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79–696 PDF 2002

PROPOSED CHANGES TO BOTH THE

WORLD BANK-INTERNATIONAL DEVELOPMENT

ASSOCIATION AND THE NORTH AMERICAN

DEVELOPMENT BANK

HEARING

BEFORE THE

SUBCOMMITTEE ON

INTERNATIONAL MONETARY POLICY AND TRADE

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

MAY 2, 2002

Printed for the use of the Committee on Financial Services

Serial No. 107–68

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director

SUBCOMMITTEE ON INTERNATIONAL MONETARY POLICY AND TRADE

DOUG BEREUTER, Nebraska, Chairman

DOUG OSE, California, Vice Chairman

MARGE ROUKEMA, New Jersey

RICHARD H. BAKER, Louisiana

MICHAEL N. CASTLE, Delaware

JIM RYUN, Kansas

DONALD A. MANZULLO, Illinois

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

GARY G. MILLER, California

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

BERNARD SANDERS, Vermont

MAXINE WATERS, California

BARNEY FRANK, Massachusetts

MELVIN L. WATT, North Carolina

JULIA CARSON, Indiana

BARBARA LEE, California

PAUL E. KANJORSKI, Pennsylvania

BRAD SHERMAN, California

JANICE D. SCHAKOWSKY, Illinois

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

KEN BENTSEN, Texas

(III)

C O N T E N T S

Page

Hearing held on:

May 2, 2002 ....................................................................................................... 1

Appendix

May 2, 2002 ....................................................................................................... 47

WITNESSES

THURSDAY, MAY 2, 2002

Aranda, Hon. Jose A., Jr., Mayor, City of Eagle Pass, Texas .............................. 22

Christoff, Hon. Joseph A., Director, International Affairs and Trade, U.S.

General Accounting Office ................................................................................... 2

Gonzales, Donald J., Executive Vice President, Estrada Hinojosa & Company,

Inc. ......................................................................................................................... 26

Miramontes, Hon. Victor, President and CEO, America City Vista, former

Managing Director and CEO, North American Development Bank ................ 19

Silva, Ernesto S., City Manager, Mercedes, Texas ............................................... 24

APPENDIX

Prepared statements:

Bereuter, Hon. Doug ........................................................................................ 48

Gonzalez, Hon. Charles A. ............................................................................... 51

Hinojosa, Hon. Ruben ....................................................................................... 55

Ortiz, Hon. Solomon ......................................................................................... 56

Reyes, Hon. Sylvester ....................................................................................... 57

Rodriguez, Hon. Ciro ........................................................................................ 60

Sandlin, Hon. Max ............................................................................................ 63

Waters, Hon. Maxine ........................................................................................ 64

Aranda, Hon. Jose A., Jr. ................................................................................. 66

Christoff, Hon. Joseph A. ................................................................................. 85

Miramontes, Hon. Victor (with attachments) ................................................. 94

Silva, Ernesto S. ............................................................................................... 110

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Gonzalez, Hon. Charles A.:

Free Trade Alliance San Antonio, prepared statement ................................. 117

Garza, Hon. Edward D., Mayor of San Antonio, TX , prepared statement . 120

San Antonio Hispanic Chamber of Commerce ............................................... 123

Ose, Hon. Doug:

CRS Report, ‘‘WorldBank: IDA Loans or IDA Grants?’’ ................................ 126

(1)

PROPOSED CHANGES TO BOTH THE

WORLD BANK-INTERNATIONAL

DEVELOPMENT

ASSOCIATION AND THE NORTH AMERICAN

DEVELOPMENT BANK

THURSDAY, MAY 2, 2002

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON INTERNATIONAL MONETARY

POLICY AND TRADE, COMMITTEE ON FINANCIAL SERVICES, Washington, DC.

The subcommittee met, pursuant to call, at 10:00 a.m., in room

2128, Rayburn House Office Building, Hon. Doug Bereuter, [chairman of the subcommittee], presiding.

Present: Chairman Bereuter; Representatives Ose, Capito, Sanders, Frank, Watt, Carson, Sherman, Bentsen, Hinojosa, and Gonzalez.

Mr. OSE. I want to call this hearing of the Subcommittee on

International Monetary Policy and Trade to order. I recognize a

quorum for today’s hearing.

Today’s hearing is designed to bring before the subcommittee two

proposals. The first is to make more international assistance in the

form of grants, rather than loans, and the second is the proposed

changes to the Charter of the North American Development Bank.

President Bush has taken the lead recently in pushing for greater support of developing nations, and especially with working with

our neighbor in Mexico. It is therefore proper that we should hear

from today’s two panels of witnesses on these proposals.

This subcommittee will soon address the role of the United

States in the International Development Bank. Today, we will hear

from Director Joseph Christoff, from the GAO’s International Affairs and Trade Section. His staff has recently completed a study

on this issue of grants versus loans in the President’s proposal.

We also looked at the recent Monterrey conference, and the discussions between President Bush and President Fox on improved

cooperation and the work of the North American Development

Bank.

Today, four witnesses will address the subcommittee on this

issue, bring a diverse set of viewpoints. Local leaders and businesses will give their perspective, while a former North American

Development Bank Director will provide an insider’s view.

I look forward to learning more on these issues and hearing from

these witnesses, as the subcommittee prepares to address these

2

issues. Mr. Bentsen, if you have an opening statement, I will recognize you for that purpose.

[The prepared statement of Hon. Doug Bereuter can be found on

page 48 in the appendix.]

Mr. BENTSEN. Thank you, Mr. Chairman, and I appreciate that

the subcommittee has called this hearing today. I do not have a

statement, other than I do want to welcome what appears to be at

least three Texans, who will testify on the second panel.

I do not know if Mr. Gonzales is from Texas or not, although I

know Mr. Strada is from Texas, and we are glad to have these panelists. I believe our colleague, Mr. Gonzales, and I think Mr.

Hinojosa, will also be here shortly.

So I yield back to you, Mr. Chairman.

Mr. OSE. I thank the gentleman.

Without objection, all Members may submit a written statement

for the record. There being no other Members who wish to be recognized for opening statements, we will move to our first panel.

I want to introduce Mr. Joseph Christoff, who is the Director of

the GAO’s International Affairs and Trade team. Among the various areas under his direction is that of multi-lateral financial institutions.

Since Mr. Christoff joined the GAO in 1980, he has worked in offices in Washington, Chicago, and Frankfort, Germany. He received

a Master’s Degree in Public Administration from American University, and a Bachelor’s Degree in Public Policy from Miami University of Ohio.

Welcome, Mr. Christoff; we have received your written statement

for the record, and it has been reviewed and read. We would like

to recognize you for 5 minutes, and then we will go to questions.

STATEMENT OF HON. JOSEPH A. CHRISTOFF, DIRECTOR OF

INTERNATIONAL AFFAIRS AND TRADE, GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY: THOMAS MELITO, ASSISTANT DIRECTOR

Mr. CHRISTOFF. Thank you, sir.

Let me first introduce my colleague sitting to my right, Mr. Tom

Melito. He is my Assistant Director that is responsible for the work

upon which my testimony is based.

I am very pleased to be here to discuss the impact that switching

some loan to grants would have on poor countries’ debt burdens.

Last year, President Bush proposed that the World Bank replace

50 percent of future loans with grants. As discussed in our recent

report, we found that the Administration’s proposal would help

poor countries reduce their debt burdens, and would cost the World

Bank $15.6 billion in present value terms. We also found that the

proposal could be financed through small increases in donor contributions.

I would first like to provide some background on this issue, and

then describe in more detail the results of our work.

During the 1970s and the 1980s, many poor countries borrowed

heavily because the prices of their primary commodities were high,

and they were optimistic that economic growth would remain

strong.

3

By the end of 1997, 42 heavily indebted poor countries had accu- mulated over $200 billion in external debt. This debt was owed to

multi-lateral institutions and bi-lateral donors. Much of this debt

was not being repaid, or was repaid only with the support of donors.

In 1996, the heavily indebted poor countries initiative, known as

HIPC, was created to provide debt relief to these countries.

According to the World Bank and the IMF, countries that receive

debt relief under the HIPC initiation are projected to be debt sustainable within the next 20 years.

However, our work has found that this not likely to happen, because the Bank and the IMF assume that these countries’ exports

will grow at rates more than double their historical levels.

In reviewing debt burdens for 10 poor countries, we found that

two key factors will make it difficult to achieve such high export

growth rates. First, most of the 10 countries we analyzed are not

likely to realize greatly increased export earnings, because they

rely on agricultural or mineral commodities, whose prices have

come down in recent years.

Second, productivity in many of these countries is expected to decline, as the result of HIV/AIDS. This disease is particularly problematic for the agricultural and mining sectors on which many of

these countries depend.

Now how would the Administration’s proposal help these poor

countries. The Administration asserts that replacing 50 percent of

future loans with grants would lesson poor countries debt burdens

and increase their ability to repay future debt.

Our analysis confirmed this. We found that four of the ten countries we analyzed would be debt sustainable for 20 years. That is,

they would have a debt-to-export ratio near or below the World

Bank’s 150 percent target, and two additional countries would be

debt sustainable for most of that period.

More importantly, a shift from loans to grants would benefit all

countries’ ability to repay their future debt. If grants were to replace half of future loans, the average debt-to-export ratio of the 10

countries we analyzed would decline significantly, from about 430

percent to 235 percent.

We also found that providing poor countries with grants will help

them more in the long term than forgiving 100 percent of their old

debt. If all old debt were forgiven, the average debt-to-export ratio

would only decline from about 430 percent to 400 percent.

While the debt forgiveness plan provides poor countries with a

one-time benefit, its advantage is eliminated after 7 years, because

these countries accumulate new debt that quickly becomes

unsustainable.

Now let me briefly discuss the financing of the 50 percent grants

proposal. The World Bank estimates that its financial loss in nominal terms would be $100 billion over 40 years. However, the Bank’s

methodology assumes that the value of a dollar received today is

the same as a dollar received 40 years from now.

This assumption does not properly account for inflation and the

investment income that would accrue over time. We made these adjustments and found that the present value of the Bank’s loss

would be $15.6 billion.

4

We also found that the World Bank could fully finance the

grant’s proposal if donors increased their contributions by 1.6 percent a year. This increase would be less than the expected rated

of inflation, which is projected to be 2.3 percent over the next 40

years.

Donor contributions over the next 3 years are expected to grow

about 4.4 percent each year, with U.S. contributions growing about

6 percent a year.

So in summary, Mr. Chairman and Members of the subcommittee, the 50 percent grants proposal would lessen the longterm debt burdens of poor countries, and could be financed through

small increases in donor contributions.

That concludes my statement, and I would be happy to answer

any of your questions.

[The prepared statement of Hon. Joseph A. Christoff can be

found on page 85 in the appendix.]

Mr. OSE. Thank you, Mr. Christoff.

Mr. Melito, would you care to add anything?

Mr. MELITO. No, thank you.

Mr. OSE. We will go to questions now. I want to welcome the

other Members who have joined us.

Mr. Christoff, you take us through the analysis of the difference

in the World Bank estimate of cost, as opposed to GAO’s present

value estimate. How does the Administration propose to cover the

$15.6 billion cost.

Mr. CHRISTOFF. Last week, at least in testimony before the

House Appropriations Committee, Secretary O’Neill did agree, first

of all, that a donor increase of 1.6 percent a year was the right estimate, in terms of how one could cover the cost of this proposal. Beyond that, I am not certain what the specifics of the Administration’s proposal are, at this point.

Mr. OSE. So a 1.6 percent increase per year from the donor community would cover the $15.6 billion? That was what the testimony

was.

Mr. CHRISTOFF. That is correct.

Mr. OSE. Are there any other viable options besides the 1.6 percent increase that were put on the table?

Mr. CHRISTOFF. Well, in our report, we did look at some other options that I think we did not consider to be too viable.

The World Bank, basically has to rely on donors. It has to rely

on repayments from the poor countries. It also has to tap into its

own internal resources. We did not see much viability in the World

Bank trying to tap into its own resources; and one would not expect

to try to place the burden of this proposal on the poor countries

who are the beneficiaries. So that leaves you with increased donor

contributions.

Mr. OSE. All right, now there are some who would argue that the

reserves at the World Bank, and some would use the word ‘‘excessive,’’ are excessive, and that they should be able to fund further

debt forgiveness, or grant proposals such as this, from existing

funds, without this 1.6 percent surcharge, so to speak, for the

donor countries.

If that is true, or I guess I should say, is this true, in your opinion?

5

Mr. CHRISTOFF. The World Bank, at least at this point from our

understanding, is even having difficulties trying to finance the existing HIPC initiative. It has yet to even come up with the additional $5 billion that they would need to fund the initiative beyond

2006. I think they have come up with the resources, up to that

point.

Mr. OSE. Is that a function of a financial question, or something

other than that?

Mr. CHRISTOFF. We have looked into this a bit. I do not think we

have a full analysis of it. But we have looked at the commitments

that the World Bank has. It appears that a lot of the commitments

are taken up by what they have committed to make to poor country

loans over the next 10 years. Mr. Melito can expand on that, if you

permit us.

Mr. MELITO. The reserves which you referred to, I believe, are in

IBRD, not in the IDA. The way the Bank is currently structured,

IDA resources are used for the IDA only, and IBRD, the nonconcessionable resources, are used for those purposes only. So there

is a firewall between those two funds.

Mr. OSE. So they do not go back and forth.

Mr. MELITO. The profits from IBRD have assisted IDA. IBRD

does make money on its loans to middle income countries, but the

actual reserves are to stay within the IBRD.

Mr. OSE. Now the 1.6 percent increase in contributions over 40

years, if you compound that over that 40 years, it totals more than

$15.6 billion. How do you reconcile that?

Mr. CHRISTOFF. Well, we actually did compound it. The actual additional resources that you need would be about $9 billion. We

included the compounding to then come up with the $15.6 billion.

Mr. OSE. All right, my time has expired. I would like to recognize

the gentleman from Texas, Mr. Bentsen, for the purpose of 5 minutes of questioning.

