RESTRICTE D

FILE COPY Report No. -'15 Public Disclosure Authorized

This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

REPORT AND RECOMMENDATIONS

OF THE PRESIDENT

TO THE EXECUTIVE DIRECTORS

Public Disclosure Authorized ON A PROPOSED LOAN TO IRAN

FOR THE DEZ MULTIPURPOSE PROJECT

February 11, 1960 Public Disclosure Authorized INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPYENT

REPORT AND RECOMMEN'4DATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO IRAN FOR THE DEZ MULTIPURPOSE PROJECT

1. I submit herewith the following report and recommendations on a proposed loan to Iran in an amount in various currencies equivalent to $42 million. The loan would be used to assist in the financing of the Dez Multipurpose Project wjhich is designed to provide powver and irrigation facilities and to reduce flood damage in the Khuzestan Province in south-western Iran.

PART I - HISTORICAL

2. The Government of Iran brought the Dez Multipurpose Project to the atten- tion of the Bank in September 1957. After appraising it, the Bank indicated that the project as submitted was not acceptable as a basis for a loan; it was unlikely that the Government, the landoimers, and the tenant-farmers would be able to put into effect, on schedule and on the scale proposed, the numer- ous organizational and administrative measures required to make the large irri- gation part of the project a success. After discussions wxith representatives of the Bank in Teheran in the summer of 1959, the Government revised the proj- ect so as to limit the irrigation portion of it to a pilot scheme and this is the basis for the proposed loan.

3. Negotiations on the proposed loan were concluded on February 5, 1960. The Government was represented by Messrs. Khodadad Farmanfarmaian, Hossein Kazemzadeh, M'Iajid Majidi and Yustafa Mozayeni, all of the Plan Organization.

4. This loan, if made, would be the Bankts third loan to Iran and the fourth in that country. Loans previously rmade were: -2-

Year No. Borrower Purpose Amount (equivalent in Millions US$)

1957 160-IR1N Iran General development 75.0 1959 227-IRN Iran Road construction 72.0 1959 240-IRN IMDBI Assist private industry Total 152.2 of which has been repaid 9.9 Total now outstanding 142.3 Amount sold 17.0 of which has been repaid 5.0 Net amount now held by the 125.3 Bank 2

5. As indicated in the attached chart (No. 1), the proposed loan would in- crease the Bank's commitments in Iran to $184 million, including participations of 'il2 million by commercial banks. The maximum net investment, including participatvions, under the previous and proposed loans in Iran would not exceed $115 million at any time during the life of these loans.

PART II - DESCRIPTIO3N OF THE PROPOSED LOAN

6. The main characteristics of the proposed loan are:

Borrower: Iran

Amount: $42 million

Amortization: By 42 semi-annual installments beginning August 1, 1964 and ending February 1, 1985.

Interest Rate: 61 per cent per annum, including 1 per cent commission.

Commitment Charge: 3/4 of 1 per cent

Closing Date: June 30, 196h.

7. The loan would be used to finance the foreign exchange cost after September 1, 1959 (the date when the Bank and the Government reached an under- standing regarding the revised project) of the construction of the Dez dam; the installation of power generating, transmission and distribution facilities; a pilot irrigation scheme of about 20,000 hectares; and interest during con- struction.

J Including `60e7 million not yet disbursed. 8. A government-owtned company has been established to carry out certain electric power works in the Kluzestan area but no leLislation has yet been enacted regarding the establishment of an authority to carry out the entire project. During negotiations an understanding has been reached with the Gover;.- ment on the principles to be included in the legislation and regulations establishing such an authority. The Government hopes that the necessary legis- lation would be enacted and regulations nromulgated by March 1960, and in any event expects these actions to take place not later than October 1960 Wqith- drawals beyond "A million (an amount considered sufficient to cover the foreigil exchange costs of the project to October 1960), except for the payment of interest and other charges on the proposed loan, have been conditioned on the Borrower taking the necessary action to establish the authority. The succe3s of the pilot irrigation scheme depends upon satisfactory arrangements having been made with the landowners to participate in the scheme. Therefore, the Government has agreed not to start any works on the pilot scheme, nor will disbursements (except for consultants' fees) be made from the irrigation por- tion of the proposed loan, until the Bank has received evidence that such arrangements have been made with the landowners.

