Foreign Relations of the United States, 1955–1957, American Republics: Central and South America, Volume VII

38. Memorandum of a Conversation, Department of State, Washington, February 20, 1956¹

Washington , February 20, 1956

SUBJECT

• Guatemala: Electric Power Problem

PARTICIPANTS

• Ambassador Cruz Salazar
• ARA—Assistant Secretary Holland
• MID—John W. Fisher, Guatemalan Desk Officer

Ambassador Cruz said he had just returned from Guatemala. President Castillo had instructed him to call on Mr. Holland and inform him of his administration’s concern over the electric power problem.

Ambassador Cruz said that the power problem was fundamentally political. Public opinion was oriented, not toward what the company² could do in the future, but what it had done in the past. The Ambassador said that the company had a record of poor service, high rates, lack of foresight, and generally deteriorating public relations. He said that under today’s circumstances, if the government were to attempt to sign an agreement with the company on any of the bases which it has thus far proposed, the administration would suffer serious loss of the prestige which it has so laboriously built up since the 1954 liberation. He recalled that the communists and their sympathisers had accused the three United States companies operating in Guatemala of having financed the liberation movement, and the Castillo Armas government of being a “vende-patria”. The government had made much progress toward demonstrating by its actions that it is sovereign and independent and not beholden in any way to the foreign companies. A contract on the terms proposed so far by the company would dangerously weaken the administration’s position, reviving and intensifying the old charges.

Ambassador Cruz said that the electric power problem had its difficult economic aspects too, but that the failure of the company to come forward with timely measures and to exercise any political vision had transformed the economic problem into a political one of major proportions. That was why the government had decided it would have to build the Marinalá plant.³

Ambassador Cruz said that President Castillo Armas and the administration continued firm in their conviction that the key to Guatemala’s economic development lay in fostering private enterprise. The government’s attitude on the electric power problem was not the result of any preference for public over private enterprise but was dictated purely by the political circumstances. He said that his government would continue to work for the maximum participation of private capital in the development of the country.

Mr. Holland said that our general policy on the financing of economic development in this hemisphere applied uniformly to all twenty countries. The present policy, which this administration had put into effect only with immense effort, provided that the IBRD and Eximbank could consider financing, without limitation, those economic development programs in the hemisphere for which private capital was not available. Adoption of this policy had already resulted in manifold expansion of Eximbank credits in the area and promised a rate of economic progress in the coming years which had not even been dreamed of up till now.

Mr. Holland said that the banks mentioned were convinced of the soundness of this policy and that he did not believe that they would deviate from it. He said that he himself shared the same conviction; but that even if he attempted to persuade the banks to make an exception in the case of Guatemala, he was certain his effort would meet with failure. Furthermore, Mr. Holland said, if he were to make such an effort, the critics of the above mentioned policy would strongly attack the administration for betraying its own principles and would dangerously weaken if not destroy the policy.

Therefore, Mr. Holland said, the Guatemalan electric power problem, insofar as concerned its financing by international or United States government institutions, also presented us with an extremely difficult political problem in addition to the economic one.

Mr. Holland said that he was certain that neither IBRD nor Eximbank would finance a government power project in Guatemala as long as private capital was available to it.

Mr. Holland said that he felt that the possibilities of reaching a completely new kind of arrangement with the company, satisfactory to all concerned, had not yet even been scratched. He urged the Ambassador to think of the present problem as being an opportunity for Guatemala to obtain not only an additional power plant but to bring about a complete modernization of its power generating and distributing system, without cost to the government. He cited the example of Mexico, where a Canadian company entered into an arrangement with the Mexican Government whereunder it was enabled to return a modest dividend on its operations and at the same time expand and modernize its facilities.

Mr. Holland said that the Department had been trying to persuade the American & Foreign Power Company to do some imaginative and resourceful thinking on the Guatemalan power problem, and he understood that Mr. Sargent,⁴ President of the company, was prepared to go to Guatemala with the company’s best offer to discuss it with the Guatemalan government. Mr. Holland said that the company clearly would have to do many things to help the government solve its political problem, but that the Government for its part would also have to meet the company with a sincere desire to collaborate in devising a satisfactory arrangement.

Mr. Holland said that he understood that the company was willing to construct the Marinalá plant and had given up its insistence on its own project. Ambassador Cruz said that the company had in fact previously expressed willingness to build Marinalá but at a cost above that estimated by other engineers. Mr. Holland observed that the difference was in the estimates, and that the actual costs would turn out approximately the same regardless of who built it, assuming it was done under competitive bidding.

Ambassador Cruz said that he recognized that the United States Government had an important political problem as well as an economic one with respect to the financing of a power plant in Guatemala. He assured Mr. Holland that the Guatemalan Government had no intention of throwing up its hands and proceeding with construction of a new plant regardless of our attitude, even though French companies, among others, had offered to provide financing for a government project. He said that he expected that the final decision would be taken only with full consideration of the views of the United States Government, which had done so much to assist Guatemala’s recovery from the ruinous conditions left by the communists.

Ambassador Cruz said that he agreed with Mr. Holland that the solution of the power problem would have to be found in some new approach.⁵

1. Source: Department of State, Central Files, 814.2614/2–2056. Drafted by Fisher and approved by Holland.
2. The American and Foreign Power Company.
3. In a memorandum of conversation by Fisher, February 16, Burke Knapp is recorded as having stated that the Bank had urged the Guatemalan Government to “exhaust the possibilities of a reasonable arrangement with the Company for constructing new capacity, but that the Company seemed to have accepted with puzzling alacrity the Government’s disposition to halt the talks and proceed to build the plant itself.” According to the memorandum, Assistant Secretary Holland stated that the Department of State “had thrown as much cold water as it could on the Guatemalans’ ideas of public power and held to the hope that the Company would come forward with some imaginative proposals which could enable the Government of Guatemala to claim a feather for its cap and obtain political acceptance of a reasonable agreement.” The memorandum further stated that William Stafford, Vice President of the Power Company, asserted that the company was determined to continue its efforts to make an agreement with the Guatemalan Government. (Department of State, Central Files, 814.2614/2–1656)
4. Henry Sargent.
5. A memorandum of conversation, February 24, reported that Holland discussed with Stafford the Power Company’s draft plan for an electric generating plant in Guatemala. The memorandum reads in part: “Mr. Holland said that he was glad to see that the company’s present draft referred only to possible acquisition by the government after 20 years. He saw no objection to the company’s agreeing to a plan for full amortization of the plant for reversion to the government at the end of that period, if that were the only way to reach any agreement with the government. He observed that it was only postponing government ownership, but that it was very much better than starting out with a government ownership plan.” (Department of State, Central Files, 814.2614/2–2456)