I acknowledge receipt of your long radio message, copy attached
[1], relating to several matters which are discussed hereunder. I
must draw your attention to the inadvisability of sending long
code messages by radio, if the subject matter is not very urgent.

The transmission of radio messages to and from Dilli is permitted
only in certain European languages. The use of code is forbidden.

Messages between Darwin and Dilli are sent without the knowledge
of the Portuguese administration, and strictly speaking, any such
messages, other than those relating specifically to flying boat
operations, should be sent in clear, and should also be paid for.

It is most desirable therefore that code messages between Darwin
and Dilli should be kept at a minimum, and should be as short as
possible, if the present irregular procedure is to remain secret,
and available for our benefit.

In the last mail leaving Dilli on 11th June, I reported my
interview with the Governor [2] regarding approval for two
assistants to join me here, but I assume your radio message was
drafted before receipt of my report. The Governor gave verbal
approval to me, and stated that he would reply formally to the
letter from the Minister for External Affairs [3], which I handed
to him. I cannot quite understand your instruction to forward
advice of the Governor's approval by aeradio, and that the two
assistants will then leave Australia by the first available
aircraft, as Mr. F. J. A. Whittaker arrived here on 10th June
last. I received advice of his impending arrival from the Director
General of Civil Aviation [4], some days before he left Australia.

Actually he arrived from Koepang a few hours after I had presented
the letter from your Minister, and had obtained the Governor's
approval. The Governor had however given me his approval in
principle many weeks before.

Now that I am well informed upon conditions in Timor, I feel that
it would be uneconomical to send a third officer to Dilli,
ostensibly as a member of the Department of Civil Aviation.

Whittaker and I can handle all problems which can be foreseen at
present, and the arrival of a third officer would give cause for
comment by some people. The Governor himself is, I think, wide
awake to the reasons for additional officers, although he has not
said anything to me on this subject, but others will draw
conclusions if three officers are now found necessary to handle
the work which has been done by one man for many months. I
appreciate that decision in this regard rests with the Department
concerned, and merely give my opinion in the light of conditions
as I know them to exist. In addition to speaking as an officer of
the Department of Civil Aviation, I also speak as an officer with
both active Naval and Air Force experience.

This morning I had a long interview with the Governor in regard to
the several matters raised in your message. During my talk, I made
the following assumptions, which I trust are acceptable to you.

(a) that the Commonwealth Government desires to cultivate good
relations between the two countries, by promoting trade,
(b) that in doing so, it is not desired to enter into competition
with other buyers of Timor products, if this should be
uneconomical,
(c) that it was not desired to bolster up a subsidised and unsound
trade, which would be of no lasting benefit to either party.

The Governor said that he agreed with the principles outlined
above, and that he was very keen to see commercial relations
established between the two countries. At present, with the
exception of a certain amount of coffee, all products of
Portuguese Timor are finding a good market. About 80 tons only of
last season's crop of coffee remains unsold, and that will be
disposed of probably within a few weeks. Small quantities of most
products are bought by Japan and although the Governor would
prefer to see these products sold elsewhere, he can make no
restrictions whilst Portugal remains neutral. So long as Japan has
an advantage with cheap freight in their own ships, then they will
be able to purchase in Timor at a higher price, and thus obtain
such products as they need. However the quantities are very small,
with the exception of manganese which will be discussed later, and
it would be unsound and uneconomical for a market to be found in
Australia, for the small quantities of products, other than coffee
and perhaps one or two additional items. If any Australian firm is
prepared to offer a price higher than the Japanese for any
particular goods, then they will not go to Japan, but it would
probably be necessary to subsidise the purchaser in Australia.

I will now deal with the method of trading. In the first place I
do not consider that the state of this territory so far as
disposal of products is concerned requires active buying by the
Commonwealth Government to enable the administration to continue
to function. Lack of an export market is not affecting the
progress of the colony to nearly the same extent as the harm
caused by graft, absurd customs and export duties, and inefficient
administration. There is no question of the colony requiring
immediate assistance with an export market, as occurred with New
Caledonia, and I therefore consider that trade with Timor should
be established with private firms in Australia, and that products
should be sold on their merits. If circumstances warrant a
reversal of this opinion, then further steps can be taken, but
there are no circumstances at present which lead me to recommend
active purchase by the Commonwealth Government.

