R E S T R I C T E D. R e po rt N o. P 78

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. R E S T R I C T E D R e po rt N o. P 78 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN TO THE EAST AF-RICA HIGH COMMISSION March 7, 1955

2 .INTERNATIONAL BANK FCR RECONSTRUCTION AND IEVEILOPMENT REPORT AND RECOI4MENDATIONS OF THE P2X51IMNT TO THE EXECUTIVE DIRECTCRS ON A PROPOSED LOAN TO THE EAST AFRICA HIGH CO2f1ISSION 1. I submit the following report and recommendations on the application by the East Africa High Commission for a loan of $24 million to finance in part a program for expanding the capacity and improving the facilities of the East African Railways and Harbours Administration. PART I - INTRODUCTION AND HISTORICAL General 2. The term "East Africa" is geographical. -It applies to an area composed of the three separate but contiguous territories of Kernya, Uganda and Tanganyika, the administration of which is the responsibility of the -United-Kingdom; Tanganyika, however, has a special status in that it is a United Nations Trust Territory. 3. While these three territories are constitutionally independent of each other, they have found it advantageous to establish legal machinery which enables them to collaborate in the field of legislation and administration for certain services and subjects which are in fact common to them. To this end, the East Africa High Commission was established in Among the principal services administered by it for East Africa as a whole are railway transport, harbours, posts, telecommunications and civil aviation, but its activities also include other services such as locust control, meteorology, agricultural and medical research, statistics, and the like. The railways and harbours and the posts and telecommunications services are designed to run on business lines and to be self-sufficient; the others are paid for out of the annual budgets of the three territories. History of Negotiations 4. As long ago as 1951 it was made known to the Bank that the territorial governments and the United Kingdom Government would welcome the Bank's participation in financing development in East Africa. An operational mission visited East Africa in the autumn of 1952 to examine the economr of the area and to investigate projects requiring further capital. As a result of this mission it evolved that the most suitable basis for a loan fronm the Bank would be the development program being carried out by the East African Railways and Harbours Administration, which is the selfsufficient service of the High Commission charged with operating the

3 -2- surface transport facilities for which the High Commission is responsible. In May 1953 the Bank informed the High Commission that the Bank was in principle prepared to consider lending for the Administration's program, but since additional capital would not be needed until later, the matter might be held in abeyance. 5. In the event, the proposal was not taken up again until the summer of 1954, although informal contact had been maintained throughout. Since two years had elapsed since the Bank's previous mission, it was thought desirable to pay another visit to East Africa to bring up to date the Bank's information on the area and on the project. Accordingly, a Bank mission visited East Africa in September and early October 1954; it also discussed the proposed borrowing with the United Kingdom Government in London. 6. In December 1954 the Bank informed the High Commission that it was ready to enter negot4ations for a loan for the development program of the Administration and it invited them to send negotiators to Washington. 7. Negotiations opened in Washington on February 14., They were conducted on behalf of the Borrower by Major-General W., D. A. Williams, Commissioner for Transport, Mr. A. F. Kirby, General Manager of the East African Railways and Harbours Administration,.and Mr. J. C. Hooton, Assistant Legal Secretary to the High Commission, and on behalf of the United Kingdom as Guarantor by Mr. R. L. Sharp. General Williams also acted for the three territories of Kenya, Uganda and Tanganyika who are additional guarantors. PART II - DESCRIPTION OF THE PROPOSED LOAN The Borrower 8. The Borrower would be the East Africa High Commission, a statutory 'body whose powers stem from the British Crown. Guarantees 9. The loan would be guaranteed by the United Kingdom, a member of the Bank. It would also be jointly and severally guaranteed by the three territories of Kenya, Uganda and Tanganyika, which are administered by the United Kingdom. The United Kingdom has existing contingent obligations to the Bank under its guarantees of loans made by the Bank to Northein Rhodesia and Southern Rhodesia amounting to $42 million. Neither the Borrower nor the three territories have any existing obligations to the Bank. Purpose 10. The purpose of the loan would be to assist the East African Railways and Harbours Administration in carrying out its program for increasing the

