302. Letter From the Deputy Secretary of State (Robinson) to the President’s Assistant for Economic Affairs (Seidman)1

Dear Bill:

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.

Sincerely,

Charles W. Robinson
4

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.

  1. Source: Ford Library, L. William Seidman Papers, Box 73, Economic Policy Board Subject File, International Resource Bank. Confidential.
  2. Minutes were not prepared for this NSC meeting.
  3. UNCTAD convened for its fourth session in Nairobi, Kenya, May 5–31. UNCTAD convened for its fourth session in Nairobi, Kenya, May 5–31. In his May 6 address before the meeting, Kissinger proposed the creation of an International Resources Bank. For the text of his speech, see Department of State Bulletin, May 31, 1976, pp. 657–672. Excerpts were printed in The New York Times, May 7, 1976, p. 12.
  4. Robinson signed "Chuck" above his typed signature.
  5. Limited Official Use.