Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY' cn'clnxrin 'P ThRNEDT DIVISION ACIVE-S 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. R E S T R I C T E D Report No. P-189 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMIENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MORTAGE BANK OF FINLAND OY March 6, 1959
Report and Recommendations of the President to the Executive Directors on a Proposed Loan to Mlortgage Bank of Finland Qy 1., I subnit the following report and recommendations on a proposed loan in various currencies equivalent to P`37 million to Mortgage Bank of Finland Or for the purpose of financing nine projects in the Finnish pulp and paper industry. PART I - HISTORICAL 2. The Bank has already made six loans to Finland aggregating the equivalent of w65 million. The status of these loans at February 28, 1959 was as follows: Amount (equivalent No. Borrower Purpose in $ million) 16FI Bank of Finland Power, wood processing and limestone 12.5 21FI Republic of Finland Equipment for timber product-on 2.1 61FI Bank of Finland Power, wood processing and agriculture,70fi " t t Wood processing 20.0 3.4 112FI " It " Power and wood processing 12.0 l1t2fi Mortgage Bank of Electric power development 15.0 Finland Oy Total (net of cancellation) 65.0 Of which has been repaid 14.6 Total now outstanding 50.7 Amount sold.1 Of which has been repaid 2.3 1.8 Net amount now held by Bank 3. In March 1958 the Finnish authorities requested the Bank to consider the possibility of further lending to the pulp and paper industry. A Bank mission visited Finland in May to review the economic situation and to assess investment priorities. As a result of this investigation it was concluded that the pulp and paper industry was the sector in which the Bank could be of most help to the Finnish economy and the Finnish authorities were invited to submit projects in this sector for appraisal by the Bank. This appraisal took place in Finland in the last part of 1958 and nine projects for an amount of $37 million were considered as suitable for Bank financing. PART II - DESCRIPTION OF THE PROPOSED LOAN 4. The purpose of the loan would be to provide capital to a group of private companies in the pulp and paper industry for modernization and expansion of capacity.
-2-5. The main characteristics of the loan would be as follows: Borrower: Mortgage Bank of Finland Oy Guarantor: Republic of Finland Amount: The equivalent in various currencies of 5;37 million Amortization: In 25 semi-annual installments, beginning August 15, 1962 and ending on August 15, 1974 Interest Rate: 5 3/4% including 1% commission Coommitment Charge: 3/4 of 1% per annum PART III - APPRAISAL OF THE PROPOSED LOAN The Borrower 6. The Borrower would be the Mortgage Bank of Finland Oy, a public institution set up in Miarch 1956, under the Finnish Mortgage Bank Law of 1933, to act as an intermediary for International Banlk loans. The Mortgage Bankts share capital is virtually all held oy the Bank of Finland, which manages and staffs the Mortgage Bank and is committing itself to keep effective control over that institution during the entire life of the loan. The imortgage Bank will relend the proceeds of the loan to the beneficiary enterprises on terms satisfactory to the Bank. The Projects 7. The attached report entitled "Appraisal of Finnish ljoodworking Projects" (T.O. 201a) (No.1) deals with the structure and investment plans of the Finnish pulp and paper industry and includes a summary appraisal of the various projects. 8. The expansion and modernization to be carried out during the coming years by the principal companies in the Finnish pulp and paper industry would result in a substantial increase in its uroductive capacity. In particular, chemical pulp and newsprint production would be raised by 610,000 and 240,000 tons, or 25% and 30%, respectively. Quite apart from the increase in the volume of output, the rationalization of production would improve the international competitive position of the firms concerned. 9. The industry should have no difficulty in expanding sales of pulp and paper sufficiently for the plants to operate at profitable levels and should be in a good position to take advantage of the expected growth of world consumption of paper, especially in Europe. The world market situation is analyzed in the attached report entitled "Prospective Growth in World Pulp and Paper Consumption and Trade" (EC 6 9a) (No.2) and the market prospects for Finnish exports are dealt with in the project appraisal report (No.1).
