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REPORTS DESK rrrr (^DU Report No. WH- 116b

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This report was prepared for use within the Bank. It may not be published nor mayit be quoted as representing the Bank's views. The Bank accepts no responsibilityfor the accuracy or completeness of the contents of the report.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

A REVIEW OF

CHILE'S TEN-YEAR NATIONAL DEVELOPMENT PROGRAM

Part I: Chapters 1-3

The General Report

April 9, 1962

Department of OperationsWestern Hemisphere

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MARCH 1962

Currency Equivalents:

1 escudo equals US$ 0.95 (official rate)*

1 US$ equals EO 1.05

1 escudo equals 1,000 Chilean pesos

The following abbreviations are used:

CAP: Compania de Acoro del Pacifico (the Chilean steel company)

CONFIN: Agricultural Extension Services(Consejo de Fomento e Investigaciones Agricolas)

CORFO: The Government's Development Corporation (Corporacion de Fomento)

CORVI: The Government's Housing Corporation (Corporacion de Vivienda)

COPERE: The cabinet level Committee for Economic Programming andReconstruction (Comite de Programacion Economica y deReconstruccion)

CORCHAC: The proposed Airport Authority(Corporacion Chilena de Aeropuertos y Aviacion Civil)

COVENSA: The central sales agency for nitrates and iodine(Corporacion de Ventas de Salitre y Yodo)

Empresa: The State Railways, officially known as Ferrocarriles del Estado,and frequently abbreviated FF.EE, but commonly referred to asthe Empresa.

EMPREMAR: Port Authority (Emp?esa Maritima)

ENAMI: State Mining Enterprise (Empresa Nacional de Mineria

ENAP: State Oil Monopoly (Empresa Nacional de Petroleo)

ENDESA: State Power Corporation (Empresa Nacional de Electricidad)

LAN: The Chilean National Airline (Linea Aero Nacional)

* Since the Bank's Mission an additional free rate has been introducedfor some transactions but all conversions in this report are at theabove official rate.

TE1 MISSION

John H. Adler Chief of Mission

IMurray Ross Chief Economist

Marius le Consquino de Bussy Adviser on Highways

Sir Ralf B. Emerson Adviser on Railways

Hans Meyer Transportation Economist

Bertram I. Moyses Adviser on Ports

George L. Reed Adviser on Housing and Urban Development

Shigeharu Takahashi Agricultural Economist

Bertil WJalstedt Industry and Power Economist

John Lindeman Editor

TABLE OF CONTENTS

INTRODUCTIONSUMMARY

PART ONE(Chapters 1-3)

CHAPTERS 1 THE TEN-YEAR PROGRAM2 THE PROGRAM OVER THE SHORT TERM3 SUMMARY OF SECTOR RECOMMENDATIONS

PART TWO(Chapters 4-8)

4 AGRICULTURE5 INDUSTRY6 MINING7 FUEL AND POWER8 BUILDING AND URBAN DEVELOPMENT

PART TWO(Chapters 9-14)

9 TRANSPORTATION POLICY10 RAILWAYS11 ROADS AND HIGHWAYS12 AIR TRANSPORT AND AIRPORTS13 PORTS14 SHIPPING

INTRODUCTION

This is the report of a mission which was organized at the re-quest of the Chilean Government by the International Bank for Recon-struction and Development to review the 10-year National DevelopmentProgram which the Development Corporation (Corporacion de Fomento --coRFo) had prepared, The Program had been completed shortly before theearthquakes of Flay 1960 In the summer of 1960 it was revised to takeaccount of reconstruction requirements. In October 1960 the Committeeof Economic Programming and Reconstruction, (Comite de ProgramacionEconomica y de Reconstruccion -- COPERE) was set up to carry out theprogram. The committee consisted of five members of the Cabinet --the Ministers of Economy, Development and Reconstruction, Finance, PublicWorks, Mining, and Agricultua' -- the Vice President of CORFO, theGeneral Manager of the Housing Corporation (Corporacion de Vivenda -CORVI) and the Director of the Budget.

The task of the mission, as agreed between the Bank and theChilean authorities in an exchange of letters, was to make:

a. "an evaluation of the over-all magnitude of the program,its financial implications and the measures and policiesproposed to achieve it;

bo "a determination of the extent to which the financialallocation to various sectors is backed up by projectsfor which preliminary economic justifications and costestimates have been prepared; and

c. "an assessment of what further work needs to be done tofirm up the projects and thereby the program."

The members of the mission prepared for their assignment inWashington in May and arrived in Santiago during the first days of June.All but one of the members of the mission spent most of June and July inChile, investigating and discussing with public officials and representa-tives of the private sector the various parts of the programo The rail-ways expert joined the mission for a shorter period. The members of themission travelled widely throughout Chile to familiarize themselves withthe conditions in the various parts of the count4y and to assess theirparticular needs. Before leaving Chile, the mission made an oral reporton its preliminary findings to COPERE.

- ii - INTRODUCTION

A preliminary draft of the report was discussed with Chileanofficials during a second visit to Santiago in November and December of1961, when additional information about the capital expenditure plans for1962, 1963, and 1964 was obtained. In the course of these discussions itbecame clear that there was general agreement between the Chilean authori-ties and the mission regarding the volume and composition of public-investment expenditures, but that the difficulties regarding the mobiliza-tion of financial resources to carry out the development program had notbeen resolved.

The mission wishes to record its appreciation for the help whichit received from all Government agencies and from numerous persons in allwalks of life and in all parts of the country. Without their assistanceit would not have been possible for the mission to complete its task inthe short time at its disposal. To name any person or group of persons asdeserving our special thanks would be an injustice to all the others whomwe met, singly or in groups, and who contributed with their knowledge andideas to our understanding of the Chilean economy and its problems, andat the same time made our work interesting and our stay in the countrymost rewarding.

1vbThe report of the mission is divided into b parts and 14

chapters. Part I summarizes the major findings and recommendations ofthe mission: Chapter 1 deals with the broad overall aspects of the pro-gram and Chapter 2 provides information on public-investment plans andprojects in the next three years. Chapter 3 is a summary of the sectorprograms. In Part% II (Chapters 4-8) and TM (Chapters 9-14), we presentour comments and recommendations on the sector programs.

Although the 10-year plan covers the private as well as thepublic sector, we have concerned ourselves primarily with the publicsector and those investment and related development activities in theprivate sector which will require financial support by the Governmentand Government agencies. This, of course, does not imply that we believethat the operations of the private sector are less important than thoseof the public sector or that they can be taken for granted. To the con-trary, we find ourselves in full agreement with the tenet of the programthat the private sector should have the fullest scope for expanding itsactivities and that one of the primary objectives of public policy shouldbe the encouragement (and where necessary the financial support) of pri-vate investment. But we believe that our comments and recommendations, tobe operationally significant, should be directed in the first instance atthe public authorities, who are in a position to take action on the meas-ures we recommend. Little would be gained if the plan, or our recommenda-tions, were to exhort the private sector to do some things and not to doothers; and it would make no sense to prescribe, whether explicitly or bythe only slightly more subtle device of detailed projections, what theprivate sector must do. The program, and our suggestions as well, imply,

- iii - INTRODUCTION

of course, a certain performance of the private sector; but instead ofconsidering this performance a test of the capabilities of the privatesector, we would consider it an indication of the correctness of our ownappraisal of the working of the Chilean economy and of the correctness ofpublic policy.

Although the program covers a 10-year period, and its objectivesand the measures to attain them must be appraised with that in mind, it isclear that the earlier years are of more immediate interest than the lateryears. The plans for carrying out the program are obviously more firm forthe first few years, while limitations of foresight make it impracticalto formulate plans with the same degree of firmness for the more distantfuture. Therefore the mission was from the outset concerned more with theearly phases of the program.

To make this report more useful to those who are not familiarwith the program (which has been published only in summary form) we presentin each chapter a brief account of the plans which we were asked toappraise.

Our comments, although stemming from a request for review andevaluation, have not been limited to 8nanalysis of the plan. Encouragedby the receptive response of the Chilean officials to our comments, wefound that it would be useful and welcomed by the Chilean authorities ifwe interpreted our assignment broadly and paid close attention to thoseorganizational measures and reforms which in our opinion are indispensableif the program is to be successfully completed. In that sense the recom-mendations of this report constitute the beginning of the second phase ofthe programming effort. During our discussions of the preliminary draftof the report we found that this interpretation of our intentions pre-vailed. The report thus suggests a line of action which we believe willenhance the prospects of the program being carried out successfully.WShile the final revision of this report was in progress (in January 1962),the foreign exchange system of Chile was modified. The rate of EO 1.05per dollar, which prevailed when the development program and this reportwere prepared, became no longer generally applicable. For certain currentand capital transactions, exchange was to be bought and sold at a freemarket in which the rate was to be allowed to fluctuate in accordancewith supply and demand.

SUViARY

1. Chile's Ten-Year Development Program has been assessed against thebackground of Chile's economic experience. Once among the most vigorous andrapidly developing economies in Latin America, Chile has suffered from pro-longed inflation and stagnation during the last two decades 9 which has ledto a loss of confidence in the capacity of the country to provide risingincomes for its people. There were many reasons for this turn of events.Until World War One, foreign private capital played an active role in thedevelopment of Chilean nitrates and other mineral resources. This broughtthe country into close commercial contact with the more industrialized nations,helped to promote its exports and acted as a gen9ral economic developmentcatalyst. Although with the advent of synthetic nitrates Chile's monopolyposition in nitrates was seriously undermined, the development and export ofcopper provided a strong substitute for nitrates and played essentially thesame vital role in furthering the country's economic growth.

2. The sharp drop in the demand for copper and the precipitous declinein the price of copper r Chile's export earnings in the enrly 1930'sto only 305 of their previous levels and inflicted a serious paralysis on theChilean economy - particularly on her incipient industries which largelydepended on imported raw materials and spare parts. This situation led to anattempt to diversify domestic industrial production by establishing a widevariety of Government-sponsored and Government-owned industries. To achievethis transition in an orderly manner required the substitution of domesticpublic savings for the previous inflow of foreign private capitale However,the social and economic pressures for growth through expansion of import-substitutes were not matched by the willingness and ability to produce and tosave. Increases in consumption were deranded by all sectors of the populationand in the absence of a substantial growth in production, these claims resultedin reduction in the proportion of Gross National Product devoted to investmentand in distortion of investment. Domestic savings declined in relation to thenational product and much of the industrial development that took placeoccurred at the expense of growing external indebtedness. Between 1950 and1958, prices increased fifteenfold and money supply, seventeenfold, while realincome per head virtually stagnated.

3. A new administration took office in late 1958, determined toachieve the financial stability which it considered prerequisite to growth.Despite the shock of the disastrous earthquakes and tidal wave of mid-1960,and the emergency expenditures they called forth, the Government succeeded(by drawing on reserves and with substantial external finance) in withstandinginflationary pressures until mid-1961; and per capita income, after a declinein the last two years of the 1950's, swung upward once again in 1961.

4. Stability was a necessary condition for the renewal of substantialgrowth, but not sufficient for it. For the country faced deep-rooted diffi-culties: a high level of consumption and relatively little saving; lack ofconfidence on the part of private investors; stagnation of agriculture; highlevel of Government subsidies to the private sector, including subsidies forgoods and services produced by State enterprises, etc. It was clear that a

renewal of growth required a systematic and rational effort over a long periodof time to remove institutional obstacles to growth, to stimulate private in-vestment and to carry out a public investment program. Accordingly, the newGovernment encouraged CORFO to proceed with the completion of a Ten-YearDevelopment Program that had long been in preparation. That program wasrevised after the 1960 earthquakes and completed and adopted by the Governmentin 1961.

The Program

5. The major objective of the 1961-70 program is to bring about anincrease in the gross domestic product of 5.5% per year, or 3% per capitaannually (above the 2'B% population growth). This compares with an increaseof hardly 1% per person per year in the 1950's. An accomplishment of thismagnitude will require a major organizational effort, and no less an effort in

planning and administration. But the principal action on which success de-

pends is an increase in domestic investment from less than 10% of domesticproduct, prevailing in the recent past, to over 18% in 1970 -- almost a

doubling within 10 years; and this, in turn, depends on saving 30% of the

projected increase in output. Even with this increased savings rate, private

consumption should grow at 2% per head if the output goals are realized. In

the mission's view, the objective of the program and the measures required to

carry it out - although they would require a sharp break with Chile's past -are not unreasonable in the light of standards generally applicable to

countries at Chile's income level.

6. With certain modifications (chiefly an increase in the emphasis on

agriculture, and on highways at the expense of railways, and a stepping up of

Government support to private enterprise in the earlier years) the missionconsiders the allocation of resources visualized in the program a suitableand commendable framework for concerted action to accelerate the growth ofthe Chilean economy. As modified by the mission, the 10-year program callsfor fixed investment of EO 9.5 billion at 1960 prices. Of this total,E° 4.3 billion would be financed by private business and personal savings,mostly for development of industry, agriculture and mining. An additionalEO 1.6 billion of private investment would be financed by transfers of publicfunds. Direct public investments, including those of the budget, autonomous

- 3 -

entities and the social security institutions, would cover the remainingEO 3.6 billion and would be largely concentrated in housing and publicbuildings, transportation, fuel and power, and agriculture. Together withthe public financing of private investment, the Government and its agencieswould thus be responsible for a little over half the entire investment pro-gram. These outlays would be crucial for the success of the program; and itis on them, and their feasibility, that the report is concentrated,

7. The public investment program presents Chile with a major challenge.For a realistic assessment of the Government's financial and administrativeresources reveals at once that serious obstacles confront the program andthat only an unreserved attack on them can bring forth the required increasein public savings and the external capital inflows necessary to supplementChile's own resources. The key to the success of the program lies in thecapacity of the Government to mobilize savings for investment. In the mission'sopinion, the Government should be able, by proper fiscal measures over the10-year period, to generate savings of EO 5 billion, sufficient to cover almost80% of its capital requirements (which include E° 695 million for amortizationof debt as wqell as EO 5,565 million of direct and indirect investment). How-ever, the capacity of the Government to save will grow only gradually; themission projects savings of only EO 104 billion in 1962-65. In these yearsthe Government cannot be expected to produce more than 60% of its capitalrequirements. The concentration of the fiscal problem in these first years

points up the urgency of the measures on which the program depends.

8. The immediacy of the fiscal problem emphasizes the uncertaintiesof the entire program. For what will happen in the later years necessarilydepends on performance in the earlier years. The longer the period covered

by projections of investment and of savings, the greater the uncertaintiesand the more difficult it is to make judgments about Chile's capacity tocarry out the program. In the circumstances, the mission focused itsattention on the prospects and problems of the years 1962-65.

9. The mission could not make a detailed examination of the possi-bilities of improving public sector finances. However, its projectionsassume that public income will rise steadily. If the percentage of thedomestic product (assumed to grow at an average 5.5% a year) which is taxedgrows slowly but steadily while the gross proceeds of State enterprises andthe contributions of the social security institutions remain a constantpercentage of the domestic product, the total public income would grow sub-stantially. In this event, the surplus available for public sector invest-ment m,,ould grow from EO 200 million in 1962 to EO 458 million in 1965, even

though the mission proposes expansion of current outlays for purposes closelyrelated to development (e.g., extension services, highway maintenance, train-ing, etc.). Such a growth of public savings is feasible; but it depends on

quick adoption of a host of important measures: improved tax collections;the early introduction of tax reforms which were planned late in 1961; thegradual reduction of operating subsidies to state enterprises, throughincreased efficiency, abandonment of uneconomic operations, increasedtariffs; reduction of wasteful current outlays; etc.

10. If the Government succeeds through such measures in generating in1962-65 the EO 1.4 billion of savings which its program calls for, and themission thinks possible, it will still be faced by a shortage of EO 95Omillion that will have to be met by capital imports. About E' 340 millionis now available to the Government in the form of credits and aid grantedsince 1960 but not yet drawn down. However, the remaining Eo 610 million ofnew external resources needed in the next four years is a large amount indeedin view of Chile's large existing external public debt (US$ 822 million) andrelatively uncertain export prospects. The mission considers that the burdenof Chile's external public debt service should be reduced gradually from thisyear's dangerously excessive 23% of expected foreign exchange earnings. Aborrowing program designed toreduce that burden to about 12% by the end of thedecade would leave Chile able to incur only about E° 367 million of new con-ventional debt in 1962-65. The remaining gap of EO 243 million is a measureof the additional fiscal effort Chile must make or of the soft loans it mustreceive, or of both -- if the program is to be realized. To the extent thatthis gap is not closed, the program will have to be spread over a longerperiod of time.

11. The magnitude and timing of Chilets problem in financing publicsector investment is summed up in the following tableg

-~~~~~~~

Revised Public Sector Projections(in E° millions at 1960 prices)

1961 1962-65 1961-70

1. Public sector investments 443 2,069 5,5652. Puhuic sector amortization requirements 91 277 695

3. Total public capital requirements 534 2,346 6,260

4. Estimated public savings 264 1,396 4.908

5. Capital imports required on publicaccount 270* 9t0 1,352

6. Available from existing loans and otheraid 340

7. Additional capital required 6io8. Possible conventional loans 367

9. Uncovered requirement 2 43

*Actually covered by drawdowns on external loans and grants,IMF resources, use of reserves and monetary expansion.

12. Execution of the program requires major administrative changesin Government: firstly, in the planning and coordination of public sectorinvestment; secondly, in priority determination and project selection;thirdly, in project formulation. The mission notes that, while some Govern-ment institutions (notably ENDESA and ENAP) are capable of preparing,appraising ^nd carrying out a flow of projects, others are not and that thecentral machinery for comparison, priority-rating and coordination is in-effective. The mission makes specific recormendations in these regardsrecommendations that require immediate implementation. Among them:

a. The planning sections of the investing ministriesand other operating agencies of Government needimmediate strengthening.

b. The Budget Office, an able organization, needsstrengthening; but, above all, the authority ofthe Budget Office over capital expenditures ofthe Government needs to be clearly established.

c. The work of programming must be regarded as acontinuing process. At the present time, thetask of supervising the execution of the program,stimulating more rapid and better project formu-lation, and making continuous revisions in thelight of changing circumstances, must be clearlyvested in CORFO. This will require strengtheningCORFO's planning offi9 e.

d. In the long run, the functions of planning andcoordination need to be concentrated and broughtinto closer relation to the Executive Power.This will involve a re-examination and rationalizationof the functions of 0ORFO, COPERE and the Budget Office.

13. Implicit in the mission's evaluation of the program has been theassumption that the Government will maintain the high degree of monetaryand price stability achieved in 1960 and part of 1961. A renewal of thecorrosive inflation of the 1950's would make impossible the execution ofthe public investment program and would eliminate an essential conditionfor the visualized expansion of private investment. Last year's increaseof wages and salaries, and the re-establishment of automatic links betweentnem and t.ie cost of living, have increased the pressure for still furtherincreases; those increases, togetner with Government subsidies and publicsector outlays in excess of non-inflationary sources of finance resultedin price rises in 1961 far in excess of those of 1960 -- a year in which theGovernment's plans and policies were thrown awry by the need for emergencyearthquake relief expenditures. Chilean officials express full awarenessof the danger of being drawn anew onto the treadlill of inflation, butescape from the danger will require continued vig-iance and a concertedattack on the sources of inflationary pressure.

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14. The mission has made no effort to judge in equivalent detailthe prospects for achieving the proposed level of private investment. Whilethe targets of public sector investment represent instructions to the opera-ting agencies of Government, those of the private sector are necessarilyprojections reasonably capable of achievement if the Government pursues thekind of general economic and fiscal policies required to stimulate privateinvestment. Financial stability and the cessation of capital flight isone prerequisite -- both to increased investment of domestic private capitaland to the foreign private investment which will be required in large amounts(chiefly in the field of mining). But stability will not be sufficient.Fiscal policies offering more substantial encouragement will be needed.Horeover, the mission strongly recommends a thorough-going survey of allaspects of the capital market -- financial institutions, banking laws,corporation laws, stock exchange, etc. -- with a view to facilitating theflow of financial resources from those who save to those who invest. Forwhile private investment will have to rely most heavily on self-generatedearnings, the goals will not be reached without increasing transfers ofpersonal savings and increasing tr)nsfers of savings from one business unitto others. Under these conditions, private domestic investment goals appearreasonable. So are those for private foreign capita] inflows, assuming --in addition to the foregoing conditions -- that faith in Chile's externalviability can be maintained.

15. The external accounts ori-inally projected in the prograrm havebeen revised. The result is a deficit substantially in excess of the amountoriginally forecast -- the upshot both of a necessary deflation of exportexpectations and of an increase in the foreign exchange requirements of theprogram. A shortage of US$ 1.2 billion (after debt service and retirementof foreign investment) appears in the four years 1962-65.

169 'Ihis is a large sum indeed, but to keep the shortage even tothis level will require vigorous pursuit of policies designed to encourageexports. The role of copper exports is crucial; attainment of the projectionsin this sector require that Chile capture a larger share of the world marketthan it has had in the recent past, and this in turn requires quick and sub-stantial encouragement of new investment. Projected increases in other ex-ports, set relatively high, can be realized only if those commodities canbe kept,or made competitive in world markets. Fiscal and monetary policiesmay well prove insufficient to align Chile's internal price level with externalprices; and in this event, timely revision of the value of the escudo wi.llprove essential to success of the development effort,

- 8 -

17. The mission has projected the following foreign exchange budget

for the program (in millions of U.S.$):

1961 1962-65 1961-70

1. Exports (+) 529 2,715 7,7652. Imports (-) 617 2,942 7,2833. Interest and dividends (-) 87 425 1,310

4. Current account deficit (-) -175 -652 -828

5. Capital outflowsa. Amortization (-) 98 370 933b. Retirement of direct investment (-) 42 177 538

6. Gross foreign exchange deficit -315 -1,199 -2,299

7. Possible financing (+)a. Direct invrestment 84 277 659b. Loans to private sector 36 118 283c. Loans to public sector 125 673 1,158

8. Remaining deficit 70 131 1999. Net capital inflow

a. Assuming 8 is covered 175 651 828b. Assuming 8 is not covered 105 520 629

18. Attention is called to several aspects of this budget, whichsuggests reasonable expectations for external financing. Firstly, the netcapital inflow of 1130-160 million per year in the next four years is well in

excess of the average net inflow of $30-40 million on public and private

capital account in the previous four years. Secondly, the capital inflowincludes direct private investment of about $70 million per year, sinilar to

the average of the past four years. This can be achieved only by an all-out

effort on the part of the Government to encourage such investment, both by

positive incentives and by maintenance of a climate of financial stability.

Thirdly, the major inflow is required on public account. The capacity of

Chile to attract the sums required, i.e., its creditworthiness, will depend on

the composition of the new debt, but above all on the nation's own savings

effort. Fourthly, failure of export proceeds to reach the forecast levelwould not only reduce the availability of imported capital goods, but also

reflect on the capacity of the country to obtain conventional loans.Fifthly, even if the estimates of external capital financing can berealized, there will remain a payments gap, small but significant. Itsexistence emphasizes again the need for vigorous export promotion, forcareful husbanding of foreign exchange resources and for monetary sta-bility.

19. The magnitude of the effort required to carry out the programand the uncertainty regarding Chile's capacity to do so do not vitiatethe fact that Chile must make the effort if it is to emerge from thestagnation that has recently characterized its economy. The programrelies heavily on capital imports, but it necessarily relies primarilyon domestic effort. That effort may fall short in various respects:

a. in the nation's ability to generate domesticsavings;

b. in the Government's administrative capacityto formulate, co-ordinate and carry out soundprojects;

c. in Chile's capacity to produce the exportproceeds necessary to maintain an adequatelevel of imports and to service additionalconventional debt; and

d. in the maintenance of financial stabilitynecessary to induce the private savings andinvestment, both foreign and domestic, whichthe program requires.

Failure in any of these respects would endanger the sustained inflow ofcapital necessary to give the Chilean economy the spur it needs and tomeet the requirements of the program. Should any of these occur, theGovernment will have no choice but to adjust the program downward -- byspreading it out over a longer period, thereby postponing the benefitsit provides.

20. On the other hand, effective action in all these respectswould put Chile well on the road to doubling its per capita income inless than a generation. It would revive confidence, which almost awhole generation has lacked, in the capacity of Chile to deal effec-tively with its economic problems. And it would lay a firm foundationfor the sustained growth to which Chile's human and physical resourcesentitle it.

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Performance and Prospects

21. The uncertainties respecting Chile 's capacity to meet the gap inits financial requirements, to obtain the capital inflows it needs, and toplan and carry out the projected investments, are enhanced rather thanrelieved by the record of public sector performance in 1961 and the prospectsfor public sector performance in 1962. As a result, the new program hasstarted off under a handicap.

22. Although production in 1961 raised Chile 's income, gross and percapita, by a percentage unprecedented in recent years, the inadequate dataavailable suggest that investment has lagged. Public investment increasedbut private investment appears not to have responded adequately. The econonyexperienced fiscal difficulties and balance of payments problems sufficientlyserious to raise the specter of the pre-stabilization years of the 1950's.The budget deficit increased in 1961 to a record level due in part to publicinvestment expenditures in excess of the amounts visualized in the 10-yearprogram just approved. This deficit was financed by Central Bank credit.At the same time, mounting social and political pressures forced a lifting ofthe bars against wage and sa9'ary increases. The demand thus generated,together with a noticeable ca. tal flight, was reflected in a rapid deter-ioration of the balance cf pwxr&s. which sustained a deficit of Ali37 millionin 1961, thrice that of l960 The Central Bank financed the great bulk of thisdeficit, mostly by foreign borrowtig, But $39 million was covered by drawingdown reserves, after a $17 million reduction of reserves in 1960. One resultwas the depletion of the Central Bank's working balances, the suspension ofall foreign exchange payments from December 27 to January 14 and the intro-duction of a multiple-exchange system.

23, The budgetary and balance of payments prospects for 1962 are notbright. The new foreign exchange regime offers temporary, but only temporaryrelief on the import side and discourages exports. Such relief as the systemmight offer this year could be undermined by continuing inflationary pressures.And these appear to be in prospect. The pressures for new wage and salaryincreases, encouraged by last year's lifting of the bars and by the reintro-duction of the link between wages and the cost of living, have increased.Important measures to reform the tax system and to increase governmentrevenue were expected at the turn of the year; they have not yet been taken.Once again, planned public investment exceeds the amounts visualized in theprogram, includes items not in the program and excludes items in it. TheGovernment faces a deficit of around EO 110 million, after taking into accountdrawdowns of existing foreign aid and credits, postponement of some budgetedinvestments, postponement to 1963 of some 1962 payments and the roll-over ofinternal debt (by means which might in themselves prove inflationary). Awareof the threat, the Government in February 1962 asked for emergency foreign aid.

- 12 -

24. The record of 1961 and the prospect for 1962 are bound to havean effect on confidence at home and abroad. Firstly, the Government'sdepartures from its own program in the first two years raise questions

concerning its willingness to accept the discipline it imposes and to make

the effort it requires. Secondly, domestic and foreign private investment,

which are crucial to the program, lagged last year, due partly at least to

the impact of the fiscal and payments deterioration on business confidence.

The new exchange system may aggravate the situation this year. Compensatory

efforts to step up public investments aggravate the already difficult problem

of public finance and threaten to substitute public works for the investment

in production of commodities which is essential to the planned growth of

output. Thirdly, the public credit will suffer from the effect of the

financial deterioration; conventional lending is bound to be affected.

Conclusion

25. Chile's development program, in magnitude and balance, is not

unreasonable and its targets could be achieved -- provided the necessary

measures are taken. The program's success is essential to overcome the

stagnation which Chile has experienced for so long. But success depends both

on substantial external capital inflows in the next few years to finance high

priority investments, and on a massive effort by the Chilean people and

Government. Unfortunately, recent trends threaten the prospects for the

program before it is fairly under way. The Chilean Government must now act

with determination to increase the flow of private investment, to increase

the national savings rate, to establish sound fiscal policies, to make

essential organizational reforms, and to ensure that public investments

follow closely the planned pattern of the development program.

TABLE OF CONTENTS

PART ONE

(CHAPTERS 1-3)

CHAPTERS PAGE(numbering is self-contained withineach chapter)

1, THE TEN-YEAR PROGRAM

General Summary of Findings . ............................... . 1The General Program .. ....................................... 2Financing the Program . . .................................... 11Organizational Requirements ................................. 25Balance of Payments Prospects ............................. 30Conclusion ............ .......... ...... . 39Appendix A: Note on Additional Borrowing Capacity ....... . 41Appendix 1-A: Summary of the National Development Program

and Mission Recommendations, 1961-70 44Appendix 1-B: The National Development Program, by

Sector and Source of Financing, 1961-70 ...... 50Appendix 1-C: Miission Recommendations by Sector and

Source of Financing, 1961-70 , ... .. *.. 51Appendix 1-D: Current Government Expenditures, 1955-59,

and Revised Projections, 1961-70 ....... .... .. 54Appendix 1-E: Public Sector Receipts as related to

Program Expenditures, 1961-70 ..* ........... .. 55Appendix 1-F: Reconciliation of Balance of Payments

Projections with Mission's ProgramRevisions, 1961-70 ......................... .. 57

2. THE PRCGRAM OVER THE SHORT TERM

Overall Financing in 1962-64 .............................. 1Plans for Specific Projects ... ................... * ..... 14Appendix Tables 2-1 through 2-19 and Covering Notes ......... 22

3. SUMMARY OF SECTOR RECOMMENDATIONS

Agriculture ............... O*.....0...... ....... 0............. 1Industry ......................... ............ .. * ........ 6Mining ................ .. ............................ 8Fuel and Power .............. .0 ....................... *.. . 12Building and Urban Development .............. . 1Transportation ..................... ...................... 18

CHAPrPER 1

THE TEN-YEAR PROGRAMI

I. GENERAL SUMEARY OF FINDINGS

1. We find ourselves in basic agreement with the overall objectiveof the Ten-Year Development Program which is to increase the level ofinvestment and output and to raise substantially the living standards ofthe population. However, we find that considerably larger public capitaloutlays will be required to reach these objectives than the program en-visaged.

2. The allocation of investments among the several sectors of theeconomy broadly correspond to the priority needs of the economy. Agri-culture is the only sector which appears to warrant still greater stressthan the program provides; the other major changes recommended in thedirection of investment are a downward revision of the railway programand an increased emphasis on the road program.

3. The original estimates of available financial resources appearto have been too optimistic; as a consequence the gap between estimatedfinancial requirements and resources available for public investment arelarger than indicated in the program. We recommend that the size of theprogram not be reduced but that every effort be made to increase theamount of public revenue available for development expenditures. Failureto do so promptly will necessitate a stretch-out in public investmentsand partial abandonment of the program goals. We therefore urge thatprompt and decisive measures of fiscal self-help be taken to solve thefinancial problem.

4. WTe also find that the program will require more external finan-cial assistance than the original program indicated because, in ouropinion, the balance of payments outlook is less promising than theChilean authorities had assumed. If the increases of copper investmentsor of copper exports envisaged by the program do not materialize promptly,balance of payments difficulties will seriously impede the carrying outof the program.

