Transcript of one hundred seventieth special meeting of Executive Directors, held on Monday, December 1, 1958 : South Africa - Fifth Transport Project

STRICTLY CONFIDENTIAL 89490 McDonald INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ONE HUNDRED SEVENTIETH SPECIAL MEETING Of EXECUTIVE DIRECTORS Board Room International Bank Building Washington, D. C. Monday, December 1, 1958 The meeting was convened at 2:35 p.m .. , Mr. hugene  2 STRICTLY CONFIDENTIAL 1' I! ! I , Agenda Item I j Pr oposed Loa n - Union or South Af rica .. . .... . 3 I !  ...., ) STRICTLY CONFIDENTIAL THE CilAIRrtiAN: I would like to first welcome Mr. Miljanic of Yugoslavia, who has been appointed Alternate Director to Dr. Lie.ftinck. We are very glad to have you. 'rhe first item of business is the Repor•t and Recommenda- tions on the proposed loan to the Union of South Africa.. I would like to first call on Mr. Stevenson. MR. STEVENSON: Mr. Chairman, gentlemen,, the loan before you today would help to finance the continuing program of expansion and modernization of the South African railway system. I!' a:pproved, it would be the seventh Bank loan to the Union of South Africa and the fifth for transport. Furthermore, it would be the thil•d time that the Bank and the New York market have joined forces to provide capital for the development of South Africa. This loan is thus no novelty but the repetition of a well-tried pattern which has worked satisfactorily for a number of years. As is t1'Ue of any joint <'.:'peration, the borrower is well known. The Bank is familiar both with south Africa ts strong points and also with her• problems and her limitations. We have often pondered over her difficult racial problems, and we have al'8o admired her sound financial policy and her unblemished debt 1•ecord. South Africa is, of course, known in ·the private capital ma1•ket also. By now she bas succeeded in establishing her  4 STRICTLY CONFIDENTIAL credit in the financial capitals of both Europe and America. She meets a significant proportion of her external capital ' needs there and comes to the Bank only for the balance. As regards the beneficiary of the loan, the Bank has been dealing with the South African Railways and Harbors Adntinistration since 1951.. While we may not always have agreed with every detail of the Unionts transport policy, we know the Administration is a sound and thoroughly competent organization that has o:perated its facllities well and has ca:ri•ied investment programs similar to this to our complete sat is fa ct ion • The pattern of the operation is also familiar, and I do not propose to go into it in any detail. The proceeds of the Bank loan would again be used to finance imported goods, in this case locomotives and rolling stock. There are small differences from previous joint operations involving South Africa. For example, in the earlier ones the proceeds of both the public bond issue and tbe B~nk loan were used for the railway program, whereas this time the proceeds of the public issue are for the general capital needs of the Union. But these differences arem1nor. Accordingly, the Loan Agreement is along the lines of its predecessors and contains no novel features. The term of the loan would again be 10 years, and the rate of interest 5-3/4 percent. STRICTLY CONFIDENTIAL THE CHAIRMAN: Thank you, sir •. Mr. Weimar. MR. WEIMAR: Mr. Chairnan, gentlemen, the economy of the Union of South /J.frica is not unfamiliar to you, as several times before an economic report dealing with that country has been considered by the Board. The last report was presented about a year ago, and its conclusion was that the Union was well able to service the additional external de\'rt contemplated. This conclusion remains unchanged in the report which is before you. One could quite justly ask whether the recent balance of payments crisis had not affected the economy in such a way as to reduce the Union ts creditworthiness. Firstly, I would like to say that although the economy was affected by an unusual combination of internal and external factors which reinforced each other and put the foreign exchange reserves under severe pressure, the economy remained basically sound. The repercussions on the economy were on the whole superficial. Secondly, one could point out that the balance of payments crisis is in fact over. Nearly all factors which adversely affected the economy and brought about the crisis have now disappearedo The corrective measures