FLE COPY P-67 RESTRICTED REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS A PROPOSED LOAN TO

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FLE COPY This report is restricted to use within the Bank. P-67 RESTRICTED INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE OFFICE CENTRAL DES CHEMIS DE FER DE LA FRANCE D'OUTRE-MER May 27, 1954

2 REPORT AND RECO NTDiATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE OFFICE CENTRAL DES CHEMINS DE FER DE Lh FRANCE DtOUTRE-MER 1. I submit the following report and recommendations on a proposed loan of $7.5 million to help finance a program of converting the French WTest African Railroads from steam to diesel operation. PART I - HISTORICAL 2' At the Bank's annual conference in September 1952 the possibility of Bank lending in the French Overseas Territories was broached in talks with the Minister of Overseas, France. As a consequence, a mission went to Paris in March 1953 and discussed with Government officials investment policies and programs in the French Union. The French Government indicated that it would welcome the Bank's assistance in the financing of d6velopmunt in its overseas territories. For the first operation the Government suggested that a project be selected in French West Africa. A second project might be in Algeria. 3. In West Africa a railroad modernization project seemed most suitable for Bank assistance. After preliminary discussions in Paris a mission went to French WSest Africa in May 1953 and spent some three weeks travelling extensively and discussing the economic problems of the area, the Government's plains for its further development, and the railroad modernization program. Subsequent discussions and final negotiations took place in IWashington and Paris. PART II - DESCRIPTION OF THE LOAN The Parties Involved 4. The administrative organization of the railroads in the French overseas territories is rather complex. While control of day-to-day operations is carried out in the individual territories, general supervision and policy control is exercised from Paris by the Office Central des Chemins de Fer de la France d'outre-mer (the Office), which comes under the authority of the Minister of Overseas France. The operating budgets and capital investment programs of the individual railroad systems are subject to the approval of the Office which also controls the selection and ordering of materials and equipment, payments against such orders, recruitment and promotion of senior personnel, and general administrative policy. 5. The railroad system in French West Africa is operated by the Regie des Chemins de Fer de l'afrique Occidentale Francaise (the Regie), with headquarters in Dakar. The Regie would carry aut the project and earn the income to purchase the foreign exchange to service the proposed loan from the Bank.

3 The Borrower would be the Office Central des Chemins de Fer de la France d'outre-mer, which would make the goods financed with the proceeds of the proposed loan available to the Regie. In view of the division of responsibility between the Office and the Regie, both would be parties to the Loan Agreement and they would be jointly and severally obligated to carry out the project. The Guarantor 7, The Guarantor would be the Republic of France, a member of the Bank. The Republic of France has a contingent liability to the Bank of $242.6 million stepming frqm its guarantee of the Bank's loan of May 9, 1947 to the Credit National. Amount 8. The amolnt of the loan would be $7.5 million or the equivalent thereof in other currencies. Purpose 9. The project for which Bank financing is requested is part of a postwar investment program to modernize the railroad facilities of French West Africa. The program, which is aimed at providing safer and cheaper transportation, involves improving permianent way, telecommunications and repair facilities, modernizing the rolling stock, and converting the entire system from steam to diesel traction. The program is now well advanced and the proceeds of the Bank loan would be used to finance the last group of mainline locomotives and shunting engines required to complete the conversion to diesel operation. These would be used on the Dakar-Niger and the Abidjan-Niger lines, the two most important lines in the French West African railroad network. Method of Procurement 10. Bids for the locomotives were solicited on an international basis. Discussions on the loan were in progress when final choice of equipment was made, and the Bank was given an opportunity for comment. French contractors were successful in the bidding, and the equipment financed under the proposed loan would be manufactured in France. Terms 11. The loan would bear interest, including 1% commission, at the rate of 4.% per annum. The commitment charge would be 3/4% and would accrue from the effective date of the loan agreement or a date 60 days after signature, whichever is the earlier. 12. The loan would be amortized by semi-annual payments, the first due on December 1, 1956 and the last on June 1, 1966.

4 I consider that the proposed schedule for the repayment of principal and the rate of interest and other charges in connection with the proposed loan are reasonable and are appropriate for the project. Legal Instruments and Authority 14. Attached hereto as Appendices A and B are the draft Loan and Guarantee Agreeaents. They are in the same form as the Bank's usual agreements except in the following principal respects. a) Although, as noted above, only the Office would be directly obligated under the Loan Agreement to repay the loan, both the Office and the Regie would be parties to the Agreement. b) Under the Loan Agreement (Sections 5.02 and' 5.03) the Regie would be obligated to pay to the Office the French franc equivalents of the amounts required to service the loan, and would deliver to the Office notes representing this obligation. Upon the request of the Bank these notes would be assigned to it as collateral. The relevant arrangements to be made between the Office and the Regie are set forth in Appendix C. c) The negative pledge clause in the Guarantee Agreement (Section 3.01) contains no specific reference to assets of Government agencies. Instead, the standard clause has been broadened to include all liens created as security for external debt of the Guarantor, and all liens created by action of the Guarantor as security for any external debt, without limitation by reason of the ownership of the assets covered by the liens. The Bank would also receive an additional assurance covering the assets of the Bank of France. This assurance would be contained in a letter to be written by the French Government, as set forth in Appendix'D. 15. Appendix E contains the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank. PART. III - APPRAISAL OF THE LOAN 16. A detailed analysis of the project is contained in the report entitled "Technical Report on the French West African Railways" (T.O. 34a, dated May 24, 1954). Economic reports on France (E.A. 28a dated May 24, 1954) and French West Africa (E.A. 21a, dated May 24, have already been circulated, as has a report entitled "TThe Economies of France and French West Africa, Introduction and Conclusions" (E.A. 29a, dated May 24, 1954). The latter contains a short description of the French Union and the franc area, as well as the conclusions to be drawn from the larger reports. The Need for the Loan 17. Although French ltest Africa may yet see further important mineral developments, for the present its prosperity depends very largely on peasantgrown agricultural products. The greater part of these come from the favored coastal areas, yet three.quarters of the native pppulation live more than

