352.1153 St 2/71
The Ambassador in Spain ( Hammond ) to the Secretary of State
[Received June 12.]
Sir: I have the honor to refer to the Embassy’s despatch No. 875 of April 17th last,31 and to previous correspondence in regard to the Spanish Petroleum Monopoly, and to submit a further report in regard to recent developments.
As stated in the despatch above mentioned, the Valuation Commission reassembled about the middle of April and hearings of the claims of the various companies involved have been taking place.
The policy and the procedure of the Commission have been described at such length in previous despatches that it hardly seems necessary to go into all the complications of recent events, and I believe that a brief statement of the position as it exists at present will be more helpful to the Department.
Acting in accordance with the new rules laid down in February to govern its procedure, rules which were entirely the result of the energetic protests of the French and American Embassies, the Commission has allowed practically in full the claims for physical property of the respective companies, but has been very wary about admitting claims for going concern or good will value, as provided for in paragraph E of the rules, transmitted with the Embassy’s despatch No. 835 of March 9th, 1928. The difficulties of the situation at present are as follows:
- 1.
- So far, the Commission has refused to review its awards made before the new rules were in vigor, and in several cases, notably in the case of the Standard Oil subsidiary, Babel and Nervion, this refusal makes a difference of several million pesetas.
- 2.
- While no definite offer has been made in regard to good will value, an unofficial suggestion has been made on behalf of the Commission that the companies accept 8% of the value of their physical property as full compensation for good will and going concern value.
In regard to point one, the action of the Commission seems so arbitrary and unjust, that in the course of a recent interview with General Primo de Rivera in regard to several other matters, I drew his attention to this procedure of the Commission, and asked him to see that the Commission acted in accordance with his instructions mentioned in the Embassy’s despatch No. 835 of March 9th last. General Primo said that he would discuss the matter with the Finance Minister (always hostile to foreign interests) and remarked that he saw no reason why the awards of the Commission for physical property should not be on a uniform basis.
In regard to point two, a considerable discussion took place, and the President, obviously ill informed about the details of the matter, was very unsatisfactory and brought up a number of irrelevant matters. He repeated his contention that he thought the companies were being fairly treated in accordance with his recently given instructions, that the matter of good will was very difficult to assess in a precise form, and said that he did not think the Government was liable to indemnify the various companies on a basis which would compensate them for lost earning power. I replied that the Spanish Railway Statutes and other previously existing legislation in Spain provided for a capitalization of earning power in the event of expropriation by the State. He then replied that he was willing to consider some method of indemnity along these lines, but that he refused to take into consideration the 1927 earnings of the companies, which were considerably larger than in past years. He said that he believed the companies had exaggerated their 1927 earnings in the hope that they might be included as a basis for indemnity. I replied stating that I could see no reason for refusing to give the companies the benefit of the one profitable year they had had recently, particularly as they had paid taxes on the earnings in question, and that their books were subject to inspection by the Spanish financial authorities. A considerable amount of discussion followed, the substance of which was that the President admitted that something was due to the companies for good will, but that he was not willing to admit that the liability was as high as the companies claimed.
To give the Department a concrete idea of what this means in regard to the Babel and Nervion Company, the following figures are of interest: the Company claims 21,000,000 pesetas for fixed property, and some fourteen or fifteen million pesetas for good will, trade marks, etc. As against this, granting that the original awards of the Commission are corrected and brought into line with its more recent awards [Page 863] for physical value, the Company would receive about 19,000,000 pesetas for physical property, and on the basis of the tentative and arbitrary offer of the Commission to pay some 8% of the value of the physical property as compensation for good will, the Company would receive about 21,000,000 pesetas. The Company claims that this is practically confiscation of half of its assets, and in view of the fact that the Monopoly has taken over the whole organization of the Company as a going concern, and is profiting thereby (I brought this out strongly to General Primo de Rivera), I think the Company’s claim is justified.
If the Company’s earnings for the last five years, including 1927 were capitalized at a 4¼% basis, as provided for in the above mentioned Railway Statutes, its total compensation would work out at about the sum claimed, some 36,000,000 pesetas. If, on the other hand, the earnings of the profitable year, 1927, were left out of account, and the earnings for the previous five years calculated on a 4¼% basis, the amount in question would approximate the sum of money the Spanish Government seems willing to give, namely some 21,000,000 pesetas.
I discussed the above referred to interview with my French colleague, who considers that the offers of the Spanish Government are entirely inadequate, and in view of the unsatisfactory state of affairs, the French Ambassador wrote to General Primo de Rivera under date of May 12th 1928, requesting, first, assurances in regard to the reviewing of the earlier valuations of the Commission above referred to, and second, a fair consideration of the companies claims for good will. I am enclosing herewith the Spanish text together with the Embassy’s English translation of the letter above referred to.32
The French Ambassador tells me that he intends to take this matter up personally with General Primo de Rivera in the course of the next few days, and we both hope that by constant pressure the Spanish Government will finally decide to make more reasonable and adequate compensation to the companies in question.
The British Embassy here has preserved its rather negative attitude in regard to the British interests affected, but the Shell subsidiary is in practically the same position as the other companies, and its representative here has already refused the Commission’s tentative offer for good will, apparently hoping to profit by French and American representations.
The Department will recall that General Primo de Rivera has already promised me in writing to accord equal treatment to foreign and Spanish interests affected by the Petroleum Monopoly, and in this connection it is of interest to know that Spanish interests are being paid in all cases in shares of the new Monopoly Company, which are already selling at a 45% premium, thus giving these interests not only [Page 864] this amount in good will value, but also a chance to profit by the stranglehold on the Spanish public which the Monopoly will certainly use to its advantage in the future. I think this fact alone should allow us to claim at least equal treatment for American interests affected, as they are not allowed to receive Monopoly shares and must be paid in money. I have already mentioned this fact to General Primo de Rivera and have pointed out that foreign interests forcibly expropriated almost without warning had an even greater claim for consideration than Spanish interests which will be able to profit from the Monopoly in the future.
As of general interest to the Department in this connection, I am enclosing herewith an English translation of the memorandum by Mr. Gonzalez, the lawyer of Babel and Nervion Company,34 which strongly supports the Company’s claims.
I have [etc.]