O z O. -FiLE COPDY. R e p o r t N o. P-z16

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized -FiLE COPDY This report was prepared for use within 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. INTERNATIONAL BANK FOR RECONSTRUCTION REPORT AND RECOMMENDATIONS OF THE R E S T R I C T E D R e p o r t N o. P-z16 AND DEVELOPMENT PRESIDENT Z W u5 x C 0 Z M cn X --I TO THE c C C) EXECUTIVE z DIRECTORS 0 Z ON THE PROPOSED LOANS T70. THE BELGIAN CONGO February 29, 1960 '- O z O 0: > X F <,

2 REPORT AND RECOIEMDATIONS OF THE PRESIDENT TO THE REXCUTIVE DIRECTORS ON THE PROPOSED LOANS TO THE BELGIAN CONGO 1. I submit a report and recommendations on three proposed loans totaling $40 million for the development of agriculture and transport in the Belgian Congo. PART I - HISTORICAL 2. In the autumn of 1958, the Belgian Government indicated that it intended to approach the Bank for further assistance in the financing of public investment in the Belgi-an Congo. 3, A formal request was received in February 1959, followed in April by information on agricultural and transport projects. A mission went to Brussels in May and subsequently spent a month in the Congo, assessing the changes which had occurred since the Bank made its last loan in November 1957 and appraising and selecting projects. 4. At the end of August, the Bank informed the Minister for the Belgian Congo that it was prepared to negotiate but, before making the loans, would wish to receive from the Belgian Government assurances as to future budget and public investment policies in the Belgian Congo. 5. Negotiation of the loans and the assurances was carried out in Washington in September-October 1959 and in Brussels in January- February The Bank has already made the following loans to Belgium or with the guarantee of Belgium: Amount as of Year Borrower Purpose Dec. 31, Belgium Equipment for steel and power plants Belgian Congo Ten-Year Plan Belgium Congo Ten-Year Plan Belgium Ports and waterways Ruanda-Urundi Highway and port Belgium Waterways Belgian Congo Highways 40.0 Total Of which has been repaid 17.2 Total now outstanding Amount sold 51.3 Of which has been repaid Net amount held by Bank / IncludesT714.3 million not yet disbursed.

3 -2-7. In addition, the Bank made in 1947 a $12 million loan to the Grand-Duchy of, Luxembourg, which is a member of the Bank in its own right but depends on the Belgo-Luxembourg foreign exchange pool for the transfer of debt service. On December 31, 1959 the Bank held % million of this loan, PART II - DESCRIPTION OF THE PROPOSED LOANS 8. The main characteristics of the loans would be as follows: Loan for agriculture Borrower: Guarantor: Amount: Amortization: Interest rate: Commitment charge: Purpose: Disbursement: The Belgian Congo. Kingdom of Belgium. The equivalent in various currencies of 07 million. In 17 semi-annual installments, commencing on April 1, 1964 and terminating on April 1, %, including 1% commission. 3./4i of 1% per annum. Soil classification, farm settlement, and establishment of tree crop plantations, cattle breeding stations and agricultural processirg plants, Related to expenditure on the project between January 1, 1959 and June 30, Loan for transport Borrower: Guarantor: Amount: Amortization: The Belgian Congo. Kingdom of Belgium. The equivalent in various currencies of $28 million. In 19 semi-annual installments, commencing on April 1, 1963 and terminating on April 1, 1972.

