l .VTE.nNATI ONA L DEVELOPMENT ASSOt. . AT/0.\' 80477 DECLASSIFIED CONFIDENTIAL JUN 28 20\3 IDA/RPL/70-24 WBG ARCHIVES May 11, 1970 IDA THIRD REPLENIS~~NT Adjustment of Voting Rights; Consideration of Course of Action I. Introduction 1. Discussions have been held among the Part I countries regarding tentative proposals to adjust (with or without an amendment of the Arti- cles of Agreement) their voting pm·1er in order to reflect their finan- cial contributions to the Association. In addition, since certain as- pects of these proposals affect the Part II countries, discussions were held by the staff with the Executive Directors representing those countrie ~, . 2. The proposals present a number of problems which have not yet been entirely resolved and a clear consensus among the Part I members has not yet emerged, although it is clear that there is general agreement on a number of issues. This memorandum outlines the basic issues involved. in the various proposals in the hope that a consensus can soon be reached on a course of action which can be used as a basis for (i) the agreement among the Part I countries on the terms of the Third Replenishment and (ii) the report to be made by the Executive Directors on the adjustment of voting power as required by paragraph 23 of the March 8, 1968 Report of the Executive Directors on the Second Replenishment. These proposals have been discussed in detail in prior memoranda considered by the Deputies and this memorandum does not attempt to restate all aspects of them. 3. The courses of action that have been considered with respect to these proposals can, broadly speaking, be put into three main categories, as follows: (a) The Third Replenishment would provide for a voting adjustment scheme along the lines of either Scheme A or B; (b) The Third Replenishment would provide for a voting adjustment scheme along the lines of either Scheme A or B, together with an agreement in principle by the Executive Directors to recom- mend to the Board of Governors an amendment of the Articles of Agreement along specified lines; (c) The Third Replenishment would not provide for any voting power. adjustment scheme but would provide for an agreement, in prin- ciple, by . the Executive Directors to recommend to the Board of Governors an amendment of the Articles of Agreement along speci- fied lines. lONAL DEVELOPMENT A,'J'SOc.ATJO.Y CONFIDENTIAL IDA/RPL/70-24 May 11, 1970 IDA THIRD REPLENISa¥.ENT Adjustment of Voting Rights; Consideration of Course of Action I. Introduction 1. Discussions have been held among the Part I countries regarding tetJ.tative proposals to adjust (with or without an amendment of the Arti- cles of Agreement) their voting power in order to reflect their finan- cial contributions to the Association. In addition, since certain as- p4~Cts of these proposals affect the Part II countries, discussions were held by the staff with the Executive Directors representing those countriec· 2. The proposals present a number of problems Hhich have not yet been entirely resolved and a clear consensus among the Part I members has not y1:t emerged, although it is clear that there is general agreement on a number of issues. This memorandum outlines the basic issues involved. in the various proposals in the hope that a consensus can soon be reached on a course of action which can be used as a basis for (i) the agreement among the Part I countries on the terms of the Third Replenishment and (ii) the report to be made by the Executive Directors on the adjustment of voting power as required by paragraph 23 of the !1arch 8, 1968 Report of the Executive Directors on the Second Replenishment. These proposals have been discussed in detail in prior memoranda considered by the Deputies and this memorandum does not attempt to restate all aspects of them. 3. The courses of action that have been considered with respect to these proposals can, broadly speaking. be put into three main categories, as follows: (a) The Third Replenishment would provide for a voting adjustment scheme along the lines of either Scheme A or B; (b) The Third Replenishment would provide for a voting adjustment scheme along the lines of either Scheme A or B, together with an agreement in principle by the Executive Directors to recom- mend to the Board of Governors an amendment of the Articles of Agreement along specified lines; (c) The Third Replenishment would not provide for any voting power adjustment scheme but 't~ould provide for an agreement, in prin- ciple, by.the Executive Directors to recommend to the Board of Governors an amendment of the Articles of Agreement along speci- fied lines. - 2 - 4. Consideration