• INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington 25~ D .. C., PA~SS RELEASE-Summary of Fifth Annual Report CONF1DEN1ff"..AL HOLD FOR RELEASE Until 10 A.M., Paris Time, Friday, September 8, 1950 The following summary of the FIFTH ANNUAL REPORT OF THE INTERNA- TIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT is sent to you in advance of release to facilitate the preparation of press material. It must be held in strict confidence and no portion, synopsis or reference may be published or given out until the report is presented in Paris, Frarice:, at the Fi#h Annual Meeting of the Board of Governors, at 10 A.M. Paris Time, Friday:, September 8, 1950. The same release time applies to radio announcers and news commentators. The Fifth Annual Report of the International whole describes the expanding activities of the Bank for Reconstruction and Devolopment, as Bank for the period, August 20, 1949, to August approved by its Executive Directors, was presented I, 1950. . _ -- --- -- -- to the Board of Governors at their annual meeting - in- Pe.:d~ t~da.y by tht; Bank's President, Eugene The Report also sets forth the major operational • R. Black. · Its financial statements cover the fiscal policies and procedures which the Bank has de- year ended June 30, 1950, and the Report as a veloped ·as a result of its experience to date. ACTIVITIES OF THE BANK The Bank granted twelve loans totaling pending a satisfactory reorganization of the Com- $166,345,000 during the fiscal year ended June 30, pany's financial structure. The new long-term 1950, £01: projects in Brazil, Colombia, El Salvador, loan, made to the Company directly, is guaranteed Finland, India, Iraq, Mexico, The Netherlands and by the Mexican Government. The loan will assist Yugoslavia; two other loans totalling $16,400,000, the Company in carrying out its share of a long.: were granted to the Government of Turkey in July range program, undertaken jointly by the Company of this year. This brings the total of loans which the and by Mexico's Federal Electricity Commission; Bank has granted to date to $832,845,000. to increase the supply. of electric power in Mexico The past year also witnessed a marked increase City and surrounding districts. This area . has in activities of Bank field missions and in the undergone rapid industrial and agricultural devel- amount and scope of technical aid furnished by opment, and expanded power facilities will there- the Bank to its member counbies. The Report fore fulfill an urgent need. _ gives a country-by-country account of the Bank's In addition, the · Mexican Government has re- operations during the past year in the two com- cently approached the Bank with a proposal for plementary fields of financial and technical assis- a loan oi moderate size to finance small projects tance. A summary of these activities, by major undertaken by private enterprises. Th~ Bank has geographic areas, follows .. expressed its interest in principle in this proposal and is now awaiting submission by the Mexican Government of detailed plans. Latin America A loan of $15,000,000 was granted to the Com- The .Bank granted a loan of $26,000,000 to the panhia · Hidro Electrica do Sao Francisco, a semi- • Mexican Light and Power Company Limited, for autonomous agency contrelled by the Brazilian electric power development; $10,000,000 of this Government, for the development of. ·hydn,electric loan was used to refunu .a short-term loan which power at Paulo Afonso Falls on the Sao Francisco the Bank hac;l made early in 1949 through the in- River in· northeast ·Brazil. The loan is guaranteed termediary of agencies of the Mexican Government by the Government of Brazil It will finance for~ign. ,. . • excha~ge costs of a project which is situated in an presented to the Bank for financing. In July a Bank area where lack of power has been a major obstacle mission visited Peru to obtain first hand informa- to development. The new power plant and trans- tion on the general economic situation and to make mission lines will serve the important ports of Recife preliminary examinations of these projects. and Salvador, and some 40 small cities and towns. Bank representatives made several visits to Chile. Electric power will also be availa.bie for the devel- The Bank has discussed the possibility of financ- opment of the hinterland of these ports and of the ing a number of projects in Chile, in addition to area areund Paulo Afonso Falls, which at present the loans already made to that country, when the are almost entirely undeveloped. present program for stabilization of the Chifoan The BanJ.c sent a mission to Brazil to study the economy shows satisfactory progress. These in- country's capacity. to assume additional external clude a pulp mill and newsprint plant, the mod- debt, the policies being followed to pro~ote devel- ernization and re-equipping of the coal mines opment, and the priorities of various development south of Concepcion, and several ir!igation and projects including the one &.t Paµlo Monsp. As a agricultural projects. result of this mission's · findings, the Bank is also The Ba~k granted a loan of $12,545)000 to the 1 investigating the electrification program of the ·Comisi6n Ejecutiva Hidro-Electrica del Rio Lempa, State of Rio Grande do Sul. an autonorp.ous governmental agency of El Salva- The Bank made a loan of $5,000,000 ·to the Caja dor, for c;Ievelopment of electric power resources de Credito Agrario, Industrial y Minero, a develop- on the Lempa River. The loari will finance the mental institution in Colombia, in August, 1949, 'for foreign exchange costs of a hydroelectric plant the purchase of agricultural machinery. During which will benefit many sectors of the country's I the past year most of the equipment financed by this loan has been distributed through normal bus- iness channels and is already in operation. The economy. The loan is guaranteed by the Salva- dorean. Government and has been . ratified by El Salv~dor's newly-elected National Constituent Bank is also discussing proposed additional loans Assembly: Moreover, the Government set up an totaling about $8,000,000 to finance part of the ad hoc committee of Government representatives foreign exchange costs of three hydroelectric proj- and independent business and professional men • ects to serve the cities of Manizales, Bucaramanga who reviewed all aspects of the plan and g~ve it and Cali. I~ is hoped that these loan discussions their unanimous approval. can be brought to an early conclusion. An interesting feature of this project is the man- The cons:..deration of other development projects ner in which its local currency costs were financed in Colombia has awaited the submission to the by a local bond issue. Since virtually no capital Bank and to the Colombian Government of the market had existed in that country up to this time, report of ·the comprehensive survey mission headed the Bank, at the request of the Salvadorean authori- by Dr. Lauchlin Currie, which made a broad study ties, sent its Director of Marketing to El Salvador to of Colombia's economy and development poten- advise on the local financing. The local bond issue, tialities. The report has just recently been com- .amounting to 13,100,000 colones, equivalent to pleted, and the Colombian Government is appoint- .about $5,240,000, was fully subscribed. ing a non-partisan commission to formulate a de- A comprehensive survey mission organized by velopment program based on the report's analyses the Bank