5. The effectiveness of the administrative arrangements for bring-ing public investments into line with the program, and for preparing andfor carrying out investment projects within the program, is of vitalimportance. The execution of the plan will lag unless the efficiency ofthe administrative machinery is strengthened.

- 2 - 1. THE PROGRAM

6. Also indispensable to the success of the program is the main-tenance of internal monetary stability and external viability which havebeen the goal of recent stabilization efforts. A return to the fiscaland monetary policies of the 1950's would jeopardize the prospects forgrowth of production and income.

II. THE GENERAL FROGRAM,

Objective

7. The major objective of the National Economic Development Programfor the decade 1961 to 1970 is an average annual increase of the grossdomestic product (GDP) of 5.5%. With an expected population growth onthe order of 2.5% per year, this would mean an increase in income perhead of 3% per year. These growth rates are in sharp contrast to theperformance of the Chilean economy over the last 10 years, when the grossdomestic product rose on the average 3.2% per year. The average annualrise in per capita growth rate called for by the program is not unreason-able by what might be called -- vaguely but meaningfully -- acceptedstandards applicable to economies with the level of real income per headthat prevails in Chile at present. The target growth rate is of thegeneral order of magnitude which was achieved in recent years by a numberof Latin American countries and surpassed by some. It implies that ifthis rate continues, the average income would double in 24 years.

Level and Composition of Investment

8. The most important measure proposed to achieve this rate ofgrowth, or, more precisely, to accelerate the pace of per capita incomegrowth from the 0.8% of recent years, is an increase in domestic invest-ment from less than 10% of GDP to over 18%. Capital inflows from abroadare projected to be greatest in the early years of the program and pro-portionately less towards the end of the 10-year period; and this impliesthat about 30% of the projected increase in output will have to be saved,against a marginal savings rate of 10% or less in recent years. The sav-ings objective was to be achieved by limiting the annual growth of privateconsumption to 2% per head, and by keeping current expenditures of Govern-ment constant on a per capita basis.

9. Although an increase in the rate of investment from 10% of GDPto more than 18% in the course of 10 years looks like, and undoubtedlyis, a formidable goal, we do not believe that it is beyond the strengthand ability of the Chilean economy. It would be an obvious over-simplifi-cation, and at the same time dangerously misleading, to make the targetrate of GDP growth of 5.5% dependent exclusively on the projected rate ofinvestment. We can conceive of the possibility of reaching a 5.5% growthrate with a lower level of investment; and conversely, an increase in invest-ment of the proposed proportions is by itself no assurance that the 5.5% rate


will be reached. It would be --rong, in concept and in policy, to relatethe hoped-for increase in output only, or even chiefly, to the amountof investment. There are not many places in the Chilean economy whereoutput is held back by capacity limitations. Fuller and more efficientuse of existing productive facilities -- through the application of bettertechniques, through better management, and better organization -- can goa long way toward increasing output. One wiay to make the increase inoutput more certain is to take such organizational and administrativemeasures as 7will promote a better utilization of existing resources aswell as of the new investment. Thus, our recommendations for institutionalchanges and for public expenditures other than capital outlays are designed,in part, to help assure that the desired growrth of output will be reached.

10. We would find it difficult, however, to expect such a very largeincrease in total output without a large increase in investment. Basedon the experience of Latin American countries which have had high rates ofgrowth, the implication of the Chilean program that it takes, on the average,three units of gross investment for each unit of additional annual outputappears reasonable. The composition of the investment program also doesnot suggest any reason why the ratio of gross investment to additional out-put should significantly deviate from the 3-to-1 rule of Latin Americanexperience. But irrespective of the pattern of investment, the investment/output ratio is never determined entirely by technological considerationsbut also by the efficiency of project preparation and nrogram coordination.Poor project preparation often means that more capital is used per unit ofoutput than necessary and that the increase in output will be lower; itcertainly will be slower. Thus, in order to achieve the stipulated 3-to-1ratio, or, to bring it down further, it is essential to use care andintelligence in the working up of projects and to eliminate whatever bottle-necks of inefficiency, laxity, and red tape may stand in the way of carryingout the program.

11. But the level of programmed investment was not determined on thebasis of the relationship of aggregate investment to increased output; itwas built up, at least for a fairly wide range of the public sector, onthe basis of specific projects and sector programs. The investmentestimates for a large part of the private sector are much vaguer; thisis inevitable in an economy with a large number of medium and smalldomestic enterprises and w!ith large foreign owned companies whose futureactions cannot be forecast with precision. Nevertheless, the investmentprojections for much of the public sector and some parts of the privatesector reflect reasonably firm plans of capital outlays, particularly forthe first years of the program.

12. The general composition of capital investment according to the plan,J2tvgettnr with the modifications the mission suggests, are shaon in Table 1-1.

1/ Unless otherwise noted, the comparison is always between the "original"program shown in the published summary and the mission's proposals, whichin some cases may also reflect changes in the Government's program whichwere made after the publication of the summary.


Table 1-1

Summary of Projected Gross Domestic Investment, 1961-70

Program Mission RecommendationEO millions % of fixed E° millions % of fixed

Sectors 1960 prices Investment 1960 prices Investment

Agriculture 938 9.8 1,235a/ 12.9Mining 688 7.2 726 7.5Manufacturing 2,022 21.2 1,878 19.5Power and Fuel 1,124 11.8 1 , 07 2 11.2Building Construction 2,413 25.3 2,661 27.7Urban Developmentand Communications 463 4.9 463 h.8

Transportation 1,387 14.6 1,427 1h.8

Total Sector Investment 9,037 94.8 9,462 98.4

Carry-over & Contingency 495 5.2 495 5.1

Deduct:Transfer of

Capital Assetsaa/ -341 -3.5

Total Fixed Investment 9,532 100.0% 9,616 100.0%

Inventories 616 616

Gross DomesticInvestment 10,149 10,232

a/ Includes land transfers of EO 100 million; excludes vehicles.b/ Includes land transfers of EO 248 million.

An overall comparison of the original composition and that envisaged bythe mission indicates that, with one major exception, we found the alloca-tion of investment expenditures by sector to be in line with our ownappraisal of the needs of the various sectors and that it would be diffi-cult indeed to justify a radical change in the composition of the program.The major difference which stands out in the comparison is the recommendedincrease in outlays for agriculture. As we shall explain in more detail,we recommend the increase partly because we have allowed approximatelyEO 100 million as the cost of the agrarian-reform program not coveredelsewhere in the sector allocations, and partly because we believe that

- 5 - 1. THE FROGRAM

agricultural production, for export as well as for the domestic market,can and should be exparnded even more than the Chilean authorities haveproposed. l/

13. The allocation for building construction, including housingexpenditures of EO 1.7 billion in the original program, as well as theconstruction of schools, hospitals, and commercial buildings, impressedus originally as large and out of proportion with the allocation for othersectors. But upon closer scrutiny, we found that the program aimed onlyat an improvement of housing without increasing per capita housing. W,,econcluded that in view of the great importance of improved housing con-ditions for social stability, a reduction in the allocation for housingwould not be appropriate.

lh. The Government development program distinguishes three categoriesof investment expenditures: capital outlays in the private sector financedby private business and personal savings (E° 4h6 billion for the 10-yearperiod as a whole); outlays in the private sector with financing providedby the public sector (E° 1.8 billion); and outlays in the public sector(E° 3.2 billion), which includes the national Government, administrativesubdivisions (though they account for only a small part of total expendi-tures), autonomous entities, and social security institutions. Publicinvestment thus accounts for one-third of the total, and investment inthe private sector for two-thirds. This division is in line with theexperience of recent years regarding capital investment, and implies thatin the formulation of the program the Government was able to resist thetemptation to expand the relative importance of the public sector. Thisdangerous temptation is always present when Government takes the lead inseeking to accelerate economic growth.

15. The authors of the 10-year plan fully realized, however, thatthe investment "schedules" for the private sector would remain mere pro-jections, or, at best, targets to be reached by means of general economicand fiscal policies, unless the Government stood ready to provide fundsto finance at least some of these investments. This brings out the stra-tegic role of investment in privately owned productive facilities andhousing financed by the public sector -- the category of "indirect"investment in Table 1-2, which consists mainly of expenditures on housing,and medium- and long-term credits to agriculture and industry.

1/ The recommended increase for agriculture is not entirely an increasein total investment; it includes an allowance for land purchases bythe Government which would be classified as transfer payments.


Table 1-2

Schedule of Gross Fixed Investment, 1961-70 Program(in EO millions, 1960 prices)

Public Sector Private Yearly

Year Direct Indirect Total Sector Total

1961 241 151 392 235 627

1962 256 144 400 284 684

1963 269 149 418 349 7661964 272 1h2 414 382 7961965 300 149 450 451 901

1966 313 166 479 475 9541967 348 189 537 514 1,0521968 386 205 592 566 1,1571969 391 219 610 635 1,2451970 422 237 658 692 1,350

1961-70 3,199 1,751 4,950 4,582 9,532

16a Impressed by the need of providing public funds to supportprivate investment, we go even further than the Government program in

proposing that additional public funds be made available for financingthe expansion and improvement of private productive facilities, parti-

cularly in agriculture. Thus, a comparison between the 10-year programand the mission's recommendations shows that our proposals would resultin public funds covering a larger share of total investment expenditures

than in the original program (Table 1-3). This increase would be

partly offset by an increase of receipts by the public sector of interestand amortization payments on loans to the private sector.


Table 1-3

Total Fixed Investment, b5y Source of Financing, 1961-70

P r o g r a m Ilission RecommendationsEu millions % of Fixed E= millions % of Fixed1960 prices Investment 1960 prices Investment

Financed by Public Sources

Agriculture 297 6.0 710 13.SMining 26 0.5 30 (-6Manufacturing 404 8.2 372 7.1Power and Fuel 851 17.2 847 16.Building Construction 1,825 36.8 2,014 38.7Urban Development and

Communications 347 7.0 347 607Transportation 954 19.3 886 17.0

Total Public 4,704 95.0 5 206 100l 0Transfer Payments -2 25.3Carry-Over and Contingency 246 5.0 282 T._Total Public

Fixed Investment b,950 100.0% 5206 100.0%

Financed by Private Sources

Agriculture 642 14.0 425 9.9Mining 662 14.5 696 16.1Manufacturing 1,618 35.3 1,506 35.oPower and Fuel 274 6.o 225 5.2Building Construction 588 12.8 647 15.oUrban Development and

Communications 116 2.5 116 2.7Transportation 433 9.5 542 12.6

Total Private 4,333 94.6 4 6Transfer Payments -59 -Carry-Over and Contingency 249 5.4 _13Total Private

Fixed Investment 4,582 100.0% 4,311 100.0%


Public Investment 117. The share of public funds in the total differs from sector tosector. It is shawn in the program as equivalent to three-fourths oftotal investment or more for the energy sector, for housing and otherconstruction, and for urban development and communications. It is some-what smaller for the transport sector (69%), less than a third for agri-culture, and down to 20% for industry. It is insignificait in the caseof mining.

18. Modifications suggested by the mission would lead to a sub-stantially larger share of public expenditures in total agriculturaloutlays, to provide more ample funds for agricultural credit and topurchase or prepare land in connection with the agrarian-reform program.Conversely, the public share of total transportation expenditures wasreduced because the mission recommended lower railway investments andallowed for purchases of commercial motor vehicles (trucks, buses andtaxis) including those needed for agriculture, by the private sector.

19. Total public-investment expenditure, as proposed in the program,amounts to EO 4.7 billion; it amounts to E° 5.2 billion in the mission'sproposal. These figures do not allow for contingencies and carry-overexpenditures of approximately 5% of sector allocations at the end of the10-year program. In the mission recommendations, a small amount (EO 270million) is included for the purchase of land by the public sector fromprivate owners. Because of the addition of land purchases the two figuresare not strictly comparable. Irrespective of the difference, however,both figures bring out the magnitude of the task of mobilizing resourcesto finance the program which faces the Government.

Time Schedule of the Program

20. Impressive and instructive as the 10-year projections may be,they are less important from an operational point of view than the annualfigures. This is particularly true for the public investment part of theprogram: in a system of orderly budgeting, it is the specific projects andtheir annual cost which are of immediate concern to the fiscal and monetaryauthorities.

21. The time shape of the program is also important for anotherreason. Although there are some indications the economy acceleratedin 1961, it has not gained the momentum which would inrdicate a growthrate of over 5`, as assumed in the program. Private investment hasprobably been smaller than expected, and the private sector is stillreluctant to increase productive capacity. While public capitalexpenditures will be an important stimulus to increased economicactivity, care must be taken to establish conditions conducive toincreased private investment. Moreover, the opportunities for investment

21 From here on, we use the term "public investment" as meaning publicfunds required to cover investments in the public sector ("direct invest-ment" in Table 1-2) and to finance a part of investments of the privatesector ("indirect investment")>


in the private sector are great; the need for an increase in public expendi-ture to finance both private investment and improved facilities in the publicsector are pressing. To have reasonable hope of achieving the target rateof growth, the amount invested annually should be increased above the pro-gram rate but at the same time investments must be maintained in line withthe planned pattern of the program. In fact it will be difficult to achieveeven the lower level of the programmed rate. Impeding factors will be:administrative shortcomings, lack of detailed studies and project plans,and slowness in increasing public savings. The mission recognizes theimportance of eliminating these impediments so that the higher rates ofinvestment may be achieved with the needed degree of efficiency. To givea needed impetus the mission recommendations provide for substantiallylarger public and private investment expenditures in the early years of theprogram. lle propose that in the next four years (1962-65) the Governmentand all entities in the public sector devote EO 2,080 million to the program,with expenditures starting at E° 500 million in 1962 and rising to E° 530million by 1965. These allocations exceed the proposals of the originalplan by approximately E° 100 million per year (Table 1-4).I/ The differ-ences between the mission's recommendations and the original program aremuch smaller for the second five-year period, amounting to only EO 21million per year.

Table 1-.

Schedule of Total Sector Investment, 1961-706/(in EO millions, 1960 prices)

Program Mission RecommendationsYear Public Private Total Public Private Total

1961 377 236 613 421 265 686

1962 405 292 697 500 364 8641963 429 321 750 511 4o8 919196h 429 357 786 540 401 9411965 466 385 853 530 435 965

1962-65 1,731 1,355 3,086 2,081 1,608 3,6891966-70 2,596 2,743 5,339 2,695 2,283 4,9781961-70 4,704 4,334 9,038 5,197 4,156 9,353

a/ Because of contingencies and carry-overs, this table differs some-what from Table 1-2.

Foreign Exchange Cost

22. In the preparation and presentation of the program, closeattention was paid to the direct foreign exchange cost of the plannedinvestment. This emphasis appears justified for at least two reasons.Since the volume of foreign exchange earnings is only partly amenableto Chilean Government policies, and depends also on developments beyondChilean control, the availability of foreign exchange is at least potentially

1 Table 1-4, and many other tables, contain figures for 1961. Themission recommendations for that year are of course not recommenda-tions. In some cases they are revisions of earlier expenditureestimates. In others the original figures have been retained.


a factor limiting the size of investment expenditures. Moreover, thedistinction between foreign and domestic cost is relevant if externalfinancing is sought, since for institutional and other reasons it iseasier to obtain such external financing for the direct foreign-exchangecost of investment than for domestic investment expenditures. Accordingto the original program, the foreign exchange cost of total investmentexpenditure amounts to the equivalent of $2.3 billion for the 10-yearperiod, rising from $180 million in 1962 to approximately $300 millionin 1970. The corresponding figure in the mission recommendations isS290 million for 1962 and roughly the same amount at the end of the 10-year period.

Table 1-5

Foreign Exchange Cost of Total Sector Investment, 1961-70(in millions of US$ equivalent)

Year Program Estimates Mission Estimates% of 7'o ol

Public Private Total Total Public Private Total Total

1961 70 92 162 26.4% 101 110 211 30.8%

1962 72 109 181 26.0 136 155 291 33.71963 78 118 196 26.1 123 1 6 2'1 33.31964 78 127 205 26.0 123 If 7 2c0 31.31965 91 130 221 25.9 101 15,5 266 28.

1962-65 319 484 803 26.0 h3 645 1,12 32.1

1966-70 424 892 1,316 24.6 447 795 1,2h_2 26.21961-70 813 1,468 2,281 25.2 1,031 1,550 2,5bi 29.0

1961-70 % oftotal expen-ditures 17.3% 33.9% ?0.8% 39.2%

23,, The foreign exchange cost is equivalent to about 25% of totalprogram expenditures and 28% of the outlays recommended by the mission.The increase is due to the agricultural investment program which themission recommends, particularly the recommended increase in imports ofagricultural machinery over and above program estimates ard tAo a largerforeigrk exchange component of the transport program.

- 11 - 1. THE PROGRA1M

24. Of more immediate concern than the foreign exchange cost oftotal investment is the foreign exchange component of public investmentexpenditures. The foreign exchange cost of the public investment programis rather small at 17% ($813 million) of the total cost according to theoriginal 10-year plan, and would be 21% ($1,031 million) if the modifica-tions which we recommend are adopted. The estimated foreign exchange con-tent of private investment is higher: 34% (1,468 million) according tothe program, and 39% ($1,550 million) according to mission estimates. Apart of this foreign exchange pertains to private investment from abroad,and thus does not constitute a claim on Chilean foreign exchange earnings.But because of the limited availability of domestic production of indus-trial equipment and machinery, the foreign exchange cost of investment indomestically owned industrial enterprises is bound to be high.

25. The foreign exchange cost of the public sector investment program,with the changes recommended by tlhe mission, is about $120 million lessthan the gross amount of foreign financing, through existing loans andcredits, and through new loans on conventional terms for the public sector,as suggested by the mission in the next section. During the next four years(1962-65), however, the foreign exchange cost is expected to amount toapproximately $480 million, while the amount of gross external financialassistance on hand and under request, together with the amount which themission thinks it would be prudent to borrow on conventional terms for thepublic sector, totals about $710 million. This figure does not allow forfurther support of the public investment program through new credits on morelenient terms which could help to fill some of the financial gap of thepublic sector (Table 1-9) and part of the uncovered balance of paymentsdeficit (Table 1-10). This, together with the fact that external capitalinflows to the private sector are expected to cover only a small proportionof the total foreign exchange cost of the privately financed investments(other than direct foreign investment), explains why in the initial phaseof the program external assistance is relied on to finance a part of thedomestic cost of the public program.

III. FINANCING THE PROGRAM

26. Although the authors of the 10-year program were concerned withthe availability of resources to finance the entire program, they paidspecial attention to the availability of financial resources to the publicsector. And, since investment expenditures financed by the public sector(including use of public funds to stimulate private investment) are ex-pected to act as an important stimulus to economic growth in the initialphase of the program, the amount of resources which can be mobilized tofinance public capital expenditures is a key factor in assuring thesuccess of the program.


rinancial Resources of Public Sector

27. Financial resources likely to be available to the public sectorwere estimated in the program by assuming that tax revenues could be raieed

from 13.2% to 14.5,, of GDP and that "other" income, which consists mainlyof the gross sales proceeds of the State enterprises and contributionsto the social security institutions, would remain equivalent to 16.55O ofGDP. WJith GDP projected to increase at an average annual rate of 5.5%,the income of the nublic sector would rise by zubstantial amounts. The

program also assumed that it would be possible to hold down current ex-

penditures of the Government, the State enterprises, and the social-security institutions to a constant level on a per capita basis. Thus,

with revenues rising by 5.5% annually and current expenditures by only2.5%, very substantial surpluses were anticipated. These funds wereexpected to be the main source for financing investments of the publicsector, as well as oroviding investment assistance to the private sectorto encourage housing construction, agriculture, and industry. The pro-

jected financial resources of the public sector and their annualallocations as between current and investment expenditures are shown inthe following table.

Table 1-6

Consolidated Public Sector Account of Program, 1961-70(in EO millions, 1960 prices)

Current ExpendituresCentral Other Surplus onGovern- Public Current

Year Income ment Sector Total Account

1961 1,563 455 799 1,254 309

1962 1,646 467 829 1,296 3501963 1,732 478 860 1,338 39419 6 4 1,826 491 893 1,38 4421965 1,926 503 926 1,429 497Total1962-65 7,130 1,939 3,508 5,447 1,683

Total1966-70 11,353 i/ 2,710 5,194 7,904 3,1449

Total1961-70 20,046 5,104 9,501 14,605 5,441

a/ Allowing for a typographical error of EO 50 million in the publishedsummary.

- 13 - 1. THE- PCGRAM

26. The current-account surpluses of the public sector include(a) the excess of revenues of the central Governrnent over ordinary expendi-tures, (b) the depreciation allowances and undistributed profits of Stateeconomic enterprises, and (c) the accumulated reserves of the social secu-rity institutions. For 1961 the program estimated the current-accountsurplus at EO 309 million and for 1962 at E° 350 million, while the require-ments for investment funds and debt amortization were estimated at EO 533million and EO 514 million. After allowing for a gross inflow of externalcapital of EO 126 million in 1961 and EO 105 million in 1962, gaps ofEO 98 million and EC 59 million remained to be filled from other sources.Starting with 1963, however, the combined resources of the public sector,supplemented by a fixed proportion of the anticipated inflows of externalcapital (derived from balance of payments projections) were expected tomore than cover the investment requirements of the public sector:

Table 1-7

Projected Canital Account of Public Sector of Program, 1961-70(in EO millions, 1960 prices)

Use of Funds Source of FundsCarry-over

Sector Contingency, Debt Current Ex- Deficit(-)Invest- and Inve.n- Amorti- Account ternal or

Year ment tories2/ zationŽI Total Surplus Loans Total Surplus(+)

i961 377 22 134 533 309 126 435 -98

1962 W5 2 107 514 350 105 455 -591963 429 -2 67 494 39h 114 508 +141964 429 -5 72 496 442 96 538 +21965 468 -8 66 526 497 102 599 +73

1962-65 1,731 -13 312 2,030 1,683 417 2,100 +701966-70 2,596 358 372 3,328 3,449 h48 3,897 +5691961-70 4,704 367 818 5,891 5,441 991 6,432 +541

a/ Including adjustments for minor revisions of sector programs.b/ Including payments on internal debt as follows (in EO millions):

1961: 30; 1962: 32; 1964: 8; 1967: 2; 1968: 1;all other payments on external debts.

As Table 1-7 shows, aside from 1961 and 1962, the financing of the programdid not appear to pose any problem. A subsequent re-examination of theassumptions behind the projection of the receipts of the public sector andof expenditures on current account indicated, however, that this hopefulconclusion was not justified. In the first place a comparison of the esti-mates presented in the program summary, and more exact data which weresubsequently assembled, showed that in 1959 the current-account surplus


had amounted to EO 230 million -- instead of the E0 238 million shown inthe summary and used as a bench mark for the projection of surpluses infuture years. This correction necessitated a downward adjustment of thecurrent-account surplus for all subsequent years.

29. Secondly, and quantitatively much more important, was a recon-sideration of the assumption that it would be possible to let current-account expenditures increase at an annual rate of 2.5% only; i.e., inline with projected population growth. It was felt that not only was itunlikely that current expenditures could be held at the contemplated level,but also that it would be inadvisable. Current expenditures for certainpurposes must be considered to be just as essential for the expansion ofproduction and the better utilization of the country's resources as somecapital expenditures. These important current-account expenditures gointo such things as extension services in agriculture, vocational andother types of educational training, and public health. Similarly, thepresent level of maintaining public capital, such as highways, is in manyinstances inadequate; and with the increased capital formation contem-plated under the program, maintenance expenditures for various publicworks will have to be greatly stepped up.

30. The projections of current-account expenditures were recomputedand allowance was made for a much higher annual increase of certain cate-

gories of current expenditures, including agricultural services (18%),public works planning and maintenance (13%), public health (12%), andeducation (6%). These rates, combined with the 2.5% rates for the remain-

ing functions of Government, raise the average annual rate of growth ofcurrent expenditures to 4.5% (see Appendix Table 1-D). The result ofthis adjustment is a reduction in the surplus over current expendituresfrom Bo 5,441 million to E° 4,034 million, or by EO 1,407 million during1961-70, Table 1-8 below,

31. The mission believes, however, that the reduction in projectedcurrent-account surpluses can be offset in part by additional receipts of

the public sector such as proceeds of rents, mortgage amortization andinterest payments on public housing, irrigation fees and other charges tobe levied on agricultural producers, and interest and amortization pay-ments of loans to private industry. These receipts are directly relatedto the public outlays envisaged under the investment program and areadditional to those shown in the Government's projections of public sectorrevenues. These additional receipts would amount to approximately EO 80million between 1962 and 1965, and to over EO 400 million between 1966and 1970.

32. TW'e believe that the current-account surplus can be increasedfurther by the reduction or elimination of certain current expenditures.


An analysis of budget expenditures in recent years shows that substantialtransfer payments had to be made to cover current operating losses of anumber of otate econornic enterprises. These subsidies have been particular-ly heavy in the transport sector where they now exceed E 40 million annu-ally to the railroads alone. Operating subsidies to the other State enter-prises account for an additional E° 20 million annually. If the mission'srecommendations are followed, particularly with regard to the transportsector, the need for most of these subsidies will be eliminated. Conse-quently, instead of projecting increases by 2.5% annually in these subsidiesas the program does, we have projected their gradual reduction, aiming attheir complete elimination by the end of the program period. This impliesof course that the Governmentrnstrimke a determined effort in this direction.Wie urge that this effort be started in 1962 and that at least EO 10 millionbe saved on this account. Our projections show that in this way expendi-tures of E° 96 million could be saved over the next four years and TE 300miillion between 1966 and 1970.

An additional source of potential savings may be found in nati-onal defense expenditures. TIre see no reason why the national defensebudget should be raised in line with population growth and believe that itcan be kept no higher than the present level. The increase in Governmentsavings which -wjould result from this measure would be ° 2 rrillionin 1962 and E° 25 million in the next four years.

534, In Table 1-8 we have brought together the changes in public ex-penditures and receipts discussed in the preceding paragraphs. They showthat the increase in current expenditures which we consider necessary forthe success of the development program can be offset to a large extent byadditional receipts and by savings of some other expenditure categories.Our recornmendations are, of course, not comprehensive. They should onlybe taken as an indication of the directions in which the efforts to improvethe fiscal performance of the public sector should move. -e are convincedthat other opportunities for reducing current expenditures and increasingreceipts exist. Our recommendations also indicate the need for a detailedscrutiny of the entire pattern of public current expenditures (as well asrevenues, which are discussed below) to assure that resources w4ill be avail-able to finance the development program.

35. Table 1-9 shows a comparison of the recommended level of publicinvestment expenditures and the financial resources available to the Govern-ment and the State economic enterprises on the basis of the revised estimatespresented in the preceding table. In order to present a complete capitalaccount of the public sector, as was done in Table 1-7, similar additionshave been made to the mission proposals for public sector investments forcarry-over expenditures, contingencies and increased inventories. Allowancehas also been made for foreign debt amortization. Amortization on internaldebts has been omitted under the assumption that with proper fiscal and mone-tary policies it should always be possible for the Government to refinancethe internal debt.l/

A special problem arises from the fact that a significant part of thedomestic debt is denominated in dollars, but we assume that it can besatisfactory resolved.

Table 1-8

Revised Project½ons of Current Account Surplus, 1961-1970(in E° millions, in 1960 prices)

Revised Official AdditionalOriginal Projections of Public Savings of Current ExpendituresProgram Current Account Sector On Operating On Defense

Year Projection a/ Surplus la/ Receipts i Subsidies Expenditures Total Difference e

1961 309 263 1 - 264 -45

1962 350 282 5 10 2 299 -511963 394 307 10 20 5 342 -521964 442 335 25 28 e 396 -461965 h97 369 41 38 10 458 -39

1962-65 1,683 1,293 81 96 25 1,495 -188 \1966-70 3,449 2,478 h46 300 88 3,312 -137

Total1961-70 5,441 4,034 528 396 113 5,071 -370

a/ As sho.wn in Tables 1-6 and 1-7.i Source: Appendix Table l-Doi Public Sector Receipts related to program Expenditures, Appendix Table 1-E.g The firures in this column are all hypothetical program projections and differ from

actual performance expected this year; see footnote 4/ to Table 1-9.e/ Between Original Program Projections and Revised Projections.

- 17 -Table 1-9

Revised Capital Account of Public Sector, 1961-70(in EO millions, 1960 prices)

A. Uses of FundsMission Proposals Carry-over, Amortization on:

for Public Sector Contingencies_4nd Exist New j

Year Investments Inventories- Debt,g Debts/ Total

1961 421 22 91 - 534

1962 500 3 81 - 584

1963 511 - 2 64 - 5731964 54o - 5 66 3 6041965 530 - 8 51 12 585

1962-65 2,081 -12 262 15 2,346

1966-70 2,695 358 169 158 3,380

Total1961-70 5,197 368 522 173 6,260

B. Sources of FundsRevised Estimate Drawdown on New Loansof Current Existing on Conven-

Year Account Surpluas/ Loans e tional Termsf/ New Gap Total

1961 20OV 33j4/ 534

1962 200 234 52 98 5841963 342 50 105 76 5731964 396 46 105 57 6041965 458 10 105 12 585

1962-65 1,396 340 367 243 2,346

1966-70 3,312 - 378 -310 3,380

Total1961-70 4,90o8 340 745 267 6,260

a/ Same as in Table 1-7.On long-term external debt payable in foreign exchange (outstanding and

undisbursed as of February 1, 1962). Source: IBRD. Amortization ofdomestic debt omitted. The difference between these figures and Table1-F ("Amortization of Public Loans") are due to the exclusion in Table1-9 of amortization payments on IBRD loans to private borrowers. Thesepayments do not constitute a charge against public sector financialresources.

i Equivalent to estimated amortization on new loans on conventional termsshown in the table.

/ The figure of EO 200 million shown for 1962 is an estimate derived froman appraisal of the 1962 budget prospects, as presented in Chapter 2.It has been adjusted to take account of price changes. All otheramounts shown in this column are taken from Table 1-8.

e/ See Appendix Table 1-F.f/ See Appendix Tables 1-A and 1-F.i Drawdown on external resources and net financial gap.

W This is an estimate in 1960 prices of actual savings available tofinance public investmento

- 18 - 1. THE PROGRAI

36. If the mission's projections of the current account surplus of thepublic sector are set against the total capital requirernents of the publicsector, a large gap totalling EO 950 million in the next four years, andanother EO 68 million in the subsequent five years remains to be financed.As a first step in determining what measures would be required to coverthis deficit, an attempt has been made to estimate first >hat part of theuncovered requirements of the public sector could be financed by foreignloans on conventional terms. On the basis of a set of assumptions whichrelate the debt service on existing and additional external loans to estimatedforeign exchange earnings and which are shown in detail in a separate Note(Appendix A to this Chapter), we found that the Chilean authorities werelikely to be in a position to incur additional external debt equivalent to7350 million in the next four years and $360 million between 1965 and 1970,provided that the loans are long-term -- with an average maturity of 15years -- and that export earnings develop as projected. 1/

37. But even if Chile's capacity to incur additional external publicdebt is taken into account and allowance is made for the availability overthe next three or four years of approximately EO 440 million in externalloans and credits already signed, at least another EO 243 million must befourd from other sources to cover the next four years of the program. Forthe second half of the program, the projections of the current accountsurplus, together with the projected loan receipts, result in a "surplus"of E° 310 million. This must be regarded as nothing more than a balancingitem in the accounts. But it does have significance: it is a good indicationthat the financial situation of the public sector wjould become easier ifnational income and the revenues of the public sector were to grow asprojected and if the Government were to adopt the fiscal measures thatthe mission considers reasonable and necessary.