4 Interest rate: Commitment charge: Purpose: Disbursement: 6;%, including l2j commission. 3/4 of 1% per annum, Construction and improvement of roads and bridges, construction, expansion and improvement of ports, and provision of dredges and navigation aids. Related to expenditure on the project bett een January 1, 1959 and June 30, Lo&n to the Office dtexploitation des Transports Coloniaux Borrower: Guarantors: Amount: Amortization: Interest rate: Commitment charge: Purpose: Disbursement: Office dtexploitation des Transports Coloniaux (Otraco)o The Belgian Congo and Kingdom of Belgiuimi The equiva'lent in various currencies of $5 million, in 17 semi-annual installments, commencing on April 1, 1962 and terminating on April 1, %, including 1/O commission. 3/4 of 1% per annum. Improvement of r2ilroad, port and river servir;es. Against imuor-ts of equipment and materials required for Ctraco's investment program, PERT III - IEGAL I7S3T,U iel TO AND AUTHORITY 9. The following documents are attached: a) Draft Loan Agreement (Agricultural Project) between the Banj<k and The Belgian Congo (No,, 1); b) Draft Guarantee Agreement (Agricultural Project) between Kingdom of Belgium and the Bank (No. 2); c) Draft Loan Agreement (Transport Project) between the Bank and The Belgian Congo (No.. 3);

5 - 4 - d) Draft Guarantee Agreement (Transport Project) between Kingdom of Belgium and the Bank (No. 4); e) Draft Loan Agreement (Otra^o Project) between the Bank and Office d'exploitation des Transports Coloniaux (No. 5); f) Draft Guarantee Agreerment (Otraco Project) between The Belgian Congo and the Bank (No. 6); g) Draft Guarantee Agreenment (Otraco Project) between Kingdom of Belgium and the Bank (No. 7); h) Letters from The Belgian Congo and Kingdom of Belgium containing assurances relative to the public finances of the Belgian Congo (Nos. 8 and 9). 10. The agreements relating to the agricultural and transport loais follow the pattern of those relating to the loan made to the Belgian Congo in l957 for a highway project. The interdependence of the proposed agricultural project and transport project, and of these projects and the 1957 highway project, is recognized by provisions which would make a default under one of the three loans an event of default under either one or both of the others (see modifications of paragraph (c) of Section 5.02 of Loan Regulations No. 4 made by paragraph (c) of Schedule 3 of the Agricultural Project Loan Agreement (No. 1) and by Section 7.01 and paragraph (c) of Schedule 3 of the Transport Project Loan Agreement (No. 3)). 11. An additional condition of effectiveness of the agricultural and transport loans is that legislation shall have been enacted authorizing the respective loans. It is expected that this will have oeen done by the tiriie of signature of the agreements. 12. The agreements relating to the loan to Otraco follow the general pattern of the Bank's agreements w4ith non-government borrowers in dependent territories, guaranteed by the territory and the mother country. Loan Regulations No. 4 have been extensively amended by Schedule 3 of the Loan Agreement, principally to take account of the existence of the two guarantcrs. Additional conditions of effectiveness of the loan have been inserted, namely a formal approval required under Otracots organic law and the enactment of a law authorizing the Belgian Congo guarantee (Section 7.01 of the Loan Agreement). It is expected that this guarantee law will have been enacted prior to signature of the agreements. 13. All three loans would be guaranteed both as to payment and nerformance by the lingdom of Belgium. In addition, the Otraco loan would be similarly guaranteed by the Belgian Congo,, PART IV - APPRAISAL OF THE PROPOElED LOASlS 14. Attached are the reports on the projects (Nos. 10, 11 and 12) and the economic reports on the Belgian Congo (No. 13) and Belgium (No. 14).