at the request of the Guatemalan Govern- and recommendations. This technic~l assistance ment arrived in Guatemala in June of this year. It mission was the first of its kind sponsored by the will make recommendations as to the general di- Bank at the request of a member government. rections in which development can be most fruit- Apart from its usefulness to Colombia, this type fully undertaken and· the conditions required for of comprehensive apprqach will serve as a val- the success of a development program. This mis- uable pattern in the conduct of future Bank opera- sion is headed by Dr. George E. Britnell, of tions. Saskatchewan University, Canada. On the recom- Active negotiations are in progress with Uru- mendation of the Food and Agriculture Organiza- guayan authorities for a loan amounting to the tion of the United Nations, the agricultural part equivalent of about $33,000,000 to cover foreign ex- of the mission's study is being undertaken by the change costs of. a project for augmenting electric Inter-American Institute of Agricultural Sciences, power facilities and for expanding telephone serv- of Turrialba, Costa Rica. ices. The borrower would be the- Administracion At the reques~ of the Cuban Government, an General de las U sinas Electricas y los Telefonos economic mission organized by the Bank is now • del Estado, an autonomous Government agency. in Cuba to study development potentialities. It The loan woulJ Lcl guaranteed by the Government will examine in particular how present obstacles to of Uruguay. domestic or foreign private investment can be over- Peru has under study a number of agricultural come. This misSiol) is under the direction of Mr. and industrial development projects which may be Francis Adams Truslow, a prominent lawyer and [2] • President of the N~w York Curb Exchange. Tech- Philippine Government agreed with the Bank that nicians for the mission have been furnished by the consideration of a loan application for hydroelectric Armour Research Foundation, the Southwest projects on the island of Luzon should be deferred Research Institute, and the Stanford Research pending formulation of a development program. Institute. The Government has not yet submitted such a Bank representatives made a preliminary survey program and accordingly the Bank has not been of development possibilities in Nicaragua and in a position to take action on the loan application. · concluded that the most effective results were The Bank granted a loan of $12,800,000 to Iraq likely to be obtained from the expansion and im- to finance the foreign exchange costs of a Hood provement of agricultural production, animal control project. This project calls for construction husbandry and transportation facilities. The Nfo- of a dam across the Tigris River which will direct araguan GoYernment has indicated its intention excess Hood waters into an unpopulated and barren of seeking technical assistance in carrying through depression, known as the Wadi Tharthar, situated remedial financial and fiscal measures necessary between the Tigris and Euphrates rivers. The to the success of a development program. project is expected to prevent recurring Hooding Other Latin American countries with which the of large arear of cultivated land, improve health Bank has held discussions during the past year and sanitation conditions, and increase agricultural concerning technical assistance or possible Bank production. The Wadi Tharthar project is part of financing are: Costa Rica, Ecuador, Honduras, and a more comprehensive plan which will eventually the Dominican Republic. provide, in addition to flood control, the regulation of water supply and irrigation. The Bank's loan Asia, Africa and the· Middle East is secured by an assignment of oil royalties, and the The Bank granted two further loans to India Government of Iraq will set aside from these royal- during the past year. One loan, of $10,000,000, is ties sufficient funds to meet the domestic costs of financing the importation of heavy agricultural the project. equipment needed to reclaim some three million The Government of Iraq recently presented ad- acres of land infested with a weed known as kans ditional projects for Bank financing, including grass, and to clear a small area of jungle land. An irrigation, grain storage, tobacco storage and agri- • increase in grain production, which land reclama- cultural machinery. The Bank has agreed to send tion will make possible, is of primary importance technicians to Iraq this fall to investigate these to the Indian economy. projects. A Bank mission visited Iran to examine general The other loan, of $18,500,000, will finance part economic conditions, fiscal policies and the pro- of the cost uf the first stage of a long-range plan gress made in the initial period of Iran's Seven- to develop the resources of the Damodar Valley, which lies in India's richest mineral and industrial y ear Plan. The mission also investigated three projects with a view to possible Bank financing- . region. The Bank's loan will be used to purchase two cement plants, aPd ~ plan for expansion of equipment for construction of the Bokaro steam the port of Khorrams.aahr- .1.nd its report is now power plant and the Konar dam. Completion of under consideration. the entire Bokaro-Konar project will provide ur The Bank sent a mission to Ethiopia to survey gently needed electric power for the expansion of the economy of the country and examine a variety indushy, and also supply water for irrigation in of projects which the Ethiopian Government has the lower valley. requested the Bank to finance. The mission con- Meanwhile deficiencies in the Indian railway cluded that Ethiopian economic development system have been largely overcome, partly with would best be served at this stage by a program the help of the loan of $34,000,000 for railway of highway improvement, the development of tele- equipment which the Bank made to India in Au- communications, and the establisrr".lent of an gust, 1949. A Bank mission visited India in the industrial and agricultural bank. The Bank has spring of 1950 to review general economic and advised Ethiopia of its willingness in principle to financial developments. assist in financing these three projects provided The Bank sent a mission to Thailand to study suitable arrangements are made to ensure compe- general economic conditions and specific projects tent management and subject, in the case of the proposed for Bank financing, including railway re- telecommunications project, to a detailed exami.. habilitation, improvement of the port of Bangkok, nation of its technical features. rice irrigation, and. hydroelectric power deve]op- A Bank mission is at present in the Union of ment. The Bank has informed the Thai Govern- • South Africa to study its general economy and ment of its willingness to start at" once to negotiate development plans. Previously the Vice President loans for these four projects. -0f the Bank visited South Africa to obtain first- A Bank mission visited the Philippines to study hand information about conditions in that area, the difficult economic position of that country. The particularly with regard to the needs and oppor- [3] tunjtj.es for capital: investment. His. party also visited N9rt.herti Rhodesia and Southern Rhode- sia. . Negotiations regarding a possible· Bank loan of about-$5,000,000 to the Colonial Development Cor- poi:ation of the United Kingdom were not consum- vestment' may· 'hesf be -channeled fa the Turkish econpmy; . 