277. Memorandum From the President’s Special Assistant (Rostow) to President Johnson 1

SUBJECT

  • Helicopters for Malaysia

As you know, the Malaysians are interested in buying helicopters, and they want to buy them from us. This was the one item of serious business raised with you by the Tunku during your visit to Kuala Lumpur. You promised to look into the matter on your return to Washington.2

The deal would involve 15 helicopters. The Malaysians need them for their civic action and counter-guerrilla activities. The amount of the contract would be about $17.2 million, which would help in our balance of payments problem. The only competitors are an American company (Sikorsky) and a French company.

The attached memo from State (Katzenbach),3 in which Defense concurs, recommends that we offer the Malaysians terms of 5 1/2% interest and 7 years repayment. It suggests that we inform the Malaysians in a letter to Deputy Prime Minister Razak from Bill Bundy, and that you not communicate directly with the Tunku on this matter.

I find the memorandum from State inadequate on several grounds.

  • First, it does not offer you the options that in fact exist for handling this matter.
  • Second, it is misleading in implying (paragraph c, page 2) that it would require $11 million to cover the difference between an offer of 5 1/2% and 3% on interest rates.
  • Third, it does not offer a judgement as to how the Malaysians may react except to say “we may have some protest and bad feeling.”
  • Fourth, it does not offer a judgement on the likelihood of the Malaysians turning to the French for this contract if we offer the suggested terms.

I have asked Bill Jorden to staff this out further. He has done so, with State, Defense and the Bureau of the Budget.

[Page 615]

The picture is as follows:

On options:

Guarantee of EXIM loan plus needed MAP credit would cost out as follows (all figures approximate):

(With a 15% down payment)

  • 5–1/2% for 7 years—$3.8 million
  • 4% for 7 years—$6.7 million
  • 3% for 10 years—$10.4 million

(With a 10% down payment)

  • 5–1/2% for 7 years—$3.9 million
  • 4% for 7 years—$6.9 million
  • 3% for 10 years—$11 million

Funding for your preferred option can come from:

(1)
Adjustments in the credit sales program (assuming not all of the programmed sales materialize);
(2)
selling at harder terms to some countries for which concessional terms are now planned;
(3)
the contingency reserve (which at last report was about $18 million).

On Malaysian reaction:

There is no doubt in Ambassador Bell’s reporting that the offer proposed by State and Defense will come as a severe disappointment to the Tunku and to his government. It may be “without any warrant from us”—as State says—that the Malaysians have built up their hopes for something better than 5 1/2%. But the fact is that those hopes exist.

Two years ago, we offered these same terms on Cessna aircraft. We lost out to the Canadians—and there were demonstrations in the street denouncing the U.S. as “uncle skinflint.”

The Malaysians have come along well in backing our policy on Viet-Nam. They seem ready to do somewhat better in the future. I would not like to see that trend reversed without good cause.

Nor would I like to see the very positive effects of your visit to KL dissipated needlessly.

On probable outcome:

The Malaysians prefer our helicopters. But the French apparently have offered 3% for 10 years. Sikorsky representative thinks the Malaysians will go to the French if we offer 5 1/2% for 7 years. Ambassador Bell agrees.

On the problem of precedent:

State and Defense are concerned that a better offer than that proposed will encourage other military purchasers to expect concessional terms. They are also worried that the Malaysians would expect us to [Page 616]supplant the British military role which, as the memo states, “is the last thing we wish to do.”

I am sympathetic with both these concerns. However, we have made concessional sales in the past, in a variety of countries, without those concessions automatically becoming the basis for future deals. We have, in fact, made military sales to the Malaysians themselves (in 1965) at 3% for 10 years. I see no reason why our position cannot be explained to the Tunku and to others (if the question arises). This is one of the functions of diplomats—to make complicated and sensitive matters clear to others. I would explain it as a very extraordinary case holding no promises for the future, and as your response to a quite special appeal from the Tunku.

Recommendation:

I recommend that you consider favorably an offer of 4% for 7 years, with a 10% down payment. Our best estimate is that we can get the deal on these terms, although they are not as good as the French. But, in any case, you would have clearly responded to the Tunku’s appeal. You may want to tell State and Defense that this is your inclination but that you will consider any strong and overriding objections. Unless there are such major objections, you propose to move ahead on this line.

Walt

Approve 5–1/2% for 7 years

Approve 4% for 7 years

Approve 4% for 7 years but check whether State and Defense have major objections4

Approve 3% for 10 years

See me

P.S. I haven’t listed the options on a 15% down payment here; they are in the body of the memorandum, if you want them.

W
  1. Source: Johnson Library, National Security File, Country File, Malaysia, Vol. IV, Memos, 1965–1968. Secret. A note on the memorandum indicates that the President saw it.
  2. According to telegram 1895 from Kuala Lumpur, November 2, the Tunku raised the issue of helicopters with President Johnson privately during Johnson’s visit to Malaysia. (National Archives and Records Administration, RG 59, Central Files 1964–66, DEF 12–5 MALAYSIA)
  3. Not printed; dated December 6.
  4. The President checked this option.