Transcript of two hundred twenty-eighth special meeting of the Executive Directors of the Bank, held on Thursday, June 29, 1961

STRICTLY CONFIDENTIAL Bubley INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 228th SPECIAL MEETING OF EXECU'l'IVE DIRECTORS Board Room International Bank Building Washington., D. C. Thursday., June 29., 1961 The meeting was convened at 11:05 a.m . ., Mr. J. Burke Knapp., Vice President., presiding. STRICTLY CONFIDENTIAL 2 -------- CONTENTS Agenda Item Proposed Loan - Argentina••••••••••••••••••••••• 3 Mr. Chaufournier - Loan Aspects•••••••••••• 3 Mr. Wt1ner - Economic Aspects•••••••••••••• 6 Mr. van Helden - Technical Aspects••••••••• 10 ** ** ** STRICTLY CONFIDENTIAL 3 P R O £ E E D I N Q: §. MR. KNAPP: The first item on our agenda today is to consider the report and recommendations on a proposed loan to the Argentine Republic. I would like to call on · Mr. Cbaufournier first to pre- sent the loan aspects. MR. CHAUFOURNIER: Mr. Chairman and gentlemen: The loan now proposed vould be the first Bank loan to Argentina, and would mark the beginning of' what we hope will be a con- tinuing and active financial relationship with that countrr. P1ttr years ago Argentina ranked among the most pros- perous countries in the world. Its high standard of 11Y1ng and its continued economic growth appeared well assured. Although Argentina's rate of development slowed down per- ceptibl1 in the inter-war period, and was further held back during the var years, it still appeared in 1945 as the most advanced cowitry 1n South America, v1th good prospects for the resumption of its economic growth. Then years later, when the Peron regime vas overthrown, the Argentine economy vas in a state ot stagnation. This disturbing picture of the Argentine economy 1n 1955 was described in last year's economic report: "A balance of payments deficit caused by a distortion in the structure of production and therefore not readily amenable to monetary and exchange measures; a transport STRICTLY CONFIDENTIAL 4 system run down to a point where the concern with the danger of immediate breakdowns leaves little room for plans for a long-term overhaul and reorganization;pover facilities, in- adequate by a wide margin to meet current needs, not to speak of growth requirements; a business conaunity 1n the t - s *. ot a b&lf-open and halt-suppressed inflation; public expendi- ture much in excess ot public revenue; and, finally, a break- down 1n labor discipline posing a serious threat to all attempts ot lasting rehabilitation ••• "But concealed underneath this combination of problems and difficulties there were the assets and advantages of Argentina: A commercial and entrepreneurial class with experience and technical competence; a middle class, politi- cally _alert and anxious to improve its economic status; a working population, which is literate, and skilled or easy to train, and has basically sound acquisitive instincts; a resource endowment uniquely suited to the production of meat and other livestock products with better than average pros- pects in the world markets; and, finally, a good record as an international borrower and debtor." The ettorts of the Argentine Government in the past rev years to deal with the economic and financial problema it inherited and to take advantage ot the country's assets, and the real results it has achieved, will be described later by Mr. Weiner. To a substantial extent, that success  5 STRICTLY CONFIDENTIAL has been made possible by the ability and persistence of the Frondizi Government, which has had to cope with political problems not less difficult than the economic ones. I wish to refer now to the groundwork ot sector pro- gr&lllling and project preparation which has been laid in the past several years to support Argentina 1 s program of capital investment. It has consisted in making a comprehensive review of problems and requirements 1n two crucial sectors of the Argentine economy, power and transportation, where th.ere exist serious bottlenecks tor the country's development and a constant and very serious threat to the stability of publio finances. The first step in this direction was the organization in 1959 ot a survey of Argentina's power problems which was financed by the United Nations Special Fund. The report, which was delivered to the Argentine Government in July last year made recommendations tor a program of power development to meet Argentina's requirements tor the ensu1ng decade. One of the principal conclusions ot the report was that the power requirements of the Greater Buenos Aires area could best be met bf the prompt completion or the Dock SUd power plant. A request to finance the completion or the project, together with a proposal to consolidate and rationalize the power facilities in the area, is under study by the Bank. Last rear, the Argentine Governlllent, wishing to insure STRICTLY CONFIDENTIAL 6 an independent and qualified review of the country's over- all transportation requirements and the development of coordinated and long-range transportation system, asked the Bank to organize a transportation survey also financed by the United Nations Special Fund. Final reconmendationa on the comprehensive and long-range program will not be avail- able until the end ot the year. But an interim report, making recommendations on the goverlllllent's emergency pro- gram tor rehabilitating the railroad and highway system, was delivered to the Government last January. The Government's requestBtor finance in transportation, in particular tor the railways, are expected. The road project now proposed is part of the National Highway Program ot the government. It will make an important contribution 1n helping to carry out this program on schedule It will also provide maintenance equipment and spare parts which are urgently needed. I wish finally to bring to your attention the tact that two minor editorial improvements have been made in the loan documents since they were distributed to you last week. They bave no effect on substance. MR • KNAPP : Thank you. I would like to call on Mr. Weiner to discuss the econom ic aspects. MR. WEINER: Mr. Chairman and gentlemen: Mr. Chautornie STRICTLY CONFIDENTIAL 7 ha8 referred to the limited econolllic expanaion, the deep struotural distortion, the deoapitalization,and the severe inflation that was the economic legacy of the Peron adminis- tration. Since the restoration of the institutions and practices of constitutional representative govermnent, to deal with these problems has been a primary preoccupation of the Argentine authorities. The progress which has been made thus far, and about whioh you have read 1n the documents before you, has not been achieved easil7. The dismantling of the apparatus of controlled trade and prices, which was essential to restore flexibility and price-responsiveness to the economy, produced changes in price levels and price relationships vbich were very sharp, and difficult for man7 groups. For a while, production 1111.tered and some real incomes even de- clined. Credit expansion by the banking system has been kept within limits established in stabilization programs agreed to with the International Monetary Fund, despite de- mands tor credit to help ease difficult adjustments. The worst of the general adjustments to the new tinancia~ discipline are now over and the benefits ot stabilization are beginning to be reaped. The fundamental purpose of the financial stabilization effort was to restore the econolllic and financial basis tor renewed investments essential to tuture growth. During the past year and a halt, private STRICTLY CONFIDENTIAL 8 investment responses to the new econolllic climate have begun in volume, both from domestic and trom foreign investors. The highway loans, from the u. s. Government and the one betore you today, mark further steps toward the long-needed recapitalization ot the Argentine economy. To provide tor a continuation ot this accelerated in- vestment effort is now the primary economic task of the Argentine authorities. It is not only essential tor the future growth ot the Argentine economy, but also essential tor the preservation of the very successes ot the stabiliza- tion effort itselt. In this task:, difficult financial problems nave still to be confronted. The two which are most urgent are the high level ot service payments now falling due each year on outstanding external indebtedness, and ~he large fiscal deficit that must somehow be reduced to more manageable pro- · portions. As tor the debt service problem, a portion ot the ex- ternal indebtedness falling due this year and during the next three years, when service payments are most heavily bunched, has already been extended by direct negotiations with creditors; and other similar negotiations are currently under way. Preparations are also being made tor the public issue of 12-year Argentine bonds in Europe and 1n the United States,.  9 STRICTLY CONFIDENTIAL the proceeds ot which would be used to repay some debts now falling due. This refunding would not be a simple rollover of debt, but would help lengthen substantially the average maturity of the present indebtedness and thus make it much more manageable. The present debt is so burdensome because it is at such short term. Aa tor the fiscal problem, the key lies 1n the elimina- tion ot the deficit of the state enterprises, but especially the deficit ot the national railways .which alone accounts tor tbree-rourths of the total. During the put tev weeks, despite opposition by the railway unions and small strikes that could foreshadow more serious resistance later on, the Government has been asserting with increasing firmness that Ile railroad problem can not be permitted any longer to threaten Argentina's financial stability and to choke all economic activity requiring transport services, and that it intends to pursue with vigor the program it has announced tor the railways. Clearly, difficult problems have yet to be solved, and in the process social pressures making tor cost-raising wage setta.ements could also recur. But equally clearly, very notable progress ha.e been made 1n overcoming the ditticult economic legacy ot the recent past. The Government has been tira and explicit in its declared determination to extend this progress further, to rebuild the country's capital stock  10 STRICTLY CONFIDENTIAL and thereby to lay the basis for realizing the full poten- tial ot this basically very rich country. Thank you. MR. KNAPP: Thank you., Mr. Weiner. I would like to now call on Mr. van Helden to discuss the technical aspects ot the loan. MR. VAN HEIDEN: Mr. Chairman., gentlemen: There is no question that an over-all transport survey as is presently being carried out., and to which Mr. Chautournier baa al- ready referred., is urgently needed because or Argentina's great over-all tranaportation problems. It is a most interesting., challenging., and difficult task., not only tor the members of the survey group, but also tor the Bank staff involved in it. Contrary to an engineer- ing study for a · technical facility, tor which the applica- tion ot well-lmown and internationally accepted formulas is the rule rather than the exception., few., it any., exact for- mulas are available tor tratf1c and transport engineering surveys. Such a survey is to a large extent dependent on broad Judgments., which again have to take account or local condi- tions~ customs., and preferences. The compoaition of the survey group in Argentina is ot an international character, having the advantage that views prevailing in one specific country would not be the only basis tor reconnendations to  11 STRICTLY CONFIDENTIAL the Argentine Government. On the other hand, bringing to- gether experts from different countries, and coordinating their various views, causes certain administrative, lin- guistic, and human problems which have to be resolved. Argentina is a typical example of what happens to a country if a transport system is not properly maintained and. not ade~uately expanded to meet growing demands. Upon arrival at the Buenos Aires Airport, driving the 40 miles to the city by car, one can easily get a wrong impression of the Argentine road network, since this show- piece of four-lane highway is about the only road built to high standards in Argentina, the rest of the road system being in considerably less good condition. I Railways and roads are the public assets which have probably suffered most from the decap1tal1zat1on policy of I the previous administration, and only a few years ago the I number of motor vehicles per capita was about thesame as around 1930. At present the number is increasing, mainly as a result of local production of trucks and cars, which, how- ever, are very expensive. It was a sound decision of the present administration to start in 1959 on an ambitious ten-year road construction and improvement program. It is, of course, recognized that there is a relation between any road program and the future role to be played by other transport means, particularly the  12 STRICTLY CONFIDENTIAL railways. However, there is no question that 1n any event the earlier phase or the program 1nc1Udes improvement of roads, the need for which is obvious and independent from whatever is going to happen to the railways. At this stage, the problem or coordination is not so much physical as financial because of the large investment requirements tor both the railways and the roads. The financing or the ten-year road program is sound in so tar as both the construction program and the cost or road maintenance are largely financed trom road-user taxes. The loan now before you for approval has certain aspects or a reconstruction loan, since its proceeds are to be used to restore roads which have existed for a long time, and to do long overdue improvements which were neglected by the previoua administration. In one respect, the situa- tion is even worse than was the case tor the reconstruction or facilities in Europe after World War II, where adequate managerial and· technical skill were amply available. Be- cause ot the more gradual process ot deterioration in Argentina, this managerial and technical ability has gradu- ally decreased and it will take the training or a younger generation before it is fully restored. The economic return on the investment is obvious. The benefit-cost ratios presented in the report are clearly very STRICTLY CONFIDENTIAL 13 favorable if one realizes that a benefit-cost ratio ot l means 6 per cent return on the investment; a ratio ot 2, 14 per cent; and of 3, 22 per cent. As will be seen from the table, many roads show