Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, December 17, 1968 : Argentina - El Chocon Power Project

STRICTLY CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION JOINT MEETING Washington, D.C. Tuesday, December 17, 1968 A joint meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10:00 o 'clock, a.m. in the Board Room, 1818 H Street, N.W., Mr. Robert S. McNamara, President, presiding as Chairman.  2 STRICTLY CONFIDENTIAL C O N T E N T S Page Proposed Loan - Argentina (Power) 3 STRICTLY CONFIDENTIAL 3 P R O C E E D I N G S MR. McNAMARA: Gentlemen, the meeting will come to The first item on the agenda is a proposed loan to ~rgentina for the El Chocon project, a very large and very 'mportant project. I'll ask Mr. Dosik to come to the table na introduce it to you. MR. DOSIK: Mr. President, Gentlemen of the Board : I am going to give a brief presentat~on on the rgentine economy, the present, and the outlook for 1969. It is · now nearly two years since Argentina embarked nits present economic course. When the new economi tea.I.1, eaded by Dr. Krieger Vasena, took office in January 1967, its irst objective was to develop a stabilization program which ould curb inflation and which would do so without aggravating he reces~ich had begun in 1966. As discussed in the ~ conornic Report which was distributed to you earlier this year, he Government's 1967 economic program was, in fact, carried hrough with an impressive measure of success. However, at the nd of last year, important questions about the economic outloo STRICTLY CONFIDENTIAL 4 ernained. First of all, while the stabilization program ad not done anything to aggravate the recession, there were still only very few signs of an actual recovery in economic activity. Secondly, it was not until the end of last year that some evidence first began to appear that the rate of increase in prices was actually beginning to slow down. In these circumstances, the Government decided to continue in 1968 the main lines of its stabilization program, by budgeting further reduction in the fiscal deficit and by continuing to maintain a tight incomes policy. However, the Government also decided to put greater emphasis on growth objectives in 1968. To this end, it planned a very substantial increase in public investment, especially in transport and energy, two sectors in which the lag in public investment in previous years had left Argentina's economic infrastructure seriously deficient. Developments in 1968 have confirmed the validity of the policy choices the Government made at the beginning of this year. Inflation has in fact been sharply reduced, there has been an unmistakable recovery in domestic economic activity, and, in addition, unemployment has declined. Exports have actually been the weak point in this yeaa:-'s economic performance owing to a poor corn crop, the certain special obstacles that Argentine producers had to face in some foreign markets, and also to some extent, level of export STRICTLY CONFIDENTIAL 5 axes. Looking ahead, briefly, now, to 1969, prospects eem favorable as regards both growth and stability. Good rops are expected next year on the basis of early reports n spring plantings and continued good growing weather; in ddition, the Government's action in substantially reducing exp rt axes on some important products would appear to help clear the ay for much improved export performance next year. Given his favorable outlook for agriculture and for exports, ogether with the pickup in investment in industry and other secto~s, the Government is now looking forward to a 6 percent increase in gross domestic product in 1969, which would compare ith the present estimates of a likely 4 percent growth rate this year. As regards stabilization, rising output and employmen will mean increasing pressure on resources, and some bottle- necks have already developed. However, the expansion of the domestic economy has by and large been well paced and orderly so far, and there still appears to be a considerable margin of unused capacity in many lines of industry. Nevertheless, the Government should still give high priority to maintenance of well-balanced monetary, fiscal, and incomes policies in order to achieve its goal of further containing inflation in 1969. STRICTLY CONFIDENTIAL 6 The success of the stabilization efforts in 1969 will e closely linked to the Government's progress in pursuing woof its basic long-range fiscal goals. These are tax eforrn and the rationalization of public ·serv:._;ices and the tate enterprises. The weaknesses in Argentina's tax structure nd administration have been highlighted this year by the act that revenues have actually been running well beneath estimates. While we do not yet know here the > etails of the Government's budget for next year, the Governmen as made it clear that it does intend to make important changes n the tax system, intended to both substantially increase evenues and to improve economic incentives. The new measures he Government is planning reportedly include the introduction f·a,national land tax intended to provide incentives for a ore productive use of the land as well as to create more eliable source of revenue from agriculture than the export axes on which governments in Argentina have previously had o rely so heavily. As regards rationalization, a good deal has already een accomplished, especially in certain of the state enter- rises, to improve operating efficiency and reduce costs. fowever, as the Government recognizes, much remains to be one before the public