The local Government here is always in need of foreign currency
for the purchase of materials for public works, and the payment of
pensions and proportion of salary of officials retired and living
abroad, or of others going on leave. Always there is a shortage,
and at times the Government is hard pressed for foreign currency.

The local currency is valueless outside the colony, so some method
of obtaining foreign currency is imperative, if the Government is
to continue to function. The method now employed is to license all
exporters and to take 70% of all foreign currency received for the
sale of exports, giving the exporter the equivalent in local
currency. Knowing this, I asked the Governor whether he would
prefer all trade with Australia to pass through the Government
organisation known as F.O.A.G. as, in this case, the Government
would obtain all the foreign currency involved and not just 70%.

As dealings up to date with F.O.A.G. have been most
unsatisfactory, and have given me cause for considerable adverse
comment in reporting to Australia, I was very agreeably surprised
when the Governor said that he did not want F.O.A.G. to function
as a trader, but to act merely as an official link between
exporters here and importers in other countries. F.O.A.G. was
originally formed for this purpose.

F.O.A.G. will deal with the export of cotton and manganese ore,
both of which products are solely under Government control, but
with any other products, the Governor stated, he would prefer
merchants in Australia to deal direct with S.A.P.T. commonly known
as Sociedade, or with Chinese firms in Dilli. I raised the
question of Japanese interest in Sociedade, and gave the opinion
that for this reason, we would probably prefer to deal with the
Chinese, but he raised the following interesting outlook.

Up to the present time, the majority of the trade of Sociedade has
been with Japan, partly because the Japanese have been prepared to
buy the products which were available for sale, and partly I feel
because of the 45% Japanese interest in the company. The senior
director of the company, Jaime Cavalho, has just succeeded his
father in control, and both he and the Governor feel that
Sociedade should try to extend its dealings to countries other
than Japan, and in this way, reduce the percentage of total trade
now being done with Japan. In this way a gradual reduction of
importance of the Japanese market will take place, and with it, of
course, a reduction of the Japanese scope of operations within the
company.

As our aim is primarily to reduce or hinder Japanese commercial
and political expansion in Portuguese Timor, it would best be
achieved by trading with Sociedade, as although the Japanese
shareholders might reap a small profit thereby the company will
not be forced to rely almost wholly upon the Japanese market for
its very existence. The Sociedade is, as far as I can gather, a
thoroughly reliable business house, and this fact is important if
trade with Australia is to be established, and maintained in a
satisfactory manner for all parties concerned.

The Governor himself said that he would like trade relations to be
established also with the Chinese, who were very reliable, and who
were also responsible for a good deal of the trade of the colony,
but having regard to our primary object I think that Sociedade
would be sufficient for the time being, and that at a later stage,
if trade grew to a reasonable extent, orders should then be given
to the Chinese firms capable of fulfilling them. In a previous
report I expressed the opinion that it was undesirable to trade
with Sociedade owing to its Japanese control of 45%, but I did
not, at the time, appreciate the possibility of trade with this
organisation reducing the proportion of Japanese trade, and with
it, Japanese influence.

With regard to banking facilities, the position has now been
clarified by the passage of time, and Fowler's coffee order, which
has been shipped. The Bank of New South Wales in Australia acts as
agent for the Government Bank in Dilli, and payment for goods
exported to Australia can now be made immediately to the Bank of
N.S.W. Sydney.

The shipping problem is difficult, as at present the only company
calling at Dilli, apart from the Japanese, is the Dutch K.P.M.

Line. This company is far from popular with the Portuguese, or for
that matter the Dutch in Netherlands East Indies, because the
freights charged are most exorbitant. The K.P.M. has a monopoly of
inter island trade throughout the East Indies, and therefore is
able to charge any freight rates which suit itself. If there were
competition, then the freights would be reduced very much indeed,
but until there is, then there is no possibility of a reduction.