taken by the government have been quite effective and sufficient to restore the equll1brium. In this connection, I would like to mention that the  6 STRICTLY CONFIDENTIAL Government refrained from reimposing import controls to check the large increase in the import bill. Instead the authorities relied on monetary and fiscal measures to correct the situationo These measures have been in effect for some time now, and the situation is again under control. The drai* I on the foreign exchange reserves was arrested, and in recent months some gains have been registered. On the whole the temporary setback has, however, not impaired the fundamental soundness of the South African economy. Being a large producer of primary products, the Union ,1 has always been sensitive to world economic conditions and trends. Economic conditions abroad continue to have an important bearing on the economy 1 but the unfortunate set of circumstances which led to the recent disequilibrium of the balance or payments should not easily be repeated. To conclude, the Union has fully retained her ability not only to service her present debt but also substantial additions to it. THE CHAIRMAN: Thank you. Mr. Saitzoff. MRo SAITZOFF: Mr. Chairman, Members of the Board, since 1951, the Bank has taken an active part in helping the South African Railways and Harbors Administration in the carrying out of a continuing program of expansion and modernization of its transportation facilities. Since then, SAR has invested the equivalent of about $1.1 billion 1n its  7 STRICTLY CONFIDENTIAL services, of which more than $900 million equivalent is in the ~ailway system. The large sums spent on expanding and modernizing the railway system are already having_a noticeable effect on the railways 1 carrying capacity and its efficiency of operations. Members of the Bank who have from time to time visited the Union have been favorably impressed by the progress achieved. However, the increase in carrying capacity is still insufficient to enable the railways to meet all demands made upon them, and the Govern- ment has consequently decided to step up considerably the rate of investment in railway facilities in an effort to reach this objective by the end of 1961, about four years ahead of schedule. This increase in the momentum of the expansion program imposes a formidable task on the Railways, but the ability demonstrated in the past by the Administration to re~olve its problems inspires confidence that the target will be met. The main problem seems to be concerned with the labor shortage. The labor supply in the Union is limited in regard to skilled and semi-skilled workers, and private industries offer higher wages and more attractive oppor- tunities than the Railways. Plans are under way to cope with the problem in order to a void all possible delay in utilizing: I 1 to the full extent the facilities that are to be provided.  8 STRICTLY CONFIDENTIAL The emphasis is on increased productivity, labor-saving devices, and training or personnel. Freight tonnage has increased in the last fillancial year from 75 to 77 million tons and is expected to e~ceed 90 million tons in 1961. Included in this forecast are some 3 million tons of coal that now have to be hauled by private truckers because of lack of rail capacity. This operation ' an economic one, as it not only impairs the condition is not of the roads but requires also a subsidy from the Railways. SAR is required by law to generate sufficient revenue to cover operating costs, depreciation, and interest charges on loan capital. Rates are set accordingly and when necessary are revised at the discretion of the Minister of Transport. The financial position of SAR is sound. " The decision to speed up the developmen1; program :tn I• " ,, ii 1: order earlier to meet all traffic demand is a proper one in view of the rapid economic development Of the Union. The project covering the two-year period l958-1960 Of the revised program is suitable as a basis for a Bank loan Of I, I $25 million equivalent for a term of 10 yea rs. All goods purchased from the proceads of the Bank loan will be subject to international competitive bidding. THE CHAIRMAN: Thank you, sir. Any questions? MR. LIEFTINCK: Mr. Chairman, would the staff perhaps tell us something about road-rail competition in the Union ,, I STRICTLY CONFIDENTIAL of South Africa? MR. STEVENSON: 'rhis is a quest ion which, as you know, every mission I think has raised in the Union