has also been given to several issues that arise under both Scheme A and B~ in particular (i) the total amount of Part I! subscriptions to be authorized and the portion, if any, to be paid in Ct::>n- vertible currencies, and (ii) the granting of membership votes. II. Desirability of an Adjustment 5. A basic and preliminary question which has been considered is whether there should be any voting power adjustment at all, either by adop- tion of Scheme A or B or by an amendment or by both methods. Discussions indicate that there is a consensus among the Part I countries that an ad- justment would be desirable. This ~;ras the conclusion that was reached by the working party on adjustment of voting rights which met in Washington on February 11 and 13, 1970 (Report of Harking Party to Deputies, dated February 20~ 1970; par. 3(a); IDA/RPL/70-8) and that seems to have been endorsed by the Deputies, but with reluctance by some, at their subsequent meeting in London 011 ~rch 9 and 10, 1970 (IDA/RPL/70-15; April 13~ 1970; pars. 26-4 7). III. ~iethod of Making Adjustment 6. Once this question is answered in the affirmative, the next ques- tion to be considered is the method to be used in making an adjustment. For this purpose, consideration has been given to the courses of action described in paragraph 3 above. These are discussed belot.r. IV. Scheme A or B 7. It will be recalled that Scheme A, in effect, adjusts voting pov;er for all contributions made by Part I countries through the Third Replen- ishment, whereas Scheme B accords additional votes to Part I countries only for their Third Replenishment contributions, thus disregarding the First and Second Replenishments and supplementary contributions. (For a detailed analysis and comparison of these schemes, see pars. 12-17, IDA/RPL/70-2, dated January 26, 1970; and Section V, IDA/P2L/69-3, dated November 24, 1969.) 8. Discussions among the Part I countries have shOtvt1 that while there does not appear to be a strong preference in favor of one scheme as op- posed to the other there is a preponderance of opinion in favor of Scheme A, although one country has expressed a strong preference for Scheme B. In this connection it should be noted that adoption of S.cheme A tvould, under the pre-emptive rights provision of the Articles of Agreement, Article III~ Section l(c), require the unanimous consent of the.Part I countries. Adop- tion of Scheme B would not give rise to a pre-emptive rights problem and therefore would not, as a legal matter, r~quire unanimous consent of the Part I countries, although as a practical matter of course unanimity would be highly desirable. (For elaboration of this point, see par. 16, IDA/RPL/70-2, dated January 26, 1970.) Therefore, if it is decided that the Third Replenishment should provide for an adjustment of voting power, it will have to be decided whether to adopt Scheme A or B. - 3 - V. Part II Subscriptions 9. If either Scheme A or B is adopted it will be necessary for the Part II countries to make additional subscriptions if the present Part I/ Part II voting power relationship is to be maintained. If the Part II countries do not subscribe~ their relative share in total voting power will decline. This has been recognized by the Part I countries and there seems to be a clear consensus that, in order to avoid a dilution of the relative voting power of the Part II countries~ the burden on the Part II countries should be kept low (both in respect of amount and the portion, i f any, payable in convertible currency) in order to make it easier for them to subscribe. There also appears to be a consensus among the Part I countries that Part II subscriptions should not exceed about $50 million (regardless of the level of replenishment) of which not more than 10% would be payable in convertible currencies~ and there is considerable support for the view that the total should be less than $50 million and that no part should be payable in convertible currency.l/ The Part II countries have been consulted about the matter and on the whole they have made it clear that they want to maintain their relative voting power and that9 if additional subscriptions are authorized, the burden on them should be kept to the minimum. 