considerably higher benefit-cost ratios on the basis or estimated traffic volumes for 1970. The main problem is likely to be that or proper super- vision or all the road work under way in Argentina at pre- sent, scattered as it. is over the whole country. A compe- tent group or road engineers and technicians is available, but it must expand farther to cope with the increased de- mands for these skills. By necessity, this expansion can be only a gradual pro- cess. It would not be feasible to bring in a large number of foreign technicians to strengthen i1111ediately the tech- nical atatr or the Vialidad, the organization which is responsible for the road project. In order to have a good check on the quality or the work to be financed by the Bank loan, an agreement has been reached with the Government that a group or experienced and highly-qualified foreign engineers will be engaged by Vialidad to carry out over-all supervision or the Bank- financed project. It was also agreed that the number ot exPerts will be adjusted in size and special know-how as required, taking into account the progress made in further strengthening ot Vialidad•s own forces. It is hoped that by  14 STRICTLY CONFIDENTIAL such an arrangement the Bank loan will also help to give Vialidad experience of the latest techniques of road con- struction. MR. KNAPP: Thank you. Are there any questions or comments? Mr. Leddy. MR. LEDDY: Mr. Chairman, I would Just like to speak briefly on this project. First, I would like to say that we certainly support this project. We think it is an excellent one and it deals with a crucial problem in Argentina in the key sector of transportation, in a field where improvement in this re- spect is essential if Argentine economic growth is now to resume on an adequate scale after the success -- and out- standing success, I would say -- of its stabilization pro- gram. On every score it deserves the support of the Bank. I have only two questions about the project itself, which I am sure can be easily answered. The first is, I found it a little difficult from the document to get an estimate as to what Argentine resources will go into this particular $48.5 million project. The second question is simply a technical one: What is the problem about the interest rate? I see that there is a statement that the interest rate on the loan can't be set right now, though the loan agreement itself does STRICTLY CONFIDENTIAL 15 contain a rate or 5-3/11 per cent. In addition to those two ~uestions, Mr. Chairman, there is a related question which is dealt with in the document that has to do with the railways. I understand there has been a report on an emergency program in the railway area, and I was wondering whether the Bank could give us any in- formation as to what the probable foreign exchange cost, at any rate, ot the emergency railway program is. This would be a part or a much longer-term and much larger over-all program tor the railways, but I gather there 1a a considerable degree or urgency in coping with the rail- way problem, and I wondered whether we could have a little light on what the financial magnitude or that need, that immediate problem, 1a. MR. KNAPP: May I answer your second question first, Juat to get that out or the way. There is no problem about the interest rate. This is a sheer formality. Theoretically, the rate is never fixed un- t11 the loan is signed, but our present interest rate is 5-3/4 per cent, and it seems to be in line with the market conditions, and there is no suggestion to depart from it. I think I will ask Mr. van Belden to answer your first and third questions. MR. VAN HEIDEN: It will be difficult to give a very specific answer on the first question, since it should be STRICTLY CONFIDENTIAL 16 realized that the Bank project forms only a part or the continuous ten-year program. Not only is it a part over the next four years, but in these tour years aga1n it is a part ot a much larger program which is partly also being financed by other outside resources, the Ex-Im Bank, and the own re- sources or the Vialidad. On the table of revenues presented in the report -- it I may refer to Annex;·,No. 2, page 1 -- over the four years the total resources ot the V1al1dad from the various taxes in the next four years is in the order or 50 billion pesos, which is much larger than is required tor the localcurrency financing or the Bank project. I must say, as has been stated in the report, that a revised cash flow has to be made by the Argentines on the basis ot the additional outside financing being obtained from the Ex-Im Bank and the Bank loan. So it was not possible to give it at the moment. There 1s no question that the total resources available are ample to finance the local currency part or it. MR. KNAPP: Do you want to answer the question about the railway program? The question was about the foreign exchange costs of the emergency railway program. ' MR. VAN HEIDEN: This is a question which it would be very difficult to answer at this stage. We did not look into the railway program at the very latest moment. This STRICTLY CONFIDENTIAL 17 depends very much on the number or years which are being con- sidered under this emergency program. MR. KNAPP: I think Mr. Leddy -- MR. LEDDY: I was talking really about the emergency program. It says: ·~n interim report containing recommendations on the government's emergency program to rehabilitate the railroad ·and highway systems was delivered to the government last January." And it goes on to say: "Prompt action is very important on the emergency rehabi- litation or the railway system." I was Just trying to get some notion as to what the external financing requirements were. I am not asking tor an exact figure. MR. VAN HEIDEN: It was broken down again in three phases, as you know. MR. KNAPP: I can give you the order or magnitude. It is that the total costs, 'it you Just dream up what kind or railway system Argentina ought to have, run up towards a billion dollars. Now, within that range there is an emer- gency program that was very carefully screened by our group, which came up with sort or immediate needs, but, again, im- mediate needs in the light or, ·~r you can find the money to do it," on the order or $200 million to $250 million. It fell  i8 STRICTLY CONFIDENTIAL within that range. MR. LEDDY: This would be two- or three-year? MR. KNAPP: Well, that's it. It is really as money be- comes available. These are the most clearly detinable needs in the sense that if you had the money to do it, this would be a useful investment to make. But the Argentine Government, I can tell you from my own · discussions there, at least in May, had no idea ot going ahead immediately with a program ot that size, because it simply didn't have the money in sight. So they are thinking of immediate procurement, again, or a traction of that. But I would say tbat $200 million to $250 million is the amount ot investment which has received · this preliminary screening trom the technical group. MR. WILSON: Are those the foreign exchange costs? MR. KNAPP: Yes. Mr. Larre. MR. IARRE: Mr. Chairman, I have been reading this re- port with great interest, and I have no question about the loan itself, but this report raises two questions in my mind. First, I think the Bank has been acting as the agent tor the United Nations Special