P - 75 FILE COPY 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 A PROPOSED LOAN TO THE KINGDOM OF BELGIUM December 1, 1954 REPORT AND RECOMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF BELGIUM 1. I submit the following report and recommendations with regard to an application from the Kingdom of Belgium for a loan of $20 million. PART I - HISTORICAL 2. During the Ninth Annual Meeting, the Belgian Government consulted their New York bankers about the possibility of selling publicly in the United States an issue of its bonds to finance part of the Belgian public investment program. The bankers indicated that they would be interested, but only if the proceeds of the issue would be used for projects selected and in part financed by the Inter- national Bank. The Belgian Government thereupon took the matter up with the Bank and discussed the kind of projects which it intended to put forward. As a result, we agreed early in October to try to work out a combined operation in- volving a $30 million public issue of Belgian bonds and a $20 million loan from the Bank. The proposal was, of course, conditioned on the projects presented by the Belgian Government being technically and economically Bound and on the circumstances justifying the Bank's making a loan almost entirely for expendi- tures on Belgian goods and services. 3. I reported the matter to you at the Executive Directors meeting on October 12 and shortly thereafter a mission went to Belgium where it examined the projects and studied the general economic and financial situation. It reported on its findings and negotiations were carried forward in Brussels and completed in Washington. PART II - THE PUBLIC BOND ISSUE 4. Concurrently, negotiations on the public bond issue have also pro- gressed rapidly, and the Kingdom of Belgium plans to issue shortly $30 million principal amount of its bonds consisting of $5 million of three-year bonds, $5 million of four-year bonds, $5 million of five-year bonds and $15 million of ten- year sinking fund bonds. The issue would be registered with the Securities and Exchange Commission. PART III - DESCRIPTION OF THE PROPOSED LOAN Borrower 5. The Borrower would be the Kingdom of Belgium, a member of the Bank. The Kingdom of Belgium has previously borrowed $46 million from the Bank and has guaranteed a loan of $40 million to the Belgian Congo. Amount 6. The amount would be $20,000,000 or the equivalent in such other curren- cies as may be agreed between the Bank and the Borrower. -2- Terms 7. The loan would be for 15 years, and would be amortized by 10 equal semi-annual payments which are calculated to retire the entire loan by maturity. Amortization would start soon after the ten-year bonds of the public issue had fallen due, the first payment being due on February 15, 1965 and the last on August 15, 1969. 8. The loan would bear interest, including 1% commission, at the rate of 4-5/8% per annum. A commitment charge of 3/4 of 1% per annum has been provided for. The dates for payment of interest and other charges would be February 15 and August 15 of each year. Purpose 9. The purpose of the loan would be to assist in the financing of five specific projects, described briefly in Part IV below, to improve the port of Antwerp and the inland waterways system of Belgium. The amount of imported equip- ment and materials required on the projects is negligible and the proceeds of the loan would be used to cover expenditures in Belgium on local labor, materials and equipment. Disbursement 10. Both the proposed loan of $20 million from the International Bank and the net proceeds of the public bond issue would be used to assist in financing the same projects. Upon delivery to the underwriters of the bonds of the public issue, the Borrower would receive payment in full of the net proceeds of the entire $30 million aggregate principal amount of bonds issued. A part of the Belgian franc equivalent of the proceeds of the issue, amounting to over 700 million Belgian francs ("14 million), would be used by the Belgian Government to reimburse itself for expenditures made after January 1, 1954 but before the date of the Loan Agreement on the four projects already under way. It is pro- posed that the Bank follow its normal procedure of making disbursements on its loan as work on the projects goes forward and evidence of payment for such work is submitted, and further that disbursements from the Loan Account be so arranged that the loan would be fully disbursed only when the Borrower had spent after January 1, 1954 an amount approximately equivalent to the combined total of the two loans (2.5 billion Belgian francs). Accordingly, periodic disbursements from the Loan Account would be equivalent to 60% of the amounts spent by the Borrower on the projects from the date of the Loan Agreement. Legal Instruments and Authority 11. There is attached as Appendix I a draft Loan Agreement between the Bank and the Kingdom of Belgium. 12. The Loan Agreement incorporates Loan Regulations No. 3 and follows the general pattern of the Bank's loan agreements in all important respects, except that: a) the Borrower agrees to cause the Belgian franc equivalent of the proceeds of both the proposed loan and the public bond issue to be used for the projects described in Schedule 2 (Section 4.02); - 3 - b) the Loan Agreement would not become effective until the Borrower had delivered and received payment for the bonds issued under the public bond issue (Section 5.01); c) in order that the Bank loan conform in this respect to the provisions of the bonds to be issued publicly, the Bank would have no right to premature the loan in case of default; d) Section 4.01 of Loan Regulations No. 3 has been amended to restrict withdrawals to U,S. dollars or such other currencies as may be agreed by the Bank and the Borrower and to provide for the disbursement arrangements mentioned in paragraph 10 above. 