Report No. P-13 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN' R E S T R I C T E D

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized R E S T R I C T E D 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. Report No. P-13 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN' REPORT AND RECOMMENDATIONS OF THE TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF BELGIUM August 23, 1957 PRESIDENT

2 REPORT AND RECOK-1ENDATIONS OF THE PRESIDENT TO THE YECCUTTlE BISECTORS 0JH A PROPOSED LOAN TO THE KDIGDOM OF BELGIUM 1. I submit the following report and recommendations with regard to an application from the Kingdom of Belgium for a loan of $10 million or the equivalent in various currencies. PART I - HISTORICAL 2. In Mayr 1957, the Belgian Government consulted their New York bankers about the possibility of obtaining funds in-the United States to finance public investment in Belgium and the Belgian Congo. As a result of subsequent discussions it was agreed that the Kingdom of Belgium would seek to float an issue in the New York market, which would be timed simultaneously with a smaller loan from the Bank, and that the Belgian Congo would also seek a Bank loan. 3. At the end of July a mission went to Belgium to examine the Belgian project put forward, and negotiations wvere carried forward in Brussels and completed in Wdashington. 4. In addition, the Bank has under consideration the above-mentioned request for a loan to the Belgian Congo. A mission has recently been in the Congo where it examined both the general situation and specific projects submitted by the Government. It is expected that a loan of $40 million for transport projects will be submitted to the Executive Directors later in the year. 5. The Bank has already made loans aggregating $110.8 million to Belgium or with the Belgian guarantee. The status of the individual loans is as follows (in millions of dollars): Year Borrower Amount Repayments Outstanding at July 31, 1957 held by held by other the Bank investors 1949 Kingdom of Belgium Belgian Congo Kingdom of Belgium Kingdom of BelgiumS/ Trust Territory of Ruanda-Urundi 2/ o, Made simultaneously with a $30 million issue of Kingdom of Belgium Bonds in New York. Not yet effective.

3 The Bank has also made a $12 mil-on loan to the Grand-Duchy of Luxembourg, which is a member of the Bank =n its own right but depends on the Belgo-Luxembourg foreign exchange pool for the transfer of debt service. Through cancellation, repayment and prepayment this loan has now been reduced to $7.5 million, of which $0.5 million is held by third parties. PART II - THE PUBLIC BOND ISSUE 7. Negotiations on the public issue have also progressed and the Kingdom of Belgium plans to issue shortly-in New York $30 million principal amount of fifteen-year sinking fund bonds. Sinking fund payments would start in the sixth year and would be sufficient to retire the entire issue by maturity. The proceeds of the issue would be used to finance the public works program being undertaken by the Belgian Government, but would not be applied specifically to the projects being financed by the Bank as 'was the case in the Belgian joint operation of The issue will be registered with the Securities and Exchange Commission. PART III - DESCRIPTION OF THE PROPOSED LOAN 8. The proposed loan would help to finance the improvement of the Charleroi-Clabecq canal and is in fact a further stage in the waterways program assisted by the Bank in The amount of imported equipment and materials required on the project is very small and most of the cost is represented by local labor, materials and equipment. The loan would accordingly be disbursed on the basis of total expenditure on the project. 9. The loan would have the following characteristics: Borrower : Kingdom of Belgium. Amount : The equivalent in various currencies of $10 million. Amortization : Twenty semi-annual instalments of $500,000 beginning on iplarch 1, 1963 and ending September 1, Interest Rate 5-314X per amum including lc commissions Commitment Charge: 3/4% per annum. PART IV - LEGAL INSTRUME1TS AND AUTHORITY 10. Attached is a draft of the Loan Agreement (No. 1), It incorporates Loan Regulations No. 3 and follows the general pattern of the Bankts loan agreements in all important respects, except that:

4 - 3 - a) as in the 1954 Loan to the Kingdom of Belgium for polt and waterways projects (Loan No. 107BE), the Loan Agreement would not become effective until the Borrower has delivered and received payment-for the bonds issued under the public bond issue (Section 6.01); b) Section 4.01 of Loan Regulations No. 3 has been amended to provide for withdrawals in dollars or other currencies equivalent to 50% of the amounts expended by the Borrower on the project; c) a new paragraph has been added to Section 5.02 of Loan Regulations No. 3 to make a default by the Borrower in the performance of any covenant in any of its Loan or Guarantee Agreements with the Bank also an event of default under the present loan. PART V - APPRAISAL OF THE PROPOSED LOAN 11. An appraisal of the project is contained in the technical report attached (No. 2). The Belgian Canal System 12. A large part of Belgium is comparatively flat and conditions are therefore favorable to transport by *water. Indeed an efficient system of inland water transportation is particularly important to Belgian heavy industry as many of the country's steel plants, now heavily dependent on raw materials not produced locally, lie at some distance from the sea. The cheap transport for bulk cargo offered by the canals is thus a significant element in their competitive strength. 13. Much of the Belgian canal system was built in the nineteenth century. A substantial part has since been modernized, but important sections are still obsolete. They cannot handle large modern barges and traffic on them is hampered and made more expensive by many curves and hand-operated locks and bridges. As long as this situation persists, the improved sections cannot be fully utilized and a considerable volume of traffic, which would normally go by water, is moved by rail. 14. The section between Charleroi and Clabecq is probably the most troublesome bottleneck in the system and by the same token the one most urgently needing attention. It links the great coal and steel industries of the south with Brussels and Antwerp, Belgiumts largest ocean port. Barges of 1,350 tons capacity can operate all the way from Clabecq to the sea; but south to Charleroi the maximum capacity is only 300 tons.