of South Africa. We have sometimes felt that the policy of the Union 1 I with regard to giving licenses for truck operation was ratherl I I less liberal than it might have been. We raised this questiot i again in South Africa, and as you may notice in the economic report there has been some liberalization, some increase in the granting of licenses for private operation of trucks, so that the situat:lon is betti~r than it was. is in charge of the coordination of the Union 1~ transport policy, is very well aware of this probl3m, and at the moment there is a study being carried out, which should be completed early next year, and which is going into this very problem. So that the South Africt:tn Government ls preoccupied with it also a MR. LIEFTINCK: Thank you, sir. MR. KHOSROPUR: Mr. Chairman, just a small questi0n. In the report it says that the cost of the program has been increased to $495 million, or something like that, and for two years. I wanted to lrnow whether this program will be financed, the rest cf the progr-a.m, by the Government and SAR itself, o:.." are they coming again to borrow some mo.re if they need some mo1"e l::>ans later in these two years?  10 STRICTLY CONFIDENTIAL ~m. STEVENSON: They may very well borrow more externally. That they dontt know yet, but it i~ not at all excluded. THE CHAIRMAN: Not the whole 495. MR. DONNER• I have a questi?D which isnft strictly connected with this loan. It refers to the public issue. :\re there any ind1catious who will be the main buyers o.f the 25 million bonds? Is there any indication from 1r1hich kinds of investors the demand for those bonds will come? A1•e they 1\met'icans o~ are they non-American? A"!'e they Europeans or Canadians? 1 rHE CHAIRMAN: I can Tt answer that question. They a re getting-- How much is it from the banke? MR, STEVENSON: Five m~llion each of' three, four, and five-year bonds, and those I understand are being taken largely by banl<:s here. THE CHAIRMAN: It will be 15 million of the 25 will be , taken by American banks, three, four and five-year maturities :/here the 10 million will go, I don rt know. MR. DO!'IlJEH: Thank you. I I MIL STEVENSON: I should perhaps add that the number of j underwriters is I think the largest that an South African Ix I tssue has yet seen, so that there is a good chance the spread I ,, 1' is wider than it has hitherto been. :! it i: MR • DONNER: That is enc OU raging. 'I  11 STRICTLY CONFIDENTIAL THE CHAIRMAN: Any other questions? If there are not any more questions, there is just one other item. The South African Reserve Bank has agreed to participate in this loan to the extent of $1,253,000, which represents the first maturity falling due on June 1, 19610 Now, on a number of occasions the South African Reserve Bank has bought from us out of our portfolio the short maturities of loans that we have made in the past. This is merely investing in this as 1: !~ a pa rt of the reserves of the country, and that is what they are doing here. They have bought a good many millions of dollars from us out of our portfolio. MR. MEJIA-PAI.ACID: Is this the Central Bank'? THE CHAIR¥AN: The Central Bank, that ts right. There is no difference in this than there is in buying out of the portfolio, but they are entirely separate. This is a part of the reserves and dollar investments of the Central .Bank. That has been done before. It is not the only country that does it. MR. DONNER: But it is a somewhat individual feature in so far as here it will be counted as foreign exchange, the 1)bligations of its own nationals o That is I think unique. THE CHAIRMAN: Well, it has been done before. Several other countries have done it. MR. DONNER: You say this is a common practice with  12 STRICTLY CONFIDENTIAL South !\frica? I wouldn tt know .. MR. CALLAGHAN: Well, the President can answer it much better than I, but I know at least two countries -- I wontt name them -- where the Central Bank does hold the obligatbns of the country in its portfolio. MR. MEJIA-PALACIO: What type of interest, Mr .. Chairman, is going to charge the Central Bank? THE CHAIRMAN: The interest rate is 5-1/4 percent. MR. COUGHRAN: What American banks are participating? THE CHAIRMAN: Not any. They are not participating in this loan because they are buying part of the public loan. MR. COUGHRAN: Do you have the names of the banks? THE CHAIRMAN: I haven t t got the names , no. I could get them, but I don•t know what they are. MR. I.ARRE: Mr. Chairman, I would like