Need for Improved Administration of Petroleum and Property Management Activites by the U.S. Civil Administration of the Ryukyu Islands

Published by the Government Accountability Office on 1971-03-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                    Uwm Sums GENERAL
                                          INTERNATIONAL        f=J-~=%3i%i         DIVEION
                                                        FAR   EAST   BRANCH
                                                     1833 KALAKAUA        AVENUE
                                                 HONOL,ULU,      HAWAII        96815         .a


              Dear General Lampert:

                    We have reviewed selected policies,    procedures, and practices*of
              the United States Civil Administration     of the Ryukyu Islands (USCAR).
              Our review included an examination into certain expenses allowed under
              contracts 64-N-l and 68-N-1, awarded to Caltex (Asia) Limited and
              covering periods May 1964 to April 1968 and May 1968 to April 1971,
              respectively,   for the supply, terminal operation and distribution      of
              bulk petroleum products.    Additionally,   we examined into the use of
              funds derived from the administration     of the former state and prefec-
              tural properties.

                        The results       of our review are discussed                  below.
              Questionable Expenses Allowed
              Under Petroleum Contracts

                    Our limited   review of expenses incurred and charged by the
              contractor   a's applicable to the services required by the contracts
              revealed some costs which we believe should not have been claimed
              by Caltex nor allowed in computing the profit     margin.

                     The contracts provided that an annual review would be made
              by USCARof ~the' expenses incurred by Caltex in performing the
              distribution      services under the contracts.    If such a review showed
              that Caltex had received payments (negotiated service allowances)
              totaling     more than its actual expenses, plus 12.5 percent of these
              expenses, the contractor would refund the excess to USCAR. No
              adjustments were to be made if the contractor made a profit        of less
              than 12.5 percent.        The contracts also provided that in determining
              all items of' expense, Caltex's regular accounting practices would
              be followed.       Contract 68-N-l further provided that only expenses
              directly     related to the performance of the required services would
              be considered proper charges to the contract.


                                             50 TH ANNIVERSARY 1921-1971
      We found that the contractor's  statements  of expenses along with
the Certified  Public Accountant audit reports have been generally
accepted by USCAR without question.    The USCAR contracting  officer
advised us that since Caltex   had been refunding substantial  amounts
to USCAR (through contract year 1969 net refunds totaled about
$845,000) as a result of the year-end comparisons of expenses incurred
with service allowances received, he had not been very concerned with
the nature of the various expenses.

      The contracting    officer     further stated that responsibility     for
reviewing Caltex's reported expenses rested with another official              of
the Comptroller    Department and that this official         had been provided
with copies of Caltex's Statements of Expenses, and the related audit
reports,  for performing such a review.          However, this other official
stated that he was not responsible          for reviewing Caltex's expenses
and that the contracting       officer    had been mistaken.

        Regardless of who was responsible,    the USCAR Comptroller agreed
that there had been inadequate review of Caltex's expenses in the past.
Further, he stated that, in his opinion, this lack of review had been
interpreted     by Caltex as approval of the reported expenses, and
therefore,    made it difficult   for TJSCARto take exception now to expenses
which had been allowed in previous years.

     Examples of expenses claimed by Caltex during contract years 1968
and 1969 which we believe were neither allowable under the terms of,
nor necessary in the performance of the contracts are presented below.

        Entertainment       expenses

       During the year ending April 30, 1968 and the last 6 months of
the year ending April 30, 1969, USCAR personnel and/or their wives had
participated'in   112 entertainment   functions   for which Caltex charged
over $4400 to the contracts.      These functions    included luncheons,
dinners, golf outings, cocktail     parties and entertainment     at hotels,
bars, and a cabaret.    Charges also included costs of Caltex personnel
attending USCAR functions.

       In April 1967, Caltex paid $134.97 for expenses incurred by a
USCAR official   and his wife during their visit   to Bangkok, Thailand,
from April 12 through April 15, 1967. These expenses were originally
paid by the Caltex office    in Bangkok and were then transferred   to the
Naha, Okinawi, office of Caltex where the costs were charged to the
petroleum contract.     We were unable to determine in Okinawa, the
exact    nature   iof   these   expenses.

     USCAR and Department of Army officials    advised us that about
half of the entertainment   expenses were for large public receptions
to which most United States and Ryukyuan leaders of the community
were invited and that some entertainment    of such individuals     is
appropriate and in accord with normal business practices       since USCAR
is in the business of selling   petroleum products to the public.

      Officials  noted the possibility     that some of the affairs attended
by USCAR personnel were not authorized by applicable       government regula-
tions, but emphasized that there was no evidence to indicate that
improper influence was exerted.        Nevertheless, we were advised that
steps had been taken to bring the required standards of conduct to
the attention   of all USCAR personnel and to require adherence thereto.

