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4.
(a)
to abandon any further effort to secure International
Bank and United States Government assistance, to back the Consortium in its forthcoming negotiations, assuming that the French and German Governments will do likewise, and to accept with them the financial risks of default by the Egyptian Government;
(3)
to
(c)
continue to negotiate for International Bank participa-
tion, accepting that this means international competition for the Consortium.
In view of the work
the Consortium has already done on the project, we may hope that it would secure the contract; or
to accept the United States Government's thesis that the only solution lies in joint Bank/United States/United Kingdom participation and to widen the basis of the Consortium to include American firms.
Course (a) offers the best hope of avoiding the danger that the Soviet bloc might seucre the contract, and would ensure substantial business for United Kingdom contractors. On the other hand the financial risks would be very serious. The cost of the dam and all its associated hydro- electric and irrigation works (including that part of the work which would be executed by the Consortiumas well as other secondary work) has been put by the International Bank at some £500 millions, of which at least £140 millions would be in foreign exchange. The sum which Her Majesty's Government would be called on to underwrite would be one-third of the latter sum (i, e, about £45 millions), the French and German Governments presumably accepting responsibility for the remaining two-thirds, and the Egyptian Government shouldering all liability for the local currency cost of £360 millions (viz. £500 millions less £140 millions), In the view of the Treasury, which appears to be shared by the International Bank and by the United States Government, a foreign exchange cost of £140 millions, even spread over ten years or more, taken in conjunction with all the other commitments in which the Egyptian Government are likely to become involved, is beyond Egypt's capabilities. It appears to be generally accepted that even with a strictly controlled programme of foreign spending Egypt will need anything from £50 millions to £70 millions from outside sources. Without outside aid Egypt would be virtually bound to default on some foreign payments and, no doubt, if she had to choose between meeting the bills presented by the Consortium, paying for food imports for her population and purchasing arms, it would be the first which would suffer.
5. It has been suggested that a safeguard against default could be found by linking the releases of blocked sterling which Egypt is to receive during the next seven years to the payments which she would be due to make to the Consortium. While we should explore this possibility which might have some value in discouraging the Egyptians from frittering away their resources, we do not believe that in a serious crisis it would provide any real safeguard. Egypt's sterling balances are at present held in an account with the National Bank of Egypt and the powers which the Treasury possess under the Exchange Control Act would enable them to block the balances but not to compel her to pay them to the Consortium. The Egyptians might be willing to enter into a specific undertaking amounting in effect to a hypothecation of these balances to the financing of the High Dam contract. This, however, is an undertaking on which in a serious financial crisis Page 63 of 321
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Page 64f13ed as likely to default as on the simple obliğage64f32et their payments to the Consortium. Finally, even if there were some means by which Her Majesty's Government could assure a lien on these balances, the sanction would be one which, on political grounds, it would be extremely difficult to exercise when the time came. We should be faced with a situation in which, not only would the whole High Dam project be brought to a standstill, but Egypt herself would be facing a serious shortage of foreign exchange for current imports.
60 It might be argued that, if Egypt's foreign exchange deficit over the period of the scheme is put at £50-£70 millions, the maximum risk for Her Majesty's Government would be one-third of this range, viz., £17-£23 millions. This, however, is not the case. In the first place the estimated deficit of £50-£70 millions is based on the assumption that Egypt will manage her financial affairs prudently. This is already open to question in the light of her purchases of arms and her current balance of payments deficit. More important, there is the risk that, if the Egyptians defaulted, the French and German Governments, with less political interest in the Middle East than ourselves, would instruct their firms to withdraw. We should then be left with the choice either of completing the Dam ourselves and of accepting the whole of the foreign exchange liability, or of withdrawing along with the French and Germans, The Russians might then step in and finish the project, taking all the credit and leaving us with the odium,
1.
Nor can the local cost of the scheme be totally disregarded, It is true that the Egyptian Government ought to have less difficulty in meeting obligations in its own currency than those in foreign exchange for it could, if necessary, resort to an unsecured overdraft from the National Bank. But such a method of financing could lead to serious internal inflation which, unless checked, would generate a higher rate of imports and an even bigger drain on Egypt's external resources.
3. To sum up, course (a) would involve Her Majesty's Government in something very like an open-ended commitment to underwrite the Egyptian economy over the next 15 years or so. Virtually the only circumstances in which it would be possible to cut our losses would be if Egypt were to pass into the Soviet orbit.
9%
The financial risks inherent in course (a) would be avoided if we adopted course (b). The chances of Egyptian default would certainly be greatly reduced if the Bank were to underwrite one half of the foreign exchange cost of the dam, and the whole project might then become a commercially insurable operation.
10.
On the other hand this course is open to two objections; first that some delay in the conclusion of the contract would be inevitable. It is however by no means clear what the International Bank has in mind by international tender. Since the project is by its very complexity unsuited to the system of world-wide tendering, it is possible that some streamlining of the usual procedures might be accepted. The second disadvantage is that either the Consortium might be under-bid by a rival group or, if the contract were broken down into a series of smaller individual and separate items, the Consortium might be split up and British firms lose some of their share. This danger can however be exaggerated, and it appears more probable that, by virtue of the long start over its potential competitors, the Consortium could meet and
lefeat
pagety Fiɣal group.