STRICTLY CONFIDENTIAL 9-23-65 INTERNATIONAL BANK FOR ELK RECONSTRUCTION AND DEVELOPMENT MEETING OF EXECUTIVE DIRECTORS Washington, D. Co li Thursday, September 23, 1965 I The meeting of the Executive Directors of the Bank Ii was convened at 10:00 o'clock aom., in the Board Room, 11 ii :i ij 1818 H Street, N. W., George D, Woods, esident, presiding. !I ii 1: d :1 i\ 11 ii J: ,, j, j 1: Ii 11 ! 'I :I H ii !l II I' ;! I' ii Ii I' ' n II II IiH H i It p STRICTLY CONFIDENTIAL ,, ., 2 !l I CONT E NT S PAGE: 6. Proposed Loan - Spain President 1 s Report and Recommendation (R65-105, R65-105-L and R65-105-L/l) 76 STRICTLY CONFIDENTIAL :1 76 I MR. 0 WOODS: The next item r elates t o documen t ! i JR65- 105 , proposed loan to Spai nu These papers were circulated I \ some t ime ago, July 6t h to be precis e. However , subsequently , ii thera was a change in the ministries in Spain , and the present - \ tion to the Board for consideration has· been delayed until the new Mi nister o f Finance could familiarize himself with t he 1 1 results of the negotiations that have been carried on between I: /, STRICTLY CONFIDENTIAL 77 ! : Jthe Spanish officials and our staffo We present it, after :I this long delay for that reason. 'I ,,I I, Mr. Cheek will tell us of the general aspects of the I I i 1oan. Mr. Torelli will touch on the economic situation in I 1 i /! Spain; and Mr. Lowdon on the particular project. ii Ii Mr. Cheeko I II Ii li ij MR. CHEEK: Mr., Chairman, Members of the Board: l 11 Ii The ports of Spain have had an international ii ji importance at least since the time of Hannibal, and, more i recently, and more peacefully, they have been the channels I' for the opening of the Spanish economy to trade and commerce i on an extensive scale with other countries. In less than 10 H i years, the volume of exports and imports has increased almost l, /I threefold. Underlying this growth has been the liberalization i' lof Spain's trading with other countries; and, indeed, a liberal1- I zation of her economic policies internally. A highlight of Jthis has been the work of the International Monetary Fund in I i: jj the Stabilization Plan in 1959; and, subsequently, the Bank I s i: ljldeep involvement through the General Survey Mission of 1961 ! 11 and t 62., li i I: We have consistently, on the part of the Bank, ex- Ii i! pressed our concern in the changes in the economic structure Ii and policies of Spain, which would be necessary to foster l substantial economic growtho And again today, in presenting IJ lthis--the third loan to Spain-•we are concerned not only with f STRICTLY CONFIDENTIAL ,i !l 78 'i i the modernization of equipment and facilities, but with the 1 ij organization and policies of port finances and management in /1 // Spain. I might add, for example, that in the 44 hours of Ii Jj negotiations which we had in May, we spent six hours in going Ii i 11 through the Loan Agreement, and over 30 hours in discussing '! !J and agreeing on the associated reforms, which we felt were //such an important part of this project as a whole~ :1 q [ In considering our activities in Spain, in- general, i I J the question naturally comes to mind, "Are there reasons 1 11 P for lending to Spain? 11 !I I Mro Torelli will refer to the strong economic posi- tion of Spain, and to its basic credit worthiness. And he wil also call attention to the need that Spain has for a capital i inflow to finance development projects. We feel that our \! lending in Spain is justified by the need for capital inflow, 1 II and by the way in which the Bank I s invo 1vemen t enables pro gresi jj to be made in improving the economic practices and policies of I Spain internally and externally, I i Ii I would at this point, therefore, like to refer l Ii ji to one of these involvements of the Bank which begins in a 1! j week I s time, and which is the Joint Bank-FAQ Agricultural 11 Ii Mission to Spain, which is due to start work in Madrid on '1 l: r' October 11th; the purpose of which is not to prepare or study Ii projects, but which is to~-with the strong support of the ii 11 government--engage in a study in depth of the agricultural !: q !i problems and policies of Spain. This is a sector of the i' i STRICTLY CONFIDENTIAL 79 economy which has lagged behind the others. In the last seven ! years or so, Spain has increased in its economic size by 50% icr more, but the agricultural sector has lagged; and this, I / think, is a hallmark .or our contact and relations and coopera-l tion with Spain, and is a most important action on our part in the field of improving policieso d At the same time as we are very active in Spain, we i !i !I have emphasized in our discussions with the Government the I need for Spain to turn to other sources of capital abroad for l Ill its public needs. There has been a substantial private inflow 1 of capital into Spain, and we have been discussing and en- 1! 