367. Briefing Memorandum From the Assistant Secretary of State for Economic and Business Affairs (Enders) and the Assistant Secretary of State for Inter-American Affairs (Kubisch) to Deputy Secretary of State Ingersoll 1
Bauxite Actions and Strategies in Guyana
The Problem
In mid-July the Socialist-oriented Government of Guyana announced that it would (1) nationalize Reynolds’s $15–20 million bauxite facility by year end, and (2) impose a new Jamaican-style levy on bauxite mined, perhaps retroactive to the first of the year. Negotiations on the levy are set to begin August 6. An added twist is that last month the GOG presented Reynolds with a $2.7 million income tax bill, most of which Reynolds thinks is unwarranted. Reynolds is paying the bill, and girding for the August levy negotiations and for nationalization later this year.
On Thursday afternoon, July 25, OPIC’s President Marshall Mays and EB and ARA officers are meeting with Richard Reynolds, President of Reynolds Aluminum and Richard Roberts, President of Reynolds’s subsidiary operating in Guyana, to review the Reynolds position in Guyana. We will include a summary of the discussion in your briefing paper for Friday’s meeting with the Chief Executive Officers of the four major U.S. aluminum companies.
[Page 953]Background
The GOG nationalized ALCAN’s bauxite mine three years ago. A compensation settlement was reached with the help of Justice Arthur Goldberg, who has a personal relationship with Prime Minister Burnham dating back over several years. At that time, the GOG stated its intention to seek majority participation in the Reynolds operation as a matter of policy. To run the former ALCAN mine, the GOG had to develop certain marketing outlets (though ALCAN continued as the principal customer of its former facility) and indigenous managerial and technical competence. Apparently, the Guyanese now think they are ready to [illegible] smaller Reynolds mine despite persistent problems in running the former ALCAN mine. Not only technical kinks, but also Justice Goldberg as a counselor to Reynolds might have delayed GOG moves in the last year and a half for “meaningful participation” or expropriation. Justice Goldberg and Reynolds officials last met with Burnham in February 1974: As a result of that meeting, Burnham apparently understands that Reynolds is not interested in majority GOG ownership, and therefore, he has proceeded toward nationalization, although he remains willing to discuss participation.
We should assume that Burnham will make good on his promise to nationalize Reynolds, as he has promised repeatedly. This action would enhance his credentials as a Third World leader. It would also impress his International Bauxite Association (IBA) colleagues who will gather in Georgetown in late August or September for IBA’s second meeting. Burnham told Reynolds officials privately in February that he would no longer remain Prime Minister if he did not nationalize Reynolds, whose capital stock, he believes, is being run down. Burnham is, however, in firm control of the government. Rigged elections in July 1973 gave his party an overwhelming majority in the Parliament.
The critical factor, however, is that the U.S. depends on Guyana for 90 percent of its imports of calcined bauxite, an unusual type used to make and periodically replace refractory bricks which line industrial furnaces. Reynolds gets all of its calcined bauxite from Guyana. Substitutes may be twice as expensive. Half of Reynolds’s bauxite output in Guyana is calcined and the other half is metal grade, the predominant type used to make aluminum. Reynolds mines 15 percent of Guyana’s annual production of bauxite, and the former ALCAN facility mines the other 85 percent.
Reynolds’s Options
Reynolds is paying the back income tax, and has indicated that it would file suit in Guyanese courts to recover at least 80 percent of the bill which Reynolds contends is unwarranted. Reynolds is now pre[Page 954]paring for negotiations on the new Jamaican-style levy beginning in Georgetown on August 6.
Burnham has emphasized that the levy would not substitute for nationalization. The GOG sorely needs revenue—export shortfalls and higher import prices have hurt Guyana’s economy; foreign exchange reserves are less than one month’s imports; prices of oil, wheat, fertilizer and other commodities have more than doubled in the past year; and a drought in 1973 slashed sugar and rice production. Gross domestic product declined by 3.5 percent in real terms in 1972, and deteriorated even further in 1973, when the government’s budget defecit hit a record high of U.S. $17 [?] million. No significant capital flows have come into Guyana since ALCAN’s nationalization in 1971. In its negotiations Reynolds might agree to pay the new bauxite levy, and the negotiation expand to consider valuation and compensation questions related to the eventual nationalization. Record aluminum prices and profits, and a steady growth of demand make it costly to Reynolds to shut down a supply source just now. The U.S. and world aluminum markets are expected to remain strong in the next few years. Reynolds apparently will pay the new bauxite levy in Jamaica. Regardless of whether Reynolds is nationalized, we presume it would have to pay the new levy if it continues to use Guyanese bauxite.
Reynolds’s prospects for compensation are brighter, but from OPIC not the GOG. Reynolds has $14.3 million in OPIC expropriation insurance, enough to cover most of its investment in Guyana. At this point it looks like there might be an OPIC payout. The GOG cannot afford any compensation except payments from future bauxite levy revenues. Reynolds is likely to prefer a call on its OPIC insurance since this is likely to exceed whatever the GOG will offer. Reynolds has indicated informally, for instance, that it would not accept ALCAN’s compensation formula (on a 1971 book value of $100 million, the GOG agreed to pay ALCAN $53 million over a 20 year period at an effective interest rate of 4.5 percent).
