Summary

This report relates to the rate of exchange applied to offshore procurement contracts awarded under the Mutual Defense Assistance Program (MDAP) in Italy. The cost of MDAP offshore procurement contracts is increased by a charge imposed by an agency of the Italian Government for the conversion of dollars to lire. Similar charges are not incurred in connection with other United States transactions in Italy. Based upon the volume of MDAP contracts awarded in Italy during fiscal years 1952 through 1956, this exchange charge may total more than one million dollars. About one half of this amount has not yet been paid. Our European Branch sought the advice of the American Ambassador at Rome on the practicability of undertaking negotiations to extend to MDAP offshore procurement contracts the same exchange rates that are applied to other United States expenditures in Italy. The officials of the Embassy apparently concluded that negotiations should not be initiated since the exchange charges do not violate existing agreements between the United States and Italy. Nevertheless, because of the potential savings which might result from such negotiations, we believe that this matter warrants further consideration at the department level. There may be factors considered in undertaking negotiations of this nature which are not treated in the report. However, based upon the information available to us at the present time, there seems to be adequate reason for initiating negotiations with the Italian Government to eliminate the exchange charges.

Our review of offshore procurement contracts placed by the military services in Italy under the Mutual Defense Assistance Program (MDAP) disclosed that the prices paid by the United States to Italian contractors included reimbursement of a charge imposed by an Italian Government agency for the conversion of dollars to lire. This exchange charge, which is not incurred by the United States on other transactions in Italy, may amount to one million dollars on MDAP offshore procurement contracts awarded during fiscal years 1952 through 1956. We reported this matter to the American Ambassador in Rome and requested the Ambassador's opinion on the practicability of undertaking negotiations with the Italian Government to extend to ADAP offshore procurement contracts the same exchange rates that are applied to other United States expenditures in Italy. In reply, the Minister-Counselor of the Embassy stated that the exchange charge on MDAP offshore procurement was made in accordance with Italian foreign exchange control regulations and could be considered by the Italian Government to be an appropriate charge for a service performed for Italian residents who are receiving exchange payments for exports. We were informed also that the charge did not violate any existing agreements between the United States and Italy. However, we were not advised as to the practicability of undertaking negotiations to eliminate this charge. Unless there are overriding conditions of which we are not aware, we believe that consideration should be given to our suggestion at departmental level. If deemed feasible by the Department of States, negotiations should be undertaken with the Italian Government to obtain an agreement which would extend to dollar payments on ADAP offshore procurement contracts the same exchange rates that are applied to all other dollar expenditures in Italy. An alternative method would be an agreement which would give the United States the option to purchase lire at the favorable rate of exchange and to pay the contractors directly in Italian currency. At the same time that these negotiations are undertaken, we believe that the possibility of obtaining a refund of the exchange charges that have already been incurred should be explored.