5 -4& miles from the coast. Cheap transport is thus the key to the further development of the country as a whole. Distances are generally too great for economic road haulage, and river transport facilities are poor. Rail transport at the lowest possible cost is thus essential. 18. The investment program of the French West African railroads is soundly conceived, The conversion of the railroads from steam to diesel operation will help to reduce the present high cost of rail transport. The program is already well advanced, the types of equipment have been discussed with the Bank staff, and I am satisfied that the railroad administration is competent to complete the program effectively. 19. The proposed loan would be in foreign exchange for what would, in effect, be local expenditure because the locomotives would be bought in France. However, France is already making a large contribution, not only to the French West African railroad investment program, but also to the other capital needs of French West Africa and the rest of the franc area. In present circumstances, the combination of this overseas investment (of the order of $400 million equivalent a year) with a substantial public investment program at home and heavy defense expenditures in Indo-China as well as in Europe, imposes a heavy burden on the French economy. Between one-fifth and one-quarter of the public capital expenditures in the overseas territories 1s estimated to give rise to imports from outside the franc area. The calls on French foreign exchange earnings to finance the foreign import needs arising out of the public investment program in the French overseas territories, even apart from investment in the franc area as a whole, are far larger than the amount of the proposed loan. It is these needs, rather than the specific purchases to be made under the proposed loan, that would justify the Bank's making the loan in foreign exchange, which, since the proceeds of the loan would be spent on French goods, would accrue to France. Prospects of Fulfillment of Obligations 20. In terms of improved safety, efficiency, and earnings, the railroad program should easily repay the cost involved. The new diesels which the Bank loan would finance should reduce traction costs substantially on the Dakar-Niger and the Abidjan-Niger lines and should pay for themselves in five or six years, or less than half their useful service life. 21. The financial outlook of the Regie, which would bear the foreign exchange risk, is satisfactory, and it should have ample earnings to make to the Office the payments required to purchase the foreign exchange to service the proposed loan. After the current investment program is completed, the Regiets debt service, including debts expected to be incurred in completing that program, is estimated at less than 10% of operating revenue. 22. The service payments on France's existing U.S. and Canadian loans and the Bank's 1947 loan to France, together with the proposed loan, would bring dollar payments for French Government and Government-guaranteed debts to about $140 million a year. France has an exemplary debt record. As the economic reports point outs the payments for debt service are large in terms of her dollar earnings but small in terms of total foreign exchange earnings.

6 France's industrial recovery since the war has been impressive but recurrent periods of monetary instability have prevented a lasting improvement in the balance of payments. Past inflations have weakened her competitive position and, although she has maintained internal price stability for more than two years, there is still a substantial balance of payments deficit. A major part of this deficit is with the EPU area, and for the past eighteen months France has been covering both her dollar deficit and her EPU deficit in gold. As a result of the inflow of exceptional dollar receipts, however, foreign exchange reserves have recently been rising from the very low level to which they had fallen about a year ago, but in total they are still equivalent to only about three months' imports from all foreign countries. In present conditions the chance of further setbacks cannot be ruled out, but for some time to come continuing exceptional dollar receipts will provide a breathing space during which France should have the opportunity to regain her competitive position and her external balance, It is, of course, impossible to predict how the situation will develop, but I am satisfied that, given continued financial stability and the growing confidence in the franc that it is bringing, France should be able to reduce the level of her foreign indebtedness and continue capital exports to the rest of the franc area. The first phase of the Monnet Plan has already laid the foundations for the increase in output in France and the overseas territories that is required, and the second phase is being expressly directed to that end, PART V - CONiPLIANCE WITH ARTICLES OF AGREEMNT. 24. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMNATIONS 25. I recommend that the Bank enter into a loan agreement with the Office Central des Chemins de Fer de la France d'outre-mer and the Regie des Chemins de Fer de l'afrique Occidentale Francaise, providing for a loan to the Office, guaranteed by the Republic of France, in an amount of $7.5 million or the equivalent in various currencies for a term of 12 years, with interest (including commission) at the rate of 4Ei% per annum, and on such other terms as are specified in the draft agreements attached. Eugene R. Black Washington, D. C.