STRICT EMBARGO FOR FRIDAY MORNING'S PAPERS.
MOUNT ISA RAILWAY.
ARTICLE BY THE PRIME MINISTER ( MR. MENZIES).
I have gathered from practiially all of my Queensland
Commonwealth Parliamentary colleagues, and also from some
communications I have personally received, that there is a great
deal of propaganda current in Queensland to the effect that the
Commonwealth Government. has'not-made genuine efforts to secure
the financing of the new rehabilitated railway; that, on the
contrary, it has impeded the project; and that it has no proper
interest in the development of Northern Queensland.
The Queensland Government is familiar with the faets,
and therefore cannot be held responsible for this propaganda.
My Government has no quarrel with the Queensland Government on
these matters, our interests are-completely in common, and we
share a great enthusiasm for this great mining and railways
enterprise. To avoid foolish controversies, and to put the record
straight, I have written this statement, which is designed to be
objective and clear, and as brief as is practicable.
As I. have had more to do with the negotiations than any
other Commonwealth Minister, most of what I have to say will have
my own first-hand authority.
What I will call " the project", which includes a'dramatic
development of the mining output of Mt. Isa so as to make it one
o. f the greate. st mines in the world, with large consequential
additions to Australia's internal activity and export income, and
a vastly improved railway link between Mt. Isa and the East Coast,.
began to be discussed some years ago. The then Queensland
Government sought a report from a. great firm of American railways
consultants, Ford, Bacon and Davis. In what is still regarded as
an authoritative examination, these engineers made it clear that
should the company develop its daily produetion, to 14,400 -tons.
( and more so should this be increased to 19,000 tons), the
projected cost of the railway (œ 29m) could be comfortably amortized,
over a period of 20 years, by the resultant freight revenues from.
Mt. Isa.
2.
The company clearly would be undertaking a vast capital
expenditure on the mine. From the point of view of-Government,
the question was how to raise the œ 29m. for the railway and its
associated expenditure.
When Mr. Nicklin became Premier, he promptly investigated
the matter, in close collaboration with Mr. Hiley, his
Treasurer. He took the matter up with us before and at the
Loan Council Meeting in June 1958. His proposal was that the
Queensland Government should, out of its own resources during
the period of construction, find k7m., and that œ E22m. should be
borrowed abroad. We thought that a World Bank borrowing would
have a triple benefit; one was that it would add to our capital
resources for the carrying out of a great work; the second was
that it would improve Australia's overseas balances; the third
was that it would not impair ordinary borrowing for the States'
works programmes. It was, however, necessary to secure Loan Council
approval for a borrowing by the Commonwealth in the specific
interest of one State. We undertook to do everything in our
power to secure this approval, and it was in fact given.
The proposal which the Premier formulated for purposes
of the Loan Council, was that Queensland envisaged entering
into a contractual agreement with the Mt. Isa Company, whereby
the Queensland Government would agree to rehabilitate the
railway between Mt. Isa and Collinsville by June 1963 to the
standard proposed by the expert consultants, Messrs. Ford
Bacon and Davis; and the company would agree to guarantee
sufficient earnings on the carriage of inwards and outwards
traffic to Mt. Isa, to meet the cost each year to Queensland
of rehabilitating the line within a period of, say,
years from 1st July, 1963. It will at once be seen that, at
that time, the proposal was that the company wouild amortize
the total cost.
We thought the proposal had great merit, and
believed that it would commend itself to the World Bank as
a borrowing for a specific and self-liquidating developmental
proj ect.
3.
From that day to t his, filv persuaded as I am of the
great value of the project, nobody has worked harder to bring
it off, But, quite early, in the subsequent negotiations, it
transpired that the Company was not prepared to guarantee the full.
amortisation, I am not criticising the company; it formed its
own business judgment. But the change did present diffio'ilties in
securing the money from the World Bank. That bank is one of
Reconstruction and Development. It does not lend money simply for
the purpose of getting interest on it and securing a repaym ent of
the principal. Its prime function is to finane2, some economic
development which will, so to speak, pay for itself. In the case
of applications for loans relating to specific projects, the World
Bank has made a practice of requiring a complete guarantee from the
principal user.
