Foreign Relations of the United States, 1952–1954, The American Republics, Volume IV

932.512/1–1253

Memorandum of Conversation, by Sterling J. Cottrell of the Office of South American Affairs

confidential

[Washington,] January 12, 1953.

Subject:

• Status of JBUSEDC Railroad Projects

• Participants
  • IBRD
    • Mr. Eugene Black
    • Mr. Robert Garner
    • Mr. Burke Knapp
  • State
    • ARA—Ambassador Merwin Bohan
    • AR—Mr. Edward Cale
    • E—Mr. Emerson Ross
    • OSA—Mr. Sterling Cottrell

A. Following is a summary of the principal statements made by Ambassador Bohan:

1. The Joint Commission expects to finish its work on March 31, with project reports completed and reviews of the railroad program by the Budd¹ group, of the power program by Mr. Ackerman,² and of the shipping program by Admiral Cochrane.³

2. Of the approximately $140 million of railroad projects, $40 million in loans have already been granted, about $50 million are now under study by the Bank, and the remaining $50 million are in final preparation by the Joint Commission and should be in finished form by March 31.

3. The railroad projects are the heart of the whole development loan program. President Vargas has repeatedly expressed his opinion that the railroads must be rehabilitated as quickly as possible and should be given top priority.

4. When the Joint Commission was established in 1950, the most important political question was whether Vargas would lead Brazil towards cooperation with the US or towards an independent or opposition position. The hope of financing a substantial part of Brazil’s basic economic development through the help of the Joint Commission may well have tipped the scales in favor of a US orientation. The Joint Commission and the US therefore have an implied obligation to see that properly prepared projects are financed.

5. Now the stage is set and positive action is required. The projects are almost complete, and the Brazilian bill to reorganize the railroads will soon be debated in Congress. A statement is now needed from the IBRD that the railroad projects, totalling approximately $140 million, will be financed—subject to clearly stated terms. This will a) enable the Joint Commission to terminate its mission properly, having fulfilled its commitments, b) give support to the passage of the railroad reorganization bill, c) indicate clearly to the Brazilians what more they must do to qualify for the loans and d) constitute an outstanding success in US–Brazil relations.

6. Failure of the Bank to provide the above assurance of financing subject to clear terms, and an indefinite delay in acting on projects already presented by the Joint Commission would:

a) Completely wipe out the prestige of the Joint Commission.

b) Make more difficult, if not preclude, passage of the railway reorganization legislation.

c) Profoundly affect US–Brazil relations and alienate President Vargas, who has always laid particular stress on the railway rehabilitation program. Vargas frankly outlined his views to us last May, pointing out his inability to understand how we gave prompt aid to rehabilitate an enemy’s rail system (Italy) while so long delaying cooperation with an ally (Brazil).

B. The views expressed by Mr. Black, Mr. Garner and Mr. Knapp are summarized as follows:

1. Minister Lafer and other Brazilians were informed two years ago, and subsequently, that the railroad system of Brazil must be reorganized before the IBRD could make railroad loans.

2. In two years there has been little tangible progress by Brazil to improve the situation, with the exception of the draft bill to reorganize the railroads, which has not yet been considered by Congress. No decision has yet been made by the Brazilians concerning the Bank’s proposal to share with it in sponsoring a railway management survey group.

3. The IBRD is interested in investing only in a sound rail transportation system in Brazil, not in financing additional equipment which the existing badly operated lines could not use effectively. Patching up the poor existing system is unsound. The IBRD must be concerned with the soundness of its investment, in the interests of all its members.

4. The IBRD has always avoided prior commitments to lend any specific amounts. Placing conditions on such commitments is no real protection; these are rapidly forgotten and misunderstandings soon arise. The general statement of IBRD to the effect that, in principle, it believed sound projects could be developed in Brazil of at least $300 million, and that IBRD would consider such projects, was twisted by the Brazilians into a report that IBRD would loan Brazil $300 million.

5. IBRD cannot guarantee financing in advance of a detailed study of each individual loan project, and consideration of other general factors.

6. Even if the US felt that it had a political interest in the railroad projects, the IBRD is an international banking institution and cannot compromise its principles to accommodate US political considerations.

7. Although the Department should not inform the Brazilians, the fact is that European members of IBRD are very concerned about Brazil’s delay in settling old European claims, and they are reluctant to see large new credits granted before the Brazilians show a reasonable willingness to undertake negotiations on these old debts.

8. Without prior commitment as to a total amount, the IBRD is prepared to do its utmost in financing Brazilian railroads on the basis of sound loans. Aside from investigation of the technical merits of individual projects, the Bank feels that the necessary conditions are:

a) Passage of the railroad reorganization bill.

b) A survey report by consultants acceptable to the IBRD and to the Brazilians (IBRD would pay ½ the cost).

c) Managerial reforms to complement any equipment rehabilitation loans.

If the survey group confirmed that the railroad projects were sound, and that the Brazilians were sincerely interested in making necessary reforms, it is possible that the IBRD could go along step by step in granting loans, as it has done in Colombia. However, at the present time there are too many unfavorable factors to permit prior guarantees. The Brazilians must show some constructive results and attitudes to qualify for railroad loans.

9. Loans for railways or any other purpose must be considered in the light of the Bank’s judgment as to Brazilian over-all credit worthiness and the priorities among different development fields. The Bank looks to Brazil to take adequate steps to solve the present arrears problem, and to insure future financial stability. This has a direct bearing on whether Brazil can repay development loans.

10. If the Department or the Joint Commission cannot work with the IBRD on the above basis, for political or other reasons, they are free to seek other sources of financing. In such an event the Department should plan on finding funds to cover the entire balance of the Joint Commission’s projects because the IBRD could not take only a portion of the program. This would create the risk that Brazil might be loaded with other loans in excess of its ability to pay.

1. Ralph Budd, Chairman, Special Railroad Mission, United States Section, Joint Brazil–United States Economic Development Commission. Mr. Budd was also Chairman of the Chicago Transit Authority, President and Director of the Great Northern Railway, and Director of the First National Bank in Chicago. For a list of the members of the Special Railroad Mission (the “Budd group”), see The Development of Brazil, p. 244.
2. Adolph Ackerman, Special Consultant on Power Development, United States Section, Joint Brazil–United States Economic Development Commission.
3. Edward L. Cochrane, Chairman, Federal Maritime Board.