strictly confidential 677 - World Bank Documents

STRICTLY CONFIDENTIAL 677

INTERNATIONAL BANK FOR

RECONSTRUCTION AND DEVELOPMENT

THE COMMITTEE OF THE WHOLE

Washington, D.C.Thursday, April 21,

1966

Pursuant to the adjournment of April 19, 1966,

the Committee of the Whole reconvened at 10:35 o'clock, A.M.

in the Board Room, 1818 H Street, Northwest, for further

consideration of Document R65-187, "Principal Points for

Consideration in Connection with Multilateral Investment

Guarantees" Mr. Aron Broches, General Counsel, presiding.

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C 0 N T? E N T S

De2aultPa e

Rema rks by:

Miss g 8 oMr. Thor £82Mr. AliMr. GDonnelDr. LieftinckMr. van Campenhout

LsS-snarn Fo mAla -jr De:loping Countries;ctin.g :s Sponsoring Members

Mr. 0'Donnell 6, 693,700, 706

Miss Steeg 686Mr. Mirza 68, 695Dr. Lieftnc- 8Mr. Map1a6Mr. Merchant 694, 7o4Mr. RadfordMr. Punirakul 702

Financing of Losses

Mr. Gutierrez Cano 708, 735, 737Miss Steeg 710, 717, 723Mr. Thor 711Dr, Lieftinck 712, 731Mr. Oi onneil 719Mr. Radford y20, 724Mr. Malaplate 2lAustrian Government 729

Mr. Aeid 730Mr. Merchant 32Dr. Chen 734Mr. Haus-Solis 738

STRICTL CONFIDENTIAL 679

PROCEEDINGS

MR. BROCHES: Miss Steeg, gentlemen:

Last time, Tuesday, we had started on one of the

two supplementary questions which were not in the stencilled

document; namely, what happens if one of the loss-sharing

members fails to meet his commitment; and the second question

was should any consideration be given to a different loss-

sharing formula in cases where the sponsoring member is

a developing country, rather than a capital-exporting country.

I don't think we had quite finished consideration of the

first supplementary question; namely, who makes up the

deficiency when one of the contributing members fails to

pay its share toward loss?

We discussed three possibilities: The first is

that the investor would share the loss, and I take it we

can disregard that further because there was a universal

feeling that would be highly unsatisfactory because it would

mean the policy which the investor receives would not be

worth its face value.

Then two other possibilities were discussed. One

was if there was a short-fall, the short-fall would be made

up by the sponsoring country, and the other that the short-

fall would be made up pro rata by all the members who had not


It was then pointed out by some of the members of

this Committee that in any event, the Corporation should have

under its control a guarantee fund so as to either make

unnecessary or postponc at least the day on which such a

contingTency would arise that insufficient funds would be

available to meet the obligrations of the Froup toward a policy-

holder.

That shows that there may be a certain link between

the loss-charing and the responsibil ity for default and the

liquidity, naving enough money in order to pay the policy-

holders.

The next-to-last section of this paper deals with

financing of losses, and we'll have to get to that -- hope-

fully this morning. I apologize for tnis long introduction,

but I thought it might be helpful to see where we were, and

with your permission, I would like to suggest tnat we deal

first this morning with any remaining comments on the question

of liability for short-fall, where one or more of the members

were required to contribute toward the loss and do not do so.

Miss Steeg.

MISS STEEG: You will recall that at the last

session, on this default problem, I was rather in favor of

h2ving the, as I call it, community make up for the default

of the contributing member, but I must say that in the

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eatime, 7 reaEd te i:structiJns I g from :.< care u y

,,gin, and there 1 1"ound out in c=nnection wi.th the cliqudi ty

problIem, our expert-, in Bonn are ralther in §n-vor é -

1hing a a und for the whole Corporatin. That

would nean that t`e Corporajtion snould not only rely _or the

inancing o` Icsses oln firct, ad ance payments ai cal

ior these aidvance p;iynent oh iGntions , and on the premiums,

but that there shou d be cuch a s acheme as a -apitalizing 'und

whih should -e e she y h n -tribulng mebers n

a quota basis, and this quota would be at the same time the

ue lmit for the inbility

I realize that the JECD thought it innecessary

tn establ 1ish that capital fund, i" I may so coI i t, but

whn yo u tv~choed on h 1111, rl ju3.1t inni tnen 1.r,-,_:

the instructions gain, I rea lly thought it met sore of the

ideas that Mr. Mer::nt :.I' :ado las wime, il sch al un

were established There woul d really be, cop e ul ly, no need

or any solution of this default probleM.

w r experts don't thnk the quota whcn w ..

bo related to each contribut ing memiber's lia bI ity need be

pid in 'ul lt the beginnin. T.i Ccou- be dne as te

numbers and the armount of gu:Ir,ntees iss w-,ulrd ins croU

this I'd like to state.

u,ould we touch Dn the lors-harlng formula for the


deve)p n ount r ies nw 0r Iater on?fi

MR. BCS: Litcr on.

Thank you very much, Miss Ste

I 1 b Leining i i ith-t it wil be -ery har

oý ~rr1ve at or try : r, onn this.-

until we've t-ked about .he financring of losse:, because

wlille ou ma aerate them intel lectualy, I -- ik in fact

toy re very 2,uch regar as tw :e of e same Droblem

ith that comment, are lhere utlier members of the

C )mmt ee who would Iike speak abou the liabiliy o

1'-, 1 t UD P

Mr. Thor.

MR. '_`O :Mr. C hai rman, e rdn cuej LtLo

o1 t b y c- on ri c I ink th1fD

ariswer to your questi wh s,hould take care o such a defa'ult

2e th 10w er o u 'd e in the negti e b-o r thIe in.lured

lnd firo the :ponsrin ontr, beu:e the. hem,s

s;aid by sorebody. el te at the 1ast meetingC, this scheme is

o ,isureand pro tIe inv1 tr, and n e J :. e o l be

ca!led o o p t-ay ar'hL in o a o :a' - There-

fore,, neither the inveSt r nor the sponsoring countrv should

be t 0 E:&. I . :tere L.- only that =Ivthe

c ontrib utin c : :o-n e r i ef haveo e tno fr . u e, a deau.

Whe ther tht wcu ld Le in d i rect payments in eacih ca----e or

STRICTLN CONFIDENTIAL

we woud ry to put up a fund to take care of that, which

S-cn 'o me the best way, well that has o be discussed

further; but my conclusion is that te contributing countries

have to share the burden of default of one of them, if such

happens.

Thank you.

MR. BROCHES: Mr. Ali.

MR . ALI: Mr. Cha.,i!r7-ran, fo-m wnarificaxtioni

on yuur second point of the rest o: tne members :aking good

a default, do you :mcan by that tnose members who commit

themselves to participate in a guarantee, or the whole

membership?

MR. BROCHES: No, no. The first.

MR. ALI: In that case, then, follo,win what Mr.

Radford said, I -irk to kep the corporate bod : that

scheme, it may be wise to th,ink of the whole m-embe,_rship

participa,,'n_, in daI~gd efault.

MR. BROCHES: Thank you, sir.

Mr. O'Donnell.

MR, O'DONNELL: I am inclined to think that the

establishment of a capital fund as the Bonn experts suggest,

and as I think Mr. Radford the other day suggested, would be

the best way to approach this question. It is a familiar

way of doing this sort of thing; it would be taniliar to rembe s

STRICTL CONFIDENTIAL

nt the B-nk. i m thinkin o c cytem by w-ich contributing

:er' anyhow : b e rm : rcmig Iin ashos c t untri es

alco, and might make a sub,cription. i haven't committed

mysel -vn my own id as to hojw t h ece sub,s c rip*nt ions wo3uldb

cacuLlted, but an arr-nrgmrn by whic joinin memb rs would

p y a subscription for tie most part, perhaps, in the f'orm

n'n o te, non-neoti , e non- nteres t - bearin no te, but

with a part pament in ': to ive the Corporat a start d 9

something tn have in hand to meet establishment expenses,

and -o meet -ny clas: tha't mighnt a 1n it bei,re the

Srantee u na s been bu1lt -p tur premiums. s omething

like that seem2 to me to be the most familiar way of

launcng a CorporaoAn o tnij -i 1.

Mik. BROCHES: Thank you, sir.