After preliminary exchanges with the bank, which it is
unnecessary to particularise, we had a three-cornered. conference
at Canberra, in which I pointed out that I did not think there was
any real chance of a World Bank loan unless there was a freight
contract between the Queensland Government, which had a proper
interest in securing the wonomic success of the new line, and the
company, which had much to gain by a long-term freight contract in
respect of a railway adequate for the ultimate expansion of the
mine. Our discussions lasted until 3 o'clock in the morning, and
ended with a broad and no doubt tentative agreement by the company
to guarantee ( on various conditions) a substantial proportion of
the amortisation, of the order of about 70 per cent, which we
thought would provide a basis for negotiation with the bank.
Upon subsequent reflection, the company did not feel able
to confirm this. Alternative proposals were considered, but for
various reasons, they later came to nothing
Just before I went off on my recent journey to America
and Europe, we had a further conference at Canberra. Queensland
Ministers had with them a revised draft agreement. We once more
discussed the possibilities of a World Bank loan. Having once
more explained the bak' method of approach, and the purposes
I
for which it had been . stablished, I was asked whether, as I had
had great personal experience with the barnk in the securing of
earlier loans, I would be willing to take the matter up in
Washington with the F'eFidont of the Bank, Ir. Eugene Black, with
i
whom I was known to be on close and friendly terms. I replied that
I would be willing to do so, though unless thee was some very
material change I was by no means sanguine of success. In effect,
I said: " The bank will consider that this business is primarily
a matter between the Queensland Government and the Mt. Isa
Company. The bank has made it clear that it wants a freight
contract between the company and the CGovernment of such a kind as
will make a very expensively re-consZructed line not a liability
to the Queensland Government, but an asset. They vill want to
strengthen the position of Queensland at the samle time -as they
facilitate this enormous mining development."
That was a perfectly fair: statement, not of our
requirements our function was lo become the borrower from the
bank and to re-lend to Queensland but of the requirements, as we
understood them, of the bank.
We had a good deal more discussion, which I need not
rehearse, about the desirability of including in'any freight
contract adequate provisions to protect the company in the event of
such events as a partial collapse of the mine, or some Government
action, or war. But, in the broad, we agreed that a suitable
freight contract would be necessary if we were to do business
with the bank. I went to Washington and saw Mr. Black and some of his
top men. Knowing that no loan could be actually secured in a day
or two, I set out to establish, if I could, the essential
pre-conditions of a useful negotiation. First, was the bank
genuinely interested in the Mt. Isa project? Did it see it, as I
saw it, as something of immense importance both for the development
of Queensland and. for the improvement of export earnings?
The answer to that was. unhesitating: " You can take it
that thi' bank would be pleased to be ' associated with this project.
But of course we have our own standards and practices." " Anyhow,"
I said, " you are keen?" Mr. Black said, ' Yes."
We then discussed the fact that the Australiar Government
would be the borrower. It was once more made clear as I had
tried to make clear at Canberra that the proposal did not turn
upon our credit-worthiness, which the bank regarded as unquestionable,
but upon the freight arrangements which could be made between
the Queensland Government and the Mt. Isa Company.
" Well,"' I said, " I think it would be useful though they
are not the direct borrowers if I could get the Queensland
Government to send their Treasurer, Mr. Hiley, to Washingtong and
the company to send Mr. Fisher. Would you and your officers be
Prepared to have discussions with them iif they cane over?" He
said " Yes." I then said, " Before I do anything about this, I want tO
know one more thing. The bank has heretofore said that it
requires a 100 per cent amortisation guarantee from the principal
user, the company. Is that inflexible?"
After discussion, th2 answer was " No. We are prepared to
negotiate on a basis of less than 100 per cent, because we think
this a valuable project.
I then dictated. in the presence of the bank's representatives,
the relevant passage of a cable to my colleagues at
Canberra on these two points. The bank agreed. I think it
necessary to set this out, because, although thereafter I made no
statement at all on the subject of the loan, it has been, I gather,
freely said by so: ne people in Queensland that I " oversold" the
prospects of a loan.