2) ·1er·means ofi·increasing Turkey's agricultural anu industrial production and improv- ing its system of distribution: 3) desirable· cha~ges in economic and financial policies and public ad;. ministration: to accelerate Turkey's development. •• . mated. Although. expressing appreciation that the · Loans.of $2,300,000 and $2,700,000 were made to Bank had exerted every effort to meet the Corpora- the Republic of Finland and the Federal People's tion's point of view,. the Corporation informed the Republic ,of Yugoslavia, respectively, for the pu:r:. Bank that the Bank's requirements,-. especially the chase of equipment for ·timber production. ·The non-financial covenants, w~re not reconcilable with loans were part of a cooperative project in :which a the Corporation's methods. number of timber exporting and importing countries The Bank has informed the Government of Leb- in Europe- participated, and which was worked out anon of its. readiness to discuss a loan of modest with the aid of ·rep:resentatives of the· Bank the size, preferably for an agricultural project. Pakis- Economic Commission for Europe, and the Food ta:µ has presented particulars of sixteen projects for and Agriculture Organization. - consideration by the Bank The machinery -being obtained by Finland and Yugoslavia as a result of -the Bank's loans, and by I Europe purchases ,of other equipment from European sup- ~ The Bank granted two loans· to Turkey totaling pliers, should enable those two countries to in- $16,400,000. One loan, of $12,-500,000, will finance crease considera~ly ~eir annual production and 1 the foreign costs of a broad program of port devel- exports of timber. The timber importing countries opment which provides for improvement of major of Europe will likewise benefit, both from the avail- Turkish ports, and· for construction of a new port ability of increased supplies of much needed timber at Samsun on the Black Sea. Up to now, Turkish and also. from their reduced dependence upon im- foreign and coastal trade has· been impeded by the ports .of timber which must be paid for in hard inadequacy of its. ports. The other loan, of $3,900,- c~en.cy. • 000, will cover foreign exchange costs of a project In July 1949, the Bank made a loan of $15,000,- for construction and mechanization of grain storage 000 . to the Netherland Herstelbank for 24 facilities throughout Turkey. This project is de- industrial projects in various private industries. signed to provide adequate storage capacity, to The loan was guaranteed by the Netherlands improve handling facilities and reduce unnecessary Covernment. At the request of the borrower, the losses. · Some :>f the new grain elevators will be Bank canceled $6,200,000 of this loan in March, built at the reconditioned ports. 1950. The cancellation reflected the development The Bank has also actively assisted in the forma- of Holland's trade relations. Some of the projects tion of Turkey's new. Industrial Development Bank. to be financed under this loan were eliminated, A Bank consultant visited Turkey twice to discuss but the cancellation did not affect the loan's basic with Turkish businessmen and Government offi- character. , . cials means to encourage private enterprise, and ·The Bank has maintained. close contact through- as a result the Industrial Development Bank of out the year with the French Government.. Members Turkey was formed last April. It will grant assist- of the Bank's engineering .staff visited F:i;ance to ob- ance in the establishment of new private enterprises serve the progress of two steel projects partly fi~ and the modernization of existing ones;' encourage nanced by the loaJ?, of $250,000,000 which the Bank private · capital investment, both domestic and had made in 1947 to Credit National. The construc- foreign, in Turkish industry; and promote a securi- tion of the contj?uous col~ fPlling mill at Monta- tie_s market in Turkey.· The International Bank taire has been completed. The. continuous hot sp:ip has indicated its willingness to work out a loan to mill at Denain is exp,ected to. be finished '.at tp.e the· Industrial Development Bank of up to $9,000, .. beginning of 1951. While tpere has been m~rked 0()0 provided its organization and management are improvement in the economic position -of Fr~n,ce established along satisfactory lines;. generally during the. past year, the B~nk is fully At the request of the Turkish· Government~ the aware of the implications of the continuing .dollar Bank has also sent a comprehensive · survey mis- gap and is carefully 'following all econonjic ,and sion to the country. It is headed by Mr. James M. political developments which affect .the solution of Barker, Chairman of the Board of the All-States this problem. . Insurance Company,. and includes members of the Bank erlg~neers · visitec:l Belgium to. obs.erve the' • Bank's staff; a staff member-of the Food and Agri- work on steel and power projects financed under culture Orga:nizaffibn, an expert nominated by the the $16,000,000 loan maua · to Belgium in iyiarcn, World Health· Organization, and- .various other 1949. The .steel project: at Ougree, including con- specialists. This mission will .• make recommenda- struction df a new blooming mill; has beep pom- tiops concerning:,. 1) the ·directions in which in;.- pleted. The cold rollirig and ·tin plating mills ~ft 4 • Tilleur are being completed and the entire plant should be ready for operation at the beginning of 1951. Erection of a thermal power plant at Awirs is expected to be completed by the middle of next year. Luxembourg was visited by Bank engineers for a survey of projects financed by a Bank loan of $12,- for any amount payable in respect thereof on re- purchase of Poland's shares) and the net income accruing thereafter until further action by the Ex- ecutive Directors or the Board of Governors. The Executive Directors are presenting a separate re- port to the Board of Governors regarding the es- tablishment of such reserve and the disposition of 000,000 made in 1947. The major part of the lo 1n the Bank's surplus as of June so: 1949. was used for the construction of steel mWs at Total disbursements made on the Bank's loans Dudelange. The hot rolling mill is expected to be up to June 30, 1950, amounted to the equivalent completed in November, 1950, and the cold mill of $614,162,160. Of the disbursements made dur- in March, 1951. A smaller part of the loan was ing the fiscal year ended June 30, 1950, approxi- utilized for equipment for the Luxembourg Rail- mately 40% was spent outside the Uniterl States ways. against approximately 20% in the previous year. Representatives of the Bank went to Italy to The geographical distribution of total expenditures examine various aspects of the Italian Govern- financed by the Bank upto June 30, 1950, in round ment's program of economic development for numbers by groups of countries, follows: United Southern Italy, involving mainly irrigation, land States, $452.3 million; Canada, $34.8 million; Latin reclamation and improvement. The Bank's President America, $55.5 million; Europe $66.7 million; Afri- also visited Rome. As a result of these preliminary ca, Near East and Far East $4.8 million. examinations, the Bank is prepared to discuss pos- Increase in Currencies Available for Lending sible Bank assistance when the formation of the necessary Italian administrative agency has been The Bank has had a gratifying degree of success completed. during the past year in efforts to obtain