Foreign Relations of the United States, 1969–1976, Volume XXVII, Iran; Iraq, 1973–1976

187. Memorandum From Clinton E. Granger of the National Security Council Staff to the President’s Assistant for National Security Affairs (Scowcroft)¹

Washington, September 3, 1976.

SUBJECT

• Pricing of F–16s for Iran

You will have seen the cable (attached)² indicating that the Shah is upset at the price of $3.4 billion for 160 F–16s reported in the press after Secretary Kissinger’s testimony on the Hill.³ The Shah warns that at this price the entire deal will fall through for lack of funds. As the Ambassador points out in a related cable from Iran,⁴ the Iranians were quoted a package price of $2.14 billion by General Dynamics for all 300 aircraft; moreover, they understood that the survey team which is coming to Iran will quote a price of $3.0 billion. What the Iranians do not yet know, is that the actual price used in the formal DOD notification to the Hill was $3.8 billion, $400 million more than the price at which they have already balked.

We have been trying to determine how this muddle occurred and have come up with the following:

1. The price of $2.14 million was used by General Dynamics in the context of the oil barter negotiations. It did not take into account start-up costs, inflation or support/infrastructure costs, and made what General Dynamics now apparently admits were erroneous assumptions about spares training.

2. The price of $3.006 billion was the price used by General Fish in his briefings on the Hill. It represents the price of the hardware exclusive of the usual margin provided for unanticipated expenses, options desired by the Iranians, and added expenses due to Iranian operational variables.

3. DOD initially added $400 million to account for the variables mentioned above, giving the pre-notification price of $3.4 billion which has been picked up by the Shah, however . . .

4. Now DOD has revised that estimate upward to approximately $800 million, giving the final price of $3.866 billion used in the formal notification to the Hill.⁵

DOD is continuing to review the $3.866 billion figure, and has asked General Dynamics to provide details of the $2.14 billion price tag they gave the Shah. There appears to be little hope, however, that the price of the package will decline, or that a confrontation with the Shah can be avoided.

We plan to get State and Defense representatives here for a post-mortem, hopefully to determine how we can avoid this kind of thing in the future.⁶

1. Source: Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran (12). Confidential. Sent for information. Scowcroft wrote on the first page of the memorandum: “Incredible! And unacceptable.”
2. Attached but not printed is telegram 8940 from Tehran, September 3, which transmitted a message from the Shah to Secretary Kissinger that if the price for 160 F–16s was $3.4 billion, then Iran would be unable to afford the 300 F–16s it intended to purchase, the deal would fall through, and “the enemies of US–Iran relationships will have won a victory, or at least they will claim that they have.” In telegram 8646 from Tehran, August 26, Helms notified Kissinger that although the Shah hoped an oil-for-arms barter could be worked out with General Dynamics, he did not rule out a purchase of the F–16s through other means, and intended to proceed with the sale in any case. (National Archives, RG 59, Central Foreign Policy Files, D760334–0959)
3. The Secretary testified before the Senate Foreign Relations Committee in Executive Session on August 30 and 31, supporting the sale to Iran of 160 F–16s at a price of $3.4 billion, according to a New York Times article, “US Influence on Iran: Gigantic and Diverse,” August 30. The Department sent a brief summary of Kissinger’s and Fish’s testimony in telegram 216316 to Tehran, September 1. (National Archives RG 59, Central Foreign Policy Files, D760331–1230)
4. Attached but not printed is telegram 8910 from Tehran, September 2, in which Helms expressed perplexity at the divergence between the price quoted in the Secretary’s testimony and the initial agreement between Iran and General Dynamics of $2.14 billion for 300 planes.
5. Scowcroft wrote in the margin: “This is over double the GD quoted price. How can this be?”
6. An Air Force team led by General Eugene M. Poe visited Iran September 4–7 to mitigate the impact of the F–16 price hike, according to telegram 9026 from Tehran, September 7. (National Archives, RG 59, Central Foreign Policy Files, D760337–0791) Granger reported to Scowcroft on the largely successful outcome of the team’s meetings in Iran, in which Poe pointed out that General Dynamics had quoted a fly-away price that provided only 3 months of follow-on spares instead of the 26 months’ supply the Iranians asked for, and included no provision for necessary design changes or inflation, which alone added $1.3 billion to the Department of Defense price. (Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran (12))