Foreign Relations of the United States, 1955–1957, Arab-Israeli Dispute, 1955, Volume XIV

348. Telegram From the Embassy in the United Kingdom to the Department of State¹

London,October 20, 1955—9 p.m.

1603. Regarding Embtel 1602,² following is text Macmillan’s secret message to Makins today:

“I am much concerned about the need for prompt action to forestall any move by the Russians to undertake the construction and financing of the High Dam. Coming on top of the recent Czech sales of arms to Egypt, this would be a serious blow to Western prestige and influence in the Middle East and might mean that the Russians would come to exercise a preponderating influence politically and economically in what is to us, both strategically and economically, a vital area.

2. As you know, negotiations have been going on for about a year between the Egyptian Government and an Anglo-French-German consortium. Their object has been to conclude a contract for the building of the Dam and the Associated Hydro-Electric Works. The total cost of this is estimated to be at least pounds 250 million, but the foreign exchange cost covering the work to be done by the consortium is estimated at pounds 100–140 million. This would be divided between the three participants and the United Kingdom firms (English Electric and others) would therefore be contracting for work costing pounds 33–46 million. A schedule of payments has been worked out covering the first 10 years of the project which provides for a maximum credit element of pounds 15 million, to be repaid within 4 years from the completion of the work. The companies concerned are willing to put up credit for this amount provided that Her Majesty’s Government, through the Export Credit Guarantee Department, will guarantee repayment.

3. The report which has recently been presented by the International Bank Mission shows that the project is technically and economically sound. It expresses the view that Egypt should from her own resources be able to finance all but about half of the foreign exchange cost, provided that she exercises careful fiscal and economic policies and tailors the rest of her development programme severely. The implication of this is that something of the order of pounds 50–70 million would have to be found from outside Egypt.

4. Apparently the Egyptians have not yet actually asked for an International Bank loan for the project. As you know, the President of the International Bank³ has made it clear that if the Bank were to make a loan, it would only be on the basis that the project was put out to international tender and was fully supervised by the International Bank from the beginning.

5. I understand that the Egyptian Government will shortly send representatives to Washington to carry on technical discussions about the High Dam project, so that further progress can be made when the Egyptian Minister of Finance visits the U.S.A. in the middle of November.

6. I see two main difficulties in relying on the participation of the International Bank in the project. The first is the delay. The Bank will expect to follow their usual thorough and careful methods and will wish to put the project out to international tender. All this will take time, and in the meantime the Russians may get in ahead of us. The second is that if international tenders are called for it will not be possible to exclude the Russians or their satellites from the bidding. I attach more importance to the first. We may perhaps be able to rely on Mr.Black to find a way round the second.

7. I have considered whether as an alternative the consortium could not go ahead and endeavor to conclude the contract without waiting for the conclusion of negotiations with the International Bank. The difficulties here are, first the risk that to do so might prejudice our relations with the Bank in the future, secondly the serious financial burden we should have to shoulder. The outlook for Egypt’s balance of payments is precarious with cotton prices at their present level. We estimate that after taking account of all Egypt’s foreign exchange resources (including her sterling balances) and setting against them her need for foreign exchange over the next 10 years (including the cost of the Dam) there would be a shortfall of at least pounds 50 million. But this assumes that Egypt manages her economic policy prudently and sensibly and that she is willing to cut down the rest of her development programme. It also assumes that she spends say pounds 50 million on arms purchases, an amount which appears likely to be substantially exceeded.

8. There is a great risk therefore that Egypt might default on a substantial part of the payment due under the contract. It may be argued that in practice Her Majesty’s Government would not be at risk for as much as pounds 33–46 million, since if default occurred some part of the payments would have been made already and not all the expenditure would have been incurred by the contractors. But we should then have to decide whether to let the whole project come to grief and, if not, what we should do if the French and German Governments would not put up any more money.

9. Having regard to all the other overseas commitments, present and prospective, with which we are faced, I am bound to agree with the Chancellor⁴ that in our present balance of payments situation, it would be a heavy risk for us to take to underwrite our share of the consortium’s risks unless there is a prospect of some further assistance for Egypt from some other quarter.

10. If the International Bank must be ruled out on grounds of urgency, can we look to the prospects of further economic aid for Egypt from the American Government? And if so, would the administration be prepared to see the consortium go ahead and conclude the contract as quickly as possible, on the ground that only by that means have we a chance of forestalling the Russians. Prime Minister and Cabinet feel that there is so much at stake in this order, that they very much hope this may be possible. They are also conscious that if there is delay consequences would be incalculable.

11. Alternatively, is there any hope that because of the overriding need to conclude a contract urgently the Bank would agree to participate even if the consortium had gone ahead and concluded a contract with the Egyptians? It looks as if Mr.Black would be hard to convince that this was necessary. Moreover, we have ourselves been foremost in pressing for the principle of international tender, and there would be great risks for us in proposing that it should be ignored in this instance. Nevertheless, if the United States administration agree with us about the extreme importance of this case, they might be prepared to support us in urging Mr.Black that it should be treated as being altogether exceptional.

12. I should therefore like you to discuss this whole question at the highest possible level as soon as possible, making it clear that I shall wish to raise the matter with Mr.Dulles in Paris next week. Our object is, as you will see, first to find out what prospects there are of further American economic aid to Egypt on a scale which would give us reasonable security that they would not default on their payments under the contract. Secondly, to ensure that if the consortium went ahead they would do so with sympathy and support not only of the United States administration but of Mr.Black and the International Bank, and finally to ascertain whether there would be any possibility of the International Bank participating by some method which would not involve too much delay”.

Aldrich

1. Source: Department of State, Central Files, 645W.74322/10–2055. Secret;Niact. Received at 9:46 p.m. Repeated to Cairo and Paris.
2. Supra.
3. Eugene R. Black.
4. Chancellor of the Exchequer Richard A. Butler.