sector's use of scarce economic esources and its finances are put on a sound, long-term basis. STRICTLY CONFIDENTIAL 7 The railway problem is the most critical and ifficult one here. While railway operations have been greatly 'mproved over the past two years, the railway still employs bout 160,000 people, many of whom are considered redundant, nd the Treasury will have to pay out this year an estimated 240 million to cover the railway's current and capital eficit. The Bank has recently examined the railway problem in the context of a general study of the transport sector. ~e hope through this study to be able to help the Government in its efforts to develop a concrete program for rehabilitation and redimensioning the railway, so that the railway can, in the relatively near future, come to play an efficient role in a modern Argentine economy. Before closing I have been asked to inform the Board of one thing; that is, that since the papers on this loan were distributed to you, we have learned that Japan has offered Hidronor credit terms similar to those offered by the nine countries listed in paragraph 13 of the President's Report and Recommendation. Consequently, Japanese tenders for generators and turbines have been opened. MR. McNAMARA: Thank you very much. Gentlemen, may I have your comments or questions? Mr. Rice. MR. RICE: Thank you, Mr. Chairman. STRICTLY CONFIDENTIAL 8 We are of course glad to support this loan to ..rgentina. We welcome the Bank's effort to assist Argentina n meeting future needs for power. I have only a minor que~tion, although the fact that I have raised this question before in connection with the achen Power Loan may seem to make it more important than it really is. It relates to the area of the choice between ydro power and thermo power in situations of this kind, and basically the same question arose, as I said, in a loan e considered earlier. In this case, and I refer now to page 5 of your Report, paragraph 15, and in the Appraisal Report, page 12, paragraph 5.08, where it is pointed out that the choice of hydro power is the least cost solution, so long as the cost of capital is, in the case of one study, 10 per- cent or less, and in the case of another study, 7-1/2 percent or less, but nowhere do I see any estimates of the cost of capital in Argentina, and I was wondering if there is any data relating to the cost of capital in that country. MR. McNAMARA: Mr. Dosik, would you comment initially and then I want Mr. Chadenet to add some words, as well. MR. DOSIK: Well, the cost of cap!tal in Argentina is a more fl;iusive concept perhaps than it is elsewhere, as a result of the fact the economy has been· through so many STRICTLY CONFIDENTIAL 9 ears of severe inflation, which means that current market 'nterest rates to which you usually look as your first indica- ors as cost of capital are not a very good guide, to say the east, to this, because interest rates in an inflationary nvironment naturally contain a large element of discount eflecting the actual rate of inflation and people's infla- ionary expectations in addition to the people's estimate of actual worth of capital. There are, however, certain long-term bonds that re traded in Argentina which have maintenance-of-value clauses nd therefore aren't presumably too much affected by infla- ionary expectations, and these have in fact been trading in of 7 to 8 percent. Short-term interest rates of course in the past ave been very high: 30 percent and more. However, as infla- ion has slowed down, these interest rates have come down very ramatically. Now, for instance, short-term interest rates 'n the extra bank market which is very heavily used in Argen- ina came down from well over 30 percent in 1966 to about 5 percent at the end of last year, and are now up to about 8 percent. If one looks at the present rate of inflation, bout 8 to 10 percent, and subtracts that off, you can get some ·aea, some perhaps indication of what the cost of capital ight be considered to be, which might well come within this STRICTLY CONFIDENTIAL 10 ange, we believe, of 7-1/2 to 10 percent. MR• McNAMARA: Thank 17'&U • Bernard, would you add a comment in relation to 1r. Rice's question? MR. CHADENET: Weli, I w:oold just offer a comment which is not as responsive but which goes beyond and gives background information. I am sure that most members of the Board are aware that this range, these figures of 7-1/2 to 10 percent, do not represent the economic return of the El Chocon project of equivalent thermal projects, because in fact we do not know how to measure the economic return of power projects. We know how to measure their financial returns and as we have seen in the report, the financial return will be a minimum of 8 percent. Therefore, one could jump to the conclusion that the economic return will be not less than 8 percent. In fact, intuitively -- and there I am diffident because I have to rely on intuition -- the economic return of the El Chocon project or of equivalent thermal projects is much more than 8 percent, because as it is explained in this appraisal, we have been doing with our lending to SEGBA and now with our lending to Chocon, a pretty long, uphill job of institution-building of sector building of the power. When we started working in Argentina, the power was rather STRICTLY CONFIDENTIAL haotic, so chaotic that the industrialists had practically 11 to lruild duplicate power plants; not being able to rely n the public sector, they had in addition to build their ndividual thermal plants. Now, by our efforts, $150 