INTER-AMERICAN DEVELOPMENT BANK ACT

AMENDMENT

THURSDAY, JULY 9, 1970

UNITED STATES SENATE,

COMMITTEE ON FOREIGN RELATIONS,

Washington, D.C.

The committee met, pursuant to notice, at 10:35 a.m., in room 4221, New Senate Office Building, Senator George D. Aiken presiding. Present: Senators Aiken, Sparkman, Pell, Case, Cooper, Williams, and Javits.

Senator AIKEN. The committee will come to order.

I am pinch-hitting for Senator Sparkman, who will be here very shortly. I will proceed to give the statement which he would give if he were here.

OPENING STATEMENT

The Committee on Foreign Relations this morning is holding a public hearing on S. 3934, a bill to amend the Inter-American Development Bank Act to authorize the United States to participate in increases in the authorized capital stock and in the resources of the Fund for Special Operations of the Bank. This bill was introduced in the Senate on June 8 of this year by Senator Fulbright at the request of the Administration.

(The text of S. 3934 follows:)

[S. 3934, 91st Cong., second sess.]

A BILL To amend the Inter-American Development Bank Act to authorize the United States to participate in increases in the authorized capital stock and resources of the Fund for Special Operations of the Inter-American Development Bank, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Inter-American Development Bank Act (22 U.S.C. 283-283n) is amended by adding at the end thereof the following new section:

"SEC. 18. (a) The United States Governor of the Bank is hereby authorized to vote in favor of the two resolutions proposed by the Governors at their annual meeting in April 1970 and now pending before the Board of Governors of the Bank, which provide for (1) an increase in the authorized capital stock of the Bank and additional subscriptions of members thereto and (2) an increase in the resources of the Fund for Special Operations and contributions thereto. Upon adoption of such resolutions the United States Governor is authorized to agree on behalf of the United States (1) to subscribe to 82,352 shares of $10,000 par value of the increase in the authorized capital stock of the Bank of which 67,352 shall be callable shares and 15,000 shall be paid in and (2) to pay to the Fund for Special Operations an initial annual installment of $100,000,000 and two subsequent annual installments of $450,000,000 each, in accordance with and subject to the terms and conditions of such resolutions.

"(b) There is hereby authorized to be appropriated, without fiscal year limitation, for payment by the Secretary of the Treasury (1) three annual installments of $50,000,000 each for the United States subscription to paid-in capital stock of the Bank; (2) two installments of $336,760,000 each for the United States subscription on the callable capital stock of the Bank; and (3) one annual installment of $100,000,000 and two annual installments of $450,000,000 each for the United States share of the increase in the resources of the Fund for Special Operations of the Bank."

S. 3934 provides that the U.S. Government would vote in favor of an increase of $2 billion in the authorized capital of the Bank. $400 million of this sum would take the form of paid-in capital and the remaining $1.6 billion would be on a callable basis.

The U.S. share of this increase in callable capital stock would amount to $150 million in paid-in capital-subscribed in three equal annual installments-and $673.5 million in callable capital to be paid in through two equal installments. The agreed overall increase in the Fund for Special Operations, which lends on softer terms than the regular capital of the Bank, would amount to $1.5 billion. Of this amount the U.S. share would be two-thirds, or $1 billion, paid in over a 3-year period.

Testifying before the committee this morning is Secretary of the Treasury David M. Kennedy. I understand he is accompanied by Assistant Secretary of the Treasury John Petty and by Henry J. Costanzo, who serves as the U.S. Executive Director of the InterAmerican Development Bank.

Mr. Secretary, we are very glad to have you with us this morning. Would you please proceed with your prepared statement.

Senator Sparkman, you show up after the work is done. [Laughter.] Senator SPARKMAN. I want to apologize, but I had to go all the way to the Rayburn Building to testify before a committee at 10 o'clock. I couldn't get back earlier.

I am sorry.

I am glad Senator Aiken started. I would have been pleased if you had continued. I believe you had called on the Secretary for his statement. Is that right?

Senator AIKEN. We called on the Secretary to deliver his prepared

statement.

Senator SPARK MAN. Fine. Thank you, sir.

STATEMENT OF HON. DAVID M. KENNEDY, SECRETARY OF THE TREASURY; ACCOMPANIED BY HON. JOHN R. PETTY, ASSISTANT SECRETARY OF THE TREASURY, AND HON. HENRY J. COSTANZO, U.S. EXECUTIVE DIRECTOR, INTER-AMERICAN DEVELOPMENT BANK

Secretary KENNEDY. Mr. Chairman and members of the committee. I appear today in support of S. 3934. This bill would authorize the United States to join with 22 Latin American nations in a further replenishment of the Inter-American Development Bank (IDB).

