Foreign Relations of the United States, 1946, The American Republics, Volume XI

825.6374/8–2046

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 to the Chilean Embassy’s memorandum of August 20, 1946⁶¹ relating again to the disposal by this Government of its synthetic ammonia plants and, in particular, to the negotiations for the transfer of the Lake Charles plant.

There will be discussed below the principal points raised in the memorandum of the Chilean Embassy with respect to the terms of lease of the Lake Charles plant and also the general observations made therein regarding the terms of disposal of those ammonia plants which have already been transferred.

At the outset, however, it is desired to inform the Chilean Government that a change has been made in the award of the Lake Charles lease from the Hercules Powder Company to the Mathieson Alkali Works, Incorporated. The Department of State has been informed by the War Assets Administration that this is a simple change in the identity of the lessee only, and that the rental terms are identical with those which had been offered to the Hercules Powder Company. In view of this fact, the Department of State does not consider the change in award to be a factor affecting the consultations with regard to the disposal of the Lake Charles plant which have been held with the Chilean Government.

The Chilean Government maintains that the fair value established for the Lake Charles plant is too low for a plant in the condition of, and having the productive capacity of Lake Charles, and that the rentals proposed are inadequate. It refers to a price of $8,000,000 having been used as a basis for the proposed lease of the plant, this price having been called fair value. It is pointed out in the memorandum that this figure represents only 59 per cent of the original cost of the project.

It is true that a preliminary fair value of $8,000,000 to $9,000,000, based on an appraisal made several months ago, was originally applied by the War Assets Administration to the plant under discussion. However, as of September 1, 1946, and without including the cost of any new facilities that may be added, a fair value of $9,534,700 for the Lake Charles plant was established by War Assets Administration Appraisal Division. As stated in the Department’s note of May 21, 1946, a computation of fair value starts with present normal reproduction cost as the base, allowances being made for depreciation and other factors mentioned below. Employing the value of $9,534,700, it will be observed that this amounts to over 70 per cent of the original cost of the project. The fact that fair value is nonetheless appreciably less than original cost is not surprising and is to be expected in the case of plants built by this Government during the war under conditions of excessive wartime costs, and in view of the scientific and economic obsolescense of such plants. Giving full weight to these facts, this Government is convinced that a fair value for the Lake Charles plant of 70 per cent of cost is reasonable.

The Chilean Government assumes that the option price of the plant in question will be $5,600,000. This assumption is not in accord with the facts. The option price will be whichever of the following methods of calculation yields the higher return to this Government:

(A) Fair value ($9,534,700), plus the cost of any additional facilities paid for by the Government, plus interest on the aggregate sum of 4 per cent per annum, less rentals plus interest at 4 per cent per annum;

(B) Fair value ($9,534,700), plus the cost of any additional facilities paid for by the Government, less depreciation at the rate or rates permitted by the Bureau of Internal Revenue on similar facilities in computing federal income taxes;

Provided, that the minimum residual value at time of exercise of the option shall be 25 per cent.

The United States Government does not concur in the position taken by the Chilean Government that the price should not differ appreciably from what it would cost a private concern to build at the present time a plant similar to that of Lake Charles. There is no obligation on the part of the War Assets Administration to place a valuation on the surplus plants in that manner. If such a formula were adopted to establish fair value for this Government’s surplus property of all kinds, or merely for its surplus industrial properties, the conclusion is inescapable that for all practical purposes there would be no disposal of surplus property.

The criterion referred to in the preceding paragraph, which the Government of Chile now suggests should be used for determination of fair value, appears to be at variance with the position taken heretofore with regard to this matter. The Chilean Government will recall that in its note of March 4, 1946 the following statement was made:

“… the Government of Chile feels that it has a perfect right to insist upon the following:

“1) That the transfer of the nitrogen plants to third parties shall be made strictly in conformity with the conditions established by the Surplus Property Board in Special Order No. 19 of September 7, 1945, which provides the manner of fixing ‘a fair sales price’.”

Special Order No. 19 (as revised January 16, 1946) in substance reads as follows: “… the disposal agency shall obtain a written estimate of the fair value of the property. The fair value shall be considered to be the maximum price which a well-informed buyer, acting intelligently and voluntarily, would be warranted in paying if he were acquiring the property for long-term investment or for continued use with the intention of devoting it to a profit-making purpose which represents the most productive type of use for which the property is suitable … Neither the original cost to the Government nor the characteristics or readiness to buy of any particular prospective purchaser shall be taken into account.”