million o SEGBA and now Chocon, we are building up the power sector, e have built it up in such a way that the industrial sector s starting to rely on the public sector,~d therefore will iscontinue its enormous waste of money in having to ~uild wo power plants instead of one. Now, this does not respond to Mr. Rice's question ecause this could be also achieved, the building up of the ector, by building a sequence of thermal plants. MR. McNAMARA: Are'there other question& or ornrnents, gentlemen? Yes. MR. SHROFF: Mr. Chairman, I support the loan, but should like to draw the attention of the Board to a rather nteresting fact. The debt service ratio of Argentina is as igh as 27 percent, as the report indicates in the documents, nd we have been following certain criteria of creditworthiness n the past, which if applied rigorously or in a rigid manner, n this particular case, one would have thought that the ountry should not receive Bank loans. I am not saying this ecause I don't support the loan. I fully support it. I am STRICTLY CONFIDENTIAL 12 saying this only to draw attention to the possibility in )( he future of a somewhat more flexible approach to criteria f creditworthiness, which would take into account not merely actual performance of the economy currently, but also the expectations about such performance in the future. We hope, Mr. Chairman, that this case may be one of those cases which will probably provide guidance to the new unit which has been set up to consider creditworthiness criteria for future Bank lend1ng, and we hope that such cri- teria will not be well defined, which would inevitably mean application of some arbitrary ratios, but that they would take into account the overall performance of the economy and the expectations about such performance as has been done in this particular case. MR. McNA!.fARA: In response let me first say a word, and then ask Mr. Frie•'1lan to comment further. I think, as I have mentioned before to the Board, we do need to refine our creditworthiness analyses, and in particular we need to give greater weight to the future, and less to the current ratio of debt service to export earnings. We rave done that in a general way in relation to this particular project. We will, as time goes by, carry on much more definitive analyses of future debt servicing potential,  13 STRICTLY CONFIDENTIAL ut let me in relation to the Argentine ask Mr. Friedman to omment on the creditworthiness analysis that has been made nd the conclusions we have come to. MR. FRIEDMAN: Mr. Chairman, I have very little, eally, to add to what you just said, and what Mr. Shroff said. she pointed out, the debt service ratio now is quite high, n the magnitude of about 27 percent, but the projections hich have been made for at least the next five years indicate hat this ratio is likely to decline quite sharply, if it an be assumed that Argentina will be able to obtain external apital for development on fairly reasonable terms, rather han heavy reliance on suppliers credit, which characterized the Our own analysis and discussions indicate that such apital will be available on these more reasonable terms. herefore we see this as a country whose external debt problem s tendi119 to improve as we can view it at this time, but we rely would take the point we'd like to take a longer run ok at this problem on the outlook of a country when coming to judgment on its creditworthiness. MR. McNAMARA: Mr. Alter, I know you've given a lot thought to this, on a loan of this size. Do you want to anything further? MR. ALTER: I would just say in a case like Argentina, were we have domestic savings and domestic level investment  > • . STRICTLY CONFIDENTIAL 14 hich are very subrtantial and where the country has been or the last sever~l years genera~ing very substantial surplus 1, . n current accountt the significance of this deb_.t service ! atio is quite difterent than in a country where you have very arge net capital ~nflows and the prospect for continued ery high capital inflows in order to sustain a certain rate f growth in net income. Argentina is a country that still requires substantial olume of growth capital inflows during this transition period, hile it is trying to bring its economic system into better alartce, but it is a country which over the long term, should ot have to rely to any large extent on net capital inflow n order to maintain the grater growth of income that it spires to at the moment. Now it is conceivable of course that in the future heir t~rgets may be raised and they may also feel for a eriod they have to up their net capital inflow, but so long as e country is in the present situation and has demonstrated is capacity actually to reduce its overall external debt, would feel reluctant to attach very much importance to the bt service ratio it may happen to have at the moment. We have always regarded this debt service ratio as ly one of the indicators to look at in assessing a country's re&i'41worthiness, and there ts a. great variety of cases, STRICTLY CONFIDENTIAL 15 economies wit1{different characteristics, with different prospec s, ana we try to identify each of these characteristics in assessing the importance of this debt service ratio. MR. McNAMARA: Dr. Machado. DR. MACHADO: Mr. Chairman, one Latin American statesman talking about Argentina once said that Argentina ·s a country with a glorious past, a difficult present, and very brilliant future. I am very happy to see the World ank invest in Argentina's future. This is a very excellent reject, and while