Mr. BENTSEN. Thank you, Mr. Chairman. In your testimony, you said that the Bank is assuming a $100 billion loss, and you are assuming a $15.6 billion present value

loss. Is the $100 billion a present value loss that the Bank is assuming, as well?

Mr. CHRISTOFF. No, nominal——

Mr. BENTSEN. Nominal of loss; and if I recall correctly, when we

were doing the debt forgiveness legislation, and looking at the 40

or so HIPC countries, you have a lot of debt that is in arrears, anyway. Do you assume, in your calculations, that all future debt, if

you were to not go to a grant, or in comparison, do you assume that

all future debt is going to be paid; or do you work that into your

calculation?

I guess the point I am making is that it is not the most creditworthy debt, even at a concessionary rate, to begin with. So is the

$15.6 billion an optimistic figure, in any event?

Mr. CHRISTOFF. We made the assumptions that is also the assumptions that the World Bank makes; that basically, there is a

five percent default on all future loans. So that was implicit in the

methodology that we used.

Mr. BENTSEN. So you have a loan loss aspect?

Mr. CHRISTOFF. Exactly.

6

Mr. BENTSEN. Let me ask you two questions. One is, in your assumptions, do you consider that in the 50 percent grant program,

that the grants are actually funded at an equal amount to what the

lending would be from the soft window?

My concern on this is more of a policy issue, I guess. My concern

is that I think the grant idea is a good idea, because I think your

earlier study that showed the unsustainability of the one-time forgiveness thing, going back to the soft window would just sort of put

people back in the tank again.

We had the Secretary here last year, where he initially started

talking about the idea of going to a grant program. What I am concerned about is whether or not they are willing to put the money

up. But you all assumed that in a 50 percent forgiveness, that they

would be putting up an equal amount in grants?

Mr. CHRISTOFF. Well, what we assumed, first we determined

what the estimate is; what we thought the cost would be at $15.6

billion, and then we determined how much donors would have to

pay, in order to fully finance that. That is where we then came up

with the 1.6 percent increase.

The whole 50 percent grants proposal is contingent upon whether

or not the donors are willing to make the commitment over an extended period of time; 1.6 percent per year, over 40 years.

Mr. BENTSEN. This may not be a fair question to you, but does

the Administration’s proposal assume, and in your studies, would

you assume, if you went to, say, a 50 percent grant proposal, and

you showed countries that could become debt sustainable in the

total, and then two others, for a period of time, would it be likely

or conceivable that those countries could be moved; again, to be

moved into the sovereign credit rating system, and start to move

away from a soft window to hard window lending?

Mr. CHRISTOFF. We are still talking about extremely poor countries, when we are talking about any of the grants proposals. Even

with the additional assistance that they might receive through a

grant element, these countries are still going to need a great deal

of external assistance.

Mr. BENTSEN. Thank you.

Thank you, Mr. Chairman.

Mr. OSE. Thank you, Mr. Bentsen.

Mr. Gonzalez, for 5 minutes.

Mr. GONZALEZ. Thank you very much, and I apologize for getting

here late. Unfortunately, you may have covered this already. But

I am always interested, when anyone comes up here with proposals, as proponents of change, what I would like to hear from you

is basically those that oppose the change, the rationale.

Let us just assume, for the sake of argument, that it is not going

to be the additional contribution, the increase and so forth by the

donor nations. That is taken care of. That is not going to be a big

issue, policy-wise and otherwise.

If you would tell me the best arguments, to remain more in the

loan nature, as opposed to grant, and who would be the proponents

of that argument.

Mr. CHRISTOFF. I am not certain if there are proponents of trying

to keep the system the way it is. I think there are proponents who

are saying that one should go to 100 percent of old debt forgiveVerDate 11-MAY-2000 14:13 Sep 03, 2002 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 C:\DOCS\79696.TXT HBANK1 PsN: HBANK1
7

ness, or there are those who may be concerned about a grant element as being too costly.

I think on the latter, in terms of those that might oppose this

proposal because of its cost, I think by looking at it from a present

value term, the $15.6 billion is perhaps not quite as ominous as the

$100 billion that the World Bank expressed in nominal terms.

There are countries that have been concerned about the cost, Mr.

Gonzalez. Some of our close allies initially labeled this 50 percent

grants proposal as crazy. But I think it might have been related

to the belief that it was an exceptionally high cost associated with

the proposal.

Mr. GONZALEZ. So you would say that most of the opposition at

the present time is associated with what people perceived to be the

cost, which is obviously not borne out when you put the figures

that you have presented today?

Mr. CHRISTOFF. Right.

Mr. GONZALEZ. Thank you very much.

Mr. OSE. The gentleman yields back.

Mr. Sanders for 5 minutes.

Mr. SANDERS. Let me deter a little bit away from your report,

and thank you very much for your excellent report. Have you done

any work which gives us some understanding, given the magnitude

of the problems in the development world in subsaharan Africa,

about what kind of commitment it would take, not just from the

United States, but from the wealthier countries in the world, to significantly improve the standard of living of the poorest people in

the world, and bring them up to at least a minimum standard of

living, where people have health care, education, clean water, and

stuff like that?

Mr. CHRISTOFF. No, we have not done that kind of detailed work,

sir.

Mr. SANDERS. My understanding is that the proposal that the

President has brought forth, your estimate is that it is $15.6 billion?

Mr. CHRISTOFF. Yes, sir.

Mr. SANDERS. From the United States Government?

Mr. CHRISTOFF. No, that is from all the donors.

Mr. SANDERS. I would then just simply put that into a very broad context, as this Government has provided $400 billion or $500 billion tax breaks to the wealthiest one percent of the population. In

over a period of how many years is this $15 billion going to be

stretched out?

Mr. CHRISTOFF. Forty years.

Mr. SANDERS. Forty years, $15 billion, and we have parts of the

world which are being ravished with AIDS. We have tens of thousands of children who are dying from treatable diseases. We have

millions of people who cannot drink clean water. Health care systems are breaking down.

Thank you very much for your work on this. But I think it is certainly not only from a moral point of view, but from our own national security point of view, that we have got to reach the level

of understanding that this country will never be safe, that this

planet will never exist in anything resembling peace and harmony,

so long as some people have so much incredible wealth.

8

My understanding is that the 500 wealthiest people in the world

own more wealth than the bottom 2.5 billion people on this planet.

So I would suggest that a contribution of $15 billion over a 40 year

period is quite minimal, and that the United States has got to

reach out to other industrialized countries.

It is certainly not just our responsibility, but the entire industrialized world is going to have to get together and address the horrendous problems facing the poorest people on this planet. We cannot allow children to die of preventable diseases, while we give tax

breaks to billionaires, in my own view.

Second of all, can you make a comment on this? I know that

some people believe, and I happen not to, that the way out of misery for the developing world is to export their way out of the problem. Some of us are rather skeptical about that. Do you want to

say a word on that?

Mr. CHRISTOFF. Well, I would like to talk about that, just in

terms of sort of the expectations that are placed upon developing

countries. When you make estimates of their debt sustainability,

you make assumptions about how they are going to export their

way out of perhaps poverty.

The export growth rates that are used, oftentimes by the World

Bank and others, generally are overly optimistic. Their export rates

are not based on historical rates that these countries have had.

Sometimes they are eight times higher.

Mr. SANDERS. Right.

Mr. CHRISTOFF. So one would not want to then hold those countries up to an expectation over things that they may not necessarily be able to control.

Mr. SANDERS. That is an excellent point, and is it not also true

that when you are talking about an export rate, it is not necessarily true that the benefits of that are going to filter down to

the poorest people.

Mr. CHRISTOFF. Sure.

Mr. SANDERS. Well, I appreciate your thoughts, and thank you

very much for your excellent work. I would yield back.

Mr. OSE. Mr. Hinojosa, for 5 minutes.

Mr. HINOJOSA. Well, thank you, Mr. Chairman.

I also want to thank Mr. Christoff for your presentation. It is

very interesting, and certainly, the question I am going to ask is

with reference to the maquiladores that we have on the Mexican

side, adjacent to all the Texas/Mexico border in McAllen, Texas.

Across from the River there is Threnosa, and we have about 150

maquiladores.

Most of the materials we send in from the United States across

the river, and we assemble them and bring them back to the

United States as finished goods. As I understand it, much of the

finished goods is recorded as exports for Mexico. Is that correct?

Mr. CHRISTOFF. I believe it is correct, sir.

Mr. HINOJOSA. That is the way I understand it. So knowing that

they simply add the labor and bring them across, there would be

very little profit to the country.

Maybe you could explain the rationale, economic or otherwise, for

focusing on debt to export ratio as a measure of sustainability.

Would it not also be useful to consider debt payments as a share

9

of the country’s national budget or debt, as a share of the gross domestic product?

Mr. CHRISTOFF. Sure, I would agree with that. I mean, you have

to look at other indicators, such as the total debt that that country

has, or their debt stock and its percentage of GNP.

Debt sustainability, we need to remember what it is. When a

country is debt sustainable, it simply means that they can manage

their existing debt, and they will not need any additional debt relief. So they could have a high amount of debt and still be debt sustainable.

Mr. HINOJOSA. The way I see it is that in the last 4 or 5 years,

Mexico has become our second largest trading partner. I think that

because of the explanation that I gave you earlier, it makes Mexico

look much more prosperous, and certainly the perception is such,

because of those millions and millions of dollars that are coming

back as finished goods.

So they need a lot of help along especially the Texas/Mexico border and that bank and, and of course, the World Bank are very important entities for us to be able to get the environmental concerns

taken care of, with waste water treatment facilities and the huge

population that is moving from the central part of Mexico to the

border; that 2,000 mile border from California to Texas.

It is amazing how many people have moved and the population

increases there are anywhere from 50 to 100 percent, you know,

every year; well, not every year, but every decade.

So I think that we need to really see how we can make the adjustments in this effort that is being made by our committee, so

that indeed, those folks, our friends to the south, are able to improve their infrastructure.

Thank you, Mr. Chairman. I yield back.

Mr. OSE. The gentlemen yields back.

Mr. Frank, for 5 minutes.

Mr. FRANK. I found this very useful. I had questioned Secretary

O’Neill. I do not understand why some of our European friends and

some others seem to think it is unfair to countries to give them

money rather than lend it to them. I think distrust of American objectives, which may be historically understandable, is a part of it;

but it is mistaken.

On the other hand, a refusal by some of the advocates of grants

to acknowledge that some more contributions will be necessary to

maintain the level is part of the problem. I asked Secretary O’Neill

that, and his answer orally was, yes, we would do it. He then wrote

a letter back and said he was not sure that it would be necessary.

You say that the Treasury agreed with your conclusions. Did they agree that the $15 billion in present value would be necessary?

Mr. CHRISTOFF. Yes, because the 1.6 percent is what you would

need to get to that point.

Mr. FRANK. OK, we have now established, and the Treasury does

acknowledge that to hold to the same level of disbursements, you

would need that 1.6 percent increase. I think that is very helpful.

Mr. CHRISTOFF. Right.

Mr. FRANK. Because I think many of us are prepared to wholeheartedly support this position, as long as there is a commitment

10

that we will do it. Now we all understand, these are projections.

It could be a little more or a little less. But once you have got that

order of a magnitude, I think that is a good thing.

Now the next question, this is posed as debt forgiveness versus

going to grants. There is an obvious question; why versus? I mean,

your view is, one takes care of two countries; one takes care of four

countries. What if we did them both?

Mr. CHRISTOFF. If you did both, it could be accomplished. It

would be expensive.

Mr. FRANK. How much more expensive than the current one?

Mr. CHRISTOFF. Well, we do not look at the full cost of the debt

forgiveness proposal. But it would cost a lot more money to try to

erase all of the existing debt burdens of these HIPC countries.

Mr. FRANK. And you have not looked at that?

Mr. CHRISTOFF. Not in detail; but if you think that right now the

World Bank has a $5 billion unfunded commitment to the HIPC

program, alone, forgiving that portion of the debt would

require——

Mr. FRANK. Well, is there a realistic discounting of the debt? I

mean, if I offered to sell you the highly indebted poor country debt,

what would you pay me on the dollar?

Mr. CHRISTOFF. Oh, I do not know.

Mr. FRANK. It would be not a hell of a lot, I think.

Mr. CHRISTOFF. No, of course not.

Mr. FRANK. Well, let us not artificially inflate the cost of the

HIPC. I mean, unless you got some unemployed Enron accountants, who could come over and help you out.

I mean, my sense is, it is a good deal less than 10 cents on the

dollar. I do not even know if it has any market value at all.

But to be clear, neither one or the other gets these 10 poorest

countries to stay in the building; all of them. The best you do, it

is four countries out of ten; versus two countries out of ten.

Mr. CHRISTOFF. Right.

Mr. FRANK. Could I get from you or could you get back to me on

what would be, or how many of the 10 would get to sustainability

if we did them both?

Mr. CHRISTOFF. We could take a look at that, sure.

Mr. FRANK. And what it could cost—we are already committed

to the HIPC. Now you are assuming that we stick with what we

have already done with the HIPC, but not go further. Is that when

you say it would cost more? You are not counting the cost of what

we have already committed to do, are you?

Mr. CHRISTOFF. I am saying anything above and beyond the

HIPC debt relief would be additional funds that would be needed,

correct.

Mr. FRANK. So your assumption about the four getting to sustainability assumes the current level of HIPC relief, plus?

Mr. CHRISTOFF. Yes, correct.

Mr. FRANK. If we did further debt relief, I would be interested

in that. I have one last question, and that is very useful, Treasury

would not let you talk to the World Bank.

Mr. CHRISTOFF. No.

Mr. FRANK. Did you want to?

Mr. CHRISTOFF. Well, yes.

11

Mr. FRANK. Do you think it would have helped the report if you

did?

Mr. CHRISTOFF. Yes.

Mr. FRANK. Did Treasury tell you why you could not do it?

Mr. CHRISTOFF. Well, first of all, GAO’s protocols with Treasury

are——

Mr. FRANK. I understand that they have the power to do it.

Mr. CHRISTOFF. Yes.

Mr. FRANK. But did they give you a reason?