4 capacity and efficiency of its transport and harbour facilities in East Africa for the four-year period beginning January 1, The estimated cost of the program is about 37 million ($104 million). Amount 11. The Bank would lend an amount in various currencies equivalent to $24 million. Terms 12. The loan would be amortized by 34 increasing semi-annual payments designed to retire the loan by its maturity. The first payment would be due on January 15, 1958, and the last on July 15, The-sum of the interest and repayment due each half year from 1958 onwards would be about $l,036, The loan would bear interest, including 1% commission, at the rate of 4-3/4% per annum. The first date for the payment of interest and other charges would be July 15, There would be a commitment charge of 3/4% per annum. PART III - DESCRIPTION OF.THE PROJECT 15, The report entitled "Appraisal of the East African Railways and Harbours Administration Develovment Program" dated February 25, 1955, which has been distributed, describes and appraises the project, the Administration, and the Borrower. 1t6. Amalgamated in the Administration are the various railway and trans. portation authorities which existed separately before There were two principal railways, both of them meter gauge: one was the line running northwest from Mombasa, Kenya's only seaport, through Nairobi and on to Uganda where it came to an end at Kampala, Uganda's chief comiercial town; the other was a roughly parallel line about 300 miles to the south, running from Dar-es-Salaam, Tanganyika's main seaport, to ports-on Lake Victoria and Lake Tanganyika. The Kenya-Uganda line was built by the British mainly at the turn of the century, though the last link to Kampala was finished as recently as The line across central Tanganyika to Lake Tanganyika was built by the Germans between 1905 and the First World War and a branch connecting Lake Victoria to this line was built in Between 1891 and 191 the Germans also built a short separate line serving the small port of Tanga. Since then this Tanga line has been connected with the Kenya- Uganda line, but there is no rail connection between the two main systems,. In addition to the railways, the Administration runs the sea and lake ports, shipping services on the lakes, and smae road services.

5 17. The amalgamation of the two railways and these other services in 1948 took place during a period when traffic was rapidly increasing. To meet the demands on it, the Administration undertook in 1949 a large development program which is now under way and is expected to be substantially completed about three years from now. In alls this program will entail the expenditure of about 59 million, about 22 million of which had been spent by the end of 1953, leaving about 37 million worth of the program still to be carried out. New locomotives and rolling stock will account for about a third of this, the construction of permanent way for an eighth, and the building'of new deepwater berths and other facilities at the ports for about one-fifth. 'The remainder, about one-third of the program, consists of expanding or improving existing facilities such as workshops, stations, bridges, staff quarters and the acquisition of stores. spare parts, tugs, lighters, signalling equipment and the like. The goods imported for this program will almost all come from the United Kingdom. 1B. The project forming the basis of the proposed loan from the Bank is that part of this over-all program which is to be carried out during the four years from January 1954 to December 1957 at the cost of about 37.6'million. Finance for this development can be counted on from several sources. As much as possible is to be borrowed in London, and the. United Kingdom Goverrment has said that it believes that about 17 million could be obtained in this way during the four years. Five million pounds of this was in fact raised'in'195. 'The whole 37.6 million needed is planned to be covered as follows:- million Funds in hand 13.7 Cash on hand January 1954 (including proceeds of earlier loans) 6,3 Proceeds of a loan from FOA 2.4 Proceeds of London loan in Funds assured 2.7 Advances from Uganda (repayable after 1957) attributable to work carried out on the project Funds to be raised 1955/ Minimum which can be expected from the London market 12.0' Proposed loan from the Bank about 8.5- Balance 0.7 This would be covered out of internal resources and by advances from the Joint Colonial Fund Total 37.6

