It has accordingly not been able to support earlier proposals for organizations to supplement private investment. The council believes, however, that the proposal under consideration here would improve the climate for private investment in the underdeveloped areas and increase the availability of investment funds, thereby assisting materially in economic development. The Corporation will act to bring together prospective investors and those with investment opportunities. In addition, where there is insufficient private capital on reasonable terms it will participate with private investors in undertakings which promise to contribute to economic development. Its resources will be small relative to capital requirements but its participation should result in making available an amount of capital which exceeds its own contribution. We say this because it is intended that the Corporation will generally engage in financing only where new private capital is being invested. In no case will the Corporation participate where there is not some private equity capital. The Corporation's contribution will thus be only a supplement to the capital of domestic or foreign private investors. However, in most cases this supplement will be a crucial one because the funds of the International Finance Corporation are not to be used to compete with private capital. Its participation in a project would imply then that the managers of the Corporation consider that without its funds the enterprise either would not exist or would operate on a smaller scale. In addition to increasing the availability of capital funds through encouraging private investment, the Corporation should be able to influence governments to improve the climate for private foreign investment. The terms of the Corporation's charter would not permit it to finance government enterprises nor to undertake its own projects. Its resources could only be used in participation with private capital and when the management of the Corporation was satisfied that its action would encourage private investment. Therefore, the International Finance Corporation would operate only in those countries where the investment climate was reasonably good or where it could influence lawmakers or administrators to adopt more favorable regulations and attitudes. It is true that the propspect of securing the assistance of the Corporation in economic development would not be enough alone to change the attitudes of those intellectually and emotionally committed to State planning. However, its prestige and resources could be decisive as an additional influence on governments more favorably disposed toward private enterprise. Furthermore, the results of the activities of the International Finance Corporation in participation with private investors in some countries will show others by practical example what can be accomplished when a reasonably favorable climate exists. The council, then, is convinced that the proposed International Finance Corporation would encourage private investment by increasing directly the availability of capital funds and by influencing governments to improve investment climate. It therefore urges the adoption of legislation authorizing the United States to participate in the International Finance Corporation. Very truly yours, LLOYD K. NEIDLINGER, Hon. BRENT SPENCE, INVESTMENT BANKERS ASSOCIATION OF AMERICA, Chairman, House Committee on Banking and Currency, DEAR MR. SPENCE: AS chairman of the foreign investment committee of the Investment Bankers Association of America, I testified before the Senate Committee on Banking and Currency on June 7, 1955, in support of the proposal to form an International Finance Corporation. I had hoped to appear before your committee also, but understand that your hearings are scheduled for the latter part of next week, at which time I will be away. However, I am enclosing for the record a copy of my statement before the Senate committee. Sincerely yours, R. H. CRAFT. STATEMENT OF ROBERT H. CRAFT, CHAIRMAN, FOREIGN INVESTMENT COMMITTEE, INVESTMENT BANKERS ASSOCIATION OF AMERICA By way of identification, I am Robert H. Craft, executive vice president of American Securities Corporation, a corporation engaged in the general securities business at 25 Broad Street, New York 4, N. Y. I am also a vice president of the Investment Bankers Association of America and chairman of the association's foreign investment committee. The board of governors of the Investment Bankers Association has authorized me to appear today before this committee to testify in behalf of the foreign investment committee in support of the proposal to form International Finance Corporation as an affiliate of the International Bank for Reconstruction and Development, as proposed in Senate bill 1894. For the record, the IBA is a voluntary unincorporated trade association of investment bankers and security dealers who underwrite and deal in all types of securities, both foreign and domestic. It was organized in 1912 and has operated continuously since that time. As of June 1, 1955, our association had 807 members engaged in one phase or another of the securities business in the United States and Canada. Our 807 members had, in addition to their main offices, 1,222 registered branch offices. We thus have members with either main or branch offices in practically all parts of the country. My statement will be confined to several aspects of the proposal with particular emphasis on the effects we believe International Finance Corporation would have on private investment abroad. The primary interest of the members of our