electricity can be generated in many ways, utting to work the natural resources of Argentina in the hocon, this being the first stage of a multiple p~pose reject in the right direction, in my opinion is the proper 'nvestrnent at this time. Those of you who are not familiar with the history f Argentina, I'd like to remind you that shortly before the War, Argentina had practically no foreign debt, their ones were quoted at premium everywhere, its currency was \ quivalent with gold. Argentina, like other countries, has one through a crisis, but what they have done the past few ears is an outstanding, remarkable performance, to the point hat Argentina's currency today is one of the few currencies, ther than the standardcbllar, the pound sterling, and the eutsche mark, that can be used by the Fund for its ordinary STRICTLY CONFIDENTIAL 16 perations. I'm convinced that what they have done the past years is a sign of what they can do in the next 20 years, nd I am very happy to lend my modest support to your recom- endation, Mr. President. MR. McNAMARA: Thank you, Dr. Machado. Yes, Mr. Reid. MR. REID: Mr. Chairman, this is a very large loan nd represents a substantial contribution by the Bank o Argentina's capital requirements. There are some things hat disturb me and some things that reassure me, however. was disturbed by the fact, as is noted in the Economic \ {emorandum and in the staff's very good introduction, in ornmenting on the Government's domestic program, it has been \ oted that a major departure from the Government's iµ:ogram as been a substantial short-fall in tax revenues. However, was very much reassured by the fact that the authorities re fully aware of the importance of this problem and are lanning a major tax reform. I was also assured by what the taff said in the introduction concerning policies now under ' oot to rationalize Government enterprises, particularly he railways. Having said that, Mr. Chairman, I have one comment on ower in Argentina. It to some extent falls on from Mr. Rice's uestion concerning the relationship between thermo and hydro. STRICTLY CONFIDENTIAL 17 y question relates to nuclear power.in Argentina. I notice n pragraph 3.01, page 4 of the project report, that the rgentine Atomic Energy Commission hopes to have the first uclear power plant in Latin America sufficiently completed o that it can be on-stream by 1971-72, and I was wondering if he staff had any comments concerning how nuclear power will it into Argentina's power developments in the future, and how he cost of nuclear power stacks up with conventional thermal. understand that in this case it's not a question of comparing uclear with hydro but with conventional thermal. Thank you. MR. McNAMARA: Let me ask Mr. Chadenet an~ through im some of his project people to omment on it. MR. CHADENET: We have made comparison of nuclear ower with thermal power or hydro power, the general study ou received a few months ago on the general comparison of uclear power and other means of generating power. In this ase I'd like Mr. Sheehan to supplement because I'm not sure hat my memory is correct. I am not convinced that the nuclear ower here is a very competitive plant with respect to its apital cost, but I'd like you to confirm this. MR. SHEEHAN: Well, this particular plant, as you ight infer from reading the paragraph, the Bank staff was not oo happy with seeing Argentina proceed with this particular STRICTLY CONFIDENTIAL 18 installation, but as far as long-term nuclear development in Argentina is concerned, we did make comparisons with Chocon and conventional power plants, and nuclear plants, and it was pretty much of a toss-up if Argentina were to develop by thermal means, there was almost no difference between a long-term nuclear development and long-term conven- tional thermal development. Argentina will have to face this problem before 1978 when preparing for the next large block of power, and in my opinion it is quite possible that the next step of development would be a long-range program of nuclear power in Argentina. MR. McNAMARA: Are there further questtons, gentle- men? If not, we will consider the project approved. Mr. Caram, would you care to co~ment? MR. CARAM: Anyone who knows the economy of my country is aware of the importance of the project just approved, not only as a source of power for the Buenos Aires arket, but also as a starting point for intensive regional development so needed in Argentina. But the benefits of the project are not confined to the economic side. In this respect I quite agree with the President when, in his report, he points out non~c;ruantifiable  19 STRICTLY CONFIDENTIAL enefits, especially on the psychological end of the program, n impact I am positive will be beneficial one way or another o the whole country. In fact, it is not an over-statement o assert that the whole country is awaiting this resolution f the Board. That is why, in the name of the Government of rgentina, I thank the Board for the decision, for the Bank's articipation in the financial project, and I thank the staff or its invaluable effort to make it possible. MR. McNAMARA: Thank you, Mr. Caram. If I may add one further word in partial answer o Mr. Rice's point, I think the non-quantifiable benefits eferred to by Mr. Caram are larger in the case of the hydro- lectric than in the case of the thermal power. I am not sure he report brought that out but I think we'd all ag~ee .with that this is simply another reason why we all agree inside the .ank that it is wise to proceed as we chose.