Mr. CHRISTOFF. Yes, they said that because they were in the

middle of negotiating the IDA replenishment, it would be inappropriate for the GAO to speak to that.

Mr. FRANK. Let me ask you, does that make the slightest bit of

sense to you?

Mr. CHRISTOFF. Absolutely not.

Mr. FRANK. Thank you.

How getting information from the World Bank could interfere

with IDA negotiations, is just odd. I must say to the Treasury,

many of us want to help them implement this plan, and I was jolted to see that they would not let you talk to the Bank.

I mean, if you are going to dispute with the Bank, I am inclined

to be persuaded by what you said. But I would be even more persuaded if I would have had a chance to have your analysis of what

the Bank said. I understand you did the best you could. This is not

a criticism of you.

But let me just appeal to Treasury. Let me ask, if Treasury

changed its mind, would there be any point in your now just double

checking with the Bank, or is it too late?

Mr. CHRISTOFF. Well, I think we would like to talk to the Bank

about the fact that if the proposal is operationalized, how would

they do it.

Mr. FRANK. I appreciate the subcommittee having this hearing,

but I think that maybe we could, as a subcommittee, ask Treasury

not to prevent you from talking to the Bank. This is an important

subject.

Mr. CHRISTOFF. That would be helpful.

Mr. FRANK. It is hard for me to see what Treasury is afraid of,

unless they are seeing this as becoming a bad precedent. But I intend to ask Treasury to do that, and I would hope others would

join.

Thank you, Mr. Chairman.

Mr. OSE. Mr. Watt, for 5 minutes.

Mr. WATT. Thank you, Mr. Chairman.

I think Mr. Frank may have covered a lot of the things that I

wanted to cover. But I confess to being a little apprehensive about

how this works.

The President’s proposal says that you would replace 50 percent

of future loans with grants. You have juxtaposed that against the

benefit of forgiving existing debt. It seems to me that just the

mathematics of this leave me a little apprehensive.

Mr. CHRISTOFF. Sure.

Mr. WATT. You have got $100 worth of debt, which you are going to leave out there, and you are going to give $50 more in the future

and $50 in addition to that in grants.

12

So you end up with $150 worth of debt, and you are saying that

that is better in some way than forgiving $100 that already exists.

I am having a little trouble with that mathematics, so help me out,

if you would.

Mr. CHRISTOFF. Let me try to explain. The 100 percent debt forgiveness does provide benefits to all the recipient countries, up to

a point. The reason why it is up to a point is that the day after

you forgive all the debt, those countries’ needs are so great that

they have to go back and continue to borrow.

So the borrowing will build up, and you reach a point, which is

at about 7 years, in which they once again become debt

unsustainable.

In contrast, the grants proposal, by replacing future lending, half

of it in the form of grants, you are keeping them debt sustainable

for a much longer period of time.

Mr. WATT. All right, but I understand that. Then I guess the

question I have is, and I guess it is the same question that Mr.

Frank had, if you both forgave the debt, which wipes out existing

debt, at a minimum, it seems to me, under your proposal, you

would expand sustainability by 14 years, I would think.

That is because you would expand that number from 7 to 14

years, even if there were no investment returns, if I understand

what you are saying. Am I missing something?

Mr. CHRISTOFF. Well, you are asking us to do what Mr. Frank

has asked us to do.

Mr. WATT. OK.

Mr. CHRISTOFF. We need to go back and do that analysis, as well,

because I think we do not want it to be perceived as an either/or

situation; that perhaps let us take the totality of it, see how much

it costs, and let us see what are the derived benefits.

Mr. WATT. That is pretty magnanimous to give away somebody

else’s money in grants. What part of these future grants come from

the U.S., just as a matter of curiosity?

I like the President giving away somebody else’s money, but I am

just trying to figure out what part of it is U.S. money and what

part of it is somebody else’s money, that he is proposing to do this

future grants program with?

Mr. CHRISTOFF. Well, the United States is a member of IDA. The

United States contributes 20 percent of all the resources to the IDA

program, itself.

The United States does still give out a lot of assistance to poor

countries, and we have traditionally been giving it out in the form

of grants, and have been doing that since the 1980s.

Mr. WATT. So our portion of the future 50 percent grants program would be 20 percent.

Mr. CHRISTOFF. Right.

Mr. WATT. Our portion of the debt forgiveness, if you did both,

would be 20 percent of what is already outstanding. It would be

higher than that, would it not? Because were we not, at some

point, a higher contributor than 20 percent?

Mr. CHRISTOFF. For IDA, that is correct.

Mr. WATT. Yes, so this may be some of the President’s interesting math here, if you look at it closely. All right, I mean, forgive

13

me for being a little apprehensive, but I think I understand what

you are saying.

But I also strongly agree with Mr. Frank, that this proposal

would be a lot better if we were talking about doing both of these,

as opposed to proposing one.

It seems to me that we do not have much credibility, proposing

to do 20 percent of 50 percent, as opposed to 30 or 40 percent of

100 percent. It seems to me that both of them working in tandem

would work a lot better.

Mr. CHRISTOFF. Well, we owe you that analysis.

Mr. OSE. You are going to have to come back to that, Mr.

Christoff.

The gentlemen from California, Mr. Sherman, for 5 minutes.

Mr. SHERMAN. Thank you. No discussion of the World Bank

should ignore the fact that the World Bank has lent substantial

dollars to the Government of Iran, which continues to develop nuclear weapons.

Money is fungible. The money we send to the World Bank is fungible with the money from other countries. The money that goes to

Iran is partially ours, and they money that they do not have to

spend meeting their domestic needs is money directly for their nuclear weapons program.

Just to put this into context, in the year 2000, the World Bank

agreed to loan $145 million to worthy projects in Iran. Keep in

mind, if an American had sent money to the Nazi Regime during

World War II and earmarked it for worthy projects, they could say,

well, I am just building hospitals or something. That would have

been a crime then. Supposedly, we have a war on terrorism now.

In any case, $145 million was disbursed for one worthy project,

and $87 million for another allegedly worthy project, on the assumption that the Government will not simply put the money directly into the Treasury, but will actually spend it on those

projects.

I would point out also that just 5 months ago, the World Bank staff circulated a memorandum proposing that $775 million additional dollars be disbursed to Iran.

What we have is bureaucracy’s that do not seem to be listening

to the country, and who do not seem to notice that September 11th

happened. They did not notice the ‘‘axis of evil’’ comment of our

President. Their reaction is to simply weakly oppose, meekly vote

against, and then acquiesce in our continued funding of the organization that is funding the development of nuclear weapons that

may be very well be used against use.

I do not think that that is the focus of this panel. But our continued participation in the World Bank is the continued participation

in this process.

We have never threatened to withdraw from the World Bank, or

to cutoff funds, or to do anything that would cause the slightest bit

of social consternation to our representatives to the World Bank, or

raise anybody’s blood pressure, just in an effort to prevent Iran

from having nuclear weapons because, well, that is not near as important as going along and getting along.

I would also like to focus on an intermediate course between

grants and loans. The loans made by the World Bank, and correct

14

me if I am wrong, involve a repayment schedule. In between, we

could loan the money with no repayment schedule at all. It would

not be quite as good as a gift. It would not be as tough as a loan.

Then if there was some change in the Government and the

Taliban took over, then we could change and enforce that loan.

Would that not put us in a stronger position to react to changes

in governments, world events, than would a situation where we

give the money to a good government today, and before they even

spend it, a horrific government takes their place? I do not know if

you have a comment.

Mr. CHRISTOFF. Well, when we are talking about the highly

concessional loans, first of all, we are talking about poor countries.

Those are 40 year loans, zero percent interest, 10 year grace period.

Mr. SHERMAN. So that is pretty much the model that I am talking about, except it is not explicitly tied toward at least no backsliding in, or perhaps even progress toward democracy?

Mr. CHRISTOFF. The loans that you were referring to, to Iran, are

not loans that would come out of this particular program. This is

the IDA program.

Mr. SHERMAN. But correct me if I am wrong, we could get outvoted tomorrow, and IDA dollars could flow to the government of

Sudan. Is that correct?

Mr. CHRISTOFF. Sure.

Mr. SHERMAN. So not only could we be funding nuclear weapons

for Teheran we could be funding slavery in Khartoum. All that it

takes is for us to get out-voted, and we have been out-voted. Go

ahead.

Mr. CHRISTOFF. I almost feel like I need a World Bank colleague

sitting next to me, to perhaps defend some of their actions.

Mr. SHERMAN. They believe that they get to do whatever they

want, and they do not really think the Iranian Government is all

that bad, and they are not sure the Sudanese government is all

that bad. I have talked to them at length. But I hope we have an

opportunity to hear them testify.

So you are saying that there is a structure for highly

concessional loans that is between regular loans and grants, and I

am glad that structure exists, and I hope it is explored, along with

the idea of shifting to a grant program. I yield back the balance

of my non-time or my non-balance.

Mr. OSE. The gentleman’s time is expired.

The gentlelady from Indiana, Ms. Carson, for 5 minutes.

Ms. CARSON. I have a dumb question. These are the intellectuals.

I am the naive one. What happens when you go to 10 or 14 years,

and the country has not replenished its financial obligation or its

debt; what happens?

Ms. CHRISTOFF. More often than not, additional loans are given

to pay for those that have not been repaid, or it is rescheduled.

Ms. CARSON. Before you give the loans or the grants, as proposed, do you have some test on accountability, stability?

Mr. CHRISTOFF. Well, the World Bank, at least through the HIPC

Program, places a lot of conditions on the existing loans that it has.

It wants those countries to try to achieve some macro-economic reVerDate 11-MAY-2000 14:13 Sep 03, 2002 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 C:\DOCS\79696.TXT HBANK1 PsN: HBANK1
15

forms. It wants it to focus some of its poverty reduction programs

in certain areas, like health and education.

Ms. CARSON. I have no other questions, Mr. Chairman.

Mr. OSE. The gentlelady yields back the balance of her time.

Is it the pleasure of the Members to go another round, or do you

have additional questions? I have two. Would you like to go another round here? All right, to the extent that you have questions.

Mr. Frank brought up what I thought was a very important

question, and that was, when you refer to the $5 billion in unfunded World Bank obligations at present, is that the face value of

the paper, or is it the present value?

Mr. CHRISTOFF. The present value.

Mr. OSE. So that would be the market valuation on that paper?

Mr. CHRISTOFF. Taking into account, right, the inflation.

Mr. OSE. If you went out into the market place to buy the paper,

it would cost you $5 billion?

Mr. CHRISTOFF. I do not know, would it Tom?

Mr. OSE. Mr. Melito.

Mr. MELITO. There is no market value for this debt. This is not

publicly traded debt, and it would be very difficult to know what

that market value is.

I want to say that it is $5 billion in present value, but it is mostly in the recent years, so the present value and the nominal value,

in that case, are fairly close to each other.

Mr. OSE. Well, I think Mr. Frank raises an interesting question.

Why would we pay $5 billion for something that potentially has no

value?

Mr. MELITO. The resources of IDA depend on several things; one

of which is repayments from recipient countries. When we talk

about the cost of forgiveness, one of the things you must think

about is, where does IDA come up with an alternative source of

money to make the loans it is scheduled to make in the future.

So when the $5 billion shortfall is considered, it is considered as

a possible funding gap for the World Bank. Any additional forgiveness of multilateral debt would be an additional potential funding

gap, and the expectation of the donors would have to make up

some of that, if not all of that gap.

Mr. OSE. I am not quite sure I understand your point. I am trying to get at, if the World Bank has an outstanding obligation or

a commitment of $5 billion for HIPC debt forgiveness, and that

debt has a market value, arguably of zero, then do you not have

to write the thing down to zero?

Mr. MELITO. From a financial perspective, that is correct.

Mr. OSE. Otherwise, we are going to go off, as Mr. Frank suggested, using Enron’s accountants.

Mr. MELITO. There is a financial perspective, which I agree with.

Mr. OSE. Or for that matter, a Global Crossings’ accountant.

Mr. MELITO. There is also a public policy issue, as well, though.

People wish for IDA to stay engaged in poor countries in the years

ahead. There is a desire to increase its resources to poor countries.

This $5 billion is currently committed, but there is no actual source

of it. That is the cost, or that is the gap.

Mr. OSE. But it committed to debt forgiveness.

16

Mr. MELITO. Well, but it is also part of their future asset base.

That is the complication.

Mr. OSE. That seems like paper with ink on it that has no value,

to me.

Mr. MELITO. Yes.

Mr. OSE. My second question has to do with the manner in which

IDA funds loans. It is my understanding that on a project that IDA

is involved in, the country makes a contract with someone who will

build it. The contract is presented to IDA. IDA never pays the

country. They pay the contractor directly. Is that correct?

Mr. CHRISTOFF. I do not have the details on that.

Mr. OSE. The question really is whether or not the money gets

co-mingled.

Mr. CHRISTOFF. We have not looked into that, in terms of the

procurement practices, no.

Mr. OSE. All right, Mr. Bentsen.

Mr. BENTSEN. Thanks, Mr. Chairman.

I think what you are saying is the $5 billion, it is cash flow, and

that they need cash flow, so that they can keep lending.

But it begs the question as to, if you are going to lend money for

40 years at zero years, and really, 50 years with a 10 year grace

period, you are going to have an evaporation. It may have a negative arbitrage. You are going to have a loss on the money.

So even though at the 50 percent level, you all calculated about

a $15 billion or $16 billion cost of funding half of future commitments through the form of grants, it is not as simplistic as doubling that, I do not think.

But I am curious whether or not you could look and see really

what the projected cost in present value terms would be, if you just

went, for the HIPC countries, to a full grant program.

Because, again, you have got a five percent loss rate, and you are

getting negative returns at zero percent. So over a very extended

period of time, we may want to re-think this. That is a policy issue,

but you all should look at that.

How much of the portfolio of IDA are the HIPC countries?

Mr. CHRISTOFF. I will have to submit that for the record. We do

not know at this point, sir.

Mr. BENTSEN. I mean, it seems to me, if it is a majority, then

I think we really want to think about re-doing IDA. If it is twothirds or something, you can always create a soft window lending

vehicle, but it is a losing money venture right now on both ends.