38. It is clear that the amount of external financial resources whichmay be prudently assumed on unconventional terms -- over and above thatalready received -- is likely to cover only a small proportion of the deficit.Thus the Chilean authorities will have to rely to a much greater extent thanthe original program envisaged on internal fiscal efforts to provide for thefinancing of public capital expenditures.

39. But we, and the Chilean authorities as well, would be misdirectingour attention if we were to focus only on the financing of the gap. Ourconcern wvith the financial needs of the public sector stems from the un-certainty regarding the level of the current account surpluses. It will bemost difficult to increase the surpluses of the few State economic enterprises

1/ Future export earnings are discussed later in this Chapter.


which manage to have receipts in excess of current expenditures. As to thefuture accumulation of social aecurity funds, we indicate below the reasonsfor our concern. Thus, it is clear that the increase in financial resourcesavailable to cover capital expenditures must come mainly from the budget.Unfortunately, the budget performance in recent years offers little comfortin this respect. In 1960, only E° 70 million of budgetary savings wereavailable to finance budgetary capital expenditures of E° 268 million (not

including debt amortization; and savings in the 1961 budget are estimatedto havre increased to only E 93 million to finance a larger budget burden. /

j The budget outlook for 1962 is discussed in Chapter ^. It shows that ourconcern with the finances of the public sector is amply justified,

- 20 - 1. THE PROGRAMt

Measures to Increase Financial Resources

4o. The Chilean authorities, apparently aware of the inadequacy ofthe resources available to finance the capital expenditures envisaged inthe program, have had under consideration measures to cope with this prob-lem. Four major projects of fiscal reform have been prepared in theMinistry of Finance. For some time they have been under review by specialtask forces in which the various political parties making up the Govern-ment majority are represented. The Government has announced its intentionto enact the measures into law if political agreement on them can be reached.

41. The first project provides for the decentralization of the in-ternal revenue service and seeks to increase the efficiency of the admin-istration and improve enforcement. The second project deals with somefar-reaching revisions of the income tax. It seeks a more equitable dis-tribution of the tax burden in terms of its incidence on various sourcesof income and on income groups. It also aims at improving the presentsystem of depreciation allowances in order to encourage reinvestment in,and modernization of, private industrial enterprises. The third projectdeals with the transactions taxes. It seeks simplification of the presentsystem; this present system, which applies the tax on every sale of goods,has led to uneconomic vertical integration of enterprises in order toavoid tax liability. In place of the present system, a two-stage salestax would be imposed on sales of the producer, importer, or wholesaler tothe retailer, and purchases by the final consumer. The objectives of thismodification are to encourage efficient specialization of economic activi-ties, to reduce the number of sources from which the tax is to be collected,and thereby to simplify administration and enforcement.

42. The fourth project deals with land taxes. They are to be revisedon the basis of re-evaluation of property to reflect potential productivi-ty. A detailed aerial photographic survey now in progress (to be readyin part by the end of 1962) is to provide information necessary for thereassessment of property. The twofold objective of the tax reform is toincrease Government revenue by basing it on a realistic and up-to-datevaluation of land, and at the same time to encourage expansion of agri-cultural production. In addition to these four major projects in thefiscal field, work is also in progress on the revision and simplificationof stamp taxes and customs duties.

43. Estimates of the expected results of these revisions are notavailable. But it is clear that the reorganization of the tax administra-tion, the conversion of the multiple transaction tax into a two-stagesales tax, and the revision of the income and land taxes would produce asubstantial increase in tax receipts. The mission underscores the urgentneed for tax revisions; in fact, if the planned revisions do not producean adequate increase in tax revenue, we urge that additional measuresaiming at higher public revenues be sought.

44. It would go beyond the scope of our assignment to appraise indetail the structure of public revenues and expenditures (other than thoseexpenditures covered in the investment program), and to make more specific

- 21 - 1. THE PROGOAMI

recommendations than those already made. But there are some aspects ofthe Government's financial operations wlhichi have a direct bearing on thedevelopment program and therefore are of direct concern to us.

Social Security Funds

45 ~ The financial projections of the program imply that the social-security system will continue to provide the public sector with largeresources to finance capital expenditures--approximately EO 70 millionannually in the first few years of the program. This expectation is basedon the experience of recent years; there have been substantial differencesbetween current contributions to the social security system and benefitspaid out (plus administrative expenses). There is danger, however, thatthese projections overlook two important changes. In the first place,during the prolonged period of inflationary price increases, the contri-bution level was constantly adjusted upward, while benefit payments wereadjusted to a lesser extent and only after considerable delays. Thisincreased the amount of surpluses in the past. Secondly, experience withsocial-security funds in other countries, as well as simple actuarial con-siderations, indicate that social security systems have a tendency to"mature' in the sense that benefit disbursements gradually approach premiumreceipts.

46. Because of the importance of these surpluses in the flow ofpublic savings, the mission urges that a realistic appraisal of thefinancial operations of the social security system, based on soundactuarial principles, be made at once. Depending on the outcome of thisstudy, a reappraisal of the amount of resources available to the publicsector, particularly in the more distant years of the program, may benecessary.

Transferability of Public Savings

47. The program deals with the financial requirements of public sectorinvestment in global amounts. This implies that measures must be taken toassure that public savings become freely transferable between the entitiesthat make up the public sector, and that they may be used indiscriminatelyfor the various parts of the program. There is no indication, however,that this has been the case up to the present, or that adequate provisionhas been made to assure it in the future.

48. The budget, which in recent years has been moving away from thepractice of earmarking specific receipts toward the transferability offunds, still has a number of binding restrictions; in particular, thereis a restriction regarding the use of more than half of receipts from thevery important income tax on the large copper companies. In the case ofthe social-security institutes (cajas), there appears to be a lack of uni-formity of legal status: some enjoy a high degree of independence in thedisposition of their surpluses, while others are now required to allocateat least a part of their surplus funds to finance investments included inthe program. Several of the State economic enterprises also have virtuallycomplete financial autonomy. While their savings are likely to be

- 22 - 1. THE WROGRAM

available to finance their own investment requirements, it is doubtfulthat under present arrangements they could be used to finance any otherparts of the program. These considerations bear directly on the avail-ability of financial resources for the public sector investments in theprogram.

49. If continued, this situation is likely to interfere with theallocation of financial resources to the most urgent uses. The missionbelieves the situation can be remedied by the creation of financial in-struments that the financial authorities, i.e., the Ninistry of Financeand the Central Bank, can use to mobilize and shift resources.

50. Insofar as existing law interferes with attempts in this direc-tion, legislative action must be sought. This appears to be particularlyimportant for those social security institutions not subject to directionfrom State authorities. There are indications that, in the past, a largeproportion of the receipts of these institutions have been 'tinvested" inthe form of loans to individual members to finance consumption expendi-tures. This form of dissavings is, of course, contrary to public policyas reflected in the development program, and it must be eliminated if allsavings of the public sector are to become available to finance the publicinvestment.

Financial Stability

510 In its appraisal of the prospects for the development program,the mission has proceeded on the assumption that the Chilean authoritieswill make every effort to maintain the high degree of monetary and pricestability which they achieved as a result of the determined stabilizationefforts of the last two years. After a period of unmitigated inflation,during which the cost of living increased tenfold between 1953 and 1959,price rises were kept to 5% in 1960; prices rose 12% in 1961. The needfor maintaining stability must be clearly recognized by all officialsresponsible for the country's economic policies. Although there is wide-spread recognition among them that a return to inflationary policies orthe reimposition of direct controls does not offer an appropriate solu-tion, policies followed have not on all occasions been in line with thisrecognition.

52. There is always the danger that, faced with difficult decisionsas to who should bear the additional burden of the expanding developmenteffort, the Chilean authorities will seek solutions which are not compat-ible with essential price stability; thus a renewal of an inflationarythreadmill could be set in motion. The recent increases in minimum wagesand salaries, although financed as far as the public sector was concernedfrom non-inflationary sources, will undoubtedly lead to some price in-creases and in due course result in new pressures for further wage adjust-ments. W^ze therefore want to make clear our firm conviction that it isinconceivable that the development program which we recommend, or anyother rational program, can be carried out unless internal stability andexternal viability of the economy are assured.

Financing of Private Sector

53. Price stability is a basic condition for the expansion of pri-vate investment, which according to the program is to increase in the1960's from 6% to 11% of GDP. Moreover, private sources are to provideapproximately one-half of the savings required to carry out the program.

54. The financing of investments by the private sector is consideredin the program only in general terms. The resources likely to be avail-able to finance private investment consist primarily of the expectedaccumulation of depreciation allowances and undistributed profits. Theyare to be supplemented by direct foreign private investments, foreignloans to private enterprises, loans from the public sector and, it ishoped, personal savings.

55. Because of the paucity of information on the sources and flowsof private savings in the Chilean economy, the program makes no attemptto trace them through financial institutions or to identify them as totheir major characteristics. The summary of the 10-year program notes,however, that "undistributed profits and depreciation, or other reserves,constitute the bulk of national savings". There are some indicationsthat, as a consequence of the relative price stability of the last twoyears, business savings were being supplemented by personal savings;there are also some indications that personal savings -- to finance build-ing construction and the purchase of stocks -- were on the increase as aresult of greater confidence in Government policies. However, in theabsence of an active capital market, through which the savings could bemade transferable, their availability to finance private investments out-side the economic unit where they are generated is limited.

Capital Market

56. Private industry has just passed through a difficult process ofadjustment from a period of corrosive price inflation to one of relativestability. With the launching of the Ten-Year Development Program, furtheradjustments will be needed if production targets are to be met. If pri-vate investment is to expand, financial resources which hitherto have notbeen available to the business community will have to be tapped. Themission has followed with interest the preparations to establish a pri-vate industrial development bank because such an institution could provideboth financing and technical assistance to private enterprise.

57. Because of the virtually complete lack of experience of indus-trial financing under conditions of price stability, very little is knownregarding the adequacy of existing financial institutions and the appro-priateness of prevailing banking and corporate law to meet the needs ofprivate investors. A comprehensive survey of the money and capital

- 24 - 1. TBE PROGRAMI

markets, which the Chilean authorities have planned for some time, shouldbe undertaken as soon as possible with the objective of determining whatarrangements would be required to increase the flow of private savings,both of business enterprises and of households, into productive uses.

58. Every effort should be made to attain the financing targets forthe private sector. The more favorable treatment of depreciation reserves,to be provided for under the new tax legislation, may be expected to raisebusiness savings. Moreover, monetary stability should put an end to cap-ital flight, which in the past has intermittently deprived the economy ofprivate savings. The contribution expected from abroad in the form ofdirect investments (EO 693 million) and of loans (E° 297 million) underthe original program projections jould appear to be reasonable if theinvestment climate is favorable.;V The projected amounts are likely tobe realized only if the copper and other mining companies find it suffi-ciently attractive to make the large investments necessary to expandproduction. The private sector will fall short of the targets set for itand the entire development program will suffer, unless private foreigninvestors find a favorable climate in Chile. Moreover, the increase inmineral exports is of decisive importance for the development of thebalance of payments (which is discussed in the last part of this chapter).

1/ The projections of much larger amounts in the revised balance ofpayments projections are, however, in our opinion excessive. Wehave therefore used the original estimates.


IV. ORGANIZATIONAL REQUIREMENTS

59. If the planned expansion of public investment is to be accomplished,major changes in the organizations responsible for planning and carryingout capital expenditures will be necessary. Many Government departmentsand a number of State economic enterprises are not now equipped to study,

appraise, engineer and carry out a flow of projects as needed to assurethe best allocation of resources available to the public sector and theefficient execution of the program.

60. Because of the scarcity of personnel trained and experienced in

the preparation and appraisal of public investment projects (and of private-

sector projects to be carried out with public financial assistance) projects

have frequently been made ready for execution only after their financing

appeared assured. This procedure has been justified on the ground that theproject preparation was expensive both in financial terms and in terms of

scarce personnel resources. But whatever the merits of this argument may

have been when public investment expenditures were small -- too small,

judged by the accumulation of urgent needs -- the procedure is clearly

inappropriate for the contemplated expansion of public investment outlays.

61. Delayed and ad hoc project preparation has many drawbacks. Inthe first place, it delays the execution of projects even after financialresources from external or internal sources have been secured. This delay

in itself constitutes an uneconomic use of resources, and at least in the

case of foreign loans, it may also entail an immediate financial cost.More important is the cost of delays in terms of additional national output.

Increasing output may be delayed because of delayed completion of the project

itself -- a housing project, for instance. Or the affect may be indirect;for example, the delayed completion of a road may prevent the expansion of

agricultural production in the area which the road is to serve.

62. Another drawback of inadequate arrangements for project preparationis the difficulty of coordinating public (and sometimes private) investmentsin different sectors. Only if projects are developed in an orderly andcontinuous process of advanced planning can development efforts in the

various sectors be coordinated.

63, In the last two years, the preparation of investment projects inthe public sector has been considerably improved, largely as a result ofthe insistence of sources of external financing that projects must be ready

for more or less immediate execution before final arrangements for their

financial support can be made. It is imperative that progress in thisrespect be put on a permanent organizational basis, and that the various

measures of improvisation be replaced by better internal organization.

- 26 - 1. THE FROGRAM

64. There are four distinct aspects of the problem. One is thepreparation of projects in the various departments of Government and theautonomous entities; the second is the selection of projects for inclu-sion in the capital budgets; the third is the overall planning andco-ordination of public capital expenditures; and the fourth is the execu-tion and control of public investment projects.

Project Preparation

65. To bring about better and speedier project preparation, it isessential to strengthen the planning and engineering sections of the vari-ous Government departments and autonomous entities. What can be accom-plished in Chile in this respect has been amply demonstrated by theplanning and engineering departments of such autonomous agencies as theState Power Company (ENDESA), the National Petroleum Corporation (ENAP),and such private enterprises as the Pacific Steel Company (CAP). Theseorganizations have succeeded in attracting into the services of theirplanning and engineering departments competent and efficiently workingpersonnel. At the same time, they have made effective use of outsideconsultants when, in their view, they could gain from foreign experienceand expertise.

66. We believe that the example of these enterprises should be emu-lated throughout the public sector. This may involve an increase in thestaff of planning and engineering departments and increased salaries forkey personnel. Since this process will take time, it will be necessaryto rely frequently on the services of foreign experts and consultingfirms. Specific recommendations are made in the sectorial chapters ofParts II and III.

Project Selection and Priority Determination

67fr It is clear that the final determination of projects to be in-cluded in the capital budget cannot be left to the Government departmentsand public entities preparing the projects. The orderly process of screen-ing projects and determining their priority for execution must be theresponsibility of the budget-making authorities. The Budget Office in theIlvinistry of Finance devised, through elaborate questionnaires and follow-up,a procedure for preparing the annual capital budget and for determiningfuture financial commitments as new projects are included in the capitalbudget. The adoption of this procedure constitutes an important improve-ment in the preparation of the annual budget.

68. But so far attempts to make the procedure effective have not beenwholly successful. Government departments and autonomous entities relyingon budget support for their expenditures have not provided enough informa-tion to permit a thorough scrutiny of appropriation requests. The BudgetOffice, in turn, although enjoying the full support of the Minister ofFinance, has not had enough staff to study and investigate the submissionsin detail. As a result, various Ministries and autonomous State enter-prises have undertaken investments without clearing them with any co-ordi-nating authority -- leading, to put it mildly, to unco-ordinated investments.


69. Because of the key role the Budget Office must play in thepreparation of capital budgets, we recommend two organizational measuresdesigned to strengthen the Budget Office immediately. i'irst, we recommendthat the ministerial members of COPERE order the departments and entitiesunder their jurisdiction to comply with the requests of the Budget Officefor complete, exact, and timely information regarding contemplated capitalexpenditures. And to make these orders fully effective, we urge a formaldecision by COPERE that any capital expenditures not included in thesubmissions to the Budget Office will require approval by COPERE beforethey can be included in the capital budget or amendments to it. Thisproposal, if carried into practice, will go a long way toward assertingthe authority of the Budget Office, since most capital expenditures arecontrolled by departments represented in COPERE. For other departmentsof Government, similar arrangements may have to be sought at the Cabinetlevel.

70. Second, we recommend that the Budget Office make use of thetechnical and professional staff of a planning and coordination departmentthat we propose under the next heading. lie realize that a Budget Office,if it is to be fully independent and effective, should have its own stafffamiliar with the plans and problems of the public sector. We do not see,however, where this staff is to come from at this time. Given the scarcityof technically competent and experienced personnel in Chile, 1/ we wTouldconsider it inadvisable to transfer Icey personnel from other Governmentdepartments to the Budget Office.

71. There exists, however, a nucleus of personnel with substantialexperience in planning and project evaluation in CORFO. This personnelwill continue to be primarily concerned wqith the overall planning effortand the preparation and promotion of projects to be financed by, or carriedout with the assistance of CORFO. But we believe that the tasks of programrevision and coordination, and the preparation of annual capital budgets,are sufficiently close to permit using the same personnel.

Planning and Coordination

72. As indicated in the Introduction, the overall responsibilityfor carrying out the 10-year development program has been given toCOPERE, with the Planning Directorate of CORFO (which was primarilyresponsible for the preparation of the 10-year program) performing asecretariat function. We believe it is essential for the success of the10-year program that the Planning Directorate of CORFO should not be con-sidered as having discharged its responsibility; to the contrary, its

1/ Lest this remark be misinterpreted as reflecting on the competence andskill of Chilean engineers, economists, administrators, etc., we want tonote that this scarcity is not unique in Chile; it is a common character-istic of all countries in the process of economic development, and itexists in advanced countries as well.


functions should be broadened to include the overall supervision, underCOPEREts direction, of the execution of the program. For that purpose,it should also have supervision over the preparation and execution ofcapital expenditures by the various Government departments and Stateeconomic enterprises.

73. The Planning Directorate of CORFO also should be given the re-sponsibility for making revisions in the program, which will be necessaryas time goes on, and for assuring that public sector projects are phasedto complement each other. At the same time, it should retain responsi-bility for overall economic intelligence and analysis.

74. The mission is aware that CORFO is an autonomous agency, andfrom an organizational point of view is far removed from the seat ofpolitical power and decision making. Ultimately, no doubt, the PlanningOffice of CORFO should operate under direct control of the Office of thePresident. But because of the many advantages which an independent statusbrings to CORFO (flexibility with respect to organization, use of foreignexperts and consultants, etc.), we are reluctant to recommend a wholesaletransfer of the planning function to the Office of the President at thistime.

75. Mloreover, we believe that a reorganization with this objectiveshould not be confined to the planning function, but should also involvethe functions of the Budget Office and the responsibilities of COPERE.But even without this transfer, we consider it essential that CORFO'sPlanning Directorate and the Budget Office be strengthened and that thisshould be done immediately. Moreover, the Planning Directorate shouldbe given: status within CORFO and authority commensurate with its respon-sibilities. Likewise COPERE and the Cabinet must insist that all Govern-ment departments and autonomous agencies give them their full support.

76. The best plan and the best project preparation are of no availunless action to carry out the program is effective. To this end, webelieve that it will be necessary to make changes in the administrativeorganization of various Government departments.

77. There is, we believe, too much concentration of decision makingin Santiago. Administrative arrangements are too rigid, allowing for toolittle local initiative and variations in local conditions. With morefacilities for agricultural credit, more roads serving local needs pri-marily, and more housing construction and administration in many locali-ties -- all scheduled under the program -- central direction and nationaladministration are bound to interfere with efficiency. We urge thatsystematic efforts be made to create regional, provincial and, whereverapplicable, local subdivisions of the various departments and agencies.


78. But we want to stress that the problem of excessive centralizationis not confined to a few instances. The possibility and need for more

decentralization can be found throughout the public administration. The

administrative reform of the internal revenue service, as an example,

is an important step in the direction which we advocate. We realize that

it will take time and continuous effort to bring about these changes in

administration -- all the more reason they should be started now.


V. BALAN1CE OF PA;; . T ROSPTC1TS

79. The development program devoted much attention to theproblems Chile will have to face in order to balance her internationalaccounts in the next 10 years. The program contains estimates ofexports, imports, various service transactions, and the required inflowsand outflows of capital. It arrived at the conclusion that, for the10-year period as a whole, a gross capital inflow of $'1,886 millionwould be required. Because of repayments the net inflow, however, wouldamount to only $316 million.

80o Foreign loans on Dulblic and private account were expected tomake up most of the capital inflow. During the period 1961-65, a grossinflow of foreign loans on public and private account of 42672 millionwould be required. Since repayments during the period would amount to$488 million, a net capital inflow of only 4184 million would be avail-able. For the second half of the program, it was estimated that thegross inflow of external loans, again on public and private account,would exceed repayments by only 4256 million. In addition the 10-yearprojections envisaged an inflow of private direct investment of$660 million. A very large part of it was expected to consist of thereinvestment of depreciation reserves of foreign owned enterpriseswhich were projected as accumulating in an amount of $584 million.l/

1/ This method of presenting the balance of payments accounts isparticularly adapted to the arrangements prevailing in Chile. Thelarge foreign owned mining companies can keep the proceeds of theirexports abroad and convert into escudos only the amounts needed forlocal disbursements.

Table 1-10

Balance of Payments Projecticns, 1961-1970 Akin $ millions)

Original Program Revised Estimates a/1961 1962-65 1966-70 1961-70 1961 1962-65 1966-70 1961-70

Exports of Goods and Services, f.o.b. 567 2,825 4,607 7,998 529 2,715 4,521 7,765

Imports of Goods and Services 567 2,620 3,802 6,989 617 2,942 3,724 7,283

Interest and Dividend Payments 84 448 793 1,325 87 425 798 1,310

Current Account Balance - 84 - 243 + 12 - 316 - 175 - 652 - 1 - 828

Capital Inflows:Loans 156 516 554 1,226 161 791 h89 1,441

Direct Investment 84 278 298 660 84 277 298 659

Capital Outflows:Loan Amortization 113 375 498 986 98 370 465 933

Retirement of Direct Investment 42 177 365 584 42 177 319 538

Net Capital Receipts 84 244 - 12 316 105 521 3 629

Residual Deficit - -- - 70 131 -2 199

j For sources and explanations see Appendix, Notes to Tables 1-10 and 1-F.

v Revised in part by the Chilean authorities and in part by the missione


Export Forecast

81. The original program forecast exports of about US$ 8 billion and

imports of roughly $7 billion during 1961-70, leaving a favorable tradebalance of about US$ 1 billion over the 10 years. This estimate was based

on the expectation that the demand for Chilean copper would rise on the

average by 5% annually, that Chile's share in the world copper market wouldbe somewhat greater than the historical 15%, and that the price f.o.b.

Chilean port would average 28 U.S. cents. Exports of iron ore and minor

minerals were expected to double between 1961 and 1970. The program also

assumed that exports of agricultural and industrial products would increase

by an average annual rate of over 10%. Total exports were expected to in-

crease from $567 million in 1961 to $1,003 million in 1970, or by 77%

(Table 1-11).

Table 1-11

Goods and Service Exports, 1955-1959, andExport Projections, 1961-70 2/

(in $ millions)

Revised EstimatesOriginal Net Ret n

Year Program Grossd_ BasisLb Differencec/

1955 535 5551956 544 5451957 458 4511958 435 431 3301959 534 528 3861960 - 564 4371961 567 529 ko8 -38

1962 630 592 459 -381963 678 660 523 -181964 737 718 569 -19

1965 780 745 596 -351966 838 835 645 -31967 892 878 685 -14

1968 922 911 715 -11

1969 952 939 742 -13

1970 1,003 958 761 -45

i/ f.o.b. Chilean frontier.b/ Gross export proceeds minus amounts retained by large mining companies

as depreciation reserves, profits, and for the purchase of importsrequired in operations. The "retentions" are equivalent to between35% and 40% of export proceeds of copper, and to 50% for nitrate andiron ore.

c/ Between original and revised estimates of gross proceeds.d/ Discrepancies between the figures for the years 1955-59, above, and

the totals in Table 1-12 stem from the annual differences between"payments" and "trade" basis.

- 33 - 1. THE FROGRAIM

Table 1-12

Exports, 1955-59, nnd Revised ExpcrtProjection, 1961-70, by Category

(in * millions)

TotalMerchandise

Year NIining Agriculture Industry Exports Services Total

1955 400 36 38 475 46 5201956 478 33 33 556 47 5931957 392 36 30 458 54 5121958 314 34 40 388 77 4651959 427 35 52 490 58 555

1961 407 35 34 476 33 5291962 462 35 40 537 55 5921963 506 38 50 594 66 6601964 547 40 60 647 71 7181965 562 43 66 671 74 745

1966 627 47 82 756 79 8351967 653 49 9L 796 82 8781968 666 54 1c6 826 85 9111969 672 63 117 852 87 9391970 674 65 128 867 91 958

Annual rateof groawth1961-70 5.7% 7.2% 15.9% 6.9% 6.2% 6.8;

Import Frrecast

82. The government program forecast an increase in Chilets importsof goods and services from '568 million in 1961 to !818 million in 1970,or 44.') The largest increase, by some 70%, was expected to take placein imports of capital goods. Imports of raw materials and of con-sumer goods were projected to increase by about 30%, while imports offuels were expected to decline. Imports of capital goods were basedon the needs of specific projects and on an estimate of the importcomponent of capital investments in various sectors. Raw materialimports were related to the growth in GDP, allowing for increases indomestic production and for some substitution.

Ilisssion Appraisal

83, During its stay in Chile, the mission had an opportunity toreview with Chilean experts some of the major assumptions underlying theexport forecasts. The mission pointed out that the assurnption of a copperprice of 28 cents (U.S.) per pound f.o.b. Chile, while not too improbable,

was rather high and that it would be sounder to base the program on 26.5¢,a price somewhat above that which in recent years the fiscal authoritieshave used to forecast revenues derived from copper. As to the volume ofoutput, the mission called attention to the fact that for technologicalreasons one of the large mines would not be in a position to increase pro-duction before 1966. In line with these observations, the Chilean authori-ties revised the balance of payments projections. According to the newexport estimates and other revisions in the projections which are in partrelated to the changes in the export forecasts5i the cumulative balanceof payments gap increased for the 10-year period as a whole from $1,866million to $2,299 million (Table 1-10).

8h. The mission is inclined to accept the revised export projectionsas reasonable provided sound policies are pursued. But we want to stressthat attaining them will depend not only on developments in the marketsfor Chile's exports but to a considerable extent on the general commercialpolicies which the Chilean authorities pursue. Tn this respect, the roleof copper exports is crucial. To realize the projectcd fore-Ign exchangeearnings, it will be necessary to groatly- ecxpaid 'copper prcdi-ing capacityand for Chile to capture a l ;er s;h-sre c;. the w,--rld copper r1arket thanshe has had in recent vears, Thex-e bjerlti'es <aS. only be attained if themining companies ncDw cpex-PtJrg in C i .Le {as well as ovi,er foreign anddomestic c' iies) a:'c ein-) trter1o mza!ka very sJzeable capital invest-ments, Be cse of the a - lags b,.-Teen t1he la-,lrchJng of suchcapital errestnct-s ar.d reiui.ant c-;put, it is imperative that effortsbe made to encourage these investments promptly.

85. The increases of exports other than co-per forecast in the pro-gram are in our opinion attainable although rather optimistic. The pros-pects for an increase in iron ore exports, whicii are expected to increasevery substantially in the 10-year period, should be feasible, particularlyif exports to Japan devrelop as expecfted0 The e:cpansion of agriculturalexports by an a&vk+r3ge an:nual :.'ate of 7c, and of industrial exports byalmost 16%,c, vill depend largely on approrriate internal inves' ents andprice policies, since in the case of these cozmwOities Chilean exportsconstitute a small proportion of total world trade.

86. Whether the projected expansion of these exports will be real-ized or not depends almost entirely on the ability of the Chilean authori-ties and producers to keep or make these commodities competitive in worldmarkets, actual or potential. As indicated before, inoreases in thedomestic price level in the past two years were held to 5% and 12%, re-spectively, a great improvement over the experience of the 1950's. Butthe price adjustments in the first phase of the stabilization program (in1959), during which many direct controls were abolished, may have gone

1/ The irregular growth of exports in the revised estimates reflects theslow growth of copper exports until 1965 and the expansion in coppermining in 1966 (Table 1-12). The postponement of the increase inexports resulted in a larger deficit in earlier years which in turnmade a revision of debt service payments necessary.


further than had been anticipated and may well have raised the Chilean

cost of production of a considerable variety of agricultural and

industrial commodities to a level at which they no longer can be sold

abroad at a profit. This is probably true for Chilean fruits and wine,

and certainly for a variety of products of Chilean industry. The wage

increases granted in recent weeks, although presumably justified in terms

of increases in the cost of living, have undoubtedly exceeded the recent

gains in productivity and thus have made worse the competitive position

of Chilean agricultural and industrial exports in foreign markets.

87. It would go beyond the scope of the mission's terms of reference

to examine in detail whether Chile's export potential can be fully

realized by means of fiscal and monetary policies that would keep the

price level of Chile in line with the level of prices abroad. In time,

however, it may become necessary to realign the external purchasing power

of the escudo with the internal purchasing power necessary for the success

of the program.

88. Turning now to the projections of imports and other entries inthe balance of payments forecasts, we want to stress their highly conjec-

tural character. The demand for imports, although obviously related to

the groweth of domestic production and income and to the composition of

total output, depends very much on the monetary, fiscal, and commercial

p.olicies which Chile will follm; in the future. Given sound policies

aiming at economic growth under conditions of price stability, we believe

that the projected level of imports is in line with the projections of the

gross domestic product and of gross investment. The estimates assembled

in Table 1-13 indicate that after adjustment in the foreign exchange

component of the capital expenditure program (which we presented in

Table 1-5), the ratio of merchandise imports to GDP in the next few years

is somewhat higher than in recent years (1955 to 1959) when it averaged

10%. According bo the program projections of imports, adjusted to take

account of our own appraisal of the import "rcontenttl of capital expendi-

tures, the ratio rises to approximately 13% in the next four years. From

1966 on it would again be around 10%, The increase in the ratio in the

early part of the program is largely due to the increases in imports of

capital goods for agricultural and industrial investments.

89<. WIe also related (in Table 1-13) the level of capital goods imports

to the projections of gross domestic investment. Again we found that the

projections were by and large reasonable. Because of fairly erratic

movements in recent years it is difficult to determine what the "normal1'

import content of capital expenditures has been in the past. Between

1957 and 1959 the ratio fluctuated from 28% to 4a% and averaged 37%. On

that rather inadequate basis, the projection of 3770 for the aggregate

import content of gross investment in the next four years appears more or

less right. The ratio declines in the second half of the program to less

than 31%. This decline is possible only if it is assumed that a rising

proportion of capital goods wrill be of domestic origin -- a development

which is uncertain but quite plausible.