6 Agricultural Project 15. The agricultural project conisists of classifying about 7 million hectares of land, establishing within the existing tribal organization 53,000 African farmers in permanent settlements on new agricultural land, each farmer having his individual plantation of oil palms, rubber, tea, coffee or cocoa. In addition, tlle project includes improvement of cattle breeding stations and the construction of several processing plants serving agricultural production. The project is estimated to cost the equivalent of `P15.5 million and should be completed by the middle of Most of the funds will be spent on housing, transport, equipment and pay for European soil specialists, surveyors and agronomists, and the African agricultural assistants. They will locate the land most suitable for the respective crops, demarcate the individual holdings, set up and run tree nurseries, decide on land use and rotation, and supervise the planting and cultivation 0 The Ministry for the Belgian Congo is satisfied that technical personnel qualified to carry out the project will be forthcoming independence notwithstanding. 17. The project follows the pattern first tried in the Congo before the war and introduced on a large scale in the 'fifties. Preparations for the transformation of African farming from subsistence agriculture to the cultivation of annual and tree crops for the market have been made by the highly competent research and extension services. Better crop yields and higher money incomes from farms in the permanent settlements now induce growing numbers of Africans to follow the guidance of the agricultural services. By helping to expand them, the Bank can make a worthy contribution to the development of agricultural production and productivity in the Congo. 18. The direct benefits of the project should be considerable. After a period of four to seven years, wjhile the trees are planted and coming into bearing, each farmer should, in addition to subsistence, earn annually about $120 in cash. Exports resulting from the project are estimated to earn the Congo the equivalent of $12 million per annum, beginning in Transport Project 19. This project includes road and port works in various parts of the country and the acquisition of equipment needed to maintain and improve river navigation. It is estimated to cost the equivalent of $4l.6 million and should be completed by the middle of l The transport system of the Belgian Congo was originally designed to move the minerals and agricultural commodities to the ocean ports and to supply imported goods to mines and plantations in

7 - 6 - the interior. It is still geared to wfater transport on the Congo River and Its tributaries; railroads by-pass the non-navigable river sections and branch out from river ports into areas producing export commodities. Construction of modern roads started only after World War IIo The rapid growth of cities and the rising deaand by their inhabitants for food and other goods have called for larger production for the internal market and for all-wjeather roads to meet the reeds of expanding local traffic. More recently, settlemlent and developraent of unused. land and the increasing cultivation of cash crops by Africans have necessitated constructior. of feeder roads in far=ing areas., 21. The road program now before the Bank consists of thle construction and reconstruction of about 700 Ion. of paved and gravel highways, improvement of.1250 km. of roads, the prov-5sion-of bridges and ferries, and the construction of 2,80C km. of surfaced, single-lane roads in African farming areas where the settlements and cattle breeding stations included in the agricultural project are located 0 Some of the works will involve the continuation of roads already included in the Bank financed highway project of 1957, which is progressing satisfactorily. 22. The waterways program consists of the improvement and expansion of infra-structure in several ocean, river and lake ports to ensure smooth handling of traffic, and the provision of necessary equipment to deepen and maintain navigable channels and to accelerate and facilitate navigation. Some of the works will be in ports which a.ill be equipped uith the help of the proposed loan to Otracoo Otraco Project 23, Otraco is an ' 1 etablissement public" t - a government agency - in which the Congo has vested its transport services. It operates the ocean port of Matadi, the Matadi-Leopoldville railroad, waterway services between Leopoldville, Starleyville and Port-Francqui, and a number of other ports on the Congo River and its tributaries. Otraco is further in charge of the Mayuwmbe railw'ay and the port of Boma, and of the services on Lake Kivu. The ports operated by Otraco are provided by it w.ith the super-structure, i.e. cargo handling equipment, yards, warehouses and other buildings, wnereas the infra-structure, i.e, quay w-alls, port areas, etc., are being built and financed by the Government directly. 24. Otraco's importance is indicated by the fact that twzo-thirds of the foreign trade of the Congo passes tbrough Matadi, Bcma and the other ports at the mouth of the Congo River, The Bank has followed the activity of Otraco ever since the proceeds of its 1951 loans for the Congo Ten-Year Plan were applied to Otraco investment expenditure in the years I Otraco is run efficiently and on business lines, and there is at present no reason to believe that the quality of its