the release The Bank made a loan of 12,500,000 to the Bank by member nations, for use in lending operations, of Finland in August, 1949, for development of of all or part of the 18% portion of their capital electric power, woodworking industries, and lime- subscriptions which are paid in local currencies. • stone powder production. A Bank mission visited Eleven additional member countries-Colombia, Finland during the past year to review the progress Costa Rica, Ecuador, El Salvador, Finland, France, of these projects. Electric power production is Honduras, Italy, Mexico, The Netherlands and now above pre-war levels and there have been in- Paraguay-have taken action along this line. creases in output of the woodworking industries As a result of the actions of various member and of limestone powder for use in agriculture. governments the situation with regard to the 18% subscriptions of member countries is now as fol- Loan discussions are proceeding with the Yugo- lows: The United States and El Salvador have con- slav Government. Progress has been made in sented to the use in Bank lending of all their 18%; examining Yugoslavia's economic position and pros- Belgium, Canada, Denmark, Mexico, Paraguay and pects, in appraising the requirements of the the United Kingdom have released portions of principal sectors of the economy in which a loan their subscriptions aggregating the equivalent of from the Bank might be spent, and in working out $16.2 million; Ecuador has agreed to the use of the tentative plans for a loan, partly in United States full amount of its 18 % subscription except for the dollars and partly in European currencies. export of a few specific items; Honduras has Results of Operations and Use of agreed to the use of its full 18 % after January 1, Loan Proceeds 1951; Costa Rica, Finland, France, Italy and The Netherlands have agreed in principle, subject to The Bank's operations for the twelve months discussion in each case, to the use of their 18 %; ended June 30, l':.. . . v, resulted in a net income Colombia has similarly consented in principle to amounting to $13,698,398, exclusive of loan com- the use of one-haH of its 18% subscription. In ad- missions credited to the Special Reserve. The total dition to the sums included above, the United net income for the entire period of the Bank's opera- Kingdom has also agreed in principle to the use of tions up to June 30, 1950, amounted to $27,339,492. a further part of its 18 % subscription subject to In addition to this net income, $5,663,064 was set approval in each case. aside in the Special Reserve during the year ended The Bank realizes that many of its member coun- June 30, 1950; the total amount in the Special Re- tries remain unable to give unconditional consent serve was thereby increased to $13,737,205. • at this time to large quantities of unrequited ex- The Executive Directors on July 27, 1950 es- ports. It feels, however, that most members can tablished a reserve against losses on loans and make at least small amounts of their 18 % subscrip- guarantees made by the Bank and allocated to such tions available for loans. The Bank has been reserve the net income of the Bank for the fiscal greatly encouraged by the increasing amounts of year ended June 30, 1950 (after making provision such funds that have been made available during [5] • the past year, and by the evidence that there are States, and some encouraging progress along this likely to be substantial further additions to its loan- line has been made. The instances, known to the able resources as a result of additional consents in Bank, in which its member governments have the future. taken action during the past year to broaden the market for the Bank's securities include the fol- Marketing Activities lowing: The Bank made its second public offering of a The Netherlands Government has facilitated the. new bond issue in the United States market on Jan- introduction of the Bank's bonds in the Amsterdam uary 25, 1950, when it sold $100,000,000 2% Serial market by granting freedom from requisitioning, Bonds of 1950 due 1953-62. This issue rei!laced to a total of $5,000,000 principal amount of Nether- $100,000,000 of the Bank's Ten Year 2~ % Bonds lands Trustee Certificates which have been issued which were redeemed on February 17, 1950, at against the Bank's 25-Year 3% Bonds. These have 101 % of their principal amount and accrued in- been listed on the Amsterdam Stock Exchange, and terest. This was the first time that an .issue of purchases of the Bank's bonds have been made in Bank bonds was sold by competitive bidding to the .American market for the account of Nether- underwriters, and the method proved successful. lands clients, who exchange the bonds for Trustee The winning bid was submitted by a syndicate Certificates. which included 37 banks and 99 investment bank- The Central Bank of Mexic.o has authorized ing firms located in ·25 states and the District of domestic and foreign banks operating in Mexico to Columbia. As a result of their bid the net interest utilize part of their foreign exchange reserve depos- cost of the issue to the Bank is 1.93% per annum, its maintained with the Central Bank for the ac- thus effecting a substantial net interest saving. quisition of International Bank bonds. The Central On March 1, 1950, the Bank also sold, to a group Bank has purchased International Bank bonds in of leading Swiss banks and the Bank for lnterna~ the open market for resale to banks in Mexico. tional Settlements, a new issue of 2¥2 % Swiss The Bank's outstanding dollar obligations are also franc Serial Bonds of 1950 in aggregate principal listed on the Mexico City Stock Exchange, and amount of 28,500,000 Swiss francs, equivalent to. have been ruled eligible as investments for banks, • approximately $6,600,000. The bonds were sold insurance companies and other credit institutions . at 100 and accrued interest and mature in semi- The Chilean Government. has ruled that foreign annual installments from March 1, 1953 to March and domestic banks in Chile may invest up to 25% 1, 19q6. of their capital and surplus in bonds delivered to The Bank's obligations are now generally con- the Bank pursuant to Chilean loan agreements sidered seasoned investment media in the United with the Bank. And the Central Bank of Cuba has States but it continues its efforts to broaden their ruled that the ob)igations of the International Bank market in that country. At the same time, the payable in dollars or in any currency convertible Bank is giving increasing attention to the develop- into gold are eligible investments for banks in ment of markets for its -bonds outside the United Cuba. POLICIES OF THE BANK While the Barik is by most standards a young The Character of Bank Lending l• J institution, the Report states, its experience in in- The basic character of Bank lending is governed ternational lnvestment has now been sufficient to by its Articles of Agreement, particularly the permit the statement of certain general conclusions three provisions requiring: 1) that,· except in about the problems it faces and the policies it has special circumstances, Bank loans be for specific adopted to meet i;hem. T?ese policies cannot be projects of reconstruction or development; 2) that regard8d as fixed but are constantly subject to the projects. initially selected for financing be those evolution in the li.ght of further experience. The most useful and urgent for increasing the produc- chief characteristics of the period in which the· tive resources of its member countries; and 3) Bank has been in active operation have been the that, again except ~ special circumstances, Bank great stress an.d rapid .chang~ in. ec.on<;>mic and financing be designed to meet foreign exchange political conditions throughout .the world. The rather than· local currency expenditures. Each of Bank was conceived in the expectation -0f quite these general provisions,. -which the Bank must. different circumstances; lt has · kept its policies :B.exil;>le in ordelt' that-it might _meet the needs o_f the present without prejudi~ing its long-range func- tion. A summary of the Bank's major operational policies, as they have developed to date, follows .. apply to specific situations as they arise, is dis- cussed below. .