Fund in two sectors. One is trans- portation, and the other is in power. And I assume that the mission has been sent there because it was felt essential to  19 STRICTLY CONFIDENTIAL the Argentine economy that the most urgent needs be met. Well, the conclusions of the power survey are, I think, that everything was all right with the power production and distribution in the Argentine, except that this Dock Sud was badly financed and it would be good for the Bank to refinance the Dock Sud and maybe to finance some expansion or this proj ect. Then there was, in the other section, the other mission · which is conte111>lating an extensive report, calling for large . investment, but tor the time being the condition they have been ma.king is that the rehabilitation of the railroads · should not be started at the expense of the road loan which is now before us. So my question is whether the needs of the Argentine economy at the present time are limited to those recommenda- tions, the ones made by the Transport Division, or it the needs of the rest of the economy would outnumber them but up to now only those two sectors have been explored through the mission; or maybe that the needs of the economy which are already known and approved by the Bank are still larger than that, but it is not felt that it would be possible on finan- cial terms to embark on a longer, larger plan for the de- velopment or the Argentine economy because there would not be enough money to go around. So that would be trG" question. STRICTLY CONFIDENTIAL 20 MR. KNAPP: Mr. Chauf'ournier, would you like to answer ·that? MR. CHAUFODRNIER: I believe that the status or the re- q uests which have been made by the Argentine Government for _ both studies and tinancing reflect the stat~ of the Argentine .·economy, the tact that it was found in the situation or being ,decapitalized. The most crucial sectors were actually power and transportation, and they were those to which the govern- ment turned its immediate attention. They certainly do not represent the extent or the re- quirements or the Argentine econolJG', but these were things .the government had to attempt. They threatened to become not only, as I said, physical obstacles in the development or the country, but to present a very serious financial threat, endangering the success of the stabilization program. I think this is part of the answer. The reason why these requests have been made for financ- ing tor a road project now is, again, that the railroad problem is much more complex. The government has, in the face or the enormous requirements represented, wanted to make a thorough, conn>rehensive study. The requirements are, far from being only financial, administrative; they are technical; they have to be studied with care. And the government itself, before making a request tor financing, has wanted to have the benefit of the STRICTLY CONFIDENTIAL 21 recommendations. MR. !ARRE: Would you have any comment about the re- quirements for investment in agriculture as another area? MR. CHAUFOURNIER: We do not have at the present time a judgment on it. But there will be a requirement in the pro- vinces tor regional developments, very likely. There will be requirements for agricultural credit, quite clearly. There are requirements tor importation of agricultural machinery in large quantities, but we do not have at the present time a basis for making a judgment on that. I II MR. KNAPP: My general impression is that there are, of I course, requirements throughout the economy, agriculture, / industry, and so on, in addition to these. It doesn't follow necessarily that they will be seeking foreign financing for I II all or those. After all, Argentina has a certain amount of capital being generated, both in the private sector, and, although their position in the public sector is very diffi- cult, there are some investment activities going on. My general impression is that at least the extemal financial requirements for some time will be overshadowed by this transportation problem, and nothing else is coming along of equal magnitude. That is a pretty safe statement in view of the fact that it is known that this is such a huge requirement. ll STRICTLY CONFIDENTIAL 22 Mr. Machado. MR. MACHADO: Mr. Chairman., I am very happy to see that our first loan to Argentina will be applied to the rehabilita- . ':tion ot roads. Having had an opportunity to travel over some or these roads in the past., there is no doubt in my mind that this money is going to be used tor a ve-ry useful purpose. My question is in connect:tn with paragraph 6 or the . present report., on page 2., where it is mentioned that in addition to our loan., in order to carry out this project · there will be some tinancing by the U. s. Export-Import Bank · d Development Loan Fund. In other words, we are making what we might call a package deal to carry this project through. I wonder it it would be possible at this time to get some information as to the terms on which these loans have finally ·; been negotiated so that we can get a picture or the whole thing. MR. KNA'PP: Can you answer that., Mr. Chautournier? MR. CHAUFOURNIER: I am not sure I can answer your ques- tion completely. I may have to check and give you complete information later. But the terms or the Export-Import Bank Loan which has been signed., actually., very recently., only some two weeks ago., I think., are tor 15 years. MR. MACHADO: For 15 years? MR. CHAUFOURNIER: Fifteen years., yes. STRICTLY CONFIDENTIAL 23 MR. MACHADO: What is the rate? MR. KNAPP: Probably 5-3,14. MR. DONNER: Five and a half. MR. CHAUFOURNIER: I could check that figure. The DLF loan has not been made. I think the first loan may have been made this week, or will be signed this week, ·and it will be tor a first branch of the program, representing · $6 million for two roads, the loan being actually approved when the technical studies are becoming available. And I do not \alow the terms or this particular loan, except that the payments would be both in local and foreign exchange, I think, but I am not sure of the exact terms of it. MR. KNAPP: Mr. Lieftinck. MR. LIEFI'INCK: Mr. Chairman, I would like first to come back to the very pertinent question put forward by Mr. Leddy, .namely, what Argentine resources will go into this particular project. I think it is an 1JIG)ortant element in our appraisal of this proposal. Now, I found in the introduction of the Technical Report · that the project consists of reconstruction and improvement or a number or road sections, totaling about 2,565 kilometers, · costing about $95 million, and the purchase of equipment in the amount of $15 million, which makes it $110 million. The proposed loan is in the amount or $48.5 million. STRICTLY CONFIDENTIAL 24 I t there were no other foreign assistance, one would only 'have to deduct 48.5 from 110 to have the amount which has to ~e got from internal sources. Therefore, I would like to ask the question whether the DLF loan and the Export-Import Bank loan have been made for ·• ·this particular part of the project, or Just as a general ·contribution to the highway project in general. If the latter is the case, it is not difficult to come to a conclusion with respect to nzy- question. ·But I do feel ·,1 t would be regrettable if we could not receive an answer to this point of how much the Argentine Government would have to match the amount to be made available by the Bank in order to complete the project. MR. KNAPP: I think there is quite a clear answer to this. Mr. van HEIDEN: It I may again refer to the table in the report, Annex 2, page 2, ''Expenditures," you will see on page 2 there is a certain amount of maintenance eveey year. Part of this amount for maintenance 1s an amount of 350 million pesos each year for the purchase of equipment, which is about $4 million per year. The Bank loan tor the equipment will release, t1rst of all, the 350 million earmarked in the cash revenues of the Vialidad for that purpose. So this money will become avail- able in addition to what they have already tor their ten-year  I :I ,, CONFIDENTIAL STRICTLY!i 25 11 i! program. I! ii !