Early in 1959 the International Bank for Reconstruction and Development reopened discussions with the Governments of India and Pakistan in the hope of working out a settlement of the long-standing Indus Waters dispute which has exacerbated relations between those two countries ever since partition of the Indian sub-continent. I am very pleased to report to Cabinet that through the patient and painstaking efforts of the Bank over the past year and a half, full agreement on the division of the Indus and its tributaries has been reached between India and Pakistan and, in addition that a number of friendly countries, including Canada, have agreed to the establishment of a fund to finance the construction of a system of development works which will provide extensive irrigation and hydro-electric power facilities in both countries.

2. A copy of the final text of the Indus Basin Development Fund Agreement is attached.†

3. It may be helpful to review briefly Canada's participation in the negotiation of these Agreements.

4. In response to the Bank's initial proposal to various friendly Governments to ascertain whether they would be prepared to participate in the Development Fund, Cabinet at its meeting of May 5, 1959⁵⁷ stated that it was favourably disposed to Canadian participation in the development programme.

5. Subsequently Cabinet at its meeting of July 22, 1959⁵⁸ further agreed to accept the recommendation of the President of the International Bank for Reconstruction and Development that Canada contribute U.S. $23,200,000 (this figure as noted below has now been set as Can. $22.1 million) over a 10-year period to the Indus Basin Development Fund on the understanding that other Commonwealth countries concerned and the United States of America agreed to provide their contributions as requested by the President of the Bank. The Governments of the following countries have agreed to participate in the Fund and to provide the funds listed:

(a) In foreign exchange

(b) In local currency

United States of America — the equivalent of U.S. $235,000,000.

(c) The International Bank for Reconstruction and Development will provide loans to Pakistan of the order of U.S. $80,000,000.

6. There are several features of the Development Fund Agreement which I wish to bring to Cabinet's attention. First, payments into the Fund will be spaced over a period of ten years, which means, in Canada's case, an average grant of approximately Can. $2.21 million per year. The Bank has made a forecast of the rate of expenditure in carrying forward the development works, and it appears that in the first two or three years Canada's annual payment to the Fund will be less than its average annual rate of Cdn. $2.21 million but that in 1962, 1963, and 1964 when expenditures reach their peak, it will exceed this amount. This may mean that more than Cdn. $2 million will have to be paid to the Indus Fund from the Colombo Plan Fund in the years of peak expenditure and consequently less will be available for direct allocation to countries. However, this possibility has been guarded against to some extent by setting aside funds in each of the years 1959/60 and 1960/61 for the Indus, and the accumulation of these funds will meet a substantial part of Canada's share in the years of peak expenditure.

7. Second, Article IX of the Agreement provides that payments from the Fund might be suspended and that the agreement might be terminated under various unusual conditions by a vote of the majority of the parties to the Agreement. This means that, if, in the opinion of the Canadian Government, payments should be suspended or that the Agreement should be terminated Canada could not act in accordance with this judgment unless it was supported by a majority of the parties to the Agreement, including the United States which, as the largest contributor, have interests identical to our own, are not objecting to this provision, and since there appears to be no preferable alternative, I would recommend that the Canadian Government accept it.

8. Third, the Government of Pakistan has insisted on the inclusion of a clause in the Fund Agreement which states, that "in concluding the treaty, Pakistan has been influenced by the consideration that financial assistance of the nature and amount subscribed hereunder will be made available to Pakistan." It was Canada's view that this provision which, in a sense, is an escape clause which Pakistan could use under certain circumstances to evade its treaty commitments, did not properly belong in the Agreement. However, after careful consideration among participating Governments and the Bank, they decided that it did not detract significantly from the intent of the Agreement and that they would therefore not insist on its exclusion.

9. The Minister of Finance and I were consulted on the foregoing difficulties as well as on other problems that arose during the discussions of this Agreement, and we authorized officials to agree to these provisions and to proceed with negotiations.

10. It is a matter of great satisfaction to India and Pakistan as well as to the other participating Governments that the Indus dispute, which has been the source of many bitter exchanges between the two countries over the past twelve years, has reached the stage where a final and amicable settlement is possible. There are undoubtedly some risks involved for all countries concerned, and difficulties may arise in the actual implementation of the Agreement. These are however, small, in comparison to these benefits and to the advantages which may be derived from a peaceful settlement of this dispute between these two Commonwealth partners.

11. I recommend that Cabinet, having agreed to participate in the Indus Basin Development programme as described above,

(1) approve the text of the Indus Basin Development Fund Agreement;

(2) authorize the Acting High Commissioner of Canada in Pakistan to sign the Indus Basin Development Fund Agreement on behalf of the Government of Canada; and

     Howard C. Green

⁵⁷Voir/See Volume 26, document 132.

⁵⁸Voir/See Volume 26, document 134.

⁵⁹Approuvé par le Cabinet le 16 septembre 1960./Approved by Cabinet on September 16, 1960.