Are there any other spe.Kers on this question?

Dr. Lieftin-k.

DR. LIEFTINCK: Vr. Ci3'1rm~n , ,m ion ec

there is a certain run over from this subject t, the riext. ne,

the establishment of a guarantee Iund. My outk>rities are

n:t In :a-or cf the e 0t':ie `t . n '0 o On fo r

advance payments )r payrrents into a capitl1 und. On

could certainly visuaLize, nowever, that in the course

this t r jtion, i , r rtc n w::ui d d uu 1 reserve

out o- net earning,s, and I do think althoughY T expres,ed


myself in favor of the liability for default being taken by

the sponsoring country, I think the sponsoring country should

be in a position to recover from the Corporation this loss,

so to speak, by taking recourse or by having a claim on the

reserves of the Corporatiou.


Mr. van Campenhout..

MR. VAN CAMPENHOUT: Mr. Chairman, I feel inclined

to agree with Dr. Lieftinck.

MR. BROCHES: Thank you.

We might, before getting completely into the

ffnancing of losses, or the financing, really, of the whole

institution, try to dispose of the second supplementary

question, which may not take too much time, and that is since

unlike the assumptions in this paper, there's been a consensus

in the Committee that developing countries should be able

to ponsor investments, should such countries when they act

as sponsors, be treated for purposes of loss-sharing, as

contributing members, which would mean that they and their

activities are thrown into the formula on which there was

substantially agreement here, this 50-50 formula, and would

this formula be applied to them as well or is there a case

for considering another formula. That is really the question

that is up for consideration.


Mr. O'Donnell.

MR.O'DONNELL: I'd be inclined to think that all

members, insofar as they are sponsors, should be treated

alike;because they've become sponsoring,members, I don't

think they'd want to be treated differently.

MR. BROCHES: Miss Steeg.

MISS STVEG: M answer would be the same as

Mr. O'Donnell's.

MR. BROCHES: Mr. Mirza.

MR. MIRZA: Mr. Chairman, I think my view would

be that in the case of the host countries, the position is

somewhat different, because the host countries do not have

the same stake as the other countries, because their con-

tribution or their investment one developing country in

another, would be very few; and their stake, as I said before

wouldn't be in the same sense as other countries. Therefore

to expect them to share 50-50 in all the cases would be a

bit, I think, too much contribution from them, and therefore

I am inclined to think a special formula should be devised,

and not the normal one -- it should be modified.

MR. BROCHES: Now, Mr. Mirza, am I to understand

th t you ry that they should pay lee than the share yen

by the formula on the ground that they would make very few

invetment s? Because if' tt Sso, their share would be


This is a self-adjusting mechanism.

MR. MIRZA: The entire risk borne by them is much

smaller, and therefore their share on that basis, percentage

basis, should also be not -- I mean, that's my view, ard

MR. BROCHES: Well, I don't see why it should. It

doesn't even follow. If they make very small volume f

investments, then their share in any loss somewhere else,

not involved in one of their investments, will also be very

smali. Now why should it be made smaller and why should

other countries share in their losses? It seems to me there

are two ways of andling it. One is to say, which seems to

be the reaction of a number of speakers, to the extent that

a developing country is a sponsoring country, 1here's not

reason not to let the formula apply because unless they are

important capital-export, their liabilities are very small

or the other is to say, another possibility would be to say no

If a contributing country wants to sponsor an investment, it

can do so for its own account and it will hre the whole

risk but the Corporation is to act as :aGent. I must say this

is a very unaisatry Idea but it has been advance,,d that

if the developing countries would like to stay out of this

loss-sharing formula, that in that case they might just use

the orporation as a technical agent to write thepoies

STRICTL' CONFIDENTIAL

but wold not be in any loss-sharing at all, that they would

take the full risk of any loss that occurred, but those

are two possible approaches. I amtrin to under-tan - the

reaso for -o. tird approach-..

MR. MIRZA: My approach Is really based, as I

said before, on this very imple argument that we do ot

expect developing untries t come in and .start this --

it will be something new for them -- it's very rare that

a developing country does have anything to export, but

when it does export, we should encourage it and this formla

of 50-50 if applied to them might discouraCe them, even thoug

I agree that the actual loss they would be called on to bear

would be a very small portion, but that smal1 portion may be

quite big from that country's point of view. So in order

not to discourage them I would say that in their case we

should modify the formula.

MR. BROCHE Maybe it's that mathematics is

so weak, but I can't see how it could ever be large from their

point of view.

MR. MIRZA: The point of view may be different on

thisF, becus I hn oially this would bedscuagn

to them to have this 50-50 formua..


Dr. LetnR

STR&C孔」 …

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- ei, e r,,., u e i : -u,,J ru r-, t e c,ý7 ici n v ii l i a r t i e --' ý2 e 1 t h e

1 c):ý e-,- whi e I i ul d ý-- e e u r Lyi i ý he p -a r t i c ii I a r ho 3 t e our. t r,,,r

is t 2crre2t'.,

MR VI R27 Ä e t muct rýa

thprf-, would tr.,311 Cther ways of micdý` t h e fo rm u a

A t this moment I I t,,i onIv su,-E.es urle. mod i f'i C,-1 -ý1 ý,)n hju 1 d

e- :1 t c c) u I J ',,ý e a n, - -e i cc Misýz

',e..'

MIJ,3 ,STEEG. r",he the quevtlon 1s, wiLli

o u r r e rtyl -s- u Mr. M my rv s e 3 r re-

,,1-in:',, voll- -ýd 7 c9 2ý t `-mo w-v-' t-'n r e r c t h e I I i s

sharing formula, yuu (j.Ldiill, want I-lo put too much 2tress

nar«'-11 co-ril-ry + vjoul-d rat`-er

ed i -w -P2e rm Mr.

w h, o m.", d e t s l- a - c::

MI B R 0 C 11 J 2 l i a 11 w a 'S Ni r in,

0 r-i ',n r rY

1, IR B R' C 11 E,` Le L r,,ie tu sý-a-e my ýýnderstnndin-

of the slýinLfiea-ncp r),' the rnrýximum amount to which ejuntricc

are willlm- uo lo s s - 2I

-1 er e u e e n c u e i n ý,:) u r r e r 2 1 s 2 u s s 01-i E 7:-1 a t,

in incurinG investments, bec- t`ie ,nax.'m,-tm w,111 he t,,-)tal

coý =.,es re

ý I - iý ý - ý- e- _sses L-ut as t-o cýlý c-un--rv, '1,1 ?


amount that they can be call-ed upon to p-y,artfo ov-

runs in of de.ault, would be the aggregate of itvestment

sponsored by it. At least, that is .he intention.

Mr. Mlpae

MR. MALAPLATE: Mr. Chairman, just a word of

clari-fic-ion. If I understand well, we are now examining

the case of a host country that would be permitted to chare

in the losses, as far as they are creditors themselve-;

is that true?

MR. BROCHES: Well, I think It would be easier

to state it in a different way, and not to use the word

ghost country." We first discussed whether host countries,

which are countries in which investments are made that are

guaranteed, should be required or permitted to share in the

bsses suffered in their own country or in other host countries

and as to that the consensus was no requirement -- there were

some dissents, but I would say the consensus was no requiremen

and some feeling if particular arrangements were made, we shoul

be flexible in that regard.

At the moment we're deaiing with another queti on,

and that Ais whetohr ountries which are developing countries

and might be expected to be host countries, are in fact not

host countries, but sponsoring countrie s; and to the extent

that they are sponsoring countries, whether they should be


treated as any other sponsoring country, that is for loss-

sa ring.

MR. MALAPLATE: I see we agree on the point. I

expressed it differently but I thik that was my view.

MR. IEuc:Es: I see.

MR. MALAPLATE: Because as you remember, I wa-

i n favor, or my government was in favor of requiring the

host country to participate in the loss-shartng, and in that

caeoI course it would not be:ossiblec to have the sm

formula because the basis of the formula is not the same.