· Then, as was stated somewhere in the report also, I 11 ·I I think, the program as it is today is really geared financially! I 1j to, again, Annex 2, page 2, the last line, the ten-year \ 11 program where they have set aside a certain amount in order 11 11 to make an allocation of 5.5 million a year for the ten-year 1! I ii I I I progr::·the program stands at present, it will not be acceler-1 I: I I I' ,1 ated by the Bank loan, because we are financing part of the I 11 I ii I i! program as it was scheduled. The roads to be financed by II DIP and the Ex-Im Bank are not the same roads as are being I I 111' financed by the Bank. There they will get additional out- II ii side financing, and that is part of what they call their I I, 11 emergency program. But it is basically really an accelera- I 11 tion program, rather than an emergency program. In other !I words, roads which were originally to be built later will be Ii built earlier now because of the outside financing being ob- I ! tained from the DLF and the Ex-Im Bank. I I i So it is the view of the Vialidad that because of the 11 P l amounts to become available from the Bank loan, they may be I I again able to accelerate the program even further. But we ! have some doubt whether they can digest much more than they I are doing at the moment, and for that reason we have an agree- 1. !' ment with the government that at all times they will first I I make available any local currency needed to match our program, i III STRICTLY CONFIDENTIAL '-:'Which 1s about 60 per cent. we have estimated that the rore1gn currency component 1s 40 per cent 1 and 60 per cent :--would be local currency. MR. KNAPP: I think the point I would like to emphasize ~and keep perfectly clear on 1s that the DLF and Ex-Im Bank -·projects are entirely different from this 1 and the financing ·provided by the Argentine Government to match our contribu- tion on these roads is coming out or their own resources. MR. LIEFI'INCK: I have one more quest1on 1 Mr. Chairman. Two days ago when we discussed the loan to Chile, I made some observations on the technical execution of the · project in view of the experience and availability ot techni- cal knowledge and advice. I would like to state that in this case I have the im- pression that the conditions have been created in order to insure an efficient execution or the project according to plan. This project will be executed in a period of rour yeara, and I had the impression that provision has been made to make sure that this program can be maintained. In this connection, it was just mentioned that the par- ties had some doubt that they could do more 1 absorb more, than .followed from this project. I think "absorb more" should refer not only to the technical representatives 1 but also to the internal resources to match this foreign assis- tance. STRICTLY CONFIDENTIAL 27 Finally, Mr. Chairman, I would like to make a very brief comment on the fact that this is going to be a Bank loan and ~- not an IDA loan, or Joint Bank and IDA loan. I am in full agreement that the proposal before us is for a Bank loan. I fully agree with the qualification given ;. -by Mr. van Helden that it is more or a reconstruction loan ·than a development loan, and since Argentina is a country ·~ which has been very prosperous and has great prospects ot : becoming prosperous again, I do feel it would not be the right thing to do now to start ma.king IDA loans to this .. country. MR. KNAPP: Thank you, air. Mr. Aragones. MR. ARAGONES: Mr. Chairman, I am very happy to support this loan that represents such a significant contribution to a very important program of improvement of roads in Argentina It has a special value because it is the first loan we have made to this country, and thereby we are supporting an ad- . ministra·t ion that has been able to carry out with determina- tion and great success an economic retorm. My comments, Mr. Chairman, will be mostly confined to the terms. Generally the Bank is kind-hearted, but I don•t know why in this particular case they give Argentina such a short period ot repayment. A road actually requires long amortizat on,  ,, 11 \, STRICTLYl CONFIDENTIAL 28 !1 11 l and 16 years is rather short. I On the other hand, the report says that Argentina has lI I foreign exchange obligations in the next five years for over 11 II $900 million, Then we start with the first maturity, or ii amortization of the loan, I think in 1965, which actually is II a little short because they have still a rather large volume It !I of payments due at this time. Perhaps one or two more years l of grace would have been better. I ! !. Then., since we control, through an agreement with the l'Ii Argentine Government., the disbursements, and they have to be 'I made on a parallel basis with domestic fwids, it may happen 1 1 IJ that the repayment of the loan will coincide with disburse- 1, II ments from the loan., because they will spread up to 1964 or j\ 1965. If there is any delay, it may be Argentina may be re- lj paying the loan before total disbursement is made. 11 l! Then there is another question regarding the comm! tment !! \\ ch arge. Since we know beforehand that this disbursement will i not be made immediately, that disbursements will be spread II over a period of four or five years, we establish in the 11 agreement -- I don•t know if this is an inflexible rule or 11 regulation of the Bank -- that the borrower will have to pay II three-quarters or one per cent, I· 1 We know beforehand this loan will not be disbursed im- 1 I I mediately. Perhaps this charge should be made on the basis Ii j! of the amounts that will be agreed as time goes by. · 11 ,I q II STRICTLY CONFIDENTIAL 29 Thank you., Mr. Chairman. MR. KNAPP: Well., I will answer those questions, if I On the matter or the maturity of the loan and the period ·. of grace., these are always a matter of negotiation, and the results that emerge reflect the negotiation. One takes into .consideration primarily the proJect itself. Had this been strictly a highway construction project., · it might have been longer term., but it includes also this ··maintenance aspect., which is an important part or it. The : lite or the maintenance eqUipment is fairly short and a purely maintenance loan would be related to the lite or the main- tenance equipment. So you come out with a sort of compromise. On the whole., I wouldn't say it is ungenerous tor the type ot proJect. A tour-year period ot grace is fairly generous., and a 16-year term. On the matter ot the commitment charge., that is a stan- ·dard provision and has been for a long while. MR. ARAGONES: I seem to recall we made an exception . ,with Pakistan -- I mean the Indus River Basin. MR. KNAPP: Well., the Indus thing., I would say., was a very special transaction in a great many ways. But there is another general category or cases where we postpone the commitment charge, and that is the case where the Bank isn't really committed. We can't make• ••1111&•••a• eharge·a 11( I STRICTLY CONFIDENTIAL 30 Jeommitment charge unless we are conunitted. ~ And in cases ' ·like loans to industrial banks where we are not committed .. 