478. Memorandum From the Under Secretary of State for Economic Affairs (Mann) to President Johnson 1

AID TO PERU AND THE IPC PROBLEM

The La Brea y Parinas oil field in Peru (which is only part of the IPC’s holdings) was the subject of a dispute between the United Kingdom and Peru in the early part of this century. In 1918 the Peruvian Congress authorized its Foreign Minister to arbitrate. An arbitration award was handed down in 1922 which established a tax regime for this particular oil field. In 1924 the IPC, now but not then a subsidiary of Standard Oil of New Jersey, bought this oil field from the British owners. As far as I know, it is undisputed that the American company bought in good faith reliance on the award.

The Miro Quesada family, which owns the largest Lima newspaper, El Comercio, has conducted for many years a newspaper campaign for nationalization of the entire oil industry in Peru. In addition, this newspaper asserts that the award was not valid and hence, under its tax calculations, IPC owes Peru more than the approximately $70 million dollars at which the company values its assets in La Brea y Parinas.

Like Illia in Argentina, Belaunde, who depended on El Comercio’s support in his campaign, promised to settle the IPC problem. In his inaugural address on July 28, 1963 Belaunde stated that he would settle it within 90 days.

In August 1963 Mr. Moscoso went to Lima and discussed with Belaunde the possibility of announcing a large aid package in order to provide a better atmosphere in Peru for a settlement. Active negotiations between Peru and IPC were going on at that time and when it appeared, near the end of the 90-day period, that a solution was imminent, our Ambassador was instructed to offer a $64 million dollar aid package to Belaunde. Two days after this offer was officially made, Belaunde broke off negotiations with the company and submitted two options to the Peruvian Congress. One was nationalization. The other was a contract under which, according to the company, IPC would have [Page 1002]been obliged to pay more than 100% of its net earnings and which it therefore considered confiscatory.

The Peruvian Congress did not follow either option recommended by Belaunde. Instead, it passed two other laws; one nullifying the 1918 Act which had authorized the arbitration and the other declaring the arbitration award null and void.

At this point, in the first week of November 1963, it was decided not to go ahead with the $64 million dollar aid package previously promised with the aim of encouraging the Peruvian government to resume negotiations with IPC. The Peruvian government was not officially informed of this decision.

In February 1964 the Peruvian Congress passed another law, in essence authorizing the President to negotiate with IPC and to submit the negotiated solution to Congress for approval. This was part of the “buck-passing” between Belaunde and the opposition-controlled Congress which has recently complicated the problem.

In 1964 and 1965 I and various Department officers talked with Belaunde, urging him to reach agreement with the company or, in the alternative, to agree to submit the legal issue of the validity of the award, which underlies the problem, to the International Court or to arbitration. Belaunde says in essence that domestic political pressures are too great to permit agreement on what the company regards as fair terms. He refuses to go to the World Court or to arbitration because he knows he will almost certainly lose.

He talks, instead, of the dangers of communism if we do not increase aid levels. He has made several public statements criticizing the sluggish AID procedures; and his Ambassador to Washington (and his brother-in-law) and others conducted a campaign consisting of complaints about our alleged attempts to influence internal Peruvian policy. Meanwhile, El Comercio has stepped up its attacks against IPC. Its line was to urge the President to nationalize, arguing that the U.S. would not react.

Certain elements in our Congress and press have spoken about my “hard line” policy and about the big U.S. jumping on poor, defenseless, democratic Peru in order to increase the profits of oil companies. These sources do not mention the United States’ stake in opposing widespread disregard of contracts in the contract society in which we live. Nor do they mention the importance to the success of the Alliance of the private sector, whose participation on an adequate scale depends on observance of contracts.

In spite of these criticisms, I believe the policy has been successful in achieving its principal objective, i.e., deterring confiscatory action by Belaunde.

The tactic has been not to cut off, but to cut back, aid without specifically admitting to Belaunde that we were doing so. Our premise [Page 1003]was that our relations with Peru would in the long run be better if we deterred confiscation than if Belaunde were lulled into a sense of security leading to confiscatory action which would then oblige us to apply rigidly the Hickenlooper-Adair Amendment. During calendar year 1964 we authorized road loans of $39 million dollars through AID and Eximbank; agricultural credit of $8 million dollars, and a labor housing cooperative loan of $6 million dollars. These were made on Ambassador Pastor’s oral assurances to me on three separate occasions that the IPC case would soon be settled.