1! c our aging the government in attempting to tap other parts of ii Ji 1· the, international capital marketo !! ll of Ii We know/ their plans to do this, and these plans fl Ii will again be discussed with our President in the next week or Ii d I! so. I! ii ;I l To return, :in conclusion, to the project before us 1: I\ and the proposed loan, as the Chairman mentioned, the delay in !1 lirubmission to you has been due to the change in cabinet and the p jj sensible policy adopted of the new Ministers of Public Works I! j[ and Finance, in particular, wishing to review the project ,1 I! ji before putting their imprimatur on it. iil We are pleased that it has now gone forward un- 11 ii ii changed, and this signifies on the part of the government-!-'# 11 1: Ii Ii their confirmation signifies their willingness to continue !! I ,I ,1 l JI STRICTLY CONFIDENTIAL 80 i i \ this process of cooperation with the Bank in reviewing II economic policies and in carrying out development projects. !j The present project and proposed loan then I; !/ incorporates important aspects of modernization for the r /) Spanish ports, and important changes in the port administra- l1/ ' tion. This is then, for us, more than a matter of the 11 11 11 financing involved, but we appreciate the farsighted action of I! i the government in reviewing its policies of port management, I and putting the ports on a commercial basis, And, finally, we see this loan, in the over-all perspective: that it.'is part of a continuing program of the i Spanish Government to improve transport facilities as a whole ! And this is a program to which, with this loan, we in the Bank l 11 would be contributing $138 million-•first in roads, then in I railroads, and now in ports. 1! I, II :MR. WOODS: Thank you, Mro Cheek. l1 ll ii p Mr. Torelli, on the economic situation. i :MR. TORELLI: Mr. Chairman, Members of the Board: Ii ;! p The high rate of economic expansion which took place 'I /1 in Spain in the early sixties, after the stabilization plan, l: I I has been maintained in most recent times. In 1964, the gross i national product increased by more than 7% compared to a targef I ii \\ of about 670 of the Development Plan. It was led by progress ]! made in industry and services, and helped by the strength of ,, 11 I\ demand, both domes tic and foreign. 1: !I :1 Ii 11 STRICTLY CONFIDENTIAL 81 The remarkable expansion of the Spanish economy, i /which was accompanied by the distribution of income in favor I lof low income earners, was achieved together with an improve- :1 : !I ment in the external position; t.he international balance of ;Jpayments of 1964 showed a surplus of about $300 million. This JI result, which is very remarkable, given the pace of development, I y not continue. However, the comfortable level of reserves, now equivalent to about six-seven months' imports, would, in 11 I ! any event, allow government policies to continue aiming at a l high rate of development. 1 1 1 At present, a major source of concern is the 1! inflationary pressures which have been present since:_early Ii lj 1964, and have accompanied the spectacular growth of the Ieconomy., In the first six months of 1965 consuTIE r prices in- ! creased by 10% to 15% compared to the same period of 1964. Th se .I pressures, which stern mainly from the increase in prices of ii Ji agricultural products and housing, are primarily the result of Ii I\ the fact that the rapid expansion of the economy did not I I evenly affect all sections; particularly agriculture has long 11 remained neglected, and efforts for its modennization and for JI improved land reforms have lagged. Substantial agricultural II '! imports will be required to check pressures on prices. But Ithe need to further liberalize imports applies not only to 'j agriculture, but to other sectors, particularly industrial I 1 goods, so as to help Spain achieve a higher degree of competi- 1 11 tiveness in relation to the other countries of Europe. Such STRICTLY CONFIDENTIAL 82 ! an achievement is among the major aims of the present four- i year Development Plan. Ii d Since the early sixties, imports have been progres- \ i !i ii l Ii sively liberalized and new additions to the list of liberalized ;j /1 imports, which now represent two-thirds of the total, were .1 Ji II added in 1964 and early this year to help check the inflation- !