'Until they come forward with a project they approve -- in ' ' · those cases we don •t reel we can appropriately charge a ·:~ -commitment fee until the sub-proJeot, so to speak, is brought · torward and approved. MR. ARAGONES: Is this the case because the Bank has to : approve the disbursement? It would be a si!IU)le case. MR. KNAPP: No, here it the thing proceeds according to :the agreement, we are committed to disburse the money. MR. ARAGONES: I see. Thank you. MR. KNAPP: Mr. Rott. MR. ROTT: Mr. Chairman, I would also like to welcome this proposal of the Argentinian highway loan because I think , it serves a very worth-wh1 le cause and can make a substan- tial contribution to the economic development or this country. I think that the volume or the program, the over-all program, is quite ambitious, and I am very glad to hear there I are also additional financial assistances coming torth from United States sources like the Ex-Im Bank and the DLF. I think this assistance, with the Bank loan, will give the country a very good start for executing its highway project which is being described as so important for the economic development ot the country as a whole. STRICTLY I! 11 CONFIDENTIAL 31 l I 11 I I ,i i It '\ The two questions that I had in mind have already, to a \ I \ 1arge extent, been answered by your statement that the DLF I 1 ,I I !lloan and the Ex-Im Bank loan, which are already negotiated, \ as far as the Ex-Im Bank loan is concerned, at least, will I concern quite different roads than the ones we are financing, so, if I understand right, there is no need to make any pro- (\visione which would prohibit an overlap of the financing. l On the other hand, Il\'f .,:iuestion was also referred other . !· 1ito by Mr. Aragones, concerning the terms, and I think you have \lgiven a very good e:,q,lanation for this, too, \1 I have only a very minor question left in nzy- mind, which \concerns the description of the deficiencies and lacks that ' 1~ad to be encountered in the staff of the autonomous agency ,1 j~hich executes the program, the Vialidad. II I \I Now, it is said there that the staff will need ~uite an I ]~mprovement, and I wondered whether any measures have been I ,1 I lfaken with the influence of the Bank to improve the situation, I I I 11 1rnd what can be done in this respect. I 11 I 1 1,11 MR. KNAPP: Mr. van Helden. I I\ MR. VAN HEIDEN: I can answer the last <1uestion by sayi~ I e are very much aware of the problem and certain measures I I I ve been taken. I I I !\ Salary scales have been improved; scholarships are being I I ~iven; special courses are being given at the university to I' ~ncrease the special staff as much as possible. During the 11 :I ,, STRICTLY CONFIDENTIAL 32 .past year, I think about 450 technicians were added to the i,tarr. The problem, or course, is that this type ot work is difficult to learn in school. It has to be learned from prac- tice in the field -- and that will take some time. And that .is the main reason that we felt that still an over-all pro- vision is needed, even if they have the full number ot start, because of the lack or experience in the field ·which Just can not be taught in the university. But certainly they are aware of it, and they are doing · as much as they can to improve the situation. MR. ROTT: Thank you. MR. KNAPP: Mr. Rott, you used a phrase there which I think I should comment on, just to get this quite clear, "that there is no overlapping in the financing. 11 I don 1 t want to make this complicated, but there is a way in which there could be a little overlapping. The Ex-Im Bank and the DLP credits, to the extent they are attached to roads, to the financing of roads, are ror different roads, so that's all right. However, as I understand it, some ot the Ex-Im Bank credit is also going to be a sort or export credit for con- struction machinery for Argentine contractors, and it is possible -- it is conceivable, you see -- that an Argentine contractor who is working on one or our roads will acquire  !I II STRICTLY IiCONFIDENTIAL 33 I'1 some 1 machinery that was imported through this exporter credit' I I from the Export-Import Bank. And to that extent you could I' argue that there is some overlapping there. I I' 11 We say here that we are financing 40 per cent of the cost ii !I and 60 per cent of the cost is financed by the Argentine ijGovernment. Now., to the extent that some of this equipment ,, II from the Ex-Im Bank line of credit might be used by a local il !!contractor on one of our highways, one could argue there would 11 j'be some overlapping. I j I l' I don't want to make it complicated., but I didn't want 11 !!the record to stand that there was no possibility of that. I MR. ROTT: I don•t think there would be any need for us ilto ,1 make any provisions, because it would have only minor I! II 1, effects. I' 11 I! MR. KNAPP: No. In the first place, you'd never know. IINobody would be able to inspect the project to the extent of !rinding that equipment. Mr. Donner. I l MR. DONNER: To continue on this last point you just dia- !!cussed, the usual procedure is to make available financing 1, !lof the loan proceeds upon submittal of suppliers• bills, and 'I !!then the question of overlapping, as was expressed., will not ii l!arise. I, I! Instead, in this case, and recently in some other cases, ,1 11 I I I I ll  34 STRICTLY CONFIDENTIAL the technique is applied that the rore1gn exchange content or the works to be executed is assumed, and that therefore the Government, the borrows; has the right to request that percentage of reimbursement tor the bills -- any bills -- resulting rrom the project. In this case the percentage has been set at 40 per cent. rNow, with that 4o per cent, two possibilities can arise. One thing is that indeed the foreign exchange component ot the works is 40 per cent, but that under the Ex-Im Bank credit, the Argentinians provide American equipment. And so far, the foreign exchange the Argentinians get from this loan would be balance ot payments financing. The second possibility is that the foreign exchange com- ponent, quite apart from what may be financed under the Ex- Im Bank or DLF' loan, for that matter, indeed is not that high. When I look at paragraph 14 -- yes, paragraph 14 -- or the Preaident•s report, I am inclined to believe that indeed it might be so. It says that in the past only a few foreign contractors -- or that now only a few foreign contractors are working on the program at present. Then the hope is expressed that because or the position taken in connection with our loan, more foreign contractors will get interested in the Argentine road program. Now, assWDing that getting more foreign contractors  i STRICTLY '!CONFIDENTIAL 35 I I d I !I according to these expectations would take some time, I submit ! I/ I consider it in no way Wllikely that the foreign exchange II component will be smaller. And in this case, in so far as II that would take place, the question raised by Mr. L1eftinck, II I and prior by Mr. Leddy, of how much the Argentinian Govern- ment indeed contributes to the execution of these programs, I is not answered by a reference to the relationship of 60 to 1 40. 