Transcript of one hundred forty-first special meeting of the Executive Directors of the Bank, held on Thursday, January 18, 1962

STRICTLY CONFIDENTIAL INTERNATIONAL BANK FOR ERC RECONSTRUCTION AND DEVELOPMENT TWO HUNDRED FORTY-FIRST SPECIAL MEETING or EXECUTIVE DIRECTORS Board Room ! International Bank Building Washington, Do C. i Thursday, January 18, 1962 II The meeting was convened at 10:35 o'clock a.m •• Sir i !William Iliff presid1ngo 11 I I I ·I l JI I j I I i 11 11 11 II II Ii ·I Ii 11 l 1! I STRICTLY CONFIDENTIAL 2 I' i! ,, CONTENTS ii 'i I Agenda Item Proposed Loan to Argentina • • • • • • • • • • • • • 3 I ) 11 11 11 ,, ,1 I STRICTLY CONFIDENTIAL 3 PROCEEDINGS ------·------ Now, the first item or business is the President's Report and Recommendations on a proposed loan to Servicios Electricos del Gran Buenos Aires inthe Republic or Argentina. I would like first to call on Mr. Chauf'ourn1er to speak on the general aspects of this operation. Mr. Chautournier. MR. CHAUFOURNIER: Mr. Chairman, Gentlemen: The proposed loan tor power development in Argentina follows by some six months the Bank's first loan to Argentina made last i I I June to assist in financing a program or highway construction.I 11 I Various economic reports have described to you the weak ! I i I I 11 I 'I',:· I STRICTLY CONFIDENTIAL 4 economic and financial condition 1n which Argentina was left i in 1955 by the dictatorial regime. 11 Ii I think it might be of interest to you to hear ot some 11 I, Ii ti of the operational problems which faced us in our efforts to 11 i find a satisfactory basis for financial assistance which I would contribute to Argentine economic recovery. An appreci- I ation ot these problems has a direct bearing on the Bank's i I I attitude toward Argentina today. i I I The first Bank mission to Argentina found that highest 1 i,,, priority for new investments was in the transportation and '1 li power sectors. But before projects could be begun in either 11 sector, basic steps had to be taken -- some time consuming Ii Ii and some politically difficult -- but necessary if the il desired objective was to be achieved. Ii I' The chief need for investments in the transportation I I i sector was in highways and railroads. But even to make a I 1! 1 1 :::::v:t::o::t:hean: :::1::e:::::::~qu:~:b:::: ::eof 11 •I I I benefits of new investment 1n railroads required the political!- I 1 11 ly difficult steps of eliminating excess labor, changing I working regulations, adjusting tariffs, closing uneconomic :'. I lines and establishing good management. II J! In the power sector, too, the Peron dictatorship left I : i a legacy of problems which had to be resolved before there I 1! would be a satisfactory basis for new investment. These 11 i Ii I' STRICTLY CONFIDENTIAL 5 problems will be discussed more fully by Mr. Piccagli. The power and transportation surveys for which the Bank H 1, /; was executing agent, provided a technical support which has .! Ii been used by the Government in resolving key problems and 'I ii ii 1: which helped lay the basis for lending operations 1n both of 'I ii 1 1 I these fields. j The preliminary conclusions of the transportation survey ' i I were of importance for the highway loan, and the power survey concluded that completion or the proJect now before you was ! ! ii I the most important step to be taken 1n that sectoro The 'I l detailed steps taken by the Government to provide a satis- II factory basis tor the proposed loan are described in the 11 '1 President's report. 11 The other part of the transportation problem -- the 11 11 problem of the railroads -- was the most difficulto Last h year, however, the Frondiz1 Government began to deal with I! II the problem of excess labor, thereby precipitating a serious I, 'l1I strike. The rate at Which the Government can progress in II solving this very serious problem has yet to be determined. t ·1 !l 11 We have been following closely the action taken by the 11 11 Government in its attempts to deal with the railroads and II will continue to keep 1n close touch with the situation. ,I ,I J! As is evident from the brief account I have given, each 1! ,I lj jl loan has been preceded by substantial work to prepare a II satisfactory basis for a sound operationo The projects on ii ii Ii 11 d II " H STRICTLY CONFIDENTIAL 6 which we are working are or key importance to Argentina's i 11 q economic recovery and future growth. In order to obtain the i[ Bank's assistance, the Government has taken steps that were i\ I I often politically d1tticult but important to the eventual I I success of the operation. Argentina will continue to need substantial financial assistance for investment vital to her economic recoveryo The size and character or the debt structure inherited by the Frondizi Government, and the corresponding high burden I I of service, reinforces the requirement, which is always i important, that new external obligations be incurred only ror projects or top priority. I I I The record of the Frondizi Government in this respect I i i has been good. But the apparent magnitude of the new invest- I l I • I J ments still required means that even with skillful manage- 'l ment, and limitation of new investment to very high priority I ·I projects, Argentina's debt service will tor some time be I uncomf'ortably high. I As long as the Government adheres to its present policy and manages its economic and t1nanc1al affairs well, the l 1! i I I I risks are risks that the Bank can properly bear. The conversd, I I I ot course, is that adherence to such policies is an essential I i j i prerequisite tor turther substantial Bank operations in I I Argentina. I I Thank you. STRICTLY CONFIDENTIAL 7 THE CHAIRMAN: Thank you. I now ask Mr. Weiner to talk on the economic aspects or t~e ii Ii ii I! Argentine situation. ,I /! MR. WEINER: Mr. Chairman, Gentlemen: This 18 not an i 11 easy moment to formulate a measured view of the Argentine I economy. A 42-day railway strike ended but a month ago under 11 