RESTRICTED Report No. P-198 FILE COPY"'"" " This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the Information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE COMPAGNIE MINIERE DE L'OGOOUE June 22, 1959 REPORT AND RECOMMEONDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE COM1PAGNIE MI NIERE DE L IGOOUE 1. I submit the following report and recommendations on a proposed loan of 35 million to the Com-pagnie Miniere de 1'Ogooue (COMILOG) to assist in financing a project to exploit the manganese deposits near Moanda in the Republic of Gabon. PART I - HISTORICAL 2. In January 1959 Comilog asked the Bank to consider a loan of $35 million to complete the financing plan for its project to exploit extensive high grade manganese deposits near Moanda in the Republic of Gabon and to ship the ore through the port of Pointe Noire, Republic of Congo. At the same time the French Government indicated its willingness to guarantee such a loan. A mission studied the project in Africa and in Paris during the second half of February and the first half of March. Negotiations with rep- resentatives of the company began in Washington at the end of April. 3. The Bank has already made loans amounting to $267.1 million to borrowers in France and French territories. As of May 31, 1959, the status of the individual loans was as follows: No. Borrower Purpose Amount ($ million equiv.) 1 FR Credit National Reconstruction $250.0 100 FR Office Central des Chemins de Fer de la France d'Outre-Mer Railway improvement 7.1 131 FR Electricite et Gaz Electric power d'Algerie development 10.0 Total net of cancellations 267.1 of which repaid 25.2 Total now outstanding 241.9 Amount sold 34.6 of which repaid 24.6 10.0 Net amount held by Bank 231.9 - 2 .- PART II - CONSTITUTIONAL CHANGES 4. With the creation of a Community according to Article XII of the Constitution of the Fifth Republic, there have been important changes in the constitutional relationships between France and her former Overseas Territo- ries, As the Republic of Congo and the Republic of Gabon, the former Overseas Territories of Middle-Congo and Gabon are now autonomous States within the French Community, on an equal footing constitutionally with the Republic of France and the other Overseas Territories which also elected to become member States in the referendum of September 28, 1958. 5. France and each of the other member States of the Community is en- tirely responsible for its own internal affairs. The Community is responsible for matters of mutual interest, defined by the Constitution as defense, foreign policy, currency and common economic and financial policy. The President of the French Republic presides over and represents the Community and thus serves as the constitutional link between France and the other member States. The institutions of the Community are an Executive Council, a Senate and a Court of Arbitration, The Executive Council, of which the President is Chairman, consists of the Prime Minister of each member State and the ministers respon- sible for Community affairs. Certain of the latter are at the same time min- isters in the French Government; for example the minister responsible for currency and common economic and financial affairs of the Community is also the Minister of Finance and Economic Affairs of France. The precise relation- ships and distribution of power between the various elements of the Community are, however, still being worked out and there remain a number of issues to be resolved. 6. These constitutional changes have raised for the Bank the formal question of membership; whether former Overseas Territories, such as Gabon and Middla-Congo, which have elected to become autonomous States within the Community are still included in the French membership. In order to clarify the position the Bank is obtaining confirmation from the French Government (No. 1) to the effect that the membership of France continues to apply to all the Republics which constitute the Community. 7. The loan would be guaranteed not only by the Republic of France, as a member of the Bank, but also by the Republic of Gabon and the Republic of Congo, both of which have immediate and extensive powers over the fortunes of the project. I am satisfied that under the circumstances the interests of the Bank are satisfactorily protected. However, these Guarantee Agreements are binding only on the guarantors as individual members of the Community and do not engage the Community itself. As the responsibilities of the Community become more precisely defined I propose to examine with the French Government how matters falling within the competence of the Community might be brought within the scope of Guarantee Agreements with member States of the Community or, if that were not possible, what other procedure might be appropriate. 8. The constitutional changes have also created problems for Comilog whose concessions had been granted by, and tax and other agreements negotiated with, the former territories of Gabon and Congo and the Ministry of Overseas - 3 - France. Following the promulgation of the new Constitution, Comilog negoti- ated an establishment agreement with the two new Republics to confirm that they considered themselves bound by the original concessions and agreements. PART III - DESCRIPTION OF THE PROPOSED LOAN 9. The main characteristics of the proposed loan would be as follows: Borrower: Compagnie Miniere de I10gooue. Guarantors: The Republics of France, Congo and Gabon. Amount: The equivalent in various currencies of $35 million. Interest rate: 6% including 1% commission. Commitment charge: 3/4% Maturity: 15 years, with amortization in 23 semi-annual payments begin- ning July 1 1963 and ending on July 1, 197 , Each payment of interest and principal taken to- gether would be approximately equal. Purpose: To finance a proposed new manganese mine near Moanda, Republic of Gabon, and facilities to transport the ore to the port of Pointe Noire, Repub- lic of Congo. The proceeds of the loan would be used to pay for im- ported goods and services. PART IV - THE PROJECT 10. A report "Appraisal of the Comilog Manganese Mining Project"., TO 205a dated June 17, 1959 is attached (No. 2). 