Foreign Relations of the United States, 1958–1960, Indonesia, Volume XVII

186. Memorandum From the Assistant Secretary of State for Far Eastern Affairs (Robertson) to the Under Secretary of State for Economic Affairs (Dillon)⁰

Washington, March 5, 1959.

SUBJECT

• Ex-Im Bank Financing of the Sale of Three Lockheed Electra Aircraft to Indonesia

Discussion:

On March 15, 1957 the Indonesian Government signed a contract with Lockheed for the furnishing of three Lockheed Electra commercial aircraft, spare parts, tools, test equipment, etc., at a total cost of about $12 million to be delivered to Garuda International Airlines in late 1960. According to the terms of the contract, Indonesia would deposit about $1.9 million (of which at least $1.2 million has already been paid) and Lockheed would finance a like amount. On April 25, 1957 Lockheed applied for exporter type credit financing by the Export-Import Bank of the balance of approximately $8.2 million. On June 27, 1957 the National Advisory Council (NAC Document #88)¹ notified the Bank that the NAC offered no objection to consideration by the Bank of $15 million financing for the Electras, as well as for three Convair 440s. (Financing of the latter was subsequently approved by the Bank.) During the regional rebellion in the latter part of 1957 and the early months of 1958, the Department adopted the policy that no additional assistance for the Indonesian Government would be considered. The Bank followed this policy as regards pending Indonesian loan applications, and in response to queries received from the Indonesian Government, the Bank indicated that consideration of the Electra loan was being held up for “technical reasons”—i.e. the lack of an agreement to provide technical services to Garuda. On August 1, 1958 the Secretary approved a broad range of future U.S. actions vis-à-vis Indonesia, including the withdrawing of our objections on political grounds to an Ex-Im Bank loan for the Electras. The Bank was notified of this decision. Another series of U.S. actions regarding Indonesia, approved by the Secretary on November 5, 1958, included informing the Ex-Im Bank that for political reasons we wished the Bank to proceed with consideration of projects in Indonesia meeting their criteria, noting the Electra loan application as one of several under consideration. Again the Bank was informed of this decision. Meanwhile, on October 21, 1958, Garuda signed a technical assistance contract with Lockheed thus removing one of the Bank’s major objections to the granting of the loan. On December 30, 1958, however, the Bank informed the Indonesian Government that the Electra loan application had been turned down.

The Bank’s decision was made primarily on economic grounds. Mr. Waugh pointed out on December 31, 1958 (Tab A)² that from the point of view of banking and economics, it was not a good loan, that the Bank had unpaid commitments of over $86 million in Indonesia and pending applications for new loans totaling over $70 million. It should be noted, however, that Indonesia has an unblemished record in servicing these outstanding commitments to the Bank. Some confusion also arose over the priority which the Indonesians attached to the Electra loan in relation to possible loans for other pending projects and this may have contributed to the Bank’s negative decision. In August and again in November 1958 the Indonesian Ambassador in Washington indicated to the Bank that two or more of the other pending projects were of higher priority than the Electras which was apparently contrary to the position of the Indonesian Government that the Electra loan be pressed as foremost in importance. This matter was clarified around the end of the year with the Electras definitely accorded No. 1 priority by the Indonesians. However, the Bank apparently still felt that the financing of some of the other pending projects—e.g. dredges, fertilizer plant, etc.—would in the long run be more beneficial to the Indonesian economy. A second major reason for the Bank’s turndown was a recommendation received by the Air Coordinating Committee that the Bank finance the sale of used piston planes which are about to be replaced by jets. The Bank has indicated its willingness to Indonesia to consider the financing of reconditioned DC–6s and 7s up to $3 million.

The Indonesian Government has expressed great disappointment at the Bank’s decision and has asked that it be urgently reconsidered. While the contract with Lockheed has expired, negotiations are currently proceeding between the Indonesian Government and Lockheed in Djakarta whereby a new contract will be signed or the old one extended to keep this transaction open for another 30–90 days. The Indonesian Parliament has not yet been informed of the Bank’s turndown which is not yet public knowledge. President Sukarno, himself, has taken a strong personal interest in the loan for the Electras. Regarding DC–6s and 7s, he has told our Ambassador that Indonesia does not want second-hand aircraft. The Bank’s turndown, if definitive, will be bound to have an undesirable effect on U.S.-Indonesian relations, but particularly on our relations with Sukarno. This comes at a critical juncture when there is increasing evidence of the President’s casting off of Communist Party (PKI) support and an expected reformulation of the Government’s structure which could lead to a further eclipse of the PKI. A denial of this loan would likely hand the PKI a strong propaganda weapon by which the U.S. would be attacked for lack of good faith in prolonging negotiations for almost two years, in tying up a substantial amount of scarce foreign exchange thus preventing Indonesia from acquiring such aircraft elsewhere and then turning its back at the last moment. The PKI has already made the Electra loan an issue in Parliament several months ago and the Party would not lose another opportunity to embarrass the Government and press for purchase of these aircraft from the bloc. The prestige of the Government is at stake since it has repeatedly encouraged Parliament to believe the Electra loan would ultimately be received.

I know you are very much aware of the massive assistance drive which the bloc has been carrying out in Indonesia over the past year. Credits in the economic and military fields offered by the bloc and accepted by Indonesia now stand at about $375 million ($200 million economic and $175 million military), most of these concentrated in the period since January 1, 1958. These credits already exceed total U.S. economic and military assistance of $308 million ($282 million economic and $26 million military) in the form of grants, loans and surplus agricultural commodities extended to Indonesia over the past nine years. We do not wish nor can we expect to compete dollar for dollar with bloc aid to the non-aligned countries. At the same time we will have to meet this major Sino-Soviet challenge with all the resources at our disposal if we are to retain our influence in these key areas, selecting our projects carefully so as to achieve the maximum possible impact. The Electra loan is, I believe, such a project.

It should be noted here that the Indonesian Government as well as our Ambassador in Djakarta do not share the Bank’s views as to the economic soundness of this loan. While the Indonesian arguments in this regard are not completely convincing, I support the Ambassador’s recommendation that if there is doubt as to the loan’s economic soundness, this doubt be resolved in Indonesia’s favor on political grounds. Failure to do so could mean a reversal in the hard-won gains we have made in Indonesia since last May.

Recommendation:

That you call Mr. Waugh and urge, that on the basis of overriding political factors, the Bank approve the Electra loan.³

0. Source: Department of State, Central Files, 756D.5622/3–559. Confidential. Drafted by Wenzel and cleared with SPA and FE.
1. Not printed. (Ibid., NAC Files: Lot 60 D 137, Documents)
2. No tabs are attached to the source text. Reference is to a meeting held on December 31 between Waugh and Francis Jarvis and Mary Olmsted of SPA. (Memorandum of conversation, December 31; ibid., Central Files, 756D.5622/3–559) See Supplement.
3. A handwritten note on the source text indicates that Dillon talked with Waugh on March 19 and the Export-Import Bank subsequently approved the Electra loan.