11 conditions which make the final outcome or this difficult ii conflict still obscure. The resignation last week ot the :I :1 '1 Minister or Public Works adda uncertainty to the railroad picture at this moment, though the final resolution of this problem continues to be vital to the Argentine economy and to i I the Government's finances. i A reading of the Argentine press reveals that difficulti~s I I experienced by the monetary authorities 1n implementing the I I l 'i' kind or credit policy needed to preserve financial stability I I li at the present exchange rate have, if anything, been in- ,j 'I Ii creaa ing o We have no information as to the precise cir- 11 11 11 cumstances which led to the resignation last week 0£ the 11 /1 Minister of Economy, though the President, in announcing the 11 'I I, :1 resignation, reiterated that the Government's financial polic~ 11 I ii I goals remain unaltered. 11 jl ii The prospect or nationwide Congressional elections I i' ,I I 11 11 within the next six weeks has certainly not made the solution I ,, !1 I! I II or these problems any easier. ii :1 These are but the most recent signs or the continuing II 11 Ji •I i: 1: 11 STRICTLY CONFIDENTIAL 8 "problems or economic and financial management which the !! li i Argentine Government is having to face, problems which have :1 been set .forth 1n the economic report on Argentina which you 1, have received as part or the documentation for the loan which !I is now be.fore you. :1 There is certainly nothing that an individual staff member or this Bank could bring before you this morning to dispel the uncertainties which the report has pointed to. They are an integral aspect or the present Argentine scene. ;! But there are aspects of the Argentine picture which should i not be lost sight of in any current appraisal. iJ i It has been said time and time again that Argentina is !I not an underdeveloped country, though it is a developing I i I eountryo This deserves to be said again at this moment, Ii 'I not because it provides any new assurance that difficult 11 problems will tor this reason be resolved readily, but because I I it points, we think, to the nature of the Argentine problems. 11 They are not the typ1ca1 development prob1em8 or lack 11 h I! or resources or lack of an easily developable labor force. 11 They have been and continue to be problems of policy. Looking! I at the record or the present Government 1n this light, the I record 18 creditableo The economic report alludes to the 11 I situation that was inherited three years ago and describes I measures ot very substantial progress. r 11 To achieve these improvements has not been easy. 11 11 ,I Ii STRICTLY CONFIDENTIAL 9 , Political conditions have called tor changes in the pace and 1 the technique or achieving policy goals. The recent change ii Ii IJ of economic ministers is the third such change or this ii II Government. But basic policy goals have not been changed. I' 1! Ii Indeed. the railway strike and the current credit policy 11 II problems arise from reactions to vigorous -- some have said I too vigorous -- effort by the Government to confront very 1, 1, difficult issues without compromise. I, i Much still remains to be done. The Argentine economy I I I needs not only the new power facilities that the present loan will make possible. but other very expensive facilities as well. Because so much is being attempted so quickly. and :1 /I not yet under the best possible coordination or in the best r! directions. there will continue to be strains and problemso New emphasis now clearly needs to be given to the development or exports and to financial planning and external i :I !J debt management. Evidence of this will be required by this ! Bank for i'Uture loans. But three years of office still fl remain tor the present Government under which the real :1 iJ improvements or the past three years have been conceived and ' i11 ,, !1 implemented. I' i 'I THE CHAmMAN: Thank you. Mr. Weiner. i Now. Mr. Piccagli will speak on the technical aspects I iI or this power project. Mr. Piccagli. /1 'I !I MR. PICCAGLI: Mr. Chairman. Gentlemen: The salient i II i :1 'I STRICTLY CONFIDENTIAL 10 events leading to the present situation of the Power Industry /: in Argentina have been presented in the Technical Report as Ii ii an introduction to the plan which is both the reason for and II 1, ii Ii the basis of the proposed loan which is before you today. !I ·I However., the history ot developments in the power sector Ii 11 11 ii is so long and involved that the presentation had to be :1 I ii I :l fairly drastically summarized in order to keep the size ot thei I I I report to a reasonable number or pages. It may therefore I I ' be ot interest at this time in some respects to elaborate I I I on that history. I II An electricity supply industry with standards of good j service was developed in Argentina from the beginning of the ;I ,1 ,l century. Most or the power companies were foreign owned and., ii jj in keeping with national economic trends., the largest ii jj •/ undertakings were established and grew in the Buenos Aires ii I! area. I' I I I The nationalistic tendencies which emerged during the regime which was deposed in 1955 resulted in a movement to I ,, expropriate or take over the foreign owned utilities. The I' ·I I movement started with the smaller utilities in the interior. I And by 1955, practically all the companies except those in I t Buenos Aires had been taken over and the strong campaign I i started against those in Buenos Aires. 1 I I I The instrument of these actions had been, in most cases, i 11 a government agency established in 1947 and called Agua y 11 i' I! !i STRICTLY CONFIDENTIAL 11 Energia Electrica. Because it was in many respects a political I instrument., Agua y Energia never had a stable and effective Ii /I management. Its Presidents and other top ot'f.'1cials were 11 I: changed frequently and even when able persons were appointed., II11 they would not be given the scope or time to shape the Agency i! !I into a reasonably sound organization. 