OPIC’s contract requires that Reynolds make good faith efforts to negotiate compensation. In deciding whether to pay a claimant, OPIC evaluates these efforts. Reynolds wrote OPIC recently to ask about its insurance contract obligations in several different contexts. OPIC’s reply made three basic points:
—an expropriation insurance claim can be based on “confiscatory” taxation, but the actual economic impact would have to be demonstrated;
—whether a threat to cease operation in the face of any new bauxite levey would be “provocative” would depend on the full context;
—Reynolds must pursue any GOG invitation to negotiate a sale.
[Page 955]U.S. Interests
Our primary interests are (a) to deter higher bauxite taxes, (b) to secure adequate compensation for Reynolds and prevent an OPIC payout, (c) to promote Caribbean political stability and economic progress, (d) to deter and undermine cartel-like actions by members of the International Bauxite Association (IBA), and (e) to prevent a dispute with Guyana, a small, poor, black, and potentially unstable neighbor.
USG Strategy
We have little leverage in Guyana. It is highly unlikely that we can dissuade the GOG from nationalizing and raising bauxite taxes. We will have to count on deterring Jamaica’s tax leadership elsewhere—perhaps in the Dominican Republic where we have more leverage. Our economic interests are important enough, however, that we should use all the leverage available, short of actions which could push Guyana even further to the Left. Were Burnham to disappear from the political scene, his successors would likely be far more radical and hostile to U.S. interests. Therefore, we would not want to take actions which could seriously undermine Burnham’s role.
Our instruments of leverage are mostly financial. The U.S. assistance program has been disproportionately large, mainly for political reasons. AID is implementing a $20 million loan program primarily for roads and rice industry modernization. AID has no grant programs, except the yearly $50,000 fund used at the Ambassador’s discretion. For FY–75, AID is proposing two small loans totaling $4.5–5.5 million in the Foreign Assistance request currently before Congress. There is no P.L.–480 program in Guyana.
The IBRD also has under consideration $32 million in loans to Guyana. We expect that the first loan to come up for a vote would be an $8 million education loan in October. The U.S. has no veto over any of these loans.
Guyana has not become a member of the Inter-American Development Bank (IDB) until now because of Venezuela’s claim on approximately two-thirds of Guyana’s territory. For the same reason, it has only observer status in the OAS. Trinidad has proposed, and the U.S. supported, membership in the IDB. It appears virtually certain that this resolution will pass.
Proposed Course of Action
Depending on the outcome of the August negotiations between the GOG and Reynolds, we would consider making a démarche in Georgetown reiterating the following points:
[Page 956]—President’s expropriation policy as it relates to our bilateral and multilateral aid policy;
—Expected damage to Guyana’s credit rating and private investment flows from contract abrogation;
—Positive action by the USG on bilateral or multilateral issues (e.g., sugar) in the future involving Guyana will be severely prejudiced if there is unilateral contract abrogation or uncompensated expropriation.
We have frequently warned the GOG in the past of the consequences of nationalizing Reynolds without the payment of prompt, adequate, and effective compensation. Our last démarche was in January 1974. In the present démarche, we should emphasize that higher taxes which abrogate contracts can also trigger our expropriation policy.
We also want to encourage that Justice Goldberg be brought in. After his last trip to Georgetown in February, however, Goldberg said he did not want to go back. His intervention could at best result in a reduction of the GOG’s demands, but probably not forestall them. Moderation, however, could contribute significantly to our interests.
We should also encourage Reynolds to make substantial efforts to negotiate.
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Summary: Enders and Kubisch proposed to Ingersoll that the U.S. Government inform Guyana that expropriation of Reynolds Metals Company’s bauxite mining facilities would damage Guyana’s credit rating and prejudice the chances of positive action on U.S. assistance and other issues.
Source: National Archives, RG 59, Central Foreign Policy File, P850125–0457. Confidential. Drafted by Courtney, Burke, and Norton on July 24; Wientraub, Ellis, Benedick, Meyers, and Shlaudeman concurred. All brackets are in the original except those indicating illegible text. On July 26, Ingersoll wrote on the first page of the memorandum, “Are we supposed to do anything now?” On May 7, Foreign Minister Ramphal told Krebs that the Guyanese Government could not “accept less than majority participation” in Reynolds’s operations in the country, adding that he believed he had persuaded Burnham to proceed slowly towards nationalization, since “precipitate action would be inconsistent with GOG endeavor to seek rapprochement with U.S.” (Telegram 757 from Georgetown, May 10; ibid., D740114–0925) On July 22, Burnham stated that because Reynolds indicated during talks in February that it was not interested in allowing Guyana a majority interest in its operations, he favored nationalization. (Telegram 1272 from Georgetown, July 23; ibid., D740199–0455)
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