The host couunt ries don't have the amount ofinetnt

outside of their country, so the formula couldn't be applied, ut

in that particular case of c nteswhic-ae,evlo-n

countries and which would participate in the scheme, in the

055shrin.g, I suppose thyshud be treated practically

as any other country. I don't see any reason for making a

difference,, and I don't see th.at, this could haveu an eff"et

on the finances of such countries because the amount of the

investment could be very low anyway in proportion of the

total, and our loss-sharing formula provides that 50 percent

of the total investment outside of the country would be the

basis for the first half of the losses, and the particular

investment or the particular countries in which losses would

occur would be the second b sis for the shring of another --

STR&CT� 기

STR&C孔―… ―rh-6--e(―・d-J---―・

STRICTL) CONFIDENTIAL 695

the Board but in a minority; ter - .,et-

ing only contributi,ng -mf-:ýýrýprs, there should b,ý w

ind a r17, whý en iý, ~tane a s-nn3 o rir g,

anj c or, t r i ý- t in, mt - c r woo I (i have tc, je th_ý_,-ý thr ---n

S

MR.

Mr. Mi-

bm . y, , ý ý-' - ý,, : mr. Chaýirma--i, n-, dif-4>iý,ul.ty is with.

pkragrapri 42 of th>_ report whic-h

"To achieve a 111-ýJ-_'_ýý- cf risks,

the -ha-- -irst Df

any ý1r] .1'y be shared all

members hac, ved one or mo~~

investments for gucr-ntee, rio rnatter where

had been

tIs this rid that, in

undue burde,ý 'ew host countries who as u-,-! >. i

countrie, cne ir two investments -_'11

lit, i tt nt of this I inve,

is ver,ý stake is

_iuut r- in the

-ýe c) deveL,,_-. and

you cou1( or.

will clear my i J-t.


MR. BROCHES: I would like to ask Mrs. Bokey to

shed light on he two sentences, ecause I thonk de second

sentence of pararaph 42 probaly has the answer.

MRS. BOSKEY: Well, the se sern, Mr. Chair-

man, woula deal with the proportion tiz-i each merber would

bear of the total, and i a developing country's activities

in relation t the it was small, its proportion o the

total would be mall. But Mr. Mir:a's poirt I ihink is th t

if this cheme were extremely active, and that the agreate

oount f jarantees had been very large, then a small

proporti6n of a very large amount could in itselif be rather

large, and that Is i s worryi him.

MR. MIRZA: That is te point.

MR. BROCHES: Well, then the solutlon would be

that for developing countries, developing countries wuldi

only share in losses on investments It had itself sp sored

and would not share in the losses f investments sponsored by

others, which would make for a Eomewhat Ineqa table r mperfet

risk-sharing.

MRS. BOSKEY: Well, could I add one thin which I

nhirk goe a to a point you made, Mr. Charman. It is

still true, Mr. Mirza, that the absolute amount, the mximum

contingent liability of any one developing country which had


sponsored investments could never be, under this formula,

no matter how large the activities of the scheme were, could

never be a:ger t-lan the l m of the investments it had

sponsored itself, so in a sense, a developing country --

not in a sense -- developing country would never be in a

shall we say worse position, or its liability would never be

greater than if it had had a national scheme of its own and

had aumed itsel full re.ponsibility for these guarantees.

So by coming into the formula, each developing country like

each contributing country would have some possibilit

sharing the risk, of passing on some part of the loss to othe

participanits in the scheme, apossibility which it would not have

if it were operating on a national scheme.

I don't know whether that is completely reassurin,

but the point is that a developing country would never be

required to accept a arger amount of liability than it had

determined for itself in advance, as this formula would work

out.

MR. RdHS hrk o,M..Bky

Mr. Radford.

MR. ?ADFRD: Mr. ~ýan, I would also gree 't

it would be desirable not to have a different loss-sharing

f ormula, I think fram a broad standpoint first, andthat is

that I think we had a discussion earller about th difi

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n ncc-t -c-,1-i,,r:v ý7[).-nsnr, tr ý,i it o' :s -_ome

.e -,re are r.- tne -ý--)ortilonment --f, tý,)13

responsJi,bill*ty .'rom, ,z hDst rýpons-)r -,nto -ther -lioulders.

P- T J-ri t'-1 e e v e n o t o

loss of eývýeryt,,iing, tlwn tý-... ý'iost turned sponsur lias 1,0 CIke

tlie f-lulL 1, 1-- 3f bv -ýtr:

Ae i re ý,efore only m In -ric n-

c;ý11 tie ac,tu,11 (-_ýxperiprieed L('_)Sses that nave ti bc 'ocrne by

1-, s omie -ý,,ay b c d 1 1'1_ e, r-2,1 t . ard he re c t- -e

VICIre on -ý,ery trieky iround. I mc,-ln it just depends m wl-iat,

-e-i I`Irik I'e li- s s p ons r s-

ý)ne '.n a c-I-uný,ry triere ýýlre f'p,4 U

it 1-iappensz to out, to b6 a ,osýs, and lt h<ns ,,ccepted

c) c) ' i.'-ýa t i: tles- ` t,- Cr.'v nwn

in tfiat )ne e-,Åntr,,,r; it turn out ti be bad

+ better ol_~ -Ke exper' ý. e r a 1

-f, -,,;n e r e -'en'- sn,ýnsorin,- is better. J o I

tri L n Y, trils is n el s e nnd woUf.a

rieeýi care`lj- b,2 `3 r e yý)',.ý bc cure v w e r e

doin,,,-, a !',ý-%ror in dev_lsln,:ý rnjre currip and dliYerent

direet-*

i ý()t Ir this 'wýlieh wI-II Or11-y bo

ur) as experence gatlýlers. 1'ý! ZAS i ý'.ay my 7ýrlrrlirv

ý7CC `ne ý,t`T-ra-e i t


can be placed 1) not upon the shoulders of the ponsor.

Thank you, Mr. Chairman.

MI. BROCHES: Thank you, Mr. Radford.

No,I think in fact there are only two possibilities

the one is t)be fully in and the other is to be entirely

out, ir which casc the d.eloping country would avail itso f

of the services of the Corporation for the technicl m-an'e-

ment, but there would be no risk-sharing; it would in effect

use the ser.ices for a national system, it would use the

services of the mu tilateral institution to 'insure on a

national or uniltteral basis.

Mr. O'Donnell.

Mh. '~OT~L: I ~ustwanted to say that I think

Mr. Mirza's worry assumes losses on a catastrophic scale.

If losses are not to be widespread, then the developing

countries with ut a little investment under their sponsorshi

would, as has been pointed out, have only a small contingent

liability. To throw some figures about which are the product

of a little mental arime c :t wich I'm not terribly

good, if we assume a total investment under the guarantee

system of billion dollars, a particular host country

spo:;nsoring $1 million worth of inetetadif we assume a

loss of $10 million somewhere in the system, then $5 1lion

would fail to be borne under the 50-50 arrangement right

across the board, which woud mean that the host country with


a million dollars' worth of investment would take, as against

a total investment of a billion, would take onethousand

part of half of $10 million; it's a thousandth part of

$5 million which 1 think is about $5,000, so its share of the

loss in that case would be $5,00. H -owever, If the $10

million loss occurred in a country in which the only

investment gua rr.eed was a $10 million investmrent, and a

$1 million investment of the host country which turned

sponsor, then the other half, the other $5 million of the

loss would falt on the developing country in the proportion

of one to ten, one-tenth f that, so it would be up for

$500,000 on that half of the formula.

So really the bger risk is on the side of the 50

percent which has to be shared b he members that have

sponsored investments in the country where the loss occurs.

MR. B1"i0Hi: It appears that there is a consensus

ln lvor of treating developing countries which sponsor

investments with respc.t to thes Investmen on the oame

basi as contributing cout ries. II there are no c' :

from that on this first round, we'll try to take that into

account in coming forward h a tex.

MR. M IRZ My vew will be expressed?

MR. BROCHES: It will b ery clearly expressed.


Mr. Purtrakul.

MR. PUNGTRAKUL: Thank you, Mr. Chairman.