9. The Government is devoting a substantial portion of its oil revenues to economic development and intends to continue to do so in the future. Since, as in the Bankts earlier loans to Iran, the proposed loan would be in the nature of borrowing against future oil revenues for thie purpose of maintaining the pace of development projects now under construction, the Government has aEreed to make arrangements to service the proposed loar out of its future oil income. The Iranian Government has negative pledge obligations under agreements with the Exoort-Import Bank covering credits (including ICA credits) aggregating '95 million. In connection therewith the Government of Iran has informed the Export-Import Bank that it is willing, as in the case of previous Bank loans to Iran, to make set-aside arrangements for the servicing of the Exoort-Import Bank credits similar to those to be made for the servicing of the proposed IBRD loan.

10. The revised Droject is based on the concept that the carnring out of the ori!linally proposed irrigation scheme of 110,000 hectares would be delayed until the pilot irrigation Part of the project demonstrated the feasibility of undertaking the remainder of the originally proposed irrigation scheme. The Government has agreed that it would not proceed with the original irrigation scheme, or any major part thereof, until the pilot irrigation part of the project has been in operation for at least three years.

11. In view of the recent failure of the Malpasset thin-arch dam in France, the Bank has decided to review the design of similar dams now under considera- tion or for which loans have recently been made. An international board of engineers has been selected for this purpose and expects to review the design of the Dez dam later this month. The loan will, therefore, not become effective unless the board of engineers shall have indicated to the Bank's satisfaction that the design of the dam is technically sound and feasible and that any in- crease in its cost due to possible changes in design will remain within such limits as will justify the carrying out of the project. The proposed loan is presented at this time because the Iranian Government wrishes to obtain parliamentary ratification of the Loan Agreement before their Parliament ad- journs about Mqarch 15, 1960. -4-

PART III - LEGAL INSTRT7,i TT-2, AND LEGAL AUTHORITY

12. A draft of the Loan Agreement between the Bank and Iran is attached (No.2). This agreement generally follows the forml of the Bank's loan agreements with approoriate changes to cover a multipurpose project in which the irrigation portion is of a pilot nature. Some of the special features of the agreement are:

(a) An undertaking from the Borrower to set u an authority to carry out and operate the project (Section 5.10); withdrawals in excess of $8 million (except the payment of interest and other charges during construction) are conditioned on the establishment of such authority (Section 2.02(b)(ii)).

(b) An undertaking by the Borrower to limit its irrigation program in the Dez area to the pilot irrigation part of the project until the pilot area has been under irrigation for at least three years (Section 5.11); withdravals for the pilot irrigation scheme (except for consultants' fees) have been conditioned on the Bank receiving evidence that the landowmers are prepared to participate in the project (Section 2.02(b)(i)).

(c) A debt consultation clause (Section 5.03).

(d) The Borrower agrees to make arrangements satisfactory to the Bank for the setting aside of oil royalties for the servicing of the proposed loan (Section 5.04). The revenues are paid in pounds sterling and the arrangements would include provision that the Borrower would take all necessary action to assure that the sums thus set aside would be converted into such currencies other than pounds sterling as might be required for service of the loan. The effectiveness of the loan is conditioned on the making of these arrangements (Section 7.01(a)). Notwithstanding these arrangements, the servicing of the proposed loan will be a general obligation of Iran (Section 2.08).

(e) The effectiveness of the loan is conditioned on the acceptability to the Bank of the results of the review of the design of the dam (Section 7.01(b)).

13. Parliamentary ratification is also required before the loan can become effective.

14. The report of the Committee provided for in Article III, Section (iii) of the Articles of Agreement of the Bank is attached (No. 3). - 5 -

PART IV - APPRAISAL OF THE PROPOSED LOAN

Description of the Project

15. The project is described in the attached "Apnraisal of the Dez Multi- purpose Project", TO 23hb, (No. 4). The project is located in Khuzestan Province in south-western Iran and will consist of a multipurpose dam; a hydroelectric power plant; electric transmission and distribution systems; and irrigation canals, works and services for a pilot irrigation project of about 20,000 hectares.

16. The dam would be a thin-arch concrete dam, approximately 190 meters high. The reservoir would have a capacity of approximately 3,350 million cubic meters.

17. The power facilities would include an underground power house in the right embanlment immediately below the darn, two generating units of 65 -NW., a 230 kv double circuit transmission line (with one circuit installed) from the dam site -to Ahw-az (approximately 166 im) to serve the Ahwaz, Abadan, and Khorramshar areas, secondary transmission lines to serve the Dezful, Andimeshk and Shush areas and the rehabilitation and expansion of the municipal distribution facilities.

18. The pilot irrigation part of the project includes a temporary diversion intake on the left bank of the Dez River belowi Dezful, a 9 kGn temoorary diversion canal, about 17 km. of main canals and 34 km. of branch canals, various public works such as roads, agricultural services and assistance to farmers. Substantial works would also have to be undertaken by the farmers.

