[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
                      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

                       U. S. GOVERNMENT PRINTING OFFICE
79-696                          WASHINGTON : 2002
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York              JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         
SHELLEY MOORE CAPITO, West Virginia  BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
             Terry Haines, Chief Counsel and Staff Director

        Subcommittee on International Monetary Policy and Trade

                   DOUG BEREUTER, Nebraska, Chairman
DOUG OSE, California, Vice Chairman  BERNARD SANDERS, Vermont
MARGE ROUKEMA, New Jersey            MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          BARNEY FRANK, Massachusetts
MICHAEL N. CASTLE, Delaware          MELVIN L. WATT, North Carolina
JIM RYUN, Kansas                     JULIA CARSON, Indiana
DONALD A. MANZULLO, Illinois         BARBARA LEE, California
JUDY BIGGERT, Illinois               PAUL E. KANJORSKI, Pennsylvania
MARK GREEN, Wisconsin                BRAD SHERMAN, California
PATRICK J. TOOMEY, Pennsylvania      JANICE D. SCHAKOWSKY, Illinois
CHRISTOPHER SHAYS, Connecticut       CAROLYN B. MALONEY, New York
GARY G. MILLER, California           LUIS V. GUTIERREZ, Illinois
SHELLEY MOORE CAPITO, West Virginia  KEN BENTSEN, Texas
MIKE FERGUSON, New Jersey







                            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

 
                      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 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.
    By the end of 1997, 42 heavily indebted poor countries had 
accumulated 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.
    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 
long-term 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?
    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 non-concessionable 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 
credit-worthy 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.
    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 forgiveness, 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.
    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 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 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.
    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.
    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 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 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 
out-voted 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 reforms. 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.
    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 two-thirds 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.]
    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 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. 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.
    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.
    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.

  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.
    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.

   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 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.
    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.
    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.
    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 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 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-a-half 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.
    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 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 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.]
    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?
    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.
    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.
    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 catch-22.
    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.
    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.
    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.
    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 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.
    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 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.
    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 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. 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.]
                            A P P E N D I X



                              May 2, 2002
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