· The Specific ·Project . Prp.vision. The Bank's Articles uf Agreement ·require. that '1oans · made or guaranteed by the Bank shall, except in special • • circumstances, be for the purpose of specific pro- jects of reconstruction or development." The ob- jective of this provision is simply to assure that Ba:nl< loans will be used for productive purpos,as. In effect, the. only requirement which it imposes is that, before a loan is granted, there shall be a clear agreement both as to the types of goods and ser- But. the proposal has a different aspect if it is intended to urge that loans should be made for pro- grams consisting only of general aspirations. In the experience of the Bank, such programs provide no adequate basis for judging whether financial in- vestment will in fact be translated effectively into the concrete substance of development. vices for which the loan is to be expended and the Determination of Projects to be Financed. Sinci uses to which those goods and services are to be the available resources of every country, including put. its capacity to borrow abroad, are limited, Bank Criticism of the specific project approach has financing must be devoted to those undertakings almost always been based on the assumption that which will contribute most. to strengthening the the Bank examines the merits of particular projects economy of the borrowing country. The Bank in isolation, without reference to their relation to therefore investigates the over-all economic posi- the over-all development nee.ds of the borrowing tion of the borrowing country in order, first, to country. In fact, the Bank does precisely the op- determine what are or should be the important posite. It seeks, in the case of each borrowing goals of a proper investment program and then to country, to determine what the appropriate invest- gauge the relative productivity of the various pro- ment priorit{es are, !!!'ld then ·to adapt its financial jects by the extent of their contribution to those assistance to meet the priority needs. For this goals. reason the Bank encourages its member countries The Bank has found that there is no single test to formulate long-term development programs and by which the relative urgency and productivity of is assisting several of them in this respect. various alternative projects can be judged. The situation in each country must be considered on If the Bank were to make loans for unspecified its own merits. Where the project under consider- purposes or for vague development programs ation is one which is intended to be self-liquidating which have not been worked out in terms of speci- in terms of local currency, the Bank will of course • fic projects, there would be danger that the Bank's wish to satisfy itself, before granting a loan, that resources would be used either for projects which the enterprise is soundly conceived to achieve that are economically ot technically unsound or are of objective. But the relative profitability of different a low priority nature, or for economically unjusti- projects will rarely be a proper test of their relative fied consumer goods imports. Experience of pro- contribution to a country's development. In many jects presented to the Bank has shown that this cases, certain basic investments in public utilities, danger is by no means hypothetical. · transport and ports, reclamation and irrigation, There are special cases, of course, where detailed workers' housing and similar projects will be re~ project investigations are neither necessary or quired before other investments in more immedi- feasible, as in the case of the early reconstruction ately profitable activities can be undertaken. The loans which were made to meet emergency needs. indirect benefits attributable to these basic invest- The Bank does not interpret the specific project ments may be very great even tl1ough the direct provision as committing it to a single inflexible earnings of the activities, at least in the short run, lending technique to be applied without regard are not high or may even be non-existent. to the a~tual needs of a given situation. It is rather The Bank recognizes that by financing one par- a lending policy which, in the opinion of the Bank, ticular investment project it may release resources t is desirable in the vast majority of cases to assure already available to the borrower for some other that member countries use their limited capacity investment activity, but it does not regard this fact for foreign indebtedness to the, best advantage. as in any way relieving it from the obligation of The proposal. has sometimes been advanced that satisfying itself that the projects it finances are the Bank should make loans for « general develop- technically sound; and are of a high priority nature. ment purposes." It is difficult to discuss the merits Indeed, it may reasonably be hoped that under- of this proposal without a more precise definition developed countries may thereby become more of "general development purposes." If all that is familiar with the Bank's methods and criteria and . meant is that ·the Bank should not confine its as- so tend gradually to apply the same standards· to sistance to individual projects but should: seek to investment projects :6.nanced from their own re- finance groups of inter-related projects, the pro- sources~. This may well prove in the -long run to be posal merely reflects ·existing Bank policy. Indeed a most valuable by-product of the Bank's lending • the Bank· prefers· to go further. and base its financ- ing on a national development program, provided this· is properly worked out in terms of the projects by ·which the· objectives ..of the program are to be attained. . [7] technique. · · Loans for Local Curr.ency Expenditures. The Rank~s . Articles 'of . Agreement make a distinction between·two types of foreign exchange expenditure which may be incurred in' the· execution of an in.. vestment project; one, the direct cost of imported equipment or services used on the project; the other, the indirect foreign exchange expenditure resulting from the fact that local e~zpenditure on labor or domestically produced equipment will usually give rise to an ·increased demand for im- ported consumer goods or raw materials. The In general, the Bank's policy in this regard may be summarized by saying that local expenditures may be financed if the following conditions are satisfied: 1) the project being financed is of such economic urgency that the country's ability to un- dertake foreign borrowing is better utilized in fi- nancing this project than in financing the dirnct • 4.rticles contemplate that the Bank should normally foreign exchange costs of alternate projects; 2) make loans