to raise a ques- tion for my information. Is it normal for the bank, which is lending for one year, has the same interest, that is, 5-3/4 percent, as the World Bank, which is lending for 20 years so? MR .. CALLAGHAN: I think, Mr. Iarre, the participation is 5-1/4. MR. I.ARRE: In place of 5-3/4? THE CHAIRMAN: That ts right. MR. I.ARRE: Does this take care or the difference in the length of the loan?  13 STRICTLY CONFIDENTIAL THE CHAIRMAN: It is the same thing we have been doing right along when banks participate in a loan. We make a lower rate on that participation than we charge ourselves because we have no obligation there. This is there without any guarantee of the World Bank at all. But that has been the policy for some time, that we have a different rate on the short maturity than the longer maturity. MR. LARRE: Would you say that 5-1/4 for one year maturity is in line with 5·3/4 for 20 years or 15 years maturity? THE CHAIRMAN: The only thing wrong with that is it is not one year and the loan isn1t 20 years. What they are taking is June 1, 1961, and our loan is for 10 years. It is in line with what we have been doing right along on the shorter maturities. We don•t know what the proper difference! l should be. All we know is what rate the banks will take it at, and if we think the banks would take it at 4-3/4 we I I i[ will do it. But this is what we think is the proper rate I I ! I; !I 11 under present market conditions. In other words, ther-e would I ,1 11 :i be no difference between the South African Reserve Bank and l the Bank of America. If the Bank of America wanted to par- ticipate, they would get it at a rate of 5-1/4 percent, so we 1 I felt we should make the same rate for the South African I I I I Reserve Bank. There ie no difference there. It is a question of what we think the traffic will bearo  14 STRICTLY CONFIDENTIAL MR. WATANABE: Just for information, could you arrange to distribute for us whenever there is a joint issue and when! ! I the public issue is made the detail of the public issue and > the terms and conditions, and so on, when it is made? ' ., THE CHAIRMAN: Yes, we can do that • :; ji ii MR. WATANABE: It would be interesting to see how the l! i! Ii joint public :tssue was made. 1. 1! THE CHAIRMAN: We cantt sometimes do it at the same i 11 time because we dontt know the terms until the last minute. !I 11 MR. WATANABE: When we know that • II 11 THE CHAIRMAN: But I can do it at the next meeting of q 11 11 the Board. If they are available to us at this time, I can ti q 11 do it then. I dontt think they will always be available. 11 11 MR. SOMMERS: They usually are not available. !1 THE CHAIRMAN: They usually are not available. They II !I dontt fix the price until the last minute. 1! MR .WATANABE: When it is made, if you will circulate i! 11 some papeI' -- I MR~ STEVENSON: The terms are probably being set now. ! H I can say that the yield on the 10-year bonds will be not !I entirely different from our loan, perhaps a trifle lower. '! ,, 11 That is the yield, not the cost of the bonds. II THE CHAIRMAN: That will be 10-year bonds. 11 MR. STEVENSON: Yes. 11 THE CHAIRMAN: We donrt know the price, but they are !I ,, I! l! !1 ii  15 STRICTLY CONFIDENTIAL going to offer in the public msrket 5 million bonds due in three years, 5 million bonds due in four years, 5 million bonds due in five years. We dontt know the prices. Then they a re going to offer a 10-yea r bond, and. we don tt lmow price on that, but Mr. Stevenson says the price on the 10-year bond will be just about the same rate of interest that we are charging here. MR.WATANABE: I, of course, can find it in the papers when it is publicized, but I would appreciate it if you would 1 I circulate some note to 1.Ddicate how it was done. THE CHA IR.MAN: Any other questions? If there a re no (Upon motion duly made and seconded., the resolution was adopted unanimously.) THE CHAIRMAN: I declare the motion carried. MR. CALLAGHAN: Mr. Chairrmn, Mr. Saitzoff indicated in his remarks how this loan touches upon a basic essential of development in the country, where much of the industry, primary and secondary, is hundreds of miles from the portse The railway program is of vital importance in a country such as this, and it is for that reason that I add even more warmly than usual my thanks to the Board and to the managemen for approval of the loan and to the staff and to the manageme t for the handling of the negotiations. THE CHAIRMAN: Thank you, sir.