So it would seem we would want to make a change. But if you

could find those answers for me, that would be helpful.

Mr. CHRISTOFF. And also, if I heard you correctly, that is looking

at 100 percent grant forgiveness for the HIPC countries.

Mr. BENTSEN. Right, if you could determine that. I think you

ought to be able to figure out a present value cost of that, with the

loan lost rate, and the negative costs, assuming an inflation rate

going out.

Thank you, Mr. Chairman.

Mr. CHRISTOFF. Absolutely.

Mr. OSE. The gentleman yields back.

Mr. Gonzalez, anything else?

[No response.]

17

Mr. OSE. Mr. Hinojosa, anything else?

Mr. HINOJOSA. I have no further questions.

Mr. OSE. OK, Mr. Frank.

Mr. FRANK. On the valuation question, which is an important

one, we did do some bilateral debt relief, as I recall. Do you remember what the discount figure was, that was applied to that?

Mr. MELITO. It was approximately nine cents on the dollar.

Mr. FRANK. Nine cents on the dollar, OK, yes, and obviously, I

assume when we talk about future HIPC debt relief, there is no

reason not to use the same figure. So was $5 billion the future highly indebted country debt?

Mr. MELITO. That is the projected cash flow loss, Mr. Frank, for

the World Bank, from its involvement in HIPC, II.

Mr. FRANK. So we would be talking about a cash amount of $450

million.

Mr. MELITO. They are valuing it at 100 cents on the dollar, yes.

Mr. FRANK. Yes, but if you apply to that outstanding HIPC debt

the discount figure that the Office of Management and Budget told

us to apply, same debt/same country, I mean, there is no qualitative difference that jumps to mind. You would be talking about

$450 million, not $5 billion.

Now over the 40 years, to replace the reflows from loans to a 50

percent grant, you said was $15 billion, approximately?

Mr. CHRISTOFF. Yes.

Mr. FRANK. And that would be a 1.6 percent increase.

Mr. CHRISTOFF. Right.

Mr. FRANK. All right, well, if $15 billion meant a 1.6 increase, does somebody have a calculator; what does $450 million do? It is

a pretty minuscule one.

So in other words, by using the discount rate that OMB gave us for debt, it would only cost us $450 million in the same realistic

terms, for the future. Let me see, that is three percent, I think, of

$15 billion would be, $150 million would be 10 percent, and $450

million is three percent. So what is three percent? That is not a lot

of money, 1.6 percent.

We are talking about further increasing by 3 percent of 1.6 percent, so it seems pretty minuscule. So I take it from that, that if

we were to stay consistent with OMB’s view of the debt in the future, now maybe you could argue that if you were to switch from

loans to grants, then the value of the future debt might be a little

greater, because they would be under a little less strain and they

would have a little more money. But it is still clearly minuscule.

So that strengthens my view that we ought to be doing both, if

we are talking about an additional $450 million on what is a $15.6

billion cost. It seems to me, just a little bit above de minimis.

Thank you, Mr. Chairman.

Mr. OSE. The gentleman yields back.

Mr. Watt, anything else?

[No response.]

Mr. OSE. Mr. Sherman.

Mr. SHERMAN. I have just a little bit more here.

Mr. Hinojosa brought up the issue of how they account for imports and exports. In his example, would the export value be just

the value added in Mexico, or would it be the entire value of the

18

goods being shipped, including the original value of the American

fabric; or is this just something you do not know?

Mr. CHRISTOFF. I do not know.

Mr. SHERMAN. I yield back.

Mr. OSE. The gentleman yields back.

We want to thank this panel for joining. Mr. Christoff, Mr.

Melito, we appreciate your testimony and your insight.

Mr. CHRISTOFF. Thank you, sir.

Mr. MELITO. Thank you.

Mr. FRANK. Mr. Chairman, could I get unanimous consent to

make a request?

Mr. OSE. Well, you can always make a request.

Mr. FRANK. My request would be that we sponsor a witness

school with these two people, for almost everybody else who comes

and testifies, and dances and evades. This was the most straightforward testimony that I can remember getting in a long time.

Mr. CHRISTOFF. I thought you were going to put me in the ‘‘dancing and evades’’ category for a second.

[Laughter.]

Mr. OSE. You have got to watch him, I have got to tell you.

Thank you for the suggestion, Mr. Frank.

Again, I want to thank this panel for joining us today. Just as

a heads up, we will leave the record open, so you may get some additional questions.

Mr. CHRISTOFF. And we owe you some things.

Mr. OSE. Right, we will be sending them, and it will be open for

10 days, I believe. Anyway, thank you for coming.

Mr. CHRISTOFF. Thank you, sir.

Mr. OSE. You are excused.

We are going to enter for the record a CRS report for Congress

on IDA loans versus IDA grants, dated February 8th, of 2002.

[The referenced material can be found on page 126 in the

appendix.]

Mr. OSE. I am going to invite the second panel up to the witness

table. We will take about 2 minutes here.

[Recess.]

Mr. OSE. I would like to welcome the second panel to our subcommittee hearing. Our second panel, as I said, has four panelists

to testify on the current status of the North American Development

Bank.

We will hear today from the Honorable Victor Miramontes. Mr.

Miramontes is currently the President and COO of American City

Vista, where his responsibilities include operations, finance, and

project development. Prior to this position, Mr. Miramontes served

as Managing Director and CEO of the North American Development Bank.

He holds a Bachelor’s and Master’s Degree in Economics from

Stanford University, and I want to say that is the Stanford Junior

University, and a Law Degree from Stanford University, as well.

I went to Cal, so we will overlook your transgression.

In addition, joining us today is the Honorable Jose Aranda, Jr.,

the Mayor of Eagle Pass, Texas. He will testify here on this panel.

Mayor Aranda was first elected in 1998. He is in his second term.

19

Eagle Pass is a border town, which has direct interaction with the

North American Development Bank and the BECC.

Mayor Aranda, who was suggested as a witness by Representative Bonilla from Texas, is also Chairman of the Texas Border Infrastructure Coalition.

Our third panelist is Mr. Ernesto Silva, the City Manger of Mercedes, Texas. Mr. Silva was suggested as a witness by Congressman Hinojosa. As City Manager, Mr. Silva has had a direct involvement with North American Development Bank, coordinating

in Mercedes a water treatment plan expansion, a master drainage

and paving program, and a master waste water interceptor program.

Mr. Silva began his work in Mercedes in 1997, after serving the

previous 10 years in the city of Farr, Texas, also as City Manager,

coordinating similar infrastructure projects.

Our final panelist, Mr. Don Gonzalez, was suggested as a witness

by Representative Gonzalez. He is the Executive Vice President

and Manager with the investment banking firm of Estrada

Hinojosa & Company, based in San Antonio. He has direct experience working with border communities in obtaining financing from

the North American Development Bank.

I know that Mr. Gonzalez had a request in for the purpose of an

opening statement at this point, and in the subcommittee’s deliberations, the gentlemen is recognized.

Mr. GONZALEZ. Thank you very much, Mr. Chairman. In the interest of time, I do have a statement to make. However, I am really

anxious to hear the testimony and the questions that will be posed

to members of this panel.

So I will be submitting my statement in writing, to be made part

of the record, as well as comments and statements from Congressman Solomon Ortiz, Sylvester Reyes, Mayor Ed Garza of San Antonio, and the Free Trade Alliance of San Antonio, all of whom are

strong supporters of NADBank.

With that, I yield back, sir. Thank you.

Mr. OSE. The gentleman yields back.

With that, we are going to go to our panelists. We will go first

to Mr. Miramontes for the purpose of a statement. We have received each of your written testimonies, and we have reviewed

them and read them. To the extent that you can, we would like you

to summarize within that 5 minute period.

Mr. Miramontes, you are recognized.

STATEMENT OF HON. VICTOR MIRAMONTES, PRESIDENT AND

COO, AMERICA CITY VISTA

Mr. MIRAMONTES. Mr. Chairman, first of all, I must say I come

here as a Stanford graduate. I respect all Cal graduates. I see you

have changed the curtains here to match the colors. But once

again, thank you very much for inviting me.

Mr. Chairman and Members of the subcommittee, I thank you

for invitation to appear before you today. I will not read from my

written comments, but I would encourage your staffs to read them,

because there are issues here that are fairly complex, but very,

very important for the future of the citizens of the border region.

20

I have read my colleagues’ comments at this table, and I can say

that I agree with most of the issues being presented today. There

are issues in conflict, not because the people at the table are in

conflict, but because the issues of the border are very complex and

creative what I call inherent conflicts, given the poverty, the

growth, and the pressures that we see up and down the border.

I would focus, therefore, rather than go through the specific presentation that I submitted, on the key issues that are being examined today.

First of all, the border region is one of the fastest growing regions throughout the world, and especially the United States. The

one thing that the people from the border share in common is that

we know there is a better future for us, as we learn how to exercise

our intellectual, political and economic capabilities. We have great

pride in our region, and we know that things will get better, as we

grow and improve our own skills.

Second of all, I need to point out that the NAFTA process almost

10 years ago created incredible expectations. There were expectations at all trade levels. But for the border, what the expectation

was, was that a bank was being created that was being funded

with $3 billion in grants; and if not grants, paid in capital.

That expectation, to this day, has been one of the major sources

of disillusionment on the parts of many border communities, because the amount of paid-in capital was a fraction of that.

Successes have occurred over the past 10 years. I would like to

just point out a few very simple facts. Over six million people over

the past 10 years have received additional service from the programs created from the NADBank BECC process. I cannot say that

if the Bank and BECC had never existed, would that many people

have been served.

But I can tell you this. Over the past 10 years, more projects

have been done along the border more equitably, especially in

smaller communities than virtually in the entire history before that

period of time. This is a better way of dealing with the issue, although there are major hurdles to overcome.

The key to this is that long-term operations and visions for a

community must be incorporated into the short-term fiscal needs;

typically, grants. But the long-term operation and maintenance and

governance issues that must be met are the solution for the future

needs of the border communities.

The Bank’s lending program, frankly, does not work. That is the

simplest way to say it. The reason it does not work is because the

majority of the communities on the border cannot afford market

rate loans, and there are much better alternatives for loans for environmental projects on the other side of the border.

Therefore, the charter of the Bank needs to change, and needs

to be amended to address the fact that it is currently unable to

lend to its current capabilities.

While the Bank’s primary lending programs have failed, the creation of the Bank and the BECC have truly improved EPA’s ability, though, to deliver and to fund projects along the border. This

was an unintended, but very good, consequence.

21

As it relates to the questions posed to me and to the question

about the proposal set forth in Monterrey, Mexico, by the Presidents, I would like to make the following comments.

First of all, I do believe expanding the Bank’s capabilities south

of the border is a positive step. It must be done judiciously, but I

think it is a very positive step.

The border region is impacted literally from every part of both

nations’ trading routes. Trucks from Chicago destroy the streets of

Eagle Pass as they drive through. So there needs to be a recognition that trade moves great amounts of traffic through very small

crossing points. Those small communities bear the brunt of the majority of that traffic and issues that are related to that type of

growth.

Second of all, the reform is proposed that the two boards of the

BECC and the NADBank be merged. I do not oppose that concept,

as long as the ability of the board to merge its interests of the two

institutions are done appropriately.

The problem is, both institutions have very different missions,

and we need to respect the fact that each mission must be met appropriately.

This is the core of my recommendation. What I would recommend is that the Bank’s charter be amended very simply. It

should be amended to allow all infrastructure projects to qualify for

the Bank’s loans.

What I would do then, because that is a very broad mandate, is

give 100 percent of the power to determine which infrastructure

program is appropriate to the Board of Directors of the Bank, and

if it is merged, the BECC, also.

Currently the Board of the Bank is controlled by the two governments. Treasury and Hacienda alternate chairmanships. So this is

not a delegation of this authority beyond the U.S. Government and

Mexican Government. It is an appropriate delegation of this authority.

It is inappropriate, though, for this issue to come back in 5 or

10 years, and try to renegotiate a bilateral agreement, again.

I would suggest we fix this once, and let future administrations

determine what is the appropriate use of that mandate, how it

should be applied; and the Congresses in the future should decide

how much money should be applied.

In essence, Mr. Chairman and subcommittee Members, I would

say that many good things have come out of this process. There is

a fundamental flaw in the Bank’s charter. It needs to be addressed.

I suggest it be addressed once. It should be done intelligently, and

with a full public process that begins, I believe, today.

I do appreciate the opportunity to be here. I will limit my comments to that, and make myself available for questions further in

the testimony.

Thank you.

[The prepared statement of Hon. Victor Miramontes can be found

on page 94 in the appendix.]

Mr. OSE. Thank you, Mr. Miramontes.

Mayor Aranda, thank you for joining us. You are recognized for

5 minutes.

22

STATEMENT OF HON. JOSE ARANDA, JR., MAYOR, EAGLE PASS,

TEXAS

Mr. ARANDA. Thank you, Mr. Chairman.

I certainly appreciate the opportunity to address this group on an

issue that is really very important to the community of Eagle Pass;

but not only Eagle Pass, but Maverick County.

What I would like to present to you is the process that we have

gone through and the experience that we have had with NADBank

and BECC, in reference to our regional project.

As you know, Eagle Pass is located right on the border, and Maverick County has had a 30 percent increase in population since

1990, according to the Census of 2000. Part of the problem, just

like any other border community in Texas, is that our poverty level

is very high, 46 percent. Out of the 254 counties in the State of

Texas, we rank number five, or 250, excuse me.

What I would like to talk to you a little bit about is the fact that

the city of Eagle Pass has gone through a lot of growth. This has

caused us to take a look at the possibilities of having a new water

treatment plant.

At the same time that this was occurring, because of the growth

and the fact that our plant was such an old plant, a 1949 plant,

and all the requisites that we have to be able to have better quality

water, it has really put a strain on the system.

So we were looking, and at the same time, outside of Eagle Pass

in Maverick County, there exists a regional or a rural water supply

corporation called El Indio Water Supply. This water supply system, which started off really just being a rural water supply area,

has already half the capacity for 1,400 connections. At this point,

it is already over 2,000.