HEMISPHERIC COOPERATION

Our country has a deep and traditional commitment to hemispheric cooperation. This cooperation gave rise to the Inter-American Development Bank a decade ago. The Bank has now become the key multi

lateral instrument of hemispheric financing for development. It requires expanded resources to meet the challenges of Latin American Development as we advance further into this decade.

As U.S. Governor, I participated in the formulation of this proposal at the IDB meeting in Punta del Este, Uruguay, in April. The proposal before you is a true expression of partnership. Under it the Latin Americans would provide a significant input of their own resources along with ours, and new policy undertakings relating to the Bank's operations would be implemented. These commitments testify to Latin America's determination to assume an increased responsibility for development within the area as a whole as well as within individual Latin American countries. The support the United States is prepared to offer will be an important factor in determining whether or not this constructive spirit in Latin America can achieve its goals in the =time ahead.

In these opening remarks I first will touch on the specific legislative request which is described in detail in the report before you of the National Advisory Council. Second, I will review some more general aspects of this multilateral approach to development financing.

AUTHORIZATION REQUEST

The request before you involves the Bank's ordinary capital window, which lends on conventional terms that reflect the cost of capital, and its Fund for Special Operations (FSO), which lends on concessional repayment terms.

On ordinary capital, we are seeking authority to subscribe to $150 million of paid-in capital stock, in three annual $50 million payments beginning in fiscal 1971. Our Latin American partners will more than match this with subscriptions totaling $236 million. As the companion to this payment, we seek guarantee authority in the form of a subscription to $673.5 million of callable capital stock which is not expected to result in cash outlays. Half of this callable subscription would be made in fiscal year 1971 and half in fiscal year 1973. The Latin American members would subscribe to $879 million of callable capital.

On the Fund for Special Operations (FSO), we are seeking authority to contribute $1 billion to the Fund's resources over a 3-year period, at the rate of $100 million in fiscal 1971 and $450 million in each of the following 2 years. The U.S. contribution of $1 billion compares with the $900 million contribution the United States made in the last replenishment, while the Latin Americans will contribute the equivalent of $500 million for this replenishment or $200 million more than their contributions last time.

NECESSITY FOR REPLENISHING BANK'S RESOURCES

Action to replenish the Bank's resources at this time is essential to permit the Bank to continue its existing loan programs and meet the important target, established by the Bank's Board of Governors, of a 50-percent increase in lending volume before the middle of this decade. By the end of calendar 1970, the Bank's ordinary capital resources in hard currencies will be insufficient to carry on another full year of operations even at current levels-about $200 million a year recently. With the paid-in and callable resources now being sought, the Bank

would be able to reach or somewhat exceed a lending level of $300 million per year, and maintain it until calendar 1975.

Although its resource situation is currently somewhat less stringent. the FSO also will enter 1971 with less than will be required for the amount of loan commitments that will be needed in that year. Lending in all currencies from the Fund for Special Operations reached a level of about $400 million last year. The new resources are intended to permit a progressive increase in FSO lending reaching the equivalent of about $600 million a year and to cover funding requirements through 1973.

IDB 10-YEAR OPERATING HISTORY

In its 10-year operating history, the IDB has lent $3.5 billion in support of Latin American development. These sums were part of projects involving a total investment of almost three times this amount. Roughly a quarter of its loans financed high-priority agricultural development projects. The Bank lent over $500 million to industrial and mining projects, and a similar amount for transportation and communications projects. It also provided substantial sums in the electric power, water supply, housing, and education sectors. While carrying on this impressive and rising volume of lending, the Bank has maintained itself on a financially sound basis with a $20 million net income in 1969 and total reserves at the end of the year of $85 million. It has attracted resources from nonmember countries. The Bank's bonds are fully accepted in the world's capital markets; a funded debt of $767 million was outstanding at the close of its fiscal year on December 31, 1969; about one-half or $375 million is held outside the United States.

BUDGET IMPACT OF AUTHORIZATION REQUEST

Now with respect to the budget impact.

The impact of this request on the U.S. budget over the next years is acceptable and substantially less than the total authorization figure of this legislation. Our $674 million of callable capital is not expected to result in any expenditures now or in the future. Appropriation of the first $50 million of the three equal installments of paid-in capital would be sought in fiscal year 1971, and payment would be expressed in the form of a letter of credit. Only a part would result in cash or budget expenditures in fiscal 1972. Similarly, appropriations would be sought in fiscal year 1971 for the first $100 million of the U.S. contribution to the FSO, but only a fraction of this would result in cash budget expenditures in fiscal 1972.

Thus, there would be no expenditure impact resulting from this request in fiscal year 1971 and only a modest amount in fiscal year 1972. Expenditures would rise by fiscal year 1973 but probably would not exceed $125 million. The proposal overall calls for $1,150 million to be paid to the Bank-as letters of credit-by the end of fiscal 1973 and this entire amount of course would eventually be expended and reflected in budgetary cash outlays in the years in which they are disbursed, but this process would be spread over a number of years well beyond fiscal 1973.