If trade relations between Australia and Portuguese Timor are
considered to be of any real importance, then Australian ships
trading between Australia and Singapore must stop at Dilli when
there is any cargo offering for Australia, or to be dropped from
Australia. Freight rates would also have to be scaled in
accordance to the distance carried and not with respect to inter
shipping company agreements, or monopolistic considerations. I
believe that between the years 1917 and 1920 ships of an
Australian Line called regularly at Dilli, and if such action was
then considered necessary, I assume that similar action is even
more warranted at the present time.

As various crops are grown throughout the territory, in widely
separated areas with which there is very little communication, it
is impossible to obtain an estimate of the production until the
crop is actually harvested, treated if necessary, and shipped to
Dilli. Information in this regard will be obtained and forwarded
from time to time, as it becomes available. I have already
mentioned that the position in Timor is not likely to require
large Government purchases to keep the Portuguese administration
in action, so the question of stocks in hand in Australia does not
enter into the picture at present. As the Portuguese have only 80
tons of coffee on hand from last year, and as this is by far the
most important crop, some months will elapse before it becomes
known whether this year's crop, due in September, will be sold
with ease or not.

On June 11th the radio operator here showed me a commercial
telegram from Japan, addressed to Segawa, the chief Japanese man
in Sociedade, apparently offering 70 guilders per ton for
manganese between 85% and 90% pure, and enquiring the amount
available per month. This telegram contained a lot of other
commercial matters which made it difficult for me to say with
certainty whether the offer of 70 guilders was correct. It hardly
appeared likely in view of Eveready's offer of only 36 guilders,
given after an examination of samples from Timor. Later I was
shown the reply from Segawa, in which he said that manganese of
98% purity was available at 100 tons per month, at a price of 60
guilders per ton. I advised you of this offer by radio, but in my
aim to achieve brevity of code communication I did not convey the
full facts and my meaning was not clear. However, the next
morning, Barbosa who is in charge of F.O.A.G. which deals with
manganese, called and told me that a contract was to be signed for
the supply of 1,000 tons of manganese to Japan at 47 guilders. The
Governor also told me this later. It will be seen that the
difference between 60 and 47 guilders, the price at which the
Japanese are going to buy, and the price which the Government is
going to receive, has leaked away. Things like this often happen
in this country. No further messages have been sent to Japan
regarding the Government price of 47 guilders, and I can only
assume that 13 guilders per ton will be split between Segawa and
Barbosa. When the Governor told me about the contract, I felt like
asking if he knew why there was such a difference between the
Japanese payments, and what the Government would receive, but had
I done so, he would have wondered at my sources of information. In
any case it is not my business, although I am sure that the
Governor has had no hand in the transaction. The Governor said
that although 100 tons per month were to be supplied to the
Japanese to fill an order for 1,000 tons, the production was in
excess of this monthly total, and that manganese would be
available for any other buyers at about 45 guilders. The
administrator from Bau Cau, in whose territory the manganese is
found, has arrived in Dilli to discuss the production required for
the Japanese order. I may be able to obtain some relevant
information from him, and if so, I will inform you accordingly.

It would appear that the Japanese have some pressing demand for
manganese as there has not been much interest displayed by them up
to recently, and a sudden order for a large quantity at a very
high price naturally raises interest as to its uses, and the
Japanese needs.

If firms in Australia are not prepared to pay at least 40 to 45
guilders for manganese F.O.B. Dilli, then I do not think there is
any chance now of this product being bought by Australia.

In conclusion, I might sum up the existing position in Portuguese
Timor, as follows:-

(a) There is no need at present for the Commonwealth Government to
purchase large and possibly unwanted products from Timor, for the
purpose of assisting the Portuguese Administration to function
effectively.

(b) The Portuguese Government welcomes the establishment of active
trade relations with Australia, and is prepared to give all
possible assistance.

(c) Trade relations should be established directly between firms
in Australia and Sociedade and Chinese firms in Dilli-the former
receiving preference for the time being.

(d) If practicable, ships on the Australian Register plying
regularly between Southern Australian ports and the East Indies
should call at Dilli whenever there is cargo ready for shipment to
Australia, or from Australia to Dilli.

(e) No reliable estimate of the quantity of products likely to be
available for disposal, the probable average prices, or whether
any difficulty will be found in effecting sales, can be given at
present.

Any further developments in the trade question, together with
details of new crops and exports, will be forwarded whenever
reliable information becomes available.

D. ROSS