Table 1-13

Gros. Domestic Product, Gross Domestic Investment and Import Requirements, 1955-70(in millions of Eu or US$)

Imports Adjustment to Gross Domestic In- C a p i t a 1 G o o d s I m po r t sGross Domestic O.i.f. Mission Recom- Imports Adjusted vestment, Mission Mission As % of Gross As % ofProduct in E° US$ mendations US$ EU % of Resommendations, Program Adjustment Adjusted Domestic In- Total

Year 1960 Prices Program i/ US$/a GNP E , 1960 Prices c US$ #/ US$ a/ US$ EU vestment Imports

1955 4,453 395 415 9 105 110 271956 4,147 390 410 10 129 135 331957 4,430 473 497 11 442 185 194 44 391958 14,657 427 448 10 424 154 162 38 361959 4,687 435 457 10- 483 129 135 28 30

1961 5,044 513 +49 562 590 12 686 207 +49 256 269 39 46

1962 5,309 542 +109 651 684 13 864 214 +109 323 339 39 501963 5,487 589 +95 684 718 13 919 244 +95 339 356 39 501964 5,892 603 +76 679 713 12 941 242 +76 318 334 35 471965 6,211 643 +45 688 722 12 965 278 +45 323 339 35 48

1962-65 22,899 2,377 +3t5 2,702 2#83.i 12 3,689 978 +325 1,303 3,368 37 49

1966 6,556 646 - 645 677, 10 954 274 -1 273. 287 30 421967 6,923 667 -1z 656 689 10 973 290 -11 279 293 30 431968 7,306 688 -16 672 706 10 991 310 -16 294 309 31 441969 7,703 709 -21 688 722 9 1,017 326 -21 305 320 32 441970 8,135 745 -26 719 755 9 1,044 357 -26 331 347 33 46

1966-70 36,623 3,455 '-75 3,380 3,549 10 4,978, 1,557 -75 1,482 ;S56 31 44

i Differance between foreign exchange cost of Government program and of mission recommendations (Table 1-5)o/ Excludes services.

i Total Sector Investment net of contingencies and carry-overs (Table 1-4)oThe difference between the foreign exchange cost of the government program (Table 1-5) and capital goods imports is accounted for by theinclusion of imports for contingencies, carry-overs and spare parts in the latter figures.

9go The last column in Table 1-13, in which capital goods importsare measured as a proportion of total merchandise imports, is of somesignificance because it shows that if the flow of capital goods importsis to increase as now envisaged, and if the volume of raw materials importsis to rise in line with the increase in the gross domestic product, thereis little room left for increased imports of consumer goods. The policyimplication of this conclusion is not that the expansion of goods produc-tion must be directed primarily toward import substitution, but ratherthat general economic policies should take full account of the country'sbalance of payments position and that expansion of the range of exportsshould be made an important policy objective, as stated in the program.

Capital Inflows

91. In the original program the projections of capital inflows wereonly a reflection of the amounts necessary to balance the external accountsof the Chilean economy. Because we have concerned ourselves primarilywith the financial requirements of the public sector, and because the pro-gram projections of the external loan requirements of the private sectorappeared reasonable, we have not changed them. We have also left theprojections of direct foreign investment unchanged, because any error intheir magnitude would be offset, at least to a large extent, by a corre-sponding change in capital goods imports. (Changes in the outflows ofdividends and depreciation reserves would further compensate errors.)But we have made independent projections of capital inflows for the publicsector (Table 1-9 and Appendix A).

92. In Table 1-14, we have compared our estimates of the externalfinancial requirements to cover imports, and service payments on publicand private debt with the program pro e7ctions of capital inflows and therevised estimates of export proceeds./ The foreign exchange "budget"that emerges from these estimates indicates that the foreign exchangeresources which may be expected are likely to fall short by a small butsignificant margin of the foreign exchange "needs" of the economy. Itmay be reasonable to expect that some part of the shortfall will be coveredby external assistance on non-conventional terms, particularly in the next

1/ le used the projections of direct foreign investment and of foreignloans to the private sector of the original program, not those of therevised balance of payments estimates, because the increased capitalinflows shown in the revision, impressed us as quite unlikely. Thefigures shown for these capital movements are not quite consistentwith the estimates of returns on private investment and accumulationof private depreciation reserves, for which the estimates of therevised balance of payments projections were used. But these incon-sistencies are minor and do not significantly affect the overallpicture. See notes to Appendix Table 1-F and Table 1-10.


four years when the balance of payments gap is much larger than in lateryears. But the existence of the gap again points to the need for vigorouspolicies of export promotion, for the most careful husbanding of foreignexchange resources, and above all, for continued monetary stability.

Table 1-14

Summary Foreign Exchange Budget, 1961-70(in $ millions)

Uses of Foreign Exchange 1961 1962-65 1966-70 1961-70

Import "Requirements", adjustedto mission recommendations 617 2,942 3,724 7,283

Add: Service on Public Debt 109 370 448 927Add: Service on Private Debt and

Foreign Direct Investment 118 602 _1,13 1,854

Total 844 3,914 5,306 10,064

Sources of Foreign Exchange

Export Proceeds 529 2,715 4 521 7,716(Gross Deficit) (315) (1,199) (785 ) (2,299)

Capital Receipts:Loans to Public Sector - Approved 125 323 - 448

- New - 350 360 710Loans to Private Sector 36 118 129 283Direct Investment 84 277 298 659

Total 774 3,783 5,308 9,865

Deficit (-) means surplus 70 131 -2 199

Source: Appendix Table 1-F.


VI. CONCLUSION

93, We started this chapter with a strong endorsement of the 10-yearplan which the Government has adopted and begun to carry out. After havingmade extensive comments and suggested a number of modifications, we want toreiterate our belief that the prozram serves well as a framework for con-certed Government action to accelerate the growth of the Chilean economy.But we would be remiss in our assignment if we did not emphasize the diffi-culties which the Chilean authorities have to face in carrying out the pro-gram,

94. These difficulties are threefold:

a. Major efforts will be necessary to mobilize sufficient domes-tic resources to finance the public investment expendituresforeseen in the program.

b. There is no assurance that in the next 10 years the foreign-exchange earnings will increase as fast as forecast in theprogram; smaller than expected export proceeds wqould adverselyaffect both the immediate availability of imported capitalgoods as well as the possibility of obtaining external loanson conventional terms,

c. The administrative preparations to carry out the program arefar from adequate; unless the machinery to prepare, appraiseand execute projects is strengthened, the increase in publicinvestment which is an essential part of the program willnot be possible.

F5~ Because we belie-ve that the program should be carried out, we urgethat speedy and determined action be taken to overcome these difficulties.this requires not just a few isolated measures but continuous vigorous andsimultaneous efforts on all sides. ?:ie mentioned specifically a large numberof steps which in our opinion are indispensable if the success of the devel-opment effort is to be assured. Many others are implied in our comments,and the need for still others will emerge as the pro-ram gets under way.

p6. Some observers of the Chilean economy have expressed the beliefthat the size of the program is beyond the financial and organizational cap-acity of the Chilean authorities, and that it would be better to adopt asmaller program wvich would be easier to carry out. lWe prefer to believe thatthe financial and administrative capacity of Chile can be sufficiently in-creased. There is, however, always the possibility that accomplishments willfall short of the objectives of the program, be it because the efforts aretoo sm4ll, or because developments beyond the control of the Chilean authori-ties intervene. It may become necessary to adapt the program to such anexigency.

- 40 - 1. THE PROGRAilB

97- The adaptation which we suggest would be not to modify the pro-gram by neglecting one sector in favor of another, but to stretch out theprogram over time, if this should become necessary. But we are hopeful thatsuch a development will not be necessary and that the Chilean authoritieswill succeed in their efforts to cope with the impediments to economicadvancement, Their internal success in turn would lay the basis for supportfrom abroad.

-u-

AFPENDIX A

Note on Additional Borrowing Capacity

'C(. The amount of additional external public loans with conventionalterms which Chile can safely incur has been derived from estimates of netforeign exchange earnings and the annual debt service on the existing publicexternal debt,

Table A-1

Borroiwing Capacity for Conventional-Term Loans

(in millions)

Estimated Total Debt ServiceNet Foreign Debt Service b/ Debt Service Borrow_ Tncl.New Loans

Exchange % of toreign Ilargin US$ ing / ofEarnings a/ Exchange Unadjust- Adjus- Capacity Foreign

Year US$ US$ Earnings ted i ted US$ BE US$ Exchange___ _ _ _ _ .__________ _________ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ E ar n i n g s

1961 4C8 109 27 - - log 27

1962 459 104 23 - - 50 52 104 231963 523 89 17 - - 100 105 89 171964 569 88 15 5 5 100 105 93 161965 595 69 12 19 10 10C 105 84 14

1962-65 2,147 350 16 350 367 370 17

1966 645 6o 9 9 10 80 84 85 :31967 685 54 8 6 10 80 84 89 131968 715 46 6 8 8 80 84 89 131969 742 41 6 5 8 60 63 92 121970 761 34 4 7 8 60 63 93 12

1966-70 3 548 235 7 360 378 448 13

1961-70 6,103 694 11 710 745 927 15

a/ Estimated f.;o.b. value of exports of goods and services, minus amounts retainedby large mining companies.

b/ Estimated interest and amortization on long-term external loans (outstanding andundisbursed) as of February 1, 1962. See footnote b/ to Table 1-7.

c/ Difference between projected debt service and $93 million, equivalent to slightlymore than 12% of 1970 estimated foreign exchange earnings.

d/ JSquivalent 'flo 10 times the adjusted debt service margin of three years later.

- 42 - 1. APPENDIX A

Because of the large volume of short- and medium-term debt, debt servicewill be very heavy in 1962 but will decline rapidly thereafter, in absoluteamounts and even more in relation to the expected increase in foreignexchange earnings. Therefore a "debt service margin" emerges. Its magni-tude has been determined, more or less arbitrarily, as the differencebetween the debt service on the existing external public debt and $93million, an amount equal to slightly more than 12% of estimated foreignexchange earnings (from the exports of goods and services, allowing forearnings retained by the large mining companies), in 1970. This impliesa gradual decline of the debt service from its present excessively highand burdensome level of 23% of foreign exchange earnings. This declineis in line with the projections of the original 10-year program whichprovided for a large reduction, in the course of the program, of the rela-tive debt service burden.

99. This reduction is, we believe, necessary because of the manyuncertainties besetting the projection of export earnings and the greatdependence of the level of exchange proceeds on a small number of exportcommodities and their prices, over which the Chilean authorities havevirtually no control. YMoreover, because of the limited interaction betweensuch major export industries as copper and iron ore mining and the restof the economy, the demand for imports does not readily adjust to changesin export earnings. It is thus in the best interest of the Chilean econ-omy to reduce the debt service burden to a level at which it will notendanger external viability even in periods of temporarily adverse move-ments in the balance of payments.

lOo1 Another equally important reason for reducing the debt service

ratio as soon as practicable is the assurance of greater safety which alower ratio gives to potential foreign lenders and foreign investors.WJith smaller amounts of foreign debt and a smaller level of debt servicepayments, Chile should find it less difficult to secure that amount offoreign borrowing that is indispensable to carry out the 10-year program;with service payments on the outstanding debt absorbing a large proportionof export earnings, it is more difficult to obtain additional resourcesat reasonable terms.

101 There is of course no firm rule as to what is tolerable andwhat is an excessive debt service burden. The debt service of $93 million,equivalent to 12.2% of projected foreign exchange earnings in 1970 maybe taken as an indication as to what may be considered a reasonable objec-tive of external debt management. The "unadjusted debt service margin"shown in Ta_le A--1 was c-rvm ed on tbrat b_.siS. In or.er to takeaccount of the more urgent need for loans in the earlier years of theplan period, and to mitigate 'he spurious appearance of accuracy, themargin has been adjusted to a more regular schedule, as shown in the"adjusted" columa,

- 43 - 1. APPENDIX A

102. In order to arrive at the amount of indebtedness which could beassumed on the basis of this debt service, an additional assumption wasnecessary. It has been assumed that the average maturity of all loanswould be 15 years and the interest rate 5-3/4% per year. For loans at

this rate and maturity, level annual payments of principal and interestpayable semi-annually are almost exactly equal to one-tenth of the prin-cipal amount; or, conversely, with these assumptions the total amount of

loans is equal to 10 times the amount of the annual debt service. W-e wantto stress in this connection the importance of the terms and maturity of

loans for the amount of the annual debt service. The Chilean authorities

can incur additional debt in the amounts shown in the table only if the

average terms are as suggested here. If the average maturity of new loans

is for example only 10 years again at a rate of interest of 5-3/4%, then

the debt service margin indicated in the table would permit borrowing of

only 7.5 times the annual debt service, or a total of roughly US$ 530

million, compared with $710 million if the average maturity is 15 years.

103. Finally, a two-year period of grace between the disbursements

of the loans and the beginning of the full debt service has been assumed.

Thus the debt service margin of $5 million in 1964 permits borrowing of$50 million in 1962.

A -.?' .lI )IjL 1-A

Sjijr:j of the .tional Developi,-i:nt "rc r-; ncnd iidssOul L.eco:,enclLtions, 1?°1-7(

(in V-illicnc)

1962-65 1966-70 1961-70Foreign Foreign ForeignExchange Domestic Total Exchange Domestic Total Exchange Domestic Total

Thae ProE am Cost US$ Cost EO EO Cost US$ Cost EO EO Cost US; Cost EO EO

Agriculture Total 383.7 268.4 309.0 65.2 501.1 569.6 111.2 821.7 938.lPublic 5.6 104.0 109.9 9.3 141.3 151.1 18.3 277.3 296.5Private 33.1 164.4 199.1 55.9 359.8 418.5 92.9 544.4 641.9

Mining Total 166.7 135.6 310.6 166.5 141.7 316.59 364.2 305.3 687.7Public 13.5 10.4 24.6 0.7 0.4 1.1 14.2 10.8 25.7Private 153.2 125.2 286.0 165.8 141.3 315.4 350.0 294.5 662.0

Mianufacturing Total 237.5 288.4 537.8 566.6 826.r2 1420.5 831.3 1,149.5 2,022.2Public 94.7 78.5 177.9 113.6 92.7 212.0 214.9 178.8 404.4Private 142.8 209.9 359.8 453.0 735.5 1,20g.5 616.4 970.7 1,617.9

lower & Fuel Total 142.9 256.4 406.4 234.7 381.8 628.2 410.8 692.9 1,124.2Public 96.0 195.5 296.3 171.4 311.1 491.1 289.6 546.5 850.6Private 46.9 60.9 110.1 63.3 70.7 137.2 121.2 146.4 273.7

Btildirng Total - 816.0 8l6.0 - 1,425.4 1,425.4 - 2.413.4 2.413.4Public - 625.6 625.6 - 1,054.7 1,054.7 - 1,824.9 1,824.9Private - 190.4 190.4 - 370.7 370.7 - 588.5 5*.5

Urban Development Total 23.1 132.1 156.4 35.3 236.4 273.5 63.6 396.2 462.9and Public 10.3 97.5 108.3 20.6 196,4 218.0 32.8 312.6 347.0Communications Private 12.8 34.6 48.0 14.7 40.0 55.4 30.7 83.6 115.8

APPETDIX 1-A

Suxnaryjr continuced)

(in millions)

1962-65 1966-70 1961-70Foreign Foreign ForeignExchange Domestic Total Exchange Domestic Total Exchange Domestic TotalCost US$ Cost EO EO Cost US$ Cost EO EO Cost US$ Cost EO EO

The Program

Transportation Total. 194.0 345.7 549.4 247.8 442.0 702.2 500.1 862.3 1,387.4(original Public 98.6 284.8 388.3 108.9 353.4 467.7 243.6 698.6 954.4program) Private 95.4 60o9 161.1 138.9 88.6 234h4 256.5 163.7 433.0

Total Program Total 802.9 2,242.6 3,085.6 1,316.1 3,956.6 5,335.9 2,281.2 6,610.3 9,036.8(excl. contingency Public 318.7 1,396.3 1,730.9 424.5 2,150.0 2,595.7 813.4 3,849.5 4h703.6and carry-over) Private 484.2 846.3 12354.7 891.6 1,806.6 2,740.2 14467.7 2,791.8 4,332.9

Total Program Total 24408.6 7,003.2 9,532.2(ncl. contingency Public 875.7 4,030.5 4,950o0and carry-over) Private 1,532.9 2,972.7 4,582.2

Note: Due to rounding totals do not necessarily add.

AP-?L'DIX 1-A

Sua ry ( co3tinuMd)

(in millions)

1962-65 1966-70 1961-70Foreign Foreign ForeignExchange Domestic Total Exchange Domestic Total Exchange Domestic Total

Cost US$ Cost E° E° Cost US$ Cost EO EO Cost US$ Cost EO E°

Kission Recommendations

Agriculture Total 175.7 326.9 511.4 I34.4 425.5 566.4 331.3 787.2 1,135.0Public 135.9 234.9 377.6 54.4 236.1 293.1 204.3 495.5 710.0Private 39.8 92.0 133.8 80.0 189.4 273.3 127.0 291.7 425.0

Mining Total 224.6 11i.5 4,1,3 146.4 124.4 27E.1 3E7J6 31E.9 726.1

Public 15.7 11.5 2E.0 1.C 1.0 2e1 16.7 12.5 3Z.lPrivate 2C8.c 17C.C 385.3 145.4 123.4 276.1 371.1 3C6.4 696.1

Manufacturing Total 278.0 372.8 664.7 441.1 631.7 1,094.8 767.4 1,072.0 l,877.8Public 79.2 78.9 162.1 102.6 84.2 191.9 190.4 171.7 371.6Private 198.8 293.9 502.6 338.5 547.5 902.9 577.0 900.3 1,506.2

Power and Fuel Total 140.3 253e4 400'e7 218.5 348.2 577.6 394.1 657.7 1,071.5Public 94.6 194.6 293,9 172.6 306.8 488.0 289.2 543.2 846.9Private 45.7 58.8 106.8 45.9 41.4 89.6 104.9 114.5 224.6

Building Total - 899.6 899.6 - 1,572.5 1,572.5 - 2,661.3 2,661.3Public - 690.2 690.2 - 1,164.6 1,164.6 - 2,013.9 2,013.9Private - 209.5 209.5 - 407.8 407.8 - 647.4 647.4

Urban Development Total 22.8 147.9 171.8 37.2 228.3 267.4 63.6 396.2 462.9and Public 10.3 110.6 121.4 21.4 188.9 211.4 32.8 312.6 347.0Communications Private 12.5 37.3 50.4 15.8 39.4 56.0 30.8 83.6 115.9

APPEHDIX 1-A

Su^aryT (continuod)

(in millions)

1962-65 1966-70 1961-70Foreign Foreign ForeignExchange Dcmestic Total Exchange Domestic Total Exchange Domestic TotalCost US$ Cost EO E° Cost US$ Cost E° EO Cost US$ Cost EO E°Mission Reccmmendations

Transportaticn Total 285.5 332.8 632.6 264.4 3433 620.9 635.5 759.8 11427.1Public 146.3 262e9 416.5 94.9 243.8 343,4 296.5 574.3 885.6Private 139.2 69.9 216.1 169e5 99.5 277.5 339,0 185.5 541.5Total Program Total 1,126.9 2,514.9 3,689.1 1,242.0 3,673.9 4,977.7 2,579.7 6,653.1 9,361.7(excl.contingency Public 482-o 1,583.6 2,180.7 446i9 2,225.14 2,694.5 1,029.9 4,123.7 5,205.1& carry-over) Private 6644.9 931.4 1,608.5 795.1 ,1448.4 2,283.2 1,549.8 2,529.4 4,156.7Total Program Total 2,719.7 7,OO1A. 9,856.7(incl.contingency Public 1,087.0 9,394.0 5I,48754& carry-over) Private 1,632.7 2,665.1 4,291.4


APRI!DIX 1-A

Suianary ( ' -inuc&)

(in millions)

1962-65 1966-70 1961-70Foreign Foreign ForeignExchange Domestic Total Exchange Domestic Total Exchange Domestic TotalCost US$ Cost EO E0 Cost US$ Cost EO EO Cost US$ Cost E0 E0

Difference Increase (+) orDecreaset)-7 Missicn reccm-mendations in Program

Agriculture Total +137.C + 58,5 +202,4 + 69.2 - 75.6 - 3.2 +220.1 - 34.5 +196.6ublic +13C.3 +130,9 +267.7 + 45.1 + 94.8 +142.0C +186.C +218.2 +413.5Private + 6.7 - 72.4 - 65.3 + 24.1 -17C.4 -145.2 + 34.1 -252.7 -216.9

NIining Total + 57.9 + 45.9 +1c6.7 - 20.1 -17.3 - 38.4 + 23.6 + 13.6 + 38.4Public + 2.2 + 11 + 34 + 0.3 + 0.6 + 1.0 + 2.5 + 17 +

Private + 55.7 + -.8 +103.3 - 2C.4 - 17.9 - 39.3 + 21.1 + 11o + 34.1

Manufacturing Total + 40.5 + 84.4 +126.9 -125.5 -156.5 -328.3 - 63.9 - 77.5 -144.6Public - 15.5 + 0.4 - 15.3 - 11.0 - 8.5 - 20.1 - 24.5 - 7.1 - 32.8Private + 56.0 + 84.0 +142.8 -114.5 -168.0 -308.2 - 39.4 - 70.4 -111.7

Power and Fuel Total - 2.6 - 3.0 - 5.7 - 16.2 - 33.6 - 50.6 - 16.7 - 35.2 - 52.7Public - 1.4 - 0.9 - 2.4 + 1.2 - 4.3 - 3.1 - 0.4 - 3.3 - 3.7Private - 1.2 - 2.1 - 3.3 - 17.4 - 29.3 - 47.6 - 16.3 - 31.9 - 49.1

Building Total - + 83.6 + 83.6 - +147.1 +147.1 - +247.9 +247.9Public - + 64.6 + 64.6 - +109.9 +109.9 - +189.0 +189,0Private - + 19.1 + 19.1 - + 37.1 + 37.1 - + 58.9 + 5839

Urban Development Total - 0.3 + 15.3 + 15.4 + 1.9 - 8.1 - 6.1 - - -

and Public - + 13.1 + 13.1 + 0.8 - 7.5 - 6.6 - - -

Communications Private - 0.3 + 2.7 + 2.4 + 1.1 - 0.6 + 0.6 - - -

APPLITDIX 1-A

Sunmar: aputinued)

(in millions)

1962-65 1966-70 1961-70Foreign Foreign ForeignExchange Domestic Total Exchange Dcmestic Total Exchange Domestic TotalCost US$ Cost EO E° Cost US$ Cost EO E° Cost US$ Cost EO E°

Difference, Increase +) orDecrease (-); Mission reccnmen-dations in Frogram

Transpcrtation Total + 91.5 - 12.9 + 8302 + 16.6 - 98.7 - 81.3 +135.4 -102.5 + 39.7Public + 47.7 - 21.9 + 28.2 - 14.0 -109.6 -124.3 + 52.9 -124.3 - 68.8Private + 43,8 + 9.0 + 55.0 + 30.6 + 10.9 + 43.1 + 82e5 + 21.8 +108.5

Total Total +32h.C +272.3 +6C3.5 - 74.1 -282.7 - 356.2 +25e.5 + 11.8 +32h.9(excl.contingency Public +163.3 +187.3 +39. B + 22.4 + 75.L + 98.8 +216.5 + °742 +2501o.5& carry-over) Private +162.5 + 85.1 +253.8 - 96.5 -358.2 - 457.0 + 82., -262.h -176.2

Total Total +311.1 - 2.1 +324.5(inclcontingency Public +211.3 +305.5 +537s4& carry-over) Private + 99.8 -307.6 -212.88


APPENDIX 1-B

The i3ational Develoument Profremu. by Sector and Source of Financinsr. 1961-70

(in millions, 1960 Prices)

1961 1962 1963 1964 1965 1962-65 1966-70 1961-70U$ Eu ° US$ E us$ E

Agriculture Total 7.3 52.2 7.7 59.1 8.9 66.7 10.3 64.2 11.8 78.4 38.7 268.4 65.2 501.1 111,2 821.7Public 3-4 32.0 1.3 26.4 1.3 31.1 1.4 21.4 1.6 25.1 5.6 104.0 9.3 141.3 18.3 277.3Private 3.9 20.2 6.4 32.7 7.6 35.6 8.9 42.8 10.2 53.3 33.1 164.4 55.9 359.8 92.9 544.4

Mining Total 31.0 28.0 1 38.5 50.1 40.7 43.9 35.9 27.6 20.5 166.7 135.6 166.5 141.7 3673.2 305.3Public -- -- 6.5 5.2 .4 4.7 0.3 0.2 0.3 0.2 13.5 10.4 0.7 0.4 14.2 10.8Private 31.0 28.0 38.6 33.3 43.7 36.0 43.6 35.7 27.3 20.3 153.2 125.2 165.8 114.3 350.0 294.5

Manufacturing Total 27.4 32.9 42.2 0 48.7 59.5 56.1 74.9 90.5 103.1 237.5 288.4 566.6 828.2 831.3 1,149.5Public 6.6 7.6 17.8 16.0 20.9 17.5 19.7 18.9 36.3 26.1 94.7 78.5 113.6 92.7 214.9 178.8 wPrivate 20.8 25.3 24.4 34.9 27.8 42.0 36.4 56.0 54.2 77.0 142.8 209.9 453.0 735.5 616.4 970.7 0

Power and Fuel Total 33.2 54.6 32.5 60.2 34.5 62.7 39.7 65.5 36.2 68.0 142.9 256.4 234.7 381.8 410.8 692.9 aPublic 22.2 39.8 18.6 42.0 22.3 46.7 29.2 52.1 25.9 54.7 96.0 I95.5 171.4 311.1 289.6 546.5Private 11.0 14.8 13.9 18.2 12.2 16.0 10.5 13.4 10.3 13.3 46.9 60.9 63.3 70.7 121.2 146.4

Building Total -- 172.0 -- 182.9 _ 196.2 -- 210.6 -- 226.3 -- 816.0 -- 1,425.4 -- 2,413.4Public -- 144.6 -- 147.3 -- 152.7 __ 158.6 -- 167.0 -- 625.6 -- 1,054.7 -- 1,824.9Private -- 27.4 -- 35.6 -- 43.5 -- 52.0 -- 59.3 -- 190.4 -- 370.7 -- 583.5

Urban Development andCommunication Total 5.2 27.8 5.3 29.3 5.7 31.9 5.8 33.9 6.3 370 23.1 132.1 236.4 63.6 396. 2

Public 2.0 18.8 2.2 20.7 2.4 23.1 2.7 25.5 3.0 28.2 10.3 97.5 20.6 196.4 32.8 312.6Private 3.2 9.0 3.1 8.6 3.3 8.8 3.1 8.4 3.3 8.8 12.8 34.6 14.7 40.0 30.7 83.6

Transportation Total 58.3 74.6 48.2 85.9 48.4 86.2 48.6 86.6 48.8 87.0 194.0 345.7 247.8 442.0 500.1 862.3Public 36.1 60.4 25.5 71.4 24.9 71.2 24.4 71.1 23.8 71.1 98.6 284.8 108.9 353.4 243.6 698.6Private 22.2 14.2 22.7 14.5 23.5 15.0 24.2 15.5 25.0 15.9 95.4 60.9 138.9 88.6 256.5 163.7

Total SectorInvestment Total 162.4 442.1 181.0 506.8 196.3 543.9 204.4 571.6 221.2 620.3 802.9 2,242.6 1,316.1 3,956,6 2.281.2 6,641.3

Public 70.3 303.2 71.9 329.0 78.2 347.0 77.7 347.8 90.9 372.4 318.7 1,396.3 424.5 2,150.0 813.4 3,849.5Private 92.1 138.9 109.1 177.8 118.1 196.9 126.7 223.8 130.3 247.9 484.2 846.3 891.6 1,806.6 1,467.7 2,791.8

APPENDIX 1-C

Mission Recommendations by Sector and Source of Financing, 1961-70

(in millions, 1960 prices)

1961 1962 1963 1964 1965 1962-65 1966-70 1961-70US$ E° US$ E° US$ EO US$ E° US$ E US$ E° US$ E

Mission Recomwendaticns

Agriculture Total 21.2 35.0 35.2 58.5 45.7 77.7 51.5 91.4 43.3 99.5 175.7 326.9 134.4 425.5 331.3 787.2Public -W.-o 24I 2039 -*T6 37o 5U.5 -1U5 66.1 -27.7 65 13-59 234.9 f547 236.1 204.3 495.5Private 7.2 10.4 6.3 13.9 7.9 19.2 10.0 25.3 15.6 33.6 39.8 92.0 80.0 189.4 127.0 291.7

Mining Total 16.8 13.0 54.5 45.2 64.7 51.4 54.2 43.4 51.2 41.5 224.6 181.5 146.4 124.4 387,8 318-2Pubii c - - 7.v1 3 -71 5.0 -0-5 - 0.7 0.5 37 1 .0 160 17 12.5Private 16.8 13.c 47.4 39.7 57.6 46.4 53.4 42.9 50.5 441.0 208.9 170.0 145.4 123.4 371.1 306.4

Manufacturing Total 48.3 67.5 59.7 81.2 65.9 88.6 71.7 94.9 80.7 108.1 278*0 372.8 441.1 631*7 767.4 1,072.0Public -- F56 -- 97. 1r49 13-7 *I9; 16.1i 22.9 21.2 22.5 25.25 79.2 -789 102.6 b4.2 190.4 171.7 VIPrivate 39.7 58.9 44.8 67.4 47.0 70.5 48.8 73.7 58.2 82.3 198.8 293.9 338.5 547.5 577.0 900.3 b-

Power and Fuels Total 35.3 56.1 32.7 61.5 34.0 61.8 38.6 64.6 35.u 65.5 140.3 253.4 218.5 348.2 394.1 65707=Pubic -r2 X -UIT 18.3 -1737 22.0 1W.7 -8Bo 7057. 25.5 733 5 94.6 194726 3062B 239.2 943 2

Private 13.3 14.3 14.4 17.7 12.0 15.1 9.8 14,0 9.5 12.0 45.7 58.8 45.9 41.4 104.9 114.5

Building Total - 189.2 - 201.6 - 216.4 - 232.1 - 249.4 - 899.6 - 1 572.5 - 2,661.3Public - I59.1 - 162.5 - 168.5 - 175.0 - 154.2 - - 1J164.6 - 2,013.9Private - 30.1 - 39.1 - 47.9 - 57.2 - 65.3 - 209.5 - 407.8 - 647.4

Urban Development Total 3.6 20.0 9-.3 26.5 5.4 34.3 6.2 41*5 6.9 45.6 22.8 147.9 37.2 228.3 63.6 396.2and Communication Public .1 1 3T( 1 T310 -2.2 25.1 3.0 3-1.5 T3@ 35.4 10.3 110.6 21.4 -1B89 32B. 312.6