In 1965 we made a $2 million dollar project loan for an agricultural university and continued our Peace Corps, technical assistance and military aid programs which total about $26 million dollars a year. In addition, Peru continued to receive substantial loans from the Inter-American Bank and other international institutions. In 1966 the Inter-American Bank made a $20 million dollar soft loan which, like its loans in 1965, were almost wholly from U.S. funds.

During 1964 the company, incidentally, offered to give up its title to the oil and gas in place and to accept in lieu thereof an operating contract to terminate in twenty-five years. In September 1964 the company thought it had reached an understanding, which had been reduced to writing and orally agreed upon by two representatives of Belaunde, only to have it rejected by the President a few months later who claimed throughout that he was under irresistible domestic pressures. One principal issue remaining is whether the total “tax take” of Peru will be 85% or a smaller figure in the range of 65–75% which the company wants. The company considers this precedent important to its efforts to hold the present world tax split. They tell me they would prefer nationalization and loss of this investment to agreeing to a bad tax split precedent.

Mr. Gordon proposed the recent Rostow Mission to Peru. As near as I can make out, Mr. Belaunde has committed himself not to “confiscate” the IPC property during his term of office. In his letter to you, President Belaunde states:

“The misinformed and irresponsible statements made in recent years by certain organs of the foreign press about the intended confiscation of foreign companies established in this country are completely groundless and are disproven by facts in a nation whose acts conform faithfully to its constitution and laws.”

The question is whether, despite the undertaking not to confiscate, Belaunde may take other action such as increasing taxes which might be tantamount to confiscation. On this I understand we have Belaunde’s oral assurances to Rostow and Jones that he will take no action which will further impair the company’s position. The majority opinion here is that Belaunde will probably not take any precipitate action during his term of office against the company but will leave the [Page 1004]problem for his successor. Belaunde is not a decisive person and if he is not misled into thinking that the United States will continue a large aid program regardless of his actions, I think we could afford to take this chance. Belaunde is a weak man, but he has his good points. I concurred in the Rostow Mission and in view of Mr. Gordon’s feeling on the matter, I concur in the following recommendations:2

1.

We make additional project loans to Peru as follows:

$9 million dollars agricultural credit loan, part of which would be funded with P.L. 480 local currency; $2 million dollar loan for community development (Cooperacion Popular); $3 million dollars for feasibility studies of new projects; $1½ million dollars for civic action training and $4 million for road construction.

2.

That no additional project or program loans be made from AID funds without your approval until we have negotiated with Peru a realistic self-help program comparable to those already negotiated with Brazil, Chile and Colombia. The self-help negotiations can best be conducted under the leadership of the World Bank, which is interested in playing this role, and with the cooperation of the International Monetary Fund.

Inflation in Peru was at a 15% rate in 1965 as compared with 10% in 1964 and 6% in prior years. The inflation is in part due to budgetary deficits and the inadequacy of Belaunde’s agricultural policies.

3.
Belaunde should be told orally, when the project loans are signed, that self-help is essential; that we will be obliged under the HickenlooperAdair Amendment to stop disbursements on all outstanding loans if confiscatory action is taken; that our ability to extend large scale loans on soft, concessional terms is limited both by our own balance of payments and budgetary problems and by the relatively strong position of the Peruvian economy; and that we expect Peru to be more forthcoming and consistent in dealing with the threat of communism to the hemisphere.

Finally, I should add that our tactics in dealing with Belaunde have been influenced by large U.S. private investments in Peru, particularly in mining.

Thomas C. Mann 3
  1. Source: National Archives and Records Administration, RG 59, Central Files 1964–66, PET 6 PERU. Confidential; Nodis. In an attached transmittal note to the President, Mann explained that the IPC problem was a “case study on the difficulties of (a) using aid as a lever to further the national interests and (b), without going into detail, getting the Inter-American Bank to play an effective role in promoting self-help.” The memorandum was forwarded under the cover of a February 21 memorandum from Komer to the President. (Johnson Library, White House Central Files, Confidential File, Co 234)
  2. According to a letter from Barnebey to Jones, March 4, the White House informed the Department on February 26 that the President approved these recommendations. Barnebey remarked: “In view of all the current interest in assistance to Peru on the 5th, 6th, and 7th floors of this building, not to exclude that of the White House, we should strike while the iron is hot.” (National Archives and Records Administration, RG 59, Lima Embassy Files, 1966: Lot 69 F 191, PER Jones)
  3. Printed from a copy that bears this typed signature.