While we are on this subject, I'm afraid I cannot a

agre with t consensus that was expressed. Further-

more, I believe when we at it from the view of the

investment arantee:, the more we look at the loss-sharing

formula, it seems that it works to the disadvantage of

countries with~ small investmen. Any country with small

or very few invetments which come unde this guarantee

would hae the rish o havin to ai te los haring

much more thai a country with more guaraitees or arIer

u nri : r aer . It could be duc t the law

of a:era , proca 1 -- 1 0i 1,00 -- an

then you look at the formula that ll members have to share

-Ie first 53 perce )f al -- e ý Iow I I onr ith1 , .~

ust one investment guarantee, say $1 million as Mr. OIDonnell

mentioned, and th cuntry too particpae

all losses, in the first 50 percent of all losses everywhere,

it can be imagined that that ceiling of $1 million for that

particular country could be wipe ou ccording to the

formula, if I understand correctly. EaCh country would have

a celli:: wnh ev-er is the amount of investment i ra ees.

HeR. BROHES r, ýå-y es.


MR. PUNGTRAKUL: Say in this case il's $1 milLion.

Tha is the maximum cel a country would want to ha-

to shar the losses, and th 1 mlllion would b used to

participate in the first haIf of all losses, and -f a country

with one invetent uarntee in ery >. unt, a t

amount would be used up, most likey would be used up while

the countries with bi M er amounts and more investments which

come under the current sche, would have it avere out,

so my point is that somethin bothers me about thi- formula.

There is some meit n working it out between countries

with more percentage of guarantees and those with less.

MR. BROCHES: I think what you say is true to the

extent that if a country which has guarantee- outstandi

with respect to investments in one country, or a small number

of countries, is in a different position so far as distributior

of losses is concerned -- not amount, but distribution or

likelhood -- as another, with respect to the 50 percent.

It is like ping roulette and eilther putting all your

nillion dollars on a namber or spreading on ten numbers,

one-tenth each. It doesn't -tIet the total amount that you

can lose, ut it makes it more of a gamble. If the event

insured against happens in Country X, you may be out of the

game. On the other hand, if something lappens in any other

country, you're going to be in for a very, very small amount

STRICTL1 CONFIDENTIAL 7o4

because on that '0 percent you'll be zero.

M. MERCHANT: I don't nink any country, under any

circumstance, however catastrophic the hypothesis, I don't

think any country if ts investment or investments are not

in default, I don't think any country by virtue of the opera-

tion of the first 50 percent can lose more than 50 percent

of its total liability.

MR. BROCHES: 1 u see it can't be out.

MR. MERCHANT: This means that then it's the very

lato~ a 1,he lon -..nsred rnlY goe t default,

the country haigsosredl that last lon-Ill nave ini

reserve hal' of its total liability to put up and there will

have teen re'rveS from everybody else out of the deluge

tht receded, it sufi-ielen inrh grgt to make uD the

other half out of the common pool.

MR. ERCHNT: So you never can lose more than you

would if you nationaLly guaranteed your own, and you maly come

out a loaetr.

R RCHESd: Y!es. You'Ire qui te- rht. You can

never lose 100 percent. The maximum you can lose In any

one Rouddyie 5: percent.

NIRS. BOSKE~Y: And in adi tion,, you will have


responsibility for the other countries' losses, but the

other countres have responsibility toward your losses,

and the siuto"ou ptmhtbe cru "tI given tlime on

the a-s;mption your country is at the moment the only one

who hasn't had a loss at all, but every time it has contributd,

every time Aountry A contribt'es toward Country B's loss,

CouIntry B has a- correspondir,obiato to contribute

toward the losses in your country, so in the end it should

baance out and ome out to the effect that each country

is responsible for no more than its own losses.

M;. BRi CES: Yes.

MR. M4ERCHANT: It is true, though, that if out of

the thousands o loans guaranteed, there is just one which

avIds default,, the country, wh rsosored ta ilhv

lot alf of its orgnlundivde ggegt liability,

and to that extent, as long as this one last loan remains

, will have paid hal ' everybody else's losss and

yt hsntbefoedto call on the others for their

50 percent, for its default.

MR. BROCHES: Thats because o the pooling of

MR. MERCHANT: Mat's right.

MR. BROCHES: Mr. Oo nnel1.


MR. 0'DiNNELL: I want to say, Mr. Chairman, that

so far as the fially multilateral 50 percent share is concerned,

no country wt1 use up it limited liability any faster than

my other country, as a rate. The rate won't be any faster

if the proporition is 1 to a thousand for one country,

then whatever loss has to be borne right across the board,

it will still be asked to take only one-thousandth part,

so that it will just be usig up or it will be alled upon

at just the same rate as any other country. The rate can

be higher of course if it happens to be one of the countries

that sponsored investment ln the place where the loss occurrec.

MR. BROCHES: I think in the light of this dis-

cussion, it may be useful if we provide some more e:aorae

examples than there were in the OECD paper, and I would

expect these e amp to lead to one of two results: ther

they will clariy the problem or they will show that the

staff is wrong.

I wonder whether for purposes of ompleting or sub-

stantially completing the fIrst round, so that the staff

can start doing at least portions of the charter -- or

maybe it houl d be done in some other form -- but to give

concrete expression to some of the alternatives that were

discussed, we could not Uo to Section D, Financing of

Losse, on png 22. I think for all useful purposes that

STRICTLN CONFIDENTIAL

could be regarded, 1, thls section that needs to be take1

up in this first round, be ase while there is stil i

Section E, Entry into Force, I think that could be afly

postponed to t second round, but : course if :n o

the : memers of the Committee -feel di--erentlywei1

discuss it here, but that eems to be not terribly urgent,

and certainly on the staff side we don't need nny particular

gliane xcDtto find ou ,t soetime what thenubr

are, and it's easily enough drafted.

But :inancing : losses is a rather complicate

subject, ardA: several members of the Committee nave said,

it's really fne financing of the institution, not merely

finncing of losses. Now there are specific questions.

nis, hld the charter m-ake provision for advane

payment by contributing members. There is a subsidiary

nuestion wh._-etr t.- y _hould be uniform or differentiaed-.

Tesecond is , -should there be a, cei~1g~ravnepyet

or should the amount be left to the Direttors, with a

subsidiary question. And the third is whether the charter

should require refunding of avance payments if they are

no longer needed. I think that last question is really not

a very important one at this stage, and as to the first

question, should the charter make provision for advance

payments by contributing members, it has already been uggest d-


to that question, members should be free to say there shouldn

be an :ane paynecould have a corporate capital

which has been urged by Dr. Machado, Who's-t here today, and

which Ieer tle 1i your - trut .ons, Miss Steegso

think the best thing would be not to stick too closey to thesa

questions, bot for the members to address themselves to how

should the Corporation be financed; should there be a cpital

fund, If not, how dos -net funds for operation?

MRS. BOKEY: May I just ask a question about some-

thing Miss Steeg said, which I may have misunderstood, Mr.

Chairman. I thought the point was that what Miss Steeg

was referring to As an additional fund which would take care Df

claims.

MISS STEEG: No.

MRS. BOSKEY: It s a capital fund in o t ?

MISS STEEG: Yes.

MR. BROCHES: Mr. Gutierrez Cano.

MR. GUTIERREZ CANO: T hank you, Mr. Chairan.

I sorry I was tied up with smethin urgent in

my oñee so I couldn't follow the first part of the meeting,

but I have already understood that Miss Steeg rased a puoint

o wh: would be the financial side, the structure of the


inaal side o ti Corporation, but I also hear from you

that You prefer not to be preise now, but just to mentior

or to relate our advice t -h questions peclficaly hero --

MR. BROCHES: No, I intended to say nearly the

oppo e, sinhc some speakers nad raised questions

which were other than these, we might as well discuss al

f~r~li problemns at onice.

MR. GUTIERREZ CANO: In this case, if you permit

me, I am incliied a rin structure o arbl

to a corporation, private corporation, in the sense that it

would possibly be preera capital structure witå

disburnements or with disbursed capital in proportion

approra o the corporation. Corequent y, I

think the idea origialy submitted by Dr. Ma'hado could

be of IntereT to be discussed, and I per:r a ly think it

would be easier pos-ibly for a corporation in its future

operaton, to have a capital definition, a capital tructure

and on this capital structure have dis buraement which could

be increased by decision of the Board of Executive Directors,

with approval of course of the Council of Governors. Con-

sequently, I would a this time liit my stat-men To ti

particular feature f the tructure of capital o the

corporation, instead of etarc int the detals the

questions expressed here.

STRICTL CONFIDENTIAL 71L)

MR. b- -'-ES: Thank you.