association in the foreign field is to contribute, through the stimulation of private enterprise, to the economic development of the less developed sections of the free world. One important prerequisite to this objective is the creation of conditions in which private capital can be encouraged to go abroad. We believe it is desirable also to substitute private capital for Government aid and capital to the extent possible. We recognize that there was no practical alternative in the immediate postwar years to the use of Government funds for rehabilitation. Relief of war-stricken areas has been largely completed. Some progress is being made in the transition from the giveaway program of economic aid to governments to the granting of loans for private industrial development. The next logical step is the substitution of private for Government capital. It may take some time to remove all of the obstacles and hazards to foreign investment that now exist. On the other hand, there appears gradually to be developing a more favorable atmosphere. There is, for example, an increasing consciousness on the part of many foreign countries of the need for creating a more favorable climate for the attraction of American capital. Some countries have done something about getting their internal houses in order by dealing effectively with fiscal problems, by taking steps to clear up past defaults, to revise laws so as to provide equal treatment for foreign capital, and by offering tax and other incentives. There are other countries in the process of adopting similar programs. Along with this progress, the general substantial worldwide economic recovery that has taken place during the past several years has contributed to an increasing interest on the part of American capital in seeking outlets abroad. Unfortunately, the cost of the exploratory and investigative work preliminary to undertaking private investment abroad and a lack of know-how to approach foreign investments intelligently have been substantial deterrents to the free flow of this capital. In our opinion, International Finance Corporation would provide a mechanism through which some of the existing roadblocks could be eliminated. Private capital that has been justifiably reluctant to undertake foreign investment alone unquestionably would be encouraged to participate in partnership with an organization such as International Finance Corporation that will have available the experience and facilities of a highly trained and competent staff that has established a record of accomplishment in the foreign field. There are other groups of private investors that would be attracted to purchase from International Finance Corporation investments that have become seasoned and investments in which a satisfactory earnings record had been established. This latter demand should assure satisfactory turnover of International Finance Corporation funds. Actually, there are several pools of capital that are to be devoted exclusively to foreign investment which are now in process of formation. Each of these has been motivated in part by the prospect of entering into joint ventures with International Finance Corporation. The record of the International Bank for Reconstruction and Development affords a criterion of what might be expected from International Finance Corporation under similar management. It is not insignificant that the World Bank recently has been successful in attracting an increasing amount of private institutional capital to participate in loans that have been made by the World Bank. We believe the same would be true of sophisticated private and corporate funds, and probably to a greater degree in the case of International Finance Corporation because its proposed fields of operations and the types of securities in which it will be permitted to invest are of a nature that would be of more interest to private investors, who for the most part seek opportunities for capital appreciation. The proposed articles of incorporation, in our judgment, contain proper safeguards. International Finance Corporation will not be permitted to make equity investments nor will it exercise control over ventures in which it holds an interest. Secondly, there is provision that International Finance Corporation will not be permitted to borrow from the World Bank. Thirdly, under the proposed Articles, the Corporation will have no advantage over private capital by reason of preferential treatment of the Corporation's positions in foreign investments. These, in our opinion, are desirable restrictive covenants. Although there has been some expression of opinion that the projected scale of operations of the International Finance Corporation would be too small to have a significant impact on the economies of underdeveloped countries, we look upon International Finance Corporation as a pump-priming operation that would pave the way for an accelerated flow of private capital, rather than the sole supplier of funds needed for development of private enterprise ventures. Of course it is contemplated that funds of the Corporation will be revolved as rapidly as possible through the sale of its holdings to private investors, and provision in addition is made for borrowing through sale of the Corporation's own securities. Many countries are anxious to attract American capital. International Finance Corporation, drawing upon the experience of the World Bank staff and personnel, can do much to guide member countries in the creation of conditions that are conducive to the attraction of this capital. As a matter of principle, we are opposed to competition by