I am not very much of a technical person, but I will tell you that

the most important thing that I would like to present to you is the

fact that drinking water is very important to all of us. It is something that is taken for granted in many communities, but in this

rural area, it has really become a problem.

You are talking just opening up the faucet and getting murky

water, getting dirty water, to the point that the Texas Natural Resource Conservation Commission has cited the system already, and

has asked the system to do something different.

The problem that El Indio Water Supply Corporation has had is

that it would like leadership to be able to get these things done.

The city of Eagle Pass system had been encouraged, had been

asked by not only the NADBank people, EPA, the Texas Water Development Board, to look at the possibilities of merging the systems.

With that intention, the city of Eagle Pass looked at it very closely. We studied it, and we came up with a plan, together with BECC

and NADBank and the Texas Water Development Port.

The project, in itself, for the city of Eagle Pass, would be a total of $53 million, and the El Indio Water Supply’s portion would be

for almost $48 million.

You would say, well, why the big difference, when you are talking about 2,000 customers, as compared to 10,000 customers within

the system of Eagle Pass. I go back to the issue of how antiquated

and how limited the El Indio Water Supply system is.

23

So the important point here that I am trying to make is that

Eagle Pass is really coming to the rescue of a system that needs

a lot of assistance. It is something that we consider to be our moral

obligation.

The city, in effect, is proposing to help prevent the health threats

associated with the inability of a water supply corporation to provide potable water to its estimated 10,000 to 14,000 residents.

The city has no responsibility to extend this service to residents

that do not reside in the city, but we have recognized that it is our

moral obligation to do this.

The project also will benefit the economic and residential projects

that are proposed by the Kickapoo Traditional Tribe of Texas, that

is within this region. Overall, it is a project that we feel is needed

for the overall growth that we have had.

The concern that we have is that the NADBank has offered assistance, but it has not been sufficient assistance. It is offering $14

million of payment assistance or debt service, to be able to help

with the debt service for 7 years. But the concern here is that $14

million, plus $4 million that they are offering in the construction

proposals or construction money, will not be substantial enough to

be able to reduce the rates.

We are looking at the possibility of having a 50 debt ratio at the

end of 7 years. This is something that, in our opinion, would be

very difficult to operate a system with such a high debt ratio.

The bottom line is, what we are looking at here is that this type

of operation, this type of regional system that we were encouraged

to be able to offer the residents of Maverick County is something

that NADBank is not really ready to be able to deal with, because

they do not have the formulas and the monies to be able to deal

with two systems that are becoming one.

There are only a certain amount of monies that can be available

to us, and we are asking for your help, and we are asking for

NADBank’s help, to be able to influence how to be able to change

those formulas.

Pretty much, that is the concern that we have in dealing with

NADBank. We feel that everything else that we have been dealing

with has been very, very good.

The relationship that we have established is based on professionalism, and we encourage the support of being able to support

projects like the Maverick County project or the Eagle Pass project.

That is certainly an example for the rest of the border, when we

are trying to create bigger projects, to be able to serve more people,

and thus, be a more manageable system, and a better, more efficient system.

Thank you.

[The prepared statement of Hon. Jose A. Aranda, Jr. can be

found on page 66 in the appendix.]

Mr. OSE. Thank you, Mr. Mayor, we appreciate your testimony.

Mr. Silva, as I said, we do have your statement for the record.

We welcome you. You are recognized for 5 minutes to summarize.

24

STATEMENT OF ERNESTO SILVA, CITY MANAGER, MERCEDES,

TEXAS

Mr. SILVA. Thank you, Mr. Chairman, and good morning, Members of the subcommittee.

I will attempt to give you the local perspective in 5 minutes of

a 6-year relationship that the city of Mercedes has had with the

bank.

For those of you that are not familiar with our small community,

it is in South Texas, located on the U.S.-Mexican border. It has a

population of 14,000. It has a sixteen percent unemployment rate

and a 52 percent poverty rate. The average income is $5,237. The

average home value is $29,500.

As you can see, the city of Mercedes, like many of the other border communities, is a distressed community. More importantly, it

has 30 colonias outside of its corporate limits, with 8,000 residents.

In 1991, the Texas Water Development Board adopted the Economically Distressed Areas Program to provide funding for municipalities and rural supply corporation to bring water and waste

water facilities to colonia resident, which are residents living in

substandard subdivisions that are often referred to as Third World

conditions.

Our NADBank experience began in 1996. We were the guinea

pig. We were the first to receive funding from the NADBank. We

received a $1.6 million loan from the North American Development

Bank, at an interest rate of approximately nine percent.

Two years later, in 1998, the bonds were refunded, and the city

of Mercedes sold tax exempt bonds at four and-a-half percent interest rate.

The reason we did this was construction had not begun in 2

years, and the city had begun to make payments on the loan, and

the interest rate was too high.

In an effort to rectify the situation, the city of Mercedes, along

with Mr. Victor Miramontes, the other panelist here, began some

extremely high profile meetings. There in these meetings, what we

identified was that the city of Mercedes, just like many of the other

communities in Texas that were going through the NADBank process, was not prepared to undertake the loans that were being given

to them.

During this process, what we identified was that the city had to

take an institutional development, as we called it then. We had to

upgrade the city’s financial management system. We received a

grant from the Rio Grande Empowerment Zone for $250,000.

We conducted a water and sewer rates study. NADBank funded that at $30,000. We conducted a sanitation rates study that was

funded by NADBank at $18,000. We conducted an in-flow infiltration study that was funded by the NADBank at $120,000. We established a debt service that was funded by the NADBank transition assistance at $450,000.

We implemented a repair and replacement reserve that was funded by the NADBank transition assistance at $250,000. We implemented a water meter replacement program that was funded by

the North American Development Bank in the city at $850,000.

We adopted a water and waste water facilities plant that was funded by the BECC and the city at $190,000. We adopted a 5 year

25

capital improvement plan at $50,000 that was funded by the city.

We also adopted a 7 year operational budget, along with a 7 year

water and sewer rate study.

This is extremely important. This approach was different than

the approaches that had been taken in the past by the North

American Development Bank and the BECC. It provided a comprehensive understanding of the city’s utility system and its functions.

More so, it also provided an additional $12 million worth of infrastructure that had to be funded by the city over the next 5 years.

The Bush and Fox plan that we have been asked to comment on,

the extension of the 100 kilometers to 300 kilometers in Mexico, we

feel would not be a problem, especially when the America cities

have the opportunity to request funding from other State and Federal agencies.

We also feel that one of the major issues that we are facing is

the expansion of the program by the North American Development

Bank to fund those projects dealing with health care, waste disposal, hazard waste, and transportation.

Two of the major obstacles that I foresee with the North American Development Bank process is the procurement of projects. The

procurement of projects takes an extremely long time, as much as

6 months.

Also, besides procuring the project, there has to be an understanding between State and Federal agencies to accept the engineering plans, or what we call a facilities plan, so that these facilities plans can be utilized by both Federal and State agencies, along

with the county agencies.

For the most part, you can undertake a facilities plan with the

Texas Water Development Board, and then you have to take it

back and do another one for the North American Development

Bank. These processes take about 6 months to a year to complete.

In closing, I would ask that the Charter of the Bank also be

amended to include other programs and be expanded, and more importantly, that the procurement process be changed, and also that

there be a standard engineering plan that would be accepted by all

parties, when the cities go to request funding from the State agencies, along with NADBank and the BECC.

Thank you.

[The prepared statement of Ernesto Silva can be found on page

110 in the appendix.]

Chairman BEREUTER [Assuming Chair]. Mr. Silva, thank you

very much. I am Congressman Doug Bereuter. I do apologize for

not being here earlier. The Speaker gave me, unexpectedly, some

duties related to the visit of the Canadian Speaker of the House

of Commons.

This hearing today is of special interest to me, and especially to

the Members who are gathered here today. So we very much appreciate the fact that all four of you have come in.

I think now we would like to call on Mr. Don Gonzales, Estrada

Hinojosa & Company, Inc. As mentioned by the Vice Chairman,

Mr. Ose, you may summarize your statement. The entire statement

will be made a part of the record.

26

I do want to thank Mr. Ose for his help in chairing the subcommittee this morning. Please proceed.

STATEMENT OF DONALD J. GONZALES, EXECUTIVE VICE

PRESIDENT, ESTRADA HINOJOSA & COMPANY, INC.

Mr. GONZALES. Thank you and good morning, Mr. Chairman and

Members of the subcommittee.

My take on the NADBank and the BECC process is slightly different from the perspective of being more technical in nature. I am

going to try to summarize my comments to that effect.

Our firm has done a significant amount of work with border communities in taking them to the BECC and NADBank, as well as

other agencies. We also serve as a financial advisor to the North

American Development Bank on projects that we have no involvement with.

One of the things that we see that I think can very much help

taking the NADBank to the next level with the BECC is some of

the things that have already been mentioned. I think one of the

critical ones is trying to bring about some type of standardization

in substance and in form with respect documents, applications,

that need to be submitted to various agencies.

That will definitely streamline the process. That will help to

bring about not only a shorter review time, but also an information

sharing process that I think has been developing, but is still not

to the point where I think everyone would like to see it.

With respect to the reforms that have been discussed with respect to Presidents Bush and Fox, I think there are a number of

avenues there that can, I would recommend, be explored. When we

look at going from 100 kilometers to 300 kilometers, that region,

we think, can be of assistance in terms of leveraging the paid-in

capital of the Bank.

In doing so, if those benefits that would ensure to that region

would be earmarked for the benefit of the priority region within the

original 100 kilometers, then I think that you will also be able to

provide additional grant assistance to that 100 kilometer region.

That region still needs to be maintained as the focus.

Without specifically addressing that with additional grants to

maintain affordability and sustainability, the projects themselves

are not going to be solved purely with just money. They need to be

looked at from both perspectives, and cannot be seen as mutually

exclusive. We feel very strongly about that.

The other point, in dealing with the expanded region, if you were

to look at infrastructure projects, such as what Mr. Miramontes

mentioned, and you are able to make more market rate type investments and loans to those areas, I think the Bank will be able to

not only expand its capital, but be able to generate better returns

than what they probably would be able to generate, given the current 100 kilometer region.

The 100 kilometer region really needs to be primarily just grants

and a limited amount of the low interest rate loans. Currently, the

loan interest rate program, at $4 million and $8 million, respectively, have a very limited impact when we talk about projects that

are in the $20 million, $30 million, or $50 million range.

27

They are larger, regional-type projects, and the benefit that

would actually come to the communities that need these types of

projects, it is just not enough to fill the gap.

When we look at competitiveness, current interest rates for communities that are investment grade can be significant, in terms of

what they can obtain right now in the market place in the tax exempt basis, whereas, the NADBank, prior to the low interest rate

loan program was, as Mr. Silva mentioned, in the seven, eight, or

nine percent range.

The way that they were being made more affordable was by

blending grant assistance in with the high interest rate loans, to

essentially blend down the interest rate to something more affordable, but still looking at something in the seven percent interest

rate range.

That is not going to be a project that is going to be affordable

and sustainable over the period in which these projects will have

their useful life, and the amount of time with which they are going

to be repaid to the Bank.

Another item that I think is important to emphasize is in looking

at trying to merge the two boards of the Bank, that is an issue that

may need a little bit more time than we have the ability to express

to you.

But I think that the emphasis from the BECC has been to really

focus on the environmental and engineering side of the projects.

That emphasis has been there. It makes sense that it would continue to be there.

The financial emphasis of the NADBank and the areas that they

have been focusing in on have not only been on the debt side, but

also on the operations and maintenance side, and looking forward

to sustainability of the projects.

With both of these pieces separated, there has been a greater

focus given to each one. Whether they are done under one board

or under two boards, we will leave that to this subcommittee and

other’s infinite wisdom. But I think the main thing that is critical

here is that the financing piece really needs to remain a very

strong emphasis.

With that, I see we are about out of time. I would like to answer

any questions, and thank you again for the opportunity to come before the subcommittee.

Chairman BEREUTER. Thanks to all of you.

In order to expedite the question period for the subcommittee, I,

without objection would like to make my entire opening statement

a part of the record.

[The prepared statement of Hon. Doug Bereuter can be found on

page 48 in the appendix.]

Chairman BEREUTER. I would have tried to set the context

through that statement, but I want to just summarize the Board,

as it exists today, with respect to the reforms that have been suggested.

With respect to proposals to reform the NADBank, Presidents

Bush and Fox formed a bi-national working group that held a series of discussions with States, communities and other stakeholders

in the border region. The purpose of generating plans for reform

was to strengthen the performance of NADBank and the BECC.

28

As a result of the meetings, the two Presidents came forth with

a joint reform proposal. One of the reforms would expand the jurisdiction of NADBank and the BECC only in Mexico from 100 kilometers to 300 kilometers from the border. Many of you have already referenced that.

The jurisdiction of NADBank and BECC in the U.S. would remain unchanged under that proposal. Additional reforms would increase the capacity of the NADBank to provide grants and low interest loans by doubling the low interest rate lending facility to

$100 million, and establishing a $50 million grant financing allocation.

The Presidents’ proposal would provide a change, as mentioned,

by Mr. Gonzales, in the organizational structure of NADBank and

BECC through creation of a single Board of Directors to oversee

both institutions. I noticed you wisely sidestepped that and left

that to us.

The Board would have representation from both countries; the

Federal Government; the four U.S. border States of California, Arizona, New Mexico, and Texas; as well as representatives from

those border States in Mexico; and from the public.

In addition, the subcommittee needs to begin examining H. Res.

355, which was introduced by Representative Gonzalez of Texas,

and which is co-sponsored by at least 10 additional House Members. This resolution would afford alternative recommendations for

reform to the NADBank.

While this resolution would allow the NADBank and BECC to remain separate entities, it would require a review and subsequent

improvement of BECC’s certification process. The resolution also

expresses the sense of the House that the Boards of the BECC and

the NADBank should consult with interested parties in exploring

options for better follow-up on projects.