11 Is that right? !l •I MR. KNAPP: Well, that's why I brought the point up. Ii :1 Let's be clear about what we•re talking about here. I. II Ii The 40 per cent is a verry rough estimate. It is the 11 I best estimate, the fairest estimate, we thought we could I i make. But obviously it is a rough estimate because it is I ji 40 per cent, not 39 or 41. It is about the approximate order I l of magnitude. 11 Now, you are right. You could argue that if you took !I lj q into account the posi.ble diversion of some of this other ,, 11 !1 equipment, it might be 39 or it might even be 38, I don •t i know. But that is the kind of proportion you are talking !I about. !, // MR. DONNER: How about 20? l1 1) MR. KNAPP: No, no, it couldn't be 20. If you look at i! 11 the magnitude you will find I I 11 MR. DONNER: Here the statement is that only a few foreigp I! I i l1!' I q i STRICTLY CONFIDENTIAL 36 contractors are working at the present time. Now 1 you may have the expectation that more will come in 1 but or course we don•t know how many will come in. I don•t want to make a critical point out or it 1 but · just since we have tried to clarity it -- MR. KNAPP: We will do some arithmetic for you1 but I · think we can show you you are talking about a possible possibility. We have thought about how you could handle this thing. One way would be to forbid any contractor working on the Bank project to use a piece of equipment which at any time in the past had originated and been financed under a foreign credit. We have rejected that as an impractical and rather silly provision. So the other thing you can do is begin whittling away at the percentages. But I am saying they are so rough any- way that the kind of difference ma.de by this kind of thing doesn't matter. MR. DONNER: But in this case 1 reformulating the ques- tion in a somewhat different way: Wasn't it possible in this case to have followed the usual procedure 1 to have paid actual foreign bills only? MR. KNAPP: We have followed the usual procedure on highway loans 1 where we have found it greatly convenient and economic and efficient from our point or view 1 and the  '1 I, I! STRICTLY IiCONFIDENTIAL 37 11 II II n borrower's point of view, to do it on this basis. 11 !: MR. DONNER: That is the practice in highway loans? ·I ., l1 MR. KNAPP: Yes, I think you will find that in every 1, 11 highway loan. " ! I MR. DONNER: Now, another question which has already I i 11 I 11 11 been discussed, this time by Mr. Aragones, with regard to the I 1· maturity -- this is just for my own elucidation. I ,I II ii I looked at the register of Bank loans as to maturities '11 I I 11 in case of road loans, and I found that the maturities varied I 11 11 between nine years in the case of Peru, which probably was a II construction loan, I assume -- II II '1 I I MR. KNAPP: Maintenance. I I I! I MR. DONNER: A maintenance program, yes. -- and 23 year~ II I i 11 in the case of Japan's highway program. I. I There were quite a nmnber of loans with 20-year ma.turity J I! II I I' !1 some 15, some 12, and so forth, 11 Now, you have answered that yuestion, that there is to !I be accomplished on the one hand maintenance programs; on the II II other hand, new road construction; that this 1s a mixture; I I and that in addition to that, there is an element of flexi- !1 !I lj bility depending upon negotiations. The more insistent the ,, 11 ,, borrower is -- ii MR, KNAPP: Oh, I didn't say that; I didn't say that. 11 I, I· (Laughter. ) H " II MR. DONNER: Well, you said, 'The outcome of the rl II II 11 II STRICTLY CONFIDENTIAL 38 ,pegotiations. " But I, too, have been wondering whether, in view or the particular foreign exchange situation this country is in, it 16 years wasn't on the short side. But I do not want to pur- ,• ~ue this question. I am sure you have given very serious :thought to that, and that 16 years is exactly what it should have been. MR. KNAPP: Thank you for the expression or cont'idence, . ·Mr. Donner. MR. DONNER: Reading the report I was wondering about the internal financing or the program Mr. van Helden had re- ·rerred to. Somewhere in the report -- I believe it is in the technical report, page 5 -- there is given a survey on how the internal revenue set aside for road financing shall be applied to the different sectors, if I may say so, or the road reconstruction and building program. ' It says that 30 per cent shall be evenly divided among .all the provinces and the Federal territory of Tierra del fuego; 30 per cent in proportion to the areas of each pro- ~ince, the above territory and the Federal Capitol; 20 per cent in proportion to the population; and 20 per cent in ·proportion to gasoline and light diesel oil consumption in the same areas. My question is: Doesn't such a system or financing apply an undesirable degree of inflexibility, or rigidity,  11 11 STRICTLYii 11 CONFIDENTIAL 39 I I Ii,1 in what the actual construction planning shall be? l I I II MR. KNAPP: Mr. van Helden. !! I li Ii MR• VAN HEIDEN: I think it is understood that there are I 11 ,I two sources of financing. There is one which is being passed J i1· ,I on to the provinces where they do their ownw:>rk, financed by the Vialidad, and the part you are referring to on page 5 I II I '! explained how the various works to be carried out by Vialidad I 11 I should be distributed over the country, the purpose of it I ·1 I I .I being to avoid that all work be concentrated in certain areas II I and other areas of the country not getting anything. I I The schedule they formerly used for that is rigid in 1. ,I ii itself. Still, in these provinces there is certain flexi- Ii bility because some of these provinces are rather large. II Ii II It should be recognized that these 30, 30, 20, 20 per l cents again refer to various categories of importance. The Ii ! area of the province comes in; the population comes in; gaso- II 1, line consumption comes in, which again makes the work concen- I, trate in the areas where the present use of motor vehicles I is already highest, because of the need for it. It certainly gives a certain rigidity. On the other I !I hand, it also avoids, I think, some political pressures evecy I! year about getting roads done in certain areas or other 11 l j .1 areas, which we always see in other countries where such a system is not followed. Here it is fixed in advance how much I each province should get of the roads to be done over the !1 :1 ! lq 11 STRICTLY CONFIDENTIAL 40 area as a whole. 