11 ti il :i ii Thus, projects were undertaken for Which it would have il rl been difficult to find justification., construction started I ' i ' before carrying out reasonable planning and without suitable ,I I arrangements to meet the cost of the works. As a result., ,, there were installations built and then not used for years I I I I while others were left unfinished. This situation led to i the paradox that in the face ot a growing power shortage 1n I I Buenos Aires., the foreign owned companies in that area were I 'I' ! prevented from taking on any of the expansion work which I ! was necessary while Agua y Energia was ineffectually pouring i I :! government appropriations into low priority works elsewhere i I in the country. ,1 I •1 These problems and the relative positions or the opposing I I ' interests became so crystallized and politically sensitive that they survived the tall o.f the Peron Government and con- I tinued unresolved during the late fifties. These were the I I problems with which the Bank was con.fronted when it was I I asked to assist with power development 1n Argentina. I believe this background highlights the critical and STRICTLY CONFIDENTIAL 12 difficult nature of the decisions the Government has now taken in order to proceed with the proposed reorganization, ii 1 1 which represents a long step indeed in the direction or 1! ii J, remedying the deterioration of the last fifteen years. I' i! With the SEGBA reorganization now being effected, the 11 iq Govemment should achieve its purpose of having, at least '.1 I' !! in the Buenos Aires area, a strong, non-political and :1 effectively autonomous power organization which can be relied fl upon to eliminate the power shortage and to attend to the I needed :1 continued development or facilities in the area. The :> 1 sound provisions of' the new charter and concession, which are I detailed in the technical report, combined with the high I ! quality of the Company's executives, Justify every confidence I that SEGBA will fulfill its tasks well. I I In a situation as difficult as this one has been, it is I I particularly rewarding that it should have been possible to I ,j ' I I arrive at a .financing plan f'or SEGBA which would result in the: Company achieving and maintaining a .financial position so sound as to compare not unfavorably with the best utility standards anywhere. This 1a due in good measure to the large amounts which will be contributed from internal resources to the financing or the program and this in turn is made possible by the relative high level or power rates in Buenos Aires and to the :/ willingness of the Government to authorize further increases I I ! STRICTLY CONFIDENTIAL 13 to meet the requirements or the emergency program of the next three years. Thank you. I: i THE CHAIRMAN: Thank you# Mr. Piccagli. I! i ii !1 Gentlemen# before I ask for comment or questions, I I'i !I think I ought to tell you again the general background or the present economic and financial situation in the Argentine !I as against these recent resignations or two cabinet ministers.: fl !I 'I Yesterday, the Argentine Ambassador sent me a message from !1 President Frondizi to this effect that the Argentine Govern- fl i ment intends to continue applying invariably the policies I 11 II of economic and financial stabilization which have been and !I !I are important goals of his administration. :iI Now# can I have questions or comments? II 'I Dr. Machadoo ,i :I MR. MACHADO: Mro Chairman# I am very happy to lend I ,I my support to this project. It is a very tine project which 11 'I 11 will definitely contribute to the development of the Argentine:# and I certainly want to commend the staff for the excellent 'I i report they have presented. It is one of the best I have fl I read in the many ,years I have been in the Bank. I I I I THE CHAIRMAN: Thank you# Dr. Machado. I I ii II Dr. Lieftincko lj !1 MR. LIEF'l'INCK: Mr. Chairman# I am also happy to be in II ii ! a position to give my support to the proposed loan to STRICTLY CONFIDENTIAL 14 Argentinao Having read the very excellent report which is : in the Economic Report., I have come to the conclusion that in the present conditions and 1n view of the very high foreign 1; i! indebtedness and the balance of payments prospects., Argentina I! is rather a marginal country for making new loans., conditional II II ,I 11 loans., to. 11 I think the Bank is taking some risk in granting this [1 II loan to Argentina., but I think it is a Justifiable risk. It 11 'I 11 ,\ has been stated very clearly in the report and has been 1, .- l further elaborated on by Mr. Weiner ~ a s to the many . I( !J I uncertainties. tt:mt-!t is by no means certain that the express- ed intentions ot the government., ws1cb, as a matter or fact., I, aa-a t1.1ll ve4t~ will be sufficiently materialized. 11 ti There are very fundamental problems which have to be 11 solved in Argentina. It is not only a matter of making the stabilization program a success., but the economic structure of the country needs readjustment after the disasterous 1 events which have happened in the last ten years. 11 ii 1\ I think one of the main problems is the very high cost :1 11 11 that prevails in the country which is protected by very high 11 II tariffs which makes for the high prices or industrial goods II i and high wages., a situation and condition which affect., as !i a matter of fact., the agricultural sector., which is the main It !I exporting sector or the country. And I wonder with what l1 II very drastic measures it will be possible to improve the II Ii 11 11 ,! 1' 11 I! STRICTLY CONFIDENTIAL 15 economic conditions for agriculture in the near future. i !, I' I fully concur with the statement in paragraph 34 of the !i !1 i! Presidential Report that if Argentina is to maintain her 11 11 external credit, the Government must take even more vigorous 1! Ii and effective measures to deal with its remaining fundamental Ii I economic problems, with increasing emphasis on the development I ! of ~~!cultural and other exports, and must direct its 1! 