government in fields in which private capital can do the job. We believe that International Finance Corporation will neither hinder nor compete with private capital, but on the contrary will help create conditions in which the flow of private capital will be expanded at a much more satisfactory rate than would otherwise be the case. We believe that our times with the free world can best be strengthened through the promotion of the free movement of goods and capital. The concept of International Finance Corporation provides the vehicle for achieving one of these two basic objectives, and inevitably one will follow the other. In brief, it is our conviction that Senate bill 1894 is in the public interest, and we urge its adoption. NATIONAL FOREIGN TRADE COUNCIL, INC., New York, N. Y., July 11, 1955. Subject: Participation of the United States in the International Finance Corporation (H. R. 6228). Hon. BRENT SPENCE, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D. C. DEAR SIR: The National Foreign Trade Council is opposed to the suggested International Finance Corporation as not only wrong in principle but as lacking in any practical justification. The commendable objective of seeking to expand and promote private investment throughout the world does not, in our opinion, justify the utilization of public funds for an experiment in international venture-capital financing. The council would urge, therefore, that the United States neither accept membership nor subscribe in any way to the proposed Corporation. It would be appreciated if you will make this letter and the accompanying detailed statement part of the record of the hearings of the Committee on Banking and Currency on H. R. 6228 which provides for the participation of the United States in the International Finance Corporation. Very truly yours, JOHN QUIRK, Vice President. STATEMENT CONCERNING PARTICIPATION OF THE UNITED STATES IN THE INTERNATIONAL FINANCE CORPORATION The National Foreign Trade Council is a voluntary, nonprofit association, founded in 1914, and comprising in its nationwide membership manufacturers, merchants, exporters and importers, rail-, sea-, and air-transportation interests, bankers, insurance underwriters, and others engaged in foreign trade and investment activities. The council has a vital interest in international commercial and investment relations. It is obviously concerned that every effort be made to strengthen and improve these relations. Beyond this, however, the council believes that such measures as are taken should at all times be consistent with the national interest of the United States and with the American system of free, private, competitive enterprise. Guided by these principles, careful and studied consideration has been given to the ideas which underlie the proposed International Finance Cor oration, to the provisions of the articles of agreement establishing such an institution, and to the advisability of participation therein by the United States as contemplated in H. R. 6228. The National Foreign Trade Council is opposed to the suggested International Finance Corporation as not only wrong in principle but as lacking in any practical justification. Furthermore, several provisions in the draft charter are considered to be affirmatively dangerous. These include the power to invest in enterprises in which there is governmental or other public interest and the authority to give open-end guaranties to marketed securities. The council would urge, therefore, that the United States neither accept membership nor subscribe in any way to the proposed Corporation. Throughout the free world there is a clear, continuing, and common need for sound industrial development. The question, however, is not whether this is a desirable objective, but how it is to be achieved, by what means the varying potentialities may most effectively and appropriately be realized. Experience surely suggests that industrial development would best be left entirely to private enterprise employing private funds in productive investment, rather than entrusted in whole or part to governmental institutions using public funds. Business investment, in short, should be governed by the merits of the opportunities offered, not by political considerations or decisions. Private resources are available to provide risk capital, and are doing so where there are reasonable opportunities or prospects for success and where fair treatment is accorded the investment. Last year, in fact, the combined private investments of this type moving abroad from the United States and Europe were estimated to equal upward of $2 billion. Nevertheless, the council has repeatedly pointed out measures which might be and should be taken to encourage and stimulate still greater private investment. In particular, it has emphasized that the basic requirement is for environments propitious to local capital formation and to the unhampered movement of capital into areas and activities where the greatest contribution to economic growth may be made. In addition to private equity and credit resources, there are substantial supplemental sums available on a loan basis from existing national and international agencies. New financing of this type currently amounts to hundreds of millions of dollars annually. Thus, even apart from the more fundamental objections, it is by no means clear why there should be a need for public funds to finance business ventures around the world. In any event, the United States Government should not appropriate its funds for participation in such a project, the more especially where the intent is to