Of course if one has capital, a corporation with

capita and ry member presuiablj would subsribe t some

extent to the capta, that would at the same time mean that

there would be loss- haring by developn countries. I

Miss Steeg.

MT STEE: No, if I :h u say something,

I wouldn't think thi would be necessary. If one sticks to

the idea that the ho countries, which _eers ) be the

gener a consensus here, should not participate in genralr

oss-shaing, so if the capital fund of the corporation were

to be raised by contrlbut',. countries o:`y on their quota

basis, that would mean on their upper-iit-of-liability

basis, certaLn procedures of ti~:- how thi shoud be paid

In, that would not necessarily mean that the host

nember countries would be out of the Corporation. It would

have of course the effect, at any rate 1n our opinion, on

the voting system.

R. -BROCHES: Yes.

MISS STEEG: But I mean just theoretieally It

ouldn't exclude the host cotries beir members o e

Corporation.

MR. I3ROCHiES: But they wouldn't be shreholders.

STRICTL) CONFIDENTIAL

MLk I ST,E,1,'7 ..: They wou-.,no be sjre_ d ~ that,'s

MR. BROCHES: I want to clarify that, bocause

I think that Dr. Machado had in mind they would be sharehold'e,

and to the extent they would be shareholders, one would

introduce I think necessarily an element of risk-sharing.

Mr. Thor.

MR. THOR: Mr. Chairman, regarding the question

in praraph 50, I agree with what you saii, I think we can

give more or less one answer to (a), (b) and (c), and what

I have to say is htI suppos thew premims w il besch

that they will, in the long run, make the scheme seif-financi

as is prudent- aAawyfo only fiacdcorporation., but A

having regard to the diffi ulties in assescing correctly in

the beginning the rk inv ced, the need -'ight ore r

some contributions from members, particularly in the first few

years of operati-on, before prmusand other income have

reached such a sufficient amount.

I eem, thogh, .ordin to the view of my

countries and :::yself not necessary to have any provision in

thle -h-rter fur, advance pamn.It Is assumed thatI- the

guarantee condition will fix a period of no less than six

months after occurrence of dmage or default before compensati

ispaabe,ain hace er, ol be plenty t-me

STRICTL) CONFIDENTIAL 712

for the Corporation to make calls on member countries to

cover the losc ascertained, according to the loss arn

f ormula.

Having all this in mind, my answer to t questions

in 50 is in the negative.

Mr. Chairman, I rully agree with what you said

regarding the question in 53, that we can hardly deal with

that at this sta;e, because we have to see what come: out

of our discussion, or out of our -- you may call it "nego-

tiations here in the C ittee of the Whole b'ore we can

decide on that, but I think I might take the pportunity

now to say that to me and to my countries, the suggestions

in the OECD proposal are too low -- five contributing arnd

two host countries seems to be tco low, and I'd te to add

already now that it seems to me seven or eight countries

of each category and an equal number of countries in each

category would be more apprepriate.

I thank you.

MR. BROCHES: Thank you, Mr. Thor.

Dr. Lieftinck.

DR. LIEFTINCK: Mr. Chairman, i think I already

indicated the position of the Netherlands authorities in this

respect. We are not in favor of an arrangement making for

advarcÃpa ~ents by contributing members under the headin g


"Financir of Losses." On the other hand, I think it should

be realized if such a Corporation be created, it should have

some income to cover administrative expenditures, and therefo e

I think this Corporation should have shareholders which joint y

put up a limited amount of money, $2 million -- one can't

assess or estimate what would be needed to cover administra-

SLive expenditures out of the income to be derived from the

Initial capital, but I would thin that capital betweenl

$3nil'7ion and$5mllo would do the job, and I would hpe

that a sufficient number of sponsoring members -- I me:n

ponsoring the Corporation -- as contributing members, would

be ready to take shares in an amount which will be sufficient

to yield the income in order to cover the administrative

expenditures. If this isn't done, then I think the

n possible source would be the World Bank would havt

pick up the check on the administrative expenditures, and I'm

not so much in favor of that. So I do think that the need

A establiTh a ma1 :share capital yielding a sufficient

amount of money to cover administrative expenses exists.

Once this "Ias been do ne, and the Corporation starts operating

it will have income out of operations as a result of the

premiums to be paid and other income which may be expected.

I don't inaw what o . sources o rcoan the aurs had

in mind in paragraph 47. I do understand (a) premium-i receiipt!


I donrt, understanduo wel- ih t sepcd to flowq from

(b) nd (c). But I would separate completely the operational

budget of income from teshare capital and expenditures

for operational purposes, and the financing of losses. I

think financin of losses snudbe put on.- mtalbai

as we have discussed before.

you.


Well, I think from what you sAid, Dr. Lieftinck,

and from what Mr. Thor said, it appears that there is i

need for the Corporation in the first place to meet its

administrative expenses, and then to be able to meet obliga-

tions arising out of losses, when a loss occurs.

Now there are two ways of doing it legally but

I don't think they affect the answers to be given to the

principal -uestion, how do you put the Corporation in a

position to meet a loss? hat I mean is that it is pcssible

to envisage that the Corporation is an agent, that the

Corporation is responsible for its own administrative expendi

tures, whic would be covered by hareholders or mermbers --

again one has avariety of forms; that the oblIgation to

meet Losses might either be on the Corporation or eight be

on the members, so that the Corporation itself would not be

liable, except,- as.n-get for thf. m.emblers.


Then thi question, how does one assure oneself

that the money will be there when needed, always assumng

the losses exceed accumulated premiums, which I think in

any system would be kept In some rm as a uran;ee :uxnd

or an encumbered fund in some way, and Mr. Thor suggested

that si months would be adequate oollt from merers.

Mr. Oanat isn't here, but Mr. -i!ana has demonstrated

t his Collease eon the staf that this i not an a isumption

snc hould be 2ad -- a nyn Iey btnu

all, because we have grent difficulty, for administrative

reasons, in gett4n amorit tac have bentnw o be due

for a long tinme, to et them un time.

he certainj,y impressed on Mr. Demuth and myself in convera-

tIn,tnat whtve c 1 om hs ltitutior as;m

he feel het Wor Ild u~1 Could not- bej cssociated w:Li it

s it dwhat h: c a-ls "integrity." And by " ntegri ty"

"intrity" can mean a great many things, Lot to hi mind

it means in this case, cash or readily available resource .

Now one solutio w is -e-,,i -ed her is d ~i

the other woild be an ironcid lega obligati . It wuld

ner t er well declared ne it would r a

rather careful scrutiny ofal the o gcos0 eres


to Tfy OI

There has been mention of non-negotiable demand

notes. Wel, that in itse is no answer. I thik the

orm is unimportant a long as- we're sure that wemca get

the money at some time, and oe possibility which has

also been mentioned Ithink by one or the other members

of the Committee, would be tI have deposit, i fund, not

quite advance payments but where the members or the risk-

saring ibers w uld deposit with th Crporati asset

in a readily tabktibe form, maybe .hort-ter eceritie --

e-y,z-l. brn >_--t-term : securities, b an, bonds --

whih wouild be pl dged to the Corporation. The contributing

countries would not part with ownership, but they'd be

pedged by them to the Corporation for the risk-sharing

commitments. This would combine a maximum of flextbility

and a minimum of imediate isa burden, i I understand

correctly, on the members concerned, becau2e it would be

part of their assets but they would be pedged to the Corpor

tion, and the participating member, could then decide

themselves at what point tey want to et legislative

authority to make payments in which case deposits wouid not

be nece:sary.

EtI Js' ane to meni ,ine r.'od ro

STRICTL CONFIDENTIAL717

had expected to be here for this partlcular subject, feels

very strøn:1y th at wnile he's quite neutral at this poiint

about the technique, that the Corporation ought to have in

sLght substantial funds to mPeet a loss, should ne occur,

especilly in the days when premiums are not yet n import,nt

asset of the Corporation.

Miss Steeg.

MISS TEEG: Thank you, Mr. Chairman.

I think we i a e(j peants now which we

ould sidiscuss. The lrst point which was raised by Dr.