/ ary pressures. As a result of these measures, as well as of I: ii ii demand factors and some decline in exports, the trade balance ii Ji lj for the first six months of the year showed considerable de- 1, II l/terioration, and there have been some losses in foreign ex- II change. , 1 Ii The stimuli which have contributed to the economic 11 11 growth of the last four years are still present in the economy /1 and, with the government committed to achieve the targets of 11 II jj the Plan, the economic development of Spain can be expected li !I to continue at a satisfactory pace. However, given the need Ii for modernizatioff and improvement in agriculture, in Ji infrastructure and in industry, an inflow of foreign capital ii /: is required to avoid an excessive strain on domes tic resources I! I Ii i Such an inflow would help Spain to maintain such a satis- 11 Ii 11 factory rate of growth while providing the necessary support l! Ji to smooth the stabilizing measures which might be requiredo l I, The proposed Bank loan, by helping to finance a Ii I Ii !. high priority project, would make a valuable contribution to the development of the Spanish economy. !I STRICTLY CONFIDENTIAL 83 Thank you. MR. WOODS: Thank you, Mr. Torellio i Mr. Lowdon. I MR. LOWDON: Mr. Chairman, Members of the Board: i Of the large number of ports in Spain, some 300 or !I1 ' more, 17 handle about 90% of the cargo traffic. While these 1 1 1 larger ports, and a few others, have been handling ocean- going vessels for centuries, many of the existing facilities II are unsuited to modern requirements and need reconstruction, II and much of the equipment is obsolete. This was the general situation found by tre Bank , Economic Mission which visited Spain in 1961. In addition, I the Mission noted an imbalance among the elements of port !J 11 capacity. Infrastructure had been emphasized, rather than '! better equipment. As a result, many of the ports could not be I i used to capacity. It also noted poor administration and con- 11 II stantl financial losses from operations. l I i The Mission recommended, among other things, modifict- 1' 11 of the then existing Port Development Plans, greater decentralil ,1 Ii 11 ,I zation of responsibility for management, for execution of , r I I their investment plans and for financial resultso ! As a means to these ends, the Mission suggested in- creases in tariffs, the removal of subsidies in the form of rate concessions to public enterprises, and the adoption of commercial policies and accounting procedures. STRICTLY CONFIDENTIAL 84 Since 1962, when a new port administration was in- stalled, the Spanish Government and Port Authorities have closely with the Bank, and have accomplished much towards improvement in po rt affairs. The investment plan has been modified to include :i:::: ::::p:::::t:::i:::: :: :::::::\:::u::::v::u::ep::::er ., !I ports, Improvements in procurement and port operating pro- Ir I! cedures have been implemented or are under study, and a port i ' F.inances Law has been agreed, which brings into play the I I objectives of obtaining a reasonable return on net fixed i I\ assets, of maintaining adequate working capital and general l. I\ reserves, j, The new Finances Law now before the Cortes ,will I l apply to all major ports, and its enactment is a condition of 11 the effectiveness of the proposed loan. Ii!; New accounting and costing procedures are being · 1 emen t e d , Iij) 1.mp ' t h t h e Ban k on a an d t h e Governmen t h ave agree d w1. jl specific program for improving the financial results of the 11 I! ports, with which the project is principally concerned; with ·1 11 the objective of achieving a small return by 1968, and of I gradually improving this to 5% by 1973. \I · Changes agreed with the government have improved !\ the Port Development Plan. The project, which comprises the i! [principal elements of the 1964-67 program, is technically i STRICTLY CONFIDENTIAL 85 sound, and economically justified. The estimates of costs are i realistic; execution of the project will be supervised by ' i! competent personnel; agreed procurement procedures will be in :: d i keeping with Bank policy, and represent improvements in con- i,, 11 tract practices. ;; ij 1: The project, together with the wide reforms under- 1: 1/ taken, or to be undertaken in consultation with the Bank, wil II ij substantially benefit the port system as a whole, and the [1 Ii ii national economy. The proposed loan and improvement program II 11 for ports parallels the substantial improvements in railway 11 i\ i1 11 administration operations and finances, which are the objectiv s ii II of Loan Number 387 for the Spanish railways. These loans, to- iI i I' gether with Highway Loan Number 360, cover a major program of !!I improvements in the transport sector of the Spanish economy [l ii and will facilitate transport coordination in Spain. II We readily recommend approval of the propos,ed ports Ii ,, JI \i loan. \i Ii I MR. WOODS: Thank you, Mr. Lowdon. ji 1 lI( II Questions on this proposed port financing are in 11 ,! order, gentlemen. 