1 MR. DONNER: That was exactly lf'IY point. I was wonder- ing whether, because or the formula being ae it is, one area is rather lushly provided with funds in relation to its tech- nical or economic needs tor road construction, and in another area, because ot the rigidity ot the formula, where it would need more resources the formula doean•t provide tor it. MR. VAN HEIDEN: Still, 35 per cent or the total re- sources or the Vialidad goes to the provinces directly, so each or them gets a share again, too, which they can use I themselves in their own regions. There is a certain rigidity there. On the other hand, I the formula has a certain logic as tar as the economic- needs are concerned. I MR. DONNER: I have had some experience with all these index numbers as to a county's capacity to pay or to be taxed and so forth, and we know what sometimes happens. MR. KNAPP: I think this formula bears a family relation- ship to the formula on Fund quotas, talcing into account both need and capacity to pay. MR. VAN HEIDEN: As you will see in Annex 2, page 2, there are categories or main roads outside the program where the government has the flexibility or using that in other parts or the country. so we still have something in the kitty I to divide.  41 STRICTLY CONFIDENTIAL MR. DONNER: One probably- may also trust in the expecta- . _ tion that once such a contract exerts undue harshness, it will be recognized. May I, in order to get an answer to the question I bad in mind which was very similar to this, ask this: Now, there have been made these stUdies on the power and transportation program which are going to be finished. The economic report, on page 4, said that a similar stUdy was under way predicated by the need tor industrial expansionJ that the government is · now preparing to create a epecial group to study the tull range ot present problems, not only financing needs but also taxation and things like that. Then, in the discussion, agriculture was mentioned. May I assume, or may I not assume, that all these things will be ultimately boiled down and put together into the . general framework or a long-term plan, a long-term economic program, or the kind that India baa put together and that Pakistan has put together and that Chile 1s putting together at the present time? or will the authorities in Argentina do it another way and Just tollow a sector approach? MR. KNAPP: Pollow what? MR. DONNER: A sector approach here, without deciding how much or each sector should be cut otf in order to give access or items in other sectors to financing possibilities. STRICTLY CONFIDENTIAL 42 MR. KNAPP: Would you comment on that., Mr. Weiner. MR. WEINER: I would Just like to say briefly that we have no understanding at the moment that these various · ..'measures are moving in the direction of a comprehensive . long-range development plan. This isn•t the kind or economy I • that lends itself as readily to this kind of an operation as . some of the others that we know. In any event., this is just the beginning of this study :Phase. The industry reference that you mentioned is primarily . ,· to rationalize and integrate policies that affect the indua- . ~ trial sector rather than to formulate a financing plan. And , it is similar in the field of agriculture. Some of the major resources for these various sector -~ efforts., as Mr. Knapp has mentioned earlier., are originating ·and will continue to originate ever more so from the private sector itself. And the most important efforts of the govern- . ment will be to facilitate md direct this. MR. DONNER: So if I understand you correctly., we do not -have to expect that some day there will be on somebody's table., say., a five-., six-., seven-., eight- or ten-year compre- hensive plan? MR. WEINER: I would hate to put IJG"Self in the position or forecasting how the thoughts or the Argentine Government are likely to develop in this regard. But we don•t have the expectation at this moment., although it is quite possible.  43 STRICTLY CONFIDENTIAL MR. DONNER: That is what I wanted to know, your imprea- .sion. I have only a last question, it I may ask that. Reterence was made to the determination ot the government to pursue its policy ot austerity and sound economic and tinancial policies. We lalow, and reference has been ma.de to it, that there is a natural resistance ot those who iDUlledi- atel.y sutter to such policies. We have read it in papers and beard it in another meeting here. Now, do we have evidence that these serious labor troubles have already been taken care ot to a degree that one can have the rather assured expectation that the program will continue? MR. KNAPP: Mr. Donner, I'm sorry, but I was interrupted there. I didn't quite get the question. It Mr. Chautournier can answer it, I will be glad to listen to the answer. MR. CHAUFOURNIER: I would like to say that I think on the start we have good reason to believe, in view or the per- formance ot the government in the race or these difficulties, that the program would continue. Atter the ditticultiea that the government encountered, particularly in the measures tor railroad rehabilitation, after President Prond1zi himself and the ministers concerf,ftd Dl. with the railroads had made the statements or policy -- after the difficulties took place, the second statement or Presiden STRICTLY CONFIDENTIAL 44 Frondizi wae still as firm and torcetul as the first he had · made, and the measures which had already been initiated have · continued in spite or these manifestations. Actually, the threats or strikes by the union were not carried out. The strike did not take place. And the evi- . dence we have so tar -- it ie naturally quite early becauae they are in the process or taking this measure, but we have good reason to believe that the program will continue. MR. DONNER: Thank you very much. MR. KNAPP: Thank you. le there any other discussion? (No response.) It not, I should like to announce that we have partici- pations in the amount or $625,000 in the first maturities. One ot the disadvantages or a long period of grace ie that · you don •t have many short maturities. That does explain why · these figures are smaller than they might otherwise be. There are tive participations, four United States banks and the Royal Bank ot Canada, in the loan, with an interest of 5-1/2 per cent. Now, may I then have a motion to approve the resolution. MR. MACHADO: I so move. MR. KHOSROPUR: Second. MR. KNAPP: All in favor, say aye. ·, (Chorus or ayes.) STRICTLY CONFIDENTIAL 45 Opposed., no. (Ho response.) The resolution is declared approved., and I declare the loan in an amowit in various currencies equivalent to $48.5 aillion to the Argentine Republic approved. We plan to . sign the loan documents at 11:30 a.m. to- 11orrow morning. Mr. Haus Solis. MR. HAUS SOLIS: Mr. Chairman, on behalf of the Govern- ~~ ·11ent ot Argentina who"I have the honor to represent her~ I ·•m pleased . a.: ~~'3 to thank tee Board tor~he tirst loan granted to thatc~ Gn order to extend IQ' congratulations to the start tor "'~~~~ . the preparatio~ 'i should have liked to h&¥e mentioned' the . ;. - (TV ..ii' ' names ot all the officers who have worked with ae. But l •• not willing to take too much ot the Board's time.,~ I must 11,d~~f-" . ~ IJM1UJ.,t1/~ ~ onlyi.""*' that w1 thout Jhe bard work ot Mr. Cha~J~1e , and 1 ~- A.J "•"-,•-1',~ ~ • · van Helden./on the technical side., and Mr. Wei-A.-., this ' i(- ~ • operation could not have been,,,.~i{be short t1me~1t was. It is a hope ot my own that~he closer relations that ·are now beginning between Argentina and the Bank will be a substantial help in t h ~ e ot Argl!Dtina•• aoono-,.t:" ~ U4J ~ k..u.,.-.A,,f/ ;,. ~L: ~ MR. KNAPP: Thank you very much. V rr-· "1.