Private 2.5 7.0 W7 7.9 3.2 9.2 3.2 10.0 3.5 10.2 12.5 37.3 15.8 39.4 30.8 83.6

Transportation Total 85.6 83.7 103.8 85.1 75.6 87.3 57.6 83.3 48.5 77.1 285.5 332.8 264.4 343.3 635.5 759.8Public 55.3 6776 7W.7 -66T. 3T.7 70.1 7259 -657 21.0 - 3F -IVe3 262.9 -949 243.8 -29T' 574.3Private 30.3 16.1 39.1 16.7 40.9 17.2 31.7 17.7 27.5 18.3 139.2 69.9 169.5 99.5 330.0 185.5

Total Sector Total 210.8 464.5 290.2 559.6 291.3 617.5 279.8 651.2 265.6 686.7 1 126.9 2 514.9 1 242.0 3 673.9 2,579.7 6 653.1Investment Pubiic 101.0 314.7 135.5 357.2 122,7 392.0 122,9 b4105 TI E E 4 I24s 462,0 1,583.6 '446i 9 1,029.9 9 4,123.7

Private 109.8 149.8 154.7 202.4 168.6 225.5 156.9 240.8 164.8 262.7 644.9 931.4 795.1 1,448.4 1,549.8 2,529.4

APPE'DIX 1-C

Kission Recoammendations (continued)


1961 1962 1963 1964 19S5 1962-65 1966-70 1961-70US$ Ev US$ E° US$ E° US$ EO US$ EO US$ E° US$ EO US$ E°

Difference, Increase (+) orDecrease (-)j Mission recom-mendations in Program

Agriculture Total +13.9 -17.2 +27.5 -o.6 +36.8 +11.0 +41.2 +27,2 +31.5 +211 +137.0 +58.5 +69.2 -75.6 +220.1 -34.5Public +10,6 -7,4 +27.6 1 +362 5 +27.14 +70.1 +44.7 +26.1 +0.5 +130.3 +130.9 +45.1 +9 +18.0 +212 2Private +3.3 -9.8 -0.1 -18.8 +0.3 -16.4 +1.1 -17.5 +5.4 -19.7 +6.7 -72.4 +24.1 -170.4 +34,1 -252.7

Miring Total -14.2 -15.0 +9.4 +6.7 +14,6 +10.7 +10.3 +7.5 +23.6 +21.0 +57.9 +45.9 -20.1 -173 +23.6 +13.6Public - - 6 +0.3 +0.7 30.3 0 +0.3 +0.ii +0.3 +2.2 +1.1 +0.3 +6.5 +1.7Private -14.2 -15.0 +8.8 +6.4 +13.9 +10,4 +9.8 +7.2 +23.2 +20,7 +55.7 +44.8 -20.4 -17.9 +21.1 +11.9

Manufacturing Total +20.9 +34.6 +17.5 +30.3 +17.2 +29.1 +15.6 +20.0 -9.8 +5.0 +40.5 +84.4 -125.5 -196.5 -63.9 -77.5Public +2.0 +1 .0 -2.9 -2.2 -2.0 +0,6 +3.2 +2.3 A3g5 -0.3 3 +0.4 -11.0 577 -- -7.1 \

Private +18.9 +33.6 +20.4 +32.5 +19.2 +28.5 +12.4 +17.7 +4.0 +5.3 +56o +84.0 -114.5 -188.0 -39.4 -70.4 r

Power and Fuels Total +2.1 +1.5 +0.2 +1.3 -0.5 -0.9 -1.1 -C.9 -1.2 -2.5 -2.6 -3.0 -16.2 -33.6 -16.7 -35.2Pubic = + - + -0.3 - -0.4 -. -0.4 - -. +1.2 - -0.4 -3.3Private +2.3 -0.5 +0.5 -0.5 -0.2 -0.9 -0.7 +0.6 -0.8 -1.3 -1.2 -2,1 -17.4 -29.3 -16.3 -31.9

Building Total - +17.2 _ +18.7 - +20.2 - +21.5 - +23.1 - +83.6 - +147.1 - +247.9Public - -iii - +15.52 - +15. - +16.4 - +17.2 - +64.6 - +109.9 - +189r0Private - +2.7 - +3.5 - +4.4 - +5.2 - +6.0 - +19.1 - +37.1 - +58,9

Urban Development Total -1.6 -7.8 -1.0 -2.8 -0.3 +2.4 +o.4 +7.6 +0.6 +8.6 -0.3 +15.8 +1.9 -8.1 - -and Communication Public -0.9 -- O -0, -2.1 -0.2 +2.0 +0.3 +6.0 +0.4 +7.2 - +13.1 +70.75 -7,5 - -

Private -0.7 -2.0 -0.4 -0.7 -0.1 +0.4 +0.1 +1.6 +0.2 +1.4 -0,3 +2.7 +1.1 -0.6 - -

Transportation Total +27.3 +9.1 +55.6 -0.8 +27.2 +1.1 +9.0 -3.3 -0.3 -9.9 +91.5 -12.9 +16.6 -98.7 +135.4 -102.5Public +19.2 +7.2 +39.2 -3,C -1.1 +1.5 -5.5 -2.8 -12.3 +47.7 -21.9 -17.0 -109.6 +52.9 -124.3Private +8.1 +1.9 +16.4 +2.2 +17.4 +2.2 +7.5 +2.2 +2.5 +2.4 +43.8 +9.o +30.6 +10.9 +82.5 +21.8

Total Sector Total +48.5 +22.4 +109.2 +52.8 +95,0 +73.6 +7594 +79.6 +44.4 +66,4 +324.0 +272.3 -74.1 -282.7 +985 +11.8Investment Public +30.7 +11 5 j3 +4*. +J4I5 +45 0 -+45 . 7 +9.9 +T 7 -I 3.3 +1573 +22 . 7§ + +274e2

Private +17.7 +10.9 +45.6 +24.6 +50.3 +28,6 +30.2 +17.0 +34.5 +14.8 +160.7 +85.1 -96.5 -358.2 +82.1 -262.4

APPENDIX 1-C

Mission Recommendations (continued)


1961 1962 1963 1964 1965 1962-65 1966-70 1961-70U$ E° US$ EC US$ E° US$ E° US$ E° US$ E° US$ -E°6 US$ E°--

Transfer Payments includedIn Mission Recommendations

PublicAgiculture - 2.C - lO.t - 10.0 - 10.0 - 10.0 - 40.0 - 58.C - 100.0Construction - 14.5 - 14.7 - 15.3 - 15.9 - 16.7 - 62.6 - 105.4 - 182.5

Total Public - 16.5 - 24.7 - 25.3 - 25.9 - 26.7 - 1C2.6 - 163.4 - 282.5

Private

Building - 2.7 - 3.5 - 4.4 - 5.2 - 6.0 - 19.1 - 37.1 - 58.9

Total Private - 2.7 - 3.5 - 4.4 - 5.2 - 6.o - 19.1 - 37.1 - 58.9

TOTAL - 19.2 - 28.2 - 29.7 - 31.1 - 32.7 - 121.7 - 2C0.5 - 341.4

APPEN])IX 1-D

Current Government Exoenditures. 1955-59. and Revised Pro,ections. 1961-70

(in E° millifons, 1960 prices) Annual R.te

Total of Increase

1955 1956 1957 1958 19S9 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1961-70 1961-70

Central Government1. Ministry of

EGucation 100 106 112 119 196 134 142 151 160 170 1,320 6.o

2. Ministry ofPublic IWorks L4 22 28 29 31 33 35 37 39 41 309 13.0

3. Ministry ofAgriculture 6 9 12 18 19 20 21 23 24 26 178 18.0

4. Ministry of Health 0.7 1.0 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 14.9 12.0

5. Other Departments 209 214 219 224 230 236 242 248 254 260 2,336 2.5

6. Total (1+2+3+4+5) 311.2 278.7 322.8 307.0 279.3 329 352 372 391 408 425 442 461 479 499 4,158 4.7

Other Government Aeencies7. University of Chile 6.1 8.7 12.7 12.9 13.5 IL 14 15 16 17 18 19 20 21 22 176 3.5 1

8. National Health 1-

Service 60.5 58.5 49.8 53.0 45.4 53 55 57 59 61 63 65 67 69 71 620 3.5 ;

9. Pension Funds andMunicipalities 32.5 30.6 27.1 42.3 40.6 37 38 39 40 41 42 43 44 45 46 415 2.5

10. Total (7+8+9) 99.1 97.8 89.6 108.2 99.5 104 107 111 115 119 123 127 131 135 139 1,211 3.2

11. Transfer Payments/l 332.5 329.4 441.0 484.0 509.9 520 541 563 586 609 633 658 684 711 739 6,244 4.0

12. State Enterprises 245.3 250.3 282.8 315.5 298.5 327 345 363 383 405 427 450 475 501 529 4,205 5.5

13. Current Expendituresof Public Sector(6+10+11+U) 988.1 956.2 1,136.2 1,214.7 1,187.2 1,280 1,345 1,409 1,475 1,541 1,608 1,677 1,751 1,826 1,9C6 15,818 4.5

14. Current Receiptsof Public Sector 1,121.6 1,097.3 1,239.1 1,329.7 1,397.5 1,543 1,627 1,716 1,810 1,910 2,015 2,126 2,243 2,366 2,496 19,852 5.5

15. Current AccountSurplus(14-13) 135.5 141.1 102.9 115.0 210.3 263 282 307 335 369 407 449 492 540 590 4,034 9.4

LI Of Central Government and Other Agencies.

APPE-IDIX 1-E

'_,lic Sector Rcceipts,_.s to&Poedri`:peuitures. 1961-70

(in E° millions, 1960 prices)

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1961-70

HouT ng - - - 8.1 16.6 25.6 35.1 45.1 55.6 66.7 252.g

Agriculture - 2.9 7.4 12.7 18.2 24.2 29.6 34.8 39.6 44.4 213.8

Industry 0.6 1.6 3.1 4.6 6.2 7.2 8.1 9.1 10.0 11.0 61.5

Total 0.6 4.5 10.5 25.4 41.0 57.0 72.8 89.0 105.2 122.1 528.1

- 56 -

Notes to Appendix Table 1-F and Table 1-10

Explanations refer to Revised Estimates.

1. Exports of Goods and ServicesExport Projections Revision by Central Bank of Chile (1961-65)and mission estimates (1966-1970), December 27, 1961.

2. Imports of Goods and ServicesCORFO Revised Balance of Payments estimates plus mission adjust-ments for the difference in foreign exchange cost between Govern-ment Program and mission recommendations (see Tables 1-5 and 1-13).

3. Interest and Dividend Payments

(a) Dividend Payments on private direct investmentCORFO Revised Balance of Payments, Table 1-5.

(b) Interest payments on public external debtIBRD estimates on existing debt (February 9, 1962) plusestimated interest on future debt within borrowing capacityas shown in Appendix A.

4. Capital Inflows

(a) Public Loans: Known approved loans as shown in Tables 2-hthrough 2-6. New loans within borrowingcapacity as shown in Appendix A.

(b) Private Loans: Program Summary, Table 1-10.

(c) Private Direct Investment: Program Summary, Table 1-10.

5. Capital Outflows

(a) Loan Amortization - Public LoansIBRD estimates of amortization payments on existing externalpublic debt (February 9, 1962) plus estimated amortizationpayments on new loans within borrowing capacity as shown inAppendix A.

Private LoansFrogram Summary Table 1-10, reduced by US$ 5 million annuallyto offset estimated inclusion of Government guaranteed privatedebt in public debt.

(b) Retirement of Direct InvestmentAccumulation of depreciation reserves (excluding interestand dividend payments) on existing and estimated futureprivate direct investment. CORFO, Revised Balance of Pay-ments Estimates, Table 1-7.

Appendix Table 1-F

Reconciliation of Balance of Payments Project&onswith Mission's Program Revisions, 1961-70/

(in millions)

1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

Export Proceeds (goods and services) 529 592 660 718 745 835 878 911 939 958Loan Receipts

Public: Approved 125 222 50 51 - - - - - -New - 50 100 100 100 80 80 80 60 60Private: 36 30 32 28 28 27 24 25 26 27Private Direct Investment 84 70 75 64 68 62 55 59 60 62Deducts

Amortization of Public Loans 88 79 65 70 63 64 68 68 70 71Interest Payments on Public Loans 21 25 24 23 21 21 21 21 22 22Total Debt Service on Public Loans 109 104 89 93 84 85 89 89 92 93

Amortization on Private Loans 10 18 25 26 24 22 24 26 25 27Dividend Payments on PrivateDirect Investment 66 68 72 86 106 118 129 l;1 148 155

Accamulation of DepreciationReserves on Direct Investment 42 43 44 45 45 52 58 64 69 76

ForeinEcae Availablefor Prcse of Imports 547 731 687 711 682 727 737 755 751 7f6

Import Projections (goods and services) 568 598 649 664 706 711 734 757 780 817Adjustment to Mission Recommendation +h9 +109 +95 +76 +45 -1 -11 -16 -21 -26Import Requirementa 617 707 744 740 751 710 723 741 759 791

Foreign ExchangeSue pu (+)cit -) -70 +24 -57 -29 -69 +17 +14 +14 -8 -35

For sources and explanations see Notes to Tables 1-10 and 1-F on following page.

CHAPTER 2

THE PROGRAM OVER THE SHORT TERM

1. This chapter will examine short-range plans for public invest-ment, as shown in the 1962 budget and in current government projectionsfor 1963 and 1964. These public investments fall into three broad cate-gories: capital expenditures in the regular budget of the centralgovernment, expenditures from social security funds, and investments ofthe State economic enterprises. Our analysis is made against the back-ground of the 10-year plan and the mission's recommendations. Our mainfocus will be on projected investments during the year 1962. Data cover-ing this year were not available when the main body of this report waswritten during the latter half of 1961, nor were the mission's commentson the 10-year plan available to the Chilean authorities who worked outthe 1962 investment plans.

2. The ability of Chile to implement the program in the immediateyears ahead depends on the readiness of projects, the availability ofadministrative and technical personnel to carry them out efficiently,and the availability of domestic and external resources to pay for them.The mission underscored these points in Chapter 1 with reference to theentire 10-year program. It will be noted that some of the short-rangeplans are not consistent with the 10-year program or with the mission'srecommendations. Some of these inconsistencies cannot be rectified:some projects are already well under way; rates of expenditure in certainsectors and sub-sectors have been committed and some public revenues areearmarked for works outside the program, as revised by the mission. Itis essential that there be enough flexibility in the short-range plansto bring performance into reasonable accord with the mission's generalrecommendations in Chapter 1, and into accord with the project recommen-dations in the detailed sector chapters.

I. OVERALL FItIANCING IN 1962-64

The Outlook for 1962

3. Total investment of the public sector authorized for 1962amounts to E° 588 million, Of this total, E° 350 million is authorizedin the regular budget, EO 61 million will be investments by the socialsecurity institutes, and EO 177 million is scheduled by the variousstate economic enterprises. This total is EO 183 million above theoriginal program total for the year, and EO 18 million above the amountrecommended by the mission for 1962. Accounting for much of the differ-ence, the original plan, as well as the mission's recommendations, dealtwith escudos in 1960 prices. Since then, the cost of living index hasincreased 12%, and presumably most factor prices have risen by roughly

- 2 - 2. THE SHORT TERM

the same amount. (No attempt has been made to adjust for any price changesfollowing the exchange reform of January 1962,) Thus, in real terms, thetotal public inve1stment is not significantly higher than that recoammendedby the mission../

4. Even so, a serious problem is revealed when the investment levelis related to the amount of public funds available to finance it. Inrecent years public savings available to finance public investment expendi-tures -- as indicated by revised data for 1959 and 1960, performance esti-mates for 1961 and budget estimates for 1962 -- have been smaller thanthose indicated in the original 10-year program. Although public savingsincreased somewhat in the last three years, the increase fell far short ofexpectations and of what would be necessary if the targets of the 10-yearprogram are to be reached.

5. Savings of the public sector rose from E° 207 million in 1959 toEO 264 million in 1961, but in 1960 prices the increase was only EO 26million. According to the budget estimates, they are expected to reachE° 328 million in 1962 (Table 2-1), which is about EO 293 million in 1960prices. In 1961, the budget contributed EO 100 million to public savings,the social security institutes contributed EO 92 million, and the Stateeconomic enterprises, E° 73 million in current prices. In Table 2-2, thesavings are broken down by origin and shown both in current escudos andescudos of 1960 value.

1/ The budgeted investments of E° 588 million, adjusted to 1960 escudos,become E° 517 million. The difference between this figure and themission recommendation (EO 500 million) is believed to be largelyaccounted for by the inclusion of defense investments in the formerand its exclusion from the latter figure.


Table 2-1

Consolidated Accounts of the Public Sector, 1959-62

(in current EO millions)

R e c e i p t s

State Economic Social SecurityYear Budget Enterprises Institutes Total

Actual

1959 583 229 298 1,110

1960 708 330 366 1,4o4

1961 812 415 405 1,632

Estimated

1962 935 618 453 2,0c6

Current Expenditures

State Economic Social SecurityYear Budget Enterprises Institutes Total Savings

Actual

1959 48o 189 234 903 207

1960 636 261 273 1,170 23h

1961 712 324 332 1,368 26h

Estimated

1962 788 525 365 1,678 328

- 4 -

Table 2-2

Funds Originating in the Public Sectorfor Financing Investment, 1959-1962

Source of Funds 1959 1960 1961 1962Est.

(in millions of current Escudos)

Budget 103v1 71.8 100.0 146.6State Economic Enterprises 40.4 68.9 91.5 93.1Social Security Institutes 63.5 93.1 72.5 88.5

TOTAL 207.0 233.8 264.0 328.2

(in millions of 1960 Escudos)

1959Li 1960 1961L2 1962/3

Budget 1114.5 71.8 93.0 130.9State Economic Enterprises 441.8 68.9 85.1 83.1Social Security Institutes 70.5 93.1 67.5 79.0

TOTAL 229.8 233.8 245.6 293.0

/1 Adjusted to 1960 prices by a factor of 111.

/2 Adjusted to 1960 prices by dividing by 107.5.

/3 Adjusted to 1960 prices by dividing by 112. This assumes stable pricesduring 1962.


6. On the basis of the Government budget approved for 1962 and theprojections of receipts of expenditures of ctate economic enterprises andof the social security institutes, total savings of the public sector for1962 are estimated at E° 328 million, of which budgetary savings amountto E° 147 million. Out of these budgetary savings, E° 52 million is neededfor external debt amortization. Thus, on the assumption that the entireexisting internal debt due in 1962 can be rolled over, the difference ofE° 95 million would be available for financing budgetary investments. How-ever, since the receipts may have been overstated by as much as E° 45million, the budgetary savings are not likely to exceed E° 50 million.Investments to be financed out of the budget amount to E° 350 million,leaving a capital account deficit of E° 300 million.

7. Approximately EO 150 million of external resources are reportedto be available to cover some of these investment requirements (see Table2-3). This leaves a gap of about EO 150 million. The Chilean authoritiesenvisage savings through prolongation of investments in the amount ofapproximately EO 20 million and additional reduction of expendituresthrough postponement of payments amounting to another EO 20 million.On this basis a gap in the order of EO 110 million remains.

- 6 - 2. THE; SHOCRT TERNIvI

Table 2-3

Estimated Disbursements of External Loans and Creditsfor Budgetary Investments in 1962

(in '000 US$)

Approved Loans and Credits

Agriculture 1,o4oIrrigation

IDB 500Marketing

French Government Credit 300French Suppliers' Credits 240

Manufacturing 840Fish Processing Plant

IDB 84o

Power 280British Government Credit 280

Transportation 11,h40Railroads

German Suppliers' Credits 500Roads

IDA 6,000Ports and Shipping

French Government Credit 590French Supplierst Credits 700

Airports and AirplanesDLF 3,45o

UnclassifiedFrench Government Credit 200

Building and Urban Development 800Water and Sewers

IDB 400IDB Trust Fund (Bogota) hoo

Unclassified 127,740US$ 100 million Earthquake Loan 70,000U.S. Government donation 11,000PL 480 21,000German Government Credit 25,000British Government Credit 140Various Countries for

Miscellaneous Purposes 600

Total 142,140

E° equivalent 149,248

- 7 - 2. THF SHORT TERM

8. Because of the limited transferability of savings within thepublic sector, as discussed in Chapter 1, none of the savings of the socialsecurity institutes and of the State economic enterprises are at presentavailable to cover the expenditures in the Government investment budget.In the case of the social security institutes, out of an estimated totalof EO 88 million in savings, E0 40 million is expected to be made availableto the National Housing Corporation (CORVI) and an additional EO 21 millionis to be invested in housing construction by the institutes themselves.The remaining E0 27 million is not likely to be available for financing anypublic investments because these funds are likely to be used for loans tomembers and for other purposes not related to public investment. In thecase of the State economic enterprises, all savings, estimated at E0 93 mil-lion, will be utilized by the enterprises themselves. These enterpriseswill also have the use of already secured external resources in the amountof E° 84 million to finance their investments in 1962 (Table 2-4).


Table 2-4

Estimated Disbursements of External Loans and CreditsPublic Investments Outside of the Budget in 1962

(in '000 US$)

Approved Loans and Credits

Agriculture 12,300Iand Setlement

IDB 3,500IDB Trust Fund (Bogota) 600

Agricultural ImprovementsIDB Trust Fund (Bogota) 4,000

Agricultural MachinerySuppliers' Credits 4,200

Manufacturing 10,345Copper Refining

German Suppliers' Credits 4,600Industrial Credits

IDB 5,745

Power 6,000IBRD 6,000

Transportation 45,520Railroads

Ex-Im Bank 12,000Italian Government Credit 10,000French Suppliers' Credit 6,200French Government Credit 1,600Japanese Government Credit 4,000British Government Credit 1,200

RoadsIBRD 6,ooo

Ports and ShippingFrench Supplierst Credit 600British Government Credit 720Danish Government Credit 400

Airports and AirplanesFrench Suppliers' Credit 1,800

UnclassifiedFrench Government Credit 1,000

Building and Urban Development 6 185Housing

DLF 5,000Schools and Education

Swiss Government Credit 950Dutch Government Credit 110British Government Credit 100

HospitalsDanish Government Credit 25

Total 80,350

EO equivalent 84,367


9. In summary, the 1962 financial accounts for public sector in-vestments at the beginning of the year (before the likelihood of newmodifications on account of the exchange rate adjustment arose) appearedas follows:

Millions ofCurrent Escudos

I. Investments Authorized 588

Budget 350

Outside of Budget 238

II. Means of Financing 477

Budget 50Outside of Budget 154

Total Domestic Savings 204

Available External Loans and Credits 234

Total Estimated Financing Available 437

Additional Savings andProlongation of Investments 20

Postponement of Payments 20

III. Shortfall 110

10. To the extent that additional external assistance becomes avail-able for 1962, and reductions in expenditures are effected by prolongationof project execution, this shortfall would be covered in a non-inflationarymanner. If the entire shortfall were covered by external aid, internalresources would then cover about 40% of total capital expenditures for 1962.If the amount of savings which the public sector must transfer ab,road toamortize previously incurred external debt (about E° 75 millionP/) isincluded as an investment expenditure, about 45% of total capital expendi-tures in 1962 would be covered from internal sources.

1/ Excluding interest payments.

- 10 - 2. THE SHORT TERIT

11. In Chapter I, we stressed the importance of co-ordinating publicinvestment activities of the various ministries and of the several Stateenterprises and of synchronizing them with the investment magnitudes andobjectives of the Ten-Year Development Program. That this has not yet beenadequately done clearly emerges from a comparison of the sum of the projectinvestments contemplated by the various ministries and State enterprisesfor 1962 (considered in detail in Part II of this Chapter) with the totalinvestments contemplated by the original Ten-Year Development Program in1962, as well as with the total amounts budgeted for 1962 and described atthe beginning of this chapter. The original program contemplated invest-ments of E° 453 million (in 1962 prices), the budgeted investments for1962 are EO 588 million, and the sum of the investments contemplated bythe various ministries and State enterprises for 1962 amounts to EO 618million (Table 2-5). The discrepancies are further accentuated by thefact that some high priority investment projects are not included in thebudgeted figures or in the larger amounts contemplated by the variousministries and State enterprises. This situation strongly suggests theneed for strengthening the screening and co-ordinating mechanisms so asto ensure that projects not included in the Ten-Year Development Programnot be undertaken.

12. The major differences in magnitudes between the sum of the pro-posed projects for 1962 and the missionts recommendations (Table 2-5) arein transportation and in urban development. In the former case, the excessis due to a higher investment in railroads and a faster pace in highwayinvestment than is favored by the mission. This situation should now bereviewed in the light of the mission's recommendations, and its consequencesfor the financial plan of the program should be considered. Similarly,the project proposals for urban development need reconsideration in orderto bring them in line with the program and mission recommendations. Theprojects in agriculture, power and fuel, and housing will probably requiremore funds to adjust for price changes. The excess in the manufacturingsector will also need to be reviewed.

13. The mission could not in the time available scrutinize in detailevery investment included in the budget and check it against the indi-vidual project proposals. However, the wide disparities in magnitudesdiscussed above strongly suggest that a situation is rapidly developingwhereby program investments are being introduced into the capital budgetwithout appropriate adjustment of a variety of carry-over budgetary in-vestments. This has placed an added financial burden upon the publicsector -- a burden not only not envisaged by the program, but one thatruns directly counter to it because it encourages use of scarce resourcesfor other purposes than high priority projects. Reconciliation of thebudgets for 1962 with the program projects, as modified by the mission,is most urgent and there are good grounds for believing thtat successfulcarrying out of this task would result in sizeable budgetary economies,possibly of the order of magnitude of between EO 50 million to EO 75million during 1962.

Table 2-5

Public Investments in 1962(in E° Millions)

Program Mission Recommendation Public Excess(+) or

(1) (2) Investment Shortfall(-) ofIn 1960 prices Total EO In 1960 prices Total EO Projectsi/ (3) over (2)

Total in 1962 Total in 1962 (3) over MLissionSector US$ E° in EO prices US$ E° in E° prices 1962 prices recomme dation

Agriculture 1.3 26.4 27.8 31.1 28,9 44.6 75.0 84.0 75.9 - 8.1

Mining 6.5 5.2 12.0 13.4 701 5.5 13.0 14.6 17.1 + 2.5

Manufacturing 17.8 16.0 34.7 38.9 14.9 13.8 29.4 32.9 38.2 + 5.3

Power and Fuel 18.6 42.0 61.5 68.9 18.3 43.8 63.0 70.6 61.3 - 9.3

Building - 147.3 147.3 165.0 - 162.5 162.5 182.0 175.3 - 6.7

UrbanDevelopment andCommunications 2,2 20.7 23.0 25.8 1.6 18.6 20.3 22.7 55.o + 32.3

Transport 25.5 71.4 9802 110.0 64.7 68.4 136.3 152.7 194.9 + 42.2

Total SectorProgram 71.9 329.0 4o4.,5 L53.0 135.5 357.2 499.5 559.5 617.7 + 58.2

Note: 1962 prices derived by 12% increase of 1960 prices.

2 Include projects budgeted and others contemplated by executing public agencies.


The Outlook for 1963 and 1964

l14 Information on public investment expenditures and the means oftheir financing, comparable to that for 1962, is not available for 1963and 1964. It is obvious, however, that the extraordinarily large externalresources available in 1962 are a non-recurrent phenomenon (a result oflarge-scale assistance obtained after the 1960 earthquakes which had notbeen drawn down), and cannot be relied upon during the forthcoming years.According to the information available to the mission, approximatelyUS$ 100 million (EO 105 million) in external loans and credits was avail-able at the beginning of 1962 to finance public investments in 1963 andsubsequently (Table 2-6). Even if the substantial external credits onconventional terms assumed to become available for 1963 and 1964 in Table1-9 amounting to EO 210 million were in effect realized, there wouldremain a substantial shortfall in public investment resources and thiswould need to be covered to carry out the program. Thus, it will beurgent to raise levels of domestic public savings above those indicatedin Table 1-9, in order to maintain the level of public investment expendi-tares necessary to achieve the fundamental objectives of the 10-yearprogram. This means that vigorous and prompt measures must be taken inthe public finance field, including basic reforms in taxation and incharges for the uses of public services.


Table 2-6

External Loans and Credits for Financing of Public SectorInvestments in 1963 and Subsequently

(in '000 US$)

AEproved Loans and Credits

Agriculture 13,3h0Irrigation

IDB 2,850Land Settlement

IDB 3,822IDB Trust Fund (Bogota) 668

Agricultural ImprovementIDB Trust Fund (Bogota) 6,ooo

Manufacturing 10,160Copper Refining

German Suppliers' Credits 6,000Fish Processing

IDB b4,160

Power 2h,000IBRD 24,ooo

Transportation 50,350Railroads

Italian Government Credit 14,000Japanese Government Credit 6,000British Government Credit 3,100Ex-Im Bank 2,300

RoadsIDA 13,000

AirportsDLF 11,950

Building and Urban Development 2,720Water and Sewers

IDB 650IDB Trust Fund (Bogota) 2,070

Total 100,570

EO equivalent 105,598


15. If these measures are not carried out promptly and effectively,the implications for the development program clearly emerge from Table1-9. According to this table, the savings of the public sector must in-crease to E° 342 million in 1963 and E° 396 million in 1964, as comparedwith EO 200 million in 1962. If these targets are reached together withthe drawdowns on existing loans of nearly EO 100 million and new long-termborrowings of EO 210 million on conventional terms, there is still a gapof roughly EO 140 million which will have to be covered through a combina-tion of additional internal efforts and/or external assistance on non-conventiornal terms. Should public savings fail to increase above thelevel of 1962, the gap for 1963-64 would increase from EO 1i0 million toabout EO 500 million. Moreover, if prompt measures in the organizationand co-ordination of public investment are not instituted and the levelof investment is permitted to exceed the mission's recommendations byEO 50 million to EO 75 million annually during 1963-64 (as is being donein 1962), the gap could increase to EO 60o million in the next two years.There can be no reasonable expectations of covering a gap of such propor-tions with non-conventicnal external financing and the entire program wouldbe seriously endangered.

II. PLANS FOR SPECIFIC PROJECTS

16. In the preceding section of this chapter, we have dealt with thebudget for 1962 and with the plans of the public sector as a whole on aglobal basis. This section comments on specific project plans in the vari-ous sectors, including those which merit priority consideration. Sectorbudgets for 1962 and tentative sector investment allocations for 1963-6h,together with explanatory notes are to be found in the appendices to thischapter.

