RESTRICTED Report No.p- 184 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 PRELIMINARY REPORT OF THE PRESIDENT TO-THE Public Disclosure Authorized EXECUTIVE DIRECTORS ONA PROPOSED LOAN TO THE KINGDOM OF- DENMARK Public Disclosure Authorized December 30, 1958. PRELIMINARY REPORT OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROSED LOAN TO THE KINGDOM OF DENIARK 1. 1 submit the following preliminary report on a proposed loan of $20 million to the Kingdom of Denmark to finance part of a program for electric power expansion. PART I - HISTORICAL 2. In May of this year, the Danish Government requested the Bank to consider the possibility of a loan to the Kingdom of Denmark in order to help the country to meet part of the foreign exchange cost of a needed increase in investment. Electric power expansion and railroad dieseli- zation were mentioned as projects suitable for Bank financing. 3. In view of Denmark's high credit standing the Government had also been thinking about borrowing in the New York market and it was decided that a loan from the Bank would be made concurrently with a Government bond issue in New York. A group of underwriters, led by Messrs. Kuhn, Loeb and Co. and Smith, Barney and Co., agreed to undertake this issue. A mission from the Bank went to Denmark in September 1958 to examine the economy and the suggested projects and to discuss the general lines of the operation with the Government and with representatives of the under- writers. As a result of this investigation it was concluded that the pro- gram for electric power expansion would constitute a suitable basis for Bank lending up to an amount of $20 million, while a bond issue of $15 million to $20 million would be made concurrently by the Danish Government in the New York market to help Denmark's general development. 5. In 1947 the Bank made a 25-year reconstruction loan to Denmark of $4o,000,000. The status of the loan is as follows: No. Borrower Purpose Amount (equivalent in $ million) 3 DE Kingdom of Denmark Reconstruction 40.0 Amount sold 5.7 34.3 Amount repaid 4.2 Less repayments to third parties 3.3 0.9 Net amount held by Bank 33.4 -2- PART II - DESCRIPTION OF TIE PROPOSED FINANCING 6. As now envisaged, the proposed financing would have the following main characteristics: The Public Issue The Bank Loan Borrower The Kingdom of Denmark The Kingdom of Denmark Amount $15 to $20 million The equivalent in various currencies of $20 million. Purpose Acquisition and impor- Foreign exchange cost of tation of capital equip- electric power expansion. ment required for the de- velopment of the Danish economy. Interest Rate To be determined. To be determined. Maturity Fifteen years. Annual Twenty years with amorti- sinking fund payments be- zation in 33 semi-annual ginning probably after payments beginning August 1, the third year would be 1962 and ending on August 1, sufficient to retire the 1978. Each payment of prin- bonds by maturity. cipal and interest taken to- gether would be approximately equal. Commitment charge 3/4 of 1%. PART III - APPRAISAL OF TE PROPOSED BANK LOAN The Project 7. A report on the project entitled "Appraisal of Thermal Power Projects, Denmark" (TO198a) is attached (No.1). The project involves the increase in capacity of five thermal power plants through the installation of additional generating units totalling 437 MW and the construction of transmission lines. This expansion is needed to meet an expected increase in power demand con- servatively estimated at about 7 percent per year during the next four years. The project will be carried out by six public utility undertakings, serving the islands of Zealand and Bornholm and the North and East central part of Jutland, which operate about 65 percent of total generating capacity in Denmark. Five of these undertakings are owned, directly or indirectly, by local govern- ments and one is a corporation owned by a large number of consumers. Con- struction is scheduled to be completed by the end of July 1962. -3- 8. The estimated total cost of the project is about $59 million equivalent. The estimated power production cost, including the high depreciation allowances customarily used in Denmark, would range between 9 and 11 mills/kwh, which is reasonable. 9. The equivalent in Danish kroner of the amount of the loan from the Bank to the Kingdom of Denmark will be lent by the Danish Ministry of Finance to the power undertakings on terms and conditions which are to be satisfactory to the Bank. Procurement 10. The orders for most of the major items of equipment were placed during the first half of 1958. Orders were based on quotations received from local suppliers and Danish representatives of major European manufacturers. Because all the projects consist of extensions to existing facilities some regard had to be had to a reasonable amount of standardization to facilitate future maintenance and repair. A part of the equipment will be supplied by Danish manufacturers at competitive prices and in this case the proposed Bank loan would finance the foreign exchange cost of the imported materials required. Economic Situation and Need for the Loan 11. A report entitled "The Economy of Denmark" (E.A.91a)dated December 19, 1958 is attached (No.2). Danish economic development has been based on the production of high quality foodstuffs for export to neighboring countries. Due to the depressed condition of the market for livestock products, Denmark has been unable to benefit from the postwar expansion in world trade as much as other Western countries and its external position has remained vulnerable during the past years. The answer to these difficulties seems to lie in the develop- ment of industrial exports in which Denmark possesses such important advan- tages as skills, business organization and proximity of markets and supplies. Denmark has already been highly successful in selling industrial products, especially machinery, abroad, but the process will have to be carried con- siderably further if the economy is to be permanently strengthened and a satisfactory rate of growth resumed. Such a basic structural change in the Danish economy requires a high volume of industrial investment. The prospect of European economic unification and the expected rapid increase in the labor force add to the urgency of raising the level of investment. The Government has already taken steps to stimulate private industrial investment and is also planning some increase in needed public investment. These increases will have a considerable impact on the balance of payments which the present foreign ex- change reserves, even aftertbaierecent improvement, are too low to bear. The rate of saving is already high for a country of small business units and great equality of income distribution and no further increase is likely in the coming years. A certain amount of foreign borrowing would not only protect the re- serves from the strain of increased investment but would also, by making possible the carrying out of needed productive expenditures, permanently strengthen the external position. -4- Prospects of Fulfillment of Obligations 12. The undertakings which will carry out the project are well managed and in a sound financial position. They follow a conservative power rate policy which will allow then to provide from their retained earnings over two-thirds of the funds needed for the expansion of their facilities during the next few years. There is therefore reasonable assurance that they will be able to meet all their obligations to the Government, including their responsibilities for financing the works comprised in the project as well as for servicing their debt to the Government. 13. The annual service of the external public debt, which at present cor- responds to 2.5% of current foreign exchange receipts, is not large and will go down to 1% by 1962. The service of the contemplated borrowing from the New York market and the Bank would correspond to only between 0.1% and 0.2% of current foreign exchange earnings. Denmark's credit standing is very high and its past history proves that the authorities are able, if necessary, to take strong measures to maintain internal and external stability. Denmark should therefore be able to undertake new foreign borrowing in the amounts contemplated. PART IV - TIMING 14. Before filing a registration statement, the underwriters wish to be assured that in the absence of some major adverse development there is no reason to believe that the loan would not be approved by the Executive Directors in time for the public issue, and if you concur, I would give them this assurance. 15. In this event I propose to submit to you at a meeting before the public issue (which is at present planned for January 28, 1959) a supplement to this report setting forth the proposed final terms of the borrowing,attaching the loan documents and containing my recommendation regarding the loan. W. A. B. Iliff, Vice President for Eugene R. Black Washington D.C. President December 30, 1958.