6 - 5 - PART IV - APPRAISAL OF THE LOAN The Need for the Loan 19. The Railways and Harbours Administration serves an area which is developing rapidly and the economic activity generated since the war has put an immense burden on it. Between 1946 and 1953 the ton-miles of traffic increased by 80%, putting a severe strain on facilities which were designed for much lighter tascs and which before the war carried only about two-fifths as much traffic as they carried in The main pressure is exerted by the flow of imports, but at certain seasons the movement of crops and export products also presents serious transport problems. The facilities at the ports of Mombasa and Dar-es-Salaam have proved quite inadequate for the traffic offered and the capacity of both ports urgently needs to be expanded. Moreover, quite apart from the need to increase the capacity of existing railways and ports, the opening of large areas like western Uganda is possible only if new lines are built. 20. The Administration's development program is designed to meet these needs and is soundly conceived. I am satisfied that the Administration is technically and administratively competent to carry it out effectively. 21. Most of the capital required to carry out the development program can be obtained within the United Kingdom and East Africa. But about. 8,5 million remains to be found and it would be appropriate for the Bank to make a loan of this amount. Ilost of the goods financed out of the loan would be bought in the United Kingdom. 22. Customarily British dependencies and their public authorities (such as the High Commission) rely heavily on London for the capital required for their development. In recent years the London market has lent around 30 million a year to such governmental borrowers qulte apart from the amount lent for private investment in these dependencies. These demands are likely to increase. In additions, the United Kingdom Government provides large sums from its annual budget to assist development and welfare in these dependencies and under present plans over a hundred million pounds is expected to be provided in this way over the ne:t five years. The total demands upon the United Kingdom for capital coming from all quarters at home and abroad can be satisfied only at the cost of inflationary effects or of a sacrifice of foreign exchange by the United Kingdom, It might be artificial to relate the particular need for capital for a project in a dependency to a specific need for foreign exchange by the mother country, but it can be said that the provision by the United Kingdom of large amounts of capital for its dependencies corning on top of other urgent demands is justification for the Bank to make the proposed loan in foreign exchange,

7 -6- Prospect.of Fulfillment of Obligations by the Borrower and Guarantors 23. As the loan is designed, there are five parties on the borrowing side who will have direct or contingent obligations to the Bank. The Borrowerts position is examined in the technical report. The positions of the three territories are appraised in "The Economies of British East Africa" dated March 7, 1955, and the position of the United Kingdom is analysed in "Current Economic and Financial Position of the United Kingdom" dated November 19, These three reports have been distributed. Their general conclusions are summarized briefly below.. 24L While the Borrower and the three territories.would have obligations to the Bank payable in foreign exchange, none of them in present circumstances holds any foreign exchange; they rely upon the United Kingdom to sell them any necessary amounts of foreign currency against.sterling. In general, therefore, as far as the Borrower and the three territories are concerned, the relevant consideration is the prospect of their having enough sterling to buy the foreign exchange necessary for servicing the proposed debt. The prospect of there being enough foreign exchange to be sold to the Borrower or the territories depends on the condition of the central reserves held in London, and it would be only in the unlikely event that the territories did not have:-access to these reserves that their ability to earn foreign exchange directly would become a.consideration! 25. It is the established practice that when money:j5 borrowed for the purposes of the Administration, the High Commission does the borrowing on the Administration's behalf. Constitutionally thesfinances of the Administration are segregated and operate:through a separate fund. The proceeds of the loans raised by the High:Commission as well-as a"l other income accruing to the Administration is paid into this-fund and all the Adninistration's expenses, including debt service,-are paid out of it. Since the High Commission has no unrestricted financial resources of its own, its ability to meet its financial obligations to-the Bank depends upon,the financial condition of the Administration as reflected in the condition of its fund., 26. The legislation governing the Administration and its operations provides that it shall operate on business principles and that all of its expenses, including debt service, shall be met out of its revenues, In keeping with this, established machinery,exists for securing that rates be set at a level which will ensure that the flow of revenue into the fund will be sufficient for all purposes, including providing the amounts regularly due to the Bank. The Administration and the Borrower are, therefore, in a good position to arrange their.affairs so that the obligations to the Bank will be met, assuming that the necessary foreign exchange can be bought. 27. In the past the AdminiistratiotI.s" affairs have been.managed well. Since its establishment it has not only paid its way but has been able to add to its reserves and pay for some of its-capltal works out of revenue.