11 investments to high priority projects within the framework of 1, i' a sound overall financing plan. i ii1l What I wonder is whether sui'ficient attention is already ii 11 It being given te bring about these fundamental changes and 11 i i1, whether already important steps have been taken to create the II !I machinery ~or some economic planning, particularly some !i !1 ,1 ll financial planning. It is true that a committee has been :1 i set up for national economic planning, but it still has to ti ,, show what it can achieveo !I ,, :1 I :1 'I With respect to the project itself, the report discusses :i i the :fact that the Bank had to deviate from its standard 'I :I :i policies in this particular case in order to give the so much i ;1 desired support to this project. I mainly refer to the !I 11 ,4'.:,-.1 i financing of part of the low currency cost of this project. I ! I think the Justification given for it is sufficient, but I I I 11 would hope that in the future, with respect to other projects, 11 !1 in case the Bank would find it possible to go along with !1 !I i these, the Bank will return as much as possible to the !1 :1 :1 :1 'I 'I :1 STRICTLY CONFIDENTIAL 16 standard practices with respect to a country like Argentina. In the Technical Report 1 which also I think 1s an extremely well written report 1 the story 1s told or the development or this project over the last three years 1 which 1s a rather sad story. I think I should 11ke 1 first or all 1 to pay tribute to the Bank and the Starr for the very successful efforts they have made to bring this project to a sound basis. I don't think it 1s very pleasant for the Bank to be the assistant or a project which has this history. On the other hand 1 I think it 1s a great achievement that it 1s now going to be a sound project with very good prospects with respect i to its management and operations. ! ,I I' 1! It 1s stated 1n the Technical Report 1 beginning on page Ii 28 1 paragraph 90 1 that the coat or the program reflects 1n i 11 some respects the consequence or poor planning in the past. Ii 11 I think it 1s very true. I would like to inquire whether 11 11 the cost is also ar.fected in a less favorable sense by ~ U.. " I I way or financing ~ a substantial part or the imported 11 equipment. I! I! The large part ot the equipment has already been contracted i i Ii ,, for and has already been shipped to the shores of Argentina Ii 1: I! and is waiting there in the poor conditions for the actual construction work. The equipment 1 as tar as being tore1gn equipment 1 has been contracted on the basis or suppliers' STRICTLY CONFIDENTIAL 17 credit. The supplier would have to take care ot the financing themselves 1 and I wonder whether this system as such is very appropriate to reach low and competitive costs. Perhaps the Staff will comment on that technical aspect. I have tried to figure out the cost or investment per Ii 1: kilowatt 1 or rather 1 to compare the cost or investment with i! Ii 1 other comparable projects 1 and it is definitely on the high !1 11 I: sideo Ii j! Now 1 in this connection 1 I would also like to inquire 11 I! of the Starr whether they have any figure tor the actual 11 !I production cost per kilowatt hour in order to see how that 11 /j compares with other projects. It makes the impression that II electricity tor industrial purposes will be costly 1n Buenos 11 II Aires area which is unfortunate in view or the fact which I ,I II mentioned already that the coat level generally speaking is ! high and industry will undoubtedly have a protection. It JI 1• difficult sometimes to be very competitive. II Nevertheless. aa I stated in the beginning. I think there jJ I' if are no other alternativeso This project is being salvaged. :11 1 II It is of very high priority1 and I am glad that the Bank 11 " Iii: is in a position at present 1 and I hope it will remain so. li JI to make a substantial contribution to the rehabilitation and :j :1 / further development or this important country. ~I ,, ,, l' :1 THE CHAIRMAN: Thank you, doctor. i 11 ! i' As far as your comments are concerned1 Dr. L1eft1nck 1 STRICTLY CONFIDENTIAL 18 I think that you have echoed the views of' the management of the Bank. " n :1 So f'ar as your questions are concerned, there is one of' 11 11 i them I would like to deal with myself, and that's on the !! II point you raised about local expenditure financing. Now, in ll i making this recommendation, Mr. Black regards this as a most ij :1 exceptional policy departure from our normal policy, but he feels it is juatitied by the very special circumstances of 'I this case and the importance of' the objectives we hope to .,I I I i achieve by making this loan. I The f'irat question I think you asked was whether or not i I ! the Bank knew or the steps that were being taken for sound I I :I economic and financial planning within the Argentine admin- ! istration. Will you do that, Mr. Weiner? MR. WEINER: I don't think, Dr. Lief'tinck, we have anything to add to what has already been said in the report. Our understanding of the situation is that a development council that will be the nucleus around which these functions: ' ' are to be developed is being established. A nucleus staff wa~ established within the Ministry of Economics, and I gather it; is now preparing to develop a work program and to amplify its working facilities. This is all very, very recent. We don't have any information as to how the program is to develop, its general orientation or how it Will be STRICTLY CONFIDENTIAL 19 affected by recent changes of personnel within the ministry, but our general impression is that this is recognized as a I, 1, I 1: :function that has to be performed. Shall I say, it is Ii recognized now more urgently than it has been in the past. I! 11 And in the absence of contrary information, it would i.I iIi be my judgment at the moment that the work to prepare this 11 !I new service within the Argentine Government will proceed I! i and that we expect to keep in touch with it and may have ii !I more to report as it develops. 