Agriculture

17. The mission regards investment in the agricultural sector as ofthe highest priority. Although there are no fully documented projectswith reliable cost estimates, approximations have been arrived at eitherby the program or the mission and are presented here for the purpose ofindicating the general orders of magnitude. Within the agriculturalsector, the following projects appear to the mission to be worthy of con-sideration and of prompt investigation:

(1) livestock development project - estimated at US$ 28 millionand EO 44 million for 1962-65;

(2) farm credit project (particularly for on-the-farm irrigationand drainage works, but also could include purchase of farmmachinery, storage facilities and development of orchardsand vineyards) - estimated at US$ 15 million and EO 25million for 1962-65;

- 15 - 2. THE SHORT TERIM

(3) facilities and equipment for research, extension andtraining - preparation of projects should start promptlywith a view to executing projects estimated up to US$ 15million and E° 30 million in 1963-65;

(4) irrigation public works - cost-benefit studies should bepromptly undertaken to establish priorities and establisha realistic time schedule - estimated projects of US$ 10million and E° 40 million in 1963-65;

(5) land settlement schemes - depending on appropriate legis-lation, preparation of projects should be undertaken witha view to executing projects up to US$ 3 million and EO 42million in 1963-65.

No financial resources have been provided for the possible above projects,except for a loan of US$ 7 million by the IDB which can be applied toproject (5).

18. The facilities and procedures for project (1) are now beingworked out and these could a1.3 be used for proj8ct (2). Project (3)would have to be worked up with.'i Cc,FFIN after considerable prior strengthen-ing of its staff. Proje't (4). requires pronmt hiring of consultants toprepare studies of a nuo'Dr of irJioation public works and to assess theirmerits and their relati-.e pr4i i These stud-es should include cost-benefit analyses including not OJ1I-V PTh1iC works but a]so on-the-farminvestment requirements, the ty-pcs o-- crops to be growTn, the markets forthese products, etc. Pr,cject (5) would have to be worked out with athoroughly reorganized Caja de Colcnizacion but no start could be madepending passage of adequate land reform legislation.

Industry

19. Because most industry in Chile is privately owned and operated,the functions of the public sector are limited in this sphere. Never-theless, private industry, especially the smaller enterprises, depend onthe government for their long-term capital. The following projects inthe industrial sector appear to the mission as worthy of consideration:

(1) A project of the highest priority in the industrial fieldis the establishment of a private industrial bank with an initial capitalof about US% 15 million. External financial assistance will be essentialin setting up this institution, although no estimates of the exact require-ments for such assistance are available.

(2) Another project of the highest priority is a new celluloseplant for the privately-owned and operated Papeles y Cartones Company. Nodefinite cost figures are available but the amount of external assistancerequired may be up to US$ 20 million.

- 16 - 2, THE SHORT TERM

(3) A project for the expansion of the CAP steel mill is alsoof high priority but the size of the expansion will depend on the exportprospects for Chilean steel. No final cost estimates are possible pendingcompletion of investigations of this aspect of the problem, but at thistime it appears that a minimum project warranted by projected growth ofdomestic demand would cost about EO 111 million.

(4) Preparation of additional projects in fish-meal processingenjoys a high priority. Studies should be promptly undertaken to deter-mine what projects in this field would warrant external financial support.

20. The mission recommends no expansion in sugar beet capacitybecause of the high-cost production which characterizes this industry inChile. No new projects should be launched pending completion of studyappraising the agricultural economics of beet-sugar production in Chile,

Fuel, Power and Mining

21. There are a number of high priority projects in the fields offuel and power which are experiencing difficulties in financing and whichare worthy of consideration for some additional external financing. Inthis category, the following may be included:

(1) Coal mining development and modernization of the mergedLota-Schwager operation, subject to the carrying out ofa fuel and energy-balance study and adoption of a co-ordi-nated fuel and energy policy by the government. Indica-tions are that the financial requirements in 1963-64 willamount to E° 3 million in local currency.

(2) Rapel hydroelectric project is expected to cost more thanoriginally estimated and even if the applied-for rateincreases are granted as it is to be hoped they will be,there may be a shortfall of EO 10 million in local currencyduring 1962-64 in ENDESA's own resources.

(3) Other ENnESA projects - EO 10 million in local currencyduring 1962-64.

22. In addition to the above, a thermal power project based on theLota coal mine is under serious consideration by both the Lota and ENDESAmanagements. A study of this project should be promptly undertaken.

23. The Government's plan to build a copper refinery with a capacityof about 100,000 tons at Las Ventanas estimated at about EO 20 million,requires further examination. If a project study, including marketanalysis, supports the contention that refining in Chile will lower averagecosts of delivered copper after covering normal power costs and a satis-factory return on the refinery investment, the refinery at Las Ventanas


might be sound from an economic point of view. However, if this be thecase the Government probably stands more to gain through taxes and otherrevenues by inducing private interests to make the heavy capital invest-ment required by the refinery.

Transport

24. The following new projects and financial requirements of projectsalready on the way, merit consideration:

Railroads

25. The railroads are carrying out a very large investment project,including the electrification of the line between Santiago and Chillan,relaying of track, installation of a new signal system, acquisition ofdiesel locomotives and rolling stock, construction of new structures, etc.The estimated cost of the entire project is US$ 114.7 million and EO 208million. The mission has recommended that the project be reduced. Therailroad investment budget for 1962 now stands at us$ 56 million andE° h405 million, as shown in Appendix Table 2-6. The figure will probablybe reduced by at least EO e55 million in order to stay within the govern-ment subsidy; the total reduction may be as much as EO 10 million if themission's recommendations are followed.

26. Pending government decision on transport policy, it is difficultto foresee the total fir_ncial requirements of the railroad project or theextent of external assistance that may be 2equired4 Gr!-Iy one point appearsreasonably clear at this stage: most, if not all, foreign exchange require-ments have already been covered by a loan from the Eximbank (US$ 30 million)and by suppliers' credibs from Ttaly (US$ 2_)4.2 m.lion), Japan (US$ 19million), and the TJnite:-i KirgdDm,m (UStj 5.6 nillion) --- a total of US`$ 78.8million as compared wi`` the mission's recorunendation of US$ 79,4 million.However, of the EO 126 04 million recommended by the mission to be investedin the project, approximately E0 60 million will be required during1962-6h. Since the railroads do not cover their current expenses and arenot likely to do so for the next several years at least, this large amountof investment will have to come from the Government or from externalresources.

27. Providing the railroad administration accepts and carries outthe most important recommendations of the mission including a cut-back inrailway investment, there may be a basis for foreign financial assistance.The foreign exchange cost of the project is covered by suppliers' creditsbut the mission estimates that the local currency requirements during1962-65 will amount to about EO 60 million. Track laying alone is reportedto require nearly E0 13 million in local currency in 1962 and its execu-tion is being handicapped by lack of local currency.

-18- 2. THE SHORT TERM

Roads

28. The mission attaches the highest importance to the construction,improvement and maintenance of highways in Chile. Within this overallobjective, the following six road projects now appear to the mission tooccupy the highest priority, The cost estimates were prepared in Chile

on the basis of a 65-35 percent split between local currency and foreignexchange.

(1) rebuilding, improvement and construction of transversalroads in the earthquake area with an estimated cost ofUS$ 23.5 million and EO 45.8 million, These cost esti-mates were prepared in Chile and accepted by IDA whichmade US$ 19 million available for this project.

(2) longitudinal highway (north of Santiago) is particularlyimportant and urgent in conjunction with the mission

tsrecommendation to consider replacing the northern rail-road. Estimated cost estimate of the highway is US$ 9.4million and EO 18.2 million. The U.S. Government hasalready financed US$ 8.7 million.

(3) longitudinal highway (south of Santiago) estimated tocost US$ 9.1 million and EO 17.7 million. The U.S.Government has financed US$ 14.6 million of this project.

(4) improvement and construction of transversal roads outsideof the earthquake area, especially in the central part,estimated to cost US$ 20.6 million and E° 40.1 million.The U.S. Government has financed US$ 800,000 of thisproject.

(5) road maintenance project (1962-64) estimated to costUS$ 6 million and EO 52.5 million. The foreign exchangecost is covered by an IBRD loan. Local currency costsare as estimated by the mission.

(6) roads to permit abandonment of some railroad branch lines.The cost of project will depend on the final decision as

to which branches are to be abandoned.

The successful carrying out of these high-priority projects will require the

establishment of the highway department of the Ministry of Public Wiorks

as an autonomous body, with sizeable additions of technical staff members,

and decentralization of its activities. As things now stand, road build-

ing facilities are severely strained and unless the recommended reforms

are carried out, a cut-back in the program may be necessary.


Ports

29. The high priority ports are as follows. The cost estimates wereprepared by the mission and are subject to modification upon more detailedstudy.

(1) San Vicente (Concepcion) -- new port to be constructedsubject to a survey to determine the seriousness of thegeological fault which has been discovered. Total costof project is about EO 10.5 million of which about E0 3million is in foreign exchange.

(2) Puerto Montt -- new port to be constructed subject todetermination of depth adequacy and foundation strength.Total cost is estimated at E° 4.3 million of whichforeign exchange is about US$ 2.4 million,

(3) San Antonio -- port expansion project with estimatedcost of EO 6.5 million of which about E° 3 million isin foreign exchange.

(4) Iquique -- port improvements costing about EO lol millionof which about one-half is foreign exchange.

(5) Valdivia -- port works are reeded but a survey should bepromptly undertaken to determine what kind of facilitiesare best suited and most economical to serve Valdivia.

30. The successful carrying out of these projects is dependent upongiving the newly established Port Authority complete control over allpublic ports, expanding its senior technical personnel, strengthening itsfinancial base by possible fee increases, etc.

Airports and Airplanes

31. The following are the highest priority projects in the airtransport field. All cost estimates are only approximations and willrequire additional investigation.

(1) improvement of airport security installations, includingtelecommunications, navigational aids, air-traffic con-trol, etc. The total cost of the project may be estimatedat the equivalent of about US$ 4 million during 1962-64.

(2) aircraft and airport maintenance equipment, machinery,facilities, etc. Estimated cost is about EO 3 millionduring 1962-64.


(3) airport construction and extensions to accommodate largejets at Antofagasta, Puerto Montt, Punta Arenas, Balmacedaand Arica; also a number of small local airports. Totalcost of these works is approximately EO 31 million ofwhich EO 16 million remains to be financed.

(h) Acquisition of Caravelle-type jets and other planes at atotal cost of about US$ 25 million of which at least 50,,might be acquired during 1962-64.

32. The feasibility of the above projects is predicated on theachievement of financial viability of the Linea Aerea Nacional and theestablishment of an autonomous airport authority.

Building and Urban Development

33. A number of high priority projects in the building and urbandevelopment sectors merit consideration. These include housing projects,water and sewers and schools and hospitals.

(1) Low-cost housing projects under construction by CORVI, theGovernment housing corporation, are of high priority.Although the mission did not investigate any specifichousing projects as a possible basis for external finan-cial assistance, there is little doubt that satisfactoryprojects could be selected within the financial require-ments of the program.

(2) Particular attention is called to the mission's recommenda-tion with regard to establishment of rural communities,including the construction of some 53,000 rural housingunits over the next decade at an average cost, includingcommunity facilities, of E° 3,000 each. One or more suchrural villages could serve as a basis for external assist-ance during 1962-1964. The cost of such a project wouldvary depending on its size but a good start would takeabout E° 3 million, mostly local currency.

3h. A number of high priority water and sewer projects requireexternal financial assistance. Three of these projects, in particular,fall in the category of pressing social investments:

(1) liedium-size towns water supply system with total finalrequirements during 1962-64 of nearly EO 8 million,mostly in local currency;

(2) Rural areas water supply system with an estimated cost ofEO 6 million during 1962-64, mostly in local currency;

(3) Rural schools sanitary facilities with an estimated costof E° 1.8 million, practically all of which is in localcurrency.


35. The remaining high priority investments in the social fieldinclude schools and hospitals. Although the mission did not investigateany specific projects in these fields, these no doubt exist and couldbecome the basis of external financial assistance. Particular attentionmay be given in this instance to schools and hospitals for rural villagesdiscussed under the heading of housing above.

Conclusion

36. The various projects enumerated above, some of which are alreadyin process of execution while others are in different stages of readiness,could provide a sound basis for external assistance in the period 1962-64.It should be observed that for the next several years a large portion ofthe foreign exchange requirements has been provided for and that much ofthe requisite external assistance will be for covering local currencyexpenditures.


Appendix Tables2-1 through 2-19 and Covering Notes

Agriculture

1. Total allocations of public funds for agriculture in the nextthree years are rather uncertain because of the multiplicity of agenciesinvolved and the important role played by loans of public funds to privateagricultural producers. The situation is further complicated by the factthat no decision regarding the scope and pace of the agrarian-reform pro-gram has been taken.

Irrigation

2. Budgetary allocations for 1962 are firm for public works in thefield of irrigation. They are identical with mission recommendationsshown in the chapter on agriculture. The irrigation works budget for 1962amounts to EO 14 million, of which approximately EO 2.5 million is inforeign exchange (Appendix Table 2-1). The works consist mostly of thecontinuation of a number of projects begun in earlier years. The largestsingle project is the Palama Dam with a total cost of EO 21.5 million, ofwhich E° 3.2 million is to be spent in 1962. Next in size are the AncoaDam, the Digua Dam, the Azapa Dam, the 1iaule Canals and the Bio-Bio Canal.Their total cost is estimated at EO 30 million, with expenditures in 1962budgeted at EO 5.8 million. Continuation of work on seven other irriga-tion projects (each with a total cost of less than EO 5 million) isbudgeted with expenditures of approximately EO 3 million cluring 1962.In addition, EO 3.5 million is budgeted for administering the irrigationinvestments and for a variety of minor irrigation and drainage works.

3. Public investments in irrigation during 1963 and 1964 are nowestimated by the Ministry of Public Wiorks at EO 19 million and E0 20million, respectively. Mlost of these expenditures are associated withthe continuation or completion of the projects. There is, however, alsoa number of large new irrigation projects. Their total cost is estimatedat E0 88 million, involving initial expenditures of E0 3.3 million in1963 and E0 8.9 million in 1964. The bulk of the expenditures on irriga-tion works (82%) are estimated to be in local currency.

4. Public works in the field of irrigation must be, as a rule,accompanied by substantial on-the-farm investments in order to make maxi-mum use of the irrigated land. These investments include land clearing,leveling, drainage, or reclamation, etc. These improvements can frequentlybe carried out only if the owners' own resources are supplemented bylong-term loans from public authorities. Since the Ministry of PublicIJorks does not have facilities to extend this type of financial assistance,the task of carrying out these functions falls upon CCRFO. Although a


detailed breakdown of the proposed C,RFC budget of EO 28 million forinvestment in agriculture during 1962 is not available, it should not bedifficult to allocate for land development purposes in 1962 EO 6e5million, as recommended by the mission.

Other Agriculture

5. CORFO's major investment outlays in agriculture during 1962 areexpected to be for pasture improvement and expansion of livestock develop-ment. Another important Corfo project for 1962 is credits to farmers forthe purchase of agricultural rnachinery and equipment.

6. A substantial part of agricultural investments in 1962-64 is tobe carried out by the Ministry of Agriculture through its DireccionAgricola, and the Consejo de Fomento e Investigaciones Agricolas (CONPI;m).Investments of the Direccion Agricola, estimated at EO 8 million in1962-6h, consist of agricultural research and extension service facili-ties. The outlays include the purchase of land, machinery and equipment,and construction.

7. The other investment agency of the MJlinistry of Agriculture --CONIFI1 -- is expected to play a more important role in the carrying outof the agricultural program. Its investment budgets are E° 9.7 millionin 1962, EO 8 million in 1963, and E0 9 million in 196h. At least inpart, CONFIN's operations in research and improvement supplement thoseof the Direccion Agricola, with emphasis on the establishment of experi-mental farms. In addition, CONFINIs activities branch out into the con-struction of dairy plants, slaughterhouses, refrigeration and storagefacilities, and more recently into supervised agricultural credit.

8. Financing of CONFIN's investments for 1962 appears to be largelyassured through external assistance. IDB granted a loan of US$ 10 millionfrom the Bogota Trust Fund for supervised agricultural credits. A sum ofUS$ 2.9 million out of the US$ 100 million earthquake loan has also beenallocated to finance COF'FIN's 1962 investments, the Rockefeller Founda-tion has allotted about US$ 190,000 for two agricultural experimentalstations, and UJUICEF has supplied machinery for a milk plant. The equiva-lent of US$ 2.7 million in 1962, US$ 3.9 million in 1963 and US$ 6 millionin 196h remains to be financed. Since these amounts include investmentsin additional dairy plants, slaughterhouses, and refrigeration and storagefacilities, and since substantial imports of machinery and equipment willbe required for them, they may serve as a basis for future external finan-cial assistance.

9. Another Government agency, the Empresa de Comercio Agricola(BOA), which has responsibility for the marketing of agricultural products,is planning to construct grain storage facilities and municipal markets


in Santiago and other urban centers. These projects require E° 4.6million in 1962, E° 5.5 million in 1963 and E° 7 million in 1964. Since

E° 2 million has already been supplied by the IDB and EO 650,000 has been

allocated from the U.S. earthquake loan, a gap of approximately E° 2

million remains for 1962. No financing has been provided for these pro-

jects in 1963 and 196h.

10. The Caja de Colonizacion Agricola, which is in charge of distri-

bution of Qovernment lands and supervision of farm settlements, plans

investments of E0 17 million in 1962, E° 18 million in 1963, and E0 21

million in 1964. Its own financial resources are estimated during these

years at approximately EO 3 million, EO 4h million, and EO 5 million,respectively. Allowing for the three loans made by IDB in the amount of

E0 8.6 million, financial requirements of approximately E0 5.5 millionremain in 1962. The financial requirements for 1963 and 196h are currentlyestimated at EO 18 million and EO 21 million, respectively.

Appendix Table 2-1: Projected Investments in Irrigation Public Works

(in ui.lions)

A n n u a l E x p e n d i t u r e s Total Cost

Name of Project 1 9 6 0 1 9 6 1 1 9 6 2 1 9 6 3 1 9 6 4 of Projects 1962-64Total Total Total Total Total Total Total

EO US$ in E° E° US$ in EO EO US$ in EO Eo US$ in EO EP US$ in EO E° US$ in EO EO US$ in EO

In Construction

1. Azapa irrigation works 11. 0.2 1.3 1,1 0.2 1.4 0.3 0.1 0.4 0.4 0.1 0.5 0.4 0.1 0.5 5.9 1.0 6.0 1.1 0.2 1.42. Calama irrigation works - - - 1.2 0.2 1.5 1.5 0.3 1.8 3.6 o.8 4.4 2.7 0.6 3.33. San Pedro of Atacama

irrigation works * * * * * * 0.5 0.1 6.0 0,4 0.1 0.5 - - - 1.0 0.2 1.2 0.9 0.2 1.14. Paloma Dam 1.3 0.3 1.6 0.7 0.1 0.8 2.6 o.6 3.2 3.9 0.8 4.7 3.1 0.7 3.8 17.6 3.7 21.5 9.6 2.0 11.75. Til-til irrigation works 0.2 * 0.2 * * 0.1 0.1 0.1 - - - - - - 0.4 01 o.6 0.1 * 0.16. Yeso Dam o.5 1.1 o.6 o.5 o.1 o.6 0.7 0.1 0.8 0.8 0.2 1.0 - - - 3.4 0.7 4.2 1.5 0.3 1.87. North of Maule Canals 0.7 1.1 o.8 0.9 0.2 1.1 C.8 0.1 1.0 1.7 0.4 2.1 1.7 0.4 2.1 6.4 1.3 7.8 4.3 0.9 5.18. South of Maule Canals 0.6 1.1 0.7 0.5 C.1 0.7 C.3 0.1 0.4 0.1 * 0.2 - - - 2.2 0.5 2.7 0,5 0.1 0.69. Melozal irrigation works 0.5 1.1 0.6 0.5 0.1 0.6 0.1 * 0.1 - - - - - - 1.8 0.4 2.2 0.1 * 0.1 1

10. Anoca Dam 1.6 0.3 1.9 0.8 0.2 1.0 0.9 0.2 1.1 0.9 0.2 1.1 0.9 0.2 1.1 6.6 1.4 8.0 2.7 0.6 3.211. Digua Dami 1.3 0.3 1,6 1.3 0.3 1.6 1.1 0.2 1.4 1.1 0.2 1.4 - - - 5.7 1.2 7.0 2.3 .5 2.8 12. Duqueco-Cuel Canal 0.2 * 0.3 0.3 0.1 0.4 o.6 0.1 0.7 - - - - - - 1.1 0.2 1.3 0.6 0.1 0.713. Bio-Bio South Canal (2nd stage) 0.5 0.1 0.7 0.9 0.2 1.1 1.0 0.2 1.3 0.7 0.2 0.9 - - - 4.4 1.0 5.4 1.8 0.4 2.214. Bio-Bio South Canal (3rd stage) * * 0.1 0.1 * 0.1 0.2 * 0.2 0.3 0.1 0.3 - - - 0.7 0.1 0.1 0.4 0.1 0.515. Drainage and nminor works 0.5 * 0.6 0.4 0.1 0.5 0.2 0.1 0.3 0.3 0.1 0.4 0.3 0.1 0.4 1.8 0.4 2.2 0.9 0.2 1.116. Studies 1.1 0.2 1.4 o.8 0.2 1.0 o.6 0.1 0.7 o.6 0.1 0.7 0.6 0.1 0.7 3.7 0.8 4.5 1.7 0.4 2.117. Miscellaneous 0.6 0.1 0.7 o.6 0.1 0.7 1.3 0.3 1.5 o.6 0.1 0.7 0.6 0.1 0.7 3.6 o.8 4.4 1.7 0.4 2.1

New Works

18. Victoria-Traiguen irrigation - - - - - - 0.1 * 0.2 1.0 0.1 1.2 1.6 0.3 1.9 6.4 1.3 7.8 2.7 o.5 3.319. Nilahue Dam - - - - - - - - - 1.3 0.3 1.6 1.6 0.3 2.0 6.6 1.4 8.0 3.0 o.6 3.620. Laja Canal - - - - - - - - - - - - 0.8 0.2 1.0 14.8 3.1 18.0 0.8 0.2 1.021. Collipulli ram - - - - - - - - - 0.4 0.1 0.5 0.8 0.2 1.0 3.1 0.1 3.8 1.2 0.3 1.822!. Puclaro Pam - - - - - - - - - - - - 0.8 0.2 1.0 10.7 2.2 13.0 o.8 0.2 1.023. Diguillin ram - - - - - - - - - - - - o.8 0.2 1.0 8.2 1.7 10.0 o.8 0.2 1.024. Punillas Dam - - - - - - - - - - - - 0.8 0.2: 1.0 22.1 4.6 27.0 0.8 0.2 1.0

Tctal 10.8 2.3 13.2 9.6 2.0 11.7 11.5 2.4 14.0 15.8 3.3 19.3 16.4 3.4 20.0 71.8 15.0 87.6 43.7 9.1 53.3

* Lesa than 50,000

- 26 -

Appen4.s Table 2-2: -Agricult,ural lnvystments 1962 Buf1get

(in millions)

Total EOInvestments E° US$ Equivalent

Irrigation Public \-orks 11.5 2.4 14.O

Financ1-'Al iequirements 11.5 2.4 14.0

CORFO Loans 11.0 16.3 28.1

External Financing 7.5 5.0 12.7Earthquake Relief 2.0 - 2.0PL 480 3.7 - 3.7IDB 1.8 - 1.8Suppliers' Credits - 5.0 5.2

Internal Financing .5 - ¢5

Finandal Requirements 3e0 11.3 14.9

Aaricultural Imrovements 7.1 9,2 16.8

External Financing 5.4 6o2 11.9Earthquake Relief 3.6 - 3.6

IDB 1.8 5.4 7.5uiz iid Rockefeller - .8 .8

Internal Financing 1.7 - 1.7

Financial Heauirements - 3.0 3.2

A-rarian Reform 15.9 1.0 16.9

External Financing 6.o 1.0 7.0

-:DB 6.o 1.0 _

Internal Financing 2.8 - 2.8

Financial Aequirements 7.1 - 7.1

Total Program 45.5 28.9 75,8

Total External Financing 18.9 12.2 31.7

Total Internal Financing 5.0 - 5.0

Total Financial Requirements 21.6 16.7 39.1

Appendix Table 2-3t Agicultural Investment ProFa, 1962-64

(in millicns)

1962 1963 1964 1962-64EO US$ TotalI Eo EO US$ Total EO EO US$ Total Eb EO US$ Total ED

Investments

Irrigation Public Works 11.5 2.4 114.0 15.8 3.3 19.3 15.4 3.4 20.0 43.7 9.1 53.3

CCRF0 Loans l.0 16.3 28.1. 17.0 26.5 44.8 20.1 28.1 49.6 48.1. 70.9 122.5

Agricultural-Improvements 7.1 9.2 16.8 8.9 7.0 16.2 9.6 9.0 19.0 25.6 25.2 52.o

Agrarian Reform 15.9 1.0 16.9 16.8 1.0 17.9 20.0 1.0 21.0 52.7 3.0 - 55.8

Total 45.5 28.9 75.8 58.5 37.8 98.2 66.1 41.5 109.6 170.1 108.2 283.6

Financing

Internal Resources 5.0 - 5.0 4.1 4.1 5.1 5.1 14.2 14.2

External Resources 18.9 12.2 31.7 4.0 4.0 3.0 3.0 25.9 12.2 38.7

Total Financed 23.9 12.2 36.7 8.1 8.1 8.1 8.1 40.1 12.2 52.9

Financing Requirements 21.6 16.7 39.1 50.4 90.1 58.0 101.5 130.0 96.0 230.7


Industry

11. Public investment in manufacturing industries for 1962 includesboth investments in State economic enterprises and loans to private indus-trial enterprises by CORFC. In the State category are investments inpetroleum refining by EICAP amounting to EO 17.9 million and in shipbuildingby Astilleros y IMaestranza de la Armada in the amount of EO 3.2 million.In the private category are investments in the fishing industry and in avariety of unspecified projects through CORFO. Total CORFO investments inindustrial enterprises during 1962 are believed to be budgeted at someEO 16.2 million and are in excess of the mission's recommendations.

Fuel, Power, and Mining

12. Public investments in fuel, power, and mining during 1962-64include both direct investments by State economic enterprises and indirectpublic sector financial assistance to private enterprises. The directpublic investments are by ENAP in petroleum exploration, by ENDESA inpower and by ENAI'I in copper mining, smelting and refining. ENAP's in-vestments are budgeted for EO 20 million in 1962, E° 27 million in 1963,and E° 39 million in 1964. These figures are very close to mission esti-mates. There is no indication of required external financing, althougha large part of the planned investment is in foreign exchange (seeAppendix Table 2-4). ENDESA's investments are budgeted at EO 38 millionin 1962, EO 47 million in 1963, and E° 47 million in 196h. These amountsare roughly the same as the mission estimates. There is no indication ofthe need for additional external financing, although much of the projectedinvestment is in foreign exchange. ENAMI has budgeted investments incopper smelting and refining amounting to E0 16 million in 1962, E0 13million in 1963, and E0 7 million in 1964. Although some suppliers'credits are believed to have been contracted for these projects, addi-tional foreign exchange will probably be required, particularly for theVentanas refinery.

13. Indirect public investments through CORFO include E° 3.5 millionfor the coal mines and E0 1 million for nitrates. These amounts areslightly in excess of the mission estimates but there is no indicationthat any foreign exchange will be required to cover them. There are nobudgetary estimates of indirect public investments in mining for 1963-64.

14. In the field of public power, ENDESA is currently engaged incarrying out a number of large projects. These include a plant at LaIsla, expansion of the hydroelectric installations at Abanico, the con-struction of the Pullinque and Rapel hydro plants, the Huasco thermalplant and a number of other smaller works.


15. The financing of ENDESA's works during the period 1962-64 willrequire EO 132 million and US$ 29 million. The foreign 6xchange costsare practically completely covered by IBRD loans. As for local currencyresources, about EO 77 million are expected from ENDESA's internal cashgeneration. The balance of EO 55 million is expected as a contributionfrom the government budget. As pointed out in Chapter 7, the missionrecommends an increase in power rates so that ENDESA's return will riseabove its present level of 3.5%, improve its cash position and reducereliance on the already heavily burdened Government budget.

Appendix Table 2-4: Pablic Investments in Petroleum and Petroleum Refining (ENAP)

(in millions)

1961 1962 1963 1964 1961-64EO US$ Total E° EO US$ Total EO Eo US$ Total E° EO US$ Total E° EC US$ Total Eo

Exploration 16.4 10.4 27,3 12.0 7.6 20.0 16.4 10.4 27.3 23.3 14.8 38.9 68.1 43.2 113.5

Refining 1.6 3.5 5.3 3.2 7.0 10.6 6.3 14.0 21.0 2.2 4.9 7.4 13.3 29.4 44.3

Other Installations 0.9 2,1 3.2 2,2 4.9 7.3 0.3 0.7 1.1 1.9 4.2 6.3 5.3 11.9 17.9

Total 18.9 16.0 35.8 17.3 19.5 37.9 23.0 25.1 49.4 27.4 23.9 52.6 86.7 84.5 175.7

Financing of the Above Investments

Own Resources 27.8 31.9 42.4 45.6 147.7

Budget Contributions 8.0 6.0 7.0/a 7. 06- 28.0

Tctal 35.8 37.9 49.4 52.6 175.7

L Mission estimate.

Appendix Table 2-5s Public Investmeato in, Power (ZNDESA)

(in mfillions)

Project 1961 1962 1963 1964 1961-64EO US$ Total EO Eo US$ Total EQ EQ US$ Total EO E° US$ Total EO EO US$ Total E°

1. Isla (CipresesExpansion) 7.3 1.9 9.5 6.3 0.4 6.7 0.1 - 0.1

2. Abanico Expansion 5.9 0.5 6.4 2.5 -- 2.5 0.1 - 0.1 (No distribution - - -

3. Pullinque 3.4 0.2 3.6 1.0 0.3 1.3 1.8 - 1.84. Huasco 0.2 * 0.2 1.0 0.4 1.3 2.9 2.9 6.2 among projects - - -5. Rapel 5.9 3.8 10.3 7.5 4.6 12.8 16.4 6.9 29.3 _ _ _6. Chapiquina 1.1 - 1.1 1.8 - 1.8 2.4 - 2.4 available) - - -7. Others 7.2 - 7.2 11.4 - 11.4 10.1 - 10.1 - - -

Total 30.9 6.4 38.3 31.3 5.7 37.8 35.5 9.8 46.7 34.5 7.0 42.5 132.2 28.9 165.3

Financin.g of Above Projects

Own Resources 17.0 - - 16.4 - 19.4 - - 24.1 - -Government Contribution 14.0 - - 15.0 - _ 16.1 - _ 10.4 - _Credit - 6.4 - - 5.7 - - 9.8 - - 7.0 -

Total 30.9 614 38.3 31.3 5.7 37.8 35.5 9.8 46.7 34.5 7.0 42.5

* Less than 50,000

- 32 - 2. THE SHORT TER1i

Transport

16. Public investments in the transport sector loom very largeduring 1'462 because of the railroads, which account for roughly half ofthe total. Budgetary allocations for roads are also substantially inexcess of the mission's recommendations. The allocation5 for airplanesare much below mission recommendations, -while for airports they aresubstantially above. Finally, allocations for ports are below thoserecorns,ended by the mission. Total public investment in t ransport bud-geted ror 1962 is some US$ 57 million above the mission's recommenda-tions.

