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conclude that our concerted actions hurt them
painfully.

The Thai facilities which have played such
a critical role in the defense of South Viet-
Nam did not appear miraculously or mysteri-
ously, simply because of the free world's ur-
gent need for them. Those installations were
put in place by Thailand much earlier, in
the course of long-term military prepared-
ness efforts undertaken in its own defense
and in response to its obligations as a highly
conscientious member of the Southeast Asia
Treaty Organization.

The complex of modern military logistical
facilities now available in Thailand is the
result of a combined effort that has been
made within the SEATO framework to pro-
vide for the defense of the treaty area. The
United States continues to play its role with-
in SEATO by taking an active part in the
maintenance and improvement of those facil-
ities. Thus, among the 35,283 members of the
American Armed Forces in Thailand, as of
January 5 there were some 8,000 engaged in



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DEPARTMENT OF STATE BULLETIN



the construction and maintenance of strategic
roadways, communications networks, port
facilities, military supply depots, and other
installations which have been judged by
SEATO members to be essential for the
security of this area.

At the same time, the U.S. continues its
16-year-old program to assist in the training
and equipment of Thailand's armed forces.
As long-range Communist plans for Thai-
land's subversion, announced by Peking some
time ago, are accelerated, Thai-U.S. coopera-
tion under the military assistance program
has taken these new tactics into account. An
American Special Forces unit has been de-
ployed here on a training mission which will
give Thailand additional military units
skilled in counterinsurgency operations. At
Thai request, a company of unarmed Ameri-
can helicopters has been temporarily operat-
ing in the northeast to provide the all-
important elements of mobility and logistical
flexibility for Thai security units. The
American unit's mission is best described as
a "taxi service," which has been available to
Thai civilian and military authorities en-
gaged in the numerous economic, social, and
security development programs Thailand
has organized to protect and benefit its
people in the remote areas. In the next 2
weeks these airlift missions will be taken
over by the Thai Government, using its own
new aircraft, flown and serviced by newly
graduated helicopter pilots and ground
maintenance crews.

I might add for the record that neither
the Special Forces and other American train-
ing personnel nor these temporarily provided
helicopters have participated in actual coun-
terinsurgency combat operations. The Thai
have insisted that this is their responsibility
which they will meet with their own armed
forces. The helicopters are therefore being
assigned to other duties by the Secretary of
Defense at the end of this month in accord-
ance with arrangements made on their ar-
rival last August.

It is in these and other unsensational ways
that the United States has moved to help
strengthen this country militarily and to as-



sist a government deeply conscious of its
responsibilities for protecting its own and
neighboring people.

As you know, the Royal Thai Government
has decided to add to the Royal Thai Air
Force and Royal Thai Navy units, now en-
gaged with their other free- wo rid allies in
resisting aggression in South Viet-Nam, an
additional fighting force from the Royal Thai
Army. They will be warmly welcomed by
their other SEATO allies, who learned of
their courage and valor when they fought
as allies in the United Nations command in
Korea.

In summary, our mission here is not to
oversee or involve ourselves in the internal
military and civilian aff'airs which are the
exclusive business of the Thai themselves.
Our mission is to perform as trusted friend,
discreet confidant, and dependable ally and
where we can to make available from our
experience and resources those things which
Thailand judges to be applicable and bene-
ficial to its own development and security.

And it is a similar approach, I submit,
that will enable America to associate itself
most fully with the new order that has begun
to emerge so rapidly within free Asia. The
old order is passing. Its death rattle can be
heard in the jungles of Viet-Nam, just as the
new era can be glimpsed in Asia's busy con-
ference halls.

The United States has traveled a long,
challenging, and burdensome way to reach
this point. The final miles may prove to be
a bit rough because they feature a bitter,
complicated struggle against fanatical ex-
tremists. But we now know what our role
entails. We know that it need not overtax
our resources. We do know that the Amer-
ican people have the patience and the deter-
mination we will need to carry out our com-
mitments. If there is any important element
still missing from the American commitment
to keep Southeast Asia secure, I would sug-
gest that it is confidence in ourselves, con-
fidence in the future of Asia, and pride that
we have made that future possible by meet-
ing our commitments, not only to Asia but
to our ancient obligation to freedom.