'I :1 :, '.I THE CHAIRMAN: Thank you. I i1 :1 Mr. Piccagli, will you deal with Dr. Lieftinck 1 s :, .1 points on correspondence? I I ! I MR. PICCAGLI: I will be glad to. I :,I Mr. Lieftinck raised first a question as to the general i d wording of the cause for the high cost of some of these I " I facilities. I'd rather like to take up first the second I :I question which was on the appropriateness of the method or 1 .I 'I ·1' procuring large equipment of this nature on the basis of I •I I manufacturer's credit. It will lead into the answer to the I 'I I first question, I think. ,I i There is no question in my mind, and I am sure I speak for the Bank, when I express my utter conviction that this 1 1,1 is the wrong way to procure equipment and to finance these :1 :I types of work. It inevitably has within it the seed of a i1; later problemo 'I :i i 'I :1 :1 STRICTLY CONFIDENTIAL 20 When buying a power station of this magnitude on terms of eight, nine years, inevitably, there is with it the problem of seven years later doing something about it because it is not an end to itself. So this is a question on which we have left no doubt in the minds of our Argentine counter- i: parts or, indeed, of any of the people undertaJ,1:t=1g that we I' 11 deal with in our general work in the Bank. 1: 11 Ii !i Now, as to how heavily this weighed as a factor in the 1: Ii 1: present cost of the station, the picture is less clear, and 1! 11 I' 1! it is for that reason that the wording used in describing Ii ii II 1: it was general. I: i11: By itself, the original contract when it was signed, Ii I! taking into account the rate of expansion prevailing at the ~ Ii time J..e' expenditures that were anticipated was the equivalent x I 1! 11 of about $172 to $175 per kilowatt. There is no question 11 [! in my mind, again, that if keener competition had been 'I I secured and if the picture had not been clouded for the request for financing arrangement, a better price would have been obtained, maybe 10 or 15 per cent lower. Yet, that price was not so bad as to have by itself some serious consequences. What magnified its importance 1 out of all proportion was the ineptitude in which the entire question of planning was handled, the location chosen for the station, which was not submitted to the judgment of the contractors which could even at that time have advised againsti! STRICTLY CONFIDENTIAL 21 it, and the fact that the work has now been progressing for the better part of four years, I think. There are two years to go. And therefore, the interest during construction on i 1 heavy sums has been predicated over a nruch longer term. 11 The 11 11 11 11 efficiency or laboring organization has been very low because Ii or the start and stop operation in construction. And, 11 I I therefore, in order to get up to this current and fairly I conservative submitted price or $240 or $245 per kilowatt, I there are too many other things that come in for one to I blame it primarily on the manner in which the procurement t I was done. 11 Production cost -- a production cost of the new Buenos Ii Aires station has not been calculated or, at any rate, it ti has not been introduced in the report. It is between eight I and nine mills per kilowatt hour, assuming about an 80 per 11 cent utilization or the plant, which no doubt will be I I realized. It isn't, I don't think, in the light of the I I I situation in Buenos Aires so high that it would cause a I I I retroversiono 11 One or the factors that are involved in the situation is that there had been no plant installed for such a long 1i 11 Ii time that the overall efficiency of the system before Gran 11 11 !l Buenos Aires comes into operation is very low so that average! Ji I 1! Ii fuel consumption per kilowatt hour for existing facilities 11 11 i 11 j! 1! 1: 11 STRICTLY CONFIDENTIAL 22 is quite high. i; I would venture to say that if it had been possible to l1 11 Ii complete the station at the contract price., the production Ii i cost would have been about one mill per kilowatt hour lower. i One of the reasons., of course., why the production cost as 11 II such was not calculated or shown is that this is clearly a 11 IJ II case where the entire cost of operating the system is of It 11 interest and perhaps the disparity between these individual ti i elements can be shown by saying that a generating cost of ii I o.8 to 0.9 cents compares with a rate to the ultimate con- 11 sumers which is going to be charged in the next three years :1 which is in the neighborhood., I think., of 3.5 or 3.6 cents. I1 I believe that perhaps this answers your question. I I l MRo LIEF'l'INCK: Very good., yes. I l THE CHAIRMAN: Thank you. Any other question? Mr. Larre. MR. LARRE: Mr. Chairman., I have just a general comment on this project. I was at the technical aspect; I think it has been much improved since the first time Mro Black spoke to us of it when he said that he was not quite satisfied that it was a good project., but it was an urgent one. And that was the reason why he was pushing this project to the Board. I think it was two or three years ago that the urgency STRICTLY CONFIDENTIAL 23 of the matter seemed to have been increasing, but the Ii importance of the project has been improving at the same I! time. I :I The only point which makes me a bit uneasy about it is 'l the one that has been mentioned by Mr. L1eft1nck when he l I says that it was a very big loan to lend $95 million to a country like Argentina on top of all the other external commitments by the country and which is impossible of taking. I ,I Which means that the third part of the payment receipts are I devoted to credit, paying the creditors. :1 I think that we don't have any doubt that President !I Frond1z1 is a person with the beet financial policy which is II ii i in the country in view of the political and economic diffi- culties he has to overcome. We have been somewhat disturbed II I by the crisis in the cabinet which was so important in the I newspapers, and the assurance with which it has been given 11 ,1 by the Embassy to the Bank on the part of the President. 