Lieftinc, and i wý ie ea -rted, is the nøi:

of the administrative expenses. I must admit that our people

in Bonn ha.d somnewhat h-up,& or atany rate played with the

idea that the World Bank would perhaps be ready to make up

for these expe nes, but I do real ze that this is very

com.pliated, so if this is not the case, then there's cer-

ta lya need for fia n thi: Dartu ar item of expense,

and In this case I think there must be some way how this

can be done; if the receipts out of the premiums are

sufficient then there need not be any additiøna arrangement,

but so iong as this isnIt the case, then one must mak

provision how these expenses can be met.

As for the advance payments for losses, I assume


now that our ie : e fund should not be

pursued beciuse if that wouid be the case, then there

vouldn't be a need for any specifie advance payments for

indemnif io 'ins. We have no comment as yet. There might

be no necessity -or advance ayments, if I i td

Dr. 'I -,, ti.n<k, but on te otner Iie s youtuceUO

it, there might be really a necessity to du so.

I- would like now to turn to paragraph 50 (b)

where the question is raised whether if there are any

advance paymaents, there should be a ce4ing . I think

definitely this must be -o because the conditions of the

budgetary laws of the individual countries would ask for this

and if there isn't i ceiling the different member countries

would oit be abe receive the authorization from their

parliaments In order to meet this obligation. And I think

this would at the same time answer the question in paragraph

50 (d) where it is said, "Should the Corporation also be

authorized, in the event a loss 's anticipated, to supplement

the amount ialable in the Guarantee Fund by making calls

on memnbers in excessf the stpuated celIin. I think

when a ceiling; is fixed, then it would be somewhat inconsist et

to make an additlonal provision to exceed the ceiling, so

the ceiling which is going to be fixed could be rather

wide in orer o leave a certain leeway that the neces

for exceeding lause would never arise.

STRICTL1 CONFIDENTIAL 7

Mr. O'Donne1l.

MR. O'DuNNELL: i ie r following Mis eeg,

I said that I was inclined to favor the idea that this

Corporation should have capital structure based on subscrip-

tions which is the method familiar to members of the Bank

and to som other multilateral institutione. What hsbeen

said since has Increased rather than diminished what I might

call the angle of my inclination. I am leaning further

toward that idea. I doubt, though, whether the amount

of the subscription could also be the limit of the obligation

or the liability accepted by members. I wouldn't be quite

sure that you could combine the two. We've been thinking

of the amount o- n-r,stnents sponsored as being thelLt

I dn'tkno tht yu could cobie these two liIt. Berhap

you could, but it sessubject to doubt to mo.

MT. B"CIES: I think i1 could be done. I

wris 'wondering wnenLL M S teeg ,adehr statement -there

wcd tIll 11 l thiese idvL fr &ance pyetor

no ceiling for :an aic payment. Nobody presumab would ever

te asked for advance payment larger than the amount Of

guarantee commitments that it has been authorized by its

Lerlature to undertake, so iat is always again s,ting

thot esolvs Itslf tothe knd ufauthrization w.hich you

from your legislature, whether it is merely authorization,


whether it'Is an appropriation, because all these questions

are related, I think, to the timi of payments rather than

to obligation to mnake payments. -t east tai 13 what

they were intended as.

Mr. Radford.

MR. RADFORD: Mr. rna, Ie been listern

without too much compreheioon to some of the discussion

of forms, and I only have guidance on the form which OECD

discussed, se you will f`orgie me if I'm rather narrow in my

comment, exept Ihxt I woutid _- ýlad to be enAihtened

as to where, in the .at anslysis, the difference lies

between the arrr.grents which the OECD guarantee fund

envisages, and the arrangements familiar to othere df the

ordinary corporation and Capita subscription. If I read

the OECD plan aright, the guarantee fund would operate very

much like a corporation in the sense as i read it that it

will have a guarantee fund into which will be paid by manda

payments of premium, all other receipts, suoation and

so forth, and the advances that are called for. Now, how they

may be called tor, to what extent, with what pper and lower

limits I don't know, but once in the guarantee fund, as I

read the OECD schem, alt.o",. there are protitions for

paying them out to the contributors, those provisions are

overrldden by the o tion f the guarantee fund to meet

all obligations falling upon the Corporation, and only to th

STRICTL) CONFIDENTIAL721

extent that there remain unimpaired advances after moetl;

obligations within s ome tim scale, is the obligaton to

return the money operable, so to this extent I amrDt sure

where the distin tion is to be found in reality, but I am

a novc e and i don' want to enlarge thi discussion, but

I think the broad point here and oie which we would subscribe,

is that the Corporation has to be put in a position to dis-

charge its operational responsibilities. The administrative

expenses I am afraid we did not think about, frankly. It

may be that like Miss stee we hao a warm 'ee i:g omewhere

that the Bank might take up this one, but either way obviously

it must be taken care of, but it seems to me a subsidiary

point. Th a point is how does the Corporation meet its

major operatie:a responsibilities; i.e., its guarantee

obligation, and here the guarantee fund, with the provision,

however it may be circumscribed, for calli: f-rth money in

whatever form that me be expres sed, from its subscribing

members, up to the limit, I agree, overall of their total

guarantee obligation, seems to be necessary. It must be so

that the Corporation has the ablity to maintain its __retec

fund to the level needed. Therefore, coming to the question

and en the premise I have stated, we think the charter would

ha eigt b e uch pror a n dfer rentsath n te, and

it mhtbe both uniform and diterentiated, in the senseta


there might be some initial subscription w:ei.n is low enug

to be acceptabe on a uniform basis, whieh wold, if inade-

q t ibr.ng al subscriptions

onosome d.erentiated bi, whih Ippose would

have t be related proportionate to the ultimate guarantee

obligations --there d-oesn't seem to be any other bai r

differenltia advances.

Question (), I thik in line with what I've

said, there might be some figure i the charter but I fee

.t would have tbe combined wi the abity of the Bord

to errde it when a perati need was Lhown. In other

words, al members inin this would kiow that the chnrter

says you pay in $1 million and are able, if called pon, to

pay somethin, oer that in proportion to your ta

gu-jarntee oligation.

Paragraph (c), again T thtnk this I nherent that

tfe re irn:is l ubordinate e needs the uar e

fund for it's obligations, and I think (d) I ve real answered

I thirk the answer is yes.

rvtha-t thi, (ý t lydalwt h

br~~adetu w505,n e have ony st-e i o

01 the guara.tee fund -na t eXD envisaged, but I must

on refletIon I rtill think thåt tat guarantee fund provides

ti anwer w w'irt, wa~eve I i l _nd w±. .hatev.er

STRICTL' CONFIDENTIAL 3

peole think ni, prhap , a i it

does seem to meet the requirements a we see them.

MR. BROCHES: Thank yu, Mr. Radford.

I think in a sense you hve answered the roader

iscues, I mean in your view o them, because he more I read

this, these questions are just as valid under the concept

of a guarantee fund as under the concept of share capital,

uecause in the one case you talk aut the rate at whih you

pay in n your share capital, and in the other case you talk

abut the time at which you make payments whiich might' have

to be met at sometime out of the guarantee fund. But I

think that :al ly the problems remain the same.

Miss Steeg.

MISS STEEG: I are wihe the view in principle,

but IT wold :av that the ifference between the concept of the

giarantee fund of OECD and the capitalize scheme, as I might

call it, would be tat the urate hi, woud in the first

line nanced out of receiþts of premiums and aiunce

payment for 1osses would not be called upon until a certain

risk would larify and perhaps turn into a loss; whereas in

the capita` scheme, irrespective of any near or future

risk, the this i cpitl - Iun would be determined

first of all by the quota and the liability and then by a

o er a n, ot ie ay ccon m, ~seoon erllnraieas,


how much would be needed, in the initial stage.

Did I make myself clear, as to what I +nk the

difference might be

MR. RADFORD: Mr. Chairmani, I tklnk t arantee

fund is quite flexLble. How much is called up by way

cf advances might be fixed as t a small sum absolutely

but a1d be capabe of being overridden by the Board e

Directors in their judgmen . The Article on the thing says,

"The Board of Directors may, whenever it deems appropriate,

call upon contributing members to make advance payments

to the guarantee fund." I tke it that "deems appropriate"

would mean in the ight, you know, of the operational needs,

whatever they might be; se jidgment callin

up capital, calling up advances: would seem to be the same

ent, I would think.

MR. BROCHES: Yes, I think it might be different,

as' Miss Steeg said, but net necesrly.

Mr. Malaplate.