to meet the first type of foreign expen- the local currency costs of the project cannot rea- diture; they permit loans for the latter type "in sonably be met out of available domestic resources; exceptional circumstances." This second type of and 3) it is apparent that, unless foreign exchange loan is often referred to as a loan to meet local is made available to the borrowing country to be currency expenditures although, strictly speaking, employed for the import of either consumer goods it is a loan in foreign exchange needed because of or raw materials, the local currency expenditures foreign exchange requirements indirectly resulting involved in the project will lead to inflationary from eA-penditure in local currency. pressures. • It has often been argued that, to the extent that It should be noted that the term "local currency local expenditure on investment projects gives rise loan" is sometimes used to mean a loan pursuant to additional demand for imports ot consumer to which the currency of the borrower is provided p;oods or raw materials, there can be no logical to cover the local expenses of a project, regardless reason for making this expenditure less eligible for of tl1eir effect upon foreign exchange requirements. loans than the direct foreign expenditure required The Bank's Articles of Agreement permit this type for the import of capital equipment. But the Bank of loan in exceptional circumstances when the local is in agreement with the view that many countries, currency cannot be raised by the borrower on rea- particularly the less developed ones, need to take sonable terms. However, the Bank has not been more effective measures to channel their limited presented with a case where financing of this na- domestic savings into the most productive invest- ture would be appropriate. • ment projects. It accordingly feels that it should The Character of Bank Investigations first assist these countries in taking the necessary measures to defray the local currency part of their Although the procedures followed necessarily investment programs from their own resources vary considerably from case to case, the Bank has where this is reasonably possible without inflation- developed a general pattern of handling loan re- ary effects. It has, for example, recently assisted quests. Normally, it prefers to hold informal ex- the Government of El Salvador in the flotation of ploratory discussions with prospec.. ;ve borrowers domestic bonds by the Rio Lempa Commission in before any formal loan request is filed. These dis- connection with the Bank's loan to the Commission. cussions enable the Bank to determine whether the However, a country may be in a position where projects to be financed are, in principle, of a type its domestic savings are reasonably fully employed which the Bank can consider and what kinds of in productive investment and where the most ad- information it will need. If the prospective bor- vantageous kind of additional investment for it to rower is not a member government the Bank make would be in such projects as roads, irrigation requires at this stage an appropriate indication by or housing which call principally for expenditure the Government that it will guarantee a loan for in domestic currency. Provided such investment is the project. in line with the natural growth of the country, the The actual process of investigation usually falls Bank believes that a loan for local expenditures to into two general stages, which in some cases may tide the country over a period of expansion with- . . '"!eed more or less concurrently. The first stage out inflation would generally be justifiable. is a general examination of the economy of the In other words, the Bank regards the local cur- borrowing country with a view to determining: rency provision of its charter not as an encum- 1) the appropriate amount of additional external brance but as a signal of the need for inquiry and debt the country can afford to service and the rate justification whenever an application is made for at which it can effectively absorb such debt; 2) a local currency loan, but there is nothing in the the general order of priority of the projects under provision to prevent such an application being consideration from the standpoint of their contri- approved if the circumstances warrant it It should bution to the country's development; and 3) the be noted, however, that it is the general policy of appropriateness of the government's economic and the Bank not to finance the whole cost of any un- dertaking, because it believes that its borrowers' best interests are served if they have a tangible financial stake in the preparation and execution of their investment projects. [8] financial policies to further the development process. This first stage frequently requires intensive study of the country's agricultural, industrial and mineral resources; its manpower, transport and • • power. situation; the- state of its external trade and that the countries concerned should give clear .evi- ·balance· of payments; and the condition of its, inter- dence· of their· willingness to.reach a fair and equit- nal finances, particularly, 'its·. budget and currency able settlement of their .debts. · In the .absence of positicfo. If- such ·an investigation has already :been such- evidence, the granting, of a ·bank foan might made by the Bank, the inquiry will normally be properly be regarded as, in the long run, hindering confined to developments occurring in the interim. rather than promoting the :flow of inte.rnational After studying the infu.lu.tation ·available at· its ·capital. · home office; the Bank ·alinost ,always dispatches a mission to eximiiie conditions· in the country itself. Loan Charges On ·the basis of the mission's report the Bank l:p. establish4lg its system of loan -~):larges; the is usuallY: able to form at· least a provisional judge- Bank considers eq-µ.ally the interests of all its mem- ment as to the amount of a:dcfitional foreign debt bers. The Bank therefore lends at the lowest rates the country can safely assume and effectively use that it considers consistent with reasonable' pru- and also as to the project or projects most suital:ile dence to safegqard those. who. supply its funds and for :financihg; TM Bank ·then proceeds in the those who guarantee their repayment. .The Bank second phase ·of its investigation ·with a detailed has macye efforts to effect a pro_gressive reduction examination of these projects: Staff engineers or of these charges. Its policy is. to make no clistinc- outside engineering consultants make a thorough tion among its, ·mem.ber countries in ~etermining technical examination· of any important technical the charges on loans. problems involved. Similarly, it . often proves ·The two ptjncipal charges are int~~est .and com- necessary to examine such factors. as market sur- mission. The main (;}lement ,in the interest :rate veys, and financial ·and administrative arrange- is the cost .at whicp. the· Bank can borrdw in the ments proposed by the borrower to carry out the market for a comparable period. The. Bank~s inter- project. Again, at least part of the technical in- est rate is calculated to exceed this cost by a small vestigaticm must usually be conducted in the field. margiil suffic lent, together wiL'i the income from its capital, to cover the Bank's operating expenses If the investigations result in a favorable report and to yield a modest amount that can be put to on the project, formal