in any re- duction or the company's labor force. We understand that for the future it is expected that when the expansion program will be executed this surplus  23 STRICTLY CONFIDENTIAL labor force will be absorbed. Now, my question is: Is there any estimate of the con- sequences for the present cost level resulting from the sur- plus of labor? MR. RIPMAN: It is hoped that when the construction program is finished the new plant will work virtually with- out any increase in the total number of men employed, and this is one of the reasons why it is mentioned in this report that the company hopes that by the end of this program to reduce its costs by some 20 rupees a ton, which, if it happens, will improve the profitability considerably, and they would not be subject to any reduction of their retention prices as the result of that increase in efficiency, MR. LIEFTINCK: Thank you, sir. THE CHAIRMAN: I'd like to say this on one of your questions: For some time the Tata people did not want to borrow any money from this Bank because of the necessity or having a governmental guarantee, and their concern that the government guarantee would allow the government to unduly interfere in their affairs. But they finally decided that they did want to do it. And I don't think there's been any particular difficulty because of that since that time. One of the things that disturbed us when we first were approached by the Tata people to lend them a substantial  II 24 . . STRICTLY CONFIDENTIAL of money was the possibility that some day the company might be nationalized. I think it's perfectly apparent that the Indian goverrunent today would feel that the steel business is a business that should be nationalized if possible. And we were concerned as to making a loan to this company because of the possibility it might be later 1 I nationalized. And we were rather curious to know why Tata wo~ld I ! be willing to put a lot more money into this in case the I I 1 company might later become nationalized. i i I Well, I think the answer to that was that there•s such an urgent need for steel in India and will be for some time to come that it would be rather difficult for the Indian goverrunent, with all the other problems they have I I~ ii got, to nationalize these companies, and that in view of that Tata was willing to go ahead and make a substantial investment also, and we were too. So I'd say that there's been no undue interference in their affairs by the goverrunent, and the relationship of Tata with the goverrunent is perfectly satisfactory. Any questions? Well, if there are no other questions, may I have a motion to adopt the draft resolution? (Motion made by Mr. Shoaib, seconded by Mr. Hockin.) And to approve the participation at the same time.  25 STRICTLY CONFIDENTIAL All in favor 11 aye. 11 {Chorus of 11 ayes. 11 ) Opposed, "no. " (No response.) I declare the motion carried and the loan approved. This loan, incidentally, will be signed tomorrow in New York • .. ;. ~? ,, MR. PINTO: Mr. Chairman, it is my pleasure, in behalf 1; p 1 of Mr. Rao and myself, to thank you and my colleagues :1 Ii around the Board for their action this morning for the loan i 11 to Tata. 1: " !i And I can hardly forget, having been once a staff member ,; myself, the very hard and efficient work that has to be put ;; n in by the staff in order that these schemes come to ll fruition. Ii Mr. Rao is running a slight temperature and he has been 11 unable to come for that reason, but I am pretty sure if he 1 1 were here he would say, "I hope that I 1 11 have many more i I ::::~~ons to thank you 11.ke this before this fiscal year l1 I. II ·1 11