      Travel   and personal   expense

      According to Caltex policy,    the receiving office pays the moving
expenses of an employee transferring     from one location to another.
However, we noted that when a Caltex employee was transferred      from
Okinawa to Saigon, Vietnam, a cost of $421.63 for shipment of his
household goods to Saigon was charged to contract 68-N-l.      It was
explained that the expenses had been absorbed by Caltex's office       in
Okinawa because the Saigon office could not transfer the funds out
of Vietnam.,
      Interest expense

      For contract years ending April 30, 1968 and April 30, 1969,
Caltex reported interest expense of $42,076.26 and $97,383.%3,

      With respect to these finance charges, the Request for Proposal
stated, in pertinent    part, that the selected offeror must demonstrate
the financial   ability  to finance incoming deliveries and reasonable
inventories' of all products and the operations of the terminal.
       These costs were for interest    incurred by Caltex on bank
overdrafts.1    This type of credit was established      by Caltex with
two banks having branch offices      in Okinawa.    Caltex  first   utilized
this credit in July 1967 to finance the sale of fuel to commercial
airlines   ati the relatively low interest    rates available     in Okinawa.

       On Dec'ember 5, 1969, Caltex requested that it be granted 60
days' credit in connection with the remittance      of monies  owed to USCAR
under contract 68-N-l.     This procedure, if implemented, would have
eliminated   the charging of interest   costs to the contract;   however, it
still   would have resulted in USCAR's financing the Caltex inventories.

*   .                .
        .   .   ‘.

                         Subsequent to our review, we were advised that USCAR had denied the
                         request from Caltex for a 60-day line of credit.   In addition,    we
                         were advised that Caltex had been requested to eliminate    the interest
                         expense for contract years 1968 and 1969 that we had questioned during
                         our review.  Also, Caltex was requested to recompute the profit     or loss
                         for those years and to make appropriate  refunds to USCAR.

                              Membership expense

                                  For contract years ending April 30, 1968 and April 30, 1969,
                         Caltex     reported membership expenses of $1,242 and $1,084, respectively.

                               These costs included payments for dues and memberships of Caltex
                         or its employees in local golf and yacht clubs, Naha Officers'  Open
                         Mess and Naha Officers'   Club.

                                  Public   relations    expense

                               In each year, this category of expense included a $600 donation
                         to the University    of the Ryukyus Foundation to provide for university
                         scholarships.     In the year ended April 30, 1969, these expenses also
                         included the cost, $687.08, for films of the United States Open and
                         Masters Golf Tournaments.     The majority  of the other public relations
                         expenses incurred in each year represented the cost of congratulatory
                         messages in local magazines and newspapers on such occasions as Armed
                         Forces Day, anniversaries    of the founding of various military   organiza-
                         tions, and holidays.
                                  Sales promotion      expenses

                               For contract years ending April 30, 1968 and April 30, 1969, Caltex
                         reported sales promotion expenses of $4,695.32 and $5,691.86, respectively.

                               These expenses included costs of various parties and luncheons for
                         service station operators.    In this connection, the sales promotion
                         budgets for 1968 and 1969 submitted by Caltex to its New York office
                         stated that two annual meetings with members of the Service Station and
                         Dealer Associations  were being proposed in the interest   of Caltex*s
                         future possible business activities   in the Ryukyus aside from the USCAR

                              This category of expenses also included the purchase of 420 golf
                         umbrellas,  costing $1,041.60 and bearing the Caltex and Ryukyu Oil
                         Company trademarks.   The Ryukyu Oil Company is the sole distributor
                         of bulk petroleum products in the Ryukyu Islands.

       Department of Army officials     stated that the contractor, in
addition to providing stipulated      terminal services and products distri-
bution, is further charged with developing a comprehensive and efficient
petroleum distribution    system in the Ryukyus. Further, they stated that
expenses for public relation,       membership, sales promotion and advertising
are consistent   with customary business procedures for enhancing a normal
petroleum industry.

         We were advised by the Caltex Chief Accountant that all of its
business on Okinawa was performed as a result of the USCAR contract and
therefore all expenses incurred were chargeable to the contract.        This
official     stated that these expenses were of the type that would be
incurred by any Caltex office and that, in his opinion, USCAR should not
be concerned with them. He further expressed the opinion that USCAR
should only be concerned as to whether Caltex incurred a loss or realized
more than 12.5 percent profit     in connection with the services required
by the contract.

     Conclusions   and recommendation

       We believe that Caltex was reimbursed for costs which were neither
allowable under the terms of, nor necessary in the performance of the
contracts and which should not have been used to compute its 12.5 percent
profit margin.       Reimbursement to Caltex of these costs and their inclusion
in prices established      by USCAR resulted in Government agencies and con-
tractors   inc!urring additional   costs for substantial  quantities of petroleum
products provided by USCAR.

       In our 'opinion, the contract provisions   allowing the contractor   to
retain profits     from the performance of the required services up to a
certain perc,entage of costs are of such a nature to have required a
thorough review by USCAR of the costs incurred.        In view of the general
acceptance by USCAR of the contractor's      expenses and the results of our
limited review of those expenses, we recommend that USCAR request the
Defense Contract Audit Agency to review the costs allowed as applicable
to the services required by contracts     64-N-l and 68-N-l.

