ILR E CopyRESTRICTED E copy Report No. P-335 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MALTA August 5, 1963 IIITLRITATIONAL BANK FOR REC'OUISYGH JCTIOLl ALTD DiBEvLOPMEINT REPORT AhND DCOPE- .ELDATIONIS OF THE PRESIDENT TO TiHE EXECUTIVE DBILCTORS ON A PRLIOPOSED LOAN TO MALTA 1. I submit the following report and recommendati ons on a proposed loan of $7V. millioni to Ma-lta f or a combined electric power and sea water distillation project. PART I - HISTORICAL 2. The Bank was asked in September, 1961 by the United Kingdom G-overnlotent and the Government of Malsa about the possibility of a loan to Malta to assist in financing a neew thermal electric power and sea wat,er distillatiorn project. 'The proposed installations would be o-rned and ope rated by a new statutory corporation, the Malta Electricity Bowad (0IEuB) tu0o whic;h the oroceeds of the loan would be relent, A mission from bhe BankL visited Y1alta in Janniary and February, 1962 to examine the econoAy and thc- nroposed p;,oject,, The neg;otiations, which were deferred r)ending the new Malta Governmeacnt's approval of a revi-sed draft lect:ricity Act, were coniducted in Washington in 'November. The Electrici- ty Act was eracted by the IIalta Legislative Assembly in June, 1963. 3. The Droposed lending would be the Bank's first loan in Malta. The Dank has already made the following loans with the guarantee of the Unit;ed Kingdon: -2- Amount as of June 30, 1963 Year Borrower Purpose (in U.S. $m. eivala,-,t) 1952 Colony of Southern Rhodesia Power 28.0 1953 Territory of Northern Rhodesia R ailwjays 1l.0 1955 East Africa High Commission Pailways & harboirs °2L0 1956 Federal Powser Board (Federa- tion of Rhodesia & Nyasaland) Power 80,0 1958 Federation of Nigeria Railways 28.0 1958 Federation of Rhodesia and lNvasaland Railways 19.0 1960 Federation of Rhodesia and N-asaland Agriculture 5.6 1960 Colony and Protvectorate of Kenya Agriculture & roads 5.6 1961 Protectorate of Uganda Power 8.4 1961 Colony of British Guiana Agriculture 1,3 1961 Trinidad and Toba,o Electric power 23.5 196i1 Col0ny and Protectorate of Xenya Agriculture 8.4 1963 State of Singapore Power 15.0 1963 Swaziland Power 4.2 Total: 26vOQ of l.hich has been renaid: 250 Total no-= outstanding: 2L0.0 Amount sold or agreed to be soldt 136,1 of which has been repaid: 2L.5 111.6 Net amount hold by the Bank 128.4 The to'tal outstanding includes :L8.9 million not yet disbursed. In ad- di-tion to the foregoing loans, IDA made a credit of $2.8 million to Swaziland in 1962 for roads. PARHT II - DESCpa:pTION OF THIE PROPOSETD LOAN 4i. The main charac-teristics of the loan are as follows: Borrower: State of Malta. Guarantor: United Kingdom. Amount: The equivalent, in various cur- rencies of $7.5 million. -3- Purpose: To assist in financing a combined therm:al power and sea water distillation station to be owned and operated by 1ffB. Amortization: In 35 semi-annual iLstallments, beginning on April 15, 1966 and ending on April 15, 1983. Interest rate: 52% per annum, including ifJ commission. Commitment charge: 3/A of 1%. Pa:yment dates: April 15 and October 15. Subsidiary7 Borrower: Malta Electricity Board. The Borrow^er will relend, at the same terms, to NEB the proceeds of the loan. PAuRT III - LEGAL INSTRU T,`'TS ADITD LEGAL AUTIHORITY 5. Attached are drafts of the Loan Agreement between the State of Malta and the Bank (No. 1), the Guarantee Agreement between the United Kingdom and the Bank (No. 2) and a Subsidiary Loan Agreement between the Borrowfer cand Ti"EB (No. 3)> 6. The draft Loan Agreement follows the usual form of the Bankts loan agreemrr ents for electric power poroj ects carried out by bodies other than thle Borrower. Under Section 5.01, the Government of Maltra will relend the oroceeds of the proposed loan to NEB under a Subsidiary Loan Agreement containing substantially the same terEis and conditions as the Loan Agree- ment. Section 5.05 containis a covenant on fiEB3s rates for the sale of electricity and water whidc reflects the statutory provisions of the Electricity Act under which MEB id.ill operate; this covenant would be amplified in a letter (No. L). Section 5.06 of the draft Loan Agreement provides for a limitation on the incurrence of new lon-term debt by NED, requiring a coverage of its mraximum debt service in any future year by at least 1.6 times of past net revenues for a recent twelve-month Deriod. As a condition for its effectiveness, the draft Loan Agreement requires that the 'Subsidiary Loan Agreement between the Borrower and NEB, in form and substance satisfactory to the Bank, be executed and delivered (Section 7.01 (a)). 