FEBRUARY 6, 1967



199



AID Report on Viet-Nam Commodity Programs
Submitted to President Johnson



Folloiving is a letter of transmittal to
President Johnson from William S. Gaud,
Administrator of the Agency for Interna-
tional Development, together with the text
of a report on the management of AID com-
modity programs in Viet-Nam in 1966.



letter of transmittal

9 January 1967

Dear Mr. President: I submit here-
with a year-end report on the management
of AID commodity assistance programs in
Vietnam and what we are doing to improve
their effectiveness and prevent their misuse.

Such a special report seemed desirable to
me because of the magnitude of our Vietnam
aid program and the difficult wartime cir-
cumstances under which it must be admin-
istered, unique in AID's experience. Effective
management of such large and complex pro-
grams would be a demanding task in any
developing country. It has been especially
demanding in a country whose economy,
social structure, communications and trans-
portation have been dislocated by a long war.
Rapid expansion of these programs to meet
urgent requirements in 1966 compounded
the management task.

The U.S. has provided about $455 million
in food, equipment and other civil aid sup-
plies during 1966 to support "revolutionary
development" activities in the rural areas,
fight inflation throughout the country, estab-
lish the foundation for long-term develop-
ment, and provide medical and relief supplies
to the victims of communist terror and ag-
gression.

To administer this expanding program, the



AID Mission staff had to be doubled during
the year. New systems, procedures and con-
trols were adopted to strengthen safeguards
against abuses and facilitate handling of sup-
plies. These include exchange devaluation
and reforms in import procedures made by
the Government of Vietnam, major changes
in AID'S Commercial Import Program opera-
tions, expansion and improvement of phys-
ical facilities and management of the Viet-
namese ports, a large increase in U.S. ad-
visory services and auditing staffs, and
improvements in documentation and infor-
mation systems.

Among the most important specific actions
taken were:

— assignment of the U.S. Army's 1st
Logistic Command to supervise the handling
of almost all AID project commodities from
ship discharge to Government warehouses;

— assignment of the 125th Terminal Com-
mand as an advisory unit to the Vietnamese
director of the Port of Saigon;

— doubling the AID Mission's auditing
staff and the assignment of controllers and
traveling auditors to all regions;

— assignment of a U.S. Bureau of Customs
team to assist the Vietnamese Customs Office
in improving its procedures and spot-check-
ing AID-financed commercial imports;

— a decision to station American logistics
advisors in provincial and regional ware-
houses; and

— development of an automated arrival ac-
counting system for AID's commercial im-
ports.

Nonetheless, as generally happens in war-
time, there has been some illegal diversion
or other loss of aid supplies to Vietnam.



200



DEPARTMENT OF STATE BULLETIN



Any such loss is deplorable, even in wartime,
and I know that you have been concerned, as
have I and my staff, with the necessity of
assuring that large amounts of AID-financed
commodities are not stolen or otherwise di-
verted. This report summarizes our work
on that problem. It reviews the AID Mis-
sion's estimates of the recent and current
rates of loss in the major program categories
and measures to reduce these losses.

These estimates, which are the most com-
prehensive and carefully reviewed findings
available, indicate that in recent months no
more than 5-6% of all U.S. economic assist-
ance commodities delivered to Vietnam were
stolen or otherwise diverted.

Though these rates of loss are comparable
to or lower than losses in other war zones
under less difficult conditions, they are by no
means acceptable and we are doing our best
to reduce them further. Management im-
provements now in force or being initiated
are expected to reduce losses substantially
over the coming year. I am confident that my
next report to you will reflect further im-
provement in the management and effective-
ness of the AID commodity programs.
Sincerely yours,

William S. Gaud



TEXT OF REPORT

I. Introduction

AID has undertaken in Vietnam a war-
time economic assistance program unprece-
dented in its magnitude and intensity.

In late 1965, it became necessary to in-
crease vastly the AID and Food for Peace
commodity programs in order to bolster the
Vietnamese economy against inflationary
pressures resulting from the U.S. and Viet-
namese military buildup, to provide greater
support to the "revolutionary development"
program in the rural areas, and to furnish
relief and medical supplies to refugees and
other victims of the "shooting war."

