I promised during my recent outline of the International Resource Bank to the
EPB that we would be submitting a
memorandum to the President on this proposed U.S. initiative. The absence of
Secretary Kissinger and the resulting
compression of time in which to resolve funding issues with OMB led to direct discussions with Jim Lynn, culminating in a discussion of
this issue at the NSC meeting today.2 The President, as you
know, decided to authorize the Secretary to make this proposal at the UNCTAD meeting,3 without specifying the amount or timing of U.S.
financial participation.
The plan was developed in close cooperation with Treasury. All are agreed
that we should present at UNCTAD only a
general outline of the IRB concept and leave
the fleshing out of details to a lengthy process of negotiation in the
CIEC commissions and in the IBRD policy
bodies. The attached paper outlines our present concept, going into greater
detail than we would table at the UNCTAD
meeting.
Attachment
5
UNCTAD POSITION PAPER
International Resource Bank
Problem
Political risks in many resource-rich countries, especially developing
countries, have radically distorted the pattern of resource investments,
causing commercially viable natural resource projects not [Page 1035] to be undertaken. The
misallocations of capital, management, and technology exact heavy
economic costs on both producers and consumers.
The uncertain politics and economics of world resource development have
led to indecision. Many commercially viable raw materials and energy
projects have been cancelled or postponed. This causes difficulty now
for the potential producing countries which face the loss of jobs and
revenues if projects are not completed. Later the consuming nations will
pay the price in terms of higher costs and increased vulnerability to
sharp increases in raw materials prices as the world economy gains
momentum.
United States Position:
The United States will propose at the UNCTAD conference the establishment of an International
Resource Bank with the following objectives:
- —to mobilize and encourage the flow of private and public
capital, management and technology to the developing countries
through multilateralizing some investment flows;
- —to encourage adherence to standards of equity and fair
treatment of host countries and corporate entities in resource
development;
- —to help assure transfer of technology on equitable terms in
conformance with globally accepted standards; and
- —to encourage a more rational and continuous development of
resources in the developing world to promote their sound
economic growth and to provide essential raw materials to
sustain global prosperity.
The International Resource Bank is a key element in our strategy toward
international resource issues and the dialogue between developed and
developing countries. It would help us provide leadership in the
upcoming United Nations Conference on Trade and Development in May and
counter some of the demands from the developing countries for a $6
billion fund to finance buffer stocks.
The primary function of the International Resource Bank will be to
facilitate the financing of resource investment projects in minerals,
oil and natural gas. The main purpose of the International Resource Bank
would be to enable resource investments to be undertaken more
efficiently. Commercial viability considerations could play a more
important role relative to political concerns in investment decisions.
The presence of the Bank in a project should exert a moderating
influence on host country disputes with private companies. The purpose
of the Bank would not necessarily be to increase total
global investment in resource projects but rather to ensure
that investments are more efficient, to see that benefits from these
investments are shared equitably by host governments and private
companies, and to channel more investment into commercially sound
projects in LDCs.
[Page 1036]
New projects financed by the IRB in
developing nations for the production of oil and gas or of basic raw
materials would be the subject of a trilateral concession agreement in
which a consortium of private investors, the host country government,
and the IRB would participate. This
concession agreement would specify the following:
- —an agreed plan for preproduction activities to complete
technical and commercial evaluation of the project;
- —the basis for financing the project, including project bonds
to be issued by the IRB on
behalf of the project and equity to be supplied by the project
consortium, the host country, or the IFC;
- —a formula for sharing the production from this investment,
with first priority to holders of the project bonds and the
balance split between the project consortium and the host
government;
- —the manner in which the project consortium would undertake to
develop host country managerial and technological capability,
contemplating a scheduled assumption of control by indigenous
owners;
- —performance and payment guarantees by both the host
government and the private firms in the consortium.
The project would be financed in a variety of ways, but the IRB issuance of project bonds, secured by a
lien on the production of the project, would be a distinctly new means
of production finance. These bonds would be sold primarily to private
firms participating in the project. They might also be sold to
government or other private investors.