7. The attached draft Guarantee Agreement is in substantially the samie form as previous guarantee a-rreemnents covering loans to dependent territories of the United Kingdom. The United Kingdom will, as usual, give the Bank a letter confirming the interpretation to be given to Section 2.02 of the Guarantee Agreement (No. 5). -4- 81, Also at,tached is a renort of the Committee orovidled for in Article III, Section U, (iii) of' the Articles of Agreement, in respect of the proposed loan (No, 6), PART IV - Al`PiPRAISAL OF Th-flE ?RO?OSED LOAN The Project tar An aDpraisal report (,\o. TO-320-a) on the electric power and sea -.iYater distillation project is atitached (No. 7). This report was prenared in Nlay, 1962 and updated at the end of tlhe year, followring the comp]letion of the loan negotiations with Malta. Although over six months have since elapsed, recent inLormation obtained from the Government and its consult- irg en n I1. MEB is a statutory body, established under legislation dated .June 28, 1963 and will start its operations this month. (At the time of the loan neg;otiations, MEB was expected to start its operations in April, 1963 and the appraisal report reflects this assumption.,) It succeeds the elect,ricity branch of the Government's present Water and -lectricity Dep.artment and has taken over the Demartment's electricity installations, including the existing 25 MW steam power station. MEB will be staffed largely by staff transferred from the Water and Electricity Department, with some new recruitment, particularly at top levels. The financial position of IYEB is sound. There is no imnmed ate need 'or an increase in power rates. 12. The nroject would be operated by MEB as an integral unit. Its electrical outout would be fed into MEB's distribution system and it is expected that the new potwer capacity would enable the Board to satisfy the growing dermand for electricity until mid-1967. The distilled water would be sold at cost to the Government's Water Authority, Twfhich is resoonsible for water distribution. 13. The cost of the project, equivalent to about $10.0 million, wsould be covered under a financial plan wzhlch provides that $7.5 million, renresenting the foreign exchange costs, wrould come from the Bank loan, $t1.4 million from the g,ov- rnrent, and. the remainder from funds generated by PiE-B itself. The g,overnment would treat its capital contribution to -5- IHEB as non-renayable advances, represented by permanent debentures carrying interest at 6% per annum, which would be subordinated to all other debt of ME-B. 1. Contracts for all major works for the generating equipment and for the distillation plant are being awarded on the basis of interna- tional competitive bidding. Economic Situation 15. A report (No. EA-13L-b) on the economy of Malta is attached (No. 8). 16. Malta is a densely-populated British dependency in the Mediterranean. It has an area of 122 square miles and a population of about 330,000. The natural increase in Dopulation (1.L% per annum) is partly offset by emigra- tion, mainly to Australia. 17. Malta's first Constitution, providing for an elected government, was granted in 1921. Since then, its constitutional history has been marked by a series of crises, arising mainly from Malta's particular position and relations with the United Kingdom as an important British naval base. In 1959, after widespread strikes and riots which followed the British Admiralty's announcement of its plans to close the naval dock- yard, the Constitution was suspended. Until March,1962, the British Governor directly exercised all governmental powers. Following general elections hield in February, 1962, a new Constitution, providing for a substantial degree of self-g,overnment, came into effect. 