11. The project consists of the equipment and operation of a manganese mine near Moanda, Republic of Gabon. Ore reserves are estimated at over 100 million tons. The ore is high grade and conditions are particularly favorable for open pit operation. Production is planned initially at the rate of 500,000 tons a year. To transport ore to the port of Pointe Noire, Republic of Congo, calls for the construction and equipment of a 73 m. cableway and a 290 km. railway to link the mine to the existing Congo-Ocean railway. The project also includes storage and loading facilities at Pointe Noire. Construction is expected to start within the next few months and the first ore is scheduled for shipment about mid-1962. The project is well conceived and well planned. The company's management should be fully capable of carrying out the construc- tion and operation. The company also has a technical assistance agreement with the U.S. Steel Corporation for services as required. 12. The cost of the project, including Torking capital and interest on outside debt,is estimated at French francs 4l,8 billion. Finance available would be as follows: Fr. frs. billion Shareholders' Funds Share capital 5.0 Shareholders advances 16.0 21.0 Outside Debt Caisse Centrale 3.5 I.B.R.D. 17.3 20.8 41.8 13. The share capital of the corporation is held as follows: Mokta-el-Hadid 14% Societe Auxiliaire de Manganese 15% Bureau Minier 22% U. S. Steel Corporation 49% 14. The Compagnie desMinerais de Fer 14agnetique de Mokta-el-Hadid is a private French company with manganese and iron ore properties in North Africa and holdings in a number of other mining companies. The Societe Auxiliaire de Manganese was formed to own and manage shares in Comilog; the capital is held equally by Mokta-el-Hadid, the Banque de Paris et des Pays-Bas and the Compagnie Miniere de l'Oubangui. The Bureau Minier is a French Government c.orporation responiible for exploration and the promotion of mineral develop- ment. The U.S. Steel Corporation participation will largely be held by the Navios Corporation, a wholly owned subzidiary. 15. In addition to the proposed Bank loan, the company has obtained a 30 year 3% loan of frs. 3.5 billion (about $7 million equivalent) from the Caisse Centrale de la France d'Outre-Mer, now the Caisse Centrale de Coopera- tion Economique. The contract with the Caisse Centrale originally provided for an assignment of ore contracts as security for the loan. In order to fa- cilitate arrangements for the Bank's loan,the Caisse Centrale has agreed to suspend its assignment provision during the life of the Bank's loan. The financial provisions of the proposed Loan Agreement have accordingly been drafted with a view to offering to the Caisse Centrale loan the same protec- tion as would be accorded to the Bank. The Bank would enter into an agreement with the Caisse Centrale reconciling the provisions of the two loans and pro- viding for consultation on matters of mutual interest, 16. Conservative estimates show that the com-pany should be able to earn a reasonable return on its capital. The service of the outside debt should be covered by an adequate margin from the start of operations. To cover the un- likely event that the company would encounter financial difficulties, the shareholders have undertaken obligations to maintain net working capital at a satisfactory level. Net working capital would include at all times the equiv- alent of 6 months debt service. The shareholders have also undertaken to finance any increase in the cost of the project. These obligations are referr- ed to in greater detail in paragraphs 19, 20 and 21 below. 17. Procurement of goods and services has been and will continue to be on an international basis to the fullest practicable extent. PRIT V - LEGAL INSTRUMENTS AND AUTHORITY 18. The following legal documents are attached: (a) Draft Loan Agreement between Comilog and the Bank (No. 3) and draft letter from the Bank to Comilog defining the level of net working capital satisfactory to the Bank (No. 4) (b) Draft Guarantee Agreement between Republic of France and the Bank (No. 5) and draft letter from the French Govern- ment regarding the assets of the Bank of France (No. 6) (c) Draft Guarantee Agreement between Republic of Congo and the Bank (No. 7) (d) Draft Guarantee Agreement between Republic of Gabon and the Bank (No. 8) 19. The following features of the Loan Agreement are of particular interest: (i) The company would look to its shareholders for any additional funds needed to complete the project and to provide initial net working capital satisfactory to the Bank (Section 5.07(b)); (ii) if at any time thereafter net working capital fell or threatened to fall below a level satisfactory to the Bank, the company would call on its shareholders to make good the deficiency by way of additional advances (Section 5.07(b)); - 