11 11 I: ,1 Mr., Rajan. l' I' MR. RAJAN: Thank you, Mr. Chairman. Ii I warmly support this proposal. And it is only Ii ll 1, a small part of the debt we owe to the Spanish ports; but for II ,I 11 'I 11 the Spanish ports we might not be meeting here today. Ii 11 Ii STRICTLY CONFIDENTIAL 86 I have only one question on para. 17 relating to the local procurement. It says, ·~apart- from :the "preference I I i of 15 per cent, or the actual rate of customs duty" there I Ii i 11 will also be the tarifa fiscal, which is the estimated indirec t /j taxes imposed on Spanish products to which foreign goods are j 11 I! not subject. I 8 ! :: : ::::~: :::: ::c:h:: :::: :::!::::: :n the I 11 previous. loans also, because this has been explained at some l 1 length here. i i MR. WOODS: Yeso That 1 s correct. Any corrnnent on that? MR 0 CHEEK: Mr. Chairman, Members of the Board: In the case of cranes, which is the largest single item of equipment in the goods to be financed, the tarifa fiscal is 11%--11%. It is never higher than 15%, and it can I I be on certain items as low as 6%; and that is the range 0 ' I MR. WOODS~ Thank you, Mr. Cheek. l! I! MR. RAJAN: It will be 15'7o--it could be a maximum of I I 21'7o-30'7oe I[ \\ MRo CHEEK: 100 plus. 11 plus 15 0 If you take an Ji JI imported price C,, I~ F. of 100, the tarifa fiscal :ts, let us say II for cranes, 11%; and the margin of preference as agreed is 15% ii II which brings you from the C. I.F,, imported price to 126 or 127, it ll II depending on whether it is compounded or not. i: !i II STRICTLY CONFIDENTIAL 87 :MR.g RAJAN: Thank you. :MRQ WOODS: It could be as much as 126%. Any other questions? Dr. Donner. DR 0 DONNER: Mr. Chairman, two points. We have been told Spain--the Government of Spain has I been encouraged to seek market financing. I take it that at the present time, that as far as one could make a reasonable I i effort to peep into the future at all, you would 1:e of the :I opinion that Spain is rather far-removed still from that class Ii of countries that under our lending policy we would consider 11 market eligible countries? ,, It :MR. WOODS: Well, when you say ''rather far,"' Dr. 11 I Donner, you get a couple of degrees in there. As of today, it I is quite clear that Spain is not a market eligible country in II my mind, Now, we do believe that the situation in Spain-.. '1 II finan, e, economic--is such that they could sell bonds in the i! normal carrnnercial markets, and we have been encouraging them Ii I fl to do so, and this effort will gradual:ly emerge from encouragei ' \ ment to urging them to do it., I Ii Ii 11 It is a little difficult, because the interest rates i i I I ! in Europe have taken the turn, that you are all familiar witho I I 1 1 i I know that Spain was right at the brink of a piece of I JI financing-with respect-...if my memory serves me-..,to a power i facility in Switzerland, when the Swiss situation changed-•not/ I 1! 1, 11 STRICTLY CONFIDENTIAL 88 because of the interest rates, but just with respect to any external financing. I hesitate to predict the future.· As far as.this port loan is concerned, it is my judgment that Spain is not market eligible. DR 0 DONNER: Thank you very much. My second point refers to the paragraph alluded to by Mr. Raja Spanish firms will get access to the bids under this loan. The protection they receive vis-A-vis firm suppliers, importers into Spain, consists of two partso The first part is the margin of preference, which is to be 15%, or the actual , whatever is lower. That this form was chosen this time is a progress over the last loan. At the occasion of the last loan, shortly after this 15% had been agreed upon with the Spanish Government, the Spanish Government lowered its tariffs, and, as far as I knew, then some of the new tariffs lower than the 15% margin, so that, as a matter of fact, I I under our loan for these particular items, the Spanish manu- l.: got a higher protection than under the regular custo4s duties they would have gotten. Maybe I am mistaken, but this ~s my impression. I I i I I said the protection of the Spanish bidders con- l! I sists of two parts. One, this 15%, or tariff, whatever is i lower. And this is a progress here, I fearo The second part is the tarifa fiscal, which was STRICTLY CONFIDENTIAL !1 ll !i 89 \ already mentioned before. With regard to the tarifa fiscal, ! j this has bem. accepted by the Bank I s staff as is. Mr. Cheek !, i told us that this is only between 6% and 15%. /I Now, I know that there has been a long discussion, I an international discussion, around GATT problems concerning I this distinction between import barriers, as a result of i tariffs, on the one hand, which are under GATT jurisdiction; land other obstacles, for instance, these tarifa fiscal, which are rot under tariff jurisdiction. There are a great many people who, in my opinion, rightly point out that this distinction is a very unfortunate one, because in so far as one deals with questions of protect and obstacles in the way of international trade, these two things have the same effect--they are barriers. The very fact ,i II that the question of jurisdiction has been differnntly settled II in earlier decades should, in my opinion, not prevent us from I\ looking at the issue under an economic impact, and asking _eu:t- i I selves, 11 ln a matter of international financing, what attitude i II 1 should we-~the Bank--take with regard to arranging with the recipient government the preference, the margin of preference I II which the domestic industry shall getZ" 1 This has not beendoneo And I think