5 -4 - The Project 15. The project is to complete the modernization of the canal from Charleroi to Clabecq so as to enable it to acconmmodate barges of 1,350 tons. This involves w-idening parts of the present canal and excavating a new channel for the remainder so as to eliminate many cuwves. The number of locks will be reduced from 31 to only four over the total length of 47 kilometers. At one point a 1,000 meter one-way tunnel is being replaced by a deeply excavated open canal and at another a special structure will be required to overcome a difference in level of 68 meters. 16. The project has been planned in two parts. The first, comprising the 27-kilometer section between Charleroi and Seneffe, constituted one of the projects included in the Bank-New York market operation of December Work on it has progressed rather more slowily than was then expected but it is now about 60% complete and should be finished by the end of The designs for the second part, the 20-kilometer section between Clabecq and Seneffe, are being prepared, the first contracts are expected to be let in the first half of 1958, and the project should be completed about the end of 1962, 17. The Belgian canal system is owned and operated by the Government and the project will be carried out in accordance with the designs and under the supervision of the Inland Waterways Administration of the Ministry of Public Works. This agency is well organized and has a competent staff which has wide experience in this type of work. The actual work will be done by private constructors. Although contracts are awrarded by public competitive bidding and foreign firms are free to submit bids, most of the work goes-to Belgian firms of whom there are many capable of carrying out such projects. 18. The total cost of the project, including amounts already spent, is estimated at 5.3 billion francs ($106 million equivalent). Of this the borrower is paying well over half from its own resources, 19. The project will greatly increase the carrying capacity of the canal and will reduce transport costs substantially. Even on the traffic expected to pass through the canal in the period inmediately following the project's completion this reduction in real costs is estimated to be of the same order of magnitude as the attendant capital charges. To this should be added the further benefits which will accrue as more larger barges are put into service and used throughout the length of the Brussels-Charleroi Canal, as the need to transship goods from larger to smaller vessels is reduced and as total traffic grows with the continued industrial development of central Belgium. The Need for the Loan 20. A report entitled "The Current Economic and Financial Position of Belgium" (EA-73-a, dated June 12, 1957) was circulated in connection with the recent loan to the Trust Territory of Ruanda-Urundi. Since that time there has been no basic change in the situation. Industrial production has continued to rise but there is still pressure on available resources and foreign exchange reserves are still falling slowly, The credit situation has become very tight and the results of the latest public issue, priced to yield 5.4%, have been

6 disappointing. Although the Belgian public investment program has been scaled down somewhat the claims on Belgium for development both at home and in the Congo, remain large and the Government is justified in covering part of its needs abroad. 21. In this transaction the role of the Bank is not only to provide part of the funds required for a project whose completion is urgently required. Equally important is its role in promoting the international flow of capital by assisting Belgium to raise a substantially larger amount by the public issue in New York. It may be recalled that the previous Belgian joint operation at the-end of 1954 has become the forerunner of a growing number of similar transactions. Prospects of Fulfillment of Obligations 22. Belgium should be able to service the loan without difficulty. Its external debt is quite small for a country of its economic strength. Even including the proposed loan and public issue, service payments in the peak years are still not much above 1% of current foreign exchange receipts. Although the present boom has temporarily strained domestic resources, there is no reason to fear for the country's financial stability. Measures have already been taken to contain the boom and the recent decision of the National Bank of Belgium to raise its discount rate by 1% to 42% is a further indication that the monetary authorities are determined to resist inflation. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed loan will comply with the requirements of the.articles of Agreement of the Bank. The report of the Committee provided for in Article III, Section 4 (ii) of the Articles of Agreement is attached (No. 3). PART VII - RECOGSENDATIONS 24. I recommend that the Bank at this time make a loan to the Kingdom of Belgium in an amount in various currencies equivalent to $1C million for a total term of 15 years with interest (including commission) at 5-3/4% and on such terms as are specified in the form of draft Loan Agreement and that the Executive Directors adopt a Resolution to that effect in the form attached (No.4). Attachments 4 Wlashington, D.C. August 23, 1957 Davidson Sommers