6 - (iii) payments of dividends, interest on shareholders' advances and repayments of principal of shareholderst advances would all be subject to their not reducing net working capital below the level satisfactory to the Bank (Section 5.06(a)); (iv) dividends and interest on advances would be payable only if covered by accumulated earnings; dividend payments in excess of 6elo could be made only if an amount equal to the excess were applied to the repay- ment of the company's outside debt (Section 5.06(b), (c)); (v) shareholderst advances paid in as part of the initial financing plan or under (i) above would be repayable only if such repayment would not increase the debt- equity ratio above 25:75 (Section 5.06(d)); (vi) shareholdersl advances under (ii) above would be re- payable as soon as the net working capital position would allow (Section 5.06(e)). 20. The shareholders have signed an agreement with Comilog (the Loan Protocol) in uhich they have severally undertaken to meet the vrrious finan- cial obligations falling on them as a consequence of the Bank's Loan Agreement with the company, notably paragraph 19 (i) and (ii) above. The company has obtained all governmental authorizations that would be required for the trans- actions concerned. If a shareholder should fail to perform its obligations, its shares would be forfeit and could be sold. The purchaser would become bound by the terms of the Loan Protocol for the amounts in question. 21. Under a provision of the Loan Protocol (No. 9), the shareholders would be relieved of their obligation to maintain the net working capital of Comilog at a level satisfactory to the Bank in the event of the nationaliza- tion of Comilog or the expropriation of an important part of its assets. Their obligation would be suspended if production or export of ore were made impos- sible for a period of at least six months as the consequence of certain events not within the control of the company or its shareholders; the obligation would be resumed in full six months after the period during which it was impossible for the company to produce or export ore, 22. Loan Regulations No. 4 have been extensively amended by Schedule 3 of the Loan Agreement, principally to take account of the existence of three guarantors. The following have been included as conditions of default: that shareholders shall have failed to make, or shall have been relieved from their obligations to make, payments required under the Loan Protocol (5.02(k) action by any of the parties to amend, suspend or terminate any of the'agree- ments between Comilog and the Governments of Congo and Gabon (M.02(1)), 23. The three Guarantee Agreements are drafted in comparable terms so far as is practicable. Each agreement refers to the existence of the other two, but each guarantor remains individually responsible. The Congo and Gabon -7- Guarantee Agreements contain a covenant (Section 3.06) not to interfere with the successful construction and operation of the project. The Congo and Gabon agreements also contain the standard negative pledge clause (Sec- tion 3.01). The French Agreement (Section 3.01) contains the modified form employed on the occasion of Loans 100 FR and 131 FR to take account of the position of the Bank of France (see also No. 6). As in the case of Loans 100 FR and 131 FR, authorization to sign the French Guarantee Agreement will be given by an arrete of the Minister of Finance; no legislative action is required. The Gabon Legislative Assembly has already approved the Gabon Agreement. The Congo Agreement is to be ratified by the Congo Legislative Assembly after signature. PART VI - ECONOMIIC BACKGROUND 24. There are attached "The Economies of the Gabon and Congo Republics", EA 99a dated June 22, 1959, and "The Economy of France", EA 98a dated June 22, 1959. (Nos. 10 end 11). The Economies of the Gabon and Congo Republics 25. The Gabon is almost wholly covered by dense eqpatorial rain forest. The population is small, about 400,000 in all, shows little evidence of growth and lives mainly in small groups along rivers, roads and tracks, leaving much of the interior virtually uninhabited. Cultivation is largely for subsistence and the opportunities for cash crops are limited. Fortunately a network of rivers opened the coastal plain to the timber industry which has been the principal source of income for many years. The more accessible stands have gradually been exhausted and since the Second World War the industry hgs had to move further inland, offsetting higher transport costs by intensive use of machinery, 26, Gabon is finding new sources of income in its subsoil. After 15 years of search, and the expenditure of some $50 million, oil was struck in 1956 near Port Gentil. The field is not thought to be large but it lies on the coast and is easily exploited. From 500,000 tons in 1958, already 20% of total exports, shipments are expected to reach 1 million tons in 1960, with an estimated value of $14 million. In addition to Comilog, which would itself add, say, a further $16 million to Gabonts exports, a uranium mine, also near Hoanda, is expected to export in 1962 concentrates worth about $`6 million a year at current prices. Thus, in the space of six years, these investments would have added an estimated $36 million a year to Gabon's traditional ex- ports, increasing them by nearly 21 times. The direct and indirect contribu- tion of these projects to the budget would also be of considerable importance. The very large Mekambo iron ore deposits are under active study, but such are the difficulties and scale of the operation that another five years of study is required before an investment decision could be taken. 