8 -7- Its rates ard not high by African standards and there is therefore some scope for increasing revenues by raising rates if necessary. The Achinistration is, moreover, fortunate in that an unusually high proportion of its capital is equity in the sense that it is non-interest-bearing and non-repayable, and it thus enjoys considerable financial flexibility. 28. Kenya, Uganda and Tanganyika are assuming contingent financial obligations to the Bank. They undertake jointly and severally to meet the debt service should the High Commission fail to do so, and they undertake to provide the capital necessary to complete the project should funds available to the High Commission be inadequate for that purpose. Practically and technically the combined resources of the three territories stand behind their obligations, thus spreading the liabilities and enhancing the prospect that the obligations to the Bank will be met. At the same time the three territories have direct debts of their own and these are expected to grow as more money is raised to pay for development undertalken by the respective governments. Barring a catastrophic change in econoraic circumstances, however, it should not be difficult for the three territories together to meet the service on all their debts including the prospective contingent liability to service the prospective debt to the Bank. At present the annual debt service payable by the three governments, the High Commission and quasi-governmental bodies is less than 5% of their collective annual revenues. This ratio will rise as a result of further borrowing in prospect, but according to present estimates, in 1960 and the years immediately following debt service should not surpass 10-12% of annual revenues, a burden which should be manageable. 29. The amount which might have to be found by the territories under their obligation 'to make good any shortfall in funds required for the project is residual and hence it is not known how large it might turn out to be. If the expectations on which the High Commission's financial planning as described above are fulfilled, the territories will not have to put up any funds, but even if the High Commission were to fail to raise the full 12 million it is expecting, it is probable that at least some of it would be forthcoming. So it can be said that the amount which the three territories between them might have to put up is hardly likely to be as much as the full amount which has to be raised in the next three years. The fulfillment of their obligations in this respect should not prove impracticable for them. 30. The territories' source of wealth is basically agricultural and government revenues are closely linked to the sale of agricultural products for export. They have benefited from highly favorable markets in recent years for their major export products:. sisal and coffee from Kenya, cotton and coffee from Uganda, and sisal, coffee and cotton from Tanganyika, which in addition exports diamonds. Incomes fronm these exports have been eood and, together with development being financed by cadital from abroad, hare generated an increasing flow of imports. Public revenues from custoins duties, export taxes and income. taxes have consequently been. buyarrt and have usually resulted in annual budget surpluses for the three governments*

9 Since 1953, however, Kenya has faced the difficulty of subduing a subversive movement called Mau-Mau. The high cost of the security measures required have sapped Kenya's resources and she has had to rely on help from the United Kingdom. The position, while not yet restored, is improving but Kenya will be left with a legacy of commitments which will necessitate a higher rate of government expenditure for some years to come. The Bank is receiving assurances to the effect that the United Kingdom's help will continue. 32. World markets for East African products are no longer as favorable as they were. Nevertheleess the economy of the area is likely to continue to expand, though possibly not as fast as in recent years. Development will continue to be a cardinal policy of the governments. To the extent that revenues are less buoyant than befores the governments in financing this development will have to rely more on their own reserves and borrowed money and their financial positions may become somewhat tighter. The expanded economy, however, will tend to make it easier for them to meet their financial obligations which should in any event be manageable. Moreover, the territorial governments have a long-proved capacity to adjust themselves to fluctuating conditions and have never failed to meet their obligations. 33. The United Kingdomts primary responsibility arising from the proposed loan would be to provide the dollars or other foreign exchange required for paying the debt service. This, together with the service on U.S. and Canadian loans and the Bank's earlier loans to Northern and Southern Rhodesia, would bring dollar payments for her own debts and debts guaranteed by her to about $200 million a year in the late 1950's and early 1960's. This is a manageable amount. 34, The slight deterioration in the last few months should not be allowed to obscure the great improvement in the internal and external economic and financial position of the United Kingdom which has taken place during the past two years. Production has increased} prices have been relatively stable, personal savings have increased, the dollar deficit was held down in suite of the U.S. recession, and external investment has been well maintained. It has been possible to remove most of the armor of direct controls and so make the economr more nrible. 35. The British have set themselves the goal of achieving a continuing large surplus on balance of pa,riients current account to finance investment abroad, to repay debt and to build up the gold and dollar reserves. While the surplus has been increased, it is still short of the desired goal. Investment in industry at home, although it may have recently increased, probably is still not as great as would be desirable, In the last half of 1954 the economy began to tend somewhat towards the inflationary side and this, in the last two month,.9 has reflected itself in the reserves. The vigorous monetary and credit measures so far taken by the government to rectify the situa&.;on are a good earnest of its determination to maintain the progress of the economy. The ability the United Kingdom has