it is open to I !doubt whether this is a right attitude: I, personally, would l I be of the opinion that these two things should be treated as belonging together. If we would do so, then our discussion I 11 11 STRICTLY CONFIDENTIAL I 90 I \ concerning the protection to be given to a national industry-- 11 II 1 1 in this case, the Spanish industry-•appears in some different i Ii magnitude. Then, we would talk--not of a margin of preference J/ of 15%; but if we add, for instance, the highest figure, 15%, II then we would talk in terms of a margin of preference of 30%. /I Of course, a lower one-•if we take the lowest figure, 6%, then i! we would talk about a margin of preference of 21% ij Now, when 0 li jj we do so, when we are presented with a situation that people / look at the preference, margin of preference, to which the l Bank agrees in international financing for orders to be l I, financed with internationally collected resources, then I fea~ li we are in a somewhat more delicate position. We kind of jl invite those who, for reasons of their own, don't like ,I 1/ protection--maybe; not protection at all; at any rate not I! \I high protection. You, so to speak, invite them to take up the Ji issue: whether indeed it is right to put those exporters, who e 11 countries supply the financing, under so big a handicap at the li )/ occasion of their trying to lodge order for these projects. II ' J: I am sa.ying this, Mr. Chairman, not to raise ob- " I! j ections in this particular case. The discussions have gone I Ii 1 ii very far. I have made this point before though, following the I Ii Ii ii first Spanish loan: that maybe these two things should be I I · ii l 1 II treated togethero At any rate, at this point now, I would subr' 11 Ii mit the request that in further discussions about these things I ii l :) in any specific case--though, as far as I know, Spain seems toj I STRICTLY CONFIDENTIAL 91 ·be the only country where we have met this problem-•at any .I II .. II rate, in the discussion lateron about the basic questions 1• l i! concerning the protection to local suppliers, we devote our ii I! attention to ·this. fl Jt 1: So I conclude with the feeling of a certain mis- ;1 i giving about an otherwise excellent loan, which I would 11 L \I supporto i MRo WOCDS: Thank you, Dr. Donner. i n Ii I hear what you say about consideration of this ii i jj aspect of these things. If there is another paper, in advance ii I! of the time we have our oft-postponed and much-looked-forward i! to discussion-.. and that includes me, I am looking forward to r it Ji it--on the paper that has to do with local procurement-,,..it I! i was put off because of the holidays in August, and it was put fl II off, frankly, because of the pressure of other business in !1 ,I Ii Septembero The staff is prepared to participate in a discus- !! 11 sion, and I sincerely hope we do it in October. I am going to ii 1; 11 IJ try very hard to do it in October, and I have no reason to I• ij 1 ill.[ believe that I won t succeed. Thank you for your comments, and they will be ro ted. 11 Ii I! Anybody else on this proposal? Questions or I! \l I' d ? I! comments. Ii,, l\ The motion, which is in the document, is in order. Iil) I' It is moved. It is seconded. !! ,. ll p ii All those in favor, please so indicate. [Showing 'i i I of hands] ,I STRICTLY CONFIDENTIAL 92 Opposed? .! il 'I [None] II 'I l1 Thank you, gentlemen. The resolution is adopted, ii :1 // and the loan of $40 million for this port proposal in Spain is // approved. /I I very much appreciate your patience and attention i H // this morning. It has been a very long session. 11 We have moved from Brazil, South America; to the i I Far East, Korea; to Africa; and then back to Europe. They have il JI been serious matters today, and I not only appreciate your l\ cooperation and attention, but I admire your stamina. Mro Gutierrez Cano. II'I li MR. GUTIERREZ CA NO: Thank you, Mr. Chairman. II I I would like to express my gratification for the excellent job once more done by the staff of the Bank; and for your decision of submitting this loan today before the i Annual L Meeting, in a very heavy schedule, for the examination fi j/ and approval of the Board; and to my Fellow Directors for j/ having approved this piece of business, which shows that the 11 i Spanish Government is maintaining a very close cooperation witr !i the Bank, initiated in 1961 and now continuing by the !I Mission of Agriculture, which will be certainly of great 11 i\ effect in the future Spanish policies, not only in this sector I. \\ but also in others. lj I, i Regarding the tarifa fiscal, I would only say that )j the tarifa fiscal is the ci;>mpensation.-for th~ int:.ernal l STRICTLY CONFIDENTIAL 93 ' i• intra taxes the Spanish producers have to pay. And, consequent~y, l ! jJthis is not a protection, but equalization . In some cases, ,, '.: also, trying to cover the return of these taxes from exporting 1 countries . Thank you very much.