To be effective, our response to these ur-
gent requirements had to be full and fast.
Obligation of funds and the initiation of or-



ders for the programs had to be started at
once, even before all the personnel needed to
manage them were on the job in Vietnam.
The AID American staff of "direct-hire" per-
sonnel stationed in Vietnam or in training
on January 1, 1966, numbered about 700; by
December 31, 1966, it had nearly doubled. At
the same time, AID and the Government of
Vietnam undertook a variety of economic
measures, reforms and procedures to man-
age more effectively this massive and com-
plex flow of commodities.

During calendar year 1966, the period cov-
ered in this report, actual disbursements for
AID and Food for Peace program goods
shipped to Vietnam totaled $455 million,
compared with $266 million in 1965. Opera-
tion and control of a program of this size
in a less developed country would be diffi-
cult in time of peace under relatively stable
social and economic conditions. South Viet-
nam in 1966 presented far greater problems.
It was in every sense disjointed by war, its
modest transportation capacity disrupted
and insecure, its public and private manage-
ment ranks thinned, its system of deterring
corruption inadequate.

To meet the requirements of the Viet-
namese economy and civil counterinsurgency
effort, well over 150,000 different commod-
ities had to be procured, shipped and dis-
tributed — items as large as huge gas tur-
bine generators and manufacturing plant
machinery and as small as sewing needles,
as complex as specially designed industrial
engines and as "simple" as shiploads of rice.
Nearly 3 million tons of economic assistance
goods were shipped to Vietnam during 1966
— the equivalent of 900 shiploads.

This report summarizes the nature and
purposes of the AID commodity programs,
describes the economic, managerial and logis-
tical problems that have had to be overcome,
and enumerates the economic measures,
physical facilities and operational systems
which have been or are being created to cope
with these problems. The report deals sepa-
rately with commodities which are intended
for sale in Vietnam's commercial markets
(part II) and those which are intended for



FEBRUARY 6, 1967



201



use in projects or relief programs (part III).
In both sections, the flow of goods is ex-
amined from arrival in Vietnam to the pro-
gram destinations.

Special attention is directed throughout
to the problems of loss, theft or other diver-
sion of AID-funded commodities and correc-
tive measures. Losses of economic assistance
goods in Vietnam are estimated by our
Mission at no more than .5 to 6 percent over-
all in recent months. This aggregate is de-
rived from estimates, using several separate
methods, of between 2 and 5 percent of com-
mercial imports (which accounted in 1966
for 85 percent of the total commodity flow),
and estimates of between 10 and 15 percent
of the far smaller amount of project and
relief commodities which must be distributed
to every province, often through insecure
territory. These rates of loss are believed to
be no more, and perhaps less, than that suf-
fered in other wartime conditions. However,
such losses are unacceptable to AID. They
are being reduced now by new measures in
the Saigon port and will be reduced through-
out the internal logistic system by other
measures recently adopted. The physical con-
trol and management systems already in-
stalled or decided upon are outlined below.

A separate section addresses economic war-
fare, the effort to frustrate the Viet Cong ex-
ploitation of local supply sources including
U.S. economic and military aid supplies.

II. strengthening the Vietnamese Economy:
The Commercial Import and Food for
Peace Programs

A. Combating Inflation

About 85 percent of the economic aid
goods sent to Vietnam in 1966 were com-
mitted to the fight against destructive infla-
tion. To the extent that imports could
moderate domestic shortages, this AID com-
mei-cial import program and Food for Peace
program succeeded.

With over two-thirds of its able-bodied
men in the 20-30 year age group absorbed
by the war eff'ort, cities swollen by refugees,
internal transportation disrupted and much
of the agricultural area a battleground.



South Vietnam's capacity to provide goods
and services for its own population has been
drastically reduced. The shortage of domestic
goods and services was compounded by an
increase of over 130 percent during 1965-
1966 in the amount of piasters in circulation,
funds spent primarily in support of the war
eff'ort for salaries and expenditures of Viet-
namese soldiers, policemen, civil servants
and construction workers, and of U.S. troops
and military contractors. If this increase in
purchasing power were not offset by an in-
crease in the inflow of goods, prices of scarce
commodities would be bid up rapidly and a
runaway inflation would undermine morale
and cause extreme social inequity, jeopard-
izing the whole defense effort.

