The Ambassador in Bolivia ( Flack ) to the Secretary of State

No. 1396

Sir: As a result of the extended criticisms leveled against the Bolivian Development Corporation’s various projects and the resulting Senate Investigation concerning BDC’s activities in general, the need for restudying and revising the McGraw–Warren contract for construction of the Cochabamba–Santa Cruz highway was particularly pointed up and I have the honor to report that the representatives of the Export-Import Bank, of the Public Roads Administration, of Warren Brothers, of F. H. McGraw Company and of McGraw–Warren, who were requested to come to Bolivia to aid in the attempt to resolve the problems in which they were concerned, have arrived in La Paz, participated in a series of meetings with the Corporation, and have left the country convinced that the basis for general agreement regarding the various differences has been established.

. . . . . . .

It was recommended that a new contract be drawn up containing the following points:

Fixed overall fee of $33,000 per kilometer.
Total cost under the contract to be 13.9 million dollars including engineering, construction, purchasing costs and contractor’s fees.
A penalty is provided if the contractor’s actual costs exceed by five percent the fixed fee. The penalty is to be 25% of the cost above the tolerance but not greater than one-third of the contractor’s fee.
All engineering work and all purchases are to be made by the contractor.
The purchase fee will be a flat $1,500 per month instead of the former 3% commission.
The engineering fee will be $700,000.
A bonus will be paid the contractor if total costs are held 5% below the fixed amount.
BDC will assign an auditor to keep it informed of actual monthly costs.
If from audits it is apparent that the contractor cannot comply with the above terms, the contract can be cancelled.
The contract will be submitted for Export-Import Bank approval.
Through incorporation in the new contract of Public Roads Administration (PRA) specifications for the highway and periodic Board inspections the Corporation can be assured that there will be no sacrifice in quality.

The Corporation had decided to go ahead with its discussions of the contract with the contractors in the face of the Senate investigation of [Page 348] BDC and the Chamber of Deputies investigation specifically of the highway contract. It was generally felt that in view of the fact that the President had appointed a new Board and had placed his confidence in that Board, that, therefore, the recommendations of the Commission, when made known, would be submitted for the Corporation’s consideration, but that a specific directive would not be issued binding the Corporation to do certain things which would necessitate the rehashing of its agreement with the contractor. On Sunday, May 25th, the Committee’s preliminary report appeared in the press and summarized the details of the investigation that it had made. A copy of this report as it appeared in the press is attached herewith.40 In its conclusion the report states that work up to the present time on the Cochabamba–Santa Cruz highway had been performed on a basis of a “project” rather than a contract which could be abandoned, if necessary, or modified on the basis of experience; that in drawing up a new contract the Corporation bear in mind its experience with the other contracting work on the highway, at much lower prices, which had already been done; and that the Corporation ought to calculate the excess costs so far under the contract, considering the other construction on the road, for the purpose of accurately gauging remaining costs and their financing.

The Corporation, however, had no intention of waiting for Congressional action to come to it. It therefore requested a meeting with the Chamber of Deputies Commission investigating the McGraw-Warren contract, and in the session with that Commission, yesterday, announced what had been its conviction in the whole problem and that it had recommended the signing of a new contract. The Chamber of Deputies Commission, which had announced the results of its investigation yesterday, a press clipping of which is attached, said that since the Senate Investigating Commission as well as its own had practically denounced the highway contract, such action, in its estimation, had practically the significance of law, and that the contract ought to be rescinded. The President of BDC then informed the Commission that the opinion of the Corporation was contrary to its views in the matter, stating that “we cannot go against our convictions,” and adding “I await the arrival of the President of the Republic to resolve this problem.”

The President of BDC then went on to point out the reasons which guided the Corporation to take the decision it has taken. A copy of a press clipping from Ultima Hora of May 27, concerning the meeting of the Corporation and the Chamber of Deputies Committee is attached.40

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It would appear that the disadvantages of rescinding the highway contract outweigh the advantages, particularly in view of the proposed changes. It is therefore believed that General Bilbao, President of BDC, will be able to point this up to the President of the Republic and obtain his approval for continuing the work with McGraw–Warren under a new contract embodying the above modifications.

Respectfully yours,

For the Ambassador:
John A. E. Orloski

Commercial Attaché
  1. Not reprinted.
  2. Not reprinted.