17. Public investment estimates for 1963 and 1964 are stillhighly tentative. Because no figures could be obtained for projectedrailroad investments in these years, no totals can be arrived at forthe transport sector in 1963-64 to compare with the mission's recornmen-dations. However, the available data indicate that the present inten-tion is to invest much more in highways than the mission recori-ends.Investment projections for the ports and airports, on the other hand,appear reasonable against the mission recomr endations. In the caseof airplanes, present estimates are mluch below m-tission recommendationsfor 1963-64,.

18. Fir,~iwnciig of the foreign exchange costs of public invest-ments in transportation appears to be reasonably well covered for 1962-64.The railroads are more than sufficiently supplied with foreign exchangefor the entire three-year period. The road program appears to be amplysupplied for 1962, although some additional foreign exchange coveragemay become necessary in 1963-64. Substantial foreign exchange commit-ments also exist for ports and airports for 1962 as well as for 1963-64.Whether additional foreign exchange will be necessary for ports and air-ports during this period will depend on the speed with which studies andpreparations for the various projects can be completed. A specialeffort should be made to complete studies of the several large projectsdiscussed in the mission report. No financinw has yet been providedfor acquisition of jet aircraft, and this may well beeome a point ofconcentration, jointly with improving and enlarging the airports andrelated facilities.

Roads

19. Four major road projects are 4nder way -- the longitudinalhighway north of Santiago, the longitudinal highway south of Santiago,the transversal (east-west) roads in the earthquake zone and the trans-versal roads outside of the earthquake zone. Total expenditures on theprojects are estimated at E° 54.1 million in 1962, E° 66.7 million in1963, and EO 66.8 million in 196)}* The breakdown between local currency

- 33 - 2. THE SHORT TEMPI

and foreign exchange expenditures is sho0n in Appendix Table 2-12 on thebasis of a 65 to 35 ratio. In addition to these four major road projects,a number of other minor ones and a large-scale maintenance improvementproject are being carried out bringing total budgeted investment in roadsto EO 69.3 million in 1962, p- 81.7 million in 1963 and Eo 81.2 millionin 1964. These amounts are well above the mission's recommendations.

20. The financing of these projects in 1962 is being aided bysubstantial external resources. The longitudinal highway in the southhas received USIs 6.6 million from the U.S. earthquake loan and US'> 460,000from PL 480 funds. The longitudinal road in the north has receivedUS4l 1,135,000 from PL 480 funds;s.saMWAkgb~ The transversal roads have received US3$ 850,000 from PL 480 funds.A contribution to the transversal roads project in the earthquake zonein the amount of US$ 6 million comes out of the US$ 19 million IDA credit.Thus, exclusive of the IBRD loan of US:) 6.3 million for road maintenancemachinery, some US$ 15e5 million is available in external resources tofinance in 1962 the mission's estimated foreign exchange cost of US$ 12.6million of the road program. In the case of 1963, some US$ 14 million isavailable from external resources -- USb 6 million from IDA and US$8 millionfrom the U.S. earthquake loan. This compares with the mission's estim.atedforeign exchange requirements of US}j 13.5 million. As for 1964, the onlyexternal resource currently available is the US$ 8 million from IDA. Thus,it would appear that the uncovered financial requirements for the road pro-jects all involve local currency, and external resources could be appliedto road building only if they could be used for local currency expenditures.

Ports

21. A nomber of major port projects are budgeted for 1962-6L.These include the ports of Puerto 1hontt with a budgeted investment ofEO 6.2 million, and Arica with a budgeted investment of EO 6 million.The project at the port of San Vicente (Concepcion) is budgeted atE° 5 million, at Chiloe at E° 3.2 million, and at San Antonio at E° 3.1 million.

22. A number of smaller port projects are under way at Valparaiso,Antofagasta, Valdivia, Chacao, etc., bringing the total budgeted invest-ments in port projects to E0 11 million in 1962, E0 10.7 million in 1963,and E0 10.8 million in 1964. As is pointed out in Chapter 13, the severalprojects are of varying priority and state of preparation. Appendix Table2-10 shows all the planned port projects and the amounts budgeted for1962-64.

23. Considerable external aid will probably be required tocarry out these projects. Although the estimated foreign exchangecomponent of all the projects is estimated at US$ 6.2 million, externalaid in the amount of only US$ 1.B million has been granted.

-34 1- 2. THE SHORT TERI

Airports and Airplanes

24. Total investments in airoorts during 1962-64 are tenta-tively estimated at E° 31.2 million. This includes E° 15 million for anew airport for Santiago, E0 5 million for a new airport at Valparaiso,E0 3.4 million for an airport at Concepcion, E° 1.2 r,million for an air-port at Valdivia, E0 1.1 million for an airport at Balmaceda, and vary-

ing amounts for a number of smaller airports (Appendix Table 2-12). The

1962 budget calls for E° 10.6 million of investments in airports; the

amounts rise to EO 11.1 million in 1963 and then declines to E° 9.4

million in 1964.

25. Although the total foreign exchange component of the

airport investments amounts to US:' 11,9 million, Chilean authoritieshave already secured approval of external resources in the amount of

USS$ 14.8 million (Appendix Table 2-13).

26. Investments in airplanes amount to E0 13.9 million during

1962-64. liost of the expenditures -- US$ 11.4 million -- are in foreign

exchange for the acquisition of aircraft, The financing of the local

currency needs appears to be amply covered by LANts own resources.

However, a good part of the purchases of airplanes is expected to be

covered by advances from the Government budget or by means of suppliers'

credits. This investment in jets may well serve as a basis for external

financial assistance, providing LAN achieves a sound financial position.

- 35 -

Appendix Table 2-6.. Investment in .ailroads, 1962

(in thouoandz)

InvestmentProjects 1962

US$ EO Total E0

Pueblo Hundido-Puerto ilontt Sector

Extraordinary Program

Track 7,820 7,680 15,891Buildings - 2,027 2,027Motive Power 14,311 4,671 19,697Other Vehicles 286 70 371Rolling, Stock 1,A52 6,662 8,187Signaling 931 1,707 2,684Communications 261 144 418Handling Mlaterials Equipment 70 42 116Printing Equipment 200 49 259Electric Installations 20,989 5,189 27,228

Sub-Total 46,321 28,241 76,877

Normal Renewal Program

Track 564 5,173 5,764Buildings - 445 445ilotive Power 1,838 742 2,672Other Vehicles 539 172 738Rolling Stock 539 173 740Signaling 118 157 280Communications 35 82 118lIandling Materials Equipment 25 122 148

Earthquake Reconstruction Program - 2,060 2,060

Total 49,978 37,366 89,843

Subsidiary Railways

Arica - La Paz 630 509 1,170Iquique - Pueblo Hundido 5,203 2,433 7,896Trans-Andean via Juncal 170 180 359

Appendix Table 2-7s Pablic Investment in Roads

(in millions)

Total Total TotalRoads 1960 1961 1962 1563 1964 1962-1964 1965-1970 1961-1970

US$ E° US$ EC US$ EO US: R° U- E° US E0 US$ E° US5. EO

Longitudinal North 2.2 4.3 1.5 3.0 2.4 4.8 4.4 8.5 2.5 4.9 9.4 18.2 - - - -

Longitudinal South 2.2 4.2 2.8 5.4 4.2 8.1 3.0 5.9 1.9 3.8 9.1 17.7 - - - -

Transversal (outsideearthquake area) 3.3 6.4 2.8 5.5 4.4 8.6 7.9 15.3 8.3 16.2 20.6 40.1 - - - -

Transversal (in aearthquake area) 3.5 6.8 3.2 6.3 7.0 13.7 7.0 13.7 9.5 18.5 23.5 45.8 - - - -

Other 5.7 11.2 8.5 15.7 5.1 9.9 5.o 9.8 5.0 9.8 15.1 29.4 - - - -

Total 16.9 32.9 18.8 35.9 23.1 45.1 27.3 53.2 27.2 53.2 77.7 151.2 35.2 208.7 131.6 395.9

- 37 -

Appendix Table 2-8: Financing iZeguirements for Public Roads

(in millions)

1962 1963EU US4p Total E° EO US$ Total EO

Financing

Total Resources Required 45.1 23.1 69.3 53.1 27.2 81.7

External Financing Approved - 28.3 29.8 - 13.3 14.0

Financing Requirements 45.1 _5.2 39,5 53.1 13.9 67.7

(minus means surplus)

1964 1962-64EO US$ Total EO EO US" Total EO

Financing


External Financing Approved - 7.6 8.o - 49.2 51.8

Financing Requirements 52.8 19.5 63.2 151.0 28.2 180.5

Revised Table

- 38 -

Appendix Table 2-9: External Aid Received for Roads

(in millions)

Total1961 1962 1963 1964 1962-64

Projects Source US;p USy UJS,u US" US<

1. Longitudinal PL 480South - 0.7 - o 0.7

US$100 millionearthquake loan 4.5 5.0 2.4 - 11.9

US%i20 milliongrant 0.3 0.4 - - 0.7

2. Longitudinal PL 480North - 1.4 0.1 - 1.5

3. Transversal (in IDAearthquake area) - 5.7 5.7 7.6 19.0

US$100 millionloan 3.4 6.9 6.7 - 17.0

US$20 milliongrant 0.3 0.4 - - 0.7

4. Transversal (out- PL 480side earthquakearea) - 0.7 0.5 - 1.2

5. aTintcniance IBRDequipment - 4.2 1.8 - 6.0

Total 8.5 25.4 17.2 7.6 58.7

- 38 -

Appendix Table 2-9: External Aid Ž-eceiv-ed for_ oads

(in millions)

1962 1963 196L otal 1962-6LProjects Source U-S F- IS US;

1. Lon-itudinal PL480South 0.4 - o.4

US$100 nillionearthquake loan 6.6 7.6 - 14.2

2. Longitudinal PLU0North 1.1 - - 1.1

US100 millionearthquake loan 7.6 - _ 7.6

3, Transversal (inearthquake area) IDA 5.7 5,.7 7.6 19.0

L. Transversal (out- PL480side eartlquakearea C. - - C.

5. ?'lainterance IB3Dequipment 6.0 - - 6.0

Total 28.2 13.3 7.6 L9.1

Appendix Table 2-10: Port Investments, 1961-64

(in thousands)

ActualExpenditure P R O J E C T E D E X P E N D I T U R E S

Projects 1 9 6 1 1 9 6 2 1 9 6 3 1 9 6 4 Total 1962-64

EO -EG US$ Total E° EO US$ Total EO EO US$ Total EO EO US$ Total El

1. Puerto Montt 289 1,374 327 1,717 2,000 476 2,500 1,600 380 2,000 4,974 1,183 6,2172. Arica 1,162 1,624 390 2,034 1,600 380 2,000 1,600 380 2,000 4,824 1,150 6,0343. San Vicente - 800 190 1,000 1,600 380 2,000 1,600 380 2,000 4,000 950 5,0004. Chiloe 100 160 38 200 800 190 1,000 1,600 380 2,000 2,560 608 3,2005. San Antonio 448 99C 235 1,237 400 95 500 1,120 267 1,400 2,510 597 3,1376. Valdivia 306 560 133 700 680 162 850 40 10 50 1,280 305 1,6007. Valparaiso 160 949 226 1,186 280 67 350 - - - 1,229 293 1,5368. Chacao 560 133 700 80 19 100 - - - 640 152 8009. Antofagasta 97 226 53 282 160 38 200 160 38 200 546 129 682

Other Ports 1,102/a 847 202 1,059 240 57 300 160 38 200 1,247 297 1,559

Other Expenditures 804 708 169 885 720 171 900 720 171 900 2,148 511 2,685

Total 4,468 8,798 2,096 11,000 8,560 2,o35 10,700 8,600 2,044 10,750 26,958 6,175 32,450~= = = = == = ====

Financing (in millions)

Total Resources Required 8.8 2,1 11.0 8.6 2,0 10.8 8.6 2.0 10.8 27.0 6.2 32.5External Financing Approved - 1.8 1.9 - - - - - - - 1.8 1.9

Financing Requirements 8.8 0.3 9.1 8.6 2.0 10.8 8.6 2.0 10.8 27.0 4.4 30.6

/a Including E° 500,000 not yet allocated to specific ports.

Appendix Table 2-Ut1t Investments in Airports

(in thousands)

1961 1962 1963 1964 Total 1962-1964Prolects EO USJ Total EO EO US$ Total E° EO US$ Total EO EO US$ Total E° EO US$ Total EC

Pudehuel (Santiago) 30 19 50 3,000 1,905 5,000 3,000 1,905 5,000 3,000 1,905 5,000 9,000 5,715 15,000Pascua Isla

(Valparaiso) - - - - - - 1,200 762 2,000 1,800 1,143 3,000 3,000 1,905 5,000Carriel Sur

(Concepcion) 120 76 200 600 381 1,000 1,400 895 2,350 - - - 2,000 1,276 3,350Pichcy (Valdivia) 60 38 100 300 191 500 300 191 500 - - - 732 466 1,220Balmaceda (Aisen) - - - - - - 330 210 550 348 221 580 678 431 1,130Ancud (Chiloo) 60 38 100 240 152 400 300 191 500 - - - 540 343 900Cerro Moreno

(Antofagasta) - - - - - - 180 114 300 300 191 500 480 305 800Chacalluta (Tarapaca) 125 79 208 372 236 620 30 19 50 - - - 402 255 670Los Angeles (Bio-Bio) - - - 240 152 400 90 57 150 - - - 330 209 550Others 986 627 1,644 1,624 1,031 2,706 54 34 90 192 121 320 1,960 1,244 3,266

Total 1,381 877 2,302 6,376 4,048 10,626 6,884 4,244 11,140 5,640 3,581 9,400 18,700 11,873 31,166

F 8nagaiM (in millions)

Total Resources Required 6.4 4.0 10.6 6.9 4.3 11.1 5.6 3.6 9.4 18.7 11.9 31.2External Financing Approved - 6.6 6.9 - 6.2 6.9 - 1.8 1.9 - 14.8 15.7

Financing Requirments 6.4 -2.6 3.7 6.9 -1.9 4.2 5.6 1.7 7.5 18.7 '-2.9 15.5

( mnu meanm surplu)

- 41 -

Appendix Table 2-12: External Aid Gr-anted for Airnort Projects

(in millions)

1962 1963 1964 1962-64Projects Source US$ US$ US US$

. Valdivia and US$ 20 mil-Ancud Airports lion grant

0.8 0.3 - 1.1

2. Pudahuel Airport DLF4.8 3.8 1.8 lo.4

3. Carriel Sur DLFAirport 1.0 2.2 - 3.2

4. Balmaceda DLFAirport - 0.5 0.5 1.1Q

Total 6.6 6.8 2.3 15.7

- 4i2 -

Appendix Ta'ble 2-13r Investmcrt. in i irp.nez (;Lne )

(in millionrs)

1962 1963EO US$ Total E° US,; Totval

Investment E° E

Airplanes (LA,'I) 0.4 4.2 4.7 0.7 4.1 5.0

Financing


Own Resources - - 1.5 - - 3.6

Budget Contributions - - 3.2 - - 1.4

1964 Total 1962-64E° UST Total EO US; Total

mnvvectment E° TL°

Airplanes (LAi') 1.0 3.1 4.2 2.1 11.4 13.9

Financing


0O, Resources - - 3.3 - - 8.4

BTudget Contributions - - 0.9 - - 5.5


Building and Urban Development

27. The budgeted public investments in housing for 1962 are esti-mated at El 139 million (according to the most recent information, thecommitments of CORVI for 1962 would raise this figure by an additionalE° 30 million) and for 1963 at EO 134 million. This is some EO 16 millionabove mission recommendations, but somewhat less than the shortfall in1961. The budgeted investment for 1964 is now EO 117 million, or EO 13million below mission recommendations, but it will probably be raised indue time. Practically all cxpcnditures are in local currency.

28. The budgeted investments in public buildings (including schools,hospitals, etc.) for 1962 and 1963 are E° 37 million and E° 32 million,respectively, which amounts to one-third more than the program and themission recommendations. The budgeted figure for 1964 is, on the otherhand, only E° 24 million -- E° 2 million below the program. Althoughmost expenditures are in local currency, foreign exchange will be neededto equip hospitals and laboratories. There is no indication of how muchexternal financing will be required for projects in these fields.

29. Public expenditure budgets for urban development during thenext three years are also greatly in excess of the program. Thus, thebudget for 1962 is E° 55 million against E° 30 million in the program;for 1963 the budget is EO 59 million against EO 32 million in theprogram; and for 1964 EO 62 million against EO 34 million in the program.These budget estimates are excessive and will need re-examination inline with the program targets. The foreign exchange component of theseworks is around 15%.

Housing

30. The financing of public investment in housing of approximatelyEO 139 million in 1962 is to come from a variety of sources. TheCorporacion de Vivienda (CORVI), which needs a minimum of EO 110 million,expects E° 40 million from the social security institutes, EO 12 millionfrom the budget provision for reconstruction, some EO 25 million fromexternal resources (Appendix Table 2-14), and the remainder of EO 33million remains to be covered. Social security institutes requireEO 21.4 million, and this is expected to be available from their ownresources. The Emergency Housing Fund will require E° 4.3 million, ofwhich half is covered by external resources and the rest remains to becovered. Lastly, the E° 3 million of public funds for the savings andloan associations are fully covered by external resources.

-44- 2. TH' SHORT TIRM

31. 1-ith respect to housing financing for 19'3-64, the socialsecurity institutes are expected to provide the same or a slightlylarger total for their own construction and for CORKV.. As for coverageof the balance, there is no information available.

Other Public Buildings

32. Schools . Budgeted investments in schools amount to EO12.8 millicn in 1962, the samne armount in 1963, but will decline toE° 4.3 million in 1964. Thus, the total for 1962-64 is B0 29.9 million(Appendix Table 2-15). Hiost of the expenditures are in local currency,but external resources in the amount of EC 1.6 million for 1962 havealready been approved.

33. Hospitals. Budgeted investments in hospitals amount toEO 1.1 million in 1962, E0 9.7 million in 1S63, and EB 9.6 millionin 1964, or a total of E° 33.4 rmillion during 1962-64 (Appendix Table2-16). Most of the expenditures are in local currency.

34. Urban Paving. Budgeted investments in urban paving amountto E0 15.6 million in 1962 and will increase to E0 18.3 rmillion andEO 18.4 million in 1963 and 1964, respectively. The total plannedinvestment in 1962-196L is B° 52.3 million (Appendix Lable 2-17). Theforeign exchaange coraponent is about 2C5t, or U4', 10 million for thethree years (UD' 3.0 million in 1962, US' 3.5 million in 1963, and US133.S million in 1964). External financing has been approved for 1962in the amount of US$ 70CO000.

35. Water and Sewers. The most irnortant water and sewerageprojects for the period 1962-196L are the followTing: Santiago andValparaiso water and sewerage systems, the rural w,ater-supply plan,the medium-size-towns' water-supply system, and the rural schools'water-disposal system. In dddition to these major water and sewer2ce-rojects, there are other proJects pplaned bzty the National MIousingAgency (CORVI), the National Health Service (SNS), the Department ofSanitary Wforks (DOS) and private entities such as hotels and industrialplants.

36. Total expenditures on the above projects are estimated atB0 37.0 million in 1962, E0 38.L million in 1963, and EO U1.7 millionin 1964. During 1962-196b, these projects will require estimatedforeign exchange of USt' 11.1 million.

-45_ 2. THE SHORT TtIIRh

37. Others. Other budgeted investments in vuilding and Urban Devel-

opment cover expenditures for public buildings: E° 9.7 million in

each of the three years 1962, 1963, and 1964; and for miscella:neousurban development ..works: E° 2.3 million in each of the three years.

Total investment for 1962-1964 a..ounts to E° 36 million, of which EO

29.1 million is for public buildings and EO 6.9 million for miscellan-eous works. There are no apparent foreign exchange requirements, butexternal assistance in the amount of US>: 565,ooo from the US earth-quake loan has been approved in 1962.

Appendix Table 2-14: Investments in Housing

(in millions)

Investments 1 9 6 2 1 9 6 3 1 9 6 4 Total 1962-1964

EO US$ Total EO EO US$ Total EO EO US$ Total EO EO US$ Total EO

Housing Corporation (CCRVI)

Total 119.0 - 119.0 117.3 - 117.3 93M8 - 93.8 330.1 - 330.1

Less Private Funds -9.0 - -9.0 -9.0 - -9.0 -9.0 - -9.0 -27.0 - -27.0

Emergency Housing and SocialAssistance Foundation 4.3 - 4.3 5.0 - 5.0 6.0 - 6.o 15.3 - 15.3

Social Security Funds 21.4 - 21.4 16.0 - 16.0 16.0 - 16.0 53.4 - 53.4

Savings and Loans Associations(Public Funds) 3.0 - 3.0 5.C - 5.0 10.0 - 10.0 18.0 - 18.0

Total 138.7 - 138.7 134.3 - 134.3 116.8 - 116.8 389.8 - 389.8

Financing

Financial Resources Required 138.7 - 138.7 134.3 - 134.3 116.8 - 116.8 389.8 - 389.8

External Aid Approved:

To CORVI - 23.4 24.6 - - - - - - - 23.3 24.5Foundation - 2.1 2.2 - - - - - - - 2.1 2.2Savings & Loan Assocs. - 7.0 7.4 - - - 6.7 7.0

Internal Resources:

For CCRVI _ _ - - - _Social Security Funds 40.0 - 40.0 - - - - - 40.0 - 40.0Reconstruction Law 12.0 - 12.0 - - - - - - 12.0 12.0

Appendix Table 2-14: Investment in Housing (cont'd)

(in millions)

Investments 1 9 6 2 1 9 6 3 1 9 6 4 Total 1962-1964

EO US$ Total EO E° US$ TcG2al EO E° US$ Total EO EO US$ Total EO

Financing

For Foundation - - - 2.2 - 2.2

For Social Security Funds 21.4 - 21.4 - - - - - - 21.4 - 21.4

For Savings & Loan Assocs. - - - - - - - - - - - -

ii'inancin2 Requirements 65.3 _32.5 31.1 134.3 - 134.3 116.8 - 116.8 314.2 -32.1 280.5


- 48 -

Appendix Table 2-15: Inve-tr-rt.s in ;3chtzocls

(in million:s)

1962 1963EO US. Total E° US5 T:t 1

E°

School Investments 12.8 - 12.8 12.8 - 1.8

Financing

Total Resources Required 12.8 - 12.8 12.8 0 12.8

Fxternal Aid Approved - 1.5 1.6 - - -

Financing Requirements 12.8 -1.5 11.2 12.& - 12.8

1964 Total 1962-64E° US&, Total EO USS'7 Total

E° E°

School Investments 4.3 - 4.3 29.9 - 29.9

Financing

Total Resources Required 4.3 - h.3 29.9 - 29.9

External Aid Approved - - - - 1.5 1.6

Financing Requirements 4.3 - 4.3 25.9 -1.5 28.3


- 49 -

Appendix Table 2-16: Investme:nts in Hospitals

(in millions)

1962 1963 1964 Total 1962-64Investment E0 EQ EO EO

HospitalsZa 14.1 9.7 9.6 33.4

Financing

Total Resources Required lL.l 9.7 9.6 33.4

External Financing Approved and/or ) 8.8 6.7 --

Under Consideration)

Financing Requirements 5.3 3.0 9.6 17.9

La Construction agency has forwarded additional plans of the NationalHealth Service (SNS) for 1962 of EO 13.1 million and of EO 11.6 mil-lion -- no action has been taken approving these plans.

- 50 -

Appendix Table 2-17: Investments in Urban Paving

(in millions)

1962 1963EU US$ Total E° US$ Total

Investments EO EO

Urban Paving 12.5 3.0 15.6 14.6 3.5 18.3

Financing


External FinancingApproved - 0.7 0.8 - - -

Financing Requirements 12.5 2.3 1-4.8 14.6 3.5 18.3

1964 Total 1962-64EO US; Total EO US& Total

Investments E0 E

Urban Paving 14.7 3.5 18.4 41.8 10.0 52.3

Financing


External FinancingApproved - - - - 0.7 0.8

Financing Requirements 14.7 3.7 18.4 41.8 9.8 51.5

Appendix Table 2-18: Investments in Water Sply and Severs

(in millions)

Investments EO 1962 1963 1964 Total 1962-1964IEO US$ Total EO EO US$ Total EO EO US$ Total EO EO US$3 Total EO

Santiago water supply system 3.5 0.4 3.9 3.4 0.4 3.8 3.6 0.4 4.0 10.5 1.1 11.7Medium-size townst water supply system 0.9 0.1 1.0 2.6 0.3 2.9 3.6 0.4 4.o 7.1 0.8 7.9Concepcion and Talcahuano water

supply improvements 1.2 0.1 1.3 1.4 0.2 1.6 1.5 0.2 1.7 4.1 0.5 4.6Rural schools water disposal system 0.3 * 0.3 0.5 * o.6 0.8 * 0.9 1.6 * 1.8Rural area water supply system plan 1.4 0.1 1.5 1.8 0.1 2.0 2.2 0.2 2.5 5.4 o.6 6.oOthers 26.0 2.8 29.0 24.8 2.7 27.5 25.7 2.7 28.6 76.5 8.2 85.1

Total 33.3 3.5 37.0 34.5 3.7 38.4 37.5 4.0 41.7 105.4 11.1 117.1 I

'n

Financing

Total Resources Required 33.3 3.5 37.0 34.5 3.7 38.4 37.5 4.0 41.7 105.4 11.1 117.1External Financing Approved - 4.5 4.8 - - - - - - - 4.5 4.8

Financing Requirements 33,3 -1,0 32.2 34.5 3,7 38.4 37.5 40o 41,7 105.4 6.6 112.3


* Less than 50,000

Appendix Table 2-19t Investnents in Pablic Buildings and Miscellaneous Urban-Development Works

(in millions)

1962 1963 1964 Total 1962-1964Investments E0 US$ Total EO EO US$ Total EO EO USS Total EO EO US$ Total EO

Public Buildings 9,7 - 9.7 9.7 - 9.7 9.7 - 9.7 29,1 - 29.1

Miscellaneous Municipal Wcrks 2.3 - 2.3 2.3 - 2,3 2.3 - 2.3 6.9 - 6.9

Total 12.0 - 12.0 12.0 - 12.0 12.0 - 12.0 36.0 - 36.o

Financing *

Total Resources Required 12.0 - 12.0 12.0 - 12.0 12,0 - 12.0 36.0 - 36.o

External Aid Apprcved - 0.6A 0.6 - - - - - - - o.6 0.6

Financing Requirements 12.0 -o06 1l. 12,0 - 12.0 12,0 - 12,0 36.0 -o.6 35.4


/a From US$ 100 million earthquake loan.

CHAPTER 3

SUMMARY OF SECTOR RECOMMENDATIONS

1. Here we present summaries of the major comments and re-commendations which we make in the following chapters dealing with theindividual investment sectors. The later chapters will explain in de-tail the reasons for our recommendations. We believe that the recemmen-dations form a coherent pattern over the next decade of the resourcesallocation which we consider most conducive to the growth of the Chileaneconomy. In contrast to Chapter 2, this chapter deals with the long term.

2. The summaries, because of the need to compress the moredetailed discussions in the sector chapters, may give the impressionthat we conceive of the program as a set of measures which must be car-ried out without any change under any and all circumstances. Clearly,this is not what we have in mind. We have stressed already the needfor constant scrutiny of the fortunes of the Chilean economy and forcontinuous adaptation of plans and programs. But it may be useful toreiterate here that our recommendations are based on the conditions aswe found them in 1961. They must be viewed with that limitation inmind, and interpreted anew as internal and external conditions change.

AGRICULTURE

3. In recent years the expansion of agricultural produc-tion has lagged behind that of the rest of the economy. It is one ofthe major objectives of the 10-year plan to raise the rate -f growth ofthe agricultural sector in order to redress the previous lack of balanceand to improve the living conditions of one-third of the population.The need to make up for deficits in food production has been a seriousdrain on the country's foreign exchange resources. Moreover, the lowincomes which prevail among agricultural workers have been a major fac-tor limiting the market for output from the other sectors of the economy.The mission believes that to achieve the planned increases in agricul-tural production and to distribute the benefits more widely, a largeramount than originally foreseen in the program will have to be devotedto agriculture. Government has become aware of this need and is in theprocess of revising the program to give more emphasis to agriculturaldevelopment and agrarian reform.

4. The mission is in general agreement with the plan tar-get of achieving a 5.5% annual rate of agricultural growth. In recentyears the rate of growth in agriculture has been only 1.8% a year, whichif continued in the face of an expected population growth of 2.5% peryear would mean a continually increasing agricultural deficit. Growthat the low rate of 1.8% has occurred without the kind of special efforts

- 2 - 3. SECTOR PROGRAMS

which are feasible in Chile under a determined and well administered pro-gram. Sufficient knowledge and experience about pasture development,improved seed, mechanization, fertilizer use, etc., have been acquiredto provide the basis for a sharp increase in output, provided farmers aregiven adequate incentives and Government is prepared to place greater emphasison agricultural development. Thus the projected growth rate is not un-reasonably high.

5. Unlike many developing countries, Chile has built up thenucleus of an effective agricultural extension service, and 1as carriedout sufficient research to provide the basis for a fairly rapid expansionof agricultural production. Moreover, there are a substantial number oftrained agricultural technicians and farm managers currently engaged innon-agricultural activities who could be brought back into agriculture ifoffered sufficient incentives. A number of efficiently run farm enter-prises demonstrate that production can be sharply increased through addi-tional investment and better management.

6. The principal scope for increasing agricultural output liesin intensification of production through investments in irrigation anddrainage facilities, pasture development, and increased inputs in theform of farm machinery, fertilizers, improved seeds, and more use ofpesticides. Until 1960 economic conditions and public policies tendedto discourage agricultural investment and favored industrial investmentand speculation in real estate and commodities. During the past twoyears conditions have become more favorable to agriculture, in some re-spects, and Government has been providing more funds for agriculturaldevelopment. However, at present prices and prevailing commercial in-terest rates, the mission believes that sufficient private agriculturalinvestments will not be forthcoming to achieve the plan targets withouta considerable increase in Government financing.

7. Consequently, the mission recommends a substantial increasein Government's financial commitment to the agricultural sector. Accord-ing to the Government program, public financing over the 10-year periodwould amount to about E° 250 million, and private financing to aboutE° 640 million. The mission believes that the realities of the requiredagricultural expansion will call for total public financing on the orderof E° 710 million over the decade, of which about EO 270 million wouldbe direct public investments and the balance would be public financingof private investments.

8. Incidentally, this amount excludes the public contributionto the financing of rural housing and transportation equipment. Whilewe consider the adequate provision of rural housing to be an integralpart of the agrarian-reform program, the mission has included the ruralhousing expenditures under the Building sector, and not under the Agri-culture sector. Similarly, transportation equipment has been includedin the Transportation sector.