U.S. provision of commodities through the
commercial import and Food for Peace pro-
grams gives the disrupted South Vietnamese
economy additional dollar resources to fi-
nance more imports, supplementing the
foreign currency resources it earns through
normal financial transactions. These pro-
grams provide food, fertilizer, construction
materials, machinery — thousands of items
needed to keep the economy operating and
expanding. The sale of these imported goods
and domestic and customs revenue collections
absorb piasters and reestablish the balance
between money and goods in the marketplace.

In late 1965 the existing AID commercial
import program (CIP) and Title I sales of
the Food for Peace program were rapidly
expanded to meet this critical need.

B. Hoiv the CIP and Title I Programs Func-
tion

The Government of Vietnam (GVN) con-
trols imports of commodities for commercial
sale in the country through a licensing sys-
tem. After a license has been issued by the
GVN and before AID approves U.S. funding
of the import under the CIP, an AID com-
modity analyst reviews the order with special
attention to four factors:

— Is the applicant an authorized importer
not under suspension?

— Is the commodity a nonluxury item ?
— Could the enemy adapt such commodity



202



DEPARTMENT OF STATE BULLETIN



to use as an item of critical importance?

— Is the size of the order reasonable in
terms of the current Vietnamese market de-
mand?

If the order is approved, the AID analyst
assists the importer in preparing an invita-
tion for proposals. The importer then entei's
into an agreement with the most qualified
responsive bidder, who ships the goods to the
importer. The supplier is paid by AID in
dollars. The importer deposits the piaster
equivalent of the cost of the goods in a
"counterpart fund," which is jointly admin-
istered by the U.S. and Vietnamese Govern-
ments to support sections of the GVN mili-
tary and civil budgets.

The goods themselves are received by the
importer through customs, almost always at
the Port of Saigon, and disseminated
throughout the Vietnamese economy. The
presence of AID's "clasped hands" symbol
on these commodities sold in shops through-
out Vietnam has frequently been misin-
terpreted as an indication of the diversion
of AID material meant for free distribution
or use in projects. It is, on the contrary,
tangible evidence that the CIP effort is
succeeding.

Most Food for Peace commodities brought
to Vietnam for sale under Title I of that
program are handled in precisely the same
manner as other CIP goods. Title I rice,
however, is treated differently. Approxi-
mately 59 percent of the rice is off-loaded at
the Port of Saigon by the U.S. Army's 4th
Terminal Command and placed in a GVN
rice warehouse, while the remaining 41 per-
cent is landed at the ports of Da Nang, Qui
Nhon and Nha Trang. The Vietnamese
Government then distributes the rice as
follows:

— Most is sold to merchants for local cur-
rency. They, in turn, distribute it in the rice
deficit areas in normal commercial channels.

— About 10 percent is turned over to the
Vietnamese armed forces to supplement
their diets.

— A small amount is sold directly by the
GVN to the public.



During calendar 1966, 422,000 metric tons
of rice, valued at approximately $58 million,
were exported to Vietnam under the Title I
program.

C. Reforms of the System

Vietnamese importers active in the CIP
and Food for Peace program, like business-
men elsewhere, strive to make the largest
sustainable profit.

Before 1965 it was not especially easy for
importers to manipulate the market because
the foreign exchange rate was fairly realistic
and smaller incomes and limited purchasing
power kept the demand for imports stable.
Following the rapid buildup of 1965, how-
ever, a combination of increased purchasing
power, saturated logistic facilities, increased
VC interdiction of internal distribution, an
exchange rate which had become unrealistic
and war-thinned civil government adminis-
tration created a situation in which importers
could collude with one another and with un-
scrupulous suppliers to generate windfall or
monopoly profits. Administrative price con-
trols proved ineffective or positively harmful.
In effect, the institutions of the import sec-
tor, operating under a body of regulations
adopted several years ago during a period of
relative stability, were shown in some in-
stances to be inadequate or counterproduc-
tive.