negotiations for a loan are reserve ag~inst future contingencies. In. accord- • begun. As the Bank's member countries have gain- ance wj.th the Articles of Agreement it also charges ed greater familiadty with the provisions of the a commission, the proceeds of which are allocated Bank's loan and guarantee agreements, it has often to a special reserve for the purpose of meeting the been possible to complete the formal negotiations liabilities of the Bank on its borrowings and guar- quite quickly. antees. Currently, a uniform commission of 1% These fonding procedures are subject to certain is charged on all ·outstanding loans. qualifications. Not infrequently, the Bank's exami- The Bank does not normally charge the full in- nation of general economic conditions in the bor- terest rate on its lbans until the proceeds are· act- rowing country reveals the existence of economic ually disbursed~· Beginning on the effective date or :financial practices which so adversely affect the of the loan, however, a commitment charge is made financial ·and monetary stability of the country on the undisbursed portion of' the loan calculated that, if continued, they would endanger both the to compensate the Bank, at least in part, for the productive purposes and the repayment prospects cost of holding funds at the borrower's disposal. of any . Bank loan. In such cases, the Bank re- quires, as a condition .of Bank financiµg, that the Currency Problems borrowing country instituta measures designed to The Bank's charter precludes it fr~~ making restore stability to its economy. The Bank does "tied" Ioans.....:that is, ·from imposing any conc;lition not insist that all remedial measures which may that th~"loan m~st be spent ~n the territories of any appear. 1J,ecessary be completed before a _country 1 particular member countries. · A mistaken imp!es- may. quali£y.for a loan, but it does require concrete sion has gained some· ·acceptance that, -although ev.idence .that, the government is ·actu~lly taking the Bank may· 'impose no contractual conditions the necessacy steps. Pnce given such evidence, it which cause its· loans to be ''tied", its policy 'and is usually wiUing to. make a loan concurrently with procedure~ tend: to ·have this 'result. 1 the exec;mtion of the measu_r~s. adopted. As of Junt./ 30, 1950~ the· Bank had disbursed the Another·qualification applies·in the c.ase of those· eqt...ivaleb.t o:f $614.1 million under ·its loans. Of few remaining member countries whose credit is this sutn, the·equivalent of $17.9 million was dra,vn impaired by a still lfnsettled default on theii out- from the Bank's· resofirces' of' currencies other than • standing foreign obligations~ The mere ·existence United States· dollars, specifically the 18% sub- of a default ·wiff bet deter the Bank from granting scriptions of certain member ·countries and the ·pro- a'loan ·if it is convinced that ·there ·are no reasonable ceeds of Bank bond issues iii Switzerland. The grounds· for" regarding the debtor's attitude· as un- remainder was· drkwil from the Bank,s dollar assets satisfactory. But the Bank considers it important and of' this{ ·suin about one quarter was spent ·out- ·9 • side the United States. In view of the types of of this loan was to enable the Herstelbank to ex- goods required by the Bank's borrowers and the tend credits to more than 20 private enterprises in supply situation of such goods during the past few a variety of Dutch industries. By having a govern- years, and in view of the fact that most of the ment guamntee a loan made to a responsible in- Bank's borrowers have confined their loan requests termediary such as the Herstelbank, it is possible to primarily to dollar needs, the fact that so large a avoid to a large extent the difficulties which con- proportion was spent outside the United States is front both the government and the private enter- clear indication that the Bank's loans have not been prises ultimately benefitting from the loan. Another tied either in form or in substance. technique is illustrated by the Bank's decision to The Bank, however, cannot be indifferent to the assist in the establishment of the new Turkish In- currencies in which its member countries incur dustrial Development Bank, which is described in obligations. When a borrowing country's total the operational section of the Report. The Inter- dollar debt is already near the prudent limit that national Bank has agreed to work out a loan to the it can be expected to bear, the Bank advises it to Development Bank, with an understanding that the explore all practical means of avoiding an addition use of the loan for particular private projects is to to that dollar debt. The Bank has made efforts to be subject to International Bank review. increase its available lending resources in curren- The Bank is continuing to study this problem cies othe . : than United States dollars by obtaining in relation to various member countries. One fur- the permission of its members for the use for loans ther possibility is the acceptance by the Bank in of part or all of the 18 % portion of their capital suitable circumstances of the guarantee of the local subscriptions. In view of the increasing availabili- central bank or comparable institution; this tech- ty of goods in Western Europe at prices competi- nique would appear appropriate for small loans to tive with comparable United States products, this private enterprises up to a limited amount. An- matter is becoming progressively more important. other is the enactment by member countries of Indeed, so long as conditions of non-convertibility legislation enabling officials or institutions to give continue, the extent to which the Bank is enabled the guarantee of the government for Bank loans to utilize its non-dollar capital or the proceeds of not exceeding a certain size. • non-dollar bond issues for lending purposes will Continuing Relationship with Borrowers inevitably have a substantial effect upon the vol- ume of Bank lending. The Bank maintains a close relationship with its borrowers throughout the life of each loan for two Loans to Private Enterprise main purposes. First, the Bank checks to assure that loans are expended only for authorized goods Loans to borrowers other than member govern- or services and keeps itself informed of the uses ments must, accor.ding to the Bank's charter, be to which the goods are put. Second, the Bank guaranteed by "the member or the central bank keeps in touch with general economic and financial or some comparable agency of the member which developments in the borrowing country. is acceptable to the Bank." This provision is a Disbursements are, in general, controlled by principal reason why a majority of the Bank's procedures similar to those applied by commercial loans to date have been to governments or gov- banks. In addition, the Bank arranges to r.aceive ernmental agencies and why loans to private a flow of information about the progress of the enterprises have been infrequent. For entirely un- execution of the project. The information request- derstandable political reasons, governments may ed by the Bank is usually much less than that re- be reluctant to guarantee loans to private enter- quired by the borrower itself for the efficient prises, since it may thereby lay itself open to control of its own operations. Field visits are also charges of favoring a particular private company made to the borrowing counby. The objective of over its competitors, or over various public