The United States Government gave assurances to the Chilean Embassy that Regulation No. 10, to which objection was raised, was merely permissive and not mandatory, and that the War Assets Administration intended to adhere strictly to Special Order No. 19 for the fixation of fair value of the surplus ammonia plants.

The Acting Secretary of State is confident that the surplus ammonia plants already disposed of have been transferred in accordance with Special Order No. 19 and that fair value has been obtained. He is likewise confident that the transfer of the Lake Charles plant, which is the main subject of the Chilean Embassy’s memorandum, is now being carried out in accordance with Special Order No. 19 and that fair value is being received. In the case of the Lake Charles plant, the terms finally granted are, in the opinion of this Government, the maximum that could be obtained. All of the surplus ammonia plants, including Lake Charles, were widely advertised for a period of many months. Prospective buyers or lessees had full opportunity to submit bids. It may not be denied, as the Chilean Embassy’s memorandum contends, that the minimum rental offered by du Pont was higher than that offered by the other bidders, but this Government is of the opinion that the actual rental, as distinguished from the minimum rental, which would have been received under the du Pont formula would have been less than that which is expected under the terms of the lease that is being concluded.

The Chilean Government states in its memorandum referred to previously that, in its judgment, the price of the Lake Charles plant should not be fixed below $12,000,000. In this connection, it is significant that the Anglo-Chilean Nitrate Corporation of New York City was invited by telegram of July 1, 1946 to submit a bid on the plant to the War Assets Administration, but no bid was submitted. The Department of State has been informed that if the Anglo-Chilean Nitrate Corporation or any other company had submitted a bid to purchase, it would have received careful consideration by the War Assets Administration. The Government of Chile may be assured that if such a bid had been submitted by the Anglo-Chilean Nitrate Corporation, that organization might have been able to purchase the plant at a figure considerably less than the $12,000,000 which the Chilean Government now suggests as fair value.

This Government does not believe that the reduced rentals during the first three years of operation of the Lake Charles plant will concurrently have any adverse effect upon the Chilean nitrate industry. All available information supports the conclusion that there will be a market at excellent prices for all the fertilizer which is likely to be produced during this period. Moreover, reduced rentals for the first three years are justifiable in consideration of the fact that it will require some time to construct the necessary facilities for the production of synthetic nitrogenous fertilizer and before production of a new company in the fertilizer industry may be expected to reach a normal level of efficiency. It is reasonably certain that insistence upon rentals at a higher figure for this period would have dissuaded prospective purchasers or lessees from submitting bids and would have required the ultimate disposal of the plant upon terms less favorable to the Government than those now being secured.

The figures set forth in the Chilean Embassy’s memorandum of the quantity of American nitrates which may be exported from the surplus ammonia plants are considered inordinately high. Only two plants, Dixie and Lake Charles, are located where export shipment would be economically feasible. After the present fertilizer shortage has been satisfied, Dixie is expected to produce mainly industrial nitrogenous products and methanol. Lake Charles will probably continue to meet a part of the domestic fertilizer needs.

This Government made a commitment at Mexico City which, in substance, required consultation with the Chilean Government if the terms of transfer of the plants were such as to constitute a subsidy or other unfair competition. Subsequently, assurances were conveyed to the Chilean Embassy that the War Assets Administration would exercise every precaution with a view to obtaining maximum prices for these plants in accordance with the definition of fair value set forth in Special Order No. 19, and that particular care would be taken to see that the disposal of the plants is carried out in conformity with the understanding reached at Mexico City. Finally, the Chilean Government was recently assured that this Government was prepared to consult regarding the terms of transfer of the Lake Charles plant prior to disposal, and is willing to consult hereafter with respect to the plants not yet disposed of.

In recent consultations between the Chilean Ambassador and the then Assistant Secretary of State, it was agreed that consideration would be limited to questions regarding subsidization or unfair competition. The representatives of the Chilean Government have had an opportunity to examine fully the terms of disposal of the Lake Charles plant and of the four others already transferred. The Government of the United States, for the reasons already stated herein, is of the opinion that the terms of disposal of the Lake Charles plant do not constitute a subsidy or provide unfair competition to the Chilean nitrate industry. Furthermore, it is convinced that the transaction has been consummated in harmony with the understanding reached at Mexico City. In the circumstances, the Acting Secretary of State does not feel that sufficient grounds exist for requesting the further postponement of the disposal of the Lake Charles plant and, consequently, the War Assets Administration has been so informed.

Washington, September 10, 1946.

61. Not printed.