In the spring and summer of 1966 the
Governments of Vietnam and the United
States agreed on import reforms. Coupled
with the economic stabilization measures rec-
ommended by the International Monetary
Fund, these reforms, each discussed below,
reduced opportunities for profiteering and
corrected other abuses that had taken place
under the CIP.

1. Devaluation. On June 18 the Vietnam-
ese Government announced a new system of
exchange rates which raised the effective
cost of foreign exchange for imports from
60 to 118 piasters per dollar, plus duties.
While the primary purpose of devaluation
was to absorb excess liquidity and keep in-
flation within tolerable limits, additional
benefits were derived from the effect the new



FEBRUARY 6, 1967



203



exchange rate had on CIP transactions.
Doubling the piaster cost of foreign exchange
made illegal reexportation of CIP commodi-
ties unattractive and reduced the profit pos-
sibilities in such practices as overinvoicing.

2. Expavded Competition in the Commer-
cial Import Sector. Open general licensing
was adopted for the licensing of most im-
ports financed under the CIP, and with
Vietnamese-owned foreign exchange, and the
former system of administrative allocation of
foreign exchange on the basis of importer
quotas was abolished. New importers were
permitted to enter the previously closed im-
port community if they could demonstrate
that they were responsible firms, 70 percent
Vietnamese owned, and had at least 15 mil-
lion piasters of paid-in capital. They had to
prove that they had warehouse facilities
available, and they were required to deposit
1 million piasters with the Ministry of Na-
tional Economy as a surety bond against
illegal activities. To date the applications of
more than 170 new importers have been au-
thorized or are in process. This increase in
competition has been a healthy stimulus to
the economy.

3. Consolidated Procurement. As a de-
terrent to possible collusion between sup-
pliers and importers, to achieve economies in
procurement and to improve logistic manage-
ment, both Governments agreed to consoli-
dated procurement procedures for several
bulk commodities, including galvanized iron
sheet, white cement, newsprint, tinplate,
fertilizer and jute bags. These commodities,
and others which may be added in the future,
are now purchased by the U.S. General Serv-
ices Administration (GSA) acting as agent.
GSA procures under standard U.S. Govern-
ment procedures and arranges ocean trans-
portation — usually on vessels provided by
the U.S. Military Sea Transportation Serv-
ice.

Since GSA buys in large quantities, econ-
omies can be achieved in both procurement
and transportation. Consolidated shipments
help to relieve port congestion and expedite
customs clearance.



4. Broader Advertising of Procurement.
Under CIP regulations any transaction of
more than $10,000 must be advertised in a
circular published by the AID Office of Small
Business. This permits American suppliers
to learn of requirements and off'er bids. To
reduce the possibility of importers who want
to import more than $10,000 worth of goods
evading this requirement by applying for
separate import licenses of less than $10,000,
each general importer is now allowed only
three licenses under $10,000 in any 3-month
period.

The resulting increase in small business
advertising should bring about lower prices
due to increased competition. By reducing the
volume of import transactions this innova-
tion should also reduce the time required to
process import licenses and consolidate the
movement of commercial shipments through
the Port of Saigon.

5. Elimination of Agents' Commissions. In
the past, local agents' commissions have been
eligible for dollar financing under the CIP.
In order to reduce possible U.S. balance of
payments drain and the opportunity for
abuses such as illegal capital flight, AID has
made arrangements to cease financing of
commissions for any agents except those who
are U.S. citizens maintaining residence in
the United States.

D. Physical Control of Commercial Imports
in Saigon Port Area.

Nowhere has the military and civilian im-
port buildup which began in the summer of

1965 caused greater strains than at the Port
of Saigon. The port's physical equipment,
security facilities and documentation sys-
tems, though adequate to handle the flow
of cargo prior to 1965, were not designed
to cope with the extraordinary demands of
1966. Designed to handle 1.5 million tons of
cargo a year, the port was operating at an
annual rate of 3.5 million tons by Januaiy

1966 and had reached an annual level of al-
most 5 million tons by November 1966.

The decision to strain port facilities be-
cause of the urgency of the military and eco-
nomic efforts was made with knowledge that



Online LibraryUnited States. Dept. of State. Office of Public CoDepartment of State bulletin (Volume v. 56, Jan- Mar 1967) → online text (page 39 of 90)