27. The nature of her resources and of her mall population make Gabon particularly dependent for further development on capital intensive industries. It is consequently dependent on maintaining a substantial inflow of public and private capital, supported by adequate technical and managerial skills, Gabon has a stable political climate. Both the main parties show a responsible - 8 - attitude to foreign investment and favor the long established French connec- tione 28. The economy of the Congo Republic is less favored than that of Gabon, Agriculture makes slow progress under unfavorable conditions of soil and climate and the forests are less rich and less accessible; until the opening of the Congo-Ocean railway in 1934, the Mayombe mountains effectively isolated much of the country from the sea. Economic activity owes much to the role of the Congo Republic as a transport artery for the Republics to the North, and Brazzaville, administrative capital of the former federation of French Equatorial Africa, remains a commercial and financial center. The construction of the Comilog railway to link up with the existing line to Pointe Noire will further increase the Republic's transit income and will in addition open up a potentially valuable but hitherto quite inaccessible forest area. It is too early to know whether the oil recently discovered near Pointe Noire exists in commercial quantities, but unless possibly the very large Kouilou project is carried out, the potential of the country is likely to remain limited. 29. The population of the Congo Republic is only 760,000, of whom one sixth live in Brazzaville and Pointe Noire and many of the rest in the country lying between those two cities. As was demonstrated by the savage riots of last February, tribal divisions are much more marked than in the Gabon, par- ticularly in Brazzaville itself where families from both north and south con- tribute to a substantial pool of unemployed. These divisions have made much more difficult the institution of a stable government for the new republic, but the sobering effect of the riots themselves and the recent elections which have given the government party a greatly reinforced majority offer greater hope of reasonable stability in the future. The riots did not involve racial hostility and there is no lack of awareness of the importance for the Congo of maintaining an inflow of capital and managerial ability. In particular, the Conjo Republic is looking to the construction and operation of the Comilog project as a much needed source of additional employment and revenue. The Economy of France 30. France has an impressive record of economic achievement since World War II. After reconstruction was completed, with the help of large U. S. aid, much progress has been made in modernizing the economy (though there is still much to do in agriculture and housing, as well as in adjusting to the European Common Yhrket). Output has increased rapidly, Gains in productivity appear to have been especially significant and urgently needed since while the post- war increase in the total population has so far meant only more consumers, there are in the short run actually fewer workers, In addition to the recon- struction and modernization effort at home, France has financed, largely on a grant basis, a large program of economic development in the countries associat- ed with her. In addition, Indo-China and Algeria have been an almost unbroken drain. 31. None of these tasks in itself was too great a burden for an economy that is basically as rich and strong as that of France. The periodical in- ability to reconcile them all with the resources currently available plunged France into a series of financial and balance of payments crises, because po- litical circumstances too often inhibited timely action. The stabilization program at the end of 1958, which the new constitution made possible, re- inforced the measures taken a year earlier and has so far been strikingly successful. The threat to continued success would come from a failure to hold within bounds conflicting demands, whether under pressure of particular interests in France or of developments in Algeria, 32. Francets debt record is excellent, In the next few years she will have to face debt repayment obligations equivalent at their peak to 10% of her 1958 exports outside the Franc Area. Payments on such a scale are not, however, beyond her capacity to meet successfully with her strengthened econ- omy and with her firmer economic management. France should be able to meet all her external obligations, existing and contemplated, PART VII COMPLIANCE WITH ARTICLES OF AGREEMENT 33. I am satisfied that the proposed loan would comply with the Arti- cles of Agreement of the Bank. The Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement is attached (No. 12). PART VIII RECOIMME2NDATIONS 34. I recommend that the Bank make a loan to the Compagnie Miniere de ItOgooue, guaranteed by the Republic of France, the Republic of Congo and the Republic of Gabon, in an amount of %35 million or the equivalent in other currencies for a total term of 15 years, with interest (including commission) of 6% per annum, and on such other terms as are specified in the attached draft Loan and Guarantee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 13). Eugene R, Black Attachments Washington, D. C. June 22, 1959