Additionally, Mr. Gonzalez’s resolution, among other things,

would allow the remaining paid-in capital and callable capital to be

lent without BECC certification for non-border and non-environmental infrastructure projects.

I hope I have summarized it correctly. Perhaps I have hit some

of the high points that Mr. Gonzalez will bring to our attention.

With that kind of a context for the record and perhaps for our

discussion here, I would like to begin the 5-minute question period

by turning first to Mr. Bentsen and then Mr. Ose and so on, in accordance with Members’ appearance here.

While we are going to operate under the 5-minute rule, I assure

you that we will come back and make sure that Members have a

chance to take advantage of the wisdom in front of us.

Mr. Bentsen.

Mr. BENTSEN. Thank you, Mr. Chairman, and I want to thank

our panelists for being here today.

Mr. Miramontes, in your testimony, you said that one of the real

problems with the lending facility under the NADBank structure,

specifically on the United States’ side of the border, to begin with,

the projects that could be lent under the current Charter can be

funded with tax exempt rates, as opposed to taxable rates, which

is what NADBank can fund out; albeit, as you also stated, a number of the credits are non-investment grade, so they are paying 200

29

or 300 basis points higher, but nonetheless, they may not eclipse

the taxable rate.

Given the fact that you have a grant funding aspect, would it not

make sense for Congress to take a look at what it did, for instance,

under the Clean Water Act, when it allowed the States to set up

the revolving fund, either to provide a guarantee or set up a bond

bank type structure, using NADBank for eligible projects in eligible

communities along the border, to allow them to take advantage of

the tax exempt rates.

If I recall correctly, unless specifically noted in the code, a Federal guarantee of a tax exempt structure is a taxable event. So it

would take a change in law to do that.

But number one, would it be possible to structure a program like

that, that would make the NADBank a more flexible financing facility?

Number two, and I say this very carefully, because I do not want

to appear to be trying to take advantage of one side or the other,

the capital is paid in equally by both the Government of Mexico

and the Government of the United States. is there a loan rate differential between lending for projects in Mexico, versus projects in

the United States; and if so, is that a formula based upon what

market loan rates would be?

Mr. MIRAMONTES. Let me address the first question. I was actually the first employee of the bank. I remember I walked into

Treasury, and in my statement, I also mentioned that the 7 years

I was there were some of the hardest years, but I loved every

minute of it. I really did.

But I remember walking into the U.S. Treasury and proposing a

concept that talked about using the Bank’s funds to guarantee, and

my proposal lasted about 3 minutes. It is a tax issue. A Federal

guarantee cannot support a tax exempt issue without losing the tax

exempt status.

The North American Development Bank is an international institution, so we explored ways of trying to come up with mechanisms

that would allow it to guarantee, maybe with the Mexican portion

of the funds, a U.S. tax exempt security, and not result in its loss

of tax status. It is a complex issue. But if there were specific approval for that, I believe then it is possible.

The SRF funds work. The State revolving funds work. I believe

that is the right mechanism for environmental projects, on both

sides of the border.

Basically, I do not care where you go in the world, environmental

projects are very expensive, and they rarely can be built without

substantial support from typically Governmental sources. So you do

need that on both sides of the border.

The problem that Mayor Aranda has in Eagle Pass is very specific. He is doing the right thing. He needs to merge two major systems. There is not enough money available for that kind of a

project. So that is one thing we have to figure out, in terms of how

you make those kind of pools of money available.

Number two, in terms of, is there a differential in the loan rates,

the answer is no. The market rate program requires you to look at

the credit, and you price it accordingly. There are some Mexican

projects that actually have lower rates than U.S., because they are

30

better credits; and there are some U.S. projects that have lower

rates than Mexican because they are better credits.

So on the market side of the equation, it is a credit analysis that

determines the rate.

Mr. BENTSEN. And if I can just ask this quickly, if you did have

a tax exempt portion, as allowed under U.S. law, what you could

do, Congress could make that happen, as we have under the SRF,

and then there would be a loan differential rate, between the

projects in the United States and projects in Mexico.

Mr. MIRAMONTES. There would be in that case, yes, sir.

Mr. BENTSEN. Thank you.

Thank you, Mr. Chairman.

Chairman BEREUTER. Thank you very much. That is an interesting idea.

The gentleman from California, Mr. Ose, is recognized.

Mr. OSE. Thank you, Mr. Chairman.

Mr. Miramontes, as I look at the list of panelists and their resumes, I suspect you are the one I should ask this question of.

What is the total lending capacity for NADBank?

Mr. MIRAMONTES. Well, that is the number that I used at the beginning. The total lending capacity originally is $3 billion. Now

that is because there is pending capital that represents about 15

percent, and 85 percent is callable capital.

The total lending limit is only doable is the loans you make are

loans that will be repaid. Otherwise, the callable capital is at risk

and you cannot use it. So practically the current lending capability

of the NADBank, given its current structure is very low.

Mr. OSE. Because the nature of the loans are?

Mr. MIRAMONTES. The nature of the loans are not bankable in

the sectors that it is focused on.

Mr. OSE. Right.

Mr. MIRAMONTES. The environmental sectors, I know of no State

that can do that.

Mr. OSE. All right, I am looking at a piece of paper here that has

a list of 43 loans that NADBank has made, totaling just under

$1.15 billion. No, that is not quite right. The total project cost is

just under $1.15 billion, and a loan amount of just over $23.5 billion. Now the Bank was established pursuant to NAFTA in 1994?

Mr. MIRAMONTES. Yes sir.

Mr. OSE. And you were the first employee.

Mr. MIRAMONTES. Yes, sir.

Mr. OSE. If I understand correctly, I mean, startups are not always good the first day, but maybe the first week or the first

month. How long was it before you made your first loan?

Mr. MIRAMONTES. I cannot remember exactly, but it was 1996.

Mr. OSE. So it has been a couple of years to get tooled up to

make the first loan, and then roughly a loan every month-and-ahalf since.

Mr. MIRAMONTES. The answer is, yes, there has been a lot of activity on the border environment infrastructure fund. That is a

grant fund, funded by EPA.

Now all of the grants that we do typically are blended. All the

funding that the Bank does is a blend of loan and grant.

Mr. OSE. Right.

31

Mr. MIRAMONTES. The majority of those projects on that list have

received loans from other sources: SRF funds and tax exempt

sources of lending. So there has been a lot of activity, but the

amount of loans is very, very small; seven percent of the total activity of the Bank and a fraction of the total project value.

Mr. OSE. Let me ask a question this way. Under your tenure, the

total amount of loans from NADBank for, and I do not know how

to describe this, other than perhaps use your words, the environmental projects that are less than bankable, the total amount of

loans committed to that direction have been, is it $23.5 million?

Mr. MIRAMONTES. Million, yes, sir.

Mr. OSE. And the total amount of loans for the more commercially oriented or the bankable sector has been what?

Mr. MIRAMONTES. Well, currently, the bank does not have the

ability to lend, or the only sector it can lend to is water, waste

water, and solid waste.

Mr. OSE. And that was your point about the Charter?

Mr. MIRAMONTES. Yes, sir.

Mr. OSE. OK, I was just trying to make sure I got that. Now I

also have a map here, for those of us who are graphically challenged, is pretty good.

But the description of this, if I understand the Charter, is that

north of the border and south of the border, NADBank can make

loans within 100 kilometers of the border. Yet, this map is not a

straight line. It kind of jig-jags around here on both the north side

and the south side. I do not quite understand that.

Mr. MIRAMONTES. I believe that is just the counties in the border. That does not depict 100 kilometers.

Mr. OSE. So it marks the eligible counties in toto, rather than

the exact 100 kilometer line.

Mr. MIRAMONTES. Exactly.

Mr. OSE. Now I am just trying to examine a couple of these

things. The loan limits of $4 million and $8 million, I think all four

of you testified, and particularly Mr. Gonzalez, that given the size

of the projects involved, that the $4 million and $8 million limit

cause considerable discomfort, in the sense that you cannot really

do the project under those limits. Am I understanding your testimony correctly?

Mr. MIRAMONTES. That is correct.

Mr. OSE. All right, and then you talked about the blended rate

between either the grant and the loan, or the grant and the commercial loan, that it was still not basically competitive; or at least

giving a cost basis low enough so that the community involved

could actually afford to service the debt. Does that summarize your

testimony?

Mr. MIRAMONTES. That is it, exactly.

Mr. OSE. Thank you, Mr. Chairman.

Chairman BEREUTER. Thank you, Mr. Ose.

Among others leading in this area, Mr. Gonzalez is probably the

person that asked the most aggressively and appropriately that we

proceed with this hearing, and I appreciate his initiative, and I recognize him.

Mr. GONZALEZ. Mr. Chairman, thank you, and my personal

thanks for conducting the hearing. It is obviously a very important

32

issue, not just to San Antonio and the border, but really for the entire United States, when you take into consideration the trading

partnership that we have with Mexico. I want to make that distinction at the outset.

Also, in the interests of full disclosure, NADBank is

headquartered in my district, and that makes it even more important. But even if NADBank was not headquartered in my district,

which I trust that it will be, it is still a very important instrument

for economic growth.

I appreciate the Chairman’s comments that even if we go over

the 5 minutes, we will be re-visiting. Because I would like to get

the lay of the land, more or less, and make some observations, so

that I am accurate, from the basis from which I am operating.

With the inception of NADBank, and Mr. Miramontes, obviously,

you were there at the very beginning of it, but my understanding

is, by its restrictions as to what projects you could actually lend

money to, coupled with the terms of the loan pretty well made the

bank ineffective, because you could not service those communities

that required that kind of assistance.

Recognizing that, though, and under your watch, I believe you

were responsible for making the Bank so very relevant to the economic growth of all these communities, by incorporating the BECC,

and bringing in the EPA funding, and then becoming, of course,

very relevant in that regard.

Yet, I know that you are always striving, in your own right, as

NADBank, in its lending capacity, as a lender, as a bank, to be

able to fill your responsibilities more completely, but your hands

were basically tied.

So we fast forward, and we are here today. My concern is as follows. If you look at how we have entitled today’s hearing, it is proposed changes to both the World Bank, International Development

Association, and the North American Development Bank. My fear,

of course, is that what we were discussing with the panel previous

to yours spills over, and the thinking is the same: one size fits all;

even though NADBank, its relationship, its goals, and its purpose

are totally different than what we were discussing as far as World

Bank and the IDA. That is my fear.

And the reason for that fear is that I believe that Treasury may

be operating under that particular philosophy. That is, a grant

mentality and philosophy, which has an appropriate place and application, versus loan which, again, in its proper environment,

makes more sense; which I would argue NADBank comes under

the latter.

That is basically, you know, my little world of NADBank that I

operate out of. That is why I have introduced the Resolution, and

for my colleagues that have joined me, I appreciate their support.

So that is where we find ourselves today. We are making a case

for NADBank to expands its mandate, and allow realistic lending

terms, so it does get involved and fulfill truly its purpose; that

which was envisioned many years ago, when my father and others

were here, when Congressman Esteban Torres were all here. You

may remember the discussions back then.

So my question to you, and I think to Mr. Miramontes, and to

Mr. Gonzales, do you agree with me, first of all, that we cannot

33

have this one size fits all in today’s hearing, in today’s context, or

otherwise; that Treasury needs to look specifically as to what is

specific and unique to NADBank, the needs of the border communities; and not necessarily apply the same philosophy that Secretary O’Neill appears to be applying when the World Bank and its

leaders and others have been meeting about debt forgiveness and

so on.

So that would be my first question, Mr. Miramontes and Mr.

Gonzales.

Mr. MIRAMONTES. I agree that the North American Development

Bank serves a very distinct purpose, totally different from the

other very large development banks.

I believe because of its focus, the border region is a better model

for a development bank. That is a personal bias. I come from the

border. I was at the Bank. But I believe because it is focused on

a region, it can become an expert at that region.

What I do no agree with is that within that region, it should be

limited to certain activities. I think the Board of Directors has the

ability to determine, as time goes on, what is important to that region.

I grew up in El Paso more years ago than I want to think now,

a few years ago. I have been to every community on the border,

more than once, every one of them.

Every community has a distinctive set of differences. There is

3,000 miles from Brownsville to San Diego. You have one of the

richest, most vibrant communities in San Diego. The poorest communities in the United States are on the border.

So the Bank has to become an expert. So I am going to argue

that yes, being a one size fits all does not work and I will leave

it at that.

Mr. GONZALES. I agree completely. I think the ability to focus the

energies and efforts to this particular region is so critical that

when you look at the people in the region, they are very hard working, very diligent people that have no problem paying their own

way.

But if their own way is limited from a financial perspective, that

debt capacity that could be placed on them would burden them beyond their limits. From a purely financial standpoint, and we talk

about bankability, their ability to repay those loans has to be within the certain economic conditions that they have to live within.

For us to necessarily make some blanket statements would not

be correct. The ability to focus in on this region, I think, is critical.

Their ability to pay back loans is there, so long as they are affordable and sustainable. But both have to be considered hand-in-hand.

Chairman BEREUTER. Thank you. We will come back to you, Mr.

Gonzalez.

Mr. Hinojosa, you are recognized for 5 minutes.

Mr. HINOJOSA. Thank you, Mr. Chairman. I would like to request

that the introduction that I had of my friend Ernesto Silva from

my home town of Mercedes be made a part of the record.

Chairman BEREUTER. Without objection, that will be the order.

[The referenced material can be found on page 55 in the

appendix.]

34

Mr. HINOJOSA. I was very pleased to read a lot of the material

that was given to us on the subcommittee, and pleased that Mayor

Aranda has a regional project that is serving lots of communities

in and around your home town.

I was also pleased to hear the way in which Mr. Ernesto Silva

took that very high interest rate of nine percent on the original

First Net Bank loan to the city of Mercedes and refinanced it with

bonds at four and-a-half percent.

So I guess that was probably one of the biggest criticisms that

I remember hearing about NADBank not being able to move faster

and a lot more projects, as was stated earlier.

My question is first going to be addressed to Mr. Ernesto Silva,

and then I would ask Mayor Aranda if he would also answer it.