provide risk capital. There is a real danger that the creation of yet another international financial institution would only serve to encourage those who hope and prefer to obtain public rather than private funds. There is a concomitant possibility that it may tend to obscure the need for improving the investment climate. The disadvantages of the IFC in delaying or reducing the flow of private funds could thereby far outweight any modest benefit it might achieve by its direct efforts. Since 1952 three successive national foreign trade conventions sponsored by the National Foreign Trade Council have taken particularly vigorous ex ception to the injection of a governmental or intergovernmental agency Inte the field of equity financing. Each has emphasized that participation by the United States in any scheme involving such intervention would stand in conflict with the fundamental concepts of our private-enterprise system. After careful study and detailed analysis of the draft charter or articles of agreement for the corporation and of the accompanying explanatory memorandum, it is quite apparent that these and other basic objections of the national foreign trade conventions to the proposal have not been met. Actually, no substantive change has been made, in spite of the fact that the Corporation is now specifically precluded from initially making investments in capital stock. It is obviously still intended that the IFC should provide venture or risk capital, which is the true function of equity financing. There has been no compromise in principle as to the purpose to provide funds which are functionally venture or entrepreneurial capital, and the concessions appear not to extend beyond the form of the initial investment. In practical terms, then, the IFC will be engaged in equity financing. These fundamental objections to the whole IFC approach constitute, in the opinion of the council, sufficient justification for a rejection of the IFC proposal by Congress. There are, however, other disturbing features, somewhat more technical in character, associated with the draft articles of agreement to which the United States is now being asked to subscribe. Inasmuch as the council's opposition is to basic concepts and only incidentally to the provisions of a particular document, no special attempt has been made to single out every merit or deficiency thereof or to suggest appropriate, corrective revisions. As long as the underlying idea and intent are still to provide venture capital, no charter, however phrased, can be completely satisfactory or acceptable to those who are opposed to the IFC as a matter of principle. Some of the specific provisions actually are, in effect, merely formal expressions and extensions of the original concepts to which exception already has been taken. They are faulty because the idea on which they are based is wrong. For example, it is contrary to our established beliefs regarding the proper relationships between government and business for a public institution to be endowed with the right and power to engage in risk financing of business ventures as contemplated under article III. While the ostensible and professed purpose of the Corporation is to assist or work with private investors, article III, section 1 specifically allows the Corporation to invest in an enterprise where there is a governmental or other public interest. Technically this provision may be designed to cover special circumstances, but at the same time it opens the way to the financing of governmentally directed and controlled business projects and can expose the Corporation to outside political pressures. Moreover, once having taken over an enterprise under article III, section 4 "for the protection of its interests," the Corporation apparently would be able to operate this enterprise under article VI, section 9 (a) immune from taxation and, therefore, in a specially privileged position vis-a-vis competitive private enterprise. Article III, section 3 (vi) states that "the Corporation shall seek to revolve its funds by selling its investments to private investors whenever it can appropriately do so on satisfactory terms." Even under the most favorable conditions it cannot be expected that all the financial ventures of the IFC would turn out equally well, and the reasonable course would be to anticipate at least some failures and some borderline cases. The Corporation, in complying with the intent expressed in article III, section 3 (vi), would be faced with situations where its capital funds could gradually be tied up in near-worthless or less salable securities while the more marketable investments were sold to private investors. As an alternative, the Corporation might attempt to retain its best income-producing securities in order to compensate for the losses incurred elsewhere. It would, therefore, seem rather doubtful whether without the periodic provision of additional capital the funds of the Corporation could be revolved sufficiently to meet the stated purposes on a worldwide basis. Among its other powers the Corporation would be authorized by article III, section 6 (i) to "borrow funds" and by section 6 (iii) to "guarantee securities in which it has invested in order to facilitate their sale." Both actions would enable the Corporation to extend its operations far beyond the amount of capital subscribed, and could expose the Corporation to contingent liabilities far in excess of its capital and assets. Initially, concern also was expressed over the wide powers granted the board of governors of the IFC to amend the articles of agreement under article VII |