As to the period of the loan, we referred to loans made by the bank to some other countries in which the maturity date was of 25 years and asked the bank for an increase of the maturity period from 20 to 25 years.

The bank’s team, however, could not agree with our proposal as it was the accepted principle of the bank that the repayment period be related to the life of the plant and equipment to be covered by the loan and we were satisfied that it was usual for the bank to fix a period of 20 years in respect of loans financing the construction of a thermal power station. A 25-year period was usually allowed for hydro-electric power stations.

Provisional agreement was therefore reached on a loan of £2.6 million at 5½% for a period of 20 years. The interest rate [is] to be reviewed if, by the time agreement is reached, the current market rates of interest undergo any change.

Such loans are invariably subject to a negative pledge by which the borrower undertakes that, except as the bank otherwise agrees, if any lien is created on any assets of the borrower as security for any national debt, such lien will rate pari passu with that created in respect of the loan from the World Bank.

This is a standard condition of the bank, but as a result of negotiations the bank’s team agreed to waive its rights to the lien created by the overdraft agreements with the Crown Agents for Overseas Governments and Administrations in London under which the Savings Bank is authorised to overdraw from time to time its account with the Joint Consolidated Fund up to an amount of £2,000,000. The purpose of this arrangement is to allow sufficient liquidity to the Savings Bank without incurring losses by the untimely realisation of its investments.

The grant of the loan by the World Bank is of course subject to the establishment of a statutory independent authority or board to run the electricity undertaking. The provisions of the draft legislation for the setting up of the Malta Electricity Board were, therefore, extensively discussed with the bank’s team.

The main preoccupation of the bank in this regard was that, in their view, the measures of autonomy conferred on the board in the Electricity Bill needed widening in conformity with generally accepted public utility practices. They held that the board could not be run as a sound commercial corporation unless its independence was statutorily recognised.

The main amendments proposed by the bank to ensure a greater measure of independence for the board, were the following:

a)            Members of the board to hold office for a period of three years, provided that the first members to be so appointed shall hold office on a rotating basis for periods ranging from one year to three years. This amendment was accepted by us as its aim is to ensure continuity of the policy of the board.

b)           The members of the board to be dismissable during their period of office only for a joint cause stated in the law. We accepted this amendment only after the bank had, following considerable negotiations, agreed to our counter-proposal for the retention of a residual clause, viz. “When a member is, in the opinion of the minister, unfit to continue in office or incapable of performing his duties”.

c)            The board should have freedom of action on staff matters except in the appointment of the General Manager who was to be appointed with the approval of the prime minister. The general manager was also to be an ex officio member of the board and to have absolute powers for appointments, promotions, dismissals and for all other establishment matters. By going through the laws for the establishment of such boards in other countries, we were satisfied that it is the practice of the bank to ensure for the board’s independence from government control in the appointment and employment of staff. We could not, therefore, very well object to the first of the two issues. The proposal to grant quasi ‘dictatorial’ powers to a general manager on appointments and other staff matters was, however, in our view unacceptable.

 

The bank took a very stiff stand on this and only after representations were made at the highest level was a formula acceptable to both parties found by the insertion of the following new paragraph after paragraph 3 in the First Schedule of the draft bill: ‘Proposals for appointment and employment of persons to the service of the board shall not be considered by the board unless submitted to the board by the general manager’.

Another amendment of substance agreed to in the course of the negotiations was proposed by us and this concerned the insertion of provisions in the bill for the preparation and adoption by the board of annual estimates of income and expenditure, of supplementary estimates, for the supply of a copy of such estimates to the minister responsible for the board and for the publication of such estimates in the Government Gazette. Similar provisions were found in corresponding legislation of other countries.

Except, therefore, insofar as the appointment of staff other than the general manager is concerned, all other ministerial control provided for in the draft bill was accepted by the bank. The draft legislation as amended as a result of these negotiations is attached.

It is also the practice of the bank to cover such loans by:

a)            A ‘Loan Agreement’ between the government and the bank covering the statutory loan regulations of the bank and any other ‘special’ conditions mutually agreed upon by the two parties.

b)           A ‘Guarantee Agreement’ between the Guarantor (in our case the British Government) and the bank, specifying the conditions under which the Guarantor accepts to guarantee the loan; and

c)            A ‘Subsidiary Loan Agreement’ between the government and the board in which the board binds itself to comply with all the terms and conditions of the loan.

 

The loan and subsidiary loan agreements cover the points already mentioned above and generally follow the pattern of similar agreements entered into with other countries and boards receiving loan funds from the bank. The above-mentioned draft agreements are enclosed.

To avoid possible future misunderstandings, it is also the custom of the bank to exchange a number of ‘side letters’ with the borrower specifying in more detail the special conditions of the loan. The ‘side letters’ annexed to this memorandum have been agreed to subject of course to government approval. These also cover the points already referred to above.

The management of the bank laid stress on the desirability of finalising the loan as early as possible, as any delay in this regard would jeopardise the approval of the loan by the bank’s directors, considering that such approval is subject to the appraisal carried out by the bank’s staff at the time of investigating the application and the directors would not be in a position to consider any application for a loan where the financial and economic analysis is already outdated.

A plan of operation of the steps to be taken by each of the two parties and the approximate timing of each action, has therefore been proposed by the bank and is annexed hereto. If this plan is adhered to it will be possible to have the loans and other agreements signed by the end of January. This will enable the board to function as from the 1st April next ie the commencement of the next financial year when the board will be in a position to receive the first instalment of the loan.

It is now for consideration of government whether the provision agreement reached with the bank should be approved.

 

(Although this memorandum is undated, it was presented at the first meetings of the Borg Olivier Cabinet in August 1962. It is unclear whether the draft agreement was signed with the Colonial Government or whether it was signed with the Borg Olivier government which took office in February 1962, though the internal evidence would seem to suggest the latter).