MR. MALAPLATE: Mr. Chairman, I think we have

two or three problems here to solve. The first Is to know

what ulnd expendtures are to be covered, and how we

cover them; and the one, what are the receipts wl i

cover them; and then the question ef say, the cash treasury.

The first problem, we'll have admnistri-ve


expenditures and then loss-sharing, and r the erg

we :ave then , I sppose, premiums and then the other

receipts of which Dr. Lieftinck spoke -- subrogation,

payments from member countries either under the forrn of

advances or capltal subscription.

My first reaction to the statement of Dr. Liet'tinek

saying administra-ive expenses and 1ss shar1n 1d be

separated, 1 a alte surprised because i rnougLt tne

premiums were intended to cover in a normal company both

kinds of expenditures, 1,4r'nistrative expenditures first,

and then loss sharing; but then T wonder If there isn't

a contradietion in having this scheme premliums which are

intended to cover part of the rizk and then los-sharin

formula with o,ymen r ot:ter countries. Id 1

hear some explanation about this. Whehwil - count'y have

to ay under the loss-sharing formula -- after the premiums

are exhu,ted, or before, or at th same time? How ca..

those be had together?

MR. BROCHES: Mrs. Boskey.

MRS. BOSKEY: Let me try, Mr. Chairman.

Mr. Mal plate, the idea of the OECD was that

when premlums were received, they would be deposited in the

guarantee fund. At the same time an entry would be made

on the K the Corp,rati on that in the event th.- premi_~:


nad been paid by a French na. , tat France would h-e

a credit of the amount of the premium, and this procedure

would be followed with respect to payments made, premium

paymnentS for each guarantee, the country which has sponsored

the -ranteed investment will be credited wi te aunt of

remiums recéived. W e ss occurs, the investor wi7l

be paid out of the u arantee fund without regard to whether

that fund had bee built up by whether or not,and it

oviously wouldn't be the case, his own country had

contributed the full amount of the guarantee fund. Losses would

be paid. Then the Corporation would look to its books and

would see that after applying the loss-sharing formula, woLlld

find that Country A had to hare a certain armount of the

loss; Country B,a certain aount; Country C, another arount.

If the amount of premiums credited on the Corporation's accoun s

to Country A equalled the amount that Country A would have

to assume, its share in this particular loss, Country A would

not be called upon for any additional contributinn. On the

other hand, if the aon -tanding to its credit were less

than the amount of its share in the loss, it would have to

put out an additional sum. Now perhaps this night have been

taken care of by the advance payments, because the Corporation

would have had the opportunity when it anticipated the loss

or even as Mr. 7a, rd sugest, assuming it might be very


cautious, it might ask everybody to make an advance payment,

and the advalce payment would also have been credited to the

account of the country that made it. So in one sense,

if I have stated this er1 y -- h hope I have -- the premium

fund would be used first with the advance payments with all

the fur,d.a tne Corpcrati r > pay a loss, and then there

would be question of bookkeeping to see whether additional

funds were needed främ the countries which participated in

parti:ular oss or not.

ME. BROCHES: ?he premiums would be used.

MRS. BOSKEY: But it would not be a question of

simply going on and using preilum funds and never going back

to the members for additional contributions until you had

actually exhausted the fund.

MR. MALAPLATE: The consequence of this is that the

premiums used are not really premiums, but advance payments.

MRS. BOSKEY: Well, except that the premiums are

paid by the investors and the advance payments are paid by

governmerts, so it is rather dfferent. You get the -redit

o the premiums paid by your investors.

MR. MALAPLATE: Yes.

MRS. BOSKEY: It is rather different.

MR. MALA TE: That's a prmium frori the point

o~ view of the ini.ators and ada payment from the point


view of the governments.

MR. BROCHES: Or it maRs unnecessary the advance

MR. MALAPLATE: i see. On the particular quet L-ns

sked in the paper, I think on the first point that no

would be either too low or too high, and it would be ver

dlfficult to find the right leve for such a garantee fund,

and it would have cither too much money and im: lize part

of the capital of the countries concerned, or to low a level

and then the question would coe back and it would be necess

to make calls on the interested countries. So I think no

real g:ara:t e fund should be created, hut of course

it would be necessary for the Corporation to have some

cash, and this )old come, in our opinon, not se much from

advance payments bu tfron the premium n, ubrogatlon, a

sald, and to from subscriptions to real capitl or th

Corporation. I don' undertand .h ,ECD has co :ered

such capital would not be help I 1 nk it d.

MR. BROCHES: ThankR yoU, sir.

May I insert here at tnis point what Mr. lauhfer -

this was passed to me by Mr. van Campenhoit, who had to leave,

and he and Mr. H hr had received comments by the Austrian

G-ernment, which le wanted summ1ried, at east, so that they


coul go into the record.

Paragraph 0 (a), the rustrir t err1e not

think it necessary tmake provision in the charter for

advnce paymerts becaus itasumes that ri k-sharing

members wi promptly pay up, should a loss occur.

Then as. a secon positioni, i; it were necessry

to make such provisioni for advance payments, then. th e fustrian

Government feel. that the amount should be dlfferentia ed

ording to a country's los-sharing Commitment, and I

Should be left to the Board oi Directors t stipuLate the

amo.t of the advance payment, but the charter would make

it elear that the return of unused advance payment would be

proper.

The uta Go rne -. t te ti be o--t very

muhi faor of a provisin tht he Corporation ol be

authorized to on members in exceso ceiling tipulate,

and finally, although g g beyond ti. paragraph 50, the

Austrian overnent has doubte wý ter thi whol here

should start operatingF thi ere are only five contributing

members and two host countries, a sentiment similar to the

one expressed by Mr. Thor. So this will go into the record

of this meeting.

Mr. Reid.


MiR. E: Mr. sir:r:a, just to ta ery

narrowly on the question of advance payments, we would

agree with those who feel we should avoid the advance

payment. I think one of the considerations Is that we

shoul4 try to make it as easy as possible for governments to

join the scheme, and the ata provision of cash would or

e overnments make it more difficult from a udgetary and

legilative point of view to join, and we had thought the

need or advance payments could be avoided entirely by

non-interest-bearing notes. This worked in IDA, and we

just assumed, perhaps too uperficially, that it coud

work In this case.

MR. BROCHES: Weil, there are non-negotiable

notes and non-negotiable notes. i mean if they're really

good, then except from a cash point of view, they have the

sam -- in most countries -- they have the same legislative

requirement as paymert of ca` and -ourse thet would

fine; on the other hand, i- it is merely a -eneral authorizat

it would still be necessary to seek a specific budget Item --

then of course they are nro xoodt all for the purposes, if

a c ani ty occurred.

MR. REID: Would the IDA approach be acceptable?

MR. BROCES: The IDA approach has scheduled dates,

you ee. Yo~n navnce ät ,ich date pimnshv


made; and if one went to a capital structure rather than

a guarantee fund, and if one had all these dates in advance,

that might be something that worked, yes.

Dr. Lieftinck has a comment on thils.

DR. LIEFTINCK: Mr. Chairman, on hi liqidit

problem of the Corporatin er the fund to be created, a guarantee

fund or a fund for financing of losses, here the suggestion

is -- the OECD report suggested that"the Corporation should

be authorized to call upon members for payments whenever it

considers it approriale without regard to the probable

allocation of liability if a loss should actua iy occur

and possibly before a loss had occurred." Well, this

is exactly the coneeption, proposal which we do not think

would be acceptable to us. I could conceive of in each

case when a loss occurs, that the Corporation, bor1 of the

Corporation be authorized by the charter to eståblish a

provisonal aessment among the contributing members, based

on the most likely share each contributing member will

ultimately have to put up, to pay; a provisional assessment

based on the best information available after a loss has

oceurred to be paid within a month or whatever term is

I don't think the a:tual payment to the insured


investor has to be done before a month after the loss occurred.

One may assume that the members joining this Corporation

and ssuming the responsibilities under the charter would

indeed pay up within a month according to the provisional

assessment established by the Corporation.

I would think that would do the . If, however,

a particular country receivirlg a .prvisional assessment

would not pay up withi, the establihed period, the: the

problem arses, the problem we have discussed in a arger

context in connection wIth 1i"iities, which now here

we're discussing in connection with liquidity; and then it

may occur that the Corporation does not have sufficient

funds to pay up the insured investor.