10. Considering the vie"t..rs which have been expressed by the Part I coun- tries on the matter, it might be said that the consensus would be for total Part II subscriptions of somet-1here between $10 million and $50 million. wit·h a proportion payable in convertible currencies of some~11here between zero and 10%. If either Scheme A or B is adopted, a decision will have to be made on this point. VI. Hembership Votes 11. Consideration has been given to the question whether any subscrip- tions which are authorized should carry with them additional membership votes so as to preserve the weighting in favor of the smaller members accorded to initial subscriptions under the Articles of Agreement. The staff memorandum on the subject (Par. 9. IDA/RPL/70-2, January 26, 1970) concluded that membership votes should be accorded and the working party on adjustment of voting pm·7er concluded that it \:vas sympathetically dis- posed towards this objective (Par. 3(c) of Report of the Working Party to the Deputies, IDA/RPL/70-·8, Feb. 20, 1970). y If Part II subscriptions ·Nere in that order of magnitude, the cost of a vote would be considerably below $5,000, i.e. the present cost. For example, if authorized Part II subscriptions totalled $50 million and assuming that the total replenishment by Part I countries is $3 billion and that membership votes are accorded, under Scheme A the cost of a vote t1JOuld be about $500 and under Scheme B about $250. If authorized Part II subscriptions totalled $10 million, these latter figures would be about $100 and $50 respectively. - 4 - 12. The one reservation to this conclusion that has been expressed at the Deputies' meetings has been by one Deputy who stated that in his opinion the granting of membership votes would~ as a legal matter~ be in- consistent with Article III, Section l(c), the pre-emptive rights provi- sion. This question was specifically considered by the General Counsel whose conclusion is that the Executive Directors can properly recommend to the Board of Governors a voting adjustment scheme which preserves the weighting in favor of the smaller countries by providing for additional membership votes. (See, pars. 5 and 6, IDA/RPL/70-2, January 26, 1970). 13. In any case, the question of whether to accord membership votes has finally to be decided. Amendment of the Articles of Agreement 14. It is recognized that, without an amendment of the Articles of Agreement, there is no completely satisfactory tvay in which the voting power of Part I countries can be adjusted to reflect their total financial contributions without affecting the Part I/Part II voting power ratio. It is also recognized that, if there is a voting power adjustment in connec- tion with the Third Replenishment but the Articles of Agreement are not amended before the Fourth Replenishment, the same kinds of problems~ although possibly lesser in magnitude, regarding future Part I voting power adjust- ments and their effect on the relative voting power of the Part II countries t>muld arise under the Fourth and future replenishmenta as have arisen now. Consideration, therefore, has been given to the desirability of proceeding with an amendment as a long-term solution to the problem, regardless of whether a Scheme A or B voting power adjustment is made in connection '#ith the Third Replenishment. 15. Discussions among the Part I members regarding an amendment have not sho"t-m a clear consensus as to any particular course of action regarding an amendment 9 except that there seems to be wide agreement that it would be un- desirable to condition the Third P.eplenishment on the securing of an amend- ment since this might result in delay in bringing the Third Replenishm,ent into effect. There is one group of countries which believes that an amend- ment is the only desirable way to solve the voting power problem in the long run; some countries have said that an amendment is not necessary :since9 as a practical matter~ any voting power adjustment which may be requir•ed for Part I countries both under the Third Replenishment as well as und•er future replenishments, could be taken care of as contemplated by Schemm the vie~.rs which have been expressed, offer the best prospect of agreement. Therefore, an arrangement along the following lines is suggested for the consideration of the Part I countries. (a) The Third Replenishment would provide for an adjustment of voting power based on Scheme A, with membership votes being accorded, provided unanimous agreement of the Part I countries can be obtained. (b) Regardless of the level of replenishment, Part II subscrip- tions would be authorized in the total amount of $10 million, all payable in local currency; (c) The Ex'~cut:i.ve Direc.tors 'tvould agree, in their report approving the Third Replenishment arrangements~ that further study be given to an amendment to the Articles of Agreement as a long-term solution to the problem of adjustment of voting power 9 such study to be completed in time to enable recommendations to be submitted to the Board of Governors at their 1971 annual meeting.