Iraq - Wadi Tharthar Flood Control Project

Tiii C'ITY >No. P 5 RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN FOR THE WADI THARTHAR FLOOD CONTROL PROJECT OF THE KINGDOM OF IRAQ June 12, 1950  CONTFIDENTIAL NTERNETIONAL BA1NK FOR RECOINSTIRUCTION AID DEVELOPWENT REPORT AND RECOMENDATIONS OF THE PREPSIDENT TO THF EXECUTIVE DIRECTORS CONCERNING PROPOSED LOAN TO THE KINGDOM OF IRAQ 1.. I submit the followring report and recommendations with regard to a loan to the Kingdom of Iraq in the amount of Q12,800,000 for the Viiadi Tharthar flood control project. PAfRT I - Historical 2. Following preliminary discussions in i1arch, 194y, a Lank mission spent several weeks in Iraq examining the country's fCinancial and economic situation and creditworthiness, discussing the fornation and scope of a development board, and making a technical examination of existing plans for flood control projects. 3. In August 1949, after study of th3 mission's reports, Bank representatives visited London to discuss wn.th representatives of Iraq and the United Kingdom steps then in progress looking to the financing of flood control measures and rarilway development. Shortly thereafter, arrangements were made by Iraq with the Export Credits Guarantee Department of the United Kingdom for a loan of i3,000,000 to cover the proposed financing of the railw-ays. 4. After further discussi-ons of Iraqls foreign exchange requirements for flood control development late in 1949, a basis for negotiations vwas established in a letter from the Ban1 to tlhe Iraq iinistry of Finance, dated January 20, 1950. 5. Negotiations with Iraq delegates were conducted in London from April 1, to Lay 13, 1950, and resumed in Vashl.ngton on June 5, 1950.  - 2 - 6. The authorized negotiators on behalf of the hingdom of Iraq have been His Excellency Ali Miumtaz, former Linister of' Finance, and Dr. Saleh Haider, Vice-Governor of the National Bank of Iraq. PART II - Description of Proposed Loan 7. The Borrower vwould be the Kingdom of Iraq, a member of the Banlc. 8. The loan would be in the amount of 412,800,000 or the equivalent thereof in other currencies. Purpose 9. (a) The proceeds of the loan would be used to finance the acquisition from abroad of equipment, supplies, and services for the specific project of constructing a dam on the Tigris River and an inlet channel for diversion of flood waters to the Viadi Tharthar depression, together with interest on the amount of the loan during the period of construction, estimated at five years. (b) According to present estimates, the proceeds of the loan would be applied as follows: Total (Equivalent in U. S. Dollars) Headworks (dam, sluices, and regulator) 1,988,000 Inlet channel 7,194,ooo Overhead and contingencies 1,918,000 Interest 1,700,000 12,800,000 10. The Government of Iraq intends to invite bids 'on an inter- national basis for aenstruct:ron of the project. After the bids have been  -3- received, the amount of the loan would be reexamined by Iraq and the Bank on the basis cf the actual amounts of foreign exchaige required to finance the project. Terns of Loan 1I. The loan would be amortized by semi-annual payments beginning on April 1, 1956, in the amounts set out in Schedule 1 of the proposed Loan, Agreement, These paynents wrould retire the entire loan by maturity on October 1, 1965. 12. The loan viould bear interest (including l comissionj at the rate of 3-31/l4 per annam. A corititment charge at the customar- rate would be payable from. the effective date of the loan or from December 1, 1950, whichever is earlier. 13.. I consider that thle proposed schedule for the repayment of principal and the rate of interest and other charges in connection tith the proposed loan are reasonable and appropriate to the project.. PART III - Legal Instruments and Legal AuChority 1i. The loan documentation wmuld consist of a Loan Agreement and an Indenture of Assignment to be entered into betweren Iraq and the 3ank and a Project Funds Agreement the parties to which vwould be Iraq, the National Bank of Iraq and the Bank. Drafts of these three Agreements were distrib- uted on JuLne 10, 1J50 (:zcnnent ai-333). Loan Agreement 15J The proposed Loan Agreement is in general similar to loan agree- meents heretofore entered into by the Bank except that the so-called "negative pledge clause" has been omitted.. In itE place the Dank would obtain, in Section 11 of Article VIII, as security for the repayment of the Loan, a  direct grant of all right, title and interest to all petroleum in or under the territories of Iraq, vwith the provision that, so long as payments under the existing oil concessions remain subject to the assignment and lien of the Indenture of Assignment, described below, the security so given shall be automatically released. Indenture of Assignment 16. As security for the payment of the Loan and the Bonds, Iraq would assign, in the Indenture of Assignment, ally and all rights -,rhich it has to receive oil royalties under the concessions held by the Iraq Petroleum Company, Ltd., the Basrah Petroleum Company, Ltd., and the Mosul Petroleum Company, Ltd. These concessions cover substantially all the territory of Iraq. 17. Oil royalties are defined in paragraph (13) of Article I as being, in effect, any payment in any form which Iraq is entitled to receive under the concessions, with the proviso that so long as the present basic royalty per ton on petroleum produced is not reduced except through the operation of a price adjustment clause contained in the concessions, the term oil royalties means that basic royalty. At present the basic royalty is four shillings (gold) per ton of petroleum produced and the maximum permitted reduction through the price adjustment clause is two shillings (gold) per ton. 18. Iraq would agree to make arrangements, satisfactory to the Bank, for the direct payment of the oil royalties by the concessionaires to the Bank, on demand. Annex C contains the form of letter providing for these proposed arrangements. The Bank. on its part, would agree that it would make no such demand so long as the service of the loan were being regularly  met by Iraq. In the event that the service should not be met and the Bank should premature the loan for that reason, the Bank could enforce such prematuring by recourse to the security if necessary. The Bank could not, however, resort to the security to enforce a prematuring of the loan if such prematuring should be for a default other than non-payment of amounts due on