Office of the Historian

55. Telegram From the Embassy in India to the Department of State1

New Delhi, October 9, 1958—4 p.m.

849. From Dillon.2 Karnafuli Dam. I found considerable concern in Pakistani governmental circles, including Mirza, regarding future of Karnafuli project. After full discussion present situation with Embassies Karachi and New Delhi it became clear that we must find new approach. Most practical one seemed to be some sort of agreement between DLF and Pakistan that would permit us to proceed immediately with full financing of Karnafuli without prejudicing our relations with India. It is clear that holding up project further will do graver damage to Pakistan-Indian relations than proceeding now in absence of interim agreement between Pakistan and India.

Accordingly Ambassador Bunker and I went to see M. J. Desai at Commonwealth office today and told him that in view of Indian legal procedures which understandably would make it impossible to reach interim agreement with Pakistan for 6 or 7 months some other approach now necessary since our present construction contract running out and it necessary for DLF to make further final contract to complete dam. I said we much appreciated his statements to Ambassador Bunker that India had no wish to interfere with actual progress of work of dam. I then said we proposed enter into contract between DLF and Pakistan which would make available funds required to complete dam so that work could go ahead. As integral part of this contract we would obtain agreement from Pakistan that they would accept impartial arbitration of this particular problem and would agree to pay India whatever compensation found to be due (Embassy Karachi told me this would be satisfactory to Pakistanis and I have indirectly obtained same impression from Pakistani officials although had not informed them in advance of my approach to Desai).

Desai confirmed once again that India had no desire to hold up construction of Karnafuli and had no objection to our proceeding as outlined subject to one suggestion. Desai then said that India would much prefer that there be no mention of arbitration in agreement between DLF and Pakistan. He said Pakistan always wanted to arbitrate [Page 142] things. India on the other hand felt that ordinary inter-governmental negotiation should be used to the full and arbitration should only be last resort. In present case India would prefer clause requesting Pakistan to negotiate an agreement with India.

I told Desai that we had thought of arbitration merely to protect India but if he preferred we would be glad to substitute clause requiring Pakistan to agree to use its best efforts to reach fair settlement of differences on this subject with India. Desai said this would be fully satisfactory to India and it was agreed that we would proceed in this way. Even though this method provides considerably less protection for India than my original suggestion, apparently Indians prefer this because they dislike idea of arbitration which might be used in other matters; i.e., Kashmir.

I recommend that DLF proceed immediately to finalize agreement with Pakistan for full financing of Karnafuli project subject to GOP agreement to negotiate with India as outlined above. Ambassador Bunker concurs in this recommendation.3

Bunker
  1. Source: Department of State, Central Files, 890D.2614/10–958. Confidential. Repeated to Karachi.↩
  2. Under Secretary of State for Economic Affairs Dillon was in New Delhi for a brief visit as part of a trip to 11 countries in Europe, the Middle East, and South Asia. The purpose of the trip was to confer with U.S. Ambassadors and other senior U.S. officials regarding operations conducted under the Mutual Security Program, as well as on certain other major economic problems, and to meet with senior government officials of those countries for conversations on matters of mutual interest. He was also in New Delhi to attend the annual meetings of the IBRD and the IMF.↩

  3. Bunker cabled his concurrence in telegram 856 from New Delhi, October 9. (Department of State, Central Files, 890D.2614/10–958)

    At a meeting of the Board of the DLF on October 20, the Board agreed to proceed with a $17.5 million loan to Pakistan for the Karnafuli dam project. In an October 24 letter to Robert B. Menapace, Acting Director of the DLF, Assistant Secretary of State for Economic Affairs Thomas C. Mann recommended that the DLF proceed to negotiate an agreement with Pakistan to finance up to $17.5 million for the Karnafuli project. (Ibid., 790D.5–MSP/10–2458)

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