13. There is attached as Appendix II the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank, PART IV - DESCRIPTION OF THE PROJECTS 14. The five projects which the proposed loan and the public bond issue would assist in financing are all important elements in the program, currently being carried out by the Belgian Government, of modernizing and improving the country's ports and inland waterways. 15. The first project consists of the completion by the end of 1955 of the Baudouin lock now being built at Antwerp. The lock, one of the largest in the world, will be 360 meters long between the gates, 45 meters wide and 10.5 meters deep at the sill, and will be able to handle four 10,000 ton vessels at the same time. By providing a second entrance for large ocean-going vessels to the Antwerp dock basin, the lock will avoid delays to shipping and eliminate the port's dependence on the single existing lock which is now in need of general repairs. 16. The second project consists of the completion by the end of 1958 of the southern and western sections of a canal by-passing the city of Ghent. Besides the canal itself, which will be about 16 kilometers long and capable of handling 2,000 ton barges, the works include several dams and locks at points where the canal meets other waterways, and a considerable number of bridges re- quired because of the dense network of roads and railways around the city. Sev- eral important waterways meet at Ghent and the Ring canal will eliminate the delays of a day or more now encountered by the large volume of barge traffic which at present has to pass through the city. At the same time the canal will give the city improved drainage and flood protection and thus remove the need for large future expenditures for these purposes. 17. The third project consists of the completion by the end of 1956 of a new section, about 14.5 kilometers long, between the towns of Baudour and Blaton and across the Mont des Groseilliers, of a canal connecting the industrial region of western Hainaut with the River Schelde. The new canal will accommodate 1,350 - 4 - ton barges and will be free of locks, whereas the existing one has ten locks and can handle only 300 ton craft. 18. The fourth project consists of the completion by the end of 1957 of the improvement of the Charleroi-Seneffe section of the canal linking the heavily industrialized area of central Hainaut with the ports of Brussels and Antwerp, The channel will be widened and many curves eliminated, an existing 1,000 meter one-way tunnel will be replaced by a deeply excavated open canal, and the number of locks will be reduced from ten to three over the total length of approximately 27 kilometers. When completed the canal will carry barges up to 1,350 tons com- pared with the existing maximum capacity of only 300 tons. 19. The fifth project consists of the construction on the Meuse River at Neuville-sous-Huy of a new dam to regulate the level of the water, of locks for navigation, and of various minor works. It will eliminate the present traffic congestion caused by the three old locks now in operation and, with the addition of subsequent dredging work on the river between Liege and Namur, will enable 1,350 ton barges to pass between these important industrial cities. 20. In all, the projects are estimated to cost about 5,900 million Belgian francs ($118 million). Of this, about 2,100 million francs ($42 million) had been spent by the end of 1953. Expenditures for the years 1954 through 1956 are esti- mated at about 2,700 million francs ($54 million) so that the $50 million which the Kingdom of Belgium will raise by the public bond issue and the proposed Bank loan would be equivalent to practically the entire outlay on the five projects in these years. A further 1,130 million Belgian francs ($22.6 million) would remain to be spent after the loan had been fully disbursed. PART V - APPRAISAL OF THE PROPOSED LOAN 21. An appraisal of the projects is contained in the technical report entitled "Appraisal of Belgian Waterway and Port Projects" (T,ba 69a, dated December 1, 1954) attached as Appendix III, A report entitled "The Economj of Belgiu!'(E.A. 44a, dated December 1, 1954) is attached as Appendix IV. The Justification for the Loan 22. Efficient ports and water transportation are extremely important to Belgium, Antwerp is one of the largest ports in Europe, and specializes in hand- ling high-value liner cargo. In 1953 it handled 28 million tons of cargo and it earns about $100 million equivalent a year in foreign exchange for the Belgian economW. It has a reputation for the prompt handling of cargo and the speedy clearance of ships and its competitive position depends in large measure on its ability to maintain its efficiency. The second large lock is urgently needed to reduce the growing pressure on the existing one and thus eliminate the delays to shipping that have arisen, particularly since the completion of the new oil port. 23. The cheap transportation for bulk cargo provided by the canals and navigable rivers is important to the competitive strength of Belgian heavy industry. About 4 billion ton-kilometers or a third of Belgium's domestic, foreign and transit trade is carried by water and the proportion has been growing in recent years. Many sections of canal are now fully loaded and the need to increase their capacity is pressing. Many of the older stretches cannot handle barges larger than 300 tons and traffic along them is hampered by numerous curves and locks, many operated by hand, and other technical limitations. Transportation costs on routes hampered by these old sections are about twice as high as on the routes modernized throughout, 24. The Belgian Government is engaged on a long-range program of improving the trunk canals so that they can carry 1,350 ton (and in some cases 2,000 ton) barges. The number of locks is being greatly reduced. The projects which the proposed loan and the public bond issue would assist in financing are urgently needed. Three of them have already been started and the fourth, the dam and locks at Neuville-sous-Huy, will be begun in 1955. They have all been well designed and the work which has been carried out so far is of excellent quality. The reduction in transport costs which is expected to result from the improve- ments is particularly important to Belgian heavy industry. The Borrower is paying from its own resources more than half the cost of these improvements and is thus making an appropriate contribution to their financing. 