3 I think that the more basic problem which ¢ffeets the II I economy of Argentina as well as most of the countries in I South America is the unbalance of the terms of trade. I 11 I don't think that the Bank can do anything for that. I don't I I 'I think that the Bank can resolve these difficulties and because, I ! of this risk shy away from ~lending important amounts to 1 I 11 those countries when projec,ts have a high priority than when I' they are well conceived and when the management of the countr~ i STRICTLY CONFIDENTIAL 24 is satisfactoryo But I think that on a general level, we have to take note of this unbalance of the terms ot trade. I know that i 1! ,I 'I the French have been calling a conference in Geneva in 11 i II order to discuss the price of wheat, international price I I I ot _wheat. I hope that Argentina will get something out of I II that. Ii I' 11 [I THE CHAIRMAN: Thank you. Ii Mr. Aragones? 11 I MR. ARAGONES: Mr. Chairman, we certainly can't have II any complaint on the Economic Report we have received on I Argentina. In the last year and a.half, I believe we have received over three economic reports. The other day, we were talking in case of the IDA loan to Jo.rdan or a friendly eye to that country. You could use the word, scrutinizing eye with Argentina because we have been kept up to date completely. Besides the three reports 11 Ii we have received, there has been a very interesting report i[i from the Fund at the end of 1961, and then it has been the Ii power survey made by the Special Fund of United Nations in i! 11 which the Bank also contributed. 11 j! Ii I am glad to see that this preparatory work has led six 1: i ii ,, months ago to a loan for roads that was essential. And this II I! !. time, it has led, not only to a very sizable loan to i ,. 1! Argentina for power development, but also has enabled to /i ii I· I! STRICTLY CONFIDENTIAL 25 establish SEGBA on new foundations. If SEGBA operates successfully, as I hope, the power program will be, not only enough for the time being, but for a long time. This question leads me now to what I call Section 3(b) of the Articles of Agreement regarding the :i possibility that the Bank finance local expenditure when the i: ,, ,, Ii enterprises or the beneficiaries of the loan involved cannot :[ Ii raise funds at reasonable terms. d Ii I realize that when there were financial difficulties 1: i Ii all over the world, this principal offer of financing only ji ii Ii purchases abroad was important, but perhaps the Bank has 1: i! reached the position that the exception could be applied j! 11 [i more frequently to special cases whenever these countries j/ deserve assistance. 1' I! The foremost purpose of the Bank is to promote economic ,I 11 development, and I think the means to attain this end are i II accessory~ I believe, to the final purpose. And when I was 1, I reading the report, I was breathlessly waiting for the end l ,I I' 1/ of the conditions. There are so many all over the report. I I They are all justified in most cases, and certainly the i j/ Bank tries to protect itself to the minimum possibility that i 1: may arise. 1[ 1 On the other hand, I must recognize that the Bank has I' !i ,, j[ been generous 1n the terms. The payment period spreads up to 1986, I believe, and the bulk of the amortization falls Ii Ii Ii11 I I ,I STRICTLY CONFIDENTIAL 26 beyond 1970, which is a year in which Argentine balance of payments certainly will improve. The Economic Report attached to this proposed loan is not only an enlightening report of the economic and financial institutions or the country, but it is also establishing a set of recommendations. And I believe if the Argentine authorities carry them out with determination, the economic and prosperous development of the country could certainly be achieved, Mr. Chairman. THE CHAIRMAN: Thank you.' Mr. Khosropur. MR. KHOSROPUR: Mr. Chairman, there is no doubt that the ,.~ economy of Argentina is a metihe« of great concern. wh1ch I ~ don 1 t have any objection to this loan because the management and the staff believe that Argentina can still afford to have some more loans. I would like to ask two questions. One is about the balance of trade of Argentina which in the previous report of June, 1961, says that the balance of payments is in equilibrium and the price has been established for more than a year. In the present report, it says that balance of payments is in serious deficito And certainly the main reason is //- because of the deficit in balance of trade wbicb has been ·1t.4-, • said in the report/'they have $400 million deficit in the ""' STRICTLY CONFIDENTIAL 27 balance of trade because of the imports which were 40 per cent above the last year level. And considering that, according to the report, Argentina is unlikely to increase their ~ because of the financial )• problems. I would like to ask how they are planning to balance their trade with that $400 million deficit and how was the previous balance of payments in equilibrium and now 1 it is in serious deficit again. i i i And my second question is about the prices which in the ,I 11 previous report it says the prices were stable. But I see I, II in the report for J~Ae-o# -- I think November, 1961, of II 11 the fund which shows that the prices, wholesale prices, in 11 Ii 1960 were 9 per cent and in 1961 12 per cent up. And the i cost of living, it says, was 12 per cent in 1960 and in the II ii 9 months of this year was 12 per cent, which might be more !I i than 12 per cent at the end. And I would like to ask how I :are the prices now in 1 61 and 1 60 and how is this stability 11 II of: prices it says in the previous report. 