What are the needs of your community with regard to economic development projects where NADBank could assist you in carrying

them out?

Mr. SILVA. Thank you, Congressman; first of all, let me say that

infrastructure is economic development. Whenever a community is

able to extend their infrastructure out to areas that are undeveloped, it allows for businesses to be able to locate and utilize those

facilities to come into our communities.

So although we say that the Bank’s role needs to be expanded

for economic development, infrastructure already is economic development. It is a tool that we use for economic development.

However, once you have the infrastructure in place, how do you

get those industries to come into your community? This is where

the Bank could lend us a helping hand with low interest loans, specifically for certain industries; to allow us to be able to expand our

industrial parks, for example; provide facilities that will support

those industrial parks; provide loans for working capital for these

industries.

These are all projects that could assist our local communities.

When you take a look at the area along the border we have to understand that first of all, these projects that we keep talking about

financing through the Bank, for the most part are not financially

feasible for the communities; nor are they financially sustainable

by the communities.

Therefore, we look for the Bank’s assistance, so that we can be

able to first develop the projects and then pay for them. If the city’s

capital is tied to these infrastructural projects, we do not have the

capital to invest to bring in the industries. It is one or the other.

When you have people that do not have the infrastructure, or are

not drinking clean water, then you are going to put your money

into your infrastructural projects for clean water, instead of bringing in economic development in new industries.

What we need is for the Bank’s role to be expanded into the

health care, transportation, international bridges, international

trade corridors, housing, for example. I would say that those are

the areas that the Bank could assist the local communities in, to

bring in economic development to, for example, Mercedes, Texas.

Mr. HINOJOSA. Thank you, Mr. Silva.

What about you, Mayor?

35

Mr. ARANDA. Mr. Hinojosa, I had not even thought of the possibilities of the NADBank being able to help out in that area. That

is just because of a frame of mind.

But as you asked the question and I thought about it, if you take

a look at Eagle Pass, just like the rest of the border region, I think

our biggest challenge is adult education and work force development, to be able to have that economic development impact.

If the NADBank could help in that area, it would certainly be in

areas of higher education and vocational education, and being able

to work with the community colleges in our region that are always

very strapped for funds.

The purpose our of our meeting here would be for water and

sewer, and basic needs that are being addressed by the NADBank

at this point. Before we get to that point that we are talking about

economic developments, of course, we need to take care of those

needs.

When you take a look at the city of Eagle Pass’ needs, as far as

water treatment plant, we really could not grow very much, having

a plant that is at almost 90 percent capacity.

But looking beyond that, I would probably go back and say that

the most important thing for our region would be the education of

our adults.

Mr. HINOJOSA. So if I hear you correctly, you would support then

the discussion that President Fox and President Bush had recently,

in consideration of expanding mission statement of NADBank?

Mr. ARANDA. Well, I guess if I go back to the first way I answered your question, there are so many basic needs that have not

been taken care of yet, that I would not support something of that

sort, yet.

If there would be funds to be able to take care of the needs that

we currently have under infrastructure, then I would go to that

next step.

Mr. HINOJOSA. I am going to have to wait until the next round

to continue this discussion, because I would like to hear from Mr.

Miramontes about expanding the mission statement, and then the

problems that he foresees when they join the two groups of

NADBank and BECC.

Thank you, Mr. Chairman.

Chairman BEREUTER. Thank you, Mr. Hinojosa.

I think, Mr. Hinojosa, that I may actually get into that in my

own round of questions a little bit, but we will pursue it.

Mr. Miramontes, since you were around at the creation, and all

of you were probably watching it, NADBank can finance the waste

water treatment, drinking water, disposal of municipal waste, or at

least they can provide resources for it.

My first question is, why was it limited? In your judgment, what

is the history on that sort of environmental spectrum of the infrastructure?

Mr. MIRAMONTES. I actually was not involved in the negotiations

during the NAFTA process. I actually came on board after the

NAFTA was passed. But basically, the general fear was, if you

were to have a major trade agreement, that would just open wide

the trade routes Mexico and the United States.

36

The pressure was already there, and that the environment would

suffer the most through increased traffic, increased air pollution.

Waste water needs, at that point back then, were in terrible shape.

So they were high priorities.

So I think the focus, and I agree with Mayor Aranda, the original

focus of health and well being, the fundamentals must be the first

job of the Bank. There is no question about that.

But jobs, in my mind, have always been the greatest source of

environmental security. For people who are poor with no jobs, the

environment is secondary. For people with a home in a community

that they take pride in, and they have a job, the environment is

important.

Chairman BEREUTER. Thank you, I would like to say that while

I recognize that in all probability, you would like to broaden this

to a whole range of infrastructure and services and assistance, and

that is quite understandable, I would like to ask each of you just

to go right down the line as to what would be the next vital elements of assistance that you would suggest?

If we did not have the ability to move it throughout, I want to

have some idea of priorities, and any kind of cautionary notes that

you might have. So let us start at that end, Mr. Gonzales, first, and

we will work back.

Mr. GONZALES. I think that is a great question. I had put some

written testimony together to hopefully go toward that end.

In expanding the range, say, from the 100 kilometers to the 300

kilometers, and various types of infrastructure projects, if that

were to be accomplished to keep the staffs of the BECC and the

NADBank focused on the 100 kilometer area, use outside consultants, the private sector, for those entities that want to come in and

utilize the NADBank’s resources for lending within that 100 to 300

kilometer range; use private sector resources to get that accomplished.

Focus the staff and the energies of the Bank on the 100 kilometer region, with the anticipated benefit of more market rate interest rates lending in that 100 to 300 kilometer region. That

money would actually be going back into the 100 kilometer region.

I think that is the area that I would recommend.

Chairman BEREUTER. All right, thank you.

Mr. Silva.

Mr. SILVA. If I understood correctly, you want to know what

areas to expand into?

Chairman BEREUTER. What are your top priorities?

Mr. SILVA. I would say transportation, the funding of international trade corridors, and also international bridge crossings.

That is the thrust of NAFTA trade, and I think that was pushed

aside.

Chairman BEREUTER. Thank you.

Mayor Aranda.

Mr. ARANDA. Mr. Chairman, I will go back to the statement of

Mr. Hinojosa. It would be in the adult education and work force development area.

Chairman BEREUTER. All right, very good; Mr. Miramontes?

Mr. MIRAMONTES. It would probably be transportation-related activities.

37

Chairman BEREUTER. Thank you very much, and we will just

wait for another question, and go back to Mr. Bentsen for our next

round.

Mr. BENTSEN. Thank you, Mr. Chairman.

On the expansion, I have to say, it does concern me a little bit,

and I think this is what Mr. Aranda was saying. I think you need

to get the first part done right, and then look at moving beyond

that.

There is a little bit of a corollary between the debt forgiveness,

even though I understand what Charlie is saying, in that part of

the concept behind debt forgiveness, when we passed that, was to

free up countries to be able to use resources that were otherwise

going for debt service to put into human development, whether it

be education or health care or whatever. I think the same would

be true here.

Let me get back to what you are funding now. I look at all the

projects and the demand that is there; what has been funded either

through loans or primarily through grants, sewer and water, waste

water, and solid waste.

A good part of this, as Mr. Aranda and Mr. Silva pointed out, has

been funded under the State revolving loan program, either

through them buying the bonds or however it works now.

But obviously, the demand or your capital need is greater than

what the State program allows for. Otherwise, I guess they would

take down the whole project, if I understand that, and Mr. Gonzalez probably understands how the project works far better than

I do.

So if we get back to what I think the idea was behind NADBank,

it was to fund an additional public good that is not already being

funded under the 1987 Clean Water Act that allowed for the creation of the SRF.

Is that accurate, or is the State not coming through with sufficient funding for these projects? Because if that is the case, again,

I think it goes back to the idea, and I understand, Mr. Miramontes,

as you go to Treasury, I mean, my opinion has always been that

the tax staff at Treasury, the first thing they say about tax exempt

bonds is that they are unconstitutional; they do not like them, and

they ought to all be repealed. But once you can get past that point,

then you can maybe get something done.

I think your testimony is right on target, in that you are priced

out of the market, as long as there is a tax exempt function, even

though you have credits, because of their situation, where they are

along the border; if, in fact, they have maxed out on what is already provided under the SRF, I mean, they are caught in a catch22.

Mr. SILVA. Well, there are two reasons why someone would not

go through the SRF. First, depending upon when the bonds were

sold by the State, that determines the interest rate. If they were

sold prior to the interest rates coming down, then the interest rate

at the State is even higher than the NADBank.

Second of all, it would be the amount of red tape that is required

to go through a loan through the SRF and the State. It is much

quicker to go through the NADBank or sell tax exempt bonds in

the open market, than it is to go through the State.

38

A prime example is the city of Mercedes. We took a different

route. The interest rate was too high. With the amount of work

that it takes to get the loans from the SRF, it would be easier to

go to the NADBank, and even eventually go out into the open market and sell tax exempt bonds. That is from Mercedes’ perspective.

Mr. ARANDA. Mr. Bentsen, for the city of Eagle Pass project, the State has put together a total of $50 million out of the $103 million; which, in my opinion, would be a great amount of money that

would be based on grants. The rest of it is based on the loans directly from the Textile Water Board. It is based on the revolving

fund, and also the community development block grants.

So I think I would pass that on to Mr. Gonzales to be able to answer the question of whether that would be sufficient or not.

Mr. GONZALES. The ability to fill the gap that the State agencies,

for example, cannot current fill, in some programs, for example,they can lend you money for your project that will take you up

to the property owners property line and no further.

The NADBank comes in with grants and is able to complete the

project from the line that runs in front of the house to the house,

the hook-ups. So there has been different pieces that different

agencies have been able to fill, in order to complete the project and

maybe somehow trying to look in a more comprehensive scope.

With the NADBank hopefully coming across with more grant assistance, it can fill more of the gap that cannot be filled in other

areas. Because from a pure lending perspective, under their current constraints, they are not going to be in a position to do that.

Mr. BENTSEN. My time is up, and Mr. Miramontes may have a

comment. But if you can lend at even tax exempt rates, you are

going to extend the use of that capital much longer than if you

grant it out. It will be gone.

Mr. MIRAMONTES. Should I respond?

Chairman BEREUTER. Yes, please respond.

Mr. MIRAMONTES. When it became clear that the Bank was not

going to be able to lend large amounts of money, I remember sitting around thinking, OK, now what do we do?

I decided that what was needed was two or three things. One

was really investment banking services. There are 10 States on the

border, with 10 different sets of rules. The Mayor has five other

jobs to do every day in Eagle Pass, and all of them are just as important as this.

So it was imperative that we help those communities understand

how to access money that was already there. That is number one.

Number two, the communities themselves needed help. Mr. Silva

mentioned all the money that we gave back then. That was community development. That was institutional development. That allowed them to go to the market place. They could not access the

market before that. So that is very important.

The Bank strived to serve and tried to make up for its lack of

lending abilities with service. This is the second point I would like

to make, real quick. I am not advocating for expanding the Bank’s

current activities. I think it should be done very prudently.

I am arguing for the reform of the Charter to allow it to occur,

when appropriate, by the Board of Directors. But I do not think it

should expand its activities much right now.

39

Chairman BEREUTER. Thank you.

Mr. Gonzalez is recognized.

Mr. GONZALEZ. Thank you, Mr. Chairman.

Again, you know, I will preface with this my own observation

here, because I know there are concerns that if the mandate is expanded, if we change the terms of the loans, while that is a good

thing, because it is in a banking environment, and it means you

leverage funds. You have monies coming back out. You make more

loans. You improve the lot for many other people than if it was in

grant form.

The concern is, of course, that you would neglect the environmental concerns in projects that these communities that need to be

addressed, and you are a part of that.

But I am also familiar with a study that was performed, and let

me get the names of everybody that was involved, because I think

it was a very good study, and has formed the basis for much of

what we discuss here today.

That was with Texas Center for Policy Studies, the Willie C.

Velasquez Institute, the Center for Strategic and International

Studies, and the National Wildlife Foundation, which brought all

stakeholders, all interested parties, diverse interests, and they all

agreed that you could expand the mandate, you could change the

terms of loans, you could do things with the capital, because they

realized the importance of the character of a bank and what that

means, as opposed to purely grants, while still not neglecting or diminishing in any way the obligations, in grant form and otherwise,

on the environmental projects.

So I know that it can be doable, and I know what Mr.

Miramontes is saying; you do it prudently and slowly. So that is

the first concern.

Anything that you suggest here today, either Mr. Gonzales or

Mr. Miramontes, does it jeopardize or diminish what need to be

done on the environmental infrastructure that we have out there

and the problems that we have.

Second, the other concern that I have heard expressed is, you do

not really want NADBank basically taking business away from the

private sector. So is there a niche out there for them that does not

impact something that might be available to communities through

the private sector. That is more for Mr. Gonzales.

But the first question is basically, you know for both of you. Do

you see any threat to the environmental side of this whole issue?

Then the second question is to Mr. Gonzales about the impact on

the private sector.

Mr. GONZALES. With respect to the diminished on the environmental perspective, I do not think that there would be any. I think

there is such a heightened awareness already that exists that there

is going to be so many people, particularly in the NGO community,

that are going to be focused on what is going to be going on, that

that is not going to happen.

With respect to the private sector, I think probably more than

anything else, there is going to be a greater ability to work with

the private sector, and hopefully accelerate projects with the private sector, and not necessarily be seen as competition.

40

One of the things that they will obviously realize is that if they

are dealing with the NADBank, there is still going to be a lot of

due diligence and analysis that is going to be done. If they have

the resources and are able to do it without the NADBank, then

they probably will not utilize them, and go their own way of either

acquiring or providing their own investment for moving forward on

their particular projects.

So I think it is probably going to be, when the transportation

issue was mentioned, for example, I think that is probably a good

blending of public/private opportunity to create greater enhancement in a shorter period of time.

Mr. MIRAMONTES. I concur with what he just said on both points.

I think the issue that a subcommittee like this has to concern itself

on policy is the issue of additionality. A development bank should

not step in the place of the private sector. It should not get in the

way of the private sector.