projects. this procedure is to bring to light at the ~'artiest The requirement of a government guarantee al- possible moment any difficulties, either technical so tends te discourage private enterprises from or financial, which hinder the successful accom- seeking Bank financing, because they fear that it plishment of a project, and by early discussion may lead to demands for government participation with the borrower to overcome them. in or control over management. Whether or not In giving continuing attention to general econo- these fears are justified, the significant fact is that mic developments in the borrowing country, one they exist. The Bank has tried various techniques of the Bank's objectives is, of course, to ensure to overcome these difficulties, for it is convinced that the maintenance of service on its loans is not • that in many situations it can make an effective jeopardized by the emergence of conditions which contribution to the development of its member might reasonably be prevented. But the Bank also countries through financing private undertakings. has a broader objective in view. By keeping in One type of solution is exemplified by the Bank's touch with the progress of its members, the Bank loan to the Netherlands Herstelbank. The purpose hopes that it may be able to be of some assistance [10] • to them in meeting important economic problems . certain groups. They may call for changes in taxa- The member countries, in mm, are able to discuss tion, for far-reaching· land reforms, or for the their plans for investment well in advance and to postponement of projects likely 'to benefit some obtain an .early indication of the Bank's opinion. particular district. ·For this reason it is a ·prere- On both sides this tends to facilitate subsequent quisite to the success of a comprehensive advisory financing frorri the Bank or, in the long run, from mission that the country concerned should sincerely any other source. desire its advice and arrange for serious, non-parti- san consideration of the recommendations made. Technical Assistance The Bank believes it is appropriate that it should In the normal course of its loan operations, as provide this type of assistance to its member coun- noted in the operational section of the Report, the tries for several reasons. It can do so without Bank renders a wide variety of technical assistance suspicion of being influenced by political or com- to its member countries. The essential purpose mercial motives or of sponsoring unrealistic recom- of this type of technical assistance is to ensure that mendations. Moreover, in view of the Bank's the Bank's resources will be used with maximum relations with its member countries, it is able to effectiveness. There have also been an increasing provide continuity and to follow up the recom- number of cases where member countries have mendations of a mission with advice on subsequent asked the Bank for advice on particular projects steps. The Bank is also in a position to help coun- or industries without reference to any financing tries which formulate well-balanced development operation. The Bank either provides such advice programs by financing appropriate projects. from its own staff or, more generally, recommends These broad activities in the field of technical the employment of outside consultants. The Bank assistance may thus form a useful working basis is steadily building up a roster of experts in various for the Bank's financing activities although that is fields in which technical advice is likely to be re- not their main objective. In the long run their quired. impact is likely to be more profound, since they In addition to advice on particular projects, the should contribute l:o the formation of a climate Bank is convinced that many of its less developed conducive to productive investment from all • member countries need assistance of a broader sources . nature. Several countries have already asked the Bank to organize a mission to make a comprehen- The Bank's Lending Standards sive survey of their economies. One mission of this The Bank has set high standards for its lending type visited Colombia in 1949 and three are now operations. That does not mean that its loans are in Turkey, Guatemala and Cuba. The precise without risk; the very essence of the Bank's task terms of reference of these missions vary in each is to take risks that private investors are unwilling case, but broadly their objective is to help the to assume. Nor does it mean that the selection of country formulate a program of investment which projects to be financed is dictated by commercial will indicate priorities among the impmtant sec- considerations. It means rather that the Bank will tors of the economy and among types of under- lend only on the basis of an informed judgement takings within each sector; to suggest methods, as to the productivity of the proposed investment. other than investment, to improve productive effi- This judgement rests on the answers to two basic • ciency in existing enterprises; and to recommend questions: first, whether the purposes for which • improvements in the government's economic and :financial policies and organization to facilitate the loan is granted can be accomplished efficiently by the means selected and with the funds at the further development. These missions are staffed borrower's disposal; and second, whether the ac- primarily with consultants recruited from outside complishment of those purposes will make a signi- the Bank on an international basis, but they in- ficant contribution to the country's economy in clude members of the Bank's staff. The expenses relation to the resources invested. of such missions are shared by the Bank and the The gathering of information necessary to form country concerned. such a judgement takes time, particularly when it It is too early to draw definite conclusions as to involves a series of inquiries. The Bank hopes and this aspect of the Bank's work. It is clear, how- expects that, as more information about the econo- ever, that the need for technical assistance of this mies of its members is assembled, as well-conceived type is very real and that the fulfillment of that development programs take shape and as the need up to the point of implementation of the technique of planning individual projects becomes • advice given is far from a simple task. While there more generally understood, the pace of the Bank's will normally be a number of recommendations of financing will accelerate and it will be able to a non-controversial nature which have a ready grant a considerably larger annual volume of loans. chance of adoption, at least some of the mission's The Bank is convinced, however, that an in- recommendations are likely to be unpalatable to crease in the volume of loans achieved at a sacrifice [11] • of the productive character of these loans would It is the Bank's firm intention, therefore. to con- be of no real benefit to its members. Nothing can tinue its efforts to choose the right projects for in- be more harmful to a country's economic future vestment and to help .bring those projects to a high than a faulty assessment of its real opportunities. pitch of technical proficiency. Only by so doing Nor can anything make the burden of a debt so can the Bank discharge its responsibility to assure difficult to bear as waste and inefficiency in the use effective use of its resources in raising the standard of borrowed funds. of living in its member countries. • •