Mr. H-iley and Mr. Fisher in fac. t went to Washington and
had negotiatifons first with Mr. Black and then with officials
which were in fact terminated by Mr. Hiley on the ground that he
felt no adequate progress was being made. This was naturally a
matter for Mr. Hiley's own judgment, and I have no right or desire
to criticise it. I did, however, redeive in London a ltter from
Mr. Black in which he said he was sorry that the negotiations had
terminated. ( Mr. Black was himself in Toronto when the talks
ended.) He repeated that the bank was very interested. He pointed
out, quite accurately, as I subsequently learned, what -the
differences were, and added " I didn't think any of them were
insoluble." On my return to Australia I was shown the documents, which
included, by courtesy of the Queensland Government, reports which
Mr. Hiley had made to Mr. Nicklin during the discussions. In these
I read that the company, through Mr. Fisher, had at Washington
offered, on certain conditions, to guarantee 70 per cent of the
0amortisation of the cost of the railway.
As this seemed to me, with my knowledge of the bank, to
provide a basis for a further loan negotiation, but as the
Commonwealth Treasury officer who had attended the Washington talks
had expressed doubts as to whether such an offer had been made in
terms ( this being, of course, a matter of interpreting the language
used), I decided to invite Mr. Nicklin, Mr. Hiley and Mr. Fisher,
once more to come to Canberra.
This they most willingly did. The conference began with
* a short statement by me on my own talks at Washington, followed by a
question from me about the company's preparedness to gua~ rantee 70 per
* cent. Mr. Fisher at once rejected any such idea. Speaking to
Mr. Hiley, he said, in substance, " I have never guaranteed 70 per
cent. What I said was that we were prepared to accept aL surcharge
on the freight rates to build up a fund of E5m. which could be drawn
upon if, in any year, the amount of freight was insufficient, and
that that might, over a period of 20 years, produce 70 iper cent of
the total amortisation." In answer to a question by me, Mr. Fisher
agreed that if for any reason the volume of freight fell for some
time, the 10 per cent surcharged freight rates might not; produce
anything like 70 per cent of the amortisation figure.
As, in a matter so complex, there was clear room for
misunderstanding, and as the 10 per cent surcharge proposal had,
I learned, been rejected at Washington, I was proceeding to ask
some more questions about it, when Mr. Fisher said: TeFeling jundersome
pressure, X advanced the 10 per cent surcharge proposal at
Washington, but it is now withdrawn." Well, I said, " What offer
are you making?"; to which Mr. Fisher replied, " None. The company
will guarantee nothing in respect of the railway rehabilitation.
Why should we? We are mining people. We will develop the mine.
The Government can develop the railway. That is its business,
not ours." This statement was subsequently repeated several times,
after which I made the obvious remfark that, in the absence of any
guarantee from the ompany, all talk about a borrowing from the
bank fell to the ground, and that we could forget about it. This
conclusion was accepted around the table.
I. am. not . auirrelling with the company or Mr. Fisher, who
are admirably competent to decide their own business, or wthie
Queensland Government., which had pursued this matter with great
activity and zeal.
But I have stated the bare essentials of the negotiations,
because it clearly appears that a proposal which began at the time
of the Loan Council mecting of 1958 as one which involved-a oorapiln1tguarantee
by the compan:, ended with a decision by the company to
give no guarantee at all,
Clearly, therefcre, the failure to secure a World Bank
loan arose from circumstances over which the Commonwealth
Government had no control, and for which we can in no sense be
fairly blamed. Mr. Nicklin and Mr. iiley, I am sure, agree with this.
Before our last conference ended, Mr. Hiley opened up the
possibilities of a borrowing from some other source or sources. I
am in close correspondence with Xr. Nicklin about this matter.
All that need be said at this stage is that the Queensland
Government and my own are both actLve and co-operative, since we are
both-enthusiastic about the project, and will do all that we can to
see it complobted as a whole, in the. Lnters-ts-tof-bcLth-ine-ral-and---
pastoral development in Northern Queensland.
CANBERRA,
August, 1959.