825.6374/4–2246
The Acting Secretary of State to the Chilean Ambassador (Mora)
The Acting Secretary of State presents his compliments to His Excellency the Ambassador of Chile and has the honor to refer again to the Embassy’s note No. 434/79 of March 4, 1946 and to the unnumbered note of April 22, 194645 expressing concern with respect to the disposition by this Government of its synthetic ammonia plants.
In particular, the Embassy indicates that paragraph 8310.6 of Regulation No. 10 of the Surplus Property Board should not be applied on the ground that it does not take into account fair value as a standard for the disposal of surplus plants. It must be pointed out, however, that Regulation No. 10 of the Surplus Property Board does not require the War Assets Administration, which now has charge of the disposition of these surplus plants, to dispose of surplus property at less than fair value nor does it establish a general standard for the disposition of such property. In the opinion of the War Assets Administration the regulation is merely permissive, and not mandatory.
The Embassy urges on the other hand that transfer of plants be made strictly in conformity with the conditions established by the Surplus Property Board in its Special Order No. 19 of September 7, 1945 which provides for the fixing of a fair value.
In this connection the Embassy’s note of April 22, 1946 makes renewed reference to the disposition of the Ozark plant and implies that this plant has not been offered for sale in accordance with Special Order No. 19 inasmuch as it has been offered for sale at $13,793,500 which is less than one-half of its construction cost.
This Government is of the opinion that this amount is in accord with Special Order No. 19 requiring disposition at fair value. According to the information in the possession of the Department of State, the actual cost of land and buildings, machinery and equipment was $27,219,509. This amount does not agree with the amount quoted in the Embassy’s note of April 22, 1946 taken from “Report on Chemical Plants and Facilities” submitted to Congress on November 12, 1945. The actual cost of land and buildings according to a War Department inventory has been slightly adjusted from records [Page 628] of the plant operator; the cost of machinery and equipment is unadjusted.
The present normal reproduction value and the present depreciated value of the plant were made by appraisal of J. Gordon Turnbull, Inc., of Kansas City, Missouri on January 18, 1946. The present normal reproduction value was appraised at $18,993,579 and the depreciated value was set at $15,908,112.
At this point it is pertinent to emphasize that the fair value of $13,793,500, according to War Assets Administration analysis, was based strictly on requirements of Special Order No. 19 of the Surplus Property Board. This figure was derived by deducting from the present normal reproduction value items such as the costs of purely military installations (guard houses, et cetera) plus costs of installations not normal or necessary to commercial operation, amounting in all to $2,523,845. From this net replacement figure of $16,469,734 an aggregate depreciation, at rates equivalent to those used by the appraiser, of $2,676,234 is then deducted representing usage for two and one-half years. The fair value figure of $13,793,500 includes engineering fees estimated at $312,000.
This note has thus set forth in considerable detail the process of arriving at fair value in order to illustrate the operation of Special Order No. 19, which the Embassy of Chile approves, and which results in this case in a fair value of less than one-half the war-inflated cost. It is believed that the procedures described above are not only in strict accord with Special Order No. 19 but are also in accord with normal commercial procedures.
Since the matter of lease as well as sale of surplus plants is of importance to the Embassy, it should be pointed out that leases must be made based on fair value but with due regard in each particular case to pertinent factors such as production costs, freight differentials and probable output. The lease provisions for the Ozark plant are rather complicated but, in brief, they run for a construction period plus five years with option to renew for two additional five-year periods, with a sliding scale of rent based on a percentage of sales, and certain minimum annual rents.
The Secretary of State has designated Mr. Willard L. Thorp, Deputy to the Assistant Secretary of State for Economic Affairs, to consult with any officer or officers of the Chilean Embassy with respect to the values determined for the disposal of surplus plants in relation to the letter from the Secretary of State to the Chilean Minister of Foreign Affairs at Mexico City on March 5, 1945.46 He now has available all of the details with respect to the lease offers of both the Jayhawk and Ozark plants. Details of at least one other offer are [Page 629] expected in the very near future. The War Assets Administration has been informed of the views of the Chilean Government and of the Mexico City understanding of March 5, 1945.
Reference is also made to the objections set forth in the Embassy’s note of March 4, 1946 to long-term leases of the surplus plants. It must be made clear that the statutory restriction on the disposal of plants to leases of not over five years duration was intended to prevent sale or long-term lease of these plants until the Congress had an opportunity to consider the plans of the Surplus Property Administrator. These plans were incorporated in the Administrator’s report to the Congress of November 12, 1945. Since the Congress voiced no objection to the recommendations, they may be considered as established policy. The matter of short-term leases may also form the subject of discussion should the Embassy of Chile so desire.