For that reason there :as be a e for establishing

a cor+ ge:oY fund which would serve the first purpose,

bedause I would condider that some time after the operation

of the Corporation, the premium would be sufficient to cover

such contingency, but in this mann I think the whole problerr

would be reduced to some contingency provision limited to

the abnormal case of a contributing member not payin,

promptly the provisional assessment.

MR. BROCHES: Tn.k you, sir.

Mr. Merchant.

MR . MERCHANT: I'm ett inm mo re c onfus ed as te

STRICTL" CONFIDENTIAL 733

discussion goes on, Mr. Chairman. i am not even sure that I

will properly reflect my following remarks, in answer to

these questions, what my gulders would desire me to. My own

thought would be that there must be an initial amount made

available to the Corporation, in order to perit it to meet

its cperatirg expenses before premium income begins to flow

in. I snouýd thina that the charter should stipulate the

amount each member would pay for this purpose; that the

amnount should be nominal; and that all members zhuld pay thal

nominal amount. Thereafter, it seems o me, the Board of

Directors should be empowered to eal for advance payment

from contributing members on a basis which wouid be directly

related to the useage of the Corporation, the agency, by the

particular contributing member, and It would be our view

that the technica- form in which such supplementary advance

menits would be made, would most desirably be non-negotiable,

interest-bearing notes which certalnly in our case -- and

I recognize here that different constitutional -ystems might

require different treatment -- but in our case suca a nom-

interest bearing note would be identical with or directly

comparable with our stated periodic contribution to IDA,

where it can be in cash, in part or in whole, on the basis

of not ha:irs bee iepsited untt there was legislative

authorizatinn ad appropriation for t imount of the note.


That really answers, I think, in a sense, both

(d) and certaln aspects of (a) and (b).

On question (c), should the charter require

refndirg in 1 of advance payments not used r

pament of claims wa specific period, I should n

not. I should think the charter should be silent on this

point, other than possibly containing a quite obvious pro-

vision for e on w:ljh, If the Corporation were ever

to go out of business, it wou liquidate and stipulate te

proportionate return, proportionate disposition of

remaining net assets at the liquidation date.

MR. BROCHE>: Than yu, sir.

Dr. hn

DR. CHEN: Thank you, Mr. Chairman.

Like Mr. Mehant, o am confused as our dis-

cussions proceed. I am glad that Mr. Merchant has suggested

a very workable approach to this complex problem, and I would

like to go on record as fully agreeing with his propoa

on paragraph 50 (é), (b), (c), (d).

Now o p:arapo 1 I would go along with Mr.

Thor and Mr. 3; ah: ->r, I to think that the sugges-

.on madc .y OBCD iv t o low -- the number of participations

and Mr. Chairman, yo (ire author of .I.D. which requires

29 ratifications. I think th u hcu2d be more


I might say no less than~ ten conrtributing members.ai v

deve p1 acountries. The t agreement would come into

force.

M4R. B3ROCHES: Tekyu

Mr. Gutierrez Ce

MR. GJTIERREZ CANO: Thank you, Mr. Chairman.

When I spoke first I was thiking in terms

the guarantee un replaced by tte cial fund

w esscriptions y the memers, wich I cud imagin

erig thism est a m o ney, th sue subscription cud

also be undertaken by host countries, as well, since the

administrative expene o the Corpor,ti had to b me

out ots fund; but Ilso heard later on anI have to

r in this ense conusion previousl mentioned, th t

_Duld also be t case of havin this Corporation havi

n1ta eve whi,h would refleet commitment not merely

mmber countries, sopersonally 2ee that some case

wu i have some benit, lik e SeCrity of

difficuity with payments, with the contributions, as we

discussed en a previous occasion. Consequenty, I thought

Sculd in s aspects als meet some f the diffcu ties

STRICTL CONFIDENTIAL736

previous meLIoned, the p sibiity f envisgin some

kind of rger conception of the Corporation which,

Mr. O'Donnell said, might have a capital ceiling reflecting

the commirtments entered into by countries, and adoptin

consequenly, as I proposed before, initialy, adinistraive

expenses, als the same sceme or contributions to cope

with the need of advance payments for taking care f losses

Which could occur in th owration of the Croration.

MR . BROCHES: Yes.

I c t e clock. Several member I

C e :rientione they have engagements which require

their departure here at :30, which will be in about five

minutes. I hare Aso tried to think wha the next step

ought to be. We have more or ess gone throug the first

round, and casting back over al these meetings, there are

some sujects on which tere's been consenus, there have

been some subjectc on which there have been clearly divergent

opinions, there are some subjects whichl have been dealt wit

in thie 1irst round subje to a review on th e asis r

s ubjec ts fifi Mr' t be'en taken up, and finaly, few, and

tInk thi s if one in which the i sues are no yet enirely

elear. It seems to me that probably the next stae work

should differenttc mn hese iifferent subjects.

It fr nstaee betiwue on sm h


proper thing would be for tie stff to prepare some texts,

whieh would te then the second round, really; and on others

it 1gh t be more useful if also after talking to Mr. Woods,

who urnfortunately has missed a great deal of the second half

of this discussion, we may find that on some subjects we

ought continue or come back to the first round. r

ina ta e, on thi whole su ject of :i ance, which came at

the end and is affected, I think, by a lot of things we've

done before, but there was r tlime really to redesign tnis.

S I plan to report to Mr. Woods f course where we are

now, and then I would expect him to make a proposal for you

as to further procedure, which likely would be an attempt

to draft some portion and to rediscuss and try to fcus

on a limited number of is e in connection, for instance,

witi the whole financ scheme which is one he is per y

or understandable reason , very much interesed n.

Mr. Gutierrez Cano.

MR. GUIERREZ CAN: I recal that in e

previous matter, the Settlement of Investment Disputes, and

I think we could consider this previous round as the

one in which different delegates of various couitries, you

remember, spoke and in which you afterwards reflected

the di:fer-nt iesexpressed by differeritý- people, s~o this

STRICTL' CONFIDENTIAL

cU d be a very useful document for the next step, and having

in this issue and others, if there was not a clear consensas

or there were some important point expressed by somebody

which nad not me t the kind ot~c n us keep this aryay

in this paper --

MR. EROCES: Qn, certainly. Yes.

MR. GUTTE'NE: A in this case, these two

alternatives.

M. BROCHES: Yes.

Are there any sugesti on this point, or

that be agreeable to the Committee?

Mr. Haus-Solis.

MR. HAIJSSOLIS: Mr. Chairman, I want to have

some clarification. I think, if I understood Mr. Woods,

at the oinni l discussion he said when we had

finished thi work we're doing now, we would have a document,

a complete draft o the convention to discuss it 'urther

in a sort of committee like thi one. I would 1ik to knw

if I am correct in my understanding?

MR. BOCHES: That is what Mr. Woods said and that

is what I think he stil intends and everybody intends to do

What I was saying s that the moment may not yet have arrived

where the staff i s able to draw up such a doeument because

not all1sbecshd been equally clarified 11te~isesl

STRICTL CONFIDENTIAL73)

at this meeting, so that while large chunks might be prepared

on the basis mentioned by you, as to others, before a text

is prepared, it might be useful to have another discussion

without a text, a discussion of this kind.

MR. HAUS-SOLIS: As I understand you, you said

it might be possible that we discuss in the form of a document

parts of the draft of the convention and go on with the

further points that we have to discuss now. I would like

to know if we're going to discuss the whole draft of the

convention or only parts, because it is very important to have

the whole document in one piece.

MR. BROCHES: Oh, certainly. All I was saying is

that we may not be in a position to draft even for the

completely non-committal consideration of this Committee,

a full draft. Then there's a choice between not showing

anything until you are ready with the full document, or

to show initially and provisionally those things that are

ready and discuss the rest later. But in any event, there

will be a point at which a complete draft will be considered

still. on the informal basis by this group sitting as the

Committee of the Whole. Until that has happened, nothing will

go to yourself in your capacity as an Executive Director.

MR. HAUS-SOLIS: Thank you.

STRICTL" CONFIDENTIAL 740

MR. BROCHES: if that is agreeable, then this

meeting stands adjourned.

(Whereupon, at 12:30 P.M. the meeting was adjourned.)

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