First responsibility for servicing these bonds would lie with the project
entity which might service some of the bonds through delivery of the
commodity. But the host country government and the private members of
the consortium would jointly guarantee performance and payment of the
bonds in the event of a commercial failure so that the IRB would bear none of the commercial
risks. In the event any party of the concession agreement violated
performance or payment guarantees, the IRB would be able to exercise a claim against the violating
party.
IRB bonds could be denominated either in
terms of the commodity or in cash terms. If they are denominated in
terms of the commodity, the company owning the bond would be required to
take delivery of the commodity, according to an agreed price formula,
when the bond matures. In this manner the purchaser of the bond would
have a future contract. The IRB would
not assume the price risk.
IRB bonds denominated in cash would be
secured by its lien on the production. In case the project entity
defaulted, the output of the project could be attached by the IRB, and the bondholders would be
reimbursed from the sale of the commodities. If the proceeds were not
sufficient to fully reimburse the bondholders, the host country and the
private companies participating in the project would be liable for the
difference as part of their joint guarantee.
[Page 1037]
Each project may be financed by a combination of commodity-denominated
and cash-denominated bonds.
If liens on production are to be an effective collateral for IRB bonds, member countries of the IRB would all have to agree that their
legal systems would be used to enforce the liens.
Sales of bonds to investors outside the participants of the consortium
would probably have to be done cautiously in order to test the market
for such instruments. But as confidence were built, more of this kind of
placement would be undertaken.
The International Resource Bank should facilitate private investment and
help ensure that private companies continue to make an effective
contribution in the politically sensitive area of resource investments
in developing countries. The International Resource Bank will insulate
private companies from political (but not commercial) risk through the
bond instrument. Proceeds from the bonds will be turned over to the
project entity in the form of a loan. Private companies would have an
alternative to equity capital in the form of commodity bonds which carry
price risk (as does equity) but are not subject to expropriation. A host
country could only get at commodity-bond capital by failing to honor its
guarantee of the loan from the IRB to
the project entity.
The IRB would not necessarily be an
insurance institution like OPIC. Rather
it could provide assurance against political risk by having a
multilateral institution act as intermediary between the host government
and private companies.
The IRB would operate in a different
manner than regular World Bank capital lending operations in a number of
ways. First, it would participate as a party to the trilateral
concession agreement. Second, it would operate on a project-by-project
basis, raising funds in a manner tailored to the particular project
financed and in a back-to-back fashion with the proceeds of bond sales
being turned over to the project. Third, the IRB would secure loans by liens on the production from a
specific project. Thus, in addition to paid-in and callable capital
backing by member governments, the IRB
would have additional security to support its financial operations.
In addition to its function of helping to finance investment projects,
the International Resource Bank might provide supplemental financing to
commodity buffer stocks. The IRB would
not, however, promote buffer stock arrangements, which would be decided
on a case-by-case basis.
The International Resource Bank could, however, operate under some form
of association with the World Bank Group. The form of the association
would be negotiated by the participating countries. An association with
the World Bank Group could provide effective management of the
institution and would help the IRB image
with [Page 1038] potential investors who
regard the World Bank as a responsible international institution with a
no-default record.
It could initiate operations with contributed capital of $1 billion to
form a limited liability loss reserve fund. Additional callable capital
may be authorized to back up the paid-in loss reserve. OPEC nations and industrialized nations
would supply roughly equal amounts and developing countries could make
contributions in accordance with their ability to pay. The United States
contribution to the loss reserve fund would depend on the contribution
of others. The IRB would have weighted
voting based on financial contributions.
Our goal at UNCTAD IV will be to get
broad political endorsement of the outlines of the proposal. Details of
the proposal should be negotiated after UNCTAD under the aegis of the Conference on International
Economic Cooperation in Paris for presentation to the next CIEC meeting of ministers. All four CIEC commissions might consider the
proposal.
Many developing countries might be attracted to the resource investment
financing facility part of the proposal because of a perceived need to
attract foreign capital and technology to develop their resources. The
International Resource Bank will be attractive to LDC’s that want to minimize direct dealings
with multinational companies, instead working through a multilateral
institution. The IRB will stimulate host
country ownership and ultimately management of resource projects.