19. The carrying ou` and operation of the project is to be entrusted initially to the Plan Organizaulon and subsequently to an authority to be set up specifically for this purpose. The authority would be an indeDendent agency of the Government and would be administered by a Deputy Prime Miinister. It would have broad powers to carry out and operate the project, including the establishment and collection of power rates and wfater charges.

20. The dam and power facilities are scheduled to be in operation by the end of 1962 and the pilot irrigation scheme in 1963-64.

Justification of the Project

21. After about five years of operation, the power portion of the project should begin to produce a satisfactory return on investment and provide a cash surplus sufficient to cover the debt service on the entire proposed loan.

22. The pilot irrigation part of the project is designed to determine on a smaller scale the feasibility of carrying out the 110,000 hectare irrigation scheme. The pilot part of the project will produce little or no direct return on the public investment; however, in any event the economy would benefit from a reduction in flood damage, the agricultural experiments and the utiliza- tion of the regulated flow of the river by farmers outside of the pilot area. -6-

Miethod of Procurement

23. Fiost of the existing contracts for the execution of the project have been; and all future contracts will be, awarded on the basis of international competition.

Economic Situation

24. The "Current Economic Position and Prospects of Iran", AS76b, is attached (No. 5). Iran's oil income has risen from $167 million in 1956/57 to $316 million in 1958/59. This rapid growth in Iran' s principal source of foreign exchange, combined with rising public and private investment activities and several years of excellent crops, resulted in an increase of real national product by about 5% a year during the last three years.

25. At the same time, the money supply has grown even faster and the cost of living has risen substantially. During the past two years, however, in con- trast to the preceding period, the accounts of the public sector have been roughly in balance and the growth in money supply was caused principally by a rapid expansion of bank credit to the private sector. This expansion was largely the result of the Government's decision to use the profits of the 1957 devaluation of the currency for additional lending to industry and a-riculture., In this situation, the Government has maintained a liberal import policy which was facilitated by the previous build-up of reserves. Reserves fell substan- tially during the 18 months preceding September 1959. Subsequently, however, reserves have been rising and at the end of January 1960 were equal to five months' imports.

26. The Government has become increasingly aware of the need to improve the administration of its economic and financial affairs. Legislation for the establishment of an independent central bank is under consideration by the Parliament; a comprehensive five-year financial olan for the public sector is being prepared. Of immediate importance, Bank Melli has recently begun to restrict the growth of bank credit, although the measures taken so far are not sufficient.

27. The long-ran economic outlook of Iran depends largely on the continued growth of petroleum exports. It is difficult to forecast the trend of these exports since the impact of the recent oil discoveries in North Africa on the market for Middle Eastern oil is as yet uncertain. Iran's oil ex;orts shoula continue to grow, thouglh at a slower rate than in recent years. Over the next five years, it appears prudent to assume an average annual increase of about 5%.

Prospects of Fulfillment of Obligations

28. The Borrower should be able to meet its obliFations under the Loan Agree- ment. The Project is sound and the cost estimates reasonable. Development and Resources Corporation (DRC) will act as principal consultants in the carrying out and initial operation of the Project. DRC will engage Electro- consult to supervise the construction of the dam and Nederlandsche - 7 -

Heidemaatschappij to design and supervise the pilot irrigation scheme and to operate it initially. Impresit has been awarded the contract to construct the dam.

29. The local currency requirements will be met either out of the Government'S own resources or from additional borrowings.

30. Iran's external indebtedness on November 30, 1959 wras $509 million. A substantial part of this is short-term credits incurred three to four years ago and debt service reaches a peak of 18% of estimated foreign exchange earnings in 1960-61; thereafter it drops rapidly. During the next two years the Plan Organization proposes to borrow abroad about $150 million at long-term. Other Government agencies are seeking suppliers credits abroad. Iran should be able to service its present indebtedness and the proposed long-term credits (includ- ing the Dez loan), but should exercise great caution in contracting additional short and medium-term credits.

PART V - CO01"PLIANCE WITH THE ARTICLES OF ACREEIIEIT

31. I am satisfied that the proposed loan complies with the requirements of the Articles of Agreement of the Bank.

PART VI - REC1,0iEIMDATIONS

32. I recommend that the Bank make a loan to Iran in an amount in various currencies equivalent to 4h2 million for a term of 25 years with interest (including commission) of 6* per cent per annum and on such terms and conditions as are specified in the form of the attached draft Loan Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (Mo. 6).

Eugene R. Black

Attachments

Wlashington, D.C.

February 11, 1960