Funds derived from the administration
of former State properties

      Since 1:948, the USCAR Office of the Ryukyuan Property Custodian
has administered    in trust former Japanese State and Okinawa Prefectural
properties   acquired by the United States at the conclusion of World
War II.    While most of the properties    do not earn revenue, USCAR is
earning an average of about $132,000 per year of which about $120,000
represents rental income on 1500 acres of land and one building,      and
about $12,OOG represents interest     earned on deposits of rental income.

‘,   .

               The Custodian's budgets are not presented to the Department of        .
         Defense, the Office of Management and Budget or the Congress for
         review and approval.    We were advised by USCAR and Department of the
         Army officials   that review by higher authority    is not required
         because these funds are not subject to the provisions      of the Act of
         July 12, 1960 (74 Stat. 461), as amended, which was enacted for the
         purpose of providing statutory   authorization   for the promotion of
         economic and social development in the Ryukyu Islands.

              That law provides, under Section 3, that revenues derived by
         USCAR from certain sources shall be deposited in separate funds which
         are authorized to be established   by the High Commissioner of the
         Ryukyu Islands and shall be available    for obligation and expenditures
         in accordance with annual budget programs approved by the President.
         These sources of revenue are:

              (1) Public-benefit    trusts,    business-type  operations, funds
                  and enterprises     established    by USCAR or its predecessor

              (2) Corporations wholly or partly owned by the civil        admini-
                  'stration  of the Ryukyu Islands.

              (3) Fines,   fees and forfeitures   received   by USCAR.

                Congressional committee reports relating   to the law noted that
         this legislation    would give precise legal authority  to the activities
         previously    conducted by the United States under the authority   of
         Executive Order 10713, dated June 5, 1957 and the Treaty of Peace
         with Japan. The reports also indicate that, although the new
         legislation    would permit the continued use of these revenues,
         statutory   controls would be established   over their use. Revenues
         covered by Section 3 would be used for reinvestment     in the activities
         from which derived or for programs such as typhoon relief      and aid to
         the Government of the Ryukyu Islands and its municipalities.

                The separate funds discussed in Section 3 of the above legislation
         comprise what is referred to as the General Fund of USCAR. Certain
         assets of the General Fund have been capitalized   to form corporate
         entities   completely owned by USCARwhile other assets have been used
         to carry on's separate fund activity   of the General Fund.

               As a result of the 1960 Act, the Bureau of the Budget, now the
         Office of Management and Budget, brought the separate fund activity
         of the General Fund under the apportionment process.     General Fund
         programs are submitted along with the annual appropriation    request for
         review by the Office of Management and Budget and the Congress.

         USCAR and other           Department      of the Army officials      maintain   that
the Ryukyuan         Property       Custodian      corpus   is not a part of the General
Fund since       neither       the language        of the law nor its legislative       history
identifies       this    revenue       as a type of revenue         which must be included      in
the annual       budget      program      approved     by the President.      They have pointed
out that      the corpus         did not have its genesis           in the sale of commodities
 (provided      under the Government             and Relief    in Occupied    Areas appropria-
tions)     as did the activities              now considered      to comprise    the USCAR
General     Fund.

         We were advised           by USCAR officials           that   the rental     income and
interest      are generally            used to (1) meet operating            expenses       of the
Custodian's        office,        (2) maintain       property      in his custody,       and (3) sup-
port various         projects        intended    to benefit        the Ryukyuan     people.       We
were also advised             that     the Custodian       has authority      to approve
expenditure        of such rental            and interest      income to meet operating
expenses      of that office             and to maintain       property    under his custody.
However,      either       the High Commissioner             or the Civil     Administrator        must
approve     the expenditure              when the funds are to be used for purposes
intended      to benefit         the Ryukyuan       people.

        Our review        of selected      expenditures         revealed       that rental        income
collected        by the Property        Custodian       had, in some instances,                been used
for purposes         which did not meet the established                    criteria       for which
these     funds were available.             In fiscal       year 1969, for example,                 about
$3,800      of these funds were used to provide                    carpets,        carpet    pads, and
office      decorations        for the offices        of the High Commissioner                which      serve
as Headquarters,            United   States    Army, Ryukyu Islands.                  These offices,
which     are separate         from the offices         in the USCAR building,               had already
been renovated          with financing        provided       from appropriated            funds.       Also,
in fiscal        years    1968 and 1969, about            $16,000     of these        funds were used
to renovate         and improve      USCAR's office         building       and to beautify           the
grounds       around    the building.

        Conclus5ons        and recommendation

        We believe    that    the Office      of Management     and            Budget    and the
Congress    should    be fully       advised    of all resources               available     to USCAR
and of the proposed         disposition       of those resources.                   In our opinion,
such disclosure       would be helpful          to the Congress              in its consideration
of requests       for appropriations         during   the period             remaining      before
reversion     of'the    Ryukyu Islands        to the Government                of Japan,       Accordingly,

                                                                                              -7-                I

        we recommend that   USCARinclude the funds and proposed programs of the
        Ryukyuan Property   Custodian in any future USCARbudget submissions and
        any presentations   of programs or activities.

               We will appreciate being advised of the action     taken or contemplated
        with   regard to the matters discussed above.

                                                   Sincerely    yours,

                                                  C. Roman

        Lieutenant General James B. Lampert
        High Commissioner of the Ryukyu Islands