the loan. 19. Since oil royalties are normally received in sterling, Iraq would agree that the exchange of any currenoies received by the Bank, under the Indenture of Assignment, for the currencies required for the service of the Loan vould constitute a first charge on all amounts of the currencies required for loan service available to Iraq from time to time. To give effect to that charge, Iraq vrould enter into an arrangement with the United Kingdom as set forth in Annex B. 20. The British Export Credits Guarantee Departument has recently agreed to make a loan to Iraq in the amount of B3,000,000 sterling. The Indenture of Assignment provides that the charge to be given to secure that loan should rank pari passu with the assignment provided for in the Indenture of Assign- ment. The Indenture of Assignment further provides that, notwithstanding the security given the Bank, advances made by the oil companies to Iraq may be recovered by them only out of such royalties as may exceed =800,000 (gold) in any year. Project Funds Agreement 21. The proposed Project Funds Agreement provideS that specified amounts of oil royalties shall be paid to the National Bank of Iraq and there kept in a Project Funds Account. The amounts of funds so specified are the amounts now estimated to be required for the internal costs of the Project.  - 6 - Funds may be withdrawn from the Project Funds Account only for expenditure for the Project and only upon presentation of an application so stating, together with a certificate of a qualified engineer, satisfactory to the Bank, that the goods and services listed in the application for withdrawal are required for the Project and that the cost and terms of purchase are reasonable. Legal Authority 22.. The Loan Agreement, the Indenture of Assignment and the Project Funds Agreement will be executed on behalf of Kingdom of Iraq by Dr. Saleh Haider, who has been authorized to do so by the Council of Idinisters of Iraq. Dr. Haider will also execute the Project Funds Agreement on behalf of the National Bank of Iraq. These Agreements vrill not become effective until after ratification by the parliament of Traq. PART IV - Appraisal of Proposed Lpan 23. A report entitled I"Present Economic Position and Creditworthiness of Iraq" vwas distributed to the Board on November 7, 1949 (Document R-259); and reports entitled "Technical Report on the Wadi Tharthar Flood Control Project in Iraq" and "Additional Information on the Financial Situation of Iraq" were distributed to the Board on June 10, 1950 (Document R-333). 24. Annex A contains the report of the Committee provided for in Article III, Section 4, paragraph (iii) of the Articles of Atgreement. The Economic Need for the Project 25. Destructive floods occur frequen-tly in the Tigris Valley, causing great damage to crops in a large and fertile agricultural area and occasion- ally to city property in Baghdad and other urban centers. By construction of a dam and a diversion channel at a point on the Tigris River about *45 miles -above Baghdad, Iraq vill effect annual savings of substantial sums  -7- presently required for levee maintenance and control and for relief measures, especially when levees have to be dynamited in order to save Baghdad during peak flood seasons. 26. Utilizing the Vuadi Tharthar depression for the diversion of flood waters from the Tigris, the present project constitutes the flood control stage of the multi-purpose Wadi Tharthar project. Although the project, in this stage, is 'limited to flood control, it provides for construction of a dam on the Tigris River to withstand a head 'of 10 meters which will be required to impound waters for future irrigation. The provision for a 10-meter head, instead of a 6-meter head suitable for flood control only, entails comparatively small structural changes in the diversion dam which will cost much less than if these changes wrere made at a later date. 27. Over 80%o of the population of Iraq is engaged in agriculture. MAeasures to increase the productivity of the country's agriculture should result in an improved balance of payments as well as in a higher national income. Such measures are basically dependent upon irrigation which, in turn, requires control of the rivers. Although water is relatively abundant in Iraq, its productive use in a modern sense has barely begu;n. Storage made possible by the construction of the dam on the Tigris will ultimately provide irrigation water for a large area. 28. I consider that the flood control project alone, without taking into account any future development of irrigation, vrould be of significant importance in the economic development of Iraq. Besides the benefits which have been mentioned, the control of the Tigris River will result in improve- ments in health and sanitation and in the increased economiic security of large sections of the population.  - 8 - Justification for the Loan 29. Iraq hae, in its oil resources, a substantial, and potentially very large source of revenue which should tend'to minimize the need for extensive external borrowing in future years. For immediate development purposes, however, there is a need to borrow against future foreign exchange revenues, Iraqts dollar earnings have normally been small, Its sterlirng credits accumulated in London during the war were greatly reduced in the following years as a result of the need to restore the supply of consumer goods and to start replacement and modernization of capital equipment. A bad drought and locust infestation in 1947 resulted in a temporary, but costly, itportation of grain, The balance of payments difficulties were intensified v{hen the oil pipeline to Haifa vras closed in 1948. Rleceipts from oil royalties at that time were1 as a result, cut more than 50 per cent. The Haifa pipeline rermains closed and Iraq's oil royalties have up to now continued to suffer. 30, The financing by a loan of the foreign exchange requirements of this important project is justified. I am satisfied that in prevailing market conditions Iraq would be unable, on reasonable terms, to obtain a loan for this project othervise than from the Bank. Prospects of Fulfillment of Obligations 31. The Project Funds Agreement provides for the mechanism by which Iraq will make available out of oil royalties the local funds required to carry out the project, 32. The preliminary engineering design and estimates on this project were made by Iraq's Irrigation Development Commission. A firm of consulting. engineers,