8 - 7 - management would be affected by political development. Otraco's operations showed a deficit in 1958 but this should be wiped off in the next ycar or two, due to an increase in rates carried out in October Thanks to the substantial expansion in Otraco's transport system over the past few years, the investment program for 1959 and 1260, which would be the object of the proposed loan, is aiming rather at modernization and improvement than at expansion. The cost of this program is estimated at the equivalent of $20 million, of which about one half is being spent on imports of rolling stock, river craft, port and other equipment, and various materials. The proposed loan would pay for part of these imports. Procurement and Disbursement 26. As a rule, road and port works in the Congo are carried out by contractors selected through competitive bidding under which Belgian and non-belgian firms are eligible to bid. International bidding is also held for purchases of equipment and materia2s for the waterwayse Short road stretches in isolated areas, agricultural roads and small bridges may be built by the Government's Public Works Department. Otraco places all orders costing more than the equivalent of $1,O0 on the basis of competitive bidding among firms in the Congo, Belgium and abroad. The Congo is an open door country and there is no customs preference for Belgium, but Otraco affords a 20% preference to Belgian offers over foreign offers. 27. It is estimated that 45% of the cost of the agricultural project, 65% of the cost of the road and port works, and 95% of the cost of waterway equipment will require expenditure in foreign exchange. Consequently, as the expenditure on the projects proceeds, the Bank would disburse funds to the Belgian Congo under the loan for agriculture in the proportion of 45)% of expenditure incurred and under the loan, for transport in the proportion of 65% and 95%'. Disbursement of the Otraco loan would be againsu actual paynent for imported equipment and materials. The Need for the Loan 28. Since 1950, about $2.5 billion has been invested in the Congo in productive facilities and basic services. Mainly because of this large investment, the gross domestic product in real terms rose at-an annual rate of 6.7% between 1950 and During the same period, the share of the African population in the rapidly rising national income rose from 45% to 56%. 29. Despite the spectacalar economic progress in the early-and mid- 'fifties, however, African per capita incomes are still very low, The present rapid growth of population resulting from greatly improved heal-th and housing, particularly in urban areas, ca'ls for a stepped up

9 - 8 - rate of investment in the Congo economy to ensure even a modest increase in income standards in the 'sixties. To provide education and employment for the fast growting numbers of Africans of school- and working-age will require an effort which can be made only with help from outside. 30. The large mining and plantation companies, owned by Belgian and other foreign interests, have not interrupted their current expansion programs and apparently intend to invest, in the next few years, sums comparable to those invested in the tfifties. The Belgian Government has decided that independence should not cause a sudden break in the continuity of public investment and an abandonment of the plans for the future. To provide funds for immediate needs, Belgium is prepared to guarantee up to $120 million of loans to be contracted by the Congo in 1960 and to assist the Congo thereafter in obtaining long-term capital. Protected by the Belgian guarantee and mindful of the financial effort being made by Belgium, the Bank can and should play its part in helping the Congo in a difficult transition period. Prospects of Fulfillment of Obligations 31. Since the Bank made its last loan in November 1957, there has been a deterioration in the public finances and the external payments position of the Congo. The ordinary budget has been showing large deficits because government revenue has lagged behind the rapidly growing current expenditure necessitated mainly by the expansion of public services and the adjustment of African salaries to the higher European standards. Public investment also continued at a high level until To finance it, the Congo exhausted its Treasury balances and borrowed heavily, so that the public debt is now almost as large as the national income. At the same time, lower prices for Congo exports in 1957 and 1958 raised the current account deficit of the balance of payments and, since the beginning of 1959, political developments have inhibited foreign lenders and investors and precipitated a flight of capital. 32. The immediate need was to redress the current situation and to look ahead for the next year or two. Since the middle of 1959, therefore, the Congo Administration and the Belgian Government have taken a number of measures to balance the ordinary budget of the Congo with the help, in 1960, of a substantial Belgian grant, to restrict public investment to urgent and necessary projects and provide for the necessary financing by giving Belgium's guarantee to Congo borrowing, and to keep within bounds the rise in the Congo public debt. For the time being, these measures should bring the public finances of the Congo under control and should, through the inflow of grant and loan capital, re'ieve the pressure on the balance of payments. 33. Basically, the economy of the Belgian Congo is sound. The Congo has large and diversified natural resources and most of its products would remain competitive even if world market pr-ces were to decline substantially from present levels. The output and export performance of