18. At the Februaary polls, the Nationalist Party, a moderate center party, w^lon a majority and fGrmed the Govern,ment. In subsequent consti- tutional discussions in London, the new Government has obtained additional powers cn administrative matters. The negotiations on the amount of the United Kingdom's financial assistance to Malta, however, broke down over the Admiralty's plans involving a substantial reduction in employ- ment in the Admiralty dockyards. The Halta Governient has asled for immediate independence within the Commonwealth. Discussions on this request,which are now being held in London, indicate that Malta may becomie independent by May, 1964. 19. L'-. editerranean standards, Malta has a relatively high per capita income ($390 equivalent) which has risen in real terms at a rate of about 5% per annum during the past six years. The economy depends heavily on British and, to a lesser extent, NATO military expenditures, which are equivalent to about half of Malta's national income and account for about two-thirds of its foreign exchange earnings. The Maltese are thrifty people and some 19% of national income is saved. Partly because of a lack of investment opportunities in Malta, savings are traditionally invested abroad. In 1959 and 1960, the outflow of capital was unusually high, mainly due to political circum,rstances, but fell sharply in 1961. 20. In the nuclear age, the strategic value of Malta is decreasing, and expenditure on the base will diminish. In 1959, a large Admiralty dockyard was transferred to a privatc concern -6- and is being, conveerted for cornnrcial ship-repairing. The Admiarlarty has recent-' ly announced plans for disclharging- about $,OCO navy dockyard ro-ikers by 196w. which will redu,ce the Admiralty labor- force to some l1,0)OO This reduction is addit-ional to sonme reducitions already made over the past few-i years, and increases the probleri, already acute, of firding emoloy- me nt. 21 ~ The current five year dervelopment plan (1959/60-1963/16L) envwisaches e,penditure over the period of $95 million equivalent, of wLdCh a6% 6will come from the United Kingdom, largely as grants. It lays emphasis on industrialization and the encouragement of tourism. Progress so far has been slow. The conversion of the naval doclkard to commercial use started late, and the establish ;ment of rew industries and the buildiing of new hotels have a.a--;ed. TW;hile some encouraginig results have been achieved, it is clear that diversification of the economry will rove slow and difficult, anrd the stabilization of the economr on a viable oasis is not yet in sighit. Prospects of Fulfillment of Otli,ations 22. Undler the government's E"lectricity Act, the Malta Electricity Board has sufficient autonomy to run its own a¸fairs on sound business lines. It should hlave no difficulty in generating sufficient revenue to provide for the servicing of tCe proposed loan. 23. Malta's exbernal public debt amounts to about $3.4 million equi- valent; the Governrnent plans to raise about $18.1 million equivalent if external loans for completion of the present Development Plan and for the proposed electric power and sea water distillation project. The service burden on the present and prospective external public debt - averaging about $1.2 million a year - would be equivalent to about 2% of Malta's foreign echange earnings in 1962, but to 32%, of its merchandise exports of domestic origin in that year. The latter ration, however, may decline to about 20% by 196h. 21,. The Government of Malta faces a difficult task in trying to adapt the Xaltese economy to meet a funcdamentally changed situation and success cannot be taken for granted. In lending to Malta for the proposed project, the Bank would have the assurance of the United Kingdomls guarantee. PART V - COMPLIAP'CE W-TIETH ARTICLES OF AGREEE-dET 25. I am satisfied that the proposed loar will comply with the re- quire7rents of the Articles of Agreement of the Bank. -7- PART VI - RECOHiMENBDAIIOUS 26. I recommend that the Bank at this time make a loan to Malta in an amount in various currencies equivalent to $765 million for a total term of twenty years, with interest (including commission) at 51% 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 fonn attached (No. 9). J. Burke Knapp Vice President for George D. Woods President August 5, 1963 Vfashington, D.C. Att achme nts.