825.51/12–2148

Memorandum by Mr. Walter Bauer of the Division of Investment and Economic Development to the Chief of That Division (Malenbaum)

confidential

Subject: Chile—Eximbank Application No. 209, $26 million (Reduced to $20 million) to Supplement Credit No. 374 for $28 million, Corporacion de Fomento de la Produccion (Steel Mill).

Background: Eximbank granted in November 1945 a credit of $28 million to Corporacion de Fomento de la Produccion for the purchase in the U.S. of equipment, materials, supplies, and services for construction of an integrated steel plant (Compania de Acero del Pacifico, at Huachipato near Concepcion) to make pig iron, heavy and light structurals, rails, galvanized sheets, wire, pipe, and other iron and steel products. Fomento agreed to furnish funds necessary for all expenditures in Chile as well as any expenditures in the U.S. required in excess of $28 million. With Eximbank’s approval, Fomento gave the Koppers Company of Pittsburgh a contract to assist and advise CAP regarding construction and operation of the steel mill.

Owing to price increases and necessary changes in plans, the cost of the plant, estimated in 1944 at $56 million, will now approximate $82.7 million, i.e., $60.5 million dollar costs and peso costs in the equivalent of $22.2 million. Since Fomento will assume $9.5 million of the dollar costs and U.S. suppliers will participate with $3 million, financing of the difference of $48 million would require an additional $20 million Eximbank loan to supplement the original $28 million.

Fomento had requested earlier an additional credit of $26 million but was able to reduce this to $20 million (1) by eliminating two departments, namely, cast iron and steel foundry facilities, and the sintering plant, which do not appear to be essential for the successful operation of the steel mill; (2) by eliminating an item for the development of certain coal deposits also considered unessential at this time; and (3) considering the advanced stage of the design and purchases, by reducing the unnecessarily large allowance for contingencies.

On the other hand, certain refinements in plant facilities were found necessary whereby dollar costs were increased. In this connection the principal items are: A large limestone quarry estimated to require $580,000 for U.S. equipment and materials, because the available commercial production apparently is unsatisfactory; a brick plant requiring $50,000 for U.S. purchases, because needed brick was found to be unsatisfactory; and $148,000 for a sulphuric acid plant required for the operation of the steel mill, inasmuch as the commercial supply of acid for Chile is reported to be unreliable.

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An additional $7.8 million is necessary because of faulty estimating of the general or overhead items of expense. Engineering, administration, and supervision, inadequately provided for in the original estimate, must be increased by $2,528,000. The total cost of sending U.S. personnel to Chile, including transportation, salary, and maintenance, which was overlooked originally, is estimated to require $750,000. Provision must be made for an item for contingencies and freight price increases of $1,700,000. The Bank is asked also to meet start-up expenses of $115,000 for personnel and $2,550,000 for inventory items such as coking coal and semi-finished steel which must be obtained in the U.S.

Article I of Law No. 8595 authorized the President of the Republic to furnish the State’s guaranty for the liability of $28 million which the Eximbank granted Fomento for the purpose of acquiring machinery, equipment, supplies, and services for the steel plant, and for the supplementary loans that might be necessary. Eximbank considers the new request for $20 million far in excess of the authority implied in the term “supplemental loans” and deems it necessary that a new law be enacted by the Chilean Congress expressly authorizing the President of the Republic to guarantee on behalf of the State the new $20 million obligation of Fomento. The Bank has been advised that such a law has been presented to the Chilean Congress. The establishment of such further credit as the Bank may desire to extend, however, need not await the enactment of such a law, as this would properly be one of the conditions precedent to disbursement required by the credit agreement.

Eximbank Recommendations: An Eximbank Staff Committee, in its December 9, 1948 memorandum to the Board of Directors, recommends:

(1)
That the line of credit in favor of Corporacion de Fomento de la Produccion, Chile, formulated in the credit agreement of November 27, 1945,1 be increased from $28 million to $48 million.
(2)
That the period within which disbursements under the credit may be made be extended from the present expiration date of December 31, 1948, to December 31, 1950.
(3)
That amortization for the previous credit of $28 million be revised from repayment of both principal and interest beginning June 15, 1949, to provide payment of interest only until June 15, 1951, and of the principal of $48 million and interest after that date in forty approximately equal semi-annual installments.
(4)
That the interest rate be fixed as may seem proper to the Board. The Staff agrees that the interest rate on the original $28 million should remain unchanged at 4 percent per annum. On the supplemental $20 million some believe that present policy would indicate a rate of 3½ [Page 437]percent while others feel that the supplemental credit should carry the same interest rate as the original.
(5)
That the entire credit of $48 million be unconditionally guaranteed by the Republic of Chile.
(6)
That Fomento unconditionally agree to finance all additional expenses necessary to complete the integrated iron and steel plant, including both U.S. dollars and Chilean currency.

Justification: Unless completed as proposed, the steel mill cannot become a productive enterprise to supply Chile’s requirements and perhaps have a small amount for export. It is estimated that annual savings of dollar exchange may rise from at least $3.5 million to approximately $13 million, after debt service on the entire credit calculated at a 4 percent rate of interest.

State Department Position: ED, IR, and NWC concur with Eximbank Staff that it is essential to complete the steel mill and have no objection to Eximbank granting the loan. With respect to the rate of interest, the Department sees no economic or political reason why the rate on the new loan should not be 4 percent, if the Board decides to adopt this rate.