11 Ii THE CHAIRMAN: Mr. Weiner? !I iJ MR. WEINER: I will try to answer your question, sir, i! fl in parts. ii II lj As for the comparison between the last report and this '1 11 report, I don I t want to apologize for apparent discrepancies, 11 i but I will try to explain them. The deterioration of the 11 II balance of trade which is mentioned underlying in the recent 11 11· ,, I. !1 11 i STRICTLY CONFIDENTIAL 28 report is a matter of fairly recent development, and more important in terms of the comparison of the two documents, · a matter or fairly recent knowledge. I I 1: This may appear odd, but. in fact, there were substantial 1: Ii 1. I' reporting discrepancies that were uncovered in the statistical I! Ii office. And to the best of my recollection, for a number of 1: Ii months early this year, no official data on international II 11 ii trade of Argentina was published while a revision of the Ii Ii records were ma.deg as a result of which some of the stat1st1- ti ii i cal data reported for 1960 changed. And also, a different Ii type of picture began to emerge for 1961. Ii There is to a degree a mechanical explanation to that, I! Ii but this is not the. whole.·story. I think part of the story is also the import of machinery and equipment which has been i i so large in the increase of imports into Argent1n8Jhas been 11 Ii,, an accelerating one and a very recent one. 11 II extent, even leaving apart the reporting problem which Ii 11 ,I aggravate~ this d1££erence between the reports, a change Ii I! would have been expected from the two dateso 1, I• I• i: As for the question of the price level, I would be i 1: I happy to review this with you and compare numbers and I. I documents after the meeting if you would prefer. Table 25 of the Economic Report attached here indicates that as far as the official index of wholesale prices is concerned, and these are just reproduced from the official tables, the STRICTLY CONFIDENTIAL 29 increase in the general index in 1960 was only 1 per cent. Now, I don't have the Fund figures in front of me, and i: I would be very happy to review these with you and try to i Ii reconcile an apparent inconsistency if you chose. 11 .I As far as 1961, prices have begun to move again and the 11 11 increase in the movement began ir you compare month to month 1, 1 1 1 figures in the spring of this year, about April, April-May i·1 was when most of stability began to give way to an upward 11 I' i movement in prices again, a time which was sufficiently late i not to have been reflected statistically in the last report. :1 :1 As for your question about how Argentina proposes to 11 ;I handle this difficulty -- MR. KHOSROPUR: The balance of trade. Where are they I , planning to have imports or what are they planni~ to do about: the balance of trade? MR. WEINER: I would be very reluctant, sir, to antici- pate the policies of the Argentine Government which they propose to take 1n this matter. I think myself that there :1 I 'I !1 are problems of credit policy that are clearly involved, and i there have been discussions with the Fund on thiso And II I 11 '1i clearly the kind of domestic credit policy that will be ti 11 11 pursued will be one important factor affecting the demand i II for importso 11 1! II There is also the question of exchange rate policy 11 I which is a matter of some discussion and speculation. 1' I 11 11 Ii II II II q I, STRICTLY CONFIDENTIAL 30 don't know how this will develop. Clearly, some combination of these are likely to be chosen to restrict the demand for imports. I don't have any impression at the moment that the Argentine Government is considering reimposing quantita- tive limitations on imports to achieve a new balance in their trade account. THE CHAIRMAN: Thank you, Mr. Weiner. Mr. Elmandjra. MRo ELMANDJRA: Mr. Ch.airman, I think that the report is quite clear on the importance of such a project for Argentina, and the comments made by Dr. Lieftinck as well as by other Directors are quite sufficient. I will not talk about the evaluation of such a projecto I would like, however, to go beyond the fact of saying that it is a justified loan and underlying this the event that the Bank is really, to my mind, fulfilling its real mission by making a real contribution to help the country of this importance to get on its development way and by / showing rather flexibility and making very great exception 1 11 because there is quite a real need. Ii Ii Problems of either financing the local costs or the 1: II 11 indebtedness or even of the risk that the Bank is taking If seem to have come into a secondary stage because the manage- II I ment as well as the staff have been convinced that by making this loan Argentina would be helped. And I would like to Ii 1: 1: STRICTLY CONFIDENTIAL 31 express my wholehearted satisfaction on the action or the management in this respect. THE CHAIRMAN: Thank you, Mr. Elmandjra. Mr. Pitblado. MR. PITBLADO: Mr. Chairman, I would like to support this loan on the general thoughts one has about it. I don't agree entirely with what Mr. Lieftinok and Mr. Larre said, and I don't need to add to that. There is one specific point about insurers which arises 1n this and other cases. I would hope that the Bank would use its influence in this field to get the greatest degree of international competition as it does in the ordinary field! or procurement. On the question or supplier's credits with which this project started, I think I would just like to say a word since it was British private interests who entered into these credits. On the question whether this is a good way to undertake this sort or development, I certainly wouldn't dissent at all from what Mr. Lieftinck implied and what Mr. Piccagli said. It seems in the long way or development, and it is certainly right for the Bank to take this view quite strongly with its followerso This particular transaction looked at from the other end from the point or view or the British Government was a private transaction arranged between suppliers and the people STRICTLY CONFIDENTIAL 32 in