-3-10. The total cost of the projects which the Bank has been asked to finance is about $90 million equivalent, and the companies concerned account for about half the whole wood-processing industry's proposed new investment. They would result in an increase in annual production of chemical pulp and newsprint of 205,000 tons and 180,000 tons, respectively, and a series of technical improvements which would increase efficiency, and reduce costs. After their completion the projects would increase the industry's net foreign exchange earnings by about $45 million equivalent annually against an additional foreign debt service of $4.2 million. 11. The proposed allocation of the loan among the various projects, together with the total cost of each, is as follows: Sulphate pulp Proposed IBRD Estimated Cost Financing (equivalent in million) Procurement ICemi Oy 6.75 3.26 Oulu Oy 21.40 8.34 Metsaliiton Selluloosa Oy 13.38 4.69 Newsprint Kymmene Aktiebolag 11.03 4.97 IMyllykosken Paperitehdas Oy 8.91 3.81 United Paper Mills Ltd. 10.28 4.81 Dissolving pulp J. W. Bnqvist A.B. 3.69 2.19 Oy Kaukas A.B. 4.o6 1.50 Rauma Repola Oy 8.12 3.10 36.67 To be allocated 0.33 Total 87.62 37.00 12. The proposed loan is designed to meet the uncovered needs for capital of the companies concerned. The equipment required for the individual projects will be obtained on the basis of satisfactory competitive procedures and it is expected that the major part of the loan will be spent on imported machinery and other equipment. Finland, however, is becoming increasingly a producer of capital goods and Finnish manufacturers are able to supply much of the range of equipment needed in the pulp and paper industry as well and as cheaply as
-44atheir competitors in other countries. The extent to which Finnish suppliers will succeed in winning contracts to be financed with the proceeds of the proposed loan cannot yet be determined, but foreign suppliers are likely to provide 75-85% of the total. Disbursement Procedure 1.3. The loan would be disbursed against specific goods determined by agreement between the Bank and the Borrower (Loan Agreement Section 3.01). In respect of local expenditures the Bank would disburse foreign currencies selected by the Bank. Economic Situation and Need for the Loan 14. A report entitled "The Economy of Finland", (EA 93a) is attached (]Yo. 3). Thanks to a high rate of savings and to favorable terms of trade, the Finnish economy grew rapidly after the war, rebuilding and modernizing i-ts productive equipment, consolidating its external position, and providing the Finnish people Tith a rising standard of living. This was achieved with only a moderate increase in foreign debt (since 1950 external indebtedness has actually fallen) and in spite of the fact that Finland had to pay heavy reparations to the U.S.S.R. and did not benefit from the Marshall Plan. It was accompanied, however, by successive rounds of inflation. Since 1957 the financial situation has been stabilized, but at the same time new investment has tended to decline, output has leveled off and unemployment has appeared. 15. The Finnish auithorities now wish to stimulate a revival of economic growth - spearheaded by new investments to modernize and expand the pulp and paper industry, the mainstay of exports and hence of the economy as a whole. Such a revival is the more desirable because the labor force is expected to show an unusually large increase during the next few years. Unwilling to take inflationary measures that might threaten the country's new-found financial stability, the authorities are seeking to supplement domestic savings by obtaining the proposed Bank loan, which is considered to be a key element in attaining the objective of expansion without inflation. Prospects of Fulfillment of Obligations 16. The companies which will carry out the projects are well-managed and financially sound, and the completion of the projects will strengthen them f-mrther. All but two of them have been beneficiaries under previous Bank loans. They should have no difficulty in meeting their obligations to the proposed Borrower, the Mortgage Bank of Finland Oy. In addition, the Bank of Finland (the central bank) is undertaking to see to it that funds are provided to meet any shortfall in the funds available to complete the projects and meet the companies working capital requirements. The Borrower, which is entirely under the control of the Bank of Finland, should have no difficulty in meeting its responsibilities under the proposed loan.
-5-17. Finlandts public external debt of about $300 million equivalent is relatively small, and debt service, including service on the proposed loan, will be only a little over 3% of 1957 foreign exchange earnings. Finland's debt record is excellent, and future debt service should present no difficulty. Trade wfith the U.".S,R. accounts for about 18% of Finland's total external trade and trade with other Eastern countries for a further 7-8%. The U.SeS.Ro has in the past granted only small credits to Finland and although recently a "100-,'l 125 million credit was offered, it is far from certain that it will materialize, at least in such a large amount. Finland's economic relations with the U.S.S.R., although hitherto fairly satisfactory, ccnstitc te an element of vulnerability. But even if trade wesre cut off, Finlar-d would at most face a temporary, although uncomfortable, period of readjustm enmt. FART IV - LEGAL INSTRUMENTS AND AUTHORITY 18. A draft Loan Agreement between the Bank and Mortgage Bank of Finland Oyr (No. 4),a draft Guarantee Agreement between the Republic of Finland and the Bark (No. 5) and a draft letter from the Bank of Finland (No. 6) are attached. These documents follow closely the form of those used for the previous loan to the Mortgage Bank (Loan No. 142FI). 19. The following points may be noted: (a) The Bank of Finland would give the Bank certain assurances relating to the financing requirements of the Projects and beneficiary enterprises and to the management, financial structure and control of the Mortgage Bank (No. 6). (b) The terms and conditions of the relending by the Mortgage Bank to each of the beneficiary enterprises would be contained in subsidiary loan agreements, which must be satisfactory to the Bank and might be modified only wlth its approval. As in the case of the previous loan, the Mortgage Bank would, pursuant to Finnish Law, obtain from each beneficiary enterprise mortgages as security for its loans (the amount secured by any such mortgage not exceeding 60% of the value of the property given as security); and the Mortgage Bank would deposit the mortgage instruments iwith the Finnish Bank Inspectorate, which would hold them for the benefit of the Mortgage Bank's creditors, in this case the Bank (Loan Agreement, Section 5.02). (c) The Mortgage Bank would agree to limit the scope of its borrowi:ags and operations in terms comparable to those under the existing loan. (Loan Agreement, Section 5.oL). (d) Withdrawals would be permitted on account of expenditures in Finland for wnich the Bank would disburse currencies selected by it. (Loan Agreement, Schedule 3, paragraphs (b) and (d)). 20. The report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Balk is attached (No. 7).
-6- PART V - COKPLIANCEP 1-ITH ARTICLES OF AGREErMENT 21. I am satisfied that the proposed loan nill comply with the requirements of the Articles of Agreement of the Bank. PART VI - RECOiH:ELIATIONS 22. I recommend that the Bank at this time make a loan to the Mortgage Bank of Finland Oy in an amount in various currencies equivalent to $37 million for a term of 15 years with interest (including commission) at 5 3/4",< per annum. and on such other terms as are specified in the attached draft Loan Agreement and. Guarantee Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (No.8). Eugene R. Black IWTashington, D.C. March 6, 1959