I truly believe though that, given the dynamic nature of the border, the border regions are a wonderful economic zone. It is one of

the most capitalistic places on earth, where people are making a

living on street corners, and eventually become store owners, and

eventually become owners of chains. I have seen it happen in different places along the border.

What you need is a mechanism to induce the private sector capital to do deals that sometimes they may not be willing to do for

different reasons. That is a case-by-case factor. But the role of a development bank should be very specifically limited to how do you

help create that economic structure where the private sector is willing to take the risk, as appropriate?

Mr. GONZALEZ. Mr. Bentsen was here whispering in my ear

about microloans. So will I yield back whatever I have left here, in

a very short period of time.

But again, in the area of microloans, because I know we are talking about certain transportation projects and others, is there a

whole other area for NADBank, should the mandate be expanded

prudently and piecemeal, according to policy, Board of Directors,

and input.

Mr. MIRAMONTES. On that issue, when we talk about transportation, we all think of highways and bridges and all kinds of big

things. I think of transportation-related air quality.

My home town of El Paso, Texas, I cannot move back to because

I am asthmatic, and the air quality in El Paso is one of the worst

anywhere in the United States, if not the worst. One program that

was being proposed in Huades was for a series of smog emission

check points being funded with microloans. That is an example of

something that the private sector probably will not do.

But will make a difference in air quality and transportation in

Huades? Definitely, it will. Will it help the people in El Paso? I

know it will.

Chairman BEREUTER. Thank you; the gentleman’s time has expired.

The gentleman from California, Mr. Ose, is recognized.

Mr. OSE. Thank you, Mr. Chairman.

I regret missing most of the questions of the gentleman from

Texas. Let me start at the 35,000 foot level. If the Charter of the

41

Bank was significantly expanded, in other words, limitations on

waste water and drinkable water and what have you, were lifted,

what is the likely size of the market, if you will, that NADBank

could invest in? I mean, is it so large as to be unquantifiable, Mr.

Miramontes?

Mr. MIRAMONTES. If you look at the infrastructure needs, just in water/waste water, over the next 5 to 10 years, I believe it is $2

billion or $3 billion, just water/waste water.

If you take transportation, energy, pipelines, you are probably in the range of $20 billion or $25 billion of needs along the border.

It is going to double in size.

Should the Bank do all that? Of course, they should not. It

makes a difference, yes. But we are talking about billions of dollars

of needs. That is why you need to have mechanisms that deal in

billions, not in millions.

Mr. OSE. All right, if we were to take the waste water, drinkable

water, storm water, and solid waste issues off the Charter, in

terms of their exclusivity, what would be the fourth thing, then?

If the first three are waste water, drinkable water, and solid waste,

what is the fourth thing? I would be interested in what the local

officials have to say about that, too; Mr. Mayor?

Mr. ARANDA. Mr. Ose, we answered that question earlier, but we

will go ahead and do it, again.

Mr. OSE. I appreciate it, thank you.

Mr. ARANDA. There was a difference of opinions. We all have a

different way of looking at our economic development regions. In

my personal opinion, I think the biggest need for the Texas border

is in the area of adult education and work force development.

That, in my opinion, would probably be the biggest economic impact that the border will ever show, when you are talking about the

poverty level and the education level of our region, and why we are

the way we are. I apologize for pointing that out.

Mr. OSE. All right, Mr. Silva.

Mr. SILVA. Yes, it was international cross and international trade

corridors.

Mr. OSE. Mr. Gonzales, any input?

Mr. GONZALES. Yes, I probably did not do a very good job of answering that question specifically last time. But I would say transportation. In general, those projects have such far reaching benefits

from an environmental and economic perspective to add, just in

general, more value to those communities.

Mr. OSE. Well, the question of the trade crossings particularly intrigues me, because I have been to El Paso and some of the other

border crossing points. You see the cars and trucks lined up on one

side of the border or the other, depending on the time of day and

what have you, just as far as the eye can see.

We would have to, if I understand the procedure correctly,

change the current Charter to allow NADBank to provide assistance for the construction of a larger processing point or transit

point. Is that correct?

Mr. SILVA. Well, there are several steps. First would be the financing of the actual studies, the environmental and feasibility

studies. I think that is more important, because that would impact

the environment.

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We would be able to provide a pro-active approach, instead of reactive, once the bridge is open and you have the problem. We

would be able to resolve some of those issues prior to the construction of these facilities.

Mr. OSE. Mr. Mayor, on the work force development stuff, it is

interesting. My father was the only member of his family to go to

college, and he is the only one who left the farm. My mother was

one of nine, eight of whom went to college, two of whom stayed in

their original community; but all of whom went into entrepreneurial efforts.

How could you connect the dots on NADBank involvement on

work force development in such a way as to quantify the direct impact?

Mr. ARANDA. Most of that education that I am talking about

would be done by the community colleges in the area. These are

community colleges that are funded through local property taxes,

and those property taxes are already at a low number. So when

these community colleges are looking into new curriculum, the concern that exists is that they do not have the money to invest, to

be able to do it for the first 3 years. After the first 3 years, the

State of Texas reimburses them, based on the amount of contact

hours.

So to start off new programs, the funding could come from

NADBank, and it is a matter of a low interest loan, or also available grants for that purpose.

Mr. OSE. All right, thank you, Mr. Chairman.

Chairman BEREUTER. Thank you, Mr. Ose.

Now Mr. Hinojosa is recognized.

Mr. HINOJOSA. Thank you, Chairman Bereuter.

I want to say that in February of 2001, when a group of Senators

and Congressmen met in Mexico City with President Vincente Fox,

he talked about expanding the mission statement. I agreed with

you, Mr. Miramontes, that we needed to first show that we could

do the original mission statement, before expanding it, and I was

in disagreement.

It is interesting that in just a year after that discussion, I have

to agree that if the NADBank mission statement has not been implemented, that maybe we need to make some changes, and not

wait until, like you said, it was practically feasible and financially

feasible, and so forth. I think that we really need to make the

changes.

I have to agree with the Mayor and with the City Manager that

the projects of transportation and education and job training are

the things that are going to change the Southwest Mexico/United

States border region.

It is interesting for me, as a new Congressman here only 6 years,

that when we try to get monies for transportation for an area like

ours, that 2,000 mile border, that we cannot possible get it, simply

because Maryland and Virginia and New York and all the big

MSAs manage to get it by the billions of dollars; and so crumbs are

given then to regions like ours, that have been neglected for 30 or

50 years.

If it is to happen, if we are to make the Mexico/United States

border look like those big MSAs of Houston and Dallas, we have

43

got to have the money for the infrastructure. I think that

NADBank is just as good a source to access the kinds of monies

that you need to be able to improve economic development in those

areas, lowering the unemployment rate which, like in the example

of my region, Hidalgo County, it was 21 percent 6 years ago.

With all the growth and improvements and monies that have

been injected here these last 5 years, we are still at 10.5 percent;

twice that of the State.

So I have to agree that it is time for this subcommittee and others in Congress to take a look at putting in enough money, $2 billion, $3 billion, $4 billion, $5 billion, into the NADBank, expanding

the mission statement, and doing what some of you are recommending. Because otherwise, it is not going to happen. If we have

to be in line to get money from the Department of Transportation,

it will be another 50 years. It will never happen in our lifetime,

that we would see the roads in the condition that they need to be,

to take care of all of the thousands and thousands of trucks that

Congressman Ose was just mentioning a moment ago in El Paso,

Laredo, Farr, Brownsville.

We need to answer something that we did not think of, and that

was that to bring trucks through our borders, you have got to have

the highways to be able to handle those 18 wheelers. that was not

accounted for. That was not planned for, and they certainly did not

earmark the money to do that.

So it has been informative, and I thank you members of the

panel for coming and making us aware of the importance of really

having a debate amongst ourselves to see if indeed we should expand the mission statement and, indeed, put in some money like

Vincente Fox and President Bush talked about doing, so that we

could carry out some of those projects.

I do not want to ask any more questions, because the time is

running out. But I, again, thank each and every one of you for

bringing us your perspective, and empowering us with that kind of

information, so that we can do a better job with NADBank and the

BECC group.

Thank you very much.

Chairman BEREUTER. Thank you, Mr. Hinojosa.

I have one more question. It really relates to the proposal of the

two Presidents about merging the boards between the NADBank

and the BECC.

I wonder if any of you could give me a specific example. Generally, I heard one of you, at least, sort of duck this issue, as that

is something that you have to consider.

But I wonder if you could give us any examples where the existence of two separate Boards of Directors acted in an efficient fashion or created problems; or examples whereby one board would

have been more effective, to put it in a positive way?

Mr. SILVA. Well, I am not going to sidestep it.

Chairman BEREUTER. Go right ahead.

Mr. SILVA. I would say, not to merge the boards would probably

be my recommendation. You have a check and balance here, where

the NADBank does the financing for projects that BECC reviews

for their engineering value.

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Also, you have the ability for the NADBank to provide grants for

institutional development for these communities. These, in essence,

are the basis for the BECC to approve or disapprove, or what they

call certify or not certify a project. It provides the basis for the

projects to be financially feasible and self-sustaining.

If you merge them, I believe there is going to be a lot of pressure

put on these boards, or this one board, to approve projects that are

not self-sustaining or financially feasible.

Chairman BEREUTER. To the extent that you are familiar with

the people that serve on the two boards, is there some movement,

or does it already exist, a specialization, in terms of expertise that

they bring? Does the Border Environmental Cooperation Commission reflect a particular expertise that may not be in the Bank, and

vice versa?

Mr. SILVA. I believe so. I believe the expertise in the BECC is

more on the project and engineering development; and the Bank

has more of a financial expertise, and it should be that way.

Chairman BEREUTER. Does anybody else want to venture a comment about inefficiencies you have seen or problems or positive

items?

Mr. MIRAMONTES. Mr. Chairman, since I am no longer employed

by the Bank, I guess I can comment as freely as I wish. I want say

that the two boards have done a good job. It has been rough, at

times. But I think a single board with a focus is useful. Because

the conflicts would come in terms of where policies were not identified.

One of the first problems initially, which was resolved, but with

a lot of discussion, initially the BECC process was giving greater

hopes to communities of grant funding that was possible by the

Bank. The Bank would then come in later and have to be the bad

guys and say, no, you cannot get that much money.

That has been pretty much the result. But that is an example

of where when you have two different missions, it can cause problems.

I think merging the boards does not solve the Bank’s problems,

though. I think merging the board makes the institutions possible

more efficient, with a single focus with one accountable board. But

it will not make more loans show up, because of the fundamental

problems we discussed earlier.

Chairman BEREUTER. Are there any other comments from the

panel; Mr. Gonzales?

Mr. GONZALES. To not side step the issue, as mentioned before,

merging the two, I think, as Mr. Miramontes said, is not necessarily going to bring about more loans. If you are trying to bring

about a greater sense of efficiency and cohesiveness, in terms of

policy directive, I think you could achieve some economies of scale.

But I think the key is that there still has to be a greater emphasis on the financial perspective; not to diminish the environmental

aspects of it. But the reality is that the financial aspects of these

projects, in order for them to succeed, is going to be based on the

finances and not on the environmental aspects.

If that aspect of the board is diminished, then I would have some

significant concerns. So long as that is maintained, then I would

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say merging the boards would probably not have a negative effect,

assuming it is done in a judicious manner.

Chairman BEREUTER. Thank you.

Mr. Miramontes, do you wish to weigh in on this subject?

Mr. MIRAMONTES. Mr. Chairman, I would support the merging of

the boards, and that goes back to business sense. Having one board

would probably be more efficient.

We did not experience any differently in working with the BECC

Board and NADBank. But if you had one board, it certainly would

make things a lot better.

Chairman BEREUTER. Thank you very much.

I would turn to the Texas delegation here, since we are well represented, and see if there are any final questions or summary comments or anything. Mr. Gonzalez?

Mr. GONZALEZ. Yes, Mr. Chairman, again, thank you for calling

this very important hearing, and putting up with so many Texans.

I know it is not an easy chore, at times.

I want to thank each and every one of the panel members. It was

short notice and you made it, and thank you for, as Congressman

Hinojosa pointed out, enlightening us and it is very important.

It is only important if, in fact, we have some input as to what

is going to happen to NADBank, which has not been forthcoming

in dealing with Treasury.

Mr. Chairman, this is something I was going to bring up to your

attention later in a private meeting. But despite repeated requests

to Treasury for certain information, some of which on the record

was promised to me, it has never materialized.

We have just not received anything in writing, after requests and

requests at different levels, to the highest levels. This leads me to

believe that they will be moving forward without any input from

Congress, without any of our concerns being addressed.

I know that negotiation would be nice. Eventually, this Congress

will be passing on whatever changes they desire, as well as the

Congress in Mexico, which has already gone on record as disapproving some of the suggested changes.

I would like to see a better relationship. I do not know what I

have to do. Obviously, in my own capacity, I have not been that

successful. So I was going to enlist the leadership from both sides

of this subcommittee. Because today, it might be Charlie Gonzalez

and NADBank, and tomorrow, it may be another Member, and another issue of great importance to that particular Member.

Again, thank you very much, Mr. Chairman.

Chairman BEREUTER. Mr. Gonzalez, I understand your concern.

If Mr. Sanders and I could be helpful by writing a joint request,

which elaborates the concerns and issues and items that you are

seeking, I think we can certainly do that. We may be able to enlist

Mr. LaFalce and Mr. Oxley, as well. Thank you.

I want to reiterate the appreciation that Mr. Gonzalez and others

have mentioned about your appearance on short notice for this important hearing. I know it was a special effort on your part. I very

much appreciate it. We are going to try to make good use of the

information that you have given us.

I know that the alumnus of this committee, former Congressman

Esteban Torres, is very interested in the progress of the NADBank.

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I think it was a crucial item with the support of the late Chairman

Gonzalez.

So we have a special interest in the Banking Committee, which

is now turned into the Financial Services Committee, in making

sure the NADBank functions well.

Thank you very much. The hearing is adjourned.

[Whereupon, at 12:27 p.m., the hearing was adjourned.]

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May 2, 2002

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