Argentina, which was within the limits of the length of credit for this sort of thing which the government could allow, I mean looking at this from the entirely other point of view of being paid for exports. When the project got into difficulties and when there was a question of the Bank coming in, the government did intervene to help with the suppliers to get them to extend the terms or the length of this credit and to postpone these installments. And this was done in order to help the Argentine in their negotiation with the Bank and help to get the thing on a good footing. But when these are private arrangements between private suppliers and the government suppliers in which the government is contributing directly, the suppliers wanted to get the ordinary form of credit insurance. THE CHAIRMAN: Thank you, Mr. Pitblado. Mr. Cocke. MR. COCKE: Mr. Chairman, I only have two points, both of which have been covered, but I think for the record they should show here in sequence, one of which is the telegram that you conveyed to the meeting which 1n substance stated the Bank's position on behalf or the Argentine Government that they saw no basic change in their economic structure by the change of their cabinet officers. And the second feature is Mr. Black's statement that STRICTLY CONFIDENTIAL 33 you mentioned a little earlier which was that this was a change in departure, but not to be a basic change, in the local currency question. I believe that it pays sometimes to have the record show that those two points have been dealt with throughout the entire discussiono I I I And may I associate myself with the group that will 1i ! support and pass this particular loan. I1 1 11 THE CHAIRMAN: Thank you, Mr. Cocke. 11 11 Any other questions? 11 i' Mr. Hudon. 11 11 ,I MR. HUDON: I would like to indicate my support for 1: .I this project as well, Mr. Chairman. I would also like to 11 ·1 11 pay tribute to the management. I think that in many respects, 'I I, Ii this is kind of showing what aid can and should be. In " ii 11 11 many respects, it is a model of what it should be, not that !1 !I !! I am suggesting or hop\ing that the Bank will be confronted 't( !1 :1 II with this type or project very often, but having been con- 'I 11 i fronted, I think the management did an excellent job in Ii i1: putting;the project back on its feet. ,, !! I also share the views expressed by Mr. Lieftinck ii 11 I, wt~ concerning the Argentine ~ p s in ~ems.-0$ ability to II I: 1! carry more debt ~~~·rrginal. ~ I think that a good look J\ :r·, Ii has to be taken at the structure of the Argentine economy II 11 and see whether a better balance can be achieved. I' 11 Ii II I' II II STRICTLY CONFIDENTIAL 34 And basically, for this reason, I also would like to associate myself with the last two sentences in paragraph 34 of the President's Report. THE CHAIRMAN: Thank you. Ii I i: Any other question, gentlemen? i ,I I! Mro Van Campenhout. Ii Ii MR. VAN CAMPENHOUI': Mr. Chairman, I am glad to support II 1! II a project which I don't think at this time needs more comment II ii than those which have been made, but I would like to I I I associate myself with the two major points made by Mr. Cocke, iJ and I would like the record to so show. 11 ii :I THE CHAIRMAN: Thank you. i!1 :1 Well, gentlemen, if there is no other question, before :I I ask for the approval of the resolution, I would like to :1 'i mention the question of participations. 'I :1 As you know, it is usual for the Bank to seek partici- i :I :.;, pations without our guarantee in the early maturities or :i our loans. Now, in this case, we did not seek participations :1 :1 :1 and the reason is this: !I We have been informed by Morgan Stanley and Company / who are the Argentine Bankers that they believe that it i I I might ~ be possible to place a substantial Argentine )( I Government issue with leadipg ~sand Insurance Companies I II 11 in the United States, Since the early maturities or our loan I, i would be roughly the same as the early maturities of this !1 II 11 II i STRICTLY CONFIDENTIAL 35 placement that the Bankers hope to bring about, we have ' refrained from soliciting participations in case it might 11 ii / interfere with the movements 1n the private market. 11 MR. COCKE: That was Morgan Stanley? Ii THE CHAIRMAN: M:>rgan Stanley, yeso I MR. ARAGONES: Mr. Chairman, what is the amount con- 11 II templated in the issue? 11 Ii Ii THE CHAIRMAN: They have been talking -- this is a 'I 11 II 'I confidential figure -- they have been talking of $25 million. Ii i MR. ARAGONES: Thank you. i I! !J THE CHAIRMAN: Now, if there is no further discussion, :, i could I hear a motion that the Executive Directors approve 11 ,j the resolution? i MR. MACHADO: So move. I I MR. COCKE: Seconded. I THE CHAIRMAN: All in favor please say, "Aye." .I I ( Chorus of, "Ayes • " ) i I Contrary, "No. 11 ( No response.) :1 I :1 iiI I declare the resolution approved. !I I' We propose to sign the loan documents tomorrow morning 11 II at 11:00 o'clock. i Mr. Haus. II ' MR. HAUS SOLIS: Mr. Chairman, on behalf of the Governme9t I of Argentina that I have the honor to represent here now, I ' i I j 1/ I' 1! :1 ll 11 STRICTLY CONFIDENTIAL 36 want to thank the Staff for the very interesting report it has made and to the Board for their approval of the loana I know that I am supposed to say nothing about the loan, but I want to make a contribution of my personal contribution , with some information that I think it is very interesting. 1: I! It was ref erred here to the price of the plant. It was said I! 1: I! that it was higho 11 ,. I think I have read a report, a very me:Lent report, of 11 J! the EC~LA. It was made in 1955, and I was astonished to )( 11 ,I I! see that the price of these types of construction, Argentina Ii Ii is about the same as this in the report. And I am in the Ii II 11 II position of assuring that the price is perhaps a little 11 i higher, but not too high. Ji i! 11 Thank you very :much. J: 1! ii THE CHAIRMAN: Thank you. ,, ii