25. Although the construction contracts on the projects are awarded by public competitive bidding and foreign firms are free to submit bids, most of the work in practice goes to Belgian contractors and practically all the expend- itures are for local equipment, materials and services. This is not surprising for Belgium is a highly industrialized country. Indeed, out of an import bill amounting to about 120 billion Belgian francs in 1953, only 11% was spent on investment goods. Most of this was distributed widely among private concerns and much was for replacement. In the circumstances, it would not be practicable for the Bank to base a loan for public investment in Belgium on imported capital goods. 26. The investment program of the Belgian Government appears as a whole reasonable both in size and general conception although the execution of public works may sometimes have suffered from a lack of overall coordination. In recent years public investment has been hampered by lack of funds and the rate of execution has clearly been lower than would have been desirable, particularly in the field of water transportation. Recognizing this, the Belgian Government has been taking steps to accelerate it, and by doing this while defense expendi- tures are still large, finds its needs of long-term finance higher than ever before. It is doubtful whether the Government could meet these needs internally and at the same time maintain the non-inflationary financial policy which has stood it in good stead since the war. In the circumstances, the Belgian Govern- ment is justified in borrowing abroad part of the funds it requires. 27. The proposed loan is unique in the Bank's operations. It would make it possible for the Borrower to raise by a public bond issue an amount substan- tially larger than the capital provided by the Bank loan. Besides financing sound projects, the proposed loan would thus promote the international flow of private investment and help Belgium, which has not floated a public bond issue in the United States for many years, to reenter the New York market. - 6 - 28. But the proposed operation has also a more general significance. Since the war the interest of private investors in the United States in foreign govern- ment bonds has been slight. The forthcoming Belgian issue, for which the pro- posed loan is a necessary precondition, should help to revive that interest. In the circumstances, it is particularly important that the issue be successful and it is in accordance with the Articles of Agreement that the Bank should lend to it such assistance as it can. Prospects of Fulfillment of Obligations 29. After the war Belgium achieved overall equilibrium in her balance of payments rather quickly and she has since demonstrated her ability to maintain it. Her external accounts have been in balance or in surplus in four of the last six years, she has kept her gold and foreign exchange reserves at a satis- factory level without great difficulty, and she has consistently been one of the leaders among European countries in the drive for full currency convertibility. 30. It is true that the rate of growth of Belgian industrial output has recently appeared less impressive than that of many other industrial countries. This no doubt finds its origin in part in Belgium's early start. It may, however, also be connected with the long-run decline in some of her traditional consumers goods industries and the possibility that there has not so far been enough invest- ment in new industries to make good that loss. This problem is widely recognized in Belgium and the Government is taking steps to encourage investment in new lines. Given time, it should not be difficult for a people as resourceful as the Belgians to make such adjustments in their country's productive apparatus as may be called for. 31. Regionally, Belgium tends to run a surplus with Western Europe and a deficit with the dollar area, while her continued heavy investment in the Congo is reflected in a rising net income from invisibles and an inflow of gold and dollars. Surpluses and deficits with individual currency areas are not likely to be large in relation to the total turnover of trade and such deficits as may appear should not cause Belgium any particular embarrassment. 32. For a country whose exports are well over $2 billion equivalent a year, Belgium's long-term external debt is very moderate. On June 30, 1954, the long- term public external debt of the Belgian Government, public corporations and municipalities stood at $365 million equivalent. The long-term foreign currency debt of the Belgian Congo, guaranteed by Belgiui, totaled $82 million equivalent and that of the Grand Duchy of Luxembourg, which is also part of the Belgian monetary area, amounted to $18 million equivalent. Total service on these debts averages about $40 million equivalent a year over the next ten years, about half of it in dollars, and declines sharply thereafter. This is less than 2% of the current foreign exchange receipts of Belgium alone, and less than 5% of her dollar earnings. The actual burden on Belgium is substantially less since the Congo services its own debt from its own foreign exchange earnings. Service payments on the proposed loan and the public bond issue would add about $7 million at their peak in 1957 and only $5 million after 1959. Belgium is well able to service this debt. -7 PART VI - COMPLIANCE WITH ARTICLES OF AGREEM'IENT 33. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VII - RECOMIENDATIONS 34. I recommend that the Bank make a loan to the Kingdom of Belgium in the amount of $20 million or the equivalent in other currencies, for a total term of 15 years with interest (including commission) at 4-5/8% per annumo and on such other terms as are specified in the draft Loan Agreement attached hereto. Eugene R. Black Washington, D.C. December 1, 1954