- 3 - 3 SECTOR PROGRAMS

9. Increases in the prices for agricultural commodities could alsobe used to create greater incentives for agricultural investments, butwould probably bring on inflationary pressures. We feel that a more prac-tical approach would be to supplement Government financing with othermeasures such as fertilizer subsidies, cheaper transportation, lower pro-cessing and marketing costs, and lower tariffs on some agricultural inputs,as well as increased public investments in irrigation facilities and roads.Both direct and indirect subsidies would be temporary measures which shouldbe withdrawn or reduced in scale as initial investments raise productiveefficiency and as terms of trade improve* Direct public investments couldalso be tapered off toward the end of the program as the current backlog ofprojects is completed.

10. The mission believes that the problem of rural poverty must beattacked on a broad front to ensure that benefits accruing from the ac-celerated agricultural program will reach the bulk of the agriculturalworkers who are generally without means of their own. Heretofore resettle-ment programs have benefitted mainly those who have substantial personalcapital. The mission has, therefore, recommended programs for expandedrural housing, improvement of labor conditions for farm workers, more ade-quate social security, farm tenancy legislation, Government financing ofland purchases, and a land redistribution program geared to the needs ofthe low-income farmer. At the same time, however, the mission has beenmindful of the need to assure the management of large landholdings whichare productive and which provide a decent living for the workers that theyneed not fear expropriation. Without such assurance much of the necessaryprivate investment would not take place.

11. To carry out this program, the mission believes that a consid-erable expansion of the Government's agricultural staff will be necessaryat all levels. We have, therefore, recommended a faster increase in Gov-ernment's expenditures on staff and staff facilities than is now providedin the plan. These additional expenditures are included in our currentbudget estimates. In addition, our recommended capital program includesexpenditures for housing, equipment, and vehicles for the expanded staff.

12. The chief differences between the mission's recommendationsand the original 10-year plan program are summarized below. It should beemphasized that the Government is already moving, in some cases, in thedirection recommended by the mission.

a. A considerable increase has been recommendea for CORFOfinancing of on-the-farm investments required to make moreeffective use of irrigation water.

b. The proposed investments for developing orchards andvineyards have been increased considerably and provisionhas been made for liberal Government financing of suchinvestments.


c. The proposed investments for farm mechanization havebeen increased to provide for a more adequate level ofreplacements and to allow for machinery and equipmentneeded for the livestock program. A much higher pro-portion of Government financing is provided during thefirst five years, in line with current CORFO policiesas to financing purchases of farm equipment.

d. Investments in cattle, fencing, pastures, and instal-lations over the life of the program are more or less inline with the original Government program. However, theannual schedule of expenditure has been changed to providefor a more realistic acceleration.

e. Estimated expenditures for other agricultural improve-ments, such as research and extension facilities, seedfarms, and breeding stock, have been increased consider-ably over the original program levels, particularly duringthe first five years.

f. Some provision for the cost of the agrarian reformprogram not covered elsewhere has been made. The amount(EO 150 million) may have to be much increased if theprogram is more fully developed.

g. The net result of these changes is to bring the totalcost of the investments recommended by the mission toE° 1,135 million for the 10-year period, as compared withthe Government's originally planned expenditures of EO888 million (EO 938 million including transportation equip-ment). Details are shown in the following table.


Table 3-1

Agricultural Investment, 1961-70 A

(in E' millions)

Government MissionInvestment Program Recommendations

Irrigation Public Works Dept. 115.6 100.0Irrigation & Land Improvements,Corfo 33.3 160.0

Orchards & Vineyards 10.2 50.0Farm Mechanization 177.6 260.0Livestock (cattle, pastures,

fencing, installations) 258.9 235.0Agricultural Improvements

(including Research andExtension) 133.6 200.0

Resettlement 60.0 150.0Processing & MarketingFacilities 27.5 80.0

Transportation Equipment 49.5 160.0Other Public Works 39.9Reconstruction 32.0

Total 938.2 1,395.0

Less Transfer Payments 100.0

938.2 1,295.0

Less Transportation Equipmentincluded in Transport Sector 49.5 160.0

GRAND TOTAL 888.7 1,135.0

A In this and other similar tables in this chapter, theforeign exchange content of the investment program hasbeen converted to escudos at the official rate of E1.05to the dollar.


INDUTRY

13. Because of the nature of the estimates which had to be made,the projections of investment in manufacturing enterprises are somewhatless precise than those for the other major economic sectors. To a con-siderable degree the investment plans in, for example, transport, hous-ing, urban development, irrigation works, and so on, are in the hands ofGovernment officials who can make their physical plans with reasonableassurance that only fiscal considerations, administrative shortcomings,or a deliberate change in pu1l~ic policy will prevent them from beingcarried out. By contrast, investment plans in manufacturing industryare for the most part made by individual business entities on the basisof their l1ng-term appraisal of future economic opportunities in theirown lines of activity. Consequently, the Government and the missionhave had to rely on generalized forecasting techniques which are muchmore an assessment of future investment opportunities than they are ofinvestment intentions.

14. The growth of manufacturing industries into a major sectorof the Chilean economy dates from the early 1930's when such growthfirst began to be favored by exchange controls and high protective duties.The Development Corporation, formed in 1939, was instrumental in creatingseveral new industries during World War II, besides aiding in the expan-sion of existing ones. The post-war period has been characterized by thedevelopment of modern steel, newsprint, and cellulose industries, theadvent of petroleum refining and beet-sugar refining, and by major in-vestments in such food and feeding-stuff industries as edible oils andoilcake, condensed and powdered milk, and fish meal. During the sameperiod there was substantial expansion and modernization of other pre-viously existing industries, e.g., the cement industry and the cottonand wool textiles industries. During the five-year period between thefirst quarter of 1956 and the first quarter of 1961, however, there wasvery little growth.

15. Overcoming this recent stagnation in manufacturing produc-tion is the aim of the Government program for the industrial sector.For the 10 years of the program, the projected annual rate of increasein manufacturing production 4Qverages 6.5%. Obviously this rate of in-crease is possible only if there is a corresponding increase in thedemand for Chilean manufactured output. Major reliance must be placedon the expansion of domestic demana, which in turn will depend on theprogress to be made in other sectors of the 10-year program. The pro-grarmed acceleration of capital projects in housing, road building,irrigation, and other such major construction efforts, will increasethe demand for steel, cement, lumber, and other building materials.But for the large proportion of Chilean manufacturing activity whichis represented by the lighter consumer gon9.s industries, the increasein demand will have to come gostly from improved domestic mass pur-chasing power.

- 7 - 3.. SECTOR PROGRAMS

16. A major objective of the 10-year program is to raise percapita real income by an average of 3%/o a year. The pattern of consumptionin Chile is now such that a very large proportion of the increased pur-chasing power will probably be reflected in greater consumption of manu-factured goods. Another source of added demand is expected to be in ex-port markets, both existing ones and those to be opened up as the LatinAmerican Free Trade Area comes into being.

17. The foregoing remarks, of course, refer to production goalsrather than estimates of what investment will be required to reach thesegoals. The overall objectives apply to the whole range of manufacturingindustry, whereas the investment forecasts -- conjectural as they must be --

are more specific. Statistically and analytically, the Government programdivides investments in manufacturing industry into four categories: spe-cified projects, non-specified projects, smnall scale industries, replace-ments and renewals.

18. The so-called "specified projects" are not projects in theusual meaning of that term, but are estimates by the Chilean authoritiesof the investments that are likely to be made in the more important in-dustrial sectors, such as steel, paper and pulp, cement, timber, petro-leum derivatives, etc. The figure for non-specified projects includes inone sum the estimate of new investments in all of the rest of Chilean in-dustry, excluding the small handicraft industries. The Government program,together with the mission recommendations in the corresponding categories,is summarized as follows:

Table 3-2

Investment in Industry, 1951-1970(in Eu millions)

Government MissionProgram Recommendations

Specified Projects 713.5 568.8Non-specified Projects 522.0 511.0Small Scale Industries 145.1 133.0Replacements & Renewals 642.0 G68.o

2,022.6 1,877.8

19. It will thus be seen that the mission recommends investmenttargets in industry on a somewhat smaller scale than the program. There isalso a different time phasing in the missionts estimates; we suggest thatinvestment requirements will be heavier than the Government anticipates duringthe first five years of the program, and less than the Gove-rnment anticipatesduring the last five years.


20. We recommend that c nsiderable attention be paid in the futureto detailed studies of feasibility and investment requirements and thatthe overall industrial investment figures proposed by the mission beused as a general guide to planning. In Chapter 5 and its appendicesexamples are given of the kinds of considerations which the missionfeels are relevant for several Chilean industries.

MINING

21. The most important product of the mining industry in Chile iscopper, which accounts for the bulk of the foreign exchange earnings.The copper industry is dominated by three large companies controlledby Anaconda and Kennecott. Next in importance are iron ore and nitrates.Iron ore production has been a dynamic and growing industry.The future of nitrates is uncertain. Chile is by far the world'slargest producer of natural nitrates, but the natural nitrate tradehas been hurt by the devOlopment of synthetics, Nevertheless, thereappears to be a reasonable opportunity for Chilean nitrate exports toimprove as new production methods are developed. Other minerals areminor in importance.

22. WJith respect to copper, Chile has the world's largest knownreserves. All the mines are near the coast, and all but a small portionof the ore is smelted in Chile by well experienced companies. In recentyears the percentage of world production accounted for by the Chileanmines has declined slightly, partly because of mid-1950s Governmentpolicy which inhibited private mining. These policies have since beenchanged, but there still exists some difference between the largemining companies and the Government as to the conditions under whichoperations can be conducted in the future. This difference appears tobe near resolution.

23. Chile is the worldts only producer of natural nitrate. At theturn of the century Chile accounted for two-thirds of the world nitrogenoutput. Since then, the development of synthetic nitrogen has dealt asevere blow to the industry, with Chilean nitrogen exports steadily de-clining. There are only two important nitrogen producers in Chile today.However, technical improvements initiated by the major producer havekept the industry alive, and there appears to be reasonaoDle opportunityfor future advancement.

24. Iron ore production now rivals nitrates as the second mostimportant of Chile's mineral products. The output approximately doubledbetween 1955 and 1960. Future increases in production are likely tokeep up with this rate of increase, providing favorable markets exist.

The Government Program

25. The production targets for the mining industry are as summar-ized below (in thousands of metric tons):


Highest CapacityOutput Increase Percentage

1956-l960 1961-1970 Increases

Copper 550 295 54%Iron Ore 4,843 6,ooo 124%Nitrate 1,310 100 8%

26. The total investments in the mining sector were set fortlh inthe program at E° 668 million, of which about three-fifths would be forcopper mining and smelting, and about 45% for the large copper miningcompanies alone. About half of the planned increase in iron ore capacitywould come from the mines of the Santa Fe mining company. A new mineowned by the CAP steel company would contribute 1.2 million tons, andthe remainder would come from smaller producers. The planned nitrateinvestments would be primarily for the modernization of existing in-stallations. No investments are envisaged in the plan for other miningsectors.

27. In contrast with the other investment sectors, public invest-ment in the plan is projected to be very small in relation to privateinvestment. Of the total planned investment of EB 668 million, onlyE0 26 million originates with public funds.

Evaluation

28. In the mission's view, the projected increases in copper pro-duction represent a reasonable target, and the investment cost projec-tion,s are consistent with estimates published by the major copper companiesThe targets for iron ore uroduction are conservative estimates, and itis possible that production increases may be larger than those contem-plated in the original plan. With respect to nitrate production, thereare indications that the tide may finally have turned in favor of thishard-pressed industry.

29. In terms of total investment requirements over the 10-yearperiod, the mission's recommendation is approximately E° 38 millionhigher than the plan estimate. This is due to a recommended increaseof just about this same amount for iron ore exploitation. The recommendedincrease in planned nitrate investment is offset by a decrease in coppermining andsaelting.

- 10 - 3. SECTOR PROGRPiMS

30. The increase for iron ore mining corresponds to the possibilitiesthat exist in Chile for the discovery and exploitation of new iron oredeposits. The major limitation on iron ore exports (and hence production)in 10-year perspective is not resources, but the market.

31. The mission's estimate of capacity requirements for copper pro-duction in 1970 is based on (a) the assumption that world production atthe end of the decade would be equal to world demand, (b) that world require-ments will rise at the rate of 4% per annum until 1965 and will taper offslightly after that, and (c) that, in view of the low costs of productionin Chile, Chile's share of the world market will increase to between 17%and 18% (as compared with 15% to 16% in recent years). It should be notedthat this last assumption does not preclude substantial increases in theabsolute quantity of exports from other producing countries. Under presentand foreseeable conditions, these assumptions appear to the mission to bereasonable ones.

32. According to a recent study, the total iron ore import require-ments of the United States and Western Europe will increase by 85 milliontons by 1970 (as compared with 1957). At first sight it would appear thatit would be reasonable to expect Chile's export potentiality to increaseby 5 mil;ion tons -- the amount expected from the development of new orebodies ./However, major expansion of iron ore output is under way or plannedin Sweden, Canada, Africa, Venezuela, and Brazil. Furthermore, Chile isfurther away from all1 major markets (except Japan) than are competing sup-pliers; consequently, she would be hardest hit by any increase in freightrates. W4e believe that a detailed study of future market potentials shouldbe made, and at the same time efforts should be made to establish firm traderelations with prospective customers.

33. There are a number of facts justifying some degree of optimismabout the future of the nitrate industry. The export price f.a.s. Chileat the present moment leaves a small margin of profit to the major producer(Anglo-Lautaro). The demand for potassium sodium nitrate is brisk, andexceeds the present production possibilities. Iodine is a very profitableby-product. There is no lack of good nitrate ore. Mioreover, if recentinnovation represented by the solar evaporation process meets all. expecta-tions, the economically recoverable reserves may be doubled. At the sametime there are certain potential threats to the industry which should beinvestigated: a fall in the price of synthetic nitrates, a trend towardsprotectionism among the major synthetic nitrate producers, or improvementin the quality of rival fertilizers which would reduce the current preferencefor natural nitrates. A study should be made of all the factors affectingthe future market possibilities. If such study should

This is over and above the 6 million ton expansion previouslyenvisaged.


indicate the favorable future conditions which the mission expects,

then there would be a clear inference that the investment planned for

nitrates is far too low.

Mission Recommendations

34. The Government program and the mission recommendations, in

summary form, are shown in the table below;

.Table 3-3

Investments in Mining, 1960-1970(in E0 millions)


Coppera 534.7 523.2

Iron Ore 46.2 85.0

Nitrate 9.3 20.0Replacementsbi 97.6 97.9

Total 687.7 726.1

21' Including replacements for the large companies.

/ Excluding replacements for the large companies.

- 12- R, SECTOR PROGRAM4S

FUEL AND POWER

Background

35. Chile's total ernrgy consumption rose by about 30% between 1950and 1955, but has since remained virtually unchanged. A major develop-ment over the past decade has been the substitution of oil for coal asa primary source of energy. This substitution was facilitated by thedevelopment of oil resources in the Magallanes fields, where productionrose from 0.1 million cubic meters in 1950 to 1.15 cubic meters in 1960,and by the completion in 1954 of the Concon oil refinery, which lastyear produced about 1.6 million tons of petroleum products (over 60%of the total Chilean consumption). The total production of electricenergy grew from 2.9 billion kwh. in 1950 to about 4.6 billion kwh. in1960, with three-quarters of the increase being accounted for by hydro-power. Nearly half of the electric energy was produced, for their owmuse, by the large copper and nitrate companies.

36.. The Government is now making an intensive study of the probablefuture demand for various types of fuels, the desirable expansion targets,and policies to be pursued to reach these targets.

The Investment Program

37. Pending the completion of the study of fuels, certain tentativeestimates were made as to expenditures needed during the 10-year periodfor investments in fuel and power. These estimates, together with themission recommendations, are as follows:

Table 3-L

Investments for Fuel and Power(in E° millions)


Coal Mining 23.1 33.3

Crude Petroleum& Natural Gas 419.1 405e9

Electric Power 682.0 632.2

Total 1,124.2 1,071.5

- 13 - 3. SECTOR FROGRAMS

38. As the above table shows, the major financing problems are inthe fields of petroleum production and refining, and generation and trans-

mission of electricity. It is expected that the investments in petroleumproduction and refining will be financed entirely by retained earnings ofthe Government's petroleum monopoly (SNAP). The investments in electricity

will be made principally by ENDESA (publicly owned) and the privately ownedCHILECTRA. ENDESA contemplates investments of EO 423 million, of which

EO 235 million would come from reinvestment of earnings, EO 75 millionwould come from CORFO, and the remainder through foreign loans. TheCHILECTRA expansion plans have already been partially financed by an

Export-Import Bank loan of $42 million.

39. The mission wishes to draw particular attention to the burdenimposed upon the government budget as a result of reduced financialresources available to S23DESA because of presently inadequate power rates:ENDESA's rate of return of 3-1/2% in 1960 has reduced the proportion of

self-financing available for ENDESA's investment program and has thereforemade it increasingly dependent on Government contributions. Prompt actionto increase power rates would strengthen ENDESA's financial position andafford relief to the already heavily burdened Government investment budget.

40. The mission feels that special attention should be given to thequestion of the choice of fuels for the production of energy. In ouropinion the replacement of coal by petroleum fuels has gone too far in

Chile. Much oil still has to be imported, while at the same time theuse of indigenous coal has fallen off. We believe that a very thoroughstudy should be made of the projected use of alternative fuels, and that

two problems in particular should be explored. These are the freightrates applicable to hauling coal to the consuming centers, and the possi-bility of locating new industries near the coal fields. We think that arational development plan will show that Chile can make better use of hercoal resources. We also recommend that private interests be permitted toexplore the potentiality of oil resources outside the area (the Magallanes)now being intensively worked by ENAP.

- 14 - * SECTOR PROGRAMS

BUILDING AND URBAN DEVELOPiMENT

14 Building and urban development account for just under EO 2,900

million or 29% of the total investment planned in the 10-year program.The greater part of the proposed investment in the sector (E° 1,727million) is for housing, both public and private; much of the privatehousing will have to be publicly financed. Of the balance, EO 687 millionwill go into building construction other than housing, roughly E° 387million into urban development (water and sewer service, paving, etc.),

and E° 75 million into improving the communications system. The programis summarized in the table below, together with the missionts recommenda-tions for revision.

Table 3-5

Construction and Urban Development Expenditure, 1961-70(in Eu millions)


Housing 1,726.9 1,899.6

Housing research and training(public) 6.5

Other Building 686.5 755.2

Urban Development 387.4 387.4

Communications 75.3 75.3

Total 2,876.1 3,124.0

42.. Although the mission's figures are higher, there is only a

minor real cost difference between the Government's program and therecommendations: the expenditure of E° 6.5 million we are proposing

for housing research and training. The greater part of the financialdifference is because the Government program allowed no funds for landpurchase for housing and other building construction. Land purchase isnot an investment from the point of view of the nation as a whole; butit is an expenditure which requires financing both for public and privatebuildings, and failure to show it as a "cost" understates the magnitudeof the financial problem connected with a building program. Consequently,we have added 10% to the Housing and Other Building projections as theestimated cost of land. 1/

1/ This "cost" is eliminated in those summary tables of Chapter 1 whichshow the relation of the investment program to the total economy.

-15 - 3t SECTOR FROGRA1S

43, As a more substantive modification of the Government's housingprogram for the rural areas, the mission recommends integration of therural housing program with the government's proposed agrarian reformmeasures, so that the two efforts will complement one another. In par-ticular, the mission favors a concentration on the development of self-contained rural communities, so located that farm workers will havereasonable access over improved roads to their place of work; while atthe same time, farm workers and their families will benefit from theeconomies of community living -- schools, clinics, sanitary facilities,etc., within the means of the economy. The mission also recomzmends con-struction methods for rural areas which wiEl yield a greater number ofmodern dwelling units for the same expenditure.

Housing

4b.. Based on today's standards and costs, the allocation of fundsto housing is sufficient only to replace earthquake losses and to main-tain the per capita quanitity of housing which existed in 1961. That is,excluding the earthquake losses, the 10-year program would, in terms ofdwelling units, just keep up with the expected population increase andthe attrition of existing dwa'ling. Contemplated expenditures wouldamount to about 2.7% of Gross Domestic Pr: iuct (GD?). The average ex-penditure on housing during the 1940-55 period was about 3.3% of GDP;then the rate fell off rapidly after 1955 to an average, through 1960,of only 1% of GDP. The program cal'ls for construction of 538,000 dwellingunits as follows (in thousands of U.its):

Total Urban Rural

Required for population growth 395.0) 422.3 57.7

Normal replacement requirements 83.0

Earthquake losses 58.7 22.2 36.5

Total 538.7 444.5 94.2

!;5, The average production rate would be 54,000 dwelling units ayear, or nearly twice the previous peak of 30,000 dwelling units attainedin 1959. Even at this high rate of production, the program will failto make inroads on the estimated deficiency of 317,000 units that existedat the beginning of the decade (as measured by the 1952 census standards).This deficiency arose from two chief factors:

a. The proportion of resources devoted to housing fell to avery low level during the inflationary years prior to 1960.

- 16 - 3, SECTOR PROGRAMS

b. In previous years building was heavily concentratedon housing for middle and upper income groups, -withworker housing falling considerably behind. A-v-ailable dataindicate that the average size of dwellings built duringthe decade of the 1950's was on the order of 80 square meters,a size considered to be generally beyond the reach of mostworking class families. The average size dwelling unit con-templated in the 10-year program is 55 square meters, mostlyfor workers.

46. To restore the 1952 number of dwelling units per capita wouldrequire the construction of 85,000 units a year over the next decade. Themission considered several alternative programs tbat would at least partiallyrestore the housing standards of 1952, but a realistic appraisal of eachalternative showed that a program larger than that now contemplated wouldclaim too large a proportion of total resources and would jeopardize othersectors of the investment program.

47.. The plans call for a graduated increase each year, a schedulewhich the mission believes to be wTell within the capabilities of the Chileanconstruction industry; as the plan shows, there is sufficient capacity toproduce the required building materials. But it will take time to organizethe construction industry for its larger role in the economy, and some ofthe contemplated rationalization procedures must be carried out.

he'. Among the rationalization procedures implied in the Governmentprogram are self-help projects that have already proven practicable in Chile,at least on a small scale. Another is simplified land development, whichwould provide space and basic utilities, leaving the construction of shel-ters to the occupants. A third is to provide "core" dwelling units whichcan later be expanded into standard housing. Research (including experi-mental projects) can prove out these possibilities, as wvell as other hous-ing methods which would be less demanding on the resources available forhousing than the methods commonly used in the past. New methods, boldlyused, can help to meet requirements within the limits of both the physicaland the financial resources available.

1)56. More than 75% of the proposed dwelling units are scheduled tobe for working-class families. Another 16% will be for middle-class,and 8% for the upper income groups. In the rural areas, nine out of 10dwelling units will be for the working classes.

5o. The mission agrees with the position taken by the programplanners that the bulk of housing construction will require public financialaid, even though eventual ownership will be private. Of the programmedexpenditure of some EO 1.7 billion, the mission estimates that about E° 1.3billion would have to be financed initially wih public funds, leaving onlyE° 400 million to be financed entirely through private sources. (To bothfigures the mission would add 10% to allow for the cost of land, as pre-viously explained). A substantial amount of "publict' financing will comefrom the various social security funds, which have traditionally investedtheir reserves in housing for their members. We expect that over the 10-year period there would be a recovery of approximately E0 250 million ofpublic funds through rent receipts and loan repayments.

- 17 - 3. SECTOR PROG RA S

Building Construction Other Than Housing

51. The program for building, excluding housing, includes schools,hospitals, public buildings, commercial buildings, installation work oncommercial premises, and other miscellaneous non-housing construction.Plans are based on studies of requirements in these categories. Theschool building allocation contesi,plates an increase in school populationof about 640,ooo students in primary, intermediate and university insti-tutions, requiring approximately 2,680,000 square meters of schoolbuildings at a cost of approximately EO 171 million. The targets inhospital construction are based on a standard of 6.56 hospital beds ofall kinds per thousand inhabitants. On this assumption, 780,000 squaremeters of such buildings must be constructed in the 10 years, providinga total of 19,300 beds at a cost of EO 87.5 million.

52. Public buildings are usually constructed through the Office ofArchitecture in the Ministry of Public Works. The public buildingsector, other than schools and hospitals, is considered to be of relativelylow priority, an opinion shared by the mission. Work is expected to con-tinue at the present rate of 40,000 square meters per year for the 1961-1970 decade at a total investment cost of EO 29.4 million.

53. Commercial buildings -- hotels, theaters and offices, marketsand commercial premises and installations in general-- are contemplatedas an undertaking by private enterprise. Estimates suggest 2.6 millionsquare meters of these types of structures will be built during the de-cade at a cost of EO 364 million. To these cost figures must be addedthe cost of reconstructing buildings in this category destroyed in theearthquake zone -- amounting to an estimated total of EO 33.6 million.

Urban Development

54. The principal expenditure contemplated for urban developmentis the extension of potable water supply and sanitary sewers. Based onestimates of urban population growth and conservative standards of waterrequirements (250 liters per capita per day), EO 182.0 millions will berequired over the decade for water supply. Sewerage services in com-munities of over 5,000 inhabitants are expected to cost EO 78.9 million.Urban paving, public lighting, and various municipal works, includingflood control in urban areas, are given a relatively low priority; theyare continued at approximately the going rate at an anticipated cost ofEO 126.3 million over the period. The mission is in agreement with theseestimates.

55. The plan is considered to be a flexible pattern of globalfigures; as the details of area and coTmnunity development are worked out,the figures must be adjusted from year to year in the development ofannual budgets.

- 18 " 3, SECTOR PROGRMUS

TRA NS PORTATI ON

56. Transportation is a key factor in the Chilean developmentprogram. Without an adequate and well planned transportation system, it

will be difficult, if not impossible, to accomplish the objectives of the

other sectors of the 10-year program. In our opinion the amount of re-

sources progrartmed by the Government for capital outlays on the trans-

portation system (excluding private automobiles) is in balance with the

rest of the program, namely, 15% of all investment planned for the de-

cennial period.

57. The major transportation problem facing Chile is to make atransition in an economic manner from primary reliance on railroads to

increasing ut'ili,_ationof highways. This transition has been madesuccessfully in all of the more fully developed countries -- though not

without some painful readjustment by the railroads. The transition will

also be painful for the railroads in Chile, but the present heavy finan-

cial burden that the railroads impose on the country must be eliminated.

The achievement of an economical railroad system will necessarily imply

a much greater emphasis than hitherto on road transport, which, with

present technology, should offer a superior means of transportation in

Chile.

58. These broadly based general considerations led us to the con-clusion that in the future road transport will continue increasing in

importance as a means of transportation in Chile. Roads are of vital

importance for the establishment and growth of rural communities and,

in general, satisfy a greater range of demands than other forms oftransport and have great flexibility in use. In the investment plans,

roads and road transport should be of first priority.

59. In Chile, with its enormous distances from the far north to thefar south, air transportation must play an important role. Investmentsin airports, air security and airplanes should be of high priority. Theprincipal object of air transport in Chile will remain the passenger

service; air freight service will also develop to some extent, but thecomplementary role will always be greater with air freight than withpassenger service.

60. For a country with the geographic peculiarity of Chile, wherefew areas are more than 100 miles from the ocean and where most importantcenters of production are within 50 miles, coastwise shipping still hassome functions: this type of transport remains the cheapest for longdistance hauls of bulk raw materials and general cargo. The coastal

transport of general cargo by ship will probably only hold its present

level. Transports of bulk raw materials can be expected to increase.

The investments in coastwise shipping, foreign trade shipping, and ports

necessary to meet future demand are expected to be small.

- 19 - 3. SECTOR PRCR-APrS

61. It follows from our concept of an overall transportationpolicy for Chile that the operations of the railwayrs must be confinedto the areas of high traffic density and should concentrate on thehaulage of goods rather than passengers. The railway management mustadapt itself to that role for railways, and make the necessary changes.Without these changes, the railways will continue to be an enormousburden for the State and the taxpayers.

62. As a most important element of transportation policy, themission believes that the whole transportation system should be finan-cially sound and that each major sector should pay its own way. Ofcourse, this does not mean that every mile of railroad, every mile ofhighways, every scheduled airplane flight, or every item of cargohandling at a port should pay its own way. But each system shouldhave a reasonably well balanced relationship between costs and bene-fits to the users.

63. In line with this policy, an all important measure is togradually abandon the branch lines of the railways that are uneconomicand wherever sound economically, to replace them by roads. Dependingon the results of studies to be undertaken of some lines, as much as60% of the present railroad network might have to be abandoned in thenext 10 years.

64. We emphasize the railroad problem because it is obviouslyacute. In the major elements of the rail system it appears thatrevenues from operations meet barely half of total costs; the differenceis made up by a Government subsidy. But this emphasis on railroadsshould not obscure the fact that all other major transport sectors arealso operating at a loss.

65. W1e believe that the best organizational device to assure finan-cial soundness is the creation of truly autonomous authorities for eachtransport sector. W4e therefore propose that the autonomy and independenceof the railways, of the National Airlines and of the incipient PortsAuthority, be greatly strengthened, and that the administration of air-ports be concentrated in the hands of an autonomous Airport Authority.Wlre also recommend that the Highway Authority -- which for obvious reasonscannot be made financially independent in the same way -- be rivenl broadoperational autonormy. The operations of the transport authorities willrequire policy supervision and control regarding investment decision.For that purpose we recommend that the function of the Undersecretariatof Uransport in the 1Ministry of Economy be strengthened and transformed

into a Ministry of Transport.

66. With this background, we can now summarize the mission'srecommendations with respect to transportation investments. The total in-vestment recommended by the mission amounts to the equivalent ofE° 1,4i27 million as compared with the Government's program figure ofEO 1,502 million.

- 20 - 3. 7ECT0T PROGr9&S

Table 3-6

Transport Investments, 1961-70

(in E° millions)


Railroads 329 213

Ports 63 58

Shipping 104 63

Roads 535 5) )

Motor Vehicles 396 478

Airports 43 43

Planes 32 28

Total 1,502 1,1427

67. Thus, our recommended investment in transportation is somewvhatless than the amount in the Government program.l/ This is almost entirelydue to the substantial reducticn which we recommend in exrenditures on therailroads. We have also proposed reductions in expenditures for ports,shipping, and aircraft. We foresee, on the other hand, the need formuch more expenditure on commercial motor vehicles as the road net-work is improved. Furthermore, expenditures on road maintenance mustbe greatly increased. This is not a capital expenditure, and so wedo not count it in the investment program. If our concept of pronertransportation policy for Chile is accepted, however, there mustinevitably be more current account expenditure on road maintenance --approximately E° 175 million over the 10-year period. Therefore ourrecommended actual expenditure, capital and current, on the transportsystem is greater than the Government's estimate. The real differencelies in the kind of expenditure and the direction of transport develon-ment.

1/ The Government program referred to in this summary and in Chapters 9through 14 is a revised program submitted to the mission at the end ofits visit to Santiago. The revised program called for 1961-70 expendituresof E° 1,500 mil'Lion, whereas the original trogram, which forms the basisfor the tables in Chapter I, amounted to E 1,387 million.

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