10 - 9 - the economy in 1959 was good and the foreign trade surplus exceptionally large. On the basis of current expansion plans of the large companies and the current African farm settlement program, and making reasonable price assumptions, the value of Congo merchandise exports might by 1970 reach $70O million compared with an average of $480 million in the past four years. If sound financial policies are followed, and exports expand as expected, the Congo should be able to service its external obligations, even though the estimated interest and amortization payments on debt presently outstanding and to be contracted in 1960 would be rather high until 1965, averaging nearly 'L% of the prospective annual current external earnings. 34. Much will depend on the sort of political structure which emerges after independence is granted on June 30, l960 At this stage, forecasts are hazardous. The pace of the political transition has been unprecedented, African Leaders have had little or no experience of political and administrative responsibility and it will be some time before the new leaders gain the experience and maturity necessary for stable and efficient government. Moreover, the Congo is a big country with no natural focal point. Tribal and regional economic differences may cause domestic stresses and strains, and it remains to be seen whether a full sense of national unity and responsibility will assert itself. 35. Fortunately, there are good chances that Belgian advice and assistance will be sought by an independent Congo, that Belgian administrators and technicians will help to shape and carry out policy decisions of the new Congolese government, that Belgian and other European missionaries and lay teachers will educate the next generations of African youths, and that Belgian business executives will continue to run the large corporations which produce most of the Congots exports and furnish most of government revenue. The Belgian Government is encouraging the personnel of the Administration to remain in the Congo, and the Societe Generale, which controls a large segment of business enterprise, and other Belgian and foreign interests seem resolved to ct,ntinue to operate in the Congo much as before. 36, Belgium would guarantee the proposed loans. Her credit is excellent. Her gold holdings and other external assets are large and have grown substantially in the past few years. Service payments on her external debt remain below 2% of annual current foreign exchange earnings. Belgium is well-to-do, her people experienced in business and skilled in manual labor. Her links with the Congo may be weakened in the future but her income from the Congo has never been large enough to have a significant bearing on her financial strength and her way of life.

11 PART V - COMPLIANCE WITH ARTICLES OF AGRFEI4FNT 37. I am satisfied that the proposed loans will comrply with the requirements of the Articles of Agreement of the Bank. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement is attached (No. 15). PART VI - RECOMI,IDfATIONS 38. I recommend that the Bank at this timse make the following loans: (a) a loan to the Belgian Congo, guaranteed by the Kingdom of Belgium, for an Agricultural Project in an amount in various currencies equivalent to 8p7 million for a t otal term of about 12 years, with interest (including commission) at 6-1% per annum and on such other terras as are specified in the attached draft Loan and Guarantee Agreements (Nos. 1 and 2); (b) a loan to the Belgian Congo, guaranteed by the Kingdom of Belgium, for a Transport Project in an amount in various currencies equivalent to $28 million for a total term of about 12 years, with interest (including commission) at 64% per annum and on such other terms as are specified in the attached draft Loan and Guarantee Agreements (Nos. 3 and 4); (c) a loan to Office dtexploitation des Transports Coloniaux, guaranteed by The Belgian Congo and the Kingdom of Belgium, in an amrount in various currencies equivalent to $5 million for a total term of abouit 10 years, with interest (including commission) at 614-% per annum and on such other terms as are specified in the attached draft Loan and Guarantee Agreements (Nos. 5, 6 and 7); and that the Executive Directors adopt resolutions in the forms attached (Nos. 16, 17 and 18). W.A.B. Iliff Attachments Vice-President for Washington D.C Eugene R. Black February 29, 1960 President

FILE COPY R E S T R I C T E D. Report No. P-132

FILE COPY R E S T R I C T E D. Report No. P-132 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY R E S T R I C T E D This report was prepared for use within the Bank. In making