10 - 9 - shown in the past.to manage her affairs and the willingness with which she has made sacrifices to meet her problems. combined with the cooperation offered by the other members of the sterling area, inspire confidence that she willibe able to continue to overcome her difficulties in the future. There is no.question of her ability and willingness to meet her obligations under the proposed guarantee. PART V - LEGAL INSTRUMENTS AND LEGAL AUTHCRITY 36. The constitutional relations between the High Commission and the Administration, and between these two bodies and Kenya, Uganda and Tanganyika are peculiar to East Africa and this-is reflected in some unusual provisions of the Loan Agreement. The Administration, on behalf of which the High Commission ib borrowing, is a nself-contained"l service and is under the effective control of the Hligh Commission, which itself is a corporation consisting of the Governors of Kenya, Uganda and Tanganyika. Because the powers of the High Commission are limited, each of these territories is to undertake obligations of guarantee to the Bank. The Loan Agreement 37. A draft Loan Agreement is attached. Attention is particularly directed to the following special provisions of it: (a) The inter-relations of the various parties are recited in the preamble; (b) The provisions of Loan Regulations relating to events of default have been necessarily extended or amended (Schedule 3, paragraph (d)) to take account of the nature of the Borrower and of its and the Bank's relations with Kenya, Uganda and Tanganyika; (c) The language of the Loan Agreement (Section 5.05) and of the Bonds (Schedule 3, paragraph (1)) has been amended to reflect the constitutional relationships between the Guarantor and Kenya, Uganda and Tanganyika; (d) An.additional condition of effectiveness (specified in Section 7.02) is that the Letters of Agreement to be executed by Kenya, Uganda and Tanganyika respectively shall have become fully effective. Letters of Agreement 30. The Bank is proposing to obtain from Kenya, Uganda and Tanganyika respectively guarantees of (a) payment of principal, interest and other charges as provided in the Loan Agreement and the Bondst and (b) payment to the Borrower of.the amount of any deficiency in funds required to

11 complete the project. These obligations, which are additional to and independent of the guarantee of the United Kingdom, would be embodied in simple letters of agreement from each of the territories; a draft of such a letter is attached. It is further proposed that the Bank should reply to the territories' letter in the form of the draft letter also attached. This reply, which in no way derogates from the binding nature of the territories' obligations, indicates the Bank's approach in case difficulties should arise as regards the territories' obligations under (b) above. Guarantee Agreement 39. A draft Guarantee Agreement is attached. It is in substantially the same form as the Guarantee Agreements previously entered into between the Bank and the United Kingdom in the case of loans to the latter's dependent territories. It is proposed that the understanding of the Bank and the United Kingdom as to the interpretation of Section 2.02 of the Guarantee Agreement in the circumstances of this loan be confirmed by a letter, to be addressed by the United Kingdom to the Bank, in the form of the draft attached. PART VI - COMPLIPA1CE WITH ARTICLES OF AGREEMENT 40. The report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank is attached. 41. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VII - RCCMMENDATIONS 42. I recommend that the Bank at this time make a loan to the East Africa High Commission, guaranteed by the United Kingdom and also by Kenya, Uganda and Tanganyika, in an amount in various currencies equivalent to $24 million for a total term of about 20 years, with interest (including commission) at 4-3/4% per annum, and on such other terms as are